Interest Rate Swap On January 1, 2013, Marshall Corp. issues$500,000 in 5.0% fixed rate debt with interest payments due everysix months. Concurrently, Marshall enters into an interest rateswap in which it receives 5.0% fixed and pays variables at averageLIBOR + 65 bp on a nontional amount of $500,000. On June 30, 2013,LIBOR averaged 3.2% during the six-month period. The estimated fairvalue of the swap to Marshall increased $50,000 on June 30, 2013,and the fair value of the debt is $550,000. a. Prepare the journalentries made by Marshall on January 1 and June 30 in connectionwith the debt issuance, the periodic interest, and value changes inthe swap and debt.
Did market interest rates increase or decrease during thisperiod? How do you know?
The market interest rates decreased, since the present value ofthe debt decreased.
The market interest rates increased, since the present value ofthe debt increased.
The market interest rates decreased, since the present value ofthe debt increased.
The market interest rates increased, since the present value ofthe debt decreased.
b. Suppose instead that Marshall issued variable rate debt andentered a swap in which it receives variable and pays fixed. If themarket rate of interest on its variable rate debt declines, doesMarshall recognize a gain or loss on the swap and what is itsaccounting treatment?
Interest Rate Swap On January 1, 2013, Marshall Corp. issues$500,000 in 5.0% fixed rate debt with interest payments due everysix months. Concurrently, Marshall enters into an interest rateswap in which it receives 5.0% fixed and pays variables at averageLIBOR + 65 bp on a nontional amount of $500,000. On June 30, 2013,LIBOR averaged 3.2% during the six-month period. The estimated fairvalue of the swap to Marshall increased $50,000 on June 30, 2013,and the fair value of the debt is $550,000. a. Prepare the journalentries made by Marshall on January 1 and June 30 in connectionwith the debt issuance, the periodic interest, and value changes inthe swap and debt.
Did market interest rates increase or decrease during thisperiod? How do you know?
The market interest rates decreased, since the present value ofthe debt decreased.
The market interest rates increased, since the present value ofthe debt increased.
The market interest rates decreased, since the present value ofthe debt increased.
The market interest rates increased, since the present value ofthe debt decreased.
b. Suppose instead that Marshall issued variable rate debt andentered a swap in which it receives variable and pays fixed. If themarket rate of interest on its variable rate debt declines, doesMarshall recognize a gain or loss on the swap and what is itsaccounting treatment?
