On 1 July 2006 McGrath Ltd enters into an arrangement with a Hong Kong bank to borrow $HK1,500,000. The term of the loan is 3 years with interest payable annually in arrears on 30 June at the rate of 7 per cent. The exchange rate information is:

What journal entries are required in McGrath Ltd's books for 1 July 2006 and 30 June 2007 and 30 June 2008 in accordance with AASB 121 (rounded to the nearest whole $A)?

Question

On 1 July 2006 McGrath Ltd enters into an arrangement with a Hong Kong bank to borrow $HK1,500,000. The term of the loan is 3 years with interest payable annually in arrears on 30 June at the rate of 7 per cent. The exchange rate information is:

What journal entries are required in McGrath Ltd's books for 1 July 2006 and 30 June 2007 and 30 June 2008 in accordance with AASB 121 (rounded to the nearest whole $A)?

Quizplus · Accepted Answer

1 July 2006:
DR Cash HKD 1,500,000
CR Loan Payable HKD 1,500,000 (initial recognition of loan)

30 June 2007:
DR Interest Expense HKD 105,000 (7% of HKD 1,500,000)
CR Loan Payable HKD 105,000 (recognition of interest expense)

30 June 2008:
DR Interest Expense HKD 105,000
DR Loss on Foreign Exchange HKD 157,500 [(HKD 1,500,000 - HKD 1,425,000) x 0.10]
CR Loan Payable HKD 210,000 (recognition of interest expense and repayment of loan)
CR Cash HKD 1,425,000 (repayment of loan principal)

*Note: The exchange rate at 30 June 2008 is not provided, but it is assumed to be the same as the 1 July 2006 exchange rate based on the information provided in the question.

On 1 July 2006 McGrath Ltd Enters into an Arrangement