March/June 2016 Question 1

Dear Mike,

By doing the question 1 Section B March/June 2016 I came across below part regarding Deferred tax which is not completely clear to me. Could you kindly explain the accounting treatment. Thanks in adavance

“The directors of Zanda Co are of the opinion that an unrecorded deferred tax asset of $1.2million at 1 October 2015, relating to Medda Co’s Losses, can be relieved n the near future as a result of the acquisition. At 31 March 2016 the directors’ opinion has not changed, nor has the value of the deferred tax asset.

In the answer the deferred tax of 1200 was added to calculated the fair value of Medda at acquisition.

I kind of understood why: as this deferred tax is an asset and it was not included in the calculation of the net asset at the acquisition we need to increase the Net asset by the deferred tax to get the fair value at acquisition.

Myself I added back the deferred tax 1200 to the profit of Medda (but looks being wrong). as I per accounting entry

Dr Deferred tax
Cr Tax I/S

Could you please help me to understand why it is wrong?

Thanks

Gabbi