ACCA Applied Skills · Financial Reporting · Taxation
At 31 December 20X1 Marlow Co had a provision for warranty costs of $80,000 in its financial statements. Warranty costs are deductible for tax only when paid. The tax rate is 30% and Marlow expects sufficient future taxable profits. What is the deferred tax treatment at 31 December 20X1?
The warranty provision creates a deductible temporary difference of $80,000 because tax relief arrives only when paid. At 30% this gives a deferred tax asset of $24,000, recognised since future taxable profits are expected.
- ARecognise a deferred tax liability of $24,000
- BRecognise a deferred tax asset of $24,000Correct
- CRecognise a deferred tax asset of $80,000
- DNo deferred tax because the difference is permanent
Explanation
The provision's carrying amount is a liability of 80,000 and its tax base is nil (carrying amount less amount deductible in future of 80,000). This gives a deductible temporary difference of 80,000. At 30% the deferred tax asset is 24,000, recognised as future profits are probable. It is temporary, not permanent, because the deduction will occur on payment.
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