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Hi everyone,
I have a little bit confuse when doing journal entry related to the Deferred Tax for unrealized profit in consolidation financial statements for intra-group transaction.
For example, Subsidiary sell inventory to Main at price 200,000$ and the cost for Subsidiary produce them is 120,000$. At the end of financial year, a half of inventory is still on hand of Main. Assume tax rate 30%.
I know that here, we have the unrealized profit of 40,000$ from the group’s perspective, but I don’t understand clearly why they recognized Dr Deferred tax asset and Cr Income tax expense for this unrealized profit.
So, anyone can explain it for me. Tks
I dont understand how you got the $40,0000. I think unrealised profit has to be eliminated from the group accounts and recognised next year, hence there is a timing difference. Dr deferred tax asset because the tax charge in the group profit or loss includes tax in this profit.( i.e $40,000 includes tax) in the first year . hence it was not supposed to be paid for this year as the profits was not recognised. so second year it would result in an decrease of deferred tax
I have just started reading income tax so not sure if this is entirely correct.
Did I really say I couldn’t help? Karen, the 40,000 is half the intra-group profit – it’s half because half the intra-group sold goods are still within the group inventory.
The deferred tax asset is debited and the current tax credited because there is a current liability so far as the taxman is concerned but, when the goods are sold next year, there will already have been shown as a liability the tax on those goods in the year of the intra-group sale
Does that help?
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