Answered: On September 1, 2020, Stone Company…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On September 1, 2020, Stone Company received an order to sell a machine to a customer in Australia at a price of 100,000 Australian dollars. Stone shipped the machine and received payment on March 1, 2021. On September 1, 2020, Stone purchased a put option giving it the right to sell 100,000 Australian dollars on March 1, 2021, at a price of $80,000. Stone properly designated the option as a fair value hedge of the Australian dollar firm commitment. The option’s time value is excluded in assessing hedge effectiveness, and the change in time value is recognized in net income over the life of the option. The option cost $2,000 and had a fair value of $2,300 on December 31, 2020. The fair value of the firm commitment was measured by referring to changes in the spot rate (discounting to present value is ignored). The following spot exchange rates apply: Date US Dollar Per Australian Dollar September 1, 2020 $.80 December 31, 2020 $.79 March 1, 2021 $.77 What was the net impact on Stone Company’s 2020 income as a result of this fair value hedge of a firm commitment? Multiple Choice $0 $700 decrease in income $700 increase in income $300 increase in income

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