Problem
On September 30, 2015, Ericson Company negotiated a two-year, 2,000,000 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 $ 0.200
December 31, 2015 0.205
September 30, 2016 0.220
December 31, 2016 0.225
September 30, 2017 0.250
a. Prepare all journal entries related to this foreign currency borrowing assuming the above exchange rates for 1 dudek.
1. Record the note and conversion of 1 million dudeks into $ at the spot rate.
2. Record the accrued interest for the period 9/30 - 12/31/15.
3. Record to revalue the note payable at the spot rate, and record the foreign exchange gain/loss thereof.
4. Record the first annual interest payment including any gain or loss on the interest payable accrued at 12/31/15.
5. Record the accrued interest for the period 9/30 - 12/31/16.
6. Record to revalue the note payable at the spot rate, and record the foreign exchange gain/loss thereof.
7. Record the second annual interest payment including any gain or loss on the interest payable accrued at 12/31/16.
8. Record the payment of 1 million dudek note.
b. Determine the effective cost of borrowing in dollars in each of the three years 2015, 2016, and 2017.
2015 -
2016 -
2017 -