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ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes

Bramley Co buys equipment for $200,000 with a 5-year straight-line useful life and no residual value. The tax authority allows a 100% deduction in the year of purchase. The tax rate is 25%. At the end of year 1, what deferred tax balance does IAS 12 require in respect of the equipment?

A deferred tax liability of $40,000 arises. The carrying amount is $160,000 and the tax base is nil, giving a taxable temporary difference of $160,000, multiplied by the 25% tax rate.

  1. ADeferred tax liability of $40,000Correct
  2. BDeferred tax liability of $50,000
  3. CDeferred tax asset of $40,000
  4. DNo deferred tax, because the difference arises from a permanent difference

Explanation

Carrying amount at end of year 1 is $200,000 x 4/5 = $160,000. Tax base is nil because the full cost was deducted. The taxable temporary difference is $160,000 and at 25% the deferred tax liability is $40,000. The $50,000 option wrongly applies the rate to the full cost of $200,000.

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