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. At this time, the spot (current) price for one ton of coffee is $ 3,000, and the future (forward) price for September 30, 2020 delivery is $ 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.

Bella’s year-end is June 30, 2020. At that date the spot price was $ 2,980, the future price for three-month delivery was $ 2,880, and the future price for five-month delivery was $ 2,850.

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 three 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)Given the information above, should Bella have hedged this transaction? Why? Would your answer be different if the future price were $ 3,100?

b)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 requirements.

Answer rating: 100% (QA)

1 If hedging is done the cost will be 17400120240 172806 2... View the full answer