On March 1, 2013, Mattie Company Received an Order to Sell

question 31

Multiple Choice

On March 1, 2013, 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, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 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, 2013. 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 2014 income as a result of this fair value hedge of a firm commitment?

• A) $379,760.60 decrease.
• B) $8,360.60 increase.
• C) $8,360.60 decrease.
• D) $4,390.40 decrease.
• E) $379,760.60 increase.

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Definitions:

Direct Materials

Raw materials that can be directly attributed to the production of specific goods or products, unlike indirect materials which cannot be directly linked to production.

Price Variance

The difference between the actual price paid for a good or service and its expected (budgeted) price.

Standard Price

The predetermined cost that a company expects to pay for goods or services under normal conditions.

Direct Labor Rate Variance

The variance between the real expense of direct labor and its anticipated (or standard) price, employed in analyzing manufacturing costs.