Skip to content

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

Group entity Parent Co sold inventory costing $60,000 to its subsidiary Sub Co for $80,000. At the year end, all of it remains in Sub Co's inventory. Parent is taxed at 30% and Sub at 20%, each on its own entity profits. Consolidation eliminates the unrealised profit of $20,000. Which statement about the tax effect in the consolidated financial statements is correct?

This item is unresolved: the correct deferred tax asset uses the buyer's rate of 20%, giving $4,000, with current tax unchanged.

  1. ACurrent tax in the group accounts is reduced by $4,000 because Sub's rate applies
  2. BCurrent tax in the group accounts is unchanged, and a deferred tax asset of $6,000 is recognised at Parent's 30% rate on the eliminated profitCorrect
  3. CCurrent tax is reduced by $6,000 and no deferred tax arises
  4. DNo tax adjustment is made because intragroup transactions are eliminated

Explanation

The tax authorities have already taxed Parent on the $20,000 profit, so entity current tax is unchanged. Eliminating the profit creates a temporary difference between the group carrying amount and the tax base (Sub's cost of 80,000). Under IAS 12 the deferred tax asset uses the rate of the buyer? No: the tax base relates to the buyer's jurisdiction, so rate used is Sub's 20%, giving 4,000. Hence the key must be reconsidered.

Did you get it right without looking?

One question tells you little. A timed set on Income taxes shows your real accuracy, how long you take and where you lose marks.

Practise Income taxesFree diagnostic mock

More Income taxes questions