On May 1, 2021, Easy Corp. enters into a silver futures contract and designs this futures contract for speculation purposes. The notional amount of the contract is 1,000 ounces, and the terms of the contract give Easy Corp. the right and the obligation to purchase silver at a price of $40,000 per ounce. The price will be good until the contract expires on November 1, 2021. Assume the following data right respect to the spot price of the silver.
Date Spot price for November delivery
May 1, 2021 $40,000 per ounce
June 30, 2021 $41,000 per ounce
September 30, 2021 $42,500 per ounce
Required: 1. Prepare the journal entries for the following dates (9%) (a) May 1, 2021 (b) June 30, 2021 (c) September 30, 2021
2. On November 1, 2021, Easy Corp. settles the future contract with 1,000 ounces of silver at the price of $43,000 per ounce. Prepare the journal entry to record the net settlement of the future contract. (4%) 3. In the situation where the silver is one of the materials that Easy Corps uses in the production of its specialty earrings. Easy Corp. probably anticipates that it will need to purchase 1,000 ounces of silver in November 1, 2021 for earrings. Easy decides to designate the future contract as a hedge to protect against volatile price movements in silvers. Briefly discuss the following questions related Easy's future contract hedging: (a) what type of hedges Easy Corp. should apply? Why? (4%) (b) describe the special accounting under IFRS for Easy's future contract. (4%) (c) how much should Easy Corp finally pay for purchase of silver on November 1, 2021, the same day the future contract is settled? (2%) (d) determine the cost of goods sold if Easy Corp, in December 2021, sells earrings containing silvers purchased on November 1, 2021. The cost of the finished goods inventory is $20,000,000. (2%)
