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Question 5: Hedge accounting (10 marks) On Jan 1,2019, Fusion Company...

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Accounting

Question 5: Hedge accounting (10 marks)
On Jan 1,2019, Fusion Company issues a 2-year, $10,000,000 note at HIBOR, with interest
paid annually to purchase an equipment. The HIBOR is reset at the end of each year. HIBOR
rate for the first year of 2019 is at 8%.
Fusion Company decides that it prefers fixed rate financing and wants to lock in a rate of 8%.
As a result, on Jan 1,2019, Fusion enters into an interest swap agreement to pay 8% fixed
rate and receive HIBOR based on $10,000,000 principal amount of the note. The variable
interest rate is reset to 6% for year 2.
Required:
a) Prepare the journal entry for the year 2019
b) Prepare the journal entry for the year 2020.
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