What was the net impact on Keefer Company s Year 1

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What was the net impact on Keefer Company's Year 1 income as a result of this fair value
hedge of a firm commitment?a. $0.b. An $860.60 decrease in income.c. An $1,100.00 increase
in income.d. A $1,960.60 increase in income.On September 1, Year 1, Keefer 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, Keefer 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. Keefer 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. The following spot
exchange rates apply: Date U.S. Dollar per Canadian DollarSeptember 1, Year 1 ……………………………
$0.75December 31, Year 1 …………………………….. 0.73March 1, Year 2 …………………………………
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.View Solution:
What was the net impact on Keefer Company s Year 1

ANSWER
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