Exhibit 4
CapIT Corporation 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.
Date |
CapIT Corporation Accounts |
Debit |
Balance |
1999 |
|||
June 17 |
Cash | (53,125) |
(53,125) |
Options contracts | 53,125 |
53,125 |
|
Interest expense (revenue) | |||
Other comprehensive income (OCI) | |||
--To record purchase of 25 put option contracts | |||
June 30 |
Cash | (53,125) |
|
Options contracts | (18,750) |
34,375 |
|
Interest expense (revenue) | 18,750 |
18,750 |
|
Other comprehensive income (OCI) | 0 |
0 |
|
--To record value adjustment of option contracts | |||
July 31 |
Cash | (53,125) |
|
Options contracts | 26,250 |
60,625 |
|
Interest expense (revenue) | (26,250) |
(7,500) |
|
Other comprehensive income (OCI) | 0 |
0 |
|
--To record value adjustment of option contracts | |||
Aug. 31 |
Cash | (53,125) |
|
Options contracts | (5,000) |
55,625 |
|
Interest expense (revenue) | 44,375 |
36,875 |
|
Other comprehensive income (OCI) | (39,375) |
(39,375) |
|
--To record value adjustment of option contracts | |||
Sept. 17 |
Cash | 62,500 |
9,375 |
Options contracts | (55,625) |
||
Interest expense (revenue) | (36,875) |
0 |
|
Other comprehensive income (OCI) | 30,000 |
(9,375) |
|
--To record option contract settlement | |||
Sept. 17 |
Cash | 25,000,000 |
25,009,375 |
Options contracts | |||
Notes payable | (25,000,000) |
(25,000,000) |
|
Interest expense (revenue) |
|
||
Other comprehensive income (OCI) |
(9,375) |
||
--To record loan transaction for $25 million | |||
Dec. 17 |
Cash | (25.434,375) |
(425,000) |
Options contracts | |||
Notes payable | 25,000,000 |
||
Interest expense (revenue) | 425,000 |
425,000 |
|
Other comprehensive income (OCI) |
9,375 |
0 |
|
--To record payoff of $25 million loan |
CapIT Corporation Summary |
|
Interest expense without hedging | $ 434,375 |
Net income from Eurodollar put option hedges | (9,375) |
Interest expense with hedging | $ 425,000 |
Comment: Whereas futures contract hedges lock in a fixed interest expense, the put option contracts in this case only lock in an interest rate cap if interest rates soar. If interest rates plunge, the put options expire worthless, but the interest expense on the $25 million note payable then drops below below the hedged cap of $425,000.