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Need help with the following question
In jan 2006 the accountant at Mighty IT Co produced the company’s draft financial statements for the year ended 31dec 2005.He then realized that he had omitted to consider deferred tax on development costs. In 2005 development costs of $200000 had been incurred and capitalised. Development costs are deductible in full for tax purposes in the year they are incurred.The development is still in process at 31 dec 2005.tax rate is 30%.
What is the adjustment required to the income tax expense in SOPL for 31 dec 2005 to account for deferred tax on the development costs?
Answer given is increase of$60000
But my answer is decrease of 60000 as its an unrecorded defered tax asset.
Pls correct me if i am wrong.“But my answer is decrease of 60000 as its an unrecorded defered tax asset.”
I believe that it’s an unrecorded tax liability
It’s a timing difference matter – the taxman allows us an expense of $200,000 this year but we don’t show it as an expense because the project is still in development
So if the taxman allows us today to claim that $200,000 as deductible, when we eventually DO expense it though our own financial statements, taxman is going to say “Whoa, you can’t claim that! I’ve already allowed you to claim that amount last year” and that’s why it’s a deferred tax liability
Is that OK for you?
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