On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 1,700,000 Chinese yuan loan from a Chinese bank at an interest rate of 4 percent per year. The company makes interest payments annually on September 30 and will repay the principal on September 30, 2022. PFI prepares U.S. dollar financial statements and has a December 31 year-end. Relevant exchange rates are as follows:

Date	U.S. Dollar per Chinese Yuan (CNY)
September 30, 2020	$	0.170
December 31, 2020		0.175
September 30, 2021		0.190
December 31, 2021		0.195
September 30, 2022		0.220
Prepare all journal entries related to this foreign currency borrowing. Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in U.S. dollars on the loan in each of the three years 2020, 2021, and 2022.

Journal entry worksheet

4.Record the first annual interest payment, record interest expense for the period 01/01/2021 – 09/30/2021, and record a foreign exchange gain or loss on the interest payable accrued at 12/31/2020.

Note: Enter debits before credits.

5. Record the accrued interest for the period 09/30/2021 – 12/31/2021.

Note: Enter debits before credits.

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

Note: Enter debits before credits.

7. Record the second annual interest payment, record interest expense for the period 01/01/2022 – 09/30/2022, and record a foreign exchange gain or loss on the interest payable accrued at 12/31/2021.

Note: Enter debits before credits.

8. Record the payment of 1 million yuan note.

Note: Enter debits before credits.

will repay the principal on September 30, 2022. PFI prepares U.S. dollar financial statements and has a December 31 year-end. Relevant exchange rates are as follows:

B. On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 1,700,000 Chinese yuan loan from a Chinese bank at an interest rate of 4 percent per year. The company makes interest payments annually on September 30 and will repay the principal on September 30, 2022. PFI prepares U.S. dollar financial statements and has a December 31 year-end. Relevant exchange rates are as follows:

DateU.S. Dollar per Chinese Yuan (CNY)

September 30, 2020$0.170

December 31, 2020 0.175

September 30, 2021 0.190

December 31, 2021 0.195

September 30, 2022 0.220

a. Prepare all journal entries related to this foreign currency borrowing.

b. Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in U.S. dollars on the loan in each of the three years 2020, 2021, and 2022.

Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in U.S. dollars on the loan in each of the three years 2020, 2021, and 2022. (Do not round intermediate calculations.)

	Effective Cost of Borrowing
2020
2021
2022