Sarazan Company issues a 4-year, 7.8% fixed-rate interest only, nonprepayable $1

Question

Sarazan Company issues a 4-year, 7.8% fixed-rate interest only, nonprepayable $1,110,000 note payable on December 31, 2013. It decides to change the interest rate from a fixed rate to variable rate and enters into a swap agreement with M&S Corp. The swap agreement specifies that Sarazan will receive a fixed rate at 7.8% and pay variable with settlement dates that match the interest payments on the debt. Assume that interest rates have declined during 2014 and that Sarazan received $17,200 as an adjustment to interest expense for the settlement at December 31, 2014. The loss related to the debt (due to interest rate changes) was $52,200. The value of the swap contract increased $52,200.

(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

(a) Prepare the journal entry to record the payment of interest expense on December 31, 2014. (b) Prepare the journal entry to record the receipt of the swap settlement on December 31, 2014. (c) Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2014. (d) Prepare the journal entry to record the change in the fair value of the debt on December 31, 2014.

Explanation / Answer

Solution:

Journal Entries:

General Journal Debit Credit a Interest Expense (1,110,000 * 7.8%)    86,580 Cash    86,580 b Cash    17,200 Interest Expense    17,200 c Swap contract    52,200 Unrealized Holding Gain or Loss    52,200 d Unrealized Holding Gain or Loss    52,200 Note Payable    52,200

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