On January 2, 2014, Sloan Company issued a 5-year, $9,000,000 note at LIBOR with interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the first year is 6.8%Sloan Company decides it prefers fixed-rate financing and wants to lock in a rate of 6%. As a result, Sloan enters into an interest rate swap to pay 7% fixed and receive LIBOR based on $9 million. The variable rate is reset to 7.4% on January 2, 2015.
Instructions
(a) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2014.
(b) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2015.

Question

Quizplus · Accepted Answer

The Answer of On January 2, 2014, Sloan Company issued a 5-year, $9,000,000 note at LIBOR with interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the first year is 6.8%Sloan Company decides it prefers fixed-rate financing and wants to lock in a rate of 6%. As a result, Sloan enters into an interest rate swap to pay 7% fixed and receive LIBOR based on $9 million. The variable rate is reset to 7.4% on January 2, 2015.
Instructions
(a) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2014.
(b) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2015.

On January 2, 2014, Sloan Company Issued a 5-Year, $9,000,000