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(i) what i done for unrealised profits was:
$1.8 of goods are in the inventory at year end, total sold goods worth $3, hence 3-1.8= 1.2. 1.2/3 gives= 40% and 40% * $1 = $0.40 unrealised profit. As there is 40% of goods not sold yet in the year end, but we already paid tax on the $1 profits which includes unrealised profits. So CR income tax and DR deferred tax asset, as the goods sold nxt year will already have shown a laibility.
Solutions states 0.6, ? can you explain.
2. What does unremmitted earnings mean?
2b (i) for revaluation, gains will be taxed in future period, so do we CR tax liability and DR P/L gains?
3. temporary differences should be recognised except: it is probable that the temprary difference wikk not reverse int he foresable future, can you please explain this?
Thank you
Karen, your opening line tells us that there is $1.8m in inventory. It’s that $1.8m that includes the unrealised profit. The $1.2m sold to the outside world IS realised.
So the pup is calculated on 1.8, not on 1.2 as you have done. The tax calculated on the seller’s unrealised profits is counter-balanced by the buyer whose cost of sales is artificially high and thus reduced profits. The net effect (so long as both companies are in the same (or similar) tax jurisdictions) is zero. The seller pays too much tax and, at the same time, the buyer pays too little
Unremitted earnings are earnings that have been achieved but not yet paid over (“remitted” is another way of saying “paid”). Presumably, the company has earned some money – maybe by acting as a commission agent – and has not paid over the net amount, after deducting the commission, to the principal
The answer to your question 2b (i) is “Yes”
Deferred tax is calculated essentially on timing differences where, for example, the rate of capital allowances is greater than the depreciation rate. But over a period of time, where capital allowances are calculated on the reducing balance basis, the depreciation calculated for a year will begin to catch up with the amount of capital allowance historically given. In that way, the difference that existed in the first, second, third etc years will become smaller and eventually disappear
That way, we can see that the difference is only temporary and “wikk not reverse int he foresable future”
OK?
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