On January 1, 2008, Kindall Company received a 5-year, $2,000,000 loan, with interest payments occurring at the
Question:
On January 1, 2008, Kindall Company received a 5-year, $2,000,000 loan, with interest payments occurring at the end of each year and the principal to be repaid on December 31, 2012. The interest rate for the first year is the prevailing market rate of 10%, and the rate in each succeeding year will be equal to the market interest rate on January 1 of that year. In conjunction with this loan, Kindall enters into an interest rate swap agreement whereby, in each year of the loan starting with 2009, Kindall will receive a swap payment (based on $2,000,000) if the January 1 interest rate is more than 10% and will make a swap payment if the rate is less than 10%. The swap payments are made at the end of the year. On January 1, 2009, the interest rate is 12%, and on December 31, 2009, the interest rate is 9%.
Required:
Make all journal entries necessary on Kindall’s books in 2008 and 2009 to record this loan and the interest rate swap. For point of estimating future swap payments, assume that the current interest rate is the best forecast of the future interest rate.
Step by Step Answer:
Intermediate Accounting
ISBN: 978-0324312140
16th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen