Question

What is the net impact on Dos Santos Company’s 2011 net income as a result of this hedge of a forecasted foreign currency transaction?
a. $–0–.
b. $400 decrease in net income.
c. $1,000 decrease in net income.
d. $1,400 decrease in net income.

Use the following information for Problems.
On November 1, 2011, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2012, at a price of 200,000 Brazilian reals. On November 1, 2011, Dos Santos pays $1,500 for a three-month call option on 200,000 reals with a strike price of $0.40 per real. Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2011, the option has a fair value of $1,100. The following spot exchange rates apply:
Date . U.S. Dollar per Brazilian Real
November 1, 2011 ..... $0.40
December 31, 2011 ..... 0.38
February 1, 2012 ...... 0.41



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  • CreatedOctober 04, 2014
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