Question

On 1 May 20X9, All-Man Imports Ltd. (AML) obtained a five-year loan from a major New York bank. The loan is for US$20,000,000, bears interest at 8% per annum (paid annually on the loan anniversary date), and matures on 31 December 20X14. AML reports in Canadian dollars. At the date the note was issued, the exchange rate was US$1.00 = Cdn$0.94. On 31 December 20X9, the exchange rate was US$1.00 = Cdn$0.90, and the average exchange rate for the last 8 months of the year was US$1.00 = Cdn$0.93. Required: 1. Prepare the journal entry to record the loan on 1 May 20X9. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Q.1 Journal Entry to record the loan transaction :

Date	Accounts	Debit	Credit
1-May-20X9	Cash	21,276,596
	Long Term Note Payable (20,000,000/0.94)		21,276,596
	(Loan of USD 20M from New York Bank)

Note : As per IFRS 21 the transactions are initially recognized at exchange rate on the date of transaction

Q.2 : Disclosure in Financial Statement :

Statement of Financial Position
Long term Note Payable (20,000,000/0.90)	22,222,222
Accrued Interest Payable (20,000,000*8%*8/12/0.90)	1,185,185

Note : As per IFRS 21, the monetary item is revalued at exchange rate on balance sheet date hence both amount will be applied 0.90 closing exchange rate

Q.3 : Disclosure in Income Statement :

Statement of Comprehensive Income
Interest Expenses (20,000,000*8%*8/12/0.93)	1,146,953.41
Foreign Exchange Gain on Notes Payable (21,276,596-22,222,222)	(945,626.48)
Foreign Exchange Gain on Accrued Interest (1,146,953-1,066,667/0.90)	(38,231.78)

Note : As per IFRS 21, the initial transaction needs to be recorded at actual exchange rate on date of transaction. However for income & expense average exchange rate can be used hence for interest applicable exchange rate will be average exchange rate i.e.0.93

Monetary item is revalued on balance sheet date with exchange rate exist on balance sheet date. Accrued interest and Notes payable both are monetary item hence both will be revalued and difference will be recognized in P&L.