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

question 10

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: 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 2013 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:

Strategy Map

A visual tool used in strategic planning to communicate the primary strategic objectives to be achieved by an organization.

Leading Indicators

Early signs or metrics that foretell future economic or financial performance, providing insight into potential trends.

Median Training Hours

The midpoint number of hours spent on training wherein half of the cases are above and half are below this value.

Lagging Indicator

A measurable economic factor that changes only after the economy has begun to follow a particular pattern or trend.