Question

On January 1, 2020 Nittany Inc. issues a 10-year, $20,000,000 note at LIBOR (floating rate), with...

On January 1, 2020 Nittany Inc. issues a 10-year, $20,000,000 note at LIBOR (floating rate), with interest paid annually on December 31. The LIBOR rate is updated at the end of each year depending on market conditions. LIBOR rate on January 1, 2020 is 10%. Nittany prefers fixed-rate financing and enters into an interest rate swap to pay 10% and receive LIBOR based on the loan amount of $20,000,000.

Required:

1. The LIBOR rate is updated to 11% on December 31, 2020. What entries does Nittany make on December 31, 2020 related to the note and interest rate swap?

2. The LIBOR rate is updated to 9% on December 31, 2021. What entries does Nittany make on December 31, 2021 related to the note and interest rate swap?

3. What is the book value of the note payable at the end of 2021?

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Answer #1

1)

The entry on december 31, 2020 is as follows:

2)

The entry on december 31, 2021 is as follows:

3)

The value of Bond on 31 December, 2021 is same $20,000,000. The swaping gains or loss does not affects the value of bond.

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