Interest Rate Swap: Journal Entries and Valuation Johnson & Johnson (J&J) has $10,000,000 of floating rate debt, with interest at LIBOR + 120 bp adjusted quarterly, and an equivalent amount of 2-year fixed-rate investments yielding 5 percent annually. To match fixed rate financing with its fixed-rate investments, J&J swaps 4 percent fixed payments to intermediary in exchange for LIBOR + 120 bp on the notional amount of $10,000,000 for 2 years. LIBOR is 2.8 percent.
Required
a. After the swap is in effect one quarter, LIBOR rises to 3.3 percent and the discount rate applicable to the fixed payments rises to 4.5 percent. Prepare the entries made by J&J at the end of the second quarter to record net interest expense under the swap.
b. Prepare the entries to revalue the swap and the hedged investments at the end of the second quarter. Assume a value change of $65,000 relates to the swap and the hedged investments.
c. Suppose the swap is not hedging fixed-rate investments and is a receive variable/pay fixed cash flow hedge. Record the $65,000 change in the swap's value assumed in part b above.