Reference no: EM133148699

Question 1 - Paolo Company of Toronto borrowed $4,000,000 in U.S funds on January 1, Year 1, at an annual interest rate of 15%. The loan is due on December 31, Year 4, and interest is paid annually on December 31. The Canadian exchange rates for U.S. dollars over the life of the loan were as follows:

January 1, Year 1 C$1.159

December 31, Year 1 C$1.168

December 31, Year 2 C$1.160

December 31, Year 3 C$1.152

December 31, Year 4 C$1.155

Exchange rates changed evenly throughout the year.

Required -

1. Prepare journal entries for Paolo for Year 1.

2. Calculate the exchange gains or losses that would be reported in the profit of the company each year over the life of the loan.

Question 2 - Paolo Company of Toronto sold goods for Euro (e) 40,000 to French Company on October 1, 2016, with collection expected on February 1, 2017. Paolo has a December 31 year end and the following exchange rates were noted:

October 1, 2016 e1 = C$1.45

December 31, 2016 e1 = C$1.40

February 1, 2017 e1 = C$1.38

Required - Calculate the foreign exchange loss (or gain) to be recorded by Paolo relating to the accounts receivable for:

1. The year ended December 31, 2016

2. The year ended December 31, 2017