On January 1,2014,Bambi Borrowed $500,000 from Lonni

question 8

Essay

On January 1,2014,Bambi borrowed $500,000 from Lonni.The five-year term note carries a variable rate interest,based on LIBOR,and interest is payable at December 31 of each year,compounded annually.The first year's rate of interest is 6% and Bambi would like to assure that their rate does not increase.Bambi enters into a pay-fixed,receive-variable interest rate swap agreement with Third National Bank,under which Bambi will pay 6%,fixed.At December 31,2014,it is determined that Bambi's interest rate to Lonni for the next year will be 5%.Treat as a cash flow hedge.
Required: Determine the estimated fair value of the hedge at December 31,2014,and prepare the related journal entry required to document this hedge and the related interest payment at December 31,2014.Assume the interest rate curve is flat.

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