2. ABC Inc. borrowed funds from its bank. Details are as follows. Four year term
ID: 2342352 • Letter: 2
Question
2. ABC Inc. borrowed funds from its bank. Details are as follows.
Four year term loan, U.S. $500,000
Funds borrowed 1 January 20X6; due 31 December 20X9
Exchange rates:
1 January 20X6
U.S. $1 = Cdn. $1.35
31 December 20X6
U.S. $1 = Cdn. $1.40
31 December 20X7
U.S. $1 = Cdn. $1.42
31 December 20X8
U.S. $1 = Cdn. $.136
31 December 20X9
U.S. $1 = Cdn. $1.39
Required:
Prepare the journal entries as follows to record:
A) Receipt of loan proceeds for January 20X6.
B) The adjustment to spot rate for December 20X6.
C) The adjustment to spot rate December 20X7
D) The adjustment to spot rate December 20X8
E) The adjustment to spot rate December 20X9
F) Repayment of loan December 20X9
G) Based on the above information calculate the total accounting recognition of loss.
1 January 20X6
U.S. $1 = Cdn. $1.35
31 December 20X6
U.S. $1 = Cdn. $1.40
31 December 20X7
U.S. $1 = Cdn. $1.42
31 December 20X8
U.S. $1 = Cdn. $.136
31 December 20X9
U.S. $1 = Cdn. $1.39
Explanation / Answer
A) Cash a/c Dr 675,000
Term Loan A/c Cr 675,000
( Being receipt of loan proceeds )
(USD 500,000*1.35 = CAD 675,000)
B) Currency Gain/Loss Unrealized A/c Dr 25,000
Term Loan A/c Cr 25,000
[(1.40-1.35)*500,000 = 25,000] This is recognised as unrealized forex loss upon revaluation.
We consider it unrealized because the we have not paid yet – this is just our best guess of how much we’ll gain or lose, but we aren’t sure. Generally, we make this a reversing entry so when we pay, we can book a realized gain or loss entry.
C) Currency Gain/Loss Unrealized A/c Dr 10,000
Term Loan A/c Cr 10,000
[(1.42-1.40)*500,000 = 10,000] This is recognised as unrealized forex loss upon revaluation.
D) Term Loan A/c Dr 30,000
Currency Gain/Loss Unrealized A/c Cr 30,000
[(1.36-1.42)*500,000 = -30,000] This is recognised as unrealized forex gain upon revaluation.
E) Currency Gain/Loss Unrealized A/c Dr 15,000
Term Loan A/c Cr 15,000
[(1.39-1.36)*500,000 = 15,000] This is recognised as unrealized forex loss upon revaluation.
F) Term Loan A/c Dr 675,000
Currency Gain/Loss Realized A/c Dr 20,000
Cash A/c Cr 695,000
The repayment will be USD 500,000 * 1.39 = CAD 695,000.
G) The total acoounting recoznition of loss is CAD 20,000, which is recognised as realized upon settlement of the loan. (1.39-1.35)*500,000 = 20,000.
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