Comprehensive Minerals NL borrowed US$35 000 000 from a syndicate of European bankers. The agreement was finalized on 1 June 20X5, the money was received on 1 July 20X5, and interest at 4% per half year is payable on 31 December and 30 June of each year. The company’s functional currency is the A$.
The following exchange rates applied.
$\begin{array} { l l l l }
\text { 1 June 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.33 \
\text { 1 July 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.38 \
\text { 31 December 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.15 \
\text { 30 June 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.25 \
\text { 31 December 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.35 \
\text { 30 June 20X7 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.20
\end{array}$

-For the reporting period ending 30 June 20X7 the net amount recognised in the profit or loss statement in respect of the loan will be:
A)A$1 820 000 expense
B)A$3 570 000 expense
C)A$5 320 000 expense
D)A$2 730 000 revenue

Question

Comprehensive Minerals NL borrowed US$35 000 000 from a syndicate of European bankers. The agreement was finalized on 1 June 20X5, the money was received on 1 July 20X5, and interest at 4% per half year is payable on 31 December and 30 June of each year. The company’s functional currency is the A$.
The following exchange rates applied.
$\begin{array} { l l l l } 
\text { 1 June 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.33 \
\text { 1 July 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.38 \
\text { 31 December 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.15 \
\text { 30 June 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.25 \
\text { 31 December 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.35 \
\text { 30 June 20X7 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.20
\end{array}$

-For the reporting period ending 30 June 20X7 the net amount recognised in the profit or loss statement in respect of the loan will be:
A)A$1 820 000 expense
B)A$3 570 000 expense
C)A$5 320 000 expense
D)A$2 730 000 revenue

Quizplus · Accepted Answer

The interest expense for the year ending 30 June 20X7 is calculated as US$35,000,000 * 4% * 2 = US$2,800,000. The exchange rate on 30 June 20X7 is A$1.20, so the interest expense in A$ is US$2,800,000 * 1.20 = A$3,360,000. The exchange rate difference from 31 December 20X6 (A$1.35) to 30 June 20X7 (A$1.20) on the principal amount of US$35,000,000 results in a gain of US$35,000,000 * (1.35 - 1.20) = A$5,250,000. The net effect is A$3,360,000 (interest expense) - A$5,250,000 (exchange gain) = A$1,890,000 gain. However, the closest option is A$1,820,000 expense, indicating a possible error in the provided options or calculations.

Comprehensive Minerals NL Borrowed US$35 000 000 from a Syndicate