On September 30, 2017, Ericson Company negotiated a two-year, 1,300,000 dudek loan from a foreign bank at an interest rate of 4 percent per year. It makes interest payments annually on September 30 and will repay the principal on September 30, 2019. Ericson prepares U.S.-dollar financial statements and has a December 31 year-end.

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

1. September 30, 2017	$	0.130
   December 31, 2017		0.135
   September 30, 2018		0.150
   December 31, 2018		0.155
   September 30, 2019		0.180

2. Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in dollars on the loan in each of the three years 2017, 2018, and 2019.

• 1

  Record the note and conversion of 1 million dudeks into $ at the spot rate.

• 2

  Record the accrued interest for the period 9/30 12/31/17.

• 3

  Record to revalue the note payable at the spot rate, and record the foreign exchange gain/loss thereof.

• 4

  Record the first annual interest payment including any gain or loss on the interest payable accrued at 09/30/18.

• 5

  Record the accrued interest for the period 9/30 12/31/18.

• 6

  Record to revalue the note payable at the spot rate, and record the foreign exchange gain/loss thereof.

• 7

  Record the second annual interest payment including any gain or loss on the interest payable accrued at 09/30/19.

• 8

  Record the payment of 1 million dudek note.

	Effective Cost of Borrowing
2017
2018
2019