Reference no: EM132857874
Question - On May 1, 2020, Bella Corp., a coffee wholesaler, placed an order with its supplier for six tons of coffee, to be delivered and paid for on September 30, 2020. The spot price for one ton of coffee on May 1, 2020 was $ 3,000, and the future (forward) price for September 30, 2020 delivery was $ 2,900. Thus, Bella decided to enter into a forward contract for six tons of coffee at $ 2,900 per ton for September 30, 2020 delivery. It designated the contract as a cash flow hedge. The contract further calls for a net cash settlement.
On June 30, 2020, Bella's fiscal year end, the future price for three-month delivery was $ 2,880.
On September 30, 2020, when the spot price was $ 2,940 and the future price for five-month delivery was $ 2,980, the company took delivery of the coffee, paid its supplier and settled the forward contract.
On October 31, 2020, Bella sold the six tons of coffee from this delivery to Java Unlimited for $ 3,400 per ton cash. Assume all prices are in Canadian dollars (CAD).
Instructions -
a) Prepare journal entries for the following dates in 2020: May 1, June 30, September 30, and October 31. Bella is a publicly traded corporation and follows IFRS. In additional Bella chooses to use optional hedge accounting.
b) What was the net cost of the six tons of coffee for Bella? Had Bella not hedged, what would have been the cost of the six tons of coffee for Bella? Would Bella's cost of the six tons of coffee be affected by Bella decision to use hedge accounting or not?