Cusso Corporation had a bank loan of $50,000,000, which was to be repaid at the end of 20x5. The loan carried an interest rate based on the three-month London Interbank Offer Rate (LIBOR) plus 150 basis points. Interest on the loan was payable half-yearly on 30 June and 31 December. Cusso, concerned that interest rates might increase during the next three years, decided to enter into a swap with a financial intermediary on 1 January 20x3, which involved Cusso paying a fixed rate of 5.5% per annum and receiving LIBOR plus 150 basis points. The notional amount of the swap was $50,000,000. LIBOR was reset semi-annually beginning with 1 January 20x3 in order to determine the next interest payment.

Differences between the fixed rate and the variable rate would be settled on a semi-annual basis. The following interest rates occurred over the term of the swap.

The following assumptions are made:

(a) The yield curve is flat.

(b) No hedge ineffectiveness (the conditions for the FASB’s “short-cut” method are assumed to be met).

(c) Other risks remain constant.
Cusso designates the swap as a cash flow hedge.

Required
Prepare the journal entries required to account for the loan and the swap over the period of the swap.

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Date 1 January 20x3. 30 June 20x3..... 31 December 20x3. 30 June 20x4..... 31 December 20x4.. 30 June 20x5 ..... LIBOR LIBOR + 150 basis points 4.0% 4.5% 5.0% 4.7% 4.5% 4.3% 5.5% 6.0% 6.5% 6.2% 6.0% 5.8%