Reference no: EM132554135

On September 1, 2015, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 2016. On September 1, 2015, Jensen purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, 2016, at a price of $80,000. Jensen properly designated the option as a fair value hedge of the Canadian dollar firm commitment. The option cost $2,000 and had a fair value of $2,300 on December 31, 2015. The fair value of the firm commitment was measured by referring to changes in the spot rate. The following spot exchange rates apply:

Date - US $ per Canadian $:

Sep 1, 2017 - .80

Dec 31, 2017 - .79

March 1, 2018 - .77

Jensen Company's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.

Question 1: What was the net impact on Jensen Company's 2015 income as a result of this fair value hedge of a firm commitment?

A. -0-

B. 680.3 decrease in income

C. 300 increase in income

D. 980.3 increase in income

Question 2: What was the net impact on Jensen Company's 2016 income as a result of this fair value hedge of a firm commitment?

A. 0

B. 1319.7 decrease in income

C. 77980.3 increase in income

D. 78680.3

Question 3: What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?

A. 0

B. 1,000 increase in cash flow

C. 1500 decrease in cash flow

D. 3000 increase in cash flow