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Chapter 13: 26E (page 658)

(Fair Value Hedge) Sarazan Company issues a 4-year, 7.5% fixed-rate interest only, nonprepayable \(1,000,000

note payable on December 31, 2016. It changes the interest rate from a fixed 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 7.5% and pay variable with

settlement dates that match the interest payments on the debt. Assume that interest rates have declined during 2017 and that

Sarazan received \)13,000 as an adjustment to interest expense for the settlement at December 31, 2017. 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, 2017.

(b) Prepare the journal entry to record the receipt of the swap settlement on December 31, 2017.

(c) Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2017.

(d) Prepare the journal entry to record the change in the fair value of the debt on December 31, 2017.

Short Answer

Expert verified
  1. Interest expense: $75,000
  2. Interest receipt: $13,000
  3. Unrealized holding gain: $48,000
  4. Loss on debt securities: $48,000

Step by step solution

01

Entry for the interest expense

In this, Sarazan makes payment of interest at the rate of 7.5%

Date

Particulars

Debit

Credit

December 31, 2017

Interest Expense

$75,000

Cash

$75,000

(Payment of interest)

02

Entry of the receipt of the swap settlement contract

Date

Particulars

Debit

Credit

December 31, 2017

Cash

$13,000

Interest Expense

$13,000

03

Entry for the change in the fair value of the swap contract.

Date

Particulars

Debit

Credit

December 31, 2017

Swap Contract

$48,000

Unrealized Holding Gain or loss- Income

$48,000

(Unrealized gain of the swap contract)

04

Entry for the debt

Date

Particulars

Debit

Credit

December 31, 2017

Unrealized Holding Gain or loss- loss

$48,000

Debt

$48,000

( loss on the debt)

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Most popular questions from this chapter

BE13-4 (L01) Sport Pro Magazine sold 12,000 annual subscriptions on August 1, 2017, for $18 each. Prepare Sport Pro’s August 1, 2017, journal entry and the December 31, 2017, annual adjusting entry, assuming the magazines are published and delivered monthly.

Question: In accounting for short-term debt expected to be refinanced to long-term debt:

  1. GAAP uses the authorization date to determine classification of short-term debt to be refinanced.
  2. IFRS uses the authorization date to determine classification of short-term debt to be refinanced.
  3. IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.
  4. GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced.

Eddie Zambrano Corporation began operations on January 1, 2017. During its first 3 years of operations, Zambrano reported net income and declared dividends as follows.

Net Income Dividends Declared

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2016 160,000 50,000

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Income before income tax \(240,000

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Effective tax rate 40%

Instructions

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