On January 1, 20X3, Shuey Company borrowed $1,000,000 at the fixed rate of 10% for 10 years with interest payable semi-annually.Shuey anticipates that interest rates will fall and has also arranged to receive a 10% rate of interest in exchange for the payment of variable rates based on LIBOR + 1.5%.LIBOR rates were as follows on the reset dates: ?

$$\begin{array} { l r r }
& \text { LIBOR rate } & \text { FV of swap } \
\text { January } 1,20 \mathrm { X } 3 & 8.5 \% & \
\text { July } 1,20 \mathrm { X } 3 & 8.3 \% & \$ 40,000 \
\text { January } 1,20 \mathrm { X } 4 & 8.2 \% & \$ 38,000
\end{array}$$ How much interest expense is recognized for the six months ended December 31, 20X3?
A)-$49,000
B)-$50,000
C)-$41,900
D)-$48,500

Question

On January 1, 20X3, Shuey Company borrowed $1,000,000 at the fixed rate of 10% for 10 years with interest payable semi-annually.Shuey anticipates that interest rates will fall and has also arranged to receive a 10% rate of interest in exchange for the payment of variable rates based on LIBOR + 1.5%.LIBOR rates were as follows on the reset dates: ?

$$\begin{array} { l r r } 
& \text { LIBOR rate } & \text { FV of swap } \
\text { January } 1,20 \mathrm { X } 3 & 8.5 \% & \
\text { July } 1,20 \mathrm { X } 3 & 8.3 \% & \$ 40,000 \
\text { January } 1,20 \mathrm { X } 4 & 8.2 \% & \$ 38,000
\end{array}$$ How much interest expense is recognized for the six months ended December 31, 20X3?
A)-$49,000
B)-$50,000
C)-$41,900
D)-$48,500

Quizplus · Accepted Answer

The correct answer is A.The interest expense for the six months ended December 31, 20X3 is $49,000. This is calculated as follows:Interest expense = $1,000,000 x 10% x 6/12 = $50,000Less: Interest received on swap = $40,000Interest expense = $49,000

On January 1, 20X3, Shuey Company Borrowed $1,000,000 at the Fixed