On May 1, 2011, Mosby Company Received an Order to Sell

question 2

Multiple Choice

On May 1, 2011, 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, 2012. On May 1, 2011, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2012 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, 2011. 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 impact on Mosby's 2012 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.

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