On September 1, Year 1, ABC Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. The machine was shipped and payment was received on March 1, Year 2.

On September 1, Year 1, ABC Company purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, Year 2, at a price of $75,000. ABC Company properly designates the option as a fair value hedge of the Canadian-dollar firm commitment. The option cost $1,700 and had a fair value of $2,800 on December 31, Year 1.

The fair value of the firm commitment is measured through reference to changes in the spot rate. ABC Companys 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.

The following spot exchange rates apply:

Date U.S. Dollar per Canadian Dollar September 1, Year 1$0.75 December 31, Year 1 0.73 March 1, Year 20.71

Prepare journal entries for the option fair value hedge and the firm commitment and detail calculation for each journal entry and question.

1. What was the net impact on ABC Companys Year 1 income as a result of this fair value hedge of a firm commitment?
2. What was the net impact on ABC Companys Year 2 income as a result of this fair value hedge of a firm commitment?
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?

Please provide journal entries for each question, and explain how the present value factor is utilized/applied in this scenario.