On January 1, 2021, a Company Has a Loan of $1,000,000

Essay

On January 1, 2021, a company has a loan of $1,000,000 on which it pays a 3% fixed rate annually on December 31. On January 1, 2021, the company enters an interest rate swap whereby it receives the 3% fixed rate and pays the prime rate + 100 bp. At the inception of the swap, the prime rate is 1.8%. The swap qualifies as a fair value hedge of the fixed payments. The company's accounting year ends December 31, and all income effects of the loan and the swap are reported in interest expense.
Required
a. Prepare the journal entry to record the company's interest expense for 2021 and the net cash payment from the swap.
b. On December 31, 2021, the prime rate has declined, and the change in the value of the swap and the debt is each $10,000. Prepare the journal entry or entries to record this information.