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ACCA Applied Skills · Financial Reporting · Taxation

At 31 December 20X5, Arden Co has a machine with a carrying amount of $480,000 and a tax written-down value of $300,000. Arden also has a provision for warranty costs of $50,000, which is deductible for tax only when the costs are paid. The tax rate is 25%. At 31 December 20X4 the net deferred tax liability was $28,000. What is the deferred tax charge to profit or loss for the year ended 31 December 20X5 (assuming no amounts are recognised in other comprehensive income)?

The deferred tax charge is $4,500. The closing net liability is $32,500: a $45,000 liability on the machine's $180,000 taxable difference less a $12,500 asset on the $50,000 provision, both at 25%. Deducting the opening liability of $28,000 gives the movement charged to profit or loss.

  1. A$4,500 chargeCorrect
  2. B$17,000 charge
  3. C$32,500 charge
  4. D$7,500 charge

Explanation

Taxable temporary difference on the machine is 480,000 - 300,000 = 180,000, giving a liability of 45,000. The warranty provision creates a deductible temporary difference of 50,000, giving an asset of 12,500. Net closing liability is 45,000 - 12,500 = 32,500. The charge is 32,500 - 28,000 = 4,500. The 17,000 option would result from ignoring the provision's tax effect partially, and 32,500 is the closing balance, not the movement.

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