On January 1, 2020, a Company Borrowed $1 Million of Variable

Essay

On January 1, 2020, a company borrowed $1 million of variable rate debt at an annual rate equal to the Treasury bill rate plus 50 bp, interest paid semiannually on June 30 and December 31 of each year. The variable rate is reset every six months. To hedge against increasing interest rates, the company entered a receive variable/pay fixed interest rate swap, agreeing to pay a 2.4% fixed rate on a notional amount of $1 million. The swap qualifies as a cash flow hedge of the variable payments. The present value of the expected future net swap payments was $6,000. The treasury bill rate was 1.5% on January 1, 2020. On June 30, the treasury bill rate is 1.6% and the swap has a fair value of $2,300. On December 31, 2020, the treasury bill rate is 1.7% and the swap has a present value of $600.
Required
Prepare the journal entries to record the events for the year 2020. The company has a December 31 year-end, and income effects of the debt and the swap are reported in interest expense.