On January 1, 2016, Marshall Corp. issues \($10,000,000\) in 4 percent fixed rate debt with interest payments due every six months. Concurrently, Marshall enters into an interest rate swap in which it receives 4 percent fixed and pays variable at average LIBOR + 60 bp on a notional amount of \($10,000,000.\) On June 30, 2016, the market interest rate on comparable fixed rate debt is 3 percent and LIBOR declined to 2.2 percent. LIBOR averaged 2.7 percent during the six-month period.

The estimated fair value of the swap to Marshall is \($275,000\) on June 30, 2016, and the fair value of the debt is \($10,275,000.\)

Required

a. Prepare the journal entries made by Marshall on January 1 and June 30 in connection with the debt issuance, the periodic interest, and value changes in the swap and debt.

b. Suppose instead that Marshall issued variable rate debt and entered a swap in which it receives variable and pays fixed. If the market rate of interest on comparable fixed-rate debt declines on June 30% does Marshall record the fair value of the swap as an asset or a liability? Does Marshall recognize a gain or loss on the swap and what is its accounting treatment?