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Question

On January 1, 2011, Hitchcock Corporation entered into a 5-year interest rate swap agreement. The agreement called for the company to make payments based on an 8% fixed notional amount of $500,000 and to receive interest based on a floating interest rate. The contract called for cash settlement of the net interest amount at the end of each year. The floating rate was to be reset at each cash settlement date. Thus, the floating rate for determining each end of year payment is the rate as of the end of the prior year.
Market (LIBOR) interest rates were 8% at January 1, 2011, 6.5% at December 31, 2011, and 9% at December 31, 2012. The fair value of the swap is as follows:
Requirements:
 1. Complete the following table to show the amounts appearing in Hitchcock's financial statements related to the swap for the years ended December 31, 2011 and December 31, 2012. There may be zeros in several of the cells. Indicate debits and credits by putting parentheses around credits. Show your work within the table.
2. Complete the following table to show the amounts appearing in Hitchcock's statement of comprehensive income related to the swap and the hedged item for the years ended December 31, 2011 and December 31, 2012, assuming that the interest rate swap is being used as a perfectly effective cash flow hedge for a $500,000 variable rate note payable issued by Hitchcock. There may be zeros in multiple cells. Indicate debits and credits by placing parentheses around the credits. Show your work within the table.
3. Complete the following table to show the amounts appearing in Hitchcock's statement of comprehensive income related to the swap and the hedged item for the years ended December 31, 2011 and December 31, 2012, assuming that the interest rate swap is being used as a perfectly effective fair value hedge for a $500,000 investment in a fixed rate note. The note is classified as an available-for-sale security. There may be zeros in multiple cells. Indicate debits and credits by placing parentheses around the credits. Show your work within the table.

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