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%.

1. 1. 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. ______________
2. 2. 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:

Net income per book -	1,384,276.43
x Income Tax rate	30%
Total Income Tax Expense - Current	415, 282.93
Less: Income Tax payments in previous quarters	250,000
Income Tax Payable	165,282.93

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:
  • 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
  • Provision for contingencies
    • Beginning balance, settled during the year P500,000
    • Provision recognized during the year, ??? (refer to #14)
  • 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

 

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

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

5. 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. ______________

6. Propose AJE to correct provision for income taxes – current.

Answer rating: 100% (QA)

The provision for litigation should be settled during the year so there should be no provision for it at the end of the reporting period For the food ... View the full answer