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

On 1 July 2006, McGrath Ltd will record a debit to Cash for $163,636 (calculated as HKD1,500,000 / 9.15), and a credit to Loan Payable (Long-term liability account) for $163,636. 
On 30 June 2007, McGrath Ltd will record a debit to Interest Expense for $11,455 (calculated as HKD1,500,000 * 7%), and a credit to Accrued Interest Payable for $11,455. 
On 30 June 2007, McGrath Ltd will record a debit to Accrued Interest Payable for $11,455, and a credit to Cash for $163,636. 
On 30 June 2008, McGrath Ltd will record a debit to Interest Expense for $11,455 (calculated as HKD1,500,000 * 7%), and a credit to Accrued Interest Payable for $11,455. 
On 30 June 2008, McGrath Ltd will record a debit to Accrued Interest Payable for $11,455, and a credit to Cash for $163,636. 
Therefore, the correct answer is B.

On 1 July 2006 McGrath Ltd Enters into an Arrangement