prepare all entries necessary to account for the inventory of heating oil and the re 615292

Entries to record fixed for variable interest rate swap. Several years ago, the Traker Corporation borrowed $5,000,000 from the New West Bank of Albuquerque at a fixed rate of 8.5%. The loan becomes due on December 31, 20X3, and has interest due dates of June 30 and December 31. Prior to 20X2, variable interest rates were typically higher than the 8.5% fixed rate. However, Traker feels that variable interest rates are likely to decline.

Therefore, on January 1, 20X2, Traker entered into an interest rate swap with the First National Bank of Denver. The swap has a notional amount of $3,000,000 and requires Traker to receive a fixed rate of 8.5% and pay a variable rate. The variable interest rate is a LIBOR rate and reset dates are January 1 and July 1. Settlement payments are made on June 30 and December 31. Relevant information regarding rates and values is as follows:

Reset Date	LIBOR Rate	Value of Swap
January 1, 20X2	81%
July 1, 20X2	76	$62,677
January 1, 20X3	73	56,868
July 1, 20X3	79	14,430

Prepare all entries to record the transactions involving the loan payable and the interest rate swap through December 31, 20X3.

Problem M-2 (LO 7) Entries to record fair value hedge involving a futures contract. The Filter Oil Company is the largest distributor of home heating oil throughout the Chicago area. Because of the seasonal nature of the company’s business, it builds up its inventory of heating oil throughout the summer months. The inventory of heating oil is then withdrawn primarily during the fall and winter months. The company has decided to hedge its inventory of 420,000 gallons of heating oil by acquiring a futures contract to sell heating oil in October. The cost of the company’s heating oil is $0.720 per gallon.

The contract that is acquired on August 1 has a notional amount of 420,000 gallons of heating oil and a futures price of $0.740 per gallon. The company properly documents the hedging relationship, and all criteria for special accounting as a fair value hedge are satisfied. The change in the time value of the futures contract is to be excluded from the assessment of hedge effectiveness.

The futures contract is settled in early October, and the company sells its inventory of heating oil in mid-October at the spot rate of $0.734 per gallon. Relevant spot prices and futures prices for the remaining term of the contract are as follows:

	Spot Price per Gallon	Futures Price per Gallon
1-Aug	$741	$740
31-Aug	738	739
30-Sep	732	731
Early October	734	734

1. Prepare all entries necessary to account for the inventory of heating oil and the related hedge.

2. Prepare a schedule to illustrate the effect on current earnings, with and without the hedge.

3. Show the balance sheet effect as of September 30.