On January 1, 2023, 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 2023, 2024, and 2025 are 6%, 7%, and 6%, respectively. a) Prepare the required journal entries for Fontaine Corporation using the shortcut method for 2023-2025. b) Indicate how the above entries affect Fontaine Corporation’s reported net earnings for each year.
Shortcut Method - Issuer Entries
On January 1, 2023, 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 2023, 2024, and
2025 are 6%, 7%, and 6%, respectively.
a) Prepare the required
for 2023-2025.
b) Indicate how the above entries affect Fontaine Corporation’s reported net earnings for
each year.
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