Question
On January 1, 2022, Victory Inc. received a three-year, $1 million loan with interest payments due at the end of each year and the principal
On January 1, 2022, Victory Inc. received a three-year, $1 million loan with interest payments due at the end of each year and the principal to be repaid on December 31, 2024. The interest rate for the first year is the prevailing market rate of 5 percent, and the rate each succeeding year will be equal to the prevailing market rate on January 1 of that year. On January 1, 2022, Victory also entered into an interest rate swap agreement related to this loan and designated this swap as a hedge against fluctuations for its interest payments. Under the terms of the swap agreement, in the years 2023 and 2024, Victory will receive or make a swap payment based on the principal amount of $1 million. If the January 1 interest rate is greater than 5 percent, Victory will receive a swap payment for the difference; and if the January 1 interest rate is less than 5 percent, Victory will make a swap payment for the difference. The swap payments are made on December 31 of each year. On January 1, 2023, the interest rate is 4 percent, and on January 1, 2024, the interest rate is 6 percent. For purposes of estimating future swap payments, assume that the current interest rate is the best forecast of the future interest rate.
Required: (Show calculations and round all entries to the nearest dollar.)
1. Make the necessary entries on Victorys books at December 31, 2022.
2. Make the necessary entries on Victorys books at December 31, 2023.
3. Make the necessary entries on Victorys books at December 31, 2024.
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