What was the net impact on Jensen Company's 2014 income as a result of this fair value hedge of a firm commitment?
a. $-0-.
b. $1,319.70 decrease in income.
c. $77,980.30 increase in income.
d. $78,680.30 increase in income.
On September 1, 2013, 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, 2014. On September 1, 2013, Jensen purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, 2014, 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, 2013. The fair value of the firm commitment was measured by referring to changes in the spot rate. The following spot exchange rates apply:
Date ___________________________ U.S. Dollar per Canadian Dollar
September 1, 2013 .............................................$0.80
December 31, 2013 ..............................................0.79
March 1, 2014 ....................................................0.77
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.