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On December 31, 2014, Mercantile Corp. had a $10,000,000 8.00% fixed-rate note outstanding, payable in 2 years.

P17-16 (Fair Value Hedge Interest Rate Swap) On December 31, 2014, Mercantile Corp. had a $10,000,000 8.00% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Mercantile will receive interest at a fixed rate of 8.00% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $10,000,000 amount. The LIBOR rate on December 31, 2014, is 7.00%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.

Mercantile Corp. designates the swap as a fair value hedge. Assume that the hedging relationship
meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows. Date 6-Month LIBOR Rate Swap Fair Value Debt Fair Value
December 31, 2014 7.00% - $10,000,000
June 30, 2015 7.50% ($200,000) $9,800,000
December 31, 2015 6.00% $60,000 $10,060,000

Instructions
(a)(1) Present the journal entries to record the entry, if any, swap on December 31, 2014.
(a)(2) Present the journal entries to record the semiannual debt interest payment on June 30, 2015.
(a)(3) Present the journal entries to record the settlement of the semiannual swap amount receivables
(a)(4) Present the journal entries to record the change in the fair value of the debt on June 30, 2015.
(a)(5) Present the journal entries to record the change in the fair value of the swap at June 30, 2015.
(b) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2014
(c) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on June 30, 2015.
(d) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2015.

TUTORIAL PREVIEW
No entry necessary at the date of the swap because the fair value of the swap at inception is zero.


File name: P17-16 Mercantile Corp.xls File type: xls PRICE: $10