Question

.On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 1,400,000 Chinese yuan loan from a Chinese bank at an interest rate of 2 percent per year. The company makes interest payments annually on September 30 and will repay the principal on September 30, 2022. PFI prepares U.S. dollar financial statements and has a December 31 year-end. Relevant exchange rates are as follows: Date September 30, 2020 December 31, 2020 September 30, 2021 December 31, 2021 September 30, 2022 U.S. Dollar per Chinese Yuan (CNY) $0.140 0.145 0.160 0.165 0.190 a. Prepare all journal entries related to this foreign currency borrowing, b. Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in U.S. dollars on the loan in each of the three years 2020, 2021, and 2022. View transaction list View journal entry worksheet No Date General Journal Debit Credit 1 09/30/2020 Cash Note payable (CNY) 2 12/31/2020 Interest expense Interest payable (CNY) IN 3 12/31/2020 Foreign exchange loss Note payable (CNY) 09/30/2021 Interest expense Interest payable (CNY) Foreign exchange loss Cash 5 12/31/2021 Interest expense Interest payable (CNY) 6 12/31/2021 Foreign exchange loss Note payable (CNY) 41 7 09/30/2022 Interest expense Interest payable (CNY) Foreign exchange loss Cash 8 09/30/2022 Note payable (CNY) Foreign exchange loss Cash Complete this question by entering your answers in the tabs below. Required A Required B Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in US dollars on the loan in each of the three years 2020, 2021, and 2022. (Do not round intermediate calculations.) Effective Cost of Borrowing 2020 2021 2022

Answer 1

The answer provides all the journal entries for the foreign currency borrowing and explains how to calculate the effective interest rate in U.S. dollars for each year.

Step-by-step explanation:

a. Prepare all journal entries related to this foreign currency borrowing:

1. 09/30/2020: Debit Cash and Credit Note payable (CNY) for 1,400,000 Chinese yuan loan.
2. 12/31/2020: Debit Interest expense and Credit Interest payable (CNY) for the annual interest payment.
3. 12/31/2020: Debit Foreign exchange loss and Credit Note payable (CNY) to record the exchange rate difference on the loan.
4. 09/30/2021: Debit Interest expense, Interest payable (CNY), Foreign exchange loss, and Credit Cash for the annual interest payment and exchange rate difference.
5. 12/31/2021: Debit Interest expense and Credit Interest payable (CNY) for the annual interest payment.
6. 12/31/2021: Debit Foreign exchange loss and Credit Note payable (CNY) to record the exchange rate difference on the loan.
7. 09/30/2022: Debit Interest expense, Interest payable (CNY), Foreign exchange loss, and Credit Cash for the annual interest payment and exchange rate difference.
8. 09/30/2022: Debit Note payable (CNY), Foreign exchange loss, and Credit Cash to record the repayment of the principal and exchange rate difference.

b. Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in U.S. dollars on the loan in each of the three years 2020, 2021, and 2022:

Effective Cost of Borrowing 2020: ((Interest expense / Principal) + Exchange rate loss) / (Principal * Exchange rate)

Effective Cost of Borrowing 2021: ((Interest expense / Principal) + Exchange rate loss) / (Principal * Exchange rate)

Effective Cost of Borrowing 2022: ((Interest expense / Principal) + Exchange rate loss) / (Principal * Exchange rate)