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

Zeta Ltd bought equipment for $500,000 at the start of Year 1. It depreciates the asset straight-line over 5 years to nil residual value. The tax authority allows a 40% reducing-balance writing-down allowance, so tax written down value at the end of Year 1 is $300,000. The tax rate is 25%. What deferred tax balance arises at the end of Year 1?

A deferred tax liability of $25,000 arises. The carrying amount is $400,000 and the tax base is $300,000, giving a taxable temporary difference of $100,000. Applying the 25% tax rate gives the liability, because accelerated tax allowances mean future taxable profit will exceed accounting profit.

  1. ADeferred tax liability of $25,000Correct
  2. BDeferred tax asset of $25,000
  3. CDeferred tax liability of $50,000
  4. DDeferred tax liability of $125,000

Explanation

Carrying amount = 500,000 - 100,000 = 400,000. Tax base = 300,000. Taxable temporary difference = 100,000, so deferred tax liability = 100,000 x 25% = 25,000. A deferred tax asset would arise only if the tax base exceeded the carrying amount. Using the 40% allowance of $200,000 as the difference gives $50,000, which ignores the depreciation charged.

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