Determine the effective interest rate in us dollars

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Reference no: EM133433358

On September 30, 2020, Peace Frog international, a US based company, negotiated a two-year, 1,000,000 Chinese yuan loan from a Chinese bank at an interest rate of 2 percent per year. The company makes interest payment annually on September 30 and will repay the principal on September 30, 2022. PFI prepares US dollar financial statements and has a December 31 year-end. Relevant exchange rates are as follows:

Date	US Dollar per Chinese Yuan
09/30/2020	$0.100
12/31/2020	0.105
09/30/2021	0.120
12/31/2021	0.125
09/30/2022	0.150

a. What are the journal entries related to this foreign currency borrowing?

b. Taking the exchange rate effect on the cost of borrowing into consideration, determine the effective interest rate in US dollars on the loan in each of the three years 2020, 2021, and 2022.

Reference no: EM133433358

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