On May 1, 2021, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2021. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the impact on Mosby's 2021 net income as a result of this fair value hedge of a firm commitment?
A) $1,760.60 decrease.
B) $1,960.60 decrease.
C) $1,000.00 decrease.
D) $1,760.60 increase.
E) $1,960.60 increase.

Question

On May 1, 2021, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2021. The following spot exchange rates apply:  Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the impact on Mosby's 2021 net income as a result of this fair value hedge of a firm commitment?
A) $1,760.60 decrease. 
B) $1,960.60 decrease. 
C) $1,000.00 decrease. 
D) $1,760.60 increase. 
E) $1,960.60 increase.

Quizplus · Accepted Answer

The Answer of On May 1, 2021, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2021. The following spot exchange rates apply:  Mosby's incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803.What was the impact on Mosby's 2021 net income as a result of this fair value hedge of a firm commitment?
A) $1,760.60 decrease. 
B) $1,960.60 decrease. 
C) $1,000.00 decrease. 
D) $1,760.60 increase. 
E) $1,960.60 increase.

On May 1, 2021, Mosby Company Received an Order to Sell