P-10 Derivatives Summary (IA1 Valix) PDF

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P- 10 DERIVATIVESINTEREST RATE SWAP*On January 1, 2019, Simple Company received a 5-year variable interest rate loan of 5,000,000 with interest payment at the end of each year and the principal to be repaid on December 31, 2023.*The interest rate for 2019 is 10% and the rate in each succeeding year ...

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P-10 DERIVATIVES INTEREST RATE SWAP *On January 1, 2019, Simple Company received a 5-year variable interest rate loan of 5,000,000 with interest payment at the end of each year and the principal to be repaid on December 31, 2023. *The interest rate for 2019 is 10% and the rate in each succeeding year is equal to the market interest rate on January 1 of each year. *Simple Company entered into an interest rate swap agreement with another bank. The swap payments are made at the end of the year. *The derivative contract is designated as a cash flow hedge Market rates of interests: January 1, 2020 January 1, 2021 January 1, 2022 January 1, 2023

11% 8% 6% 7%

2019 VIR 1/1/20 UIR More than NCS (5M x 1%)

11% 10% 1% 50,000

2020 VIR 1/1/20 UIR Less than NCS (5M x 2%)

8% 10% 2% 100,000

2021 VIR 1/1/20 UIR Less than NCS (5M x 4%)

6% 10% 4% 200,000

2019 VIR 1/1/20 UIR Less than NCS (5M x 3%)

7% 10% 3% 150,000

Journal entries 2019 Jan 1 Cash Loan Payable

5,000,000 5,000,000

# Dec. 31 Interest expense(5Mx10%) 500,000 Cash 500,000 # Dec. 31 IRS Receivable 155,000 Unrealized gain-IRS 155,000 (50,000 x 3.10) PV of ordinary annuity of 1 at 11% for 4 period 2020 Dec. 31 Interest expense(5Mx11%) 550,000 Cash 550,000 # Dec. 31 Cash 50,000 IRS Receivable 50,000 # Dec. 31 Unrealized gain-IRS 50,000

P-10 DERIVATIVES Interest expense 50,000 # Dec. 31 Unrealized gain-IRS 105,000 Cancelation of the balance of the IRS IRS Receivable 105,000 receivable and the related unrealized (155,000 – 50,000) gain because of the reduced interest # rate on January 1. 2021. Dec. 31 Unrealized loss-IRS 258,000 IRS Payable 258,000 (100,000 x 2.58) PV of an ordinary annuity of 1 at 8% for 3 periods 2021 Dec. 31 Interest expense(5Mx8%) 400,000 Cash 400,000 # Dec. 31 IRS Payable 100,000 Cash 100,000 # Dec. 31 Interest Expense 100,000 Unrealized loss-IRS 100,000 Unrealized loss – 12/31/21 (200T x 1.83) 366T Unrealized loss per book (258T-100T) 158T # Increase in Unrealized loss 208T Dec. 31 Unrealized loss-IRS 208,000 IRS Payable 208,000 *1.83 = the PV of ordinary annuity of 1 at 6% for two periods

2022 Dec. 31

Interest expense(5Mx6%) 300,000 Cash 300,000 # Dec. 31 IRS Payable 200,000 Cash 200,000 # Dec. 31 Interest expense 200,000 Unrealized loss-IRS 200,000 # Dec. 31 IRS Payable 26,500 Unrealized loss-IRS 26,500 2023 Dec. 31 Interest Expense(5Mx7%) Cash # Dec. 31 IRS Payable Unrealized loss-IRS Cash # Dec. 31 Interest expense Unrealized loss-IRS # Dec. 31 Loan Payable Cash

350,000 350,000 139,500 10,500 150,000 150,000 150,000 5,000,000 5,000,000

Unrealized loss – 12/31/22(150T x .93) 139,500 Unrealized loss per book (366T-200T) 166,000 Decrease in Unrealized loss (26,500) *1.83 = the PV of ordinary annuity of 1 at 6% for two periods

P-10 DERIVATIVES...