Question
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.
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. Mosby properly designates the option as a Fair Value Hedge of the peso firm commitment. The following spot rate and option price exchange rates apply:
| Date | Spot Rate | Option Price |
| 5/1/2013 | $0.095 | $0.0015 |
| 12/31/2013 | $0.094 | $0.0016 |
| 3/1/2014 | $0.089 |
Mosby's incremental borrowing rate is 12%, and the present value factor for two months at 12% annual rate is .9803.
A) Prepare the journal entries for the foreign currency option and firm commitment.
B) What is the impact of net income over the two accounting periods?
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