Wedding Planners Ltd. (WP), owned by Anne Tremblay, provides wedding planning and related services. WP owns a building (The Pavilion) that has been custom built for hosting weddings. WP plans a wedding from start to finish and hosts the wedding-day events: photos, ceremony, reception, dinner, open bar, and dance at The Pavilion.

In early 2019, while attending a wedding at The Pavilion, dangerous actions by a wedding guest resulted in a lawsuit by other guests. There was no damage to The Pavilion or any WP property. However, since the incident occurred at a WP event, WP was named as one of several defendants in the lawsuit. WP was ordered to pay

$800,000 and did so on November 30, 2019, without consulting its lawyers.

It is now January 15, 2020. You, CPA, were recently hired as a corporate accountant for WP. One of your staff has provided you with selected financial information and notes (Appendix) for your review and to help you in preparing the tax provision for the year end. Anne has requested that as part of the tax provision preparation, she be provided with information on how losses can be treated for tax purposes. You tell the staff member that you will review the financial information and provide her with feedback regarding any accounting issues and potential adjustments.

APPENDIX Selected financial information For the year ended December 31, 2019 (Prepared by staff member)

Balance sheet information Assets
Cash	$ 43,124
Refundable deposits	25,000
Inventory	83,999
Income statement information
Gross margin	$ 707,147
Expenses:
Selling and administrative	143,005
Amortization	69,134
Maintenance supplies	27,759
Lawsuit judgment	800,000
Other	3,245
Preliminary net income (loss)	$ (335,996)

Additional information:

1. This year, WP began collecting fully refundable deposits six months prior to customers wedding dates. The deposits are to hold The Pavilion for the date and will be applied against the rental fee when the wedding occurs. These deposits have been recorded in revenue when received. As at December 31, 2019, there was

$25,000 in deposits relating to weddings in 2020.

2. Annes best friend, Cathy, publishes a local magazine. During 2019, Anne agreed to trade the use of The Pavilion in exchange for advertising in Cathys magazine. The advertising ran in the spring of 2019 and would have cost $4,850. The magazine used The Pavilion two Sundays in September. The rental rate would have been

$1,500 per day. The transaction was not recorded in the financial statements.

Appendix (continued) Selected financial information

3. In January 2017, Anne entered into a five-year fixed-price contract for champagne to protect WP against market fluctuations. During each of the first three years of the contract, Annes decision appeared to be a good one, as the price of champagne continued to go up. At December 31, 2019, the market price of champagne dropped significantly. Anne heard that the price per case is expected to remain at this level or drop even more over the next two years. On December 31, Anne triggered the cancellation clause that allows WP to get out of the contract for $60,000. The payment was made and expensed on January 2, 2020.
4. WP uses tax capital cost allowance (CCA) for accounting amortization purposes, as it reasonably approximates the economic life of the underlying assets.
5. WPs lawyer was unhappy with Anne for settling the lawsuit without consulting her, and she immediately launched an appeal. A letter from the lawyer dated January 10, 2020, indicates that she is positive that the $800,000 judgment against WP will be refunded, with interest, within two to three years for the following reasons:
   • Several breaches of protocol by both the plaintiffs lawyer and the judge in the original court case have been identified.
   • The person who committed the dangerous act, and who had originally left Canada to avoid charges, has returned to Canada.
   • There has just been a similar case settled through appeal in a higher Canadian court where the defendant was refunded all of the original damages.

Anne now recognizes paying the lawsuit was a mistake. She would like to record a receivable for the reversal of the judgment.

6. WP has always filed its corporate tax return claiming the small business deduction, resulting in an effective tax rate of 15% for the past several years. WP has always used the taxes payable method of accounting for income taxes, as permitted under accounting standards for private enterprises (ASPE). WPs income tax payments over the last five years were as follows:

2018	$59,342
2017	$48,126
2016	$30,404
2015	$32,500
2014	$25,442

During the year, Anne participated in a local ladies golf league in an effort to network with the community. As a result, WP paid $3,500 in dues and green fees on her behalf. This amount is included in selling and administrative expenses along with an additional $7,540 incurred by WP for meals and entertainmen