Question

On April 1, 2017, Mendoza Company borrowed 460,000 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 $1.14

October 1, 2017 1.24

December 31, 2017 1.28

March 31, 2018 1.32

Prepare Journal Entries for the following:

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 loss/gain

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

Answer 1

Solution:

Journal Entries

No	Date	Particulars	Debit($)	Credit($)	Calculations
1	April 1	Cash A/c Dr	$524,400		(460,000*$1.14)
		To payable foreign loan A/c		$524,400
		(To Record the borrowal of the foreign loan)
2,3	Oct 1	Interest expense A/c Dr	$14,260		(460,000*5%*6/12*$1.24)
		To Cash A/c		$14,260
		(To Record the first interest payment and year end interest accrual on the foreign loan)
4	Dec 31	Interest expense A/c Dr	$7,360		(460,000*5%*3/12*$1.28)
		To interest accured A/c		$7,360
		(To Record the year end adjustment to the foreign loan.)
	Dec 31	Foreign exchange loss A/c Dr	$64,400		460,000*($1.28-$1.14)
		To Payable foreign loan A/c		$64,400
		(To  Record the year end adjustment to the foreign loan.)
5	March 31	Interest expense A/c Dr	$7,590		(460,000*5%*3/12*$1.32)
		Interest accured A/c Dr	$7,360
		Foreign exchange loss A/c Dr	$230
		To Cash A/c		$15,180	(460,000*5%*6/12*$1.32)
		(To Record the second interest payment and foreign exchange loss/gain)
6	March 31	Payable foreign loan A/c Dr	$588,800
		Foreign exchange loss A/c Dr	$18,400
		To cash A/c		$607,200	(460,000*$1.32)
		(To Record the repayment of the loan and foreign exchange loss/gain)