Frosty Frozen Treats (FFT) was established in 1995, in Nanaimo, BC, by Partha Mashraw to produce natural ice creams using only milk, sugar, chocolate, and fruits. The company prides itself on its wide selection of varieties and the fact that it uses no preservatives or stabilizers.

Partha is planning to take the company public within the next few years; however, he is having doubts given the recent turbulence in the equity markets as a result of the global economic slowdown. The IPO market has become much more competitive as investors are hesitant to take on the risks associated with small cap companies. Only companies with a strong financial position and earnings growth have been greeted positively by the equity markets. The controller of FFT is preparing the year-end financial statements and external audit working paper file.

The controller is reviewing the following transactions that took place during the year (all figures are in ’000s): The company agreed to sell a large order of ice cream to a retailer in exchange for $10,000 cash and a note receivable for $50,000 at 3%. The note is repayable at the end of a two-year period. Interest must be paid at the end of each year. The retailer’s normal borrowing rate is prime plus 3%. At the time of the sale, prime was 3%. FFT recorded revenues of $60,000.

Given the recent volatility in the market, FFT decided to enter into a futures contract to lock in the price of milk on April 1. The contract is traded on the Chicago Mercantile Exchange, under the symbol DC, and is for the standard contract size of 200,000 lbs. The contract was entered into at a price of $21.22 per hundredweight. As at year end, milk was trading at $19.54 per hundredweight. FFT has not recognized this futures contract in the accounts.

On July 1, the company received a $150,000 patent infringement settlement regarding a competitor’s use of FFT’s special recipe. The funds are going to be used to reinvest in the business’s capital assets and expand operations within the next two years. Because the expansion is not taking place until next year, management decided to invest funds into an exchange traded fund that invests in a mixture of short and long-term bonds. The bond fund was trading at $12.50 per share on July 1, and at $13.38 on December 31. This bond fund is being carried at its historical cost.

On January 1, the company purchased for $150,000 a newly issued, five-year bond that was yielding 6%, when the market rate was 6%. Interest is paid annually. As of year end, global economic turmoil resulted in a flight to safety, pushing market yields down. The market rate for this bond is now 5%. Management plans to use the funds from the bonds to help finance the future expansion plans. The bond is currently being measured at amortized cost.

During the prior year, FFT purchased 10% of the common shares of Crispy Cones (CC), a producer of waffle ice cream cones, for $200,000. The shares of CC are not publicly traded, and the purchase price was established as five times net income of $40,000. The past fiscal year has proved to be a challenge for CC due to increased competition, commodity price inflation, and an inability to raise prices due to limits on consumer discretionary spending. CC’s most recent financial statements report reveals net income of $27,500.

Prior to the above-noted transactions, pretax net income was $225,000. The management team is happy about the current year results as they will obtain a bonus of $11,250, or 5% of net income. The company has a December 31 year end.

Required

Assume the role of the controller and prepare a report that discusses the recognition and measurement of the financial instruments noted above. The company uses IFRS.