On January 1, 2020, a Company Borrows $1,000,000 from Its

Essay

On January 1, 2020, a company borrows $1,000,000 from its bank for three years at the prime rate plus 1.5%, adjusted yearly. The interest payment is due December 31 of each year. The prime rate is currently 0.7%. The company buys a three-year, 2.5% interest rate cap from another financial institution. On December 31, 2020, the cap has declined in value by $200. The loan is renewed next year, when the prime rate is 1.2%. During the year, the cap's market value increases by $300. The company records all income effects of these transactions in interest expense.
Required
Prepare the journal entries to record interest for 2020 and 2021, any reimbursement of interest from the cap writer, and to mark the cap to market.