On September 30, 2013, Ericson Company negotiated a two-year, 1,000,000 dudek loan from a foreign bank at an interest rate of 2 percent per year. It makes interest payments annually on September 30 and will repay the principal on September 30, 2015. Ericson prepares U.S.-dollar financial statements and has a December 31 year-end.
a. Prepare all journal entries related to this foreign currency borrowing assuming the following exchange rates for 1 dudek:
September 30, 2013 .......................... $0.100
December 31, 2013 .......................... 0.105
September 30, 2014 .......................... 0.120
December 31, 2014 .......................... 0.125
September 30, 2015.......................... 0.150
b. Determine the effective cost of borrowing in dollars in each of the three years 2013, 2014, and 2015.