On April 1, 2017, Mendoza Company borrowed 600,000 euros for one year at an inte

Question

On April 1, 2017, Mendoza Company borrowed 600,000 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 oan 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 $1.20 1.30 1.34 1.38

Explanation / Answer

Journal Entry in the Books of Mendoza Company S. No. Date Account Desription , Title Debit Credit 1 01-Apr Cash $720,000 Short Term loan $720,000 To Record foreign Loan Borrowing (Euro 600000*$1.20) 2 01-Oct Interest Expense $19,500 Cash $19,500 To Record First Interest Payment (Euro600000*5%/2*$1.30) 3 31-Dec Interest Expense $10,050 Accrued Interest $10,050 To Record Year End Interest (Euro600000*5%/4*$1.34) 4 31-Dec Foreign Exchange loss $84,000 Short Term loan $84,000 To Record Foreign Exchange Loss ($600000*(1.34-1.20)) 5 31-Mar Accrued Interest $11,700 Foreighn Exchange Loss $402 Cash $12,102 To Record Payment of Accrued interest and Foreign Exchange Loss ($10050*($1.38-$1.34)) 6 31-Mar Short Term loan $804,000 Foreign Exchange Loss $24,000 Cash $828,000 To Repayment of the Loan and Foreign exchange Loss/Gain (Euro 600000*($1.38-1.34))

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