Sandretto 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 6 each year Interest is payable annually on December 31, and the note matures on December 31, 2015 Sandretto Corporation has the option of...

a January 1 2013 Equipment 50000 Note Payable 50000 To record the acquisition of equipment by giving a 50000 note payable with a fixed interest rate of 6 December 31 2013 Interest Expense 3000 Cash 30 ...

Sandretto Corporation issues a note payable on January 1, 2013, to a supplier in return for equipment.

Question:

Sandretto issues a note payable on January 1, 2013, to a supplier in return for equipment. The note has a of $50,000 and bears interest at 6% each year. Interest is payable annually on December 31, and the note matures on December 31, 2015. Sandretto has the option of repaying the note at any time prior to at its fair value. Sandretto will repay the note early only if interest rates drop. In that event, the fair value of the note would exceed $50,000, and Sandretto will not capture the benefits of the lower interest rate. To neutralize the effects of changes in the fair value of the note payable, Sandretto enters into an interest rate swap with its bank. The swap has the effect of allowing Sandretto to exchange its fixed interest rate liability for a variable rate obligation.
Assume that the variable interest rate is 6% on January 1, 2013, and the rate is reset to 8% on December 31, 2013, and to 4% on December 31, 2014.
a. Give the journal entries that Sandretto will make on January 1, 2013, December 31, 2013, and December 31, 2014.
b. Sandretto decides to repay this note on January 1, 2015. Give the journal entries for the repayment of the note and to close out the swap agreement, assuming that Sandretto does not incur any additional costs for the early repayment or closing out the swap contract.
c. How would the entries in part a differ if Sandretto elected the fair value option for the note payable and interest rate swap?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...