On January 1, 2011, Nathan Company received a 5-year, $5,000,000 loan, with interest payments occurring at the

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On January 1, 2011, Nathan Company received a 5-year, $5,000,000 loan, with interest payments occurring at the end of each year and the principal to be repaid on December 31, 2015. The interest rate for the first year is the prevailing market rate of 8%, 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, Nathan enters into an interest rate swap agreement whereby, in each year of the loan starting with 2012, Nathan will receive a swap payment (based on $5,000,000) if the January 1 interest rate is more than 8% and will make a swap payment if the rate is less than 8%. The swap payments are made at the end of the year.

On January 1, 2012, the interest rate is 11%, and on December 31, 2012, the interest rate is 7%.

Instructions:

Make all journal entries necessary on Nathan’s books in 2011 and 2012 to record this loan and the interest rate swap. For purposes of estimating future swap payments, assume that the current interest rate is the best forecast of the future interest rate.


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Related Book For  answer-question

Intermediate Accounting

ISBN: 978-0324592375

17th Edition

Authors: James D. Stice, Earl K. Stice, Fred Skousen

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