MGT_322_ch16_solutions - MGT 322 CHAPTER 16...

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MGT 322 CHAPTER 16 SOLUTIONS *EXERCISE 16-18 (15-20 minutes) (a) December 31, 2007 Note Rate Amount Interest paid $ 1,000,000 5.8% $ 58,000 Cash paid on swap 2,000 Interest expense $ 1,000,000 6% $ 60,000 December 31, 2008 Note Rate Amount Interest paid $ 1,000,000 6.6% $ 66,000 Cash received on swap (6,000) Interest expense $ 1,000,000 6% $ 60,000 (b) December 31, 2007 Interest Expense ........................................... 58,000 Cash ...................................................... 58,000 Interest Expense ........................................... 2,000
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Cash ...................................................... 2,000 December 31, 2008 Interest Expense ........................................... 66,000 Cash ...................................................... 66,000 Cash ............................................................... 6,000 Interest Expense .................................. 6,000 (b) The interest rate swap is a cash flow hedge because the purpose in using the hedge is to protect Parton against variations in future cash flows caused by the changes in the LIBOR rate of interest. At the time of entering into the contract, Parton had not yet incurred the interest charges for the note. The cash flows are therefore related to future interest payments. Consequently the hedge cannot be a fair value hedge.
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*EXERCISE 16-19 (20-25 minutes) (a) December 31, 2008 Cash ............................................................... 75,000 Interest Revenue .................................... 75,000 ($1,000,000 X 7.5%) (b) December 31, 2008 Cash ............................................................... 13,000 Interest Revenue .................................... 13,000 (c) December 31, 2008 Derivatives – Trading .................................... 48,000 Holding Gain ........................................... 48,000 (d) December 31, 2008 Holding Loss (AFS) ....................................... 48,000 Available for Sale Investments - Bonds ............................................... 48,000 Note: Had the investment in bonds not been hedged, the unrealized loss would have been recorded to Other Comprehensive Income.
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