On 1 January, 2015, Hikers Inc., a U.S.-based company, borrowed £200,000 on a two-year note at a per annum interest of 4.5%. The spot rate on this day was $1.65 per pound. The spot rate on 31 December, 2015, was $1.64 per pound. The journal entries to account for this foreign currency borrowing will include:

Question

Quizplus · Accepted Answer

- A is incorrect because the borrowing was in pounds, not dollars, and the exchange rate is only relevant for calculating the dollar equivalent of the borrowing amount (which was £200,000 x $1.65 = $330,000).
- B is correct because it records the repayment of the note at its dollar equivalent on December 31, 2015, which includes both the principal and interest.
- C is incorrect because there is no indication that the company incurred a foreign exchange loss on this transaction.
- D is correct because it records the interest expense at 4.5% per annum on the borrowed amount for one year, converted to dollars using the spot rate on the date the interest accrued (which was £200,000 x 4.5% x 365/365 x $1.64/$1 = $14,760).