On 1 July 2015 Jarrets Plc Borrows £500 000 from a British

question 41

Multiple Choice

On 1 July 2015 Jarrets Plc borrows £500 000 from a British bank at an interest rate of 8 per cent,repayable in pounds sterling (£) and with interest due on 30 June each year.The term of the loan is 3 years.On the same date Fitners Plc borrows €1 million from a European bank at an interest rate of 10 per cent.The term of the loan is 3 years.Jarrets and Fitners decide to swap their interest and principal obligations on 1 July 2015.Exchange rate information is as follows:
1 July 2015 = £0.50
30 June 2016 = £0.55
Both Jarrets and Fitners are Dutch companies.What are the journal entries to record the swap for the period ended 30 June 2016 in Jarrets Plc's books (rounded to the nearest whole euro) ?

• A) \(1 \text { July } 2015\)
• \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Cash } & 250000 & \\
• \hline \mathrm{Cr} & \text { Foreign loan } & & 250000 \\
• \hline {\mathrm{Dr}} & & \\
• \hline \mathrm{Dr} & \text { Foreign currency receivable } & 250000 & \\
• \hline \mathrm{Cr} & \text { Australian loan } & & 250000 \\
• \hline
• \end{array}\)
• \(30 \text { June } 2016\)
• \(\begin{array}{|l|l|r|r|}
• \hline\mathrm{Dr} & \text { Foreign exchange loss } & 25000 & \\
• \hline \mathrm{Cr} & \text { Foreign loan } & & 25000 \\
• \hline & & 25000 & \\
• \hline \mathrm{Dr} & \text { Foreign currency receivable } & & 25000 \\
• \hline \mathrm{Cr} & \text { Foreign exchange gain } & & \\
• \hline & & 22000 & \\
• \hline \mathrm{Dr} & \text { Interest expense } & & 22000 \\
• \hline \mathrm{Cr} & \text { Cash } & 3000 & \\
• \hline & & & 3000 \\
• \hline \mathrm{Dr} & \text { Interest expense } & & \\
• \hline \mathrm{Cr} & \text { Cash } & & \\
• \hline
• \end{array}\)
• B) \(1 \text { July } 2015\)
• \(\begin{array}{|l|l|l|l|}
• \hline \mathrm{Dr} & \text { Cash } & 1000000 & \\
• \hline \mathrm{Cr} & \text { Foreign loan } & & 1000000 \\
• \hline& & \\
• \hline \mathrm{Dr} & \text { Foreign currency receivable } & 1000000 & \\
• \hline \mathrm{Cr} & \text { Australian loan } & & 1000000 \\
• \hline
• \end{array}\)
• \(30 \text { June } 2016\)
• \(\begin{array}{|c|l|r|r|}
• \hline \mathrm{Dr} & \text { Foreign loan } & 90909 & \\
• \hline \mathrm{Cr} & \text { Foreign exchange gain } & & 90909 \\
• \hline & & & \\
• \hline \mathrm{Dr} & \text { Foreign exchange loss } & 90909 & \\
• \hline \mathrm{Cr} & \text { Foreign currency receivable } & & 90909 \\
• \hline & & 80000 & \\
• \hline \mathrm{Dr} & \text { Interest expense } & & 80000 \\
• \hline \mathrm{Cr} & \text { Cash } & & \\
• \hline
• \end{array}\)
• C) \(1 \text { July } 2015\)
• \(\begin{array}{|l|l|l|l|}
• \hline \mathrm{Dr} & \text { Cash } & 1000000 & \\
• \hline \mathrm{Cr} & \text { Foreign loan } & & 1000000 \\
• \hline\\
• \hline{\mathrm{Dr}} & \text { Foreign currency receivable } & 1000000 \\
• \hline \mathrm{Cr} & \text { Australian loan } & & \\
• \hline
• \end{array}\)
• \(30 \text { June } 2016\)
• \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Foreign loan } & 90909 & \\
• \hline \mathrm{Cr} & \text { Foreign exchange gain } & & 90909 \\
• \hline & & & \\
• \hline \mathrm{Dr} & \text { Foreign exchange loss } &90909 & \\
• \hline \mathrm{Cr} & \text { Foreign currency receivable } & &90909 \\
• \hline & & & \\
• \hline \mathrm{Dr} & \text { Interest expense } & 72727& \\
• \hline \mathrm{Cr} & \text { Cash } & &72727 \\
• \hline & & \\
• \hline \mathrm{Dr} & \text { Interest expense } & 272273 & \\
• \hline \mathrm{Cr} & \text { Cash } & & 27273 \\
• \hline
• \end{array}\)
• D) \(1 \text { July } 2015\)
• \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Cash } & 250000 & \\
• \hline \mathrm{Cr} & \text { Foreign loan } & & 250000 \\
• \hline & & \\
• \hline \mathrm{Dr} & \text { Foreign currency receivable } & 250000 & \\
• \hline \mathrm{Dr} & \text { Loss on foreign currency swap } & 750000 & \\
• \hline \mathrm{Cr} & \text { Australian loan } & & 1000000 \\
• \hline
• \end{array}\)
• \(30 \text { June } 2016\)
• \(\begin{array}{|l|l|r|r|}
• \hline \mathrm{Dr} & \text { Foreign exchange loss } & 25000 & \\
• \hline \mathrm{Cr} & \text { Foreign loan } & & 25000 \\
• \hline & & 25000 & \\
• \hline \mathrm{Dr} & \text { Foreign currency receivable } & & 25000 \\
• \hline \mathrm{Cr} & \text { Foreign exchange gain } & & \\
• \hline & & 22000 & \\
• \hline \mathrm{Dr} & \text { Interest expense } & & 22000 \\
• \hline \mathrm{Cr} & \text { Cash } & & \\
• \hline & & 3000 & \\
• \hline \mathrm{Dr} & \text { Interest expense } & & 3000 \\
• \hline \mathrm{Cr} & \text { Cash } & & 300 \\
• \hline
• \end{array}\)

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Definitions:

Usury Law

Regulations that cap the maximum interest rate that can be charged on loans, aimed at preventing exorbitant or unreasonable interest rates.

Quantity of Money

The quantity of money refers to the total amount of money, including cash and deposits, available in an economy at a particular time.

Unconscionably High Rates

Charges or fees that are excessively high and considered unreasonable or unethical, often in the context of lending or service provision.

Usury

The practice of charging exorbitantly high or illegal interest rates on loans.