On January 1, 2020, Carla Vista Ltd. entered into a purchase commitment contract to buy 14,500 oranges
Question:
On January 1, 2020, Carla Vista Ltd. entered into a purchase commitment contract to buy 14,500 oranges from a local company at a price of $0.40 per orange any time during the next year. The contract provides Carla Vista with the option either to take delivery of the oranges at any time over the next year, or to settle the contract on a net basis for the difference between the agreed-upon price of $0.40 per orange and the market price per orange for any oranges that have not been delivered. As at January 31, 2020, Carla Vista Ltd. did not take delivery of any oranges, and the market price for an orange was $0.35.
1) Assuming that Carla Vista Ltd. follows IFRS, how should Carla Vista Ltd. account for this purchase agreement if it fully intends to take delivery of all 14,500 oranges over the next year? Prepare any required journal entries at January 1 and January 31.
2) Assuming that Carla Vista Ltd. follows IFRS, how should Carla Vista Ltd. account for this purchase agreement if it did not intend to take delivery of the oranges? Prepare any required journal entries at January 1 and January 31.