Question

Problem 9-28 (LO 9-3)

On April 1, 2017, Mendoza Company borrowed 506,000 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	$	1.10
October 1, 2017		1.20
December 31, 2017		1.24
March 31, 2018		1.28

Answer 1

Mendoza Company Journal Enteries Date Particulars Debit in $ Credit in $ 1.4.2017 Cash a/c Dr. 556600 To Loan Payable 556600 To record the euro loan payable at the spot rate of $1.10 and the conversion of 1 euro into U.S. dollars. 506,000 euros x $1.10 15180 1.10.2017 Interest Expense a/c Dr. 15180 To Cash To record interest payment. 506,000 euros x 5% = 25,300 euros x 6/12 = $12,650 x $1.20 7843 31.12.2017 Interest Expense a/c Dr. 7843 To Accrued Interest Payable To accrue interest for the period October 1 - December 1 506,000 euros x 5% = 25,300 euros x 3/12 = $6,325 x $1.24 70840 31.12.2017 Foreign Exchange Loss a/c Dr. 70840 To Loan Payable To record the euros loan payable at the spot rate of $1.24 and record a foreign exchange loss.506,000 euros x ($1.24 - $1.10) 31.3.2018 Interest Expense a/c Dr. 8096 Accrued Interest Payable a/c Dr. 7843 Foreign Exchange Loss a/c Dr. 253 To Cash To record interest payment and foreign exchange loss. 506,000 euro x 5% = 25,300 euro x 3/12 = 6,325 x $1.28 = interest 506,000 euro x 5% = 25,300 euro x = 12,650 x $1.28 = cash 16192 31.3.2018 Note Payable a/c Dr. 647680 Foreign Exchange Loss a/c Dr. 20240 To Cash 667920 To record repayment of the 506,000 euro loan and foreign exchange loss. 506,000 x $1.28 = Note payable 506,000 X (1.28-1.24) = foreign exchange loss