Question

On January 1, 2005, Eden Ventures, Inc., received a three-year, $1 million loan with interest payments due at the end of each year and the principal to be repaid on December 31, 2004. The interest rate for the first year is the prevailing market rate of 9 percent, and the rate each succeeding year will be equal to the prevailing market rate on January 1 of that year. Eden also entered into an interest rate swap agreement related to this loan. Under the terms of the swap agreement, in the years 2003 and 2004, Eden will receive a swap payment based on the principal amount of $1 million. If the January 1 interest rate is greater than 9 percent, Eden will receive a swap payment for the difference; and if the January 1 interest rate is less than 9 percent, Eden will make a swap payment for the difference. The swap payments are made on December 31 of each year. On January 1, 2003, the interest rate is 8 percent, and on January 1, 2004, the interest rate is 12 percent.

Requirements :
Make the journal entries for the interest rate swap on Eden's Books at the dates shown below ( assume the interest rate swap is not designated as hedging instrument) ignore the hedged item, example, the loan). For purposes of estimating future swap payments,assume that the current interest rate is the best forecast of the future interest rate ( round all entries to the nearest dollar)

1.) Januart 1, 2002
2.) December 31, 2002
3.) December 31, 2003
4.) December 31, 2004

Answer 1

Journal entries for interest rate swap:
Date	particular	Amount Dr	Amount Cr
01-01-2002	No Entry need to pass for entering into swap
	For Loan
	Bank A/c	10,00,000.00
	Loan		10,00,000.00
	( being loan recorded )
31-12-2002	Interest on loan	90,000.00
	To bank A/c		90,000.00
	(1000,000*9/100)
	(Payment of intt)
31-12-2003	Interest on loan	80,000.00
	To bank A/c		80,000.00
	(10,00,000*8/100)
	(Payment of intt)
	Bank A/c	80,000.00
	P/l A/c	10,000.00
	To Derivative asset		90,000.00
	(9-8)*10,00,000
	(Being derivative asset amount received.)
	Derivative asset A/c	90,000.00
	To bank A/c		90,000.00
	(Being derivative amount paid )
31.12.2004	Interest on loan	1,20,000.00
	To bank A/c		1,20,000.00
	(10,00,000*12/100)
	(Payment of intt)
	Bank A/c	1,20,000.00
	To Derivative asset		1,20,000.00
	(Being derivative asset amount received.)
	Derivative asset A/c	1,20,000.00
	To bank A/c		90,000.00
	To P/L A/c		40,000.00
	(Being derivative amount paid )
31.12.2004	Loan A/c	10,00,000.00
	To bank A/c		10,00,000.00
	( Being payment made for loan principal )