Skysong Company issues a 4-year, 7.90% fixed-rate interest only, nonprepayable $

Question

Skysong Company issues a 4-year, 7.90% fixed-rate interest only, nonprepayable $1,200,000 note payable on December 31, 2016, It decides to change the interest rate from a fixed rate to variable rate and enters into a swap agreement with M&S; Corp. The swap agreement specifies that Skysong will receive a fixed rate at 7.90% and pay variable with settlement dates that match the interest payments on the debt. Assume that interest rates have declined during 2017 and that Skysong received $11,000 as an adjustment to interest expense for the settlement at December 31, 2017. The loss related to the debt (due to interest rate changes) was $45,700. The value of the swap contract increased $45,700. (a) Prepare the journal entry to record the payment of interest expense on December 31, 2017. (b) Prepare the journal entry to record the receipt of the swap settlement on December 31, 2017. (c) Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2017. (d) Prepare the journal entry to record the change in the fair value of the debt on December 31, 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts.) No. Account Titles and Explanation Debit

Explanation / Answer

Date Account titles Debit Credit (a) 2017 Dec. 31 Interest expense 94800 Cash [1200000*7.9%] 94800 (To record debt interest payment) (b) Dec. 31 Cash 11000 Interest expense 11000 (To record the settlement of swap amount) c) Dec. 31 Notes payable 45700 Unrealized holding gain/loss 45700 (To record the change in fair value of the debt) (d) Dec. 31 Unrealized holding gain/loss 45700 Swap contract 45700 (To record the change in fair value of the swap)

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