On January 1, a Company Issues $1,000,000 in 3-Month 3

Essay

On January 1, a company issues $1,000,000 in 3-month 3% notes and plans to reissue the notes in 3 months at the prevailing market interest rate. To hedge against rising interest rates, the company sells short $1,000,000 in Treasury bill futures, due in 3 months, at 97.5. The futures are a qualified cash flow hedge of the forecasted renewal of the notes. There is no margin deposit. The market interest rate for the company's level of risk declines to 2.8% on April 1, the company closes out its futures position at 97.7 and issues new notes at 2.8%.
Required
a. Compute the gain or loss on the futures contract for the 3-month period beginning January 1.
b. On April 1, Fresh Foods closes its position and settles with the broker. Prepare the journal entry to record this transaction.
c. Prepare the journal entry to report Fresh Foods' interest expense for the 3-month period beginning April 1 and compute its effective interest rate on the notes for that period.