Audit of Income and Deferred Taxes

Your audit engagement team is in the process finalizing the audit of Zuan Company's financial statement for year 2021. You were task to audit the income taxes and deferred taxes of the entity. The following procedures were deemed necessary to be performed in finalizing the audited figures in the entity's financial statements:

The following items were available from the entity's December 31, 2021 trial balance:

After inquiring with the management and performing the appropriate audit procedures, you discovered the following:

Note 1 - Deferred Taxes

The entity has been recognizing deferred taxes related to its accrued commission income and allowance for uncollectible accounts. However, the entity failed to update the balances of the related deferred tax asset and liability account as of year-end.

• The accrued commission income had a balance of P130,000 at the beginning of the year which was collected and taxable in 2021. At the end of 2021, the entity had accrued commission income of P170,000.
• The allowance for doubtful accounts had a beginning balance of P120,000 and an ending balance of P100,000. The movement was accounted for as follows: accounts written off - P60,000; impairment loss/doubtful accounts expense recognized - P40,000.

Note 2 - Current Income Tax

The entity paid P300,000 worth of income taxes for the first three quarters. The figure reported under "Income tax expense - current" was based on the income before tax. The entity failed to consider the effects of temporary and permanent differences in the said computation.

• Dividend was received from one of its equity investments which amounted to P500,000. This item is not subject to tax per existing tax laws.
• The entity failed to comply with some regulatory requirements of the Securities and Exchange Commission and the Bureau of Internal Revenue which resulted to an amount of P400,000 recognized as fines and penalties. This amount is not considered necessary for the operations of the business, thus, not allowed to be deducted in computing the taxable income.
• The entity incurred P1,800,000 worth of representation and entertainment expenses which was reported as one of the major expense items. However, per existing tax laws, the maximum allowable amount allowed to be deducted or income tax expenses was limited to P1,000,000 only.
• Tax rate for current and future period is constant for years 2021 and onwards.

Determine the following as a result of your audit:

1. How much is the balance of deferred tax asset in Zuan Company's Statement of financial position as of December 31, 2021?
2. How much is the balance of deferred tax liability in Zuan Company's Statement of financial position as of December 31, 2021?
3. How much is the amount of current income tax expense in its Statement of Comprehensive Income for the period ending December 31, 2021?
4. How much is the amount of total income tax expense in its Statement of Comprehensive Income for the period ending December 31, 2021?
5. How much is the taxable income in Zuan Company's Income Tax Return for the period ending December 31, 2021?