Shortcut Method - Issuer Entries On January 1, 2021, ABC Corporation issued an $800,000 notes payable to Allegheny State Bank. The note pays coupon payments at the rate of 5%, which is also the market rate of interest when the note was issued. The note matures in three years. ABC Corporation entered into an interest rate swap with the same maturity and notional amount to hedge against falling interest rates. The swap will result in ABC Corporation paying floating rate interest tied to the prevailing LIBOR rate and receiving fixed rate interest at 5%. Interest payments and cash settlement occur at the end of each year. LIBOR settlement rates at the end of 2021, 2022, and 2023 are 6%, 7%, and 6%, respectively. a) Prepare the required journal entries for ABC Corporation using the shortcut method for 2021-2023 b) Indicate how the above entries affect ABC Corporation's reported net earnings for each year. Problem #2 Shortcut Method - Investor Entries Use the same information as in Problem #1. However, consider the purchase of the note from the perspective of Allegheny State Bank. The bank also hedges the fair value risk by entering into an interest rate swap. The swap will result in Allegheny State Bank receiving floating rate interest tied to the prevailing LIBOR rate and paying fixed rate interest at 5%. a) Prepare the required journal entries for Allegheny State Bank using the shortcut method for 2021-2023 b) Indicate how the above entries affect Allegheny State Bank's reported net earnings for each year. Problem #3 Extended Method - Issuer Entries Assume the same information as in Problem #1. a) Prepare the required journal entries for ABC Corporation using the extended method for 2021-2023. b) Indicate how the above entries affect ABC Corporation's reported net earnings for each year. Shortcut Method - Issuer Entries On January 1, 2021, ABC Corporation issued an $800,000 notes payable to Allegheny State Bank. The note pays coupon payments at the rate of 5%, which is also the market rate of interest when the note was issued. The note matures in three years. ABC Corporation entered into an interest rate swap with the same maturity and notional amount to hedge against falling interest rates. The swap will result in ABC Corporation paying floating rate interest tied to the prevailing LIBOR rate and receiving fixed rate interest at 5%. Interest payments and cash settlement occur at the end of each year. LIBOR settlement rates at the end of 2021, 2022, and 2023 are 6%, 7%, and 6%, respectively. a) Prepare the required journal entries for ABC Corporation using the shortcut method for 2021-2023 b) Indicate how the above entries affect ABC Corporation's reported net earnings for each year. Problem #2 Shortcut Method - Investor Entries Use the same information as in Problem #1. However, consider the purchase of the note from the perspective of Allegheny State Bank. The bank also hedges the fair value risk by entering into an interest rate swap. The swap will result in Allegheny State Bank receiving floating rate interest tied to the prevailing LIBOR rate and paying fixed rate interest at 5%. a) Prepare the required journal entries for Allegheny State Bank using the shortcut method for 2021-2023 b) Indicate how the above entries affect Allegheny State Bank's reported net earnings for each year. Problem #3 Extended Method - Issuer Entries Assume the same information as in Problem #1. a) Prepare the required journal entries for ABC Corporation using the extended method for 2021-2023. b) Indicate how the above entries affect ABC Corporation's reported net earnings for each year
