PROVISIONS AND CONTINGENCIES

At the beginning of the year, the company had P500,000 provision for litigation related to an illegal dismissal case. The same was settled during the year.

On September 2020, the company was sued for a food poisoning case involving 20 schoolchildren. Based on the reply of the external legal counsel handling the case, there is a high probability that the company will be held liable for an amount ranging from P500,000 to P800,000.

On October 2020, the company was sued by one of its suppliers for a data privacy breach. Based on your inquiries with the company's external legal counsel, it is possible that the company may be held liable for P1,000,000 in penalties and in damages, but the probability is just 20%.

14. Assuming that the timing of settlement of the above cases is expected to be beyond twelve months from the reporting period, how much should be accrued as provision? Do not discount the amount/s. ______________

15. Are there any contingent liabilities? If any, how much? What should be the proper treatment of the latter in the financial statements?

INCOME TAXES

After all the adjustments above had been effected, the company had a pre-tax income of P1,384,276.43. In the previous three quarters, the company has paid a total of P250,000 in income taxes. Hence, the company has accrued income tax payable as follows:

However, the company failed to take into account the following permanent and temporary differences:

Dividend income from a domestic corporation, exempt from income tax, P50,000.

Interest earned from banks, already subjected to final withholding taxes, P47,364.20.

Fines and penalties, P48,000.

Nondeductible portion of interest expense, P7,111.48.

Movements in the following accounts:

o Allowance for credit losses

Beginning balance, P185,000

Provision for bad debts, P100,000

Write-offs evidenced by collection notices "returned to sender", P25,000

o Provision for contingencies

Beginning balance, settled during the year P500,000

Provision recognized during the year, ??? (refer to #14)

o Customer deposits

Beginning balance, P138,000

Deposits earned during the year, P70,000

Deposits collected from customers during the year, to be applied on subsequent year, P47,000

16. How much should be the correct current income tax expense for 2020? ______________

17. How much is the deferred income tax expense for 2020? ______________

18. How much should be presented as net deferred income tax asset/liability as of December 31, 2020? Apply offsetting. Indicate whether the amount is a net DTA or a DTL. ______________

19. Propose AJE to correct provision for income taxes - current.

GL Acct Code Description Debit Credit

20. Assume that a new effective tax rate is enacted which reduces the income tax rates from 30% to 25% was signed into law on March 2021, before the 2020 audited financial statements were approved for release. This law is effective January 2021. Following the guidance from PAS 10, Events After the Reporting Period and PAS 12, Income Taxes, determine whether the latter is an adjusting or a non-adjusting event. Document this on your working papers and provide recommendation as to what the company should do regarding its deferred income taxes.