Working Paper 231

Appendix 2

Interest Rate Swap Journal Entries Under Methods 2 and 3 for Exhibit 1 Swap

Bob Jensen at Trinity University

Method =

2

Valuation

=

Current (Present) Value

Amortization (Discount) Rate = [Bond/Note + Swap] Rate

Method =

3

Valuation

=

Historical Cost

Amortization (Discount) Rate = [Bond/Note + Swap] Rate


A=

Company A

  

Swap Term n=

  

7 Years
B=

Company B

  

Swap Term n=

  

7 Years


A's Notional Bond/Note Rate =

0.0950

+

0.0000 x t for t>0

A's Notional Bond/Note Amt

$ 10000000
B's Notional Bond/Note Rate =

0.0900

+

0.0050 x t for t>0

B's Notional Bond/Note Amt

$ 10000000






A's Swap Receivable Rate =

0.1100

+

0.0000 x t for t>0

    
B's Swap Receivable Rate =

0.0900

+

0.0050 x t for t>0

    






A's Swap Payable Rate =

0.0900

+

0.0050 x t for t>0

    
B's Swap Payable Rate =

0.1100

+

0.0000 x t for t>0

    


Year t = 1

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

9.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

8.00%

  

11.00%

  

8.00%

  

11.00%

  
 

Method 2

Method 2

Method 2

Method 2

Method 3

Method 3

Method 3

Method 3
 

A's

A's

B's

B's

A's

A's

B's

B's

Year 1

Debit

  

Debit

  

Debit

  

Debit

  

January 1, 19x

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance












Swap Receivable/Payable

$780,956

$780,956

($706,829)

($706,829)

$780,956

$780,956

($706,829)

($706,829)

Other Comprehensive Income

($780,956)

($780,956)

$706,829

$706,829

($780,956)

($780,956)

$706,829

$706,829


Year t = 1

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

9.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

8.00%

  

11.00%

  

8.00%

  

11.00%

  
 

Method 2

Method 2

Method 2

Method 2

Method 3

Method 3

Method 3

Method 3
 

A's

A's

B's

B's

A's

A's

B's

B's

Year 1

Debit

  

Debit

  

Debit

  

Debit

  

December 31, 19x

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance












Cash

$150,000

$150,000

($150,000)

($150,000)

$150,000

$150,000

($150,000)

($150,000)

Swap Receivable/Payable

($87,524)

$693,432

$72,249

($634,581)

($87,524)

$693,432

$72,249

($634,581)

Other Comprehensive Income

$87,524

($693,432)

($72,249)

$634,581

$87,524

($693,432)

($72,249)

$634,581

Interest Expense

($62,476)

($62,476)

$77,751

$77,751

($62,476)

($62,476)

$77,751

$77,751

Gain/Loss On Swap

($87,524)

($87,524)

$72,249

$72,249

($87,524)

($87,524)

$72,249

$72,249












Retained Earnings

($150,000)

($150,000)

$150,000

$150,000

($150,000)

($150,000)

$150,000

$150,000

Interest Expense

$62,476

$0

($77,751)

$0

$62,476

($1)

($77,751)

$0

Gain/Loss On Swap

$87,524

$0

($72,249)

$0

$87,524

$0

($72,249)

$0


Year t = 2

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

10.00%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

8.50%

  

11.00%

  

8.00%

  

11.00%

  
 

Method 2

Method 2

Method 2

Method 2

Method 3

Method 3

Method 3

Method 3
 

A's

A's

B's

B's

A's

A's

B's

B's

Year 2

Debit

  

Debit

  

Debit

  

Debit

  

December 31, 19x

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance












Cash

$100,000

$250,000

($100,000)

($250,000)

$100,000

$250,000

($100,000)

($250,000)

Swap Receivable/Payable

($299,368)

$394,064

$634,581

$1

($94,525)

$598,907

$80,196

($554,385)

Other Comprehensive Income

$299,368

($394,064)

($634,581)

($1)

$94,525

($598,907)

($80,196)

$554,385

Interest Expense

($55,475)

($55,475)

$69,804

$69,804

($55,475)

($55,475)

$69,804

$69,804

Gain/Loss On Swap

($44,525)

($44,525)

$30,196

$30,196

($44,525)

($44,525)

$30,196

$30,196












Retained Earnings

($100,000)

($250,000)

$100,000

$250,000

($100,000)

($250,000)

$100,000

$250,000

Interest Expense

$55,475

$0

($69,804)

$0

$55,475

$0

($69,804)

$0

Gain/Loss On Swap

$44,525

$0

($30,196)

$0

$44,525

$0

($30,196)

$0


Year t = 3

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

10.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

9.00%

  

11.00%

  

8.00%

  

11.00%

  
 

Method 2

Method 2

Method 2

Method 2

Method 3

Method 3

Method 3

Method 3
 

A's

A's

B's

B's

A's

A's

B's

B's

Year 3

Debit

  

Debit

  

Debit

  

Debit

  

December 31, 19x

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance












Cash

$50,000

$300,000

($50,000)

($300,000)

$50,000

$300,000

($50,000)

($300,000)

Swap Receivable/Payable

($161,986)

$161,986

$155,122

($155,122)

($496,819)

$496,819

$465,367

($465,367)

Other Comprehensive Income

$411,986

($161,986)

($405,122)

$155,122

$746,819

($496,819)

($715,367)

$465,367

Interest Expense

($33,495)

($33,495)

($0)

($0)

($47,913)

($47,913)

$60,982

$60,982

Gain/Loss On Swap

($16,505)

($16,505)

$50,000

$50,000

($2,087)

($2,087)

($10,982)

($10,982)












Retained Earnings

($50,000)

($300,000)

$50,000

$300,000

($50,000)

($300,000)

$50,000

$300,000

Interest Expense

$33,495

$0

$0

$0

$47,913

$0

($60,982)

$0

Gain/Loss On Swap

$16,505

$0

($50,000)

$0

$2,087

$0

$10,982

$0


Year t = 4

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

11.00%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

9.50%

  

11.00%

  

8.00%

  

11.00%

  
 

Method 2

Method 2

Method 2

Method 2

Method 3

Method 3

Method 3

Method 3
 

A's

A's

B's

B's

A's

A's

B's

B's

Year 4

Debit

  

Debit

  

Debit

  

Debit

  

December 31, 19x

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance












Cash

$0

$300,000

$0

($300,000)

$0

$300,000

$0

($300,000)

Swap Receivable/Payable

$161,986

$0

($155,122)

$0

$110,254

$386,565

($98,810)

($366,557)

Other Comprehensive Income

($161,986)

($0)

$155,122

$0

($110,254)

($386,565)

$98,810

$366,557

Interest Expense

($14,579)

($14,579)

$17,063

$17,063

($39,746)

($39,746)

$51,190

$51,190

Gain/Loss On Swap

$14,579

$14,579

($17,063)

($17,063)

$39,746

$39,746

($51,190)

($51,190)












Retained Earnings

($0)

($300,000)

$0

$300,000

($0)

($300,000)

$0

$300,000

Interest Expense

$14,579

$0

($17,063)

$0

$39,746

$0

($51,190)

$0

Gain/Loss On Swap

($14,579)

$0

$17,063

$0

($39,746)

$0

$51,190

$0


Year t = 5

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

11.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

10.00%

  

11.00%

  

8.00%

  

11.00%

  
 

Method 2

Method 2

Method 2

Method 2

Method 3

Method 3

Method 3

Method 3
 

A's

A's

B's

B's

A's

A's

B's

B's

Year 5

Debit

  

Debit

  

Debit

  

Debit

  

December 31, 19x

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance












Cash

($50,000)

$250,000

$50,000

($250,000)

($50,000)

$250,000

$50,000

($250,000)

Swap Receivable/Payable

$86,777

($86,777)

($85,626)

$85,626

$119,075

$267,490

($109,679)

($256,879)

Other Comprehensive Income

($86,777)

$86,777

$85,626

($85,626)

($119,075)

($267,490)

$109,679

$256,879

Interest Expense

($0)

($0)

$0

$0

($30,925)

($30,925)

$40,321

$40,321

Gain/Loss On Swap

$50,000

$50,000

($50,000)

($50,000)

$80,925

$80,925

($90,321)

($90,321)












Retained Earnings

$50,000

($250,000)

($50,000)

$250,000

$50,000

($250,000)

($50,000)

$250,000

Interest Expense

$0

$0

$0

$0

$30,925

$0

($40,321)

$0

Gain/Loss On Swap

($50,000)

$0

$50,000

$0

($80,925)

$0

$90,321

$0


Year t = 6

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

12.00%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

10.50%

  

11.00%

  

8.00%

  

11.00%

  
 

Method 2

Method 2

Method 2

Method 2

Method 3

Method 3

Method 3

Method 3
 

A's

A's

B's

B's

A's

A's

B's

B's

Year 6

Debit

  

Debit

  

Debit

  

Debit

  

December 31, 19x

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance












Cash

($100,000)

$150,000

$100,000

($150,000)

($100,000)

$150,000

$100,000

($150,000)

Swap Receivable/Payable

$3,721

($90,498)

($4,464)

$90,090

$128,601

$138,889

($121,743)

($135,135)

Other Comprehensive Income

($3,721)

$90,498

$4,464

($90,090)

($128,601)

($138,889)

$121,743

$135,135

Interest Expense

$8,678

$8,678

($9,419)

($9,419)

($21,399)

($21,399)

$28,257

$28,257

Gain/Loss On Swap

$91,322

$91,322

($90,581)

($90,581)

$121,399

$121,399

($128,257)

($128,257)












Retained Earnings

$100,000

($150,000)

($100,000)

$150,000

$100,000

($150,000)

($100,000)

$150,000

Interest Expense

($8,678)

$0

$9,419

$0

$21,399

$0

($28,257)

$0

Gain/Loss On Swap

($91,322)

$0

$90,581

$0

($121,399)

$0

$128,257

$0


Year t = 7

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

12.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

11.00%

  

11.00%

  

8.00%

  

11.00%

  
 

Method 2

Method 2

Method 2

Method 2

Method 3

Method 3

Method 3

Method 3
 

A's

A's

B's

B's

A's

A's

B's

B's

Year 7

Debit

  

Debit

  

Debit

  

Debit

  

December 31, 19x

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance

(Credit)

Balance












Cash

($150,000)

$0

$150,000

($0)

($150,000)

$0

$150,000

($0)

Swap Receivable/Payable

($90,498)

$0

$90,090

$0

$138,889

$0

($135,135)

$0

Other Comprehensive Income

$90,498

$0

($90,090)

$0

($138,889)

$0

$135,135

$0

Interest Expense

$9,502

$9,502

($9,910)

($9,910)

($11,111)

($11,111)

$14,865

$14,865

Gain/Loss On Swap

$140,498

$140,498

($140,090)

($140,090)

$161,111

$161,111

($164,865)

($164,865)












Retained Earnings

$150,000

($0)

($150,000)

$0

$150,000

($0)

($150,000)

$0

Interest Expense

($9,502)

$0

$9,910

$0

$11,111

$0

($14,865)

$0

Gain/Loss On Swap

($140,498)

$0

$140,090

$0

($161,111)

$0

$164,865

$0