1. Calculate the net cash settlement at the end of 2011, 2012, and 2013.

2. Prepare the journal entries during 2011 to record the issuance of the note, interest, and necessary adjustments for changes in fair value.

3. Prepare the journal entries during 2012 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value. A-18

4. Prepare the journal entries during 2013 to record interest, net cash interest settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt.

5. Calculate the carrying values of both the swap account and the note in each of the three years.

6. Calculate the net effect on earnings of the hedging arrangement in each of the three years. (Ignore income taxes.)

7. Suppose the fair value of the note at December 31, 2011, had been $97,000 rather than $98,241 with the additional decline in fair value due to investors' perceptions that the creditworthiness of Labtech was worsening. How would that affect your entries to record changes in the fair values?

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## This question was asked on Jan 08, 2013 and answered on Jan 12, 2013.

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