Question

On September 30, 2015, Ericson Company negotiated a two-year, 2,200,000 dudek loan from a foreign bank at an interest rate of 4 percent per year. It makes interest payments annually on September 30 and will repay the principal on September 30, 2017. Ericson prepares U.S.-dollar financial statements and has a December 31 year-end.

September 30, 2015	$	0.110
December 31, 2015		0.115
September 30, 2016		0.130
December 31, 2016		0.135
September 30, 2017		0.160

a.	Prepare all journal entries related to this foreign currency borrowing assuming the above exchange rates for 1 dudek. (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

       

b.	Determine the effective cost of borrowing in dollars in each of the three years 2015, 2016, and 2017. (Do not round intermediate calculations.)

       

Answer 1

Ericson Company Requirement 2 Requirement 1 (In Dudek) Journal Enteries Date Particulars Debit Credit 30.9.2015 Cash a/c Dr. 242000 To Note payable 242000 Note payable (dudek) [2,200,000 $0.110) = $242,000 Effective Cost of Borrowing 2015 13530 2016 55000 2017 66110 2015 Interest expense Foreign exchange loss Total Dr. 2530 31.12.2015 Interest expense a/c To Interest payable 2530 11000 13530 2530 Interest Payable (dudek) [2,200,000 x 4% x 3/12 = 22,000 dudeks x $0.115 spot rate] = $2,530 13530 / 242000 = 5.59% for 3 months 5.59% x 12/3 = 22.36% for 12 months 31.12.2015 Foreign exchange loss a/c Dr. 11000 To Note payable Note Payable (2.2 mx ($0.115 - $0.110)] = $11,000 11000 2016 Interest expense Foreign exchange loss Total 10670 44330 55000 30.9.2016 55000 / 242000 = 22.73% for 12 months Interest expense a/c Dr. 8580 Interest payable a/c Dr. 2530 Foreign exchange loss a/c Dr. 330 To Cash 11440 Interest Expense (66,000 dudeks x $0.130] = $8,580 Foreign Exchange Loss [22,000 dudeks x ($0.130 - $.0.115)] = $330 2017 Interest expense Foreign exchange loss Total 10560 55550 66110 31.12.2017 Interest expense a/c Dr. 2970 To Interest payable 2970 Interest Payable (dudek) [22,000 dudeks x $0.135] = $2,970 Note Payable (dudek) [2.2 mx ($0.135 - $0.115)] = $44,000 66110 / 242000 = 27.32% for 9 months 27.32% x 12/9 = 36.42% for 12 months Dr. 44000 31.12.2017 Foreign exchange loss a/c To Note payable 44000 30.9.2018 Interest expense a/c Dr. 10560 Interest payable a/c Dr. 2970 Foreign exchange loss a/c Dr. 550 To Cash 14080 Interest Expense (66,000 dudeks x $0.160] = $10,560 Foreign Exchange Loss [22,000 dudeks x ($0.160 - $0.135)] = $550 Cash [88,000 dudeks x $0.160] = $14,080 Cash (2.2 m dudeks x $0.160] = $352,000 30.9.2018 celossale Drop 297000 55000 285000 Note payable a/c Foreign exchange loss a/c Dr. To Cash 44000 + 11000 = 55000 352000