- May 15, 2021 at 3:07 pm #620670shashikalamanushaniMember
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In the statement of financial position of XY at 31 March 20X9 there is a warranty provision of $350,000. The balance on the provision at the end of the previous year was $275,000. Warranty costs are deducted for tax purposes on a cash paid basis.
The corporate income tax rate is 20%.
Calculate the charge or credit that would appear in the statement of profit or loss of XY for the year ended 31 March 20X9 in respect of the deferred tax arising on the above warranty provision. State your answer in $ and clearly state whether the amount would be a debit or credit in the statement of profit or loss.
Sir, how should we work out this question?May 17, 2021 at 7:46 pm #620871P2-D2Keymaster
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You very rarely see anything other than deferred tax and PPE in the FR exam, so I’d not get too worried about it.
You are given the carrying value each year of the provision, and the tax base is nil each year given that the deduction is given on a cash basis. Effectively the tax authorities would not recognise anything on their SFP. So now you have the carrying value of the liability each year and the tax base, so can carry on with the usual methodology looking at the temporary difference and movement in deferred tax.
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