Question

Monty Company issues a 4-year,  7.50% fixed-rate interest only, nonprepayable $ 1,100,000 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 Monty will receive a fixed rate at  7.50% and pay variable with settlement dates that match the interest payments on the debt. Assume that interest rates have declined during 2017 and that Monty received $ 10,500 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 $ 55,500. The value of the swap contract increased $ 55,500.

(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 0 for the amounts.)

No.	Account Titles and Explanation	Debit	Credit
(a)
(b)
(c)
(d)

Answer 1

	Date	Accounts Titles & Explanation	Debit	Credit
a		Interest Expenses	$82,500
		Cash		$82,500
		($1,100,000 x 7.5%)
b		Cash	$10,500
		Interest Expenses		$10,500
c		Interest Rate Swap	$55,500
		Holding gain – Interest Rate Swap		$55,500
d		Holding Loss – Hedged Note	$55,500
		Note Payable		$55,500