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Q1) On July 1, 20X1, Littleton Inc. loaned key supplier of raw material $2,000,000 to create new processing facility. Loan is due on July 1, 20X3 and pays interest each December 31 and June 30. Supplier insisted on variable rate loan. Charles Upton, controller of Littleton Inc., wishes to avoid risk of variable interest rate fluctuations. As a result, Littleton Inc. entered into the interest rate swap in which it will pay variable rate on $2,000,000 in exchange for fixed interest rate of 8.3%. Swap is settled on the interest payment dates. Variable interest rates and value of swap on chosen dates are as follows:

 

Variable Interest Rate

Value of the Swap

July 1, 20X1

7.9  %

 

December 31, 20X1

7.75%

$10,400

problems:

Create all entries to record this hedge through December 31, 20X1.

Accounting Basics, Accounting

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  • Reference No.:- M917977

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