Working Paper 231

Appendix 3

Interest Rate Swap Journal Entries Under Methods 4 and 5 for Exhibit 1 Swap

Bob Jensen at Trinity University

Method =

4

Valuation

=

Current (Present) Value

Amortization (Discount) Rate = Legal Settlement Exit Value Rate

Method =

5

Valuation

=

Historical Cost

Amortization (Discount) Rate = Legal Settlement Exit Value 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 =

24.41%

  

24.41%

  

24.41%

  

24.41%

  
 

Method 4

Method 4

Method 4

Method 4

Method 5

Method 5

Method 5

Method 5
 

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

$481,284

$481,284

($481,284)

($481,284)

$481,284

$481,284

($481,284)

($481,284)

Other Comprehensive Income

($481,284)

($481,284)

$481,284

$481,284

($481,284)

($481,284)

$481,284

$481,284


Year t = 1

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

9.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

23.84%

  

23.84%

  

24.41%

  

24.41%

  
 

Method 4

Method 4

Method 4

Method 4

Method 5

Method 5

Method 5

Method 5
 

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

($26,527)

$454,758

$26,527

($454,758)

($32,515)

$448,769

$32,515

($448,769)

Other Comprehensive Income

$26,527

($454,758)

($26,527)

$454,758

$32,515

($448,769)

($32,515)

$448,769

Interest Expense

(117,485)

($117,485)

$117,485

$117,485

($117,485)

($117,485)

$117,485

$117,485

Gain/Loss On Swap

($32,515)

($32,515)

$32,515

$32,515

($32,515)

($32,515)

$32,515

$32,515












Retained Earnings

($150,000)

($150,000)

$150,000

$150,000

($150,000)

($150,000)

$150,000

$150,000

Interest Expense

$117,485

$0

($117,485)

$0

$117,485

($1)

($117,485)

$0

Gain/Loss On Swap

$32,515

$0

($32,515)

$0

$32,515

$0

($32,515)

$0


Year t = 2

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

10.00%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

23.97%

  

23.97%

  

24.41%

  

24.41%

  
 

Method 4

Method 4

Method 4

Method 4

Method 5

Method 5

Method 5

Method 5
 

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

($180,058)

$274,700

$729,457

$274,700

($40,453)

$408,316

$40,453

($408,316)

Other Comprehensive Income

$180,058

($274,700)

($729,457)

($274,700)

$40,453

($408,316)

($40,453)

$408,316

Interest Expense

($108,418)

($108,418)

$108,418

$108,418

($109,547)

($109,547)

$109,547

$109,547

Gain/Loss On Swap

$8,418

$8,418

($8,418)

($8,418)

$9,547

$9,547

($9,547)

($9,547)












Retained Earnings

($100,000)

($250,000)

$100,000

$250,000

($100,000)

($250,000)

$100,000

$250,000

Interest Expense

$108,418

$0

($108,418)

$0

$109,547

$0

($109,547)

$0

Gain/Loss On Swap

($8,418)

$0

$8,418

$0

($9,547)

$0

$9,547

$0


Year t = 3

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

10.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

24.08%

  

24.08%

  

24.41%

  

24.41%

  
 

Method 4

Method 4

Method 4

Method 4

Method 5

Method 5

Method 5

Method 5
 

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

$3,412,690

$3,292,651








Cash

$50,000

$300,000

($50,000)

($300,000)

$50,000

$300,000

($50,000)

($300,000)

Swap Receivable/Payable

($154,661)

$120,039

($154,661)

$120,039

($357,989)

$357,989

$357,989

($357,989)

Other Comprehensive Income

$154,661

($120,039)

$154,661

($120,039)

$607,989

($357,989)

($607,989)

$357,989

Interest Expense

($65,850)

($65,850)

($65,850)

($65,850)

($99,673)

($99,673)

$99,673

$99,673

Gain/Loss On Swap

$15,850

$15,850

$115,850

$115,850

$49,673

$49,673

($49,673)

($49,673)












Retained Earnings

($50,000)

($300,000)

$50,000

$300,000

($50,000)

($300,000)

$50,000

$300,000

Interest Expense

$65,850

$0

$65,850

$0

$99,673

$0

($99,673)

$0

Gain/Loss On Swap

($15,850)

$0

($115,850)

$0

($49,673)

$0

$49,673

$0


Year t = 4

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

11.00%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

0.00%

  

0.00%

  

24.41%

  

24.41%

  
 

Method 4

Method 4

Method 4

Method 4

Method 5

Method 5

Method 5

Method 5
 

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

$2,688,086

$2,688,086








Cash

$0

$300,000

$0

($300,000)

$0

$300,000

$0

($300,000)

Swap Receivable/Payable

($120,039)

$0

($120.039)

$0

$62,612

$295,377

($62,612)

($295,377)

Other Comprehensive Income

$120,039

$0

$120,039

$0

($62,612)

($295,377)

$62,612

$295,377

Interest Expense

($28,906)

($28,906)

($28,906)

($28,906)

($87,388)

($87,388)

$87,388

$87,388

Gain/Loss On Swap

$28,906

$28,906

$28,906

$28,906

$87,388

$87,388

($87,388)

($87,388)












Retained Earnings

($0)

($300,000)

$0

$300,000

($0)

($300,000)

$0

$300,000

Interest Expense

$28,906

$0

$28,906

$0

$87,388

$0

($87,388)

$0

Gain/Loss On Swap

($28,906)

$0

($28,906)

$0

($87,388)

$0

$87,388

$0


Year t = 5

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

11.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

24.25%

  

24.25%

  

24.41%

  

24.41%

  
 

Method 4

Method 4

Method 4

Method 4

Method 5

Method 5

Method 5

Method 5
 

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

$1,883,776

$1,956,404








Cash

($50,000)

$250,000

$50,000

($250,000)

($50,000)

$250,000

$50,000

($250,000)

Swap Receivable/Payable

($72,628)

($72,628)

($72,628)

($72,628)

$77,897

$217,480

($77,897)

($217,480)

Other Comprehensive Income

$72,628

$72,628

$72,628

$72,628

($77,897)

($217,480)

$77,897

$217,480

Interest Expense

$0

$0

$0

$0

($72,103)

($72,103)

$72,103

$72,103

Gain/Loss On Swap

$50,000

$50,000

($50,000)

($50,000)

$122,103

$122,103

($122,103)

($122,103)












Retained Earnings

$50,000

($250,000)

($50,000)

$250,000

$50,000

($250,000)

($50,000)

$250,000

Interest Expense

$0

$0

$0

$0

$72,103

$0

($72,103)

$0

Gain/Loss On Swap

($50,000)

$0

$50,000

$0

($122,103)

$0

$122,103

$0


Year t = 6

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

12.00%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

24.32%

  

24.32%

  

24.41%

  

24.41%

  
 

Method 4

Method 4

Method 4

Method 4

Method 5

Method 5

Method 5

Method 5
 

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

$990,991

$1,071,429








Cash

($100,000)

$150,000

$100,000

($150,000)

($100,000)

$150,000

$100,000

($150,000)

Swap Receivable/Payable

($7,810)

($80,438)

($7,810)

($80,438)

$96,912

$120,568

($96,912)

($120,568)

Other Comprehensive Income

$7,810

$80,438

$7,810

$80,438

($96,912)

($120,568)

$96,912

$120,568

Interest Expense

$17,613

$17,613

$17,613

$17,613

($53,088)

($53,088)

$53,088

$53,088

Gain/Loss On Swap

$82,387

$82,387

($117,613)

($117,613)

$153,088

$153,088

($153,088)

($153,088)












Retained Earnings

$100,000

($150,000)

($100,000)

$150,000

$100,000

($150,000)

($100,000)

$150,000

Interest Expense

($17,613)

$0

($17,613)

$0

$53,088

$0

($53,088)

$0

Gain/Loss On Swap

($82,387)

$0

$117,613

$0

($153,088)

$0

$153,088

$0


Year t = 7

    
   
   
   

Notional Bond/Note Rate =

9.50%

  

12.50%

  

9.50%

  

9.50%

  

Amortization (Discount) Rate =

0.00%

  

0.00%

  

24.41%

  

24.41%

  
 

Method 4

Method 4

Method 4

Method 4

Method 5

Method 5

Method 5

Method 5
 

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

$0

$0








Cash

($150,000)

$0

$150,000

($0)

($150,000)

$0

$150,000

($0)

Swap Receivable/Payable

$80,438

$0

$80,438

$0

$120,568

$0

($120,568)

$0

Other Comprehensive Income

($80,438)

$0

($80,438)

$0

($120,568)

$0

$120,568

$0

Interest Expense

$19,562

$19,562

$19,562

$19,562

($29,432)

($29,432)

$29,432

$29,432

Gain/Loss On Swap

$130,438

$130,438

($169,562)

($169,562)

$179,432

$179,432

($179,432)

($179,432)












Retained Earnings

$150,000

($0)

($150,000)

$0

$150,000

($0)

($150,000)

$0

Interest Expense

($19,562)

$0

($19,562)

$0

$29,432

$0

($29,432)

$0

Gain/Loss On Swap

($130,438)

$0

$169,562

$0

($179,432)

$0

$179,432

$0