Problem:
On January 1, 2015, Slidell Company received a two-year, $500,000 loan, with interest payments occurring at the end of each year and the principal to be repaid on December 31, 2016. The interest rate for the first year is the prevailing market rate of 7%, and the rate in 2016 will be equal to the market interest rate on January 1, 2016. In conjunction with this loan, Slidell enters into an interest rate swap agreement to receive a swap payment (based on $500,000) if the January 1, 2016, interest rate is greater than 7% and will make a swap payment if the rate is less than 7%. The interest swap payment will be made on December 31, 2016.
Make all journal entries necessary on Slidell's books in 2015 and 2016 to record this loan and the interest rate swap. On January 1, 2016, the interest rate is 6%.