A company has a loan of $1,000,000 on which it pays the treasury bill rate + 90 bp annually on December 31. On January 1, 2021, the treasury bill rate is 1.3%, and the company enters an interest rate swap whereby it receives the treasury bill rate + 90 bp and pays a fixed rate of 2%. The swap qualifies for hedge accounting, the company has a December 31 year-end, and all income effects of the loan and the swap are reported in interest expense. The company values the swap at the expected future net swap cash flows, discounted at the variable rate.
Required
a. Is the swap initially recognized as an asset or liability? Explain.
b. Prepare the journal entries to record the company's interest expense for 2021.
c. On December 31, 2021, the treasury bill rate has fallen to 1%. Is the swap now reported as an asset or liability? Explain. What account reports the gain or loss on the swap, required to revalue it to its new market value?

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The Answer of A company has a loan of $1,000,000 on which it pays the treasury bill rate + 90 bp annually on December 31. On January 1, 2021, the treasury bill rate is 1.3%, and the company enters an interest rate swap whereby it receives the treasury bill rate + 90 bp and pays a fixed rate of 2%. The swap qualifies for hedge accounting, the company has a December 31 year-end, and all income effects of the loan and the swap are reported in interest expense. The company values the swap at the expected future net swap cash flows, discounted at the variable rate.
Required
a. Is the swap initially recognized as an asset or liability? Explain.
b. Prepare the journal entries to record the company's interest expense for 2021.
c. On December 31, 2021, the treasury bill rate has fallen to 1%. Is the swap now reported as an asset or liability? Explain. What account reports the gain or loss on the swap, required to revalue it to its new market value?

A Company Has a Loan of $1,000,000 on Which It