Question

On April 1, 2017, Mendoza Company borrowed 500,000 euros for one year at an interest rate of 5 percent per annum. Mendoza must make its first interest payment on the loan on October 1, 2017, and will make a second interest payment on March 31, 2018, when the loan is repaid. Mendoza prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 euro April 1, 2017 October 1, 2017 December 31, 2017 March 31, 2018 $1.10 1.20 1.24 1.28

Answer 1

Mendoza Company Journal Enteries Particulars Debit in €Credit in Date 1.4.2017 Cash a/c Dr. 550000 To Note payable 550000 |(Note Payable issued) 500000 x 1.10 1.10.2017 Interest expense (euro) a/c Dr 15000 To Cash 15000 (Interest paid) x 5% x 0.5 1 12500 x 1.20 31.12.2017 Interest expense (euro) a/c Dr 7750 To Interest payable (euro) 7750 |Interest accrued) 500000 x 5% x 3/12 6250 x 1.24 = 7750 31.12.2017 Foreign exchange loss a/c Dr 70000 To Note payable 70000 (Loss on exchange difference) 500000 x ( 1.24- 1.10) 31.3.2018 Interest expense (euro) a/c Dr Interest payable (euro) a/c Dr. Foreign exchange loss a/c Dr. То Cash 8000 7750 250 16000 (Interest expense paid) 500000 x 5% x 3/12 6250 x 1.28 8000 500000 x 5% x 0.5 12500 x 1.28 16000 31.3.2018 Note payable (euro a/c Dr. 620000 Foreign exchange loss a/c Tо Cash Dr. 20000 640000 (Note Payable paid off) 500000 x 1.28 640000 500000 x 1.24 620000