On September 30, Year 1, the Lester Company negotiated a two-year loan of 1,000,000 markkas from a foreign bank at an interest rate of 2 percent per annum. Interest payments are made annually on September 30, and the principal will be repaid on September 30, Year 3. Lester Company prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing, assuming the following exchange rates for 1 markka:
Date U.S. Dollars per Markka
September 30, Year 1 …………………………..$0.20
December 31, Year 1 …………………………… 0.21
September 30, Year 2 …………………………… 0.23
December 31, Year 2 …………………………… 0.24
September 30, Year 3 ………………………….. 0.27
Required:
Prepare all journal entries for the Lester Company in connection with the foreign currency borrowing. What is the effective annual cost of borrowing in dollars in each of the three years Year 1, Year 2, and Year 3?