Beauty Bath Equipment Limited $($BBEL$),$ a private company based in Ottawa and prepares its financial statements using ASPE. BBEL is the city$$s largest manufacturer and vendor of bathtubs, showers, and sinks$.$ The company sells products direct to consumers and sells wholesale to other retailers.

BBEL is owned by Frank Juul, who runs the operations side of the business. His brother, Jacky Juul, manages all the accounting functions. Frank performed market research and determined that the next step for BBEL is to expand sales to Alberta. BBEL has slowly reduced its debt load over the years, but still relies on creditors and bankers to finance its operations. BBEL went to the bank to obtain additional financing to expand to Alberta. The bank agreed to provide $$3$ million in financing at face value, at a rate of $9\%,$ interest payable annually. The bank indicated that audited financial statements would be required this year, and BBEL would need to maintain a debt to equity ratio of $1$:$1,$ where debt is defined as all liabilities.

A&F LLP is a local audit firm engaged to perform the December $31,2024$ year$-$end audit to satisfy the bank requirements. You are the senior accountant assigned to this audit engagement. It is January $2025,$ you met with Frank and Jacky and note the following transactions that occurred during the year:

On December $31,2024,$ BBEL was notified that it will need to perform a cleanup every $10$ years of the area surrounding its plant. BBEL estimated that the costs of the cleanup will be approximately $$500,000$ in $10$ years. Frank indicated that, because the amount is not due for years, there is no need to recognize anything at this point.

On June $30,2024,$ an employee launched a wrongful dismissal suit against BBEL for $$180,000.$ BBEL$$s lawyers have indicated that they expect a payment of $$120,000$ to $$150,000,$ but the lawsuit is still in court proceedings. Frank didn$$t recognize any amount for this because he believes that BBEL will be able to successfully defend the suit.

BBEL bought inventory on January $1,2024.$ The purchase was financed through an interest$-$free vendor take$-$back loan, with a promise to repay $$200,000$ in two years. Frank recorded the loan on the balance sheet at $$200,000.$ As at December $31,2024,$ the inventory$$s net realizable value was $$100,000.$

BBEL$$s balance sheet shows that the company has $$1\mathrm{.}3$ million in debt and $$2\mathrm{.}4$ million in equity.

Instructions

Adopt the role of the company auditor and discuss the financial reporting issues you anticipate facing once the audit begins.

Note: Marks are only awarded to the analysis of relevant financial reporting issues.