Question

On April 1, 2017, Mendoza Company borrowed 514.000 euros for one year at an interest rate of 5 percent per annum. Mendoza must make its first interest payment on the loan on October 1, 2017 and will make a second interest payment on March 31, 2018 when the loan is repaid. Mendoza prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 euro $ April 1, 2017 October 1, 2017 December 31, 2017 March 31, 2018 1.10 1.20 1.24 1.28

Answer 1

Answer with working notes is given below

Date April 1 2017 Debit $565,400 General Journal Cash To Short term loan (Being loan borrowed for 1 year) Credit (514,000 * 1.10) $565,400 $15,420 October 1 2017 Interest expense To Cash (Being interest on loan for 6 months paid) (514,000 * 5%*6/12*1.20) $15,420 $7,967 (514,000 * 5%*3/12*1.24) December 31, Interest expense 2017 To Interest payable (Being interest accrued for 3 months) $7,967 $71,960 December 31, Foreign exchange loss 2017 To Short term loan (Being year end adjustment to loan) (514,000 * 0.14) $71,960 0.14 is exchange loss (1.24-1.10) (514,000 * 5%*3/12*1.28) March 31, 2018 Interest expense Interest payable Foreign exchange loss To Cash (Being Interest on loan for 6 months paid) $8,224 $7,967 $257 (6,425 * 0.04) 0.04 exchange loss is (1.28-1.24) $16,448 $637,360 $20,560 March 31, 2018 Short term loan Foreign exchange loss To Cash Account (Being repayment of short term loan) (514,000 * 0.04 0.04 exchange loss is (1.28-1.24) $657,920