Reference no: EM132788496

You are the controller for Company, a medium size manufacturer. To expand its operations, Company borrowed $1,000,000 on an 8% note payable. The note pays interest annually, and the note's principal is due in 10 years. Company believes that interest rates prevailing over the next 10 years will be lower than 8%. So the Company decides to enter into a 10 year hedging contract with a third-party investor. Under the terms of the agreement, at each annual interest date, Company will receive 8% interest on the underlying amount ($1,000,000) from the investor and in return pay the investor LIBOR + 0.25% interest on the underlying amount ($1,000,000). The diagram below illustrates the agreement.

This is your first experience with such an agreement which is called an "interest rate swap" and are unfamiliar with the accounting and reporting.

Problem 1: Using this agreement as an example, discuss the accounting and financial reporting issues you would need to research regarding a transaction or event you were not familiar with. Do not focus on resolving this issue specifically but discuss the general issues you would have to understand to properly account for and report in accordance with GAAP.