LEW Jewellery Corp. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2020 for jewellery that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW's cost to produce its jewellery will increase, which could reduce its profit margins. 

To hedge the risk of increased gold prices, on April 1, 2020, LEW enters into a gold futures contract and designates this contract as a cash flow hedge of the anticipated gold purchase (under IFRS). The notional amount of the contract is 500 ounces, and the terms of the contract require LEW to purchase gold at a price of $300 per ounce on October 31, 2020, or to settle the contract net on the basis of the difference between the $300 and the gold price at October 31. LEW expects to settle the contract on a net basis. Assume the following data with respect to the price of the futures contract. Assume no margin deposits were paid. 

Date...................................Fair Value of Futures Contract 

Apr. 1, 2020.......................................$ –0– 

June 30, 2020....................................5,000 

Sept. 30, 2020...................................7,500 

Oct. 31, 2020.....................................7,500

Instructions 

a. For this transaction, perform analysis using the five-step approach: 

1. Identify the hedged item. 

2. Identify the hedging item. 

3. Identify how the hedged item is being accounted for without hedge accounting. 

4. Identify how the hedging item is accounted for without hedge accounting. 

5. Locate where the recognized gains and losses for the hedged and hedging items are recognized. 

b. Prepare the journal entries for items (1) through (5): 

1. April 1, 2020: Inception of the forward contract. 

2. June 30, 2020: LEW prepares financial statements. 

3. September 30, 2020: LEW prepares financial statements. 

4. October 31, 2020: LEW purchases 500 ounces of gold at the market price of $315 per ounce, and settles the futures contract on a net basis. 

5. December 20, 2020: LEW sells on account for $350,000 jewellery containing the gold purchased in October 2020. The cost of the finished goods inventory is $200,000 before any adjustment for hedge accounting. 

c. Indicate the amount(s) reported on the SFP and statement of comprehensive income related to the futures contract for the six months ended June 30, 2020. 

d. Indicate the amount(s) reported on the statement of comprehensive income related to the futures contract and the inventory transactions for the year ended December 31, 2020. 

e. Explain how the accounting would be different using hedge accounting under ASPE.