On May 1, 2013, Mosby Company Received an Order to Sell

question 89

Multiple Choice

On May 1, 2013, 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, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 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, 2013. The following spot exchange rates apply: $\begin{array}{|l|c|}\hline \text { Date } & \text { Spot Rate } \\\hline \text { May 1,2013 } & \$ 0.095 \\\hline \text { December 31,2013 } & \$ 0.094 \\\hline \text { March 1,2014 } & \$ 0.089 \\\hline\end{array}$ Mosby'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 impact on Mosby's 2014 net income as a result of this fair value hedge of a firm commitment?

• A)$1,800.00 decrease.
• B)$2,500.00 increase.
• C)$2,500.00 decrease.
• D)$188,760.60 increase.
• E)$188,760.60 decrease.

---

Definitions:

Nonconforming Goods

Products delivered by a seller that do not meet the specifications or requirements as stated in a contract of sale.

Uniform Commercial Code

A comprehensive set of laws governing commercial transactions in the United States.

Breach of Contract

The violation of any of the agreed-upon terms and conditions of a binding contract. This breach could involve not performing on time, not performing in accordance with the terms of the agreement, or not performing at all.

Impracticable

Not possible to do or carry out in practice, either due to technical, legal, or other constraints.