Interest Rate Swap On January 1, 2013, Marshall Corp. issues $500,000 in 5.0% fixed rate debt with interest payments due every six months. Concurrently, Marshall enters into an interest rate swap in which it receives 5.0% fixed and pays variables at average LIBOR + 65 bp on a nontional amount of $500,000. On June 30, 2013, LIBOR averaged 3.2% during the six-month period. The estimated fair value of the swap to Marshall increased $50,000 on June 30, 2013, and the fair value of the debt is $550,000. 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.

Did market interest rates increase or decrease during this period? How do you know?

The market interest rates decreased, since the present value of the debt decreased.

The market interest rates increased, since the present value of the debt increased.

The market interest rates decreased, since the present value of the debt increased.

The market interest rates increased, since the present value of the debt decreased.

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 its variable rate debt declines, does Marshall recognize a gain or loss on the swap and what is its accounting treatment?