Paton Company Has an $11,000,000, Note Payable Outstanding with a Variable

Essay

Paton Company has an $11,000,000, note payable outstanding with a variable rate equal to LIBOR of 8.4% which matures on June 30, 20X3.The variable rates are reset each 6 months for the following 6-month period.The company believes that interest rates have bottomed, and they will begin to rise.At the end of June 20X1, Paton Company negotiated an interest rate swap with York National Bank of Bellingham that would allow Paton to pay a fixed rate of 7.75% in exchange for receiving interest based on the LIBOR.The swap is effective July 1, 20X1.The settlement date for the swap coincides with the company's interest payment dates.
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The criteria for special accounting have been satisfied, and the hedging relationship has been properly documented.Management of Paton Company has concluded that the hedge will be highly effective.Paton Company's fiscal year end is June 30.The LIBOR and swap values are as follows:
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$$\begin{array} { l r r } & \text { LIBOR } & \text { Swap Value } \\ \text { June } 30,20 \mathrm { X } 1 & 8.40 \% & \\ \text { December } 31,20 \mathrm { X } 1& 8.55 \% & \$ 19,300 \\\text { June } 30,20 \mathrm { X } 2& 8.10 \% & ( 8,010 )\end{array}$$
Required:
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Present the journal entries to record the above events from December 31, 20X1 through June 30, 20X2.
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