On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 2,600,000...
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On September 30, 2020, Peace Frog International (PFI) (a U.S.-based company) negotiated a two-year, 2,600,000 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
$
0.150
December 31, 2020
0.155
September 30, 2021
0.170
December 31, 2021
0.175
September 30, 2022
0.200
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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