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

question 10

Multiple Choice

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.

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Definitions:

Leading Versus Doing

The distinction between guiding, directing, and motivating others to achieve a goal (leading) versus personally executing tasks and activities (doing).

Expectancy Theory

A psychological theory stating that an individual's motivation to engage in an activity is influenced by the expected outcome and the value of that outcome to the individual.

Expectancy

In psychology, a theory that explains the motivation behind choices, suggesting that people are motivated to act in a certain way because they expect their actions will lead to their desired goal.

Instrumentality

In expectancy theory, the belief that a certain level of performance will lead to a specific outcome or reward.