In order to take advantage of lower U.S. interest rates, Zhang Ltd. borrowed $8 million from a U.S. bank on 1 May 20X2. Annual interest, at 7¼%, was due each subsequent 1 May, with lump-sum principal due on 1 May 20X5. Zhang Ltd. has a 31 December year-end. Exchange rates were as follows:

Required:
1. Calculate the loan principal that would appear on the 31 December 20X2 and 20X3 statement of financial position and the related exchange gain or loss in 20X2 and 20X3.
2. Calculate interest expense for the years ended 31 December 20X2 and 20X3. Why would there be an exchange gain or loss related to interest expense? Calculate this gain or loss for the year ended 31 December 20X2.

Transcribed Image Text:

1 May 20X2 31 December 20X2 1 May 20X3 31 December 20X3 Average, 1 May 20X2-31 December 20X2 Average, 1 January 20X3-31 December 20X3 US$1 = Cdn$1.09 1.12 1.14 1.10 1.11 1.09