Question

On April 1, 2020, Mendoza Company (a U.S.-based company) borrowed 514,000 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, 2020, and will make a second interest payment on March 31, 2021, when the loan 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:

Date	U.S. Dollar per Euro
April 1, 2020	$	1.10
October 1, 2020		1.20
December 31, 2020		1.24
March 31, 2021		1.28

• 1 Record the borrowal of the foreign loan.

• 2 Record the first interest payment on the foreign loan.

• 3 Record the year-end interest accrual on the foreign loan.

• 4 Record the year-end adjustment to the foreign loan.

• 5 Record the second interest payment and foreign exchange gain or loss.

• 6 Record the repayment of the loan and foreign exchange gain or loss.

Answer 1

Answer:

1.	Date	General Journal	Debit	Credit
	04-01-2020	Cash	$ 5,65,400.00			Loan Principal in Euros	$ 5,14,000.00
		Loan Payable		$ 5,65,400.00		Exchange rate - April 1, 2020	$                 1.10
							$ 5,65,400.00
2.	Date	General Journal	Debit	Credit		Loan Principle in Euros	$ 5,14,000.00
	10-01-2020	Interest Expense	$      15,420.00			Interest Rate	5%*6/12
		Cash		$      15,420.00		Interest In Euros	$      12,850.00
						Exchange Rate - Oct 1, 2020	$                 1.20
							$      15,420.00
3.	Date	General Journal	Debit	Credit
	12-31-2020	Interest Expense	$        7,967.00			Loan Principle in Euros	$ 5,14,000.00
		Interest payable		$        7,967.00		Interest Rate	5%*3/12
						Interest In Euros	$        6,425.00
						Exchange Rate -Dec 31, 2020	$                 1.24
							$        7,967.00
4.	Date	General Journal	Debit	Credit
	12-31-2020	Loss on Foreign currency Transaction	$      71,960.00			loan Pricipal in Euros	$ 5,14,000.00
		Loans Payable		$      71,960.00		Exchange Rate - Dec 31, 2020	$                 1.24
						Revalued Amount	$ 6,37,360.00
						Recorded Amount	$ 5,65,400.00
						Loss on Foreign Currency Transactions	$      71,960.00
5.	Date	General Journal	Debit	Credit
	3-31-2021	Interest Expense	$        8,224.00			Loan Principal in Euros	$ 5,14,000.00
		Loss on Foreign currency Transaction	$            257.00			Interest Rate	5%*6/12
		Interest payable	$        7,967.00			Interest In Euros	$      12,850.00
		Cash		$      16,448.00		Exchange Rate -Mar 31, 2021	$                 1.28
						Interest for 6 months	$      16,448.00
						Loan Pricipal in euros	$ 5,14,000.00
						Interest rate	5%*3/12
						Interest in Euros	$        6,425.00
						Exchange rate - Mar 31, 2021	$                 1.28
						Interest in 3 months	$        8,224.00
						Interest Payable	$        7,967.00
						Loss on Foreign Currency Transaction	$            257.00
						Loan Pricipal in Euros	$ 5,14,000.00
6.	Date	General Journal	Debit	Credit		Exchange Rate - Mar 31, 2021	$                 1.28
	3/31/2021	Loan Payable	$ 6,37,360.00			Amount to be paid	$ 6,57,920.00
		Loss on Foreign Currency Transaction	$      20,560.00			Revalues Amount = Dec 31, 2020	$ 6,37,360.00
		Cash		$ 6,57,920.00		Loss on Foreign currency Transaction	$      20,560.00