Martinez Company issues a 4-year, 7.60% fixed-rate interest only, nonprepayable $830,000 note payable on December 31,...
Martinez Company issues a 4-year, 7.60% fixed-rate interest
only, nonprepayable $830,000 note payable on December 31, 2019. 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 Martinez will receive a fixed rate at
7.60% and pay variable with settlement dates that match the
interest payments on the debt. Assume that interest rates have
declined during 2020 and that Martinez received $10,500 as an
adjustment to interest expense for the settlement at December 31,
2020. The loss related to the debt (due to interest rate changes)
was $56,000. The value of the swap contract increased
$56,000.
| (a) | Prepare the journal entry to record the payment of interest expense on December 31, 2020. | |
| (b) | Prepare the journal entry to record the receipt of the swap settlement on December 31, 2020. | |
| (c) | Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2020. | |
| (d) | Prepare the journal entry to record the change in the fair value of the debt on December 31, 2020. |
Homework Answers
Answer:
| No. | Account Titles and Explanation | Debit | Credit |
| a | Interest Expense (830,000* 7.60%) | $63,080 | |
| Cash | $63,080 | ||
| b | Cash | $10,500 | |
| Interest Expense | $10,500 | ||
| c | Swap contract | $56,000 | |
| Unrealized Holding Gain or Loss | $56,000 | ||
| d | Unrealized Holding Gain or Loss | $56,000 | |
| Note Payable | $56,000 |
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