E17-25 (Fair Value Hedge) Sarazan Company issues a 4
-year, 7.50% fixed-rate interest only, non-prepayable $1,000,000 note payable
on December 31, 2013. It decides to change the interest rate from a fixed rate
to variable rate and enters into a swap agreement with M&S Corp. The swap agreement
specifies that Sarazan will receive a fixed rate at 7.50% and pay variable with
settlement dates that match the interest payments on the debt. Assume that interest
rates have declined during 2014 and that Sarazan received $13,000 as an
adjustment to interest expense for the settlement at December 31, 2014. The
loss related to the . debt (due to interest rate changes) was $48,000. The
value of the swap contract increased $48,000
Instructions
(a) Prepare the journal entry to record the payment
of interest expense on December 31, 2014.
(b) Prepare the journal entry to record the receipt
of the swap settlement on December 31, 2014.
(c) Prepare the journal entry to record the change
in the fair value of the swap contract on
December 31, 2014.
December 31, 2014.
(d) Prepare the journal entry to record the change
in the fair value of the debt on December 31, 2014.
TUTORIAL
PREVIEW
Instructions
(a) Prepare the journal entry to record the payment of
interest expense on December 31, 2014.
|
Interest
Expense
|
75,000
|
|
|
Cash ($100,000 × 7.5%)
|
|
75,000
|
