Shortcut Method - Issuer Entries

On January 1, 2021, Fontaine Corporation issued an $800,000 notes payable to Allegheny State Bank. The note pays coupon payments at the rate of 5%, which is also the market rate of interest when the note was issued. The note matures in three years. Fontaine Corporation entered into an interest rate swap with the same maturity and notional amount to hedge against falling interest rates. The swap will result in Fontaine Corporation paying floating rate interest tied to the prevailing LIBOR rate and receiving fixed rate interest at 5%. Interest payments and cash settlement occur at the end of each year. LIBOR settlement rates at the end of 2021, 2022, and 2023 are 6%, 7%, and 6%, respectively.

REQUIRED:

a) Prepare the required journal entries for Fontaine Corporation using the shortcut method for 2021-2023.

b) Indicate how the above entries affect Fontaine Corporations reported net earnings for each year.