Deferred Tax Question

Jamesw2

Can anyone please explain the following simply i.e. Why is the tax an asset?

Company A has a 75% subsidiary called Company B. During the year Company B sells goods to Company A for 2 million at a mark up of 25% on cost. At year end Company A has 1/4 left in inventory. Corporation tax is 30%.

Solution:

dr Consolidated Retained earnings 75,000
dr Minority Interest 25,000
cr Inventory 100,000

dr deferred tax provision 30,000
cr deferred tax charge I/S 30,000

Thanks.

HeinekenTicket

The profit is fully realised at Co. B level. The tax is charged and paid based on the full amount of the profit.

At group level, some of the profit is unrealised (your first journal). Your second journal records the deferral of the tax expense that relates to the unrealised profit. The credit entry reduces the group tax charge and the debit entry records the deferred tax asset ( or reduction in liability as you have it).

The debit entry on the second journal represents the tax that, in theory, is the amount of tax recoverable at group level until such time as the profit to which the tax relates is earned at group level.

Jamesw2

Got it now.

KingEnda

Is that a CAP 2 problem?
Consolidation and Deferred Tax in the one question !!:eek: