Accounting for Fair Value Hedge: Interest Rate SwapOn January 1 of Year 1, Innovative Lab issued a 4-year $50,000 note to a local bank with fixed interest payments based on 6%, payable annually on December 31. To hedge the risk of a fixed interestpayment, Innovative Lab entered into a 4-year interest rate swap agreement on January 1 of Year 1, calling for interest payments tied to a designated benchmark interest rate to a counterparty andreceipt of interest based on 6%, negotiated at a notional amount of $50,000. The settlement date for the net cash payment is on December 31 of each year. The following table provides additionalinformation related to the interest rate swap as forecasted over the next 4 years.Fair value: Interest rate swapFair value: note payableBenchmark interest rateRequiredDec. 31, Year 1 Dec. 31, Year 2 Dec. 31, Year 3 Dec. 31, Year 4$200$0$50,2004.2%$400$50,4004.0%$0$50,0005.2%$50,0005.8%a. Record the required journal entries for Year 1, Year 2, Year 3, and Year 4 related to the note payable and interest rate swap agreement.• Note: a journal entry isn't required, select "N/A-Debit" and "N/A-Credit" as the account names and leave the Dr. and Cr. answers blank (zero). b. Compute the effect on net income for each year, Year 1 through Year 4, ignoring incometax.• Note: Use a negative sign to indicate a loss.Net income effectYear 1 $Year 2Year 3Year 40000c. What change(s) in the forecast would make the interest rate swap more valuable than itis projected to be currently?in the benchmark rate, which wouldcounterpartythe net effective interest paid.the interest paid to the

Dateparticulars Debit($)Credit ($)Year 1Interest Expense 3000Interest Payable 3000To record interest…

Required a. Record the required journal entries for Year 1, Year 2, Year 3, and Year 4 related to the note payable and interest rate swap agreement. • Note: If a journal entry isn't required, select "N/A-Debit" and "N/A-Credit" as the account names and leave the Dr. and Cr. answers blank (zero).

Required a. Record the required journal entries for Year 1, Year 2, Year 3, and Year 4 related to the note payable and interest rate swap agreement. • Note: If a journal entry isn't required, select "N/A-Debit" and "N/A-Credit" as the account names and leave the Dr. and Cr. answers blank (zero).

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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