Question:
Question 1.
On March 1, Pimlico Corporation (a U.S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.10 per Swedish Pimlico, krona enters into a forward contract to purchase 500,000 Swedish kroner at a three-month forward rate of $0.12. At the end of 3 months, when the spot rate is $0.115 per Swedish krona, Pimlico orders and gets the merchandise, paying 500,000 kroner. What amount does Pimlico report in net income as a result of this cash flow hedge of a forecasted transaction?
Question 2.
On September 1, 2013, Jensen Company gets 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 providing 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 subsequent 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 current value factor for two months at an annual interest rate of 12 percent (1 percent per month) is 0.9803.
What was the total impact on Jensen Company's 2013 income as a result of this fair value hedge of a firm commitment?