On September 30, 2017, Ericson Company negotiated a two-year, 1,300,000 dudek lo

Question

On September 30, 2017, Ericson Company negotiated a two-year, 1,300,000 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, 2019. Ericson 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 dudek:

Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in dollars on the loan in each of the three years 2017, 2018, and 2019.

September 30, 2017 $ 0.130 December 31, 2017 0.135 September 30, 2018 0.150 December 31, 2018 0.155 September 30, 2019 0.180

Explanation / Answer

Loan taken=1300000*0.13 dollars=169000 dollars

Interest paid for 2017

Sep-Dec Interest paid for 2017=(3/12)*4%*1300000 dudeks=3/12*4%*1300000*0.135 dollars=1755 dollars

Hence, effective interest rate for 2017=1755/169000*(12/3)=4.1538%

Interest paid for 2018

Till Sep=(9/12)*4%*1300000 dudeks=(9/12)*4%*1300000*0.150 dollars=5850 dollars

Sep-Dec=(3/12)*4%*1300000 dudeks=(3/12)*4%*1300000*0.155 dollars=2015 dollars

Total interest paid=5850+2015=7865

Hence, effective interest rate for 2018=7865/169000=4.6538%

Interest paid for 2019

Jan-Sep Interest paid=(9/12)*4%*1300000 dudeks=(9/12)*4%*1300000*0.180 dollars=7020 dollars

Hence, effective interest rate for 2019=7020/169000*(12/9)=5.5385%

Principal paid=1300000 dudeks=1300000*0.18 dollars=234000 dollars

Total payment=234000+7020=241020

169000+169000*9/12*rate=241020

=>total rate=(241020-169000)/169000*12/9=5.68%

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