FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Financial Transaction Analysis
The transaction analysis is done with the help of the accounting equation. The basic accounting equation is alternatively known as the balance sheet equation is based on the double-entry system which says that for each transaction happening in a business…
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On January 1, 2021, LLB Industries borrowed $270,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. • LLB entered into a two-year interest rate swap agreement on January 1, 2024, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. • The agreement called for the company to receive payment based on a 10% fixed interest rate on a notional amount of $270,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly and rates reset at the beginning of each period. • Floating (SOFR) settlement rates were 10% at January 1, 8% at March 31, and 6% at June 30 and September 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Assume that LLB does not elect to use the shortcut method. The swap is deemed highly effective, but it is not assumed to be perfectly effective. Those quotes and the fair values of the note are as follows: Fair value of interest rate swap Fair value of note payable January 1 $0 $ 270,000 March 31 $ 7,172 $ 277,172 June 30 $ 12,911 $ 234,000 September 30 $ 10,965 $ 280,965 Required: Prepare the journal entries through September 30, 2024, to record the issuance of the note, interest, and necessary adjustments for changes in fair value. Use the extended method. Note: Round your intermediate and final answers to the nearest whole dollar. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.
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Transcribed Image Text:On January 1, 2021, LLB Industries borrowed $270,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. • LLB entered into a two-year interest rate swap agreement on January 1, 2024, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. • The agreement called for the company to receive payment based on a 10% fixed interest rate on a notional amount of $270,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly and rates reset at the beginning of each period. • Floating (SOFR) settlement rates were 10% at January 1, 8% at March 31, and 6% at June 30 and September 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Assume that LLB does not elect to use the shortcut method. The swap is deemed highly effective, but it is not assumed to be perfectly effective. Those quotes and the fair values of the note are as follows: Fair value of interest rate swap Fair value of note payable January 1 $0 $ 270,000 March 31 $ 7,172 $ 277,172 June 30 $ 12,911 $ 234,000 September 30 $ 10,965 $ 280,965 Required: Prepare the journal entries through September 30, 2024, to record the issuance of the note, interest, and necessary adjustments for changes in fair value. Use the extended method. Note: Round your intermediate and final answers to the nearest whole dollar. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.
No 1 2 3 4 5 6 7 8 9 Date January 01, 2024 March 31, 2024 March 31, 2024 March 31, 2024 June 30, 2024 June 30, 2024 June 30, 2024 Cash Notes payable Interest expense Cash Interest rate swap Interest expense Interest expense Notes payable Interest expense Notes payable Interest rate swap Cash Interest expense Interest expense Notes payable September 30, 202 Notes payable Interest expense September 30, 202 Cash Interest rate swap General Journal 33 33 33 33 33 333 ✔ 33 33 33 Debit 270,000✔ 8,750 7,172 7,172 5,739 Credit 270,000✔ 6,750 7,172 7,172
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Transcribed Image Text:No 1 2 3 4 5 6 7 8 9 Date January 01, 2024 March 31, 2024 March 31, 2024 March 31, 2024 June 30, 2024 June 30, 2024 June 30, 2024 Cash Notes payable Interest expense Cash Interest rate swap Interest expense Interest expense Notes payable Interest expense Notes payable Interest rate swap Cash Interest expense Interest expense Notes payable September 30, 202 Notes payable Interest expense September 30, 202 Cash Interest rate swap General Journal 33 33 33 33 33 333 ✔ 33 33 33 Debit 270,000✔ 8,750 7,172 7,172 5,739 Credit 270,000✔ 6,750 7,172 7,172
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