Working Paper 283
Bob Jensen at Trinity University


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
(Credit)

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

Summary

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.