Question

ABC Inc. borrowed funds from its bank. Details are as follows.
Four year term loan, U.S. $500,000
Funds borrowed 1 January 2016; due 31 December 2019
Exchange rates:

1 January 2016	U.S. $1 = Cdn. $1.34
31 December 2016	U.S. $1 = Cdn. $1.40
31 December 2017	U.S. $1 = Cdn. $1.41
31 December 2018	U.S. $1 = Cdn. $.136
31 December 2019	U.S. $1 = Cdn. $1.38

Required:

Prepare the journal entries as follows to record:
A) Receipt of loan proceeds for January 2016.
B) The adjustment to spot rate for December 2016.
C) The adjustment to spot rate December 2017
D) The adjustment to spot rate December 2018
E) The adjustment to spot rate December 2019
F) Repayment of loan December 2019

7. Based on the above information calculate the total accounting recognition of loss.

Answer 1

A) Cash a/c Dr 675,000

Term Loan A/c Cr 675,000

( Being receipt of loan proceeds )

(USD 500,000*1.35 = CAD 675,000)

B)  Currency Gain/Loss Unrealized A/c Dr 25,000

Term Loan A/c    Cr 25,000

[(1.40-1.35)*500,000 = 25,000] This is recognised as unrealized forex loss upon revaluation.

We consider it unrealized because the we have not paid yet – this is just our best guess of how much we’ll gain or lose, but we aren’t sure. Generally, we make this a reversing entry so when we pay, we can book a realized gain or loss entry.

C) Currency Gain/Loss Unrealized A/c Dr 10,000

Term Loan A/c    Cr 10,000

[(1.42-1.40)*500,000 = 10,000] This is recognised as unrealized forex loss upon revaluation.

D) Term Loan A/c    Dr 30,000

Currency Gain/Loss Unrealized A/c Cr 30,000

[(1.36-1.42)*500,000 = -30,000] This is recognised as unrealized forex gain upon revaluation.

E) Currency Gain/Loss Unrealized A/c Dr 15,000

Term Loan A/c Cr 15,000

[(1.39-1.36)*500,000 = 15,000] This is recognised as unrealized forex loss upon revaluation.

F) Term Loan A/c Dr 675,000

  Currency Gain/Loss Realized A/c Dr 20,000

Cash A/c Cr 695,000

The repayment will be USD 500,000 * 1.39 = CAD 695,000.

G) The total acoounting recoznition of loss is CAD 20,000, which is recognised as realized upon settlement of the loan. (1.39-1.35)*500,000 = 20,000.