Answer:
1/01
Dr Cash $200,000
Cr To notes payable $200,000
31/03
Dr Interest expense $5,000
Cr To cash $5,000
Dr Cash $1,000
Cr To interest expense $1,000
Dr Interest rate swap (asset) $6,472
Cr Holding gain—interest rate $6,472
Dr Holding loss $6,472
Cr notes payable $6,472
30/06
Dr Interest expense $5,000
Cr To cash $5,000
Dr Cash $2,000
Cr To interest expense $2,000
Dr Interest rate swap [asset] $4,922
Cr Holding gain—interest rate swap 4,922
Dr Holding loss—hedged note $4,922
Cr Note payable $4,922
Explanation:
Preparation of the journal entries through June 30, 2021, to record the issuance of the note, interest, and necessary adjustments for changes in fair value
1/01
Dr Cash $200,000
Cr To notes payable $200,000
(To record the issuance of the note)
31/03
Dr Interest expense $5,000
Cr To cash $5,000
(200,000 * 10% * 1/4)
( To record Interest)
Dr Cash $1,000
[5,000 -(8%* 1/4 * 200,000)]
Cr To interest expense $1,000
(To record the net Cash settlement)
Dr Interest rate swap (asset) $6,472
($6,472 – 0)
Cr Holding gain—interest rate $6,472
(To record change in net value of the derivative)
Dr Holding loss $6,472
Cr notes payable $6,472
($206,472- $200,000)
(To record change in net value of the note)
30/06
Dr Interest expense $5,000
($200,000 * 10% * 1/4)
Cr To cash $5,000
(To record Interest)
Dr Cash $2,000
[$5,000-(6% * 1/4 * $200,000)
Cr To interest expense $2,000
(To record the net Cash settlement)
Dr Interest rate swap [asset] ($11,394 – 6,472)$4,922
Cr Holding gain—interest rate swap 4,922
(To record change in fair value of the derivative)
Dr Holding loss—hedged note $4,922
Cr Note payable ($211,394 – 206,472) $4,922
(To record change in fair value of the note)
