Deferred Tax

Hello,

Question
Aspire has a foreign branch which has the same functional currency as Aspire. The
branch’s taxable profits are determined in dinars. On 1 May 2013, the branch
acquired a property for 6 million dinars. The property had an expected useful life of
12 years with a zero residual value.

The asset is written off for tax purposes over
eight years. The tax rate in Aspire’s jurisdiction is 30% and in the branch’s jurisdiction
is 20%. The foreign branch uses the cost model for valuing its property and measures
the tax base at the exchange rate at the reporting date.

Aspire would like an explanation (including a calculation) as to why a deferred tax
charge relating to the asset arises in the group financial statements for the year
ended 30 April 2014 and the impact on the financial statements if the tax base had
been translated at the historical rate.

Answer
The tax base of the property at the reporting date is D5.25 million (D6m × 7/8). If
translated at the closing rate, this gives $0.875 million (D5.25m/6).
The temporary difference is $0.225 million ($1.1m – $0.875m). The deferred tax
balance will be calculated using the tax rate in the overseas country. The deferred tax
liability arising is $45,000 ($0.225m × 20%), which will increase the tax charge in
profit or loss.

Query
How did they calculated the deferred tax D5.25 million (D6m × 7/8)?

Thanks