REFERENCE: Ref.09_08 on May 1,2007,Mosby Company Received an Order to Sell a Sell

question 75

Multiple Choice

REFERENCE: Ref.09_08
On May 1,2007,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 1,2008.On May 1,2007,Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1,2008 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 31,2007.The following spot exchange rates apply: 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 net impact on Mosby's 2008 income as a result of this fair value hedge of a firm commitment?

• A)$1,760.60 decrease.
• B)$2,500 increase.
• C)$2,500 decrease.
• D)$188,760.60 increase.
• E)$188,760.60 decrease.

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Definitions:

Stratum Granulosum

A layer in the epidermis situated between the stratum corneum and stratum spinosum, involved in the process of keratinization.

Keratin

A type of protein found in the hair, nails, and outer layer of the skin, which provides protection and strength.

Accessory Structures

Structures that are not vital for the body to function but support or assist the role of major organs or systems.

Dense Irregular Connective

A type of connective tissue with collagen fibers arranged in a disorganized pattern, providing strength and resistance in various directions.