Working Paper 286
Bob Jensen at Trinity University


Exhibit 4
MarginOOPS Bank Case Journal Entries and Summary of Results
(Students are required to fill in the numbers shown in red.)

Instructions:  Please fill in debits without dollar signs and credits in parentheses.  If there is no entry for a given account, please leave it blank rather than entering a zero.  Note that all accounts listed for a given date will not necessarily have entries on that date.

   

Discounting at

 0.00 % APR

Discounting at

6.00% APR

 

 

Debit

 

Debit

 

Date

MarginOOPS Bank Accounts

(Credit)

Balance

(Credit)

Balance

1999

Assumed FAS 133 discount rate =

0.000000%

0.000000%

0.016438%

0.016438%

17-Jun

Cash

25,000,000

25,000,000

25,000,000

25,000,000

 

Notes payable

(25,000,000)

(25,000,000)

(25,000,000)

(25,000,000)

 

-To record borrowing for one year

 

 

 

 

 

 

 

 

 

 

17-Jun

Cash

(25,000,000)

0

(25,000,000)

0

 

Notes receivable

25,000,000

0

25,000,000

0

 

-To record lending for one year

 

 

 

 

 

 

 

 

 

 

17-Jun

Cash

(500)

(500)

(500)

(500)

 

Futures margin account 

500

500

500

500

 

-To record margin account

 

 

 

 

 

 

 

06/30/99

 

06/30/1999

30-Jun

Cash

(7,500)

(8,000)

(7,500)

(8,000)

 

Futures margin account 

0

500

0

500

 

Other comprehensive income (OCI)

3,750

3,750

3,647

3,647

 

Interest expense (revenue)

3,750

3,750

3,647

3,647

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

07/31/99

 

07/31/1999

31-Jul

Cash

(12,500)

(20,500)

(12,500)

(20,500)

 

Futures margin account 

0

500

0

500

 

Other comprehensive income (OCI)

11,250

15,000

11,016

14,663

 

Interest expense (revenue)

1,250

5,000

1,231

4,878

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

08/31/99

 

08/31/1999

31-Aug

Cash

(16,875)

(37,375)

(16,875)

(37,375)

 

Futures margin account 

0

500

0

500

 

Other comprehensive income (OCI)

15,000

30,000

14,812

29,475

 

Interest expense (revenue)

1,875

6,875

1,877

6,755

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

09/17/99

 

09/17/1999

17-Sep

Cash

(5,000)

(42,375)

(5,000)

(42,375)

 

Futures margin account 

0

500

0

500

 

Other comprehensive income (OCI)

(8,750)

21,250

(8,698)

20,777

 

Interest expense (revenue)

13,750

20,625

14,343

21,098

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

 

 

 

17-Sep

Cash

500,000

457,625

500,000

457,625

 

Interest expense (revenue)

(500,000)

(479,375)

(500,000)

(479,375)

 

-To record interest on note receivable

 

 

 

 

 

 

 

 

 

 

17-Sep

Cash

(339,986)

117,639

(339,986)

117,639

 

Interest expense (revenue)

339,986

(139,389)

339,986

(139,389)

 

-To record interest on note payable

 

 

 

 

 

 

 

09/30/1999

 

09/30/1999

30-Sep

Cash

0

117,639

0

117,639

 

Futures margin account 

4,375

4,875

4,375

4,875

 

Other comprehensive income (OCI)

(35,000)

(13,750)

(34,250)

(13,473)

 

Interest expense (revenue)

(129,389)

(108,764)

(130,139)

(109,041)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

10/31/1999

 

10/31/1999

31-Oct

Cash

0

117,639

0

117,639

 

Futures margin account 

16,875

21,750

16,875

21,750

 

Other comprehensive income (OCI)

(13,750)

(27,500)

(13,610)

(27,083)

 

Interest expense (revenue)

(3,125)

(111,889)

(3,265)

(112,306)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

11/30/1999

 

11/30/1999

30-Nov

Cash

0

117,639

0

117,639

 

Futures margin account 

14,375

36,125

14,375

36,125

 

Other comprehensive income (OCI)

(20,000)

(47,500)

(19,929)

(47,012)

 

Interest expense (revenue)

5,625

(106,264)

5,554

(106,752)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

12/17/1999

`

12/17/1999

17-Dec

Cash

0

117,639

0

117,639

 

Futures margin account 

9,375

45,500

9,375

45,500

 

Other comprehensive income (OCI)

11,875

(35,625)

11,922

(35,090)

 

Interest expense (revenue)

(21,250)

(127,514)

(21,297)

(128,049)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

 

 

 

17-Dec

Cash

500,000

617,639

500,000

617,639

 

Interest expense (revenue)

(500,000)

(627,514)

(500,000)

(627,514)

 

-To record interest on note receivable

 

 

 

 

 

 

 

 

 

 

17-Dec

Cash

(329,243)

288,396

(329,243)

288,396

 

Interest expense (revenue)

329,243

(298,271)

329,243

(298,271)

 

-To record interest on note payable

 

 

 

 

 

 

 

12/31/1999

`

12/31/1999

31-Dec

Cash

0

288,396

0

288,396

 

Futures margin account 

(1,250)

44,250

(1,250)

44,250

 

Other comprehensive income (OCI)

6,875

(28,750)

6,706

(28,384)

 

Interest expense (revenue)

(5,625)

(303,896)

(5,991)

(304,262)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

01/31/2000

`

01/31/2000

31-Jan

Cash

0

288,396

0

288,396

 

Futures margin account 

(1,875)

42,375

(1,875)

42,375

 

Other comprehensive income (OCI)

(2,500)

(31,250)

(2,626)

(31,010)

 

Interest expense (revenue)

4,375

(299,521)

4,501

(299,761)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

02/29/2000

`

02/29/2000

29-Feb

Cash

0

288,396

0

288,396

 

Futures margin account 

(8,125)

34,250

(8,125)

34,250

 

Other comprehensive income (OCI)

7,500

(23,750)

7,330

(23,680)

 

Interest expense (revenue)

625

(298,896)

795

(298,966)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

03/17/2000

`

03/17/2000

17-Mar

Cash

24,250

312,646

24,250

312,646

 

Futures margin account 

(34,250)

0

(34,250)

0

 

Other comprehensive income (OCI)

23,750

0

23,750

0

 

Interest expense (revenue)

(13,750)

(312,646)

(13,750)

(312,646)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

03/17/2000

`

03/17/2000

17-Mar

Cash

500,000

812,646

500,000

812,646

 

Interest expense (revenue)

(500,000)

(812,646)

(500,000)

(812,646)

 

-To record interest on note receivable

 

 

 

 

 

 

 

03/17/2000

`

03/17/2000

17-Mar

Cash

(376,007)

436,639

(376,007)

436,639

 

Interest expense (revenue)

376,007

(436,639)

376,007

(436,639)

 

-To record interest on note payable

 

 

 

 

 

 

 

03/31/2000

`

03/31/2000

31-Mar

Cash

0

436,639

0

436,639

 

Futures margin account 

0

0

0

0

 

Other comprehensive income (OCI)

0

0

0

0

 

Interest expense (revenue)

0

(436,639)

0

(436,639)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

04/30/2000

`

04/30/2000

30-Apr

Cash

0

436,639

0

436,639

 

Futures margin account 

0

0

0

0

 

Other comprehensive income (OCI)

0

0

0

0

 

Interest expense (revenue)

0

(436,639)

0

(436,639)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

05/31/2000

`

05/31/2000

31-May

Cash

0

436,639

0

436,639

 

Futures margin account 

0

0

0

0

 

Other comprehensive income (OCI)

0

0

0

0

 

Interest expense (revenue)

0

(436,639)

0

(436,639)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

06/17/2000

`

06/17/2000

17-Jun

Cash

0

436,639

0

436,639

 

Futures margin account 

0

0

0

0

 

Other comprehensive income (OCI)

0

0

0

0

 

Interest expense (revenue)

0

(436,639)

0

(436,639)

 

- To adjust futures contracts to fair value.

 

 

 

 

 

 

 

06/17/2000

`

06/17/2000

17-Jun

Cash

500,000

936,639

500,000

936,639

 

Interest expense (revenue)

(500,000)

(936,639)

(500,000)

(936,639)

 

-To record interest on note receivable

 

 

0

0

 

 

 

06/17/2000

`

06/17/2000

17-Jun

Cash

(340,618)

596,021

(340,618)

596,021

 

Interest expense (revenue)

340,618

(596,021)

340,618

(596,021)

 

-To record interest on note payable

 

 

 

 

 

 

 

06/17/2000

`

06/17/2000

17-Jun

Cash

25,000,000

25,596,021

25,000,000

25,596,021

 

Notes receivable

(25,000,000)

0

(25,000,000)

0

 

-To record the payoff of the note receivable

 

 

 

 

 

 

 

06/17/2000

`

06/17/2000

17-Jun

Cash

(25,000,000)

596,021

(25,000,000)

596,021

 

Notes payable

25,000,000

0

25,000,000

0

 

-To record the payoff of the note payable

 

 

 

 

 

 

 

 

 

 

31-Dec

Interest expense (revenue)

596,021

0

596,021

0

 

Retained earnings

(596,021)

(596,021)

(596,021)

(596,021)

 

-To close the books

 

 

 

 

 

 

 

 

 

 

 

Summary

     Summary of MarginOOPS Bank Transactions

Date

Dollars

Dollars

Percent

     Interest revenue for the year

$2,000,000

8.0000%

     Less interest expense if not hedged

9/17/99

$339,986

12/17/99

$329.243

3/17/00

$376,007

6/17/00

$340,618

$1,385,854

-5.5434%

     Net income if interest expense is not hedged

$614,146

2.4566%

     Add (deduct) futures hedging gains and (losses)

 

 

6/30/99

($  7,500)

7/31/99

($12,500)

8/31/99

($16,875)

9/17/99

($5,000)

  9/30/99 $4,375    
  10/31/99 $16,875    
  11/30/99 $14,375    
  12/17/99 $9,375    
  12/31/99 ($1,250)    

01/31/00

($1,875)

02/29/00

($8,125)

  03/17/00 ($10,000) ($18,125) -0.0725%
     Net income if interest expense is hedged

$596,021

2.3841%

Calculation Verification
Spread Spread Note that the multiplication factor is $62,500 = (25 contracts)($2,500 notional).
Futures prices are taken from Exhibit 3.

($14,375) = (5.21-5.44)($62,500) loss on the September 1999 futures contracts
  $10,000 = (5.95-5.79)($62,500) gain on the December 1999 futures contracts
($13,750) = (5.65-5.87)($62,500) loss on the March 2000 futures contracts
($18,125) = net "loss" on the futures contracts (which locked the hedged cost of the $25 note payable)

Comment:  Unlike option contract hedges that only lock in a net income floor or cap, the futures contract hedges in this case lock in a fixed net income of amount of $596,021.