Question

On April 1, 2017, Mendoza Company borrowed 580,000 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

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

1) Foreign Loan taken - 01.04.2017

Bank a/c Dr (580000*1.12) 649600

To Loan A/c 649600

When we take loan in foreign currency, it is booked at the rate prevailing at the time of availing loan that's why it is booked at April 1st rate i.e., 1.12

2)First Interest payment

Interest Amount = 580000*5%*6/12 = 14500 euros

It is paid on 1st October, so we will use the October 1st rate for payment of Interest

Interest Expense a/c Dr (14500*1.22) 17690

To Bank A/c 17690

3)Year End Interest Accrual

Interest is accrued for 3 months,

So interest accrued = 580000*5%*3/12 = 7250 euros

As per IFRS, all liabilities are booked at the closing rate, so we will use December 31st rate to book interest accrued amount

Interest Expenses a/c Dr (7250*1.26) 9135

To Interest Accrued a/c 9135

4) Year End adjustments to the foreign loan

As per IFRS, Liabilities are converted at the closing rate i.e., 31st December rate

We have already booked the loan @ 1.12, so we will increase the loan amount as follows

Foreign Exchange difference a/c Dr (580000*(1.26-1.12)) 81200

To Loan a/c 81200

So, Closing Loan Amount = 649600+81200= 730800 which is equal to (580000 euros * 1.26)

5) Second Interest Payment

Interest payment amount = 580000*5%*6/12 = 14500 Euros but we already booked 3 months interest expense, now we will book the other 3 months interest

Interest payment entry is as follows

Interest expense a/c Dr (14500/2 * 1.30) 9425

Interest Accrued a/c Dr 9135

Foreign Exchange Difference a/c Dr 290 (7250*(1.30-1.26))

To Bank a/c (14500*1.30) 18850

6) Repayment of the loan

Loan Amount as on 31.12.2017 = $ 730800 but we have to pay 580000 euros @ 1.30, so exchange difference is equal to 580000 euros * (1.30-1.26) i.e., 23200

Loan A/c Dr 730800

Exchange Diffrence a/c DR 23200

To Bank a/c(580000*1.30) 754000