On 1 July 2022, Jimbour Ltd enters a loan agreement with the Bank of New Zealand to borrow NZ$200 000. The funds are to be used to purchase materials needed for the construction of a manufacturing plant. By 31 December 2022, additional costs of A$75 000 have been paid to complete the manufacturing plant. Interest on the funds borrowed is payable half-yearly in arrears at the fixed interest rate of 5% p.a. Relevant exchange rates are: 1 July 2022 NZ$1.00 = A$0.75
Average July to December 2022 NZ$1.00 = A$0.77
31 December 2022 NZ$1.00 = A$0.85
Average January to June 2023 NZ$1.00 = A$0.80
30 June 2023 NZ$1.00 = A$0.70
The interest expense and any foreign exchange gain or loss on the interest at 31 December 2022 is:
A) Interest expense A$3 850; Foreign exchange gain A$400
B) Interest expense A$3 850; Foreign exchange loss A$400.
C) Interest expense A$6 494; Foreign exchange loss A$611..
D) Interest expense A$6 494; Foreign exchange loss A$611

Question

On 1 July 2022, Jimbour Ltd enters a loan agreement with the Bank of New Zealand to borrow NZ$200 000. The funds are to be used to purchase materials needed for the construction of a manufacturing plant. By 31 December 2022, additional costs of A$75 000 have been paid to complete the manufacturing plant. Interest on the funds borrowed is payable half-yearly in arrears at the fixed interest rate of 5% p.a. Relevant exchange rates are: 1 July 2022 NZ$1.00 = A$0.75
Average July to December 2022 NZ$1.00 = A$0.77
31 December 2022 NZ$1.00 = A$0.85
Average January to June 2023 NZ$1.00 = A$0.80
30 June 2023 NZ$1.00 = A$0.70
The interest expense and any foreign exchange gain or loss on the interest at 31 December 2022 is:
A) Interest expense A$3 850; Foreign exchange gain A$400
B)  Interest expense A$3 850; Foreign exchange loss A$400.
C) Interest expense A$6 494; Foreign exchange loss A$611..
D) Interest expense A$6 494; Foreign exchange loss A$611

Quizplus · Accepted Answer

First, we need to calculate the interest expense for the period from 1 July to 31 December 2022. The loan amount is NZ$200 000, and the fixed interest rate is 5% p.a. Half-yearly interest = (NZ$200,000 x 5%)/2 = NZ$5,000.

Next, we need to convert the interest expense from NZD to AUD using the exchange rate at the time of payment. We know that the average exchange rate for July to December 2022 is NZ$1.00 = A$0.77. Therefore, the interest expense in AUD is (NZ$5,000 x A$0.77) = A$3,850.

Finally, we need to calculate any foreign exchange gain or loss on the interest. Since the exchange rate at 31 December 2022 is NZ$1.00 = A$0.85, there is a gain of (NZ$5,000 x (A$0.85 - A$0.77)) = A$400.

Therefore, the total interest expense is A$3,850, and there is a foreign exchange gain of A$400. The correct answer is B.

On 1 July 2022, Jimbour Ltd Enters a Loan Agreement