Question

No hand writing please

On September 30, 2015, Ericson Company negotiated a two-year, 1,200,000 dudek loan from a foreign bank at an interest rate of 2 percent per year. It makes interest payments annually on September 30 and will repay the principal on September 30, 2017. Ericson prepares U.S.-dollar financial statements and has a December 31 year-end. September 30, 2015 December 31, 2015 September 30, 2016 December 31, 2016 September 30, 2017 $0.120 0.125 0.140 0.145 0.170

Answer 1

a)

Date	General Journal	Debit	Credit
09/30/2015	Cash	144,000
	Note Payable		144,000
	(1,200,000*0.120)
12/31/2015	Interest Expense	750
	Interest Payable		750
	[1,200,000*2%*(3/12) ]=6,000dudeks *0.125
12/31/2015	Foreign Exchange Loss	6,000
	Note payable		6,000
	[1,200,000 * (0.125-0.120)]
9/30/2016	Interest expense	2,520
	Interest payable	750
	Foreign exchange loss	90
	Cash		3,360
	Foreign exchange loss = 6,000*(0.140-0.125) =
	Interest Expense = [1,200,000*2%*(9/12)]=18,000dudeks*0.140 =
12/31/2016	Interest Expense	870
	Interest Payable		870
	(6,000 dudeks * 0.145)
12/31/2016	Foreign exchange loss	24,000
	Note Payable		24,000
	[1,200,000 * (0.145-0.125)]
9/30/2017	Interest Expense	3,060
	Interest Payable	870
	Foreign exchange loss	150
	Cash		4,080
	Interest expense [18,000dudeks *0.170] = 3,060
	Foreign exchange loss[6,000 dudeks * (0.170-0.145)]
	Cash [24,000 dudeks * 0.170] =
9/30/2017	Note Payable	174,000
	Foreign exchange loss	30,000
	Cash		204,000
	Foreign exhange loss = 6,000 + 24,000 = 30,000
	Cash = [1,200,000 * 0.170] = 204,000

b) Effective cost of borrowing:

2015

Interest Expense = 750

Foreign exhange loss = 6,000

TOTAL = 6,750

(6,750 / 144,000)*(12/3) *100 = 18.75% for 12 months

2016

Interest Expense = 3,390 [2,520 + 870]

Foreign exchange loss = 24,090 [24,000 + 90]

TOTAL = 27,480

(27,480 / 144,000) * 100 = 19.08% for 12 months

2017:

Interest Expense = 3,060

Foreign exchange loss = 30,150 [30,000 + 150]

TOTAL = 33,210

(33,210 / 144,000) * (12/9) * 100 = 30.75% for 12 months