On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803.
What was the net impact on Mattie's 2014 income as a result of this fair value hedge of a firm commitment?
A) $379,760.60 decrease.
B) $8,360.60 increase.
C) $8,360.60 decrease.
D) $4,390.40 decrease.
E) $379,760.60 increase.

Question

On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply:  Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803.
What was the net impact on Mattie's 2014 income as a result of this fair value hedge of a firm commitment?
A) $379,760.60 decrease. 
B) $8,360.60 increase. 
C) $8,360.60 decrease. 
D) $4,390.40 decrease. 
E) $379,760.60 increase.

Quizplus · Accepted Answer

[$380,000 Sales Revenue] - [$2,000 Cost of Option] + [$1,760.60 Adjustment from 2013 Net Income] = $379,760.60 Increase to 2014 Net Income

On March 1, 2013, Mattie Company Received an Order to Sell