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

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.