What was the net impact on Jensen Company's 2017 income as a result of this fair value hedge of a firm commitment?
a. $-0-.
b. $680.30 decrease in income.
c. $300 increase in income.
d. $980.30 increase in income.
On September 1, 2017, 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, 2018. On September 1, 2017, Jensen purchased a put option giving it the right to sell 100,000 Canadian dollars on March 1, 2018, 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, 2017. 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, 2017 ...................................................$0.80
December 31, 2017.................................................... 0.79
March 1, 2018 ..........................................................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.