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Chapter 12: Q32. (page 610)

Why might a company become involved in an interest rate swap contract to receive fixed interest payments and pay variable?

Short Answer

Expert verified

A company might enter into the contract of the interest rate swap contract to set off the fixed payment of the debt obligation against the fixed payment swap.

Step by step solution

01

Definition of interest rate swap contract

An interest rate swap contract means the exchange of interest rates between two parties.

02

The reason a company chooses an interest rate swap contract

Whenever a company enters into an interest rate swap, the company wants to hedge the fair value of a certain fixed debt obligation. From this, the company wants to set off its fixed debt obligation with the payment received from the contract. This leads to a fall in the interest rate that increases the value of the swap contract. The swap contract is a very important part of risk management. It is directly related to the interest rate and affects the fixed debt obligation. Hence, the main reason for receiving the fixed interest payment is to set off against fixed debt obligations.

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Most popular questions from this chapter

Question: Explain how the investment account is affected by investee activities under the equity method.

Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for \(13,200 (Fairbanks does not have significant influence). During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman stock was selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustmentaccount.)

Explain why reclassification adjustments are necessary.

In examining financial statements, financial analysts often write off goodwill immediately. Comment on this procedure.

(Copyright Impairment) Presented below is information related to copyrights owned by Mare Company at December 31, 2017.

Cost

\(8,600,000

Carrying amount

4,300,000

Expected future net cash flows

4,000,000

Fair value

3,200,000

Assume that Mare Company will continue to use this copyright in the future. As of December 31, 2017, the copyright is estimated to have a remaining useful life of 10 years.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. The company does not use accumulated amortization accounts.
  2. Prepare the journal entry to record amortization expense for 2018 related to the copyrights.
  3. The fair value of the copyright at December 31, 2018, is \)3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.
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