On September 30, 2011, Ericson Company negotiated a two-year, 1,000,000 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, 2013. 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, 2011 | $0.100 |
December 31, 2011 | 0.105 |
September 30, 2012 | 0.120 |
December 31, 2012 | 0.125 |
September 30, 2013 | 0.150 |
b. Determine the effective cost of borrowing in dollars in each of the three years 2011, 2012, and 2013.
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