On January 1, 2020, a Company Borrowed $5,000,000 for Three

Essay

On January 1, 2020, a company borrowed $5,000,000 for three years at the prime rate plus 1.2%, adjusted semiannually, when the prime rate was 0.9%. Interest is payable on June 30 and December 31. To hedge against a possible rise in interest rates, on January 1, 2020, the company bought a three-year 2.3% interest rate cap for a total price of $15,000, paid in full immediately. The intrinsic value of the cap was designated as the hedge instrument. The fair value of the cap was $12,000 on June 30, 2020, when the prime rate was 1.3%, and $14,000 on December 31, 2020 when the company closed its books. All income effects of the loan and the cap are reported in interest expense.
Required
a. Record the interest payment and the $3,000 decline in the value of the cap for the period January 1 to June 30, 2020, and any interest reimbursement by the cap writer.
b. Record the interest payment and $2,000 increase in the value of the cap for the period June 30 to December 31, 2020, and any interest reimbursement by the cap writer.