On April 1, 2017, Mendoza Company borrowed 620,000 euros for one year at an inte
ID: 2538563 • Letter: O
Question
On April 1, 2017, Mendoza Company borrowed 620,000 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 US-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 1.14 1.24 1.28 1.32 View transaction listExplanation / Answer
Date
General Journal
Debit
Credit
1.
Record the borrowal of foreign loan (W.N 2)
Apr 1, 2017
Cash
706,800
Foreign Loan Payable (Euro)
706,800
2.
Record the first interest payment on foreign loan (W.N 3)
Oct 1, 2017
Interest expense
19,220
Cash
19,220
3.
Record the year end interest accrual on foreign loan (W.N 4)
Interest expense (euro)
9,920
Interest payable (euro)
9,920
4.
Record the year adjustment to the foreign loan (W.N 5)
Foreign exchange loss
86,800
Foreign loan payable (euro)
86,800
5.
Record the second interest payment and foreign exchange loss/gain (W.N 6)
Mar 31, 2018
Interest Expenses (euro)
10,230
Interest payable (euro)
9,920
Foreign exchange loss
310
Cash
20,460
6.
Record the repayment of the loan and foreign exchange loss/gain (W.N 7)
Mar 31, 2018
Foreign loan payable (euro)
793,600
Foreign exchange loss
24,800
Cash
818,400
Working Notes:
1.
Borrowings on April 1, 2017 = 620,000 euros
Rate of interest = 5%
Interest for full year = 620,000 * 5% = 31,000 euros
Interest payment on October 1, 2017 i.e. for 6months (Apr – Oct) = 31,000*6/12 = 15,500 euros
Accrued interest for December 31, 2017 i.e. for 3 months (Oct – Dec) = 31,000 *3/12 = 7,750 euros
Interest for March 31, 2018 i.e. for 3 months (Jan - Mar) = 31,000 *3/12 = 7,750 euros
2.
Date
Loan amount in euros
(A)
Exchange rate
(B)
Loan Amount in dollars
[C] = B*A
April 1, 2017
620,000
1.14
$706,800
3.
Date
Interest amount in euros
(A) (See W.N 1)
Exchange rate
(B)
Interest Amount in dollars
[C] = B*A
October 1, 2017
15,500
1.24
$ 19,220
4.
Date
Interest amount in euros
(A) (See W.N 1)
Exchange rate
(B)
Interest Amount in dollars
[C] = B*A
December 31, 2017
7,750
1.28
$9,920
5.
A. Total Euros borrowed
620,000 euros
B. Exchange rate at the date of borrowal
$1.14
C. Exchange rate at the year-end December 31, 2017
$1.28
D. (Increase)/Decrease in Exchange rate from the date of borrowing (B-C)
$(0.14)
E. (Increase)/Decrease in loan borrowed (A*D)
$86,800
6.
Date
Description
Interest amount in euros
(A) (See W.N 1)
Exchange rate
(B)
Amount in dollars
[C] = B*A
March 31, 2018
A. Cash payment of interest
15,500
1.32
$20, 460
B. Interest related to prior period (December 31, 2017) (W.N 4)
$9,920
C. Interest for the period (Jan – Mar’18)
7,750
1.32
$10,230
D. Total Interest expense (B+C)
$20,150
E. Foreign Exchange (Gain)/Loss (A-D)
$310
7.
Date
Description
Total Borrowing in euros
(A) (See W.N 1)
Exchange rate
(B)
Amount in dollars
[C] = B*A
March 31, 2018
A. Repayment of foreign loan
620,000
1.32
$818,400
B. Balance of Foreign loan on the date of borrowal (W.N 2)
$706,800
C. Foreign Exchange adjustment (W.N 5)
$86,800
D. Total Foreign loan balance (B+C)
$793,600
E. Foreign exchange (Gain)/Loss on repayment (A-D)
$24,800
Date
General Journal
Debit
Credit
1.
Record the borrowal of foreign loan (W.N 2)
Apr 1, 2017
Cash
706,800
Foreign Loan Payable (Euro)
706,800
2.
Record the first interest payment on foreign loan (W.N 3)
Oct 1, 2017
Interest expense
19,220
Cash
19,220
3.
Record the year end interest accrual on foreign loan (W.N 4)
Interest expense (euro)
9,920
Interest payable (euro)
9,920
4.
Record the year adjustment to the foreign loan (W.N 5)
Foreign exchange loss
86,800
Foreign loan payable (euro)
86,800
5.
Record the second interest payment and foreign exchange loss/gain (W.N 6)
Mar 31, 2018
Interest Expenses (euro)
10,230
Interest payable (euro)
9,920
Foreign exchange loss
310
Cash
20,460
6.
Record the repayment of the loan and foreign exchange loss/gain (W.N 7)
Mar 31, 2018
Foreign loan payable (euro)
793,600
Foreign exchange loss
24,800
Cash
818,400
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.