Question $5$: Hedge accounting $(10$ marks$)$

On Jan $1,2019,$ Fusion Company issues a $2-$year, $$10,000,000$ note at HIBOR, with interest

paid annually to purchase an equipment. The HIBOR is reset at the end of each year. HIBOR

rate for the first year of $2019$ is at $8\%.$

Fusion Company decides that it prefers fixed rate financing and wants to lock in a rate of $8\%.$

As a result, on Jan $1,2019,$ Fusion enters into an interest swap agreement to pay $8\%$ fixed

rate and receive HIBOR based on $$10,000,000$ principal amount of the note. The variable

interest rate is reset to $6\%$ for year $2.$

Required:

a$)$ Prepare the journal entry for the year $2019$

b$)$ Prepare the journal entry for the year $2020.$