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

question 46

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: $$\begin{array} { | l | c | } \hline \text { Date } & \text { Spot Rate } \\\hline \text { May 1, 2011 } & \$ 0.095 \\\hline \text { December 31,2011 } & \$ 0.094 \\\hline \text { March 1,2012 } & \$ 0.089 \\\hline\end{array}$$ 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 2011 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:

Unemployment Rate

The proportion of job-seekers in the labor force who do not currently hold employment.

Labor Force

The total number of people who are eligible to work, including both the employed and those seeking employment.

Unemployed Category

A classification for individuals who are able and willing to work but are unable to find employment.

Unemployment Rate

The rate of unemployment among those actively seeking work within the labor force.