P9.14 Interest Rate Swap: Journal Entries and Valuation Johnson & Johnson (J&J) has $10,000,000 of floating rate debt, with interest at LIBOR + 120 bp adjusted quarterly, and an equivalent amount of 2-year fixed-rate debt investments yielding 4 percent annually. J&J classifies the investments as held-to-maturity. To match fixed rate financing with its fixed-rate investments, J&J swaps 3 percent fixed payments to intermediary in exchange for LIBOR + 120 bp on the notional amount of $10,000,000 for 2 years, and designates the investments as the hedged item. LIBOR is 1.8 percent.

a. Prepare the entries made by J&J at the end of the first quarter to record interest expense.

b. After the swap is in effect one quarter, LIBOR rises to 2.3 percent. The swap and the hedge investment both change in value by $50,000. Prepare the entries made by J&J to record the value changes.

c. Prepare the entries made by J&J at the end of the second quarter to record interest expense.

d. Suppose the swap is not hedging fixed-rate investments, but instead hedges changing interest rates on debt. LIBOR rises to 2.3 percent at the end of the first quarter, and the swap changes in value by $50,000. Prepare the entries made by J&J at the end of the quarter.