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

Parent owns 100% of Sub. Parent sold inventory to Sub for $120,000, which cost Parent $90,000. At the year end all of the inventory remains in Sub's warehouse. The tax rate is 20% in both entities' jurisdictions and tax is based on each entity's own separate profits. What is the consolidation adjustment for deferred tax on the unrealised profit?

A deferred tax asset of $6,000 is recognised. The unrealised profit of $30,000 is eliminated, so group carrying amount is $90,000 while the tax base in Sub is $120,000, giving a $30,000 deductible difference taxed at 20%.

  1. ADeferred tax asset of $6,000 in the consolidated statement of financial positionCorrect
  2. BDeferred tax liability of $6,000
  3. CNo deferred tax, because the profit is eliminated on consolidation
  4. DDeferred tax asset of $24,000

Explanation

Unrealised profit eliminated is $30,000. In the group the inventory carrying amount is $90,000 but its tax base for Sub is $120,000, since Parent was taxed on the profit. This is a deductible temporary difference of $30,000, giving a deferred tax asset of 20% x $30,000 = $6,000. Ignoring it would overstate group tax expense.

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