On September 30, 2011, Ericson Company negotiated a two-year, 1,000,000 dudek loan from a foreign bank at an interest rate of 2 percent per year. It makes interest payments annually on September 30 and will repay the principal on September 30, 2013. Ericson prepares U.S.-dollar financial statements and has a December 31 year-end.

a. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 dudek:

b. Determine the effective cost of borrowing in dollars in each of the three years 2011, 2012, and 2013.

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September 30, 2011 $0.100 December 31, 2011 0.105 September 30, 2012 0.120 December 31, 2012 0.125 September 30, 2013 0.150