6821- Derivatives PDF

Preview

Summary

CPA REVIEW SCHOOL OF THE PHILIPPINESM a n i l aFINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZDERIVATIVES On January 1, 2021, an entity borrowed P5,000,000 from a bank at a variable rate of interest for 2 years. Interest will be paid annually to the bank on December 31 and the...

Description

CPA REVIEW SCHOOL OF THE PHILIPPINES Manila FINANCIAL ACCOUNTING AND REPORTING

VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

DERIVATIVES 1. On January 1, 2021, an entity borrowed P5,000,000 from a bank at a variable rate of interest for 2 years. Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2022. Under the agreement, the market rate of interest every January 1 resets the variable rate for that period and the amount of interest to be paid on December 31. In conjunction with the loan, the entity entered into a “receive variable, pay fixed” interest rate swap agreement with another bank speculator as a cash flow hedge. The market rates of interest are 10% on January 1, 2021 and 12% on January 1, 2022. The “underlying” fixed interest rate is 10%. The PV of 1 at 10% for one period is .91 and the PV of 1 at 12% for one period is .89. 1. What is the derivative asset or liability on December 31, 2021? a. 89,000 asset b. 89,000 liability c. 91,000 asset d. 91,000 liability 2. What amount should be reported as interest expense for 2022? a. 600,000 b. 500,000 c. 511,000 d. 700,000 2. On January 1, 2021, an entity received a four-year P5,000,000 loan with interest payments occurring at the end of each year and the principal to be repaid on December 31, 2024. The interest for 2021 is the prevailing market rate of 10% on January 1, 2021, and the market interest rate every January 1 resets the variable rate of interest for that year. The “underlying” fixed interest rate is 10%. In conjunction with the loan, the entity entered into a “receive variable, pay fixed” interest rate swap agreement as cash flow hedge. The interest swap payment will be made on December 31 of each year. The market rate of interest is 6% on January 1, 2022 and 8% on January 1, 2023. The PV of an ordinary annuity of 1 at 6% for three periods is 2.67 and the PV of an ordinary annuity of 1 at 8% for two periods is 1.78. 1. What is the derivative asset or liability on December 31, 2021? a. 600,000 asset b. 600,000 liability c. 534,000 asset d. 534,000 liability 2. What is the derivative asset or liability on December 31, 2022? a. 178,000 asset b. 178,000 liability c. 334,000 asset d. 334, 000 liability 3. What amount of interest expense should be reported for 2022? a. 500,000 b. 300,000 c. 400,000

d. 156,000

6821...