Deferred tax problem

cornflower Registered Posts: 129 ? ? ?
Hello everyone. Hope you're enjoying the long bank holiday.
I am revising for P2 ACCA exam and really stuck on a question. It's becoming worrying now because I feel like I know nothing and am now just looking at the answers too much as a way of trying to get through it. The question I am stuck on is this:

Entity operates in a country where tax is payable at a higher rate on undistributed profit rather than on distributed profit. For the year 2007 it's taxable income is $150,000. It also had net taxable temporary differences of $50,000. The tax rate on distributed profit is 25% and 40% for undistributed profit. The difference is refundable if profit is later distributed. At the year end no liability for dividends proposed or paid has been reflected on the statement of financial position. On 31 March 2008 the company distributes dividends of $50,000.


Explain the tax consequences.

I am totally lost here can someone help?


  • cornflower
    cornflower Registered Posts: 129 ? ? ?
    Oh sorry. I posted in wrong forum as well.
  • Steve Collings
    Steve Collings Registered Posts: 997

    I would not advise 'auditing' the model/suggested answer at P2 level as this is counter-productive. You should work the question as best you can and then carefully review your answer against the suggested answer to see where you went wrong. This is much more effective than auditing answers.

    The tax consequences in your Q are as follows:

    1. The entity will recognise current tax of $150,000 x 40% = $60,000.
    2. No deferred tax asset is recognised in 2007 for the amount that will be (potentially) recoverable when the divis are eventually distributed.
    3. A deferred tax liability and associated expense for 2007 will be $50,000 x 40% = $20,000.
    4. In 2008 when the company recognises the divis of $50,000, the company will also recognise the recovery of income taxes of $50,000 x (40% - 25%) = $7,500 as a current tax asset and a reduction of the current income tax expense.

    Hope that helps.

  • cornflower
    cornflower Registered Posts: 129 ? ? ?
    Thanks Steve. I managed to get there in the end but your help is appreciated.

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