On January 1 of Year 1, Innovative Lab issued a 4-year $50,000 note to a local bank with xed interest payments based on 6%, payable annually on December 31. To hedge the risk of a xed interest payment, Innovative Lab entered into a 4-year interest rate swap agreement on January 1 of Year 1, calling for interest payments tied to a designated benchmark interest rate to a counterparty and receipt of interest based on 6%, negotiated at a notional amount of $50,000. The settlement date for the net cash payment is on December 31 of each year. The following table provides additional information related to the interest rate swap as forecasted over the next 4 years.

Required

a. Record the required journal entries for Year 1, Year 2, Year 3, and Year 4 related to the note payable and interest rate swap agreement. Note: If a journal entry isn't required, select "N/ADebit" and "N/ACredit" as the account names and leave the Dr. and Cr. answers blank (zero).

b. Compute the eect on net income for each year, Year 1 through Year 4, ignoring income tax. Note: Use a negative sign to indicate a loss.

c. What change(s) in the forecast would make the interest rate swap more valuable than it is projected to be currently?

(Blank) in the benchmark rate, which would (Blank) the interest paid to the counterparty (Blank) the net effective interest paid.