On January 1, 2024, XYZ, Company borrowed $300,000 from Principal Bank by issuing a three-year floating rate note based on SOFR, with interest payable semiannually on June 30 and December of each year.

XYZ Company entered into a three-year interest rate swap agreement on January 1, 2024 and designated the swap as a cash flow hedge. The intent was to hedge the risk that interest will rise, increasing its semi-annual interest payments.

The swap agreement called for the company to receive payment based on a floating interest rate on a notional amount of $300,000 and to pay a 6% fixed interest rate.

The contract called for cash settlement of the net interest amount semiannually and the rate on each reset date (June 30 and December 31) determines the variable interest rate for the following six months. In other words, the net cash settlement is based on beginning-of-period rates.

SOFR rates in 2024 were 6% at January 1, 5.5% at June 30, and 7% at December 31. The fair values of the swap on those dates, obtained by dealer quotes were as follows: January 1, $0, June 30 $(3,459) and December 31, $5,510.

Required:

1. Calculate the net settlement on June 30 and December 31,2024.

2. Prepare journal entries for the period January 1 to December 31, 2024, to record the note payable and hedging instrument, necessary adjustments for changes in fair value, and settlement of the swap contract.