Defferred tax question
cornflower
Registered Posts: 129 Dedicated contributor ๐ฆ
I am studying F7 ACCA and I have been pondering this question for 2 days and don't understand it. The question is,
Subsidiary sold goods costing $10m to parent for 11m and all goods are in inventory at year end. Sub pays tax at 30%. Explain the defferred tax implications.
Any help gratefully received.
Subsidiary sold goods costing $10m to parent for 11m and all goods are in inventory at year end. Sub pays tax at 30%. Explain the defferred tax implications.
Any help gratefully received.
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Comments
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Are you doing INT or UK?0
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Thanks for replying. I am doing internatioanal.beverly hudson wrote: ยปAre you doing INT or UK?0 -
Given the scenario in the question I cannot see how any deferred tax would arise. Has your tutor given you this question? Is it not asking a further requirement or something similar? There wouldn't be any deferred tax arising in this situation.0
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It is a question given by our tutor.I thought that it might be no defferred tax but I wonder if it is simple as that.0
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Would this article (scroll down to group financial statements and example 2) answer your question?
http://www2.accaglobal.com/members/publications/accounting_business/CPD/30706320 -
Thanks Rinske that helps a lot.
I have another problem which I am struggling with and hope I can get some help before Tuesday.
P acquired 30% of S for $1m on 31/12/05 when retained earnings were $2m. P appoints 3 directors and the investment is held for a long period of time. Extracts from S balance sheet as at 31 December 2007 are:
Net assets $6m
Share capital $1m
Share premium $2m
Retained earnings $3m
S made no new issue of share and recoverable amount of assets of S is $7m and fair value of $5m for net assets.
What amount is to be shown in consolidated balance sheet as at 31 December 2007 for the investment?
I am completely confused here.0 -
Ah I now see. The question was quite vague! With regards to question 2 your answer would be 30% x 12million = 3.6m. You would account for this as an associate. The question also should not refer to P and S as this indicates a parent subsidiary relationship which you don't have in this question.0
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Hi,
Unfortunately I don't agree with Beverly's calculation because she has included the top half of the SFP in her calculation. The Q includes sundry net assets which is essentially the 'top half' of the SFP. P has only bought 30% of:
Issued share capital $1m
Share premium $2m
Retained earnings $3m
Therefore 30% x $6m = 1.8
You can prove this by saying:
Cost = $1m
Post acquisition profit30% x ($3m - $2m) = $0.3m
Negative goodwill (30% x $5m) = $0.5m (this will be credited to income).
You can prove the carrying amount of the investment is not impaired by saying:
Recoverable amount $7m x 30% = 2.1m
Carrying value of investment = 1.8m
As recoverable amount is higher than carrying then the investment is not impaired.
Regards
Steve0 -
cornflower wrote: ยปIt is a question given by our tutor.I thought that it might be no defferred tax but I wonder if it is simple as that.
Don't forget that at F7 level you must appreciate how other IFRS/IAS inter-relate. Here you have IAS 27 principles (elimination of unrealised profit in inventory) combined with IAS 12!
Kind regards
Steve0 -
Steve OK I accept I made an error in my calculation because of the way the poster laid the figures out but I cannot understand why you have brought in negative goodwill. This isn't required in the Question and may confuse the issue.0
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Hi Beverly,
I can't see how my solution creates confusion??
I think at F7 level, students should be able to work out for themselves that negative goodwill exists in this scenario. I merely offered an 'alternative' calculation to prove the investment in associate, though to illustrate how I arrived at my negative goodwill:
Cost of investment = $1m
Fair value of net assets at date of acq = $5m - multiply this by % held = 30% = $1.5 so as consideration is less than fair value of net assets at proportionate holding, this gives rise to a negative goodwill (due to a 'bargain purchase') of $0.5m.
Hopefully I have not cause any further confusion!!
Best wishes
Steve0 -
I'm just confused, but does the appointment of 3 directors make any difference to how to treat the associate or is that just a red herring?
I'm far away from any of these questions with my study, and it's purely curiosity.
It just sounds way more interesting then marketing and HR strategies at the moment!0 -
Rinske,
I think the fact that P has appointed S's directors demonstrates that P has 'significant influence' over S. It could be that P owned (say) 23% of S and could appoint 3 directors out of (say) 9 but not have any representation on the board. In such cases P would be unable to exercise significant influence as P's directors would seem to be ignored at board meetings. In such situation, P could not use the 'equity' method of accounting because they would cease to have significant influence and the investment would then be accounted for using IAS 39 (provided the associate does not become a subsidiary or joint venture).
I think this scenario is merely emphasising the point that P has significant over S and is therefore an investment governed by IAS 28 principles.
Regards
Steve0 -
Thanks to everyone for their help.
Steve I did not find your answer confusing, in fact I found it more understandable.
C x0 -
Thanks Steve!
I hadn't thought of that, no matter how long I would have stared at the question.0
