On March 1, 2011, Mattie Company Received an Order to Sell

question 29

Multiple Choice

On March 1, 2011, 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, 2012. On March 1, 2011, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2012 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, 2011. 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 2011 income as a result of this fair value hedge of a firm commitment?

• A) $1,800.00 decrease.
• B) $1,760.60 decrease.
• C) $2,240.40 decrease.
• D) $1,660.40 increase.
• E) $2,240.60 increase.

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Definitions:

Principle

A fundamental truth, law, doctrine, or motivating force, upon which others are based or derived.

Relative Motion

The movement of an object in relation to another object, considering both of their movements in a specific frame of reference.

Shape Constancy

The sensory experience in which an object's observed shape stays the same, even when the perspective or distance from which it is seen changes.

Size Constancy

A perceptual phenomenon in which the perceived size of an object remains constant despite changes in the distance from which it is observed.