On January $1,2024,$ Avalanche Corporation borrowed $$100,000$ from First Bank by issuing a two$-$year, $8\%$ fixed$-$rate note with annual interest payments. The principal of the note is due on December $31,2025.$

Avalanche wanted to hedge against declines in general interest rates, so it also entered into a two$-$year SOFR$-$based interest rate swap agreement on January $1,2024,$ and designates it as a fair value hedge. Because the swap is entered at market rates, the fair value of the swap is zero at inception.

The agreement called for the company to receive fixed interest at the current SOFR swap rate of $5\%$ and pay floating interest tied to SOFR. This arrangement results in an effective variable rate on the note of SOFR $+3\%.$page A$-28$

The contract specifies that the floating rate resets each year on June $30$ and December $31$ for the net settlement that is due the following period. In other words, the net cash settlement is calculated using beginning$-$of$-$period rates.

The SOFR rates on the swap reset dates and the fair values of the swap obtained from a derivatives dealer are as follows:

Avalanche meets all criteria for hedge accounting using the shortcut method.

Required:

What does the shortcut method allow Avalanche to assume? How does this assumption affect the application of hedge accounting?

Calculate the net cash settlement at each settlement date during $2024$ and $2025.$

Prepare the journal entries during $2024$ to record the issuance of the note, interest, net cash settlement for the interest rate swap, and necessary adjustments for changes in fair value under the shortcut method.

Prepare the journal entries during $2025$ to record interest, net cash settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt.

Rollforward both the swap account and the notes payable account at each settlement$/$interest payment date.

Calculate the net effect on earnings of the hedging arrangement for the six$-$month periods ending June $30$ and December $31,2024,$ and June $30$ and December $31,2025.$