ACCA P2: Calculation for deffered tax on covertible loan stock

Situation: A plc issued 6% convertible loan stock amounting $10 million and the effective interest rate is 10%. The liability and equity component of this loan stock $9 million and $1 million respectively. The plc had recognized the interest expense for the of $900,000 when the interest to be paid was $600,000. The IRB will only recognnize the interest amount paud during the year as deductible expenditure.

Answer

Accounting treatment:

The interest expenses of $900,000 will be included as interest payable of $600,000 where the excess will be amortized into convertible loan stock liability as premium. The carrying value is $9.3 million.

Tax Treatment:

Interest is deducted when paid. Since only $600,000 paid the excess is not deductible. Thus current and future tax charges will continue to be higher as the differences will not be deducted until the liability settled at $10 million. However the tax charges will be used to reduce the equity component. Tax base is $10 million.

CV – Tax Base = Temporary Difference

$9.30 – $10 = $0.7 Taxable Temporary Difference

My question is:

1) Does the nature of convertible loan stock affect the income tax / deferred calculation?

2) How to determine the carrying value of the convertible loan in company book at year end?

3) How come the tax base is $10 million whereas the situation stated that $0.30 ($0.9 – $0.6) was paid ?

Hi, thank you for even reading question. I appreciate all the help and view.