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 $800,000 and did so on November 30, 2019, without consulting its lawyers.
It is now January 15, 2020. You, CPA, were recently hired as a corporate accountant for WP. One of your staff has provided you with selected financial information and notes (Appendix) for your review and to help you in preparing the tax provision for the year end. Anne has requested that as part of the tax provision preparation, she be provided with information on how losses can be treated for tax purposes. You tell the staff member that you will review the financial information and provide her with feedback regarding any accounting issues and potential adjustments. WP follows ASPE for GAAP purposes.
Balance sheet information
Cash$ 43,124Refundable deposits25,000Inventory83,999
Income statement information
Gross margin Expenses:$ 707,147Selling and administrative143,005Amortization 69,134Maintenance supplies27,759Lawsuit judgment 800,000Other 3,245Preliminary net income (loss) $ (335,996)