Recording International Investment

To take advantage of high short-term interest rates, Chipotle Mexican Grill, Inc. purchased a 1,000,000 krona six-month certificate of deposit from a Swedish bank for $125,000 on October 1, 2016. The annual interest rate is 6 percent. Chipotle received the full principal and interest, in krona, on March 31, 2017, and immediately exchanged the krona for U.S. dollars at the current spot rate. Spot rates ($/krona) at December 31, 2016, and March 31, 2017, were $0.1445 and $0.1228, respectively. Chipotle is a calendar-year company, and accrues interest only at year-end.

a. Prepare the journal entries recorded by Chipotle on October 1, 2016, December 31, 2016, and March 31, 2017.

b. What was the effective annual rate of return on this investment? Show calculations. Why is the effective annual rate different from 6 percent?