A Company Has a $1,000,000 Loan with a Variable Interest

Essay

A company has a $1,000,000 loan with a variable interest rate, due December 31, 2021. The interest rate is set at the beginning of each year and interest is paid at year-end. On January 1, 2020, when the variable rate is 2.5%, Organic Farms enters a swap agreement whereby it pays a fixed rate of 2.8% and receives the variable rate required to pay interest on the loan. The swap qualifies as a cash flow hedge of the variable payments. On December 31, 2020, the variable rate is reset to 2.6%. The company has a December 31, year-end and all income effects of the loan and the swap are reported in interest expense.
Required
Prepare journal entries to record the swap liability at January 1, 2020, and all entries required at December 31, 2020 and 2021. The company records the swap liability at the present value of future expected net payments, discounted at the variable rate.