On January 1, 20X1, Hitchcock Corporation entered into a 5-year interest rate swap agreement. The agreement called for the company to make payments based on an 8% fixed notional amount of $500,000 and to receive interest based on a floating interest rate. The contract called for cash settlement of the net interest amount at the end of each year. The floating rate was to be reset at each cash settlement date. Thus, the floating rate for determining each end of year payment is the rate as of the end of the prior year.Market (LIBOR) interest rates were 8% at January 1, 20X1, 6.5% at December 31, 20X1, and 9% at December 31, 20X2. The fair value of the swap is as follows:

Jan 1, 20X1 Dec 31, 20X1 Dec 31, 20X2

Fair value of interest rate swap 0 ($25,693) $12,656

Requirements:

1. Complete the following table to show the amounts appearing in Hitchcock's financial statements related to the swap for the years ended December 31, 20X1 and December 31, 20X2.

Dec 31, 20X1 Dec 31, 20X2

Balance sheet

Swap asset (liability)

Retained earnings

Accumulated other comprehensive

income

Statement of comprehensive income

Net income

Other comprehensive income

2. Complete the following table to show the amounts appearing in Hitchcock's statement of comprehensive income related to the swap and the hedged item for the years ended December 31, 20X1 and December 31, 20X2, assuming that the interest rate swap is being used as a perfectly effective cash flow hedge for a $500,000 variable rate note payable issued by Hitchcock.

Dec 31, 20X1 Dec 31, 20X1 Statement of comprehensive income

Net income

Other comprehensive income

3. Complete the following table to show the amounts appearing in Hitchcock's statement of comprehensive income related to the swap and the hedged item for the years ended December 31, 20X1 and December 31, 20X2, assuming that the interest rate swap is being used as a perfectly effective fair value hedge for a $500,000 investment in a fixed rate note. The note is classified as an available-for-sale security.

Dec 31, 20X1 Dec 31, 20X2

Statement of comprehensive income

Net income

Other comprehensive income