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Hi,
I’m doing the June 2016 past exam and I have a question relating to the question 1 in part B. The situation is Zanda Co acquired 60% of Medda Co. In the note 1, it said that “the directors of Zanda are of the opinion that an unrecorded deferred tax asset of $1.2m at 1 October 2015, relating to Medda Co’s losses, can be relieved in the near future as a result of the acquisition. At 31/03/2016, the directors’ opinion has not changed, nor has the value of the deferred tax asset.”
I quite dont understand this note and I think that if the deferred tax asset is unrecorded then when we work on the Retained earning, a deferred tax income should be included however the answer ignored it.
Can you please explain to me this problem?
Thank you.Hi,
If the asset can be relieved then it should be recorded as part of S’s net assets. You would therefore increase the net assets at acquisition by the $1.2 million and at the reporting date by the same amount. As there is no change in the value of the asset, there is no impact on the retained earning of the subsidiary.
Thanks
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