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Bob Jensen's web site is at http://www.trinity.edu/~rjensen
Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
Changes in the Cash Flow Hedge of Forecasted Interest Payments with an
Interest Rate Swap
Statement on derivatives is available as Publication Number 186-B, June 1998, Product Code S133
           FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
           Call (800) 748-0659 or go to web site http://www.rutgers.edu/Accounting/raw/fasb/home2.html
           Copies are $11.50 each and are subject to academic discounting.
             SFAS 133 replaces the Exposure Draft publication Number 162-B, June 1996




Questions This is Bob Jensen's answer file.

Example 8 of SFAS 133, Page 82, Paragraph 154.
MNO Company enters into an interest rate swap (Swap 1) and designates it as a hedge of the
variable interest payments on a series of $5 million notes with 90-Day terms. MNO plans
to continue issuing new 90-day notes over the next five years as each outstanding note
matures. The interest on each note will be determined based on LIBOR at the time each note
is issued. Swap 1 requires a settlement every 90 days and the variable interest rate is
reset immediately following each payment. MNO pays a fixed rate of interest (6.5%) and
receives interest at LIBOR. MNO neither pays nor receives a premium at the inception of
 Swap 1. The notional amount of the contract is $5 million, and it expires in 5 years.

Example 8 of SFAS 133, Pages 82-83, Paragraphs 156-157.
Scenario 1 --- Two Undesignated Interest Rate Swaps
156. At the end of the second year of the 5-year hedging relationship, MNO discontinues
its practice of issuing 90-day notes. Instead, MNO issues a 3-year, $5 million note with a
fixed rate of interest (7.25%) . Because the interest rate on the three-year note is fixed, the
variability of the future interest payments has been eliminated. Thus, Swap 1 no longer
qualifies for cash flow hedge accounting. However, the net gain or loss on Swap 1 in
accumulated other comprehensive income is not reclassified immediately. Immediate
reclassification is required (ad permitted) only if it becomes probable that the hedged
transactions (future interest payments) will not occur. The variability of the payments has
been eliminated, but it still is probable that they will occur. Thus, those gains or losses
will continue to be reclassified from accumulated other comprehensive income to earnings
as the interest payments affect earnings (as required by paragraph 31).

157. Rather than liquidate the pay-fixed, receive variable Swap 1, MNO enters into a
pay-variable, receive-fixed interest rate swap (Swap 2) with a 3-year term and a notional
amount of $5 million. MNO neither pays nor receives a premium. Like Swap 1, Swap 2
requires a settlement every 90 days and reprices immediately following each settlement.
The relationship between 90-day interest rates and longer term rates has changed since
MNO entered into Swap 1 (that is, the shape of the yield cure is different). As result,
Swap 2 has different terms and its settlements do not exactly offset the settlements on
Swap 1. Under the terms of Swap 2, MNO will receive a fixed rate of 7.25% and pay interest
at LIBOR.

Example 8 of SFAS 133, Pages 83-84, Paragraphs 159-161.
Scenario 2 --- Two Interest Rate Swaps Designated as a Hedge of Future Variable Interest Payments
159. At the end of the second year of the 5-year hedging relationship, MNO discontinues its
practice of issuing 90-day notes and issues a 3-year, $5 million note with a rate of interest
that adjusts every 90 days to the prime rate quoted on that day. Swap 1 is no longer
effective as a cash flow hedge because the receive-variable rate on the swap is LIBOR,
and the prime rate and LIBOR are expected to change differently. Thus cash flows from the
swap will not effectively offset changes in cash flows from the three-year note.

160. The net gain or loss on Swap 1 in accumulated other comprehensive income as of the date MNO issues the three
reclassification would be required only if it becomes probable that the hedged transactions
(future interest payments) will not occur. The expected amounts of those payments have
changed (because they will be based on prime instead of LIBOR, as originally expected),
but it still is probable that the payments will occur. Thus, those gains or losses will continue
to be reclassified to earnings as the interest payments affect earnings.

160. Rather than liquidate Swap 1 and obtain a separate derivative to hedge the variability
of the prime-rate based interest payments, MNO enters into a pay-LIBOR, receive-prime
basis swap. The basis swap has a $5 million notional amount and a 3-year term and requires
a settlement every 90 days. MNO designates Swap 1 and the basis swap in combination as
the hedging instrument in a cash flow hedge of the variable interest payments on the three-
year note. On the three-year note, MNO pays interest at prime. On the basis swap, MNO
receives interest at prime and pays interest at LIBOR. On Swap 1, MNO receives interest
at LIBOR and pays interest at changes in the interest payments on the three-year note.
Changes in fair value of the two swaps are recognized in other comprehensive income
and are reclassified to earnings when the hedged forecasted transactions (the variable
interest payments) affect earnings (as required in paragraph 31). Because the two swaps in
combination meet the conditions discussed in paragraph 68, MNO is permitted to assume no
ineffectiveness and use the shortcuts method illustrated in Example 5.


Prior to assigning the questions below, students are given the Sheet 2 journal entries with some
numbers missing (red question marks). Their first task is to complete Sheet 2.
sb/home2.html
of the date MNO issues the three-year note is not reclassified into earnings immediately. Immediate
Warning: This file is best viewed in Excel software rather than in a web browser.
Fixed Data Sheet 2
Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
Changes in the Cash Flow Hedge of Forecasted Interest Payments with an
Interest Rate Swap
This is Bob Jensen's answer file.




Bob Jensen's Excel workbooks of FAS 133 illustrations http://www.cs.trinity.edu/~rjensen/
Example 8 should not be studied until the student understands Example 5
Paragraphs 154-161 Data of SFAS 133 With Some Added Data From Bob Jensen
               Annual       Annual          Annual                   Quarterly        Quarterly    Note &
               LIBOR         Note            Swap                      LIBOR             Note      Swap
 Quarter        Rate       Payment         Payment      Quarter          Rate            Rate     Principal
    0         5.5600%      7.8100%         6.5000%      07/01/x1       0.0139         0.019525  (5,000,000)
    1         5.5600%      7.8100%         6.5000%      09/30/x1       0.0139         0.019525  (5,000,000)
    2         5.6300%      7.8800%         6.5000%      12/31/x1       0.0141         0.019700  (5,000,000)
    3         5.5600%      7.8100%         6.5000%      03/31/x2       0.0139         0.019525  (5,000,000)
    4         5.4700%      7.7200%         6.5000%      06/30/x2       0.0137         0.019300  (5,000,000)
    5         6.7500%      9.0000%         6.5000%       09/30x2       0.0169         0.022500  (5,000,000)
    6         6.8600%      9.1100%         6.5000%      12/31/x2       0.0172         0.022775  (5,000,000)
    7         6.9700%      9.2200%         6.5000%      03/31/x3       0.0174         0.023050  (5,000,000)
    8         6.5700%      8.8200%         6.5000%      06/30/x3       0.0164         0.022050  (5,000,000)
Scenario 1                Scenario 1 Scenario 1 In Swap 2, MNC receives a fixed 7.25% and pays at variable LIBOR
    8                                                   06/30/x3                                (5,000,000)
    9         7.0000%      7.2500%         6.5000%      09/30/x3       0.0175         0.018125  (5,000,000)
    9         7.0000%      Swap 2 =        7.2500%       Swap 2 =      0.0175                   (5,000,000)
Scenario 2                Scenario 2 Scenario 2 In Swap 2, MNC receives variable prime and pays variable LIBOR
    8                                                   06/30/x3                                 (5000000)
    9         7.0000%      7.3250%         6.5000%      09/30/x3       0.0175         0.018313   (5000000)
    9         7.0000%      Swap 2 =        7.0000%      Swap 2 =       0.0175                    (5000000)


                                                                          Debit
   Date                                                                 (Credit)      Balance
 07/01/x1 Notes payable                                               (5,000,000)   ($5,000,000)
          Cash                                                         5,000,000     $5,000,000
          -To record initial borrowing on 90-day note




Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


                             Variable      Note &          Note           Net         Interest     Swap's
               LIBOR         Note        Swap          Interest     Swap        Swap       Estimated
 Quarter        Rate         Rate       Principal      Revenue      Rate       Payment       Value
 07/01/x1    0.013900     0.019525    ($5,000,000)        $0       0.0000        $0           $0
 09/30/x1    0.013900     0.019525    ($5,000,000)     $97,625    (0.0024)     $11,750     ($124,250)


                                                                    Debit
 Date                                                             (Credit)     Balance
 09/30/x1 Cash                                                    (97,625)    $4,902,375
          Interest expense (revenue)                               97,625      $97,625
          -To record interest expense on 90-day note

 09/30/x1 Cash                                                    (11,750)    $4,890,625
          Interest expense (revenue)                               11,750      $109,375
          -To record interest rate swap payment

 09/30/x1 Interest rate swaps receivable (payable)                (124,250)   ($124,250)
          Other comprehensive income (OCI)                         124,250     $124,250
          -Adjustment of swap to fair market value

 09/30/x1 Interest expense (revenue)                              (109,375)      $0
          Retained earnings                                        109,375    $109,375
          -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


             Quarterly     Variable      Note &          Note        Net       Interest      Swap's
              LIBOR          Note        Swap          Interest    Swap         Swap       Estimated
 Quarter        Rate         Rate       Principal      Revenue      Rate       Payment        Value
 09/30/x1    0.013900     0.019525    ($5,000,000)     $97,625    (0.0024)     $11,750     ($124,250)
 12/31/x1    0.014075     0.019700    ($5,000,000)     $98,500    (0.0022)     $10,875     ($369,000)


                                                                    Debit
 Date                                                             (Credit)     Balance
 12/31/x1 Cash                                                    (98,500)    $4,792,125
          Interest expense (revenue)                               98,500      $98,500
          -To record interest expense on 90-day note

 12/31/x1 Cash                                                    (10,875)    $4,781,250
          Interest expense (revenue)                               10,875      $109,375
          -To record interest rate swap payment

 12/31/x1 Interest rate swaps receivable (payable)                (244,750)   ($369,000)
          Other comprehensive income (OCI)                         244,750     $369,000
          -Adjustment of swap to fair market value

 12/31/x1 Interest expense (revenue)                              (109,375)      $0
          Retained earnings                                        109,375    $218,750
            -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


             Quarterly      Variable       Note &        Note        Net       Interest      Swap's
              LIBOR           Note         Swap        Interest    Swap         Swap       Estimated
 Quarter        Rate          Rate        Principal    Revenue      Rate       Payment        Value
 12/31/x1    0.014075      0.019700      (5000000)      98500     (0.0022)     $10,875      (369000)
 03/31/x2    0.013900      0.019525      (5000000)      97625     (0.0024)     $11,750      (429550)


                                                                    Debit
 Date                                                             (Credit)     Balance
 03/31/x2 Cash                                                    (97,625)    $4,683,625
          Interest expense (revenue)                               97,625      $97,625
          -To record interest expense on 90-day note

 03/31/x2 Cash                                                    (11,750)    $4,671,875
          Interest expense (revenue)                               11,750      $109,375
          -To record interest rate swap payment

 03/31/x2 Interest rate swaps receivable (payable)                (60,550)    ($429,550)
          Other comprehensive income (OCI)                         60,550      $429,550
          -Adjustment of swap to fair market value

 03/31/x2 Interest expense (revenue)                              (109,375)      $0
          Retained earnings                                        109,375    $328,125
          -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.

             Quarterly      Variable       Note &        Note        Net       Interest      Swap's
              LIBOR           Note         Swap        Interest    Swap         Swap       Estimated
 Quarter        Rate          Rate        Principal    Revenue      Rate       Payment        Value
 03/31/x2    0.013900      0.019525      (5000000)      97625     (0.0024)     $11,750      (429550)
 06/30/x2    0.013675      0.019300      (5000000)      96500     (0.0026)     $12,875      (214100)


                                                                    Debit
 Date                                                             (Credit)     Balance
 06/30/x2 Cash                                                    (96,500)    $4,575,375
          Interest expense (revenue)                               96,500      $96,500
          -To record interest expense on 90-day note

 06/30/x2 Cash                                                    (12,875)    $4,562,500
          Interest expense (revenue)                               12,875      $109,375
          -To record interest rate swap payment
 06/30/x2 Interest rate swaps receivable (payable)                   215,450    ($214,100)
          Other comprehensive income (OCI)                          (215,450)    $214,100
          -Adjustment of swap to fair market value

 06/30/x2 Interest expense (revenue)                                (109,375)      $0
          Retained earnings                                          109,375    $437,500
          -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


             Quarterly      Variable       Note &          Note        Net       Interest      Swap's
              LIBOR           Note         Swap          Interest     Swap        Swap       Estimated
 Quarter        Rate          Rate        Principal      Revenue      Rate       Payment        Value
 06/30/x2    0.013675      0.019300      (5000000)        96500     (0.0026)     $12,875      (214100)
 09/30x2     0.016875      0.022500      (5000000)       112500      0.0006      ($3,125)      36452


                                                                      Debit
 Date                                                                (Credit)     Balance
 09/30x2    Cash                                                    (112,500)   $4,450,000
            Interest expense (revenue)                               112,500     $112,500
            -To record interest expense on 90-day note

 09/30x2    Cash                                                      3,125     $4,453,125
            Interest expense (revenue)                               (3,125)     $109,375
            -To record interest rate swap payment

 09/30x2    Interest rate swaps receivable (payable)                 250,552      $36,452
            Other comprehensive income (OCI)                        (250,552)    ($36,452)
            -Adjustment of swap to fair market value

 09/30x2    Interest expense (revenue)                              (109,375)      $0
            Retained earnings                                        109,375    $546,875
            -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


             Quarterly      Variable       Note &          Note       Net        Interest     Swap's
              LIBOR           Note         Swap          Interest    Swap         Swap       Estimated
 Quarter        Rate          Rate        Principal      Revenue     Rate        Payment       Value
 09/30x2     0.016875      0.022500      (5000000)       112500     0.0006       ($3,125)     36452
 12/31/x2    0.017150      0.022775      (5000000)       113875     0.0009       ($4,500)     74358


                                                                     Debit
 Date                                                              (Credit)     Balance
 12/31/x2 Cash                                                    (113,875)   $4,339,250
          Interest expense (revenue)                               113,875     $113,875
          -To record interest expense on 90-day note

 12/31/x2 Cash                                                      4,500     $4,343,750
          Interest expense (revenue)                               (4,500)     $109,375
          -To record interest rate swap payment

 12/31/x2 Interest rate swaps receivable (payable)                 37,906       $74,358
          Other comprehensive income (OCI)                        (37,906)     ($74,358)
          -Adjustment of swap to fair market value

 12/31/x2 Interest expense (revenue)                              (109,375)      $0
          Retained earnings                                        109,375    $656,250
          -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


             Quarterly     Variable      Note &          Note       Net        Interest     Swap's
              LIBOR          Note        Swap          Interest    Swap         Swap       Estimated
 Quarter        Rate         Rate       Principal      Revenue     Rate        Payment       Value
 12/31/x2    0.017150     0.022775     (5000000)       113875     0.0009       ($4,500)     74358
 03/31/x3    0.017425     0.023050     (5000000)       115250     0.0012       ($5,875)     98763


                                                                    Debit
 Date                                                              (Credit)     Balance
 03/31/x3 Cash                                                    (115,250)   $4,228,500
          Interest expense (revenue)                               115,250     $115,250
          -To record interest expense on 90-day note

 03/31/x3 Cash                                                      5,875     $4,234,375
          Interest expense (revenue)                               (5,875)     $109,375
          -To record interest rate swap payment

 03/31/x3 Interest rate swaps receivable (payable)                 24,405       $98,763
          Other comprehensive income (OCI)                        (24,405)     ($98,763)
          -Adjustment of swap to fair market value

 03/31/x3 Interest expense (revenue)                              (109,375)      $0
          Retained earnings                                        109,375    $765,625
          -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
             Quarterly     Variable       Note &         Note        Net         Interest      Swap's
              LIBOR          Note         Swap         Interest     Swap          Swap        Estimated
 Quarter        Rate         Rate        Principal     Revenue      Rate         Payment        Value
 03/31/x3    0.017425     0.023050      (5000000)      115250      0.0012        ($5,875)       98763
 06/30/x3    0.016425     0.022050      (5000000)      110250      0.0002         ($875)       (26453)


                                                                    Debit
 Date                                                              (Credit)       Balance
 06/30/x3 Cash                                                    (110,250)     $4,124,125
          Interest expense (revenue)                               110,250       $110,250
          -To record interest expense on 90-day note

 06/30/x3 Cash                                                       875        $4,125,000
          Interest expense (revenue)                                (875)        $109,375
          -To record interest rate swap payment

 06/30/x3 Interest rate swaps receivable (payable)                (125,216)      ($26,453)
          Other comprehensive income (OCI)                         125,216        $26,453    Must be amortized
          -Adjustment of swap to fair market value

 06/30/x3 Interest expense (revenue)                              (109,375)     ($109,375)
          Retained earnings                                        109,375       $875,000
          -To close interest expense (revenue)

 06/30/x3 Notes payable                                            5,000,000       $0
          Cash                                                    (5,000,000)   ($875,000)
          -To record termination of 90-day notes payable

 06/30/x3 Notes payable                                           (5,000,000)   ($5,000,000) Fixed LIBOR in Scenario 1
          Cash                                                     5,000,000     $4,125,000 Variable U.S. Prime in Scena
          -To record issuance of three-year fixed rate note



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
Scenario 1               Scenario 1 Scenario 1
               Annual      Annual        Annual                   Quarterly      Quarterly      Note &
               LIBOR        Note          Swap                     LIBOR           Note         Swap
 Quarter        Rate      Payment      Payment       Quarter        Rate           Rate        Principal
    8                     7.2500%         Fixed     06/30/x3                                       0
    9         7.0000%     7.2500%       6.5000%     09/30/x3       0.0175        0.018125     (5000000)
    9         7.0000%     Swap 2 =      7.2500%       Swap 2 =     0.0175                     (5000000)


Scenario 1                                                           Debit
 Date                                                              (Credit)      Balance
 09/30/x3 Cash                                                     (90,625)     $4,034,375   Scenario 1
Scenario 1 Interest expense (revenue)                               90,625       $90,625     Scenario 1
           -To record interest expense on Scenario 1 note

 09/30/x3 Cash                                                      6,250       $4,040,625   Scenario 1
           Other comprehensive income (OCI)                     (2,204)     $24,249     Scenario 1
Scenario 1 Interest expense (revenue)                           (4,046)     $86,579     Scenario 1
           -To record interest rate Swap 1 payment

 09/30/x3 Interest rate swaps receivable (payable)              128,350     $101,897    Scenario 1
Scenario 1 Interest expense (revenue)                          (128,350)   ($101,897)   Scenario 1
           -Adjustment of Swap 1 to fair market value

 09/30/x3 Cash                                                  (3,125)     $98,772     Scenario 1
Scenario 1 Interest expense (revenue)                            3,125      $89,704     Scenario 1
           -To record interest rate Swap 2 payment

 09/30/x3 Interest rate swaps receivable (payable)              17,452      ($17,452)   Scenario 1
Scenario 1 Interest expense (revenue)                          (17,452)      $72,252    Scenario 1
           -Adjustment of Swap 2 to fair market value


 09/30/x3 Interest expense (revenue)                           (89,704)       $0        Scenario 1
Scenario 1 Retained earnings                                    89,704     $964,704     Scenario 1
           -To close interest expense (revenue)




Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
Scenario 2              Scenario 2 Scenario 2
               Annual      Annual        Annual                Quarterly   Quarterly      Note &
               LIBOR        Note          Swap                  LIBOR        Note         Swap
 Quarter        Rate      Payment      Payment       Quarter     Rate        Rate        Principal
    8                                                  0                                     0
    9         7.0000%     7.3250%       6.5000%     09/30/x3    0.0175     0.018313     (5000000)
    9         7.0000%     Swap 2 =      7.0000%     Swap 2 =    0.0175     0.000000     (5000000)


Scenario 2                                                       Debit
 Date                                                          (Credit)     Balance
 09/30/x3 Cash                                                 (91,563)    $4,033,438   Scenario 2
Scenario 2 Interest expense (revenue)                           91,563      $91,563     Scenario 2
           -To record interest expense on Scenario 1 note

 09/30/x3 Cash                                                   6,250     $4,039,688   Scenario 2
           OCI                                                  (2,204)     $24,249     Scenario 3
Scenario 2 Interest expense (revenue)                           (4,046)     $87,517     Scenario 2
           -To record interest rate Swap 1 payment

 09/30/x3 Interest rate swaps receivable (payable)              128,350     $101,897    Scenario 2
Scenario 2 Other comprehensive income (OCI)                    (128,350)   ($104,101)   Scenario 2
           -Adjustment of Swap 1 to fair market value

 09/30/x3 Cash                                                  (4,062)    $4,035,625   Scenario 2
Scenario 2 Interest expense (revenue)                            4,062      $91,579     Scenario 2
           -To record interest rate Swap 2 payment
 09/30/x3 Interest rate swaps receivable (payable)       17,452     ($17,452)   Scenario 2
Scenario 2 Other comprehensive income (OCI)             (17,452)   ($121,553)   Scenario 2
           -Adjustment of Swap 2 to fair market value


 09/30/x3 Interest expense (revenue)                    (91,579)      $0        Scenario 2
Scenario 2 Retained earnings                             91,579    $966,579     Scenario 2
           -To close interest expense (revenue)
                 Note         Net      Interest   Swap's      Note +
               Interest      Swap        Swap    Estimated    Swap
               Expense        Rate     Payment      Value    Payment
                   0       0.000000        0         0          0
                97,625    (0.002350)    11,750   (124,250)   109,375
                98,500    (0.002175)    10,875   (369,000)   109,375
                97,625    (0.002350)    11,750   (429,550)   109,375
                96,500    (0.002575)    12,875   (214,100)   109,375
               112,500     0.000625     (3,125)    36,452    109,375
               113,875     0.000900     (4,500)    74,358    109,375
               115,250     0.001175     (5,875)    98,763    109,375
               110,250     0.000175      (875)    (26,453)   109,375
 pays at variable LIBOR                 $32,875                $32,875 = Total Expense
                                                  (26,453)
              90,625      0.001250      (6,250)   101,897
                          0.000625       3,125    (17,452)
d pays variable LIBOR                   ($3,125)
                                                  (26453)
              91563       0.001250      (6250)    101,897
                          0.000812       4062     (25,632)
              $91,563                   ($2,188)




              Note +
 Swap
Payment

$109,375




 Note +
 Swap
Payment

$109,375
 Note +
 Swap
Payment

$109,375




 Note +
 Swap
Payment

$109,375
 Note +
 Swap
Payment

$109,375




 Note +
 Swap
Payment

$109,375
 Note +
 Swap
Payment

$109,375
               Note +
               Swap
              Payment

             $109,375




Must be amortized




Fixed LIBOR in Scenario 1
Variable U.S. Prime in Scenario 2




                Note           Net     Interest  Swap's    Para. 156
              Interest        Swap      Swap    Estimated    OCI
              Expense         Rate     Payment    Value   Amortiation
                                                    0
               90625        0.001250    (6250)   101897    ($2,204)
                            0.000625     3125     97542
No deferral in OCI




No deferral in OCI




  Note             Net   Interest  Swap's
Interest          Swap    Swap    Estimated
Expense           Rate   Payment    Value

 91563       0.001250     (6250)   101897
   0         0.000812      4062    (25632)




Deferral in OCI
Deferral in OCI
Warning: This file is best viewed in Excel software rather than in a web browser.
Fixed Data Sheet 2
Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
Changes in the Cash Flow Hedge of Forecasted Interest Payments with an
Interest Rate Swap
This is Bob Jensen's answer file.




Change any of the red numbers in Rows 21-37 for a sensitivity analysis
             Annual        Annual       Annual                     Quarterly Quarterly   Note &
              LIBOR        Note          Swap                        LIBOR      Note     Swap
 Quarter       Rate      Payment      Payment        Quarter          Rate      Rate    Principal
   0        5.5600%       7.8100%      6.6500%       07/01/x1      0.013900  0.019525  (5000000)
   1        5.5600%       7.8100%      6.6500%       09/30/x1      0.013900  0.019525  (5000000)
   2        5.6300%       7.8800%      6.6500%       12/31/x1      0.014075  0.019700  (5000000)
   3        5.5600%       7.8100%      6.6500%       03/31/x2      0.013900  0.019525  (5000000)
   4        5.4700%       7.7200%      6.6500%       06/30/x2      0.013675  0.019300  (5000000)
   5        6.7500%       9.0000%      6.6500%       09/30x2       0.016875  0.022500  (5000000)
   6        6.8600%       9.1100%      6.6500%       12/31/x2      0.017150  0.022775  (5000000)
   7        6.9700%       9.2200%      6.6500%       03/31/x3      0.017425  0.023050  (5000000)
   8        6.5700%       8.8200%      6.6500%       06/30/x3      0.016425  0.022050  (5000000)
Scenario 1               Scenario 1 Scenario 1 In Swap 2, MNC receives a fixed 7.25% and pays at variable LIBOR
   8                                                 06/30/x3                          (5000000)
   9        7.0000%       7.2500%      6.6500%       09/30/x3      0.017500  0.018125  (5000000)
   9        7.0000%      Swap 2 =      7.2500%        Swap 2 = 0.017500                (5000000)
Scenario 2               Scenario 2 Scenario 2 In Swap 2, MNC receives variable prime and pays variable LIBOR
   8                                                 06/30/x3                          (5000000)
   9        7.0000%       7.3250%      6.6500%       09/30/x3      0.017500  0.018313  (5000000)
   9        7.0000%      Swap 2 =      7.0000%      Swap 2 = 0.017500                  (5000000)


                                                                      Debit
   Date                                                              (Credit)    Balance
 07/01/x1 Notes payable                                              (5000000) ($5,000,000)
          Cash                                                        5000000 $5,000,000
          -To record initial borrowing on 90-day note




Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


                            Variable      Note &          Note          Net         Interest   Swap's
              LIBOR         Note        Swap          Interest      Swap       Swap        Estimated
Quarter        Rate         Rate       Principal      Revenue        Rate     Payment         Value
07/01/x1    0.013900     0.019525     (5000000)          0        0.000000      $0             0
09/30/x1    0.013900     0.019525     (5000000)        97625     (0.002725)   $13,625       (124250)


                                                                   Debit
Date                                                              (Credit)   Balance
09/30/x1 Cash                                                       (97625) $4,902,375
         Interest expense (revenue)                                  97625   $97,625
         -To record interest expense on 90-day note

09/30/x1 Cash                                                       (13625) $4,888,750
         Interest expense (revenue)                                  13625   $111,250
         -To record interest rate swap payment

09/30/x1 Interest rate swaps receivable (payable)                  (124250)   ($124,250)
         Other comprehensive income                                 124250     $124,250
         -Adjustment of swap to fair market value

09/30/x1 Interest expense (revenue)                                (111250)   ($111,250)
         Retained earnings                                          111250     $111,250
         -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


            Quarterly     Variable      Note &          Note         Net      Interest       Swap's
             LIBOR          Note        Swap          Interest      Swap       Swap        Estimated
Quarter        Rate         Rate       Principal      Revenue       Rate      Payment         Value
09/30/x1    0.013900     0.019525     (5000000)        97625     (0.002725)   $13,625       (124250)
12/31/x1    0.014075     0.019700     (5000000)        98500         (0)      $12,750       (369000)


                                                                   Debit
Date                                                              (Credit)   Balance
12/31/x1 Cash                                                       (98500) $4,790,250
         Interest expense (revenue)                                  98500   $98,500
         -To record interest expense on 90-day note

12/31/x1 Cash                                                       (12750) $4,777,500
         Interest expense (revenue)                                  12750   $111,250
         -To record interest rate swap payment

12/31/x1 Interest rate swaps receivable (payable)                  (244750)   ($369,000)
         Other comprehensive income                                 244750     $369,000
         -Adjustment of swap to fair market value

12/31/x1 Interest expense (revenue)                                (111250)   ($111,250)
         Retained earnings                                          111250     $222,500
           -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


            Quarterly      Variable       Note &        Note         Net      Interest       Swap's
             LIBOR           Note         Swap        Interest      Swap       Swap        Estimated
Quarter        Rate          Rate        Principal    Revenue       Rate      Payment         Value
12/31/x1    0.014075      0.019700      (5000000)      98500     (0.002550)   $12,750       (369000)
03/31/x2    0.013900      0.019525      (5000000)      97625     (0.002725)   $13,625       (429550)


                                                                   Debit
Date                                                              (Credit)   Balance
03/31/x2 Cash                                                       (97625) $4,679,875
         Interest expense (revenue)                                  97625   $97,625
         -To record interest expense on 90-day note

03/31/x2 Cash                                                       (13625) $4,666,250
         Interest expense (revenue)                                  13625   $111,250
         -To record interest rate swap payment

03/31/x2 Interest rate swaps receivable (payable)                   (60550)   ($429,550)
         Other comprehensive income                                  60550     $429,550
         -Adjustment of swap to fair market value

03/31/x2 Interest expense (revenue)                                (111250)   ($111,250)
         Retained earnings                                          111250     $333,750
         -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.

            Quarterly      Variable       Note &        Note         Net      Interest       Swap's
             LIBOR           Note         Swap        Interest      Swap       Swap        Estimated
Quarter        Rate          Rate        Principal    Revenue       Rate      Payment         Value
03/31/x2    0.013900      0.019525      (5000000)      97625     (0.002725)   $13,625       (429550)
06/30/x2    0.013675      0.019300      (5000000)      96500     (0.002950)   $14,750       (214100)


                                                                   Debit
Date                                                              (Credit)   Balance
06/30/x2 Cash                                                       (96500) $4,569,750
         Interest expense (revenue)                                  96500   $96,500
         -To record interest expense on 90-day note

06/30/x2 Cash                                                       (14750) $4,555,000
         Interest expense (revenue)                                  14750   $111,250
         -To record interest rate swap payment
06/30/x2 Interest rate swaps receivable (payable)                   215450    ($214,100)
         Other comprehensive income                                (215450)    $214,100
         -Adjustment of swap to fair market value

06/30/x2 Interest expense (revenue)                                (111250)   ($111,250)
         Retained earnings                                          111250     $445,000
         -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


            Quarterly     Variable      Note &          Note         Net      Interest       Swap's
             LIBOR          Note        Swap          Interest      Swap       Swap        Estimated
Quarter        Rate         Rate       Principal      Revenue        Rate     Payment         Value
06/30/x2    0.013675     0.019300     (5000000)        96500     (0.002950)   $14,750       (214100)
09/30x2     0.016875     0.022500     (5000000)       112500      0.000250    ($1,250)       36452


                                                                   Debit
 Date                                                             (Credit)    Balance
 09/30x2 Cash                                                      (112500) $4,442,500
         Interest expense (revenue)                                 112500   $112,500
         -To record interest expense on 90-day note

 09/30x2 Cash                                                         1250 $4,443,750
         Interest expense (revenue)                                  (1250) $111,250
         -To record interest rate swap payment

 09/30x2 Interest rate swaps receivable (payable)                   250552     $36,452
         Other comprehensive income                                (250552)   ($36,452)
         -Adjustment of swap to fair market value

 09/30x2 Interest expense (revenue)                                (111250)   ($111,250)
         Retained earnings                                          111250     $556,250
         -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


            Quarterly     Variable      Note &          Note        Net       Interest      Swap's
             LIBOR          Note        Swap          Interest     Swap        Swap        Estimated
Quarter        Rate         Rate       Principal      Revenue       Rate      Payment        Value
09/30x2     0.016875     0.022500     (5000000)       112500     0.000250     ($1,250)      36452
12/31/x2    0.017150     0.022775     (5000000)       113875     0.000525     ($2,625)      74358


                                                                   Debit
Date                                                             (Credit)    Balance
12/31/x2 Cash                                                     (113875) $4,329,875
         Interest expense (revenue)                                113875   $113,875
         -To record interest expense on 90-day note

12/31/x2 Cash                                                         2625 $4,332,500
         Interest expense (revenue)                                  (2625) $111,250
         -To record interest rate swap payment

12/31/x2 Interest rate swaps receivable (payable)                   37906     $74,358
         Other comprehensive income                                (37906)   ($74,358)
         -Adjustment of swap to fair market value

12/31/x2 Interest expense (revenue)                               (111250)   ($111,250)
         Retained earnings                                         111250     $667,500
         -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.


            Quarterly     Variable      Note &          Note        Net      Interest      Swap's
             LIBOR          Note        Swap          Interest     Swap       Swap        Estimated
Quarter        Rate         Rate       Principal      Revenue       Rate     Payment        Value
12/31/x2    0.017150     0.022775     (5000000)       113875     0.000525    ($2,625)      74358
03/31/x3    0.017425     0.023050     (5000000)       115250     0.000800    ($4,000)      98763


                                                                  Debit
Date                                                             (Credit)    Balance
03/31/x3 Cash                                                     (115250) $4,217,250
         Interest expense (revenue)                                115250   $115,250
         -To record interest expense on 90-day note

03/31/x3 Cash                                                         4000 $4,221,250
         Interest expense (revenue)                                  (4000) $111,250
         -To record interest rate swap payment

03/31/x3 Interest rate swaps receivable (payable)                   24405     $98,763
         Other comprehensive income                                (24405)   ($98,763)
         -Adjustment of swap to fair market value

03/31/x3 Interest expense (revenue)                               (111250)   ($111,250)
         Retained earnings                                         111250     $778,750
         -To close interest expense (revenue)



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
             Quarterly     Variable      Note &          Note         Net       Interest       Swap's
              LIBOR          Note        Swap          Interest      Swap         Swap        Estimated
 Quarter        Rate         Rate       Principal      Revenue        Rate      Payment         Value
 03/31/x3    0.017425     0.023050     (5000000)       115250      0.000800     ($4,000)        98763
 06/30/x3    0.016425     0.022050     (5000000)       110250     (0.000200)     $1,000        (26453)


                                                                    Debit
 Date                                                              (Credit)    Balance
 06/30/x3 Cash                                                      (110250) $4,111,000
          Interest expense (revenue)                                 110250   $110,250
          -To record interest expense on 90-day note

 06/30/x3 Cash                                                        (1000) $4,110,000
          Interest expense (revenue)                                   1000   $111,250
          -To record interest rate swap payment

 06/30/x3 Interest rate swaps receivable (payable)                  (125216)    ($26,453)
          Other comprehensive income                                 125216      $26,453
          -Adjustment of swap to fair market value

 06/30/x3 Interest expense (revenue)                                (111250)   ($111,250)
          Retained earnings                                          111250     $890,000
          -To close interest expense (revenue)

 06/30/x3 Notes payable                                             5000000       $0
          Cash                                                     (5000000)   ($890,000)
          -To record termination of 90-day notes payable

 06/30/x3 Notes payable                                             5000000 $5,000,000
          Cash                                                     (5000000) ($5,890,000)
          -To record issuance of three-year fixed rate note



Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
Scenario 1              Scenario 1 Scenario 1
              Annual      Annual        Annual               Quarterly          Quarterly       Note &
              LIBOR        Note          Swap                 LIBOR               Note          Swap
 Quarter       Rate      Payment       Payment      Quarter     Rate              Rate         Principal
   8                     7.2500%         Fixed     06/30/x3                                        0
   9         7.0000%     7.2500%       6.6500%     09/30/x3  0.017500           0.018125      (5000000)
   9         7.0000%     Swap 2 =      7.2500%      Swap 2 = 0.017500                         (5000000)


                                                                    Debit
 Date                                                              (Credit)    Balance
 09/30/x3 Cash                                                       (90625) ($5,980,625)
Scenario 1 Interest expense (revenue)                                 90625    $90,625
           -To record interest expense on Scenario 1 note

 09/30/x3 Cash                                                         4375    ($5,976,250)
Scenario 1 Interest expense (revenue)                             (4375)   $86,250
           -To record interest rate Swap 1 payment

 09/30/x3 Interest rate swaps receivable (payable)              128350      $101,897
Scenario 1 Other comprehensive income                          (128350)    ($101,897)
           -Adjustment of Swap 1 to fair market value

 09/30/x3 Cash                                                     3125    $105,022
Scenario 1 Interest expense (revenue)                             (3125)    $83,125
           -To record interest rate Swap 2 payment

 09/30/x3 Interest rate swaps receivable (payable)                97542     $199,439
Scenario 1 Other comprehensive income                            (97542)   ($199,439)
           -Adjustment of Swap 2 to fair market value


 09/30/x3 Interest expense (revenue)                             (83125)      $0
Scenario 1 Retained earnings                                      83125    $973,125
           -To close interest expense (revenue)




Example 8 of SFAS 133, pp. 82-84, Paragraphs 153-161.
Scenario 1              Scenario 1 Scenario 1
              Annual      Annual        Annual                Quarterly    Quarterly      Note &
              LIBOR        Note          Swap                  LIBOR         Note         Swap
 Quarter       Rate      Payment       Payment      Quarter     Rate         Rate        Principal
   8                                                  0                                      0
   9         7.0000%     7.3250%       6.6500%     09/30/x3   0.017500     0.018313     (5000000)
   9         7.0000%     Swap 2 =      7.0000%     Swap 2 =   0.017500     0.000000     (5000000)


                                                               Debit
 Date                                                         (Credit)    Balance
 09/30/x3 Cash                                                  (91563) ($5,981,563)
Scenario 2 Interest expense (revenue)                            91563    $91,563
           -To record interest expense on Scenario 1 note

 09/30/x3 Cash                                                     4375 ($5,977,188)
Scenario 2 Interest expense (revenue)                             (4375)  $87,188
           -To record interest rate Swap 1 payment

 09/30/x3 Interest rate swaps receivable (payable)              128350      $101,897
Scenario 2 Other comprehensive income                          (128350)    ($101,897)
           -Adjustment of Swap 1 to fair market value

 09/30/x3 Cash                                                     4062 ($5,973,125)
Scenario 2 Interest expense (revenue)                             (4062)  $83,125
           -To record interest rate Swap 2 payment

 09/30/x3 Interest rate swaps receivable (payable)               99532     $201,429
Scenario 2 Other comprehensive income                   (99532)   ($201,429)
           -Adjustment of Swap 2 to fair market value


 09/30/x3 Interest expense (revenue)                    (83125)      $0
Scenario 2 Retained earnings                             83125    $973,125
           -To close interest expense (revenue)
                 Note           Net      Interest    Swap's
               Interest        Swap       Swap     Estimated
              Expense           Rate     Payment      Value
                  0          0.000000        0          0
                97625       (0.002725)    13625     (124250)
                98500       (0.002550)    12750     (369000)
                97625       (0.002725)    13625     (429550)
                96500       (0.002950)    14750     (214100)
               112500        0.000250     (1250)      36452
               113875        0.000525     (2625)      74358
               115250        0.000800     (4000)      98763
               110250       (0.000200)     1000      (26453)
nd pays at variable LIBOR                    47875             47875 = Total Expense
                                                     (26453)
              90625         0.000875      (4375)     101897
                            0.000625      (3125)      97542
and pays variable LIBOR                   (7500)
                                                     (26453)
              91563         0.000875      (4375)     101897
                            0.000812      (4062)      99532
              91563                       (8437)
  Note       Net      Interest    Swap's
Interest    Swap       Swap      Estimated
Expense     Rate      Payment      Value
                                     0
90625      0.000875    (4375)     101897
           0.000625    (3125)      97542
  Note       Net      Interest    Swap's
Interest    Swap       Swap      Estimated
Expense     Rate      Payment      Value

91563      0.000875    (4375)     101897
  0        0.000812    (4062)      99532

				
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