On January 1, 20X1, Hitchcock Corporation entered into a five-year interest rate swap agreement. The agreement uses a notional value of $500,000 and calls for the company to receive fixed interest of 9% and to make payments based on a floating interest rate. The contract calls for cash settlement of the net interest amount at the end of each year. The floating rate is to be reset at each cash settlement date. Thus, the floating rate for determining each end-of-year payment is the rate as of the beginning of that year. The interest rate swap is being used as a perfectly effective fair value hedge for a $500,000 9% fixed-rate note payable. The note was issued at face value and pays interest annually.

Market (LIBOR) interest rates are 9% at January 1, 20X1; 6.5% at December 31, 20X1; and 8% at December 31, 20X2. The fair value of the swap asset is $0 on January 1, 20X1; $42,823 on December 31, 20X1; and $12,886 on December 31, 20X2.

Required:

1. Compute the amount of interest expense that Hitchcock should recognize in 20X2.

2. At what amount should the fixed-rate note payable be shown on the balance sheet at December 31, 20X1?