Question

Return to question On September 30, 2017, Ericson Company negotiated a two-year, 2,100,000 dudek loan from a foreign bank at an interest rate of 4 percent per year. It makes interest payments annually on September 30 and will repay the principal on September 30, 2019. Ericson prepares U.S.-dollar financial statements and has a December 31 year-end. a. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 dudek: September 30, 2017 December 31, 2017 September 30, 2018 December 31, 2018 September 30, 2019 $ 0.100 0.105 0.120 0.125 0.150 b. Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in dollars on the loan in each of the three years 2017, 2018, and 2019.

Answer 1

Solution:

a)Given that

interest rate =4%

sep 30 2017	$ 0.100
dec 31 2017	$ 0.105
sep 30 2018	$ 0.120
dec 31 2018	$ 0.125
sep 30 2019	$ 0.150

Compute the effective cost of borrowing in dollars :

year	principal	interest rate	number of months	effective cost of borrowing
2017	2100000	4	3(sep2017-dec 2017)	=2100000*4/100*3/12 =21000
2018	2100000	4	12(dec2017-dec 2018)	=2100000*4/100*12/12 =84000
2019	2100000	4	9(dec2018-sep2019	=2100000*4/100*9/12 =63000

b)

Effective cost of borrowing
2017	$ 21000
2018	$ 84000
2019	$ 63000