On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 2,700,000 Chinese yuan loan from a Chinese bank at an interest rate of 4 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: DateU.S. Dollar per Chinese Yuan (CNY) September 30, 2020$0.160 December 31, 2020 0.165 September 30, 2021 0.180 December 31, 2021 0.185 September 30, 2022 0.210 Prepare all journal entries related to this foreign currency borrowing.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.

Foreign exchange works as a medium of identifying the value of one country’s currency in another…

Answered: On September 30, 2020, Peace Frog…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 2,700,000 Chinese yuan loan from a Chinese bank at an interest rate of 4 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	U.S. Dollar per Chinese Yuan (CNY)
September 30, 2020	$	0.160
December 31, 2020		0.165
September 30, 2021		0.180
December 31, 2021		0.185
September 30, 2022		0.210

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

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