Sweet Dreams Ice Cream

Sweet Dream Ice Cream $($SDIC$)$ was established in $1995,$ in Selwyn, ON$,$ by Kristen Smith 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.

Kristen is planning to take the company public within the next few years; however, she 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 SDIC 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 $\text{'}000$ s $)$:

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 $3\%.$ SDIC recorded revenues of $$60,000.$

Given the recent volatility in the market, SDIC 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 $200,000lbs.$ The contract was entered into at a price of $$21\mathrm{.}22$ per

hundredweight. As at year end, milk was trading at $$19\mathrm{.}54$ per hundredweight. SDIC 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 SDIC'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 $$12\mathrm{.}50$ per share on July $1,$ and at $$13\mathrm{.}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, SDIC purchased $10\%$ of the common shares of Twin Cones $($TC$),$ a producer of

dipped ice cream cones, for $$200,000.$ The shares of TC 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

TC due to increased competition, commodity price inflation, and an inability to raise prices due to limits on

consumer discretionary spending. TC$\text{'}$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.

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.