On September 30, Year 1, the Lester Company negotiated a two-year loan of 1,000,000 markkas from a
Question:
Date U.S. Dollars per Markka
September 30, Year 1 ………………………….. $0.20
December 31, Year 1 …………………………… 0.21
September 30, Year 2 …………………………… 0.23
December 31, Year 2 …………………………… 0.24
September 30, Year 3 ………………………….. 0.27
Required:
Prepare all journal entries for the Lester Company in connection with the foreign currency borrowing. What is the effective annual cost of borrowing in dollars in each of the three years Year 1, Year 2, and Year 3?
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Step by Step Answer:
Lester Company Foreign CurrencyBorrowing 930Y1 Cash 200000 Note payable markka1000000 x 20 200000 Torecord the note and conversion of 1 million markkas into at the spot rate 1231Y1 Interest expense 1050 Interest payablemarkka 1050 1000000 x 2 x 312 5000 markkas x21 spot rate Toaccrue interest for the period 930 1231Y1 Foreign exchange loss 10000 Note payable markka 1mn x 21 20 10000 Torevalue the note payable at the spot rate of 21 and record a foreign exchangeloss 930Y2 Interest expense 15000 markkas x 23 3450 Interest payable markka 1050 Foreign exchange loss 5000markkas x 23 21 100 Cash 20000 markkas x23 4600 Torecord the first annual interest payment record interest expense for theperiod 11 930Y2 and record a foreign exchange loss on the interestpayable accrued at 1231Y1 1231Y2 Interest expense 1200 Interest payablemarkka 5000 markkas x 24 1200 To accrue interest for theperiod 930 1231Y2 Foreign exchange loss 30000 Note payable markka 1mn x 24 21 30000 Torevalue the note payable at the spot rate of 24 and record a foreign exchangeloss 930Y3 Interest expense 15000 markkas x 27 4050 Interest payable markka 1200 Foreign exchange loss 5000markkas x 27 24 150 Cash 20000 markkas x27 5400 Torecord the second annual interest payment record interest expense for theperiod 11 930Y3 and record a foreign exchange loss on the interestpayable accrued at 1231Y2 Note payable markka 240000 Foreign exchange loss 30000 Cash 1 mn markkas x27 270000 Torecord payment of the 1 million markka ...View the full answer
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