On January 1, 20X1, Lucky Inc. received a two-year, $2 million loan with interest payments due at the end of each year and the principal to be repaid on December 31, 20X2. The interest rate for the first year is the prevailing market rate of 9 percent, and the rate each succeeding year will be equal to the prevailing market rate on January 1 of that year. On January 1, 20X1, Lucky also entered into an interest rate swap agreement related to this loan and designated this swap as a hedge against fluctuations for its interest payments. Under the terms of the swap agreement, in the year 20X2, Lucky will receive a swap payment based on the principal amount of $2 million. If the January 1 interest rate is greater than 9 percent, Lucky will receive a swap payment for the difference; and if the January 1 interest rate is less than 9 percent, Lucky will make a swap payment for the difference. The swap payments are made on December 31 of each year. On January 1, 20X2, the interest rate is 12 percent.

Required: Make the necessary entries on Lucky’s books at the dates shown below. For purposes of estimating future swap payments, assume that the current interest rate is the best forecast of the future interest rate (round all entries to the nearest dollar).

(1) January 1, 20X1.

(2) December 31, 20X1.

(3) December 31, 20X2.

Answer rating: 100% (QA)

Date Account Description Debit Credit January 1 20x1 Cash 2000000 Loan Payable 2000000 December 31 20x1 Interest Expense 180000 Cash 180000 Interest rate swap receivable 53580 Unrealized Gain interest ... View the full answer