Use the following information for Problems 21 and 22. On November 1, 2015, Dos S
ID: 2390791 • Letter: U
Question
Use the following information for Problems 21 and 22. On November 1, 2015, Dos Santos Company forecasts the zilian supplier on February 1, 2016, at a price of 200,000 Brazilian reals. On Nove Dos Santos pays $1,500 for a three purchase of raw materials from a Bra- -month call option on 200,000 reals with a strike price of S0.40 Dos Santos properly designates the option as a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2015, the option has a fair value of $1,100. The following spot exchange rates apply: Date November 1, 2015 December 31, 2015 February 1, 2016 U.S. Dollar per Brazilian Real $0.40 0.38 0.41 09-6 a result of this hedge o 09-6 22. What is the net impact on Dos Santos Company's 2016 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2016. a. $80,000 decrease in net income. b. $80,600 decrease in net income. c. $81,100 decrease in net income. d. $83,100 decrease in net income.Explanation / Answer
Solution: 81,100 decrease in net income
Explanation:
Foreign Currency (BRL) (200,000 * $0.41) $82,000
Cash (200,000 * $.40) $80,000
Foreign Currency Option 2,000
AOCI $2,000
Adjustment to Net Income $2,000
Net impact on 2016 net income is computed as below:
Option Expense $ (1,100)
COGS $ (82,000)
Adjustment to Net Income $2,000
Net Income decrease $ (81,100)