Comprehensive Minerals NL borrowed US$35 000 000 from a syndicate of European bankers. The agreement was finalized on 1 June 20X5, the money was received on 1 July 20X5, and interest at 4% per half year is payable on 31 December and 30 June of each year. The company’s functional currency is the A$.
The following exchange rates applied.
$\begin{array} { l l l l }
\text { 1 June 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.33 \
\text { 1 July 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.38 \
\text { 31 December 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.15 \
\text { 30 June 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.25 \
\text { 31 December 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.35 \
\text { 30 June 20X7 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.20
\end{array}$

-In the company's financial statements for the reporting period ending 30 June 20X6 the following items will appear:
A)interest expense A$3 500 000; foreign currency denominated loan A$43 750 000
B)interest expense A$3 360 000; foreign currency denominated loan A$43 750 000
C)interest revenue A$3 500 000; foreign currency denominated loan A$43 750 000
D)interest expense A$3 864 000; foreign currency denominated loan A$43 750 000

Question

Comprehensive Minerals NL borrowed US$35 000 000 from a syndicate of European bankers. The agreement was finalized on 1 June 20X5, the money was received on 1 July 20X5, and interest at 4% per half year is payable on 31 December and 30 June of each year. The company’s functional currency is the A$.
The following exchange rates applied.
$\begin{array} { l l l l } 
\text { 1 June 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.33 \
\text { 1 July 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.38 \
\text { 31 December 20X5 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.15 \
\text { 30 June 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.25 \
\text { 31 December 20X6 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.35 \
\text { 30 June 20X7 } & \text { US } \$ 1.00 & = & \mathrm { A } \$ 1.20
\end{array}$

-In the company's financial statements for the reporting period ending 30 June 20X6 the following items will appear:
A)interest expense A$3 500 000; foreign currency denominated loan A$43 750 000
B)interest expense A$3 360 000; foreign currency denominated loan A$43 750 000
C)interest revenue A$3 500 000; foreign currency denominated loan A$43 750 000
D)interest expense A$3 864 000; foreign currency denominated loan A$43 750 000

Quizplus · Accepted Answer

To calculate the interest expense for the reporting period ending 30 June 20X6, we need to first calculate the carrying value of the loan on that date.

On 1 July 20X5, when the loan was received, the exchange rate was 1 USD = 1.38 AUD. Therefore, the AUD value of the loan was 35,000,000 * 1.38 = 48,300,000 AUD.

As of 30 June 20X6, the loan has been outstanding for one year, so one half-year interest payment has been made and one half-year interest payment is due. The interest payment due on 30 June 20X6 can be calculated as follows:

Interest payment = Carrying value of loan at 30 June 20X6 * semi-annual interest rate
= (48,300,000 / 1.38) * 0.04
= 1,386,861.31 USD

To convert this to AUD, we need to use the exchange rate of 1 USD = 1.25 AUD (given above):

Interest payment = 1,386,861.31 * 1.25
= 1,733,576.64 AUD

The carrying value of the loan on 30 June 20X6 can be calculated as follows:

Carrying value of loan = Loan amount + accrued interest - principal payments
= 48,300,000 + 1,386,861.31 - 0
= 49,686,861.31 USD

To convert this to AUD, we need to use the exchange rate of 1 USD = 1.25 AUD (given above):

Carrying value of loan = 49,686,861.31 * 1.25
= 62,108,576.64 AUD

Therefore, the interest expense for the reporting period ending 30 June 20X6 is:

Interest expense = Interest payment made on 31 Dec 20X5 + Interest payment due on 30 June 20X6
= 1,386,861.31 * 1.15 / 1.33 + 1,733,576.64
= 1,169,081.92 + 1,733,576.64
= 2,902,658.56 AUD

Therefore, the correct option is B, interest expense A$3,360,000; foreign currency denominated loan A$43,750,000.

Comprehensive Minerals NL Borrowed US$35 000 000 from a Syndicate