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 $125,000 on October 1, 2019. The annual interest rate is 6 percent. Chipotle received the full principal and interest, in krona, on March 31, 2020, and immediately exchanged the krona for U.S. dollars at the current spot rate. Spot rates ($/krona) at December 31, 2019, and March 31, 2020, were $0.1445 and $0.1228, respectively. Chipotle is a calendar-year company, and accrues interest only at year-end.

Required

a. Prepare the journal entries recorded by Chipotle on October 1, 2019, December 31, 2019, and March 31, 2020.

Enter answers using decimal places, when appropriate (do not round answers).

Date	Description		Debit	Credit
10/1/19	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	To record the purchase of a C.D. from a Swedish bank.
12/31/19	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	To record the purchase of a C.D. from a Swedish bank.
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	To accrue interest income.
3/31/20	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	To record the exchange gain or loss on the certificate of deposit.
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	To record the exchange gain or loss on the interest receivable.
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	To record interest income for the period 1/1/20 to 3/31/20.
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	Interest receivable		Answer	Answer
	To record the receipt of foreign currency at maturity of the C.D.
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	AnswerCashExchange gainExchange lossForeign currencyInterest incomeInterest receivableShort-term investments		Answer	Answer
	To record conversion of kronas into dollars.

b. What was the effective annual rate of return on this investment?

Round percentage to two decimal places (0.03645 = 3.65%).

Answer%

Why is the effective annual rate different from 6 percent?

The U.S. dollar strengthened against the krona during the investment period, which reduced the amount of U.S. dollars received, and caused the rate of return to drop.

The U.S. dollar weakened against the krona during the investment period, which reduced the amount of U.S. dollars received, and caused the rate of return to increase.

The U.S. dollar strengthened against the krona during the investment period, which increased the amount of U.S. dollars received, and caused the rate of return to drop.

The U.S. dollar weakened against the krona during the investment period, which increased the amount of U.S. dollars received, and caused the rate of return to increase.