Question: Avery Corporation issues a note payable on January 1 2013
Avery Corporation issues a note payable on January 1, 2013, to a supplier in return for equipment. The note has a face value of $50,000 and bears interest at a variable interest rate; the variable interest rate is 6% on January 1, 2013. Interest is payable annually on December 31, and the note matures on December 31, 2015. To protect its cash flows from changes in the variable interest rate, Avery Corporation enters into an interest rate swap with its bank. The swap has the effect of allowing Avery Corporation to exchange its variable interest rate liability for a 6% fixed rate obligation. Assume the variable interest rate increases to 8% on December 31, 2013, and decreases to 4% on December 31, 2014. Avery Corporation designates the interest rate swap as a cash flow hedge. Give the journal entries that Avery Corporation will make on January 1, 2013, December 31, 2013, December 31, 2014, and December 31, 2015.
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