Prepare the journal entries made by Roderick on December 16,2014, December 31,2014, and January 15, 2015 — Recording Hedged International Loan Company borrowed million from London

Recording a Hedged International Loan The Roderick Company borrowed £50 million from a London bank on December 16,2014. The £50 million were immediately converted to dollars for use in the United States and were scheduled to be repaid with interest of £500,000 on January 15, 2015. To hedge the risk of an unfavorable change in the exchange rate, Roderick purchased £50.5 million for delivery on January 15, 2015. Roderick's accounting period ends on December 31. Exchange rates on various dates follows:.

Required

Prepare the journal entries made by Roderick on December 16,2014, December 31,2014, and January 15, 2015.

SOLUTION

December 16, 2014	December 16, 2014	December 16, 2014
Cash			84,000,000
		Loan payable		84,000,000

To record the dollar equivalent of £50 million borrowed from a London bank; $84,000,000 = $1.68 x 50,000,000.

December 31, 2014

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Loan payable		1,000,000
	Exchange gain		1,000,000
To accrue the exchange gain on the loan payable;	To accrue the exchange gain on the loan payable;
$1,000,000 = ($1.68 - $1.66) x 50,000,000.	$1,000,000 = ($1.68 - $1.66) x 50,000,000.
Exchange loss		1,010,000
	Investment in forward
	contract		1,010,000
To accrue the loss on the forward purchase contract;	To accrue the loss on the forward purchase contract;
$1,010,000 = ($1.71 - $1.69) x 50,500,000.	$1,010,000 = ($1.71 - $1.69) x 50,500,000.
Interest expense		415,000
	Interest payable		415,000

Exchange loss			3,030,000
	Investment in forward
	contract			3,030,000
To accrue the exchange loss on the forward purchase contract;	To accrue the exchange loss on the forward purchase contract;	To accrue the exchange loss on the forward purchase contract;
$3,030,000 =($1.69 - $1.63) x 50,500,000.	$3,030,000 =($1.69 - $1.63) x 50,500,000.	$3,030,000 =($1.69 - $1.63) x 50,500,000.
Interest payable			7,500
	Exchange gain			7,500
To accrue the gain on the interest payable; $7,500 = ($1.66 - $1.63) x 250,000.
Interest expense			407,500
	Interest payable			407,500
To accrue interest expense on the loan payable from January 1 - January 15, 2015;
$407,500 = $1.63 x 250,000.	$407,500 = $1.63 x 250,000.	$407,500 = $1.63 x 250,000.
Foreign currency			82,315,000
Investment in forward
contract			4,040,000
	Cash			86,355,000
To record settlement of the forward purchase contract.	To record settlement of the forward purchase contract.	To record settlement of the forward purchase contract.
Loan payable			81,500,000
Interest payable			815,000
	Foreign currency			82,315,000