Biofuel Inc BI is a private company that just started #2227

Biofuel Inc. (BI) is a private company that just started up this year. The company's owner, Sarah
Biorini, created a process whereby carbon dioxide (CO,) emissions are converted into biofuel.
Specifically, the C02 is pumped into a pond where algae is grown. The algae feeds on the C02
and releases oxygen. The algae is harvested, dried, and sold as fuel. The fuel is used by
cement manufacturing companies to heat their kilns (ovens). Sarah contributed the prototype
and idea to the newly formed company in return for common shares. She estimated that the
prototype was worth about $500,000. BI spent the first year developing the idea and by year
end was producing and selling the fuel to several cement production companies. Cement
companies not only produce large amounts of CO,, but also need large amounts of fuel to heat
their kilns.One of the critical success factors for BI is that the algae-producing pond be close to
the source of C02• This reduces transportation costs. After much consideration, BI decided to
build pipelines to pump CO, from the source (the cement company) into an adjacent algae-filled
pond. The pond is excavated by BI but it sits on the cement company's land (close to the source
of CO,). Once a month, BI harvests the algae and ships it to its manufacturing plant to process it
into biofuel. It then sells the biofuel back to the cement companies. The cost of constructing the
pipelines is funded by the bank, as is the excavation of the ponds. The construction is done by
BI and generally takes about three to six months. The finished biofuel made from algae is priced
to recover patent costs and the cost of building the pipe and the ponds as well as any other
costs. It is sold back to the cement companies. The cement companies are both suppliers of the
CO, and customers.The bank is quite happy to continue funding additional projects as long as
BI sends its financial statements to the bank every quarter starring next year. In addition, the
bank would like to see audited annual financial statements beginning with the current year. The
bank and BI have agreed that the debt to equity ratio cannot exceed 3:1, otherwise the loans
become immediately due. BI's accountant is looking to produce the annual financial statements
for the first year of operations. He has not yet decided whether to follow IFRS or ASPE and is
interested in the differences between the two.InstructionsAssume the role of BI's accountant
and discuss the financial reporting issues relating to the above. Use the case analysis
framework presented in class, including an overview, analysis, and recommendations.View
Solution:
Biofuel Inc BI is a private company that just started

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