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On January 2, 2015, Golf Corp. issued a 4-year, $100,000 note at 6% fixed interest, interest...

Question:

On January 2, 2015, Golf Corp. issued a 4-year, $100,000 note at 6% fixed interest, interest payable semiannually. Golf now wants to change the note to a variable-rate note.

As a result, on January 2, 2015, Golf Corp. enters into an interest rate swap where it agrees to receive 6% fixed and pay LIBOR of 5.7% for the first 6 months on $100,000. At each 6-month period, the variable rate will be reset. The variable rate is reset to 6.7% on June 30, 2015.

(a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2015.

(b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2015.

Interest Expense:

The cost occurred to the company in borrowing the fund is known as the interest expense. Such expenses are mentioned in the income statement as a non-operating expense.

Answer and Explanation:

(a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2015.

Interest rate after swap = Fixed Interest rate Payment - Fixed interest recieved + 6 month Libor rate

Interest rate after swap = 6% -6% + Libor Rate

Interest rate after swap = Libor rate

Net interest expense = Interest rate after swap * Notes Payable

Net interest expense = 5.7%*1/2 * $100,000

Net interest expense = $2,850

(b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2015.

Net interest expense = Interest rate after swap * Notes Payable

Net interest expense = 6.7%*1/2 * $100,000

Net interest expense = $3,350


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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