Blue Inc. issued a 400,000 10-year, 4% fixed-rate interest note payable on December 31, 2020. Blue Inc. is concerned that interest rates will decrease in the future, causing the value of its debt to increase so it enters into a swap agreement with Bank Corp. The swap agreement specifies that Blue Inc. will receive a fixed rate at 4% and pay a variable (floating) rate with settlement dates occurring on the dates interest payments are due. Interest payments are due annually on December 31st. The hedge is classified as a fair value hedge.

Required:

1. During 2021 the interest rates increased to 5%. Which journal entries does Blue Inc. record on December 31, 2021 to account for interest and the swap arrangement?
2. During 2022 the interest rates decreased to 3.5%. Which journal entries does Blue Inc. record on December 31, 2022 to account for interest and the swap arrangement?
3. What is the book value of Blue Incs note payable at the end of 2022?