Question

On April 1, 2017, Mendoza Company borrowed 680,000 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 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 $ 1.12

October 1, 2017 1.22

December 31, 2017 1.26

March 31, 2018 1.30

Answer 1

Solution:

Journal Entries

No	Date	Account title and explanation	Debit($)	Credit($)	Calculations
1	April 1	Cash A/c	$761,600		(680,000*$1.12)
		To payable foreign loan A/c		$761,600
		(To Record the borrowable of the foreign loan)
2,3	Oct 1	Interest expense A/c	$20,740		(680,000*5%*6/12*$1.22)
		To Cash A/c		$20,740
		(To Record the first interest payment and year end interest accrual on the foreign loan)
4	Dec 31	Interest expense A/c	$10,710		(680,000*5%*3/12*$1.26)
		To interest accrued A/c		$10,710
		(To Record the year end adjustment to the foreign loan.)
	Dec 31	Foreign exchange loss A/c	$95,200		680,000*($1.26-$1.12)
		To Payable foreign loan A/c		$95,200
		(To  Record the year end adjustment to the foreign loan.)
5	March 31	Interest expense A/c	$11,050		(680,000*5%*3/12*$1.30)
		Interest accrued A/c	$10,710
		Foreign exchange loss A/c	$340
		To Cash A/c		$22,100	(680,000*5%*6/12*$1.30)
		(To Record the second interest payment and foreign exchange loss/gain)
6	March 31	Payable foreign loan A/c	$856,800
		Foreign exchange loss A/c	$27,200		(680,000*($1.30-$1.26)
		To cash A/c		$884,000	(680,000*$1.30)
		(To Record the repayment of the loan and foreign exchange loss/gain)