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Hi,
In January 20X6, the accountant at Mighty IT Co produced the company’s draft financial statements for the year
ended 31 December 20X5. He then realised that he had omitted to consider deferred tax on development costs. In
20X5, development costs of $200,000 had been incurred and capitalised. Development costs are deductible in full
for tax purposes in the year they are incurred. The development is still in process at 31 December 20X5.
What adjustment is required to the income tax expense in Mighty IT Co’s statement of profit or loss for the year
ended 31 December 20X5 to account for deferred tax on the development costs?
A Increase of $200,000
B Increase of $60,000
C Decrease of $60,000
D Decrease of $200,000Why is deffered tax an increase? Since dev costs are fully deductible for tax purposes it shd be a dec of 60000…
Pls clear my understanding
Thanks in advanceHi,
The carrying value is 200,000 and the tax base is nil, as the costs are deductible in full. We will therefore have a taxable temporary difference as the CV>TB, and so a deferred tax liability.
The deferred tax balance has therefore increased and so there will be a corresponding increase in the tax expense.
Thanks
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