Tax base :net assets less than the C.amount

Hello Sir,

I don’t understand why for the tax base in the following question , being the net asset less than the carrying amount of $12 ,the deferred tax was added to tax of the year instead of substracted.

what they do mean here by the net asset is less than the carrying amount .
Isn’t it like a loss or what ?

Thanks a lot
——————————————————————————————————————————
Q
CLARION
After preparing a draft statement of profit or loss for the year ended 30 September 20X4 and
adding the year’s profit (before any adjustments required by notes (i) to (v) below) to
retained earnings, the summarised trial balance of Clarion as at 31 March 20X5 is:

$000 $000
Equity shares of $1 each 35,000
Retained earnings – 31 March 20X5 33,100
8% loan notes (note (i)) 20,000
Plant and equipment at cost (note (ii)) 77,000
Right?of?use plant (note (iii)) 8,000
Accumulated depreciation plant and equipment
– 1 April 20X4 19,000
Investments through profit or loss
– value at 1 April 20X4 (note (iv)) 6,000
Inventory at 31 March 20X5 11,700
Trade receivables 20,500
Bank 1,900
Deferred tax (note (v)) 2,700
Trade payables 9,400
Environmental provision (note (ii)) 4,000
Lease liability (note (iii)) 4,200
Loan note interest paid (note (i)) 800
Suspense account (note (i)) 5,800
Investment income (note (iv)) 500
––––––– –––––––
129,800 129,800
––––––– –––––—

The following notes are also relevant.
(i) On 31 March 20X5, one quarter of the 8% loan notes were redeemed at par and six
months’ outstanding loan interest was paid. The suspense account represents the
debit entry corresponding to the cash payment for the capital redemption and the
outstanding interest.
(ii) Property, plant and equipment
Included in property, plant and equipment is an item of plant with a cost of $14 million
purchased on 1 April 20X4 However, the plant will cause environmental damage which
will have to be rectified when it is dismantled at the end of its five year life The present
value (discounting at 8%) on 1 April 20X4 of the rectification is $4 million. The
environmental provision has been correctly accounted for, however, no finance cost
has yet been charged on the provision.
No depreciation has yet been charged on plant and equipment which should be
charged to cost of sales on a straight?line basis over a five?year life No plant is more
than four years old.
(iii) The right?of?use plant was acquired on 1 April 20X4 under a five?year lease with an
initial deposit of $2.3 million and annual payments of $1.5 million on 31 March each
year The present value of the annual payments under the lease (excluding the initial
deposit) at 1 April 20X4 was $5.7 million, the lease has an implicit rate of interest of
10%, and the right?of?use plant has been correctly capitalised The lease liability in the
trial balance above represents the initial liability less the first annual payment.
(iv) The investments through profit or loss are those held at 31 March 20X5 (after the sale
below). They are carried at their fair value as at 1 April 20X4, however, they had a fair
value of $6.5 million on 31 March 20X5. During the year an investment which had a
carrying amount of $1.4 million was sold for $1.6 million. Investment income in the
trial balance above includes the profit on the sale of the investment and dividends
received during the year.
(v) A provision for current tax for the year ended 31 March 20X5 of $3.5 million isrequired
At 31 March 20X5, the tax base of Clarion’s net assets was $12 million less than their
carrying amounts. The income tax rate of Clarion is 25%.
Required:
(a) Prepare Clarion’s statement of financial position as at 31 March 20X5. (15 marks)
(b) Prepare extracts from the statement of cash flows for Clarion for the year ended
31 March 20X5 in respect of cash flows from investing and financing activities.
(5 marks)
Notes to the financial statements are not required.
(Total: 20 marks) ?

Answer

1 CLARION
(a) Clarion – Statement of financial position as at 31 March 20X5
Assets $000 $000
Property, plant and equipment
(77,000 + 8,000 – 19,000 – 17,000 (W1))
49,000
Investments through profit or loss 6,500
–––––––
55,500
Current assets
Inventory 11,700
Trade receivables 20,500
––––––– 32,200
–––––––
Total assets 87,700
–––––––
Equity
Equity shares of $1 each 35,000
Retained earnings (W1) 10,810
–––––––
45,810
Non?current liabilities
8% loan notes (20,000 – 5,000 redeemed) 15,000
Deferred tax (W3) 3,000
Environmental provision (4,000 + 320 (W1)) 4,320
Lease liability (W4) 3,747
––––––– 26,067
Current liabilities
Trade payables 9,400
Lease liability (W4) 1,023
Bank overdraft 1,900
Current tax payable 3,500
––––––– 15,823
–––––––
Total equity and liabilities 87,700
–––––––
(b) Clarion – Extractsfrom the statement of cash flowsforthe year ended 31 March 20X5
$000
Cash flows from investing activities
Purchase of plant and equipment (note (ii)) (14,000)
Dividends received (W2) 300
Sale of investments (note (iv)) 1,600
Cash flows from financing activities
Redemption of loan notes (W5) (5,000)
Repayment of lease liability (2,300 + (1,500 – 570)) (W5) (3,230

Workings (figures in brackets in $000)

(W1) Retained earnings $000
Per trial balance 33,100
Depreciation of plant and equipment ((77,000 + 8,000) × 20%) (17,000)
Finance costs: 8% loan notes (800 TB + 800 suspense (W5)) (1,600)
Lease interest (W4) (570)
Environmental provision (4,000 × 8%) (320)
Investment income (W2) 1,000
Tax: current year (3,500)
Deferred tax (W3) (300)
–––––––
10,810
–––––––

(W2) Investment income
Dividends received and profit on sale per TB * 500
Gains on fair value (6,500 – 6,000) 500
––––––
1,000
––––––
*Profit on sale = 200 (1,600 – 1,400), dividends received = 300 (500 – 200)

(W3) Deferred tax
Provision required as at 31 March 20X5 (12,000 × 25%) 3,000
Balance at 1 April 20X4 (2,700)
––––––
Charge to retained earnings 300
––––––

(W4) Lease liability
Balance
b/f
Interest
at 10% Paid
Balance
c/f
$000 $000 $000 $000
Year to 31 March 20X5 5,700 570 (1,500) 4,770
Year to 31 March 20X6 4,770 477 (1,500) 3,747
Interest charge $570
Non?current liability $3,747
Current liability (4,770 – 3747) $1,023

(W5) Elimination of suspense account
$000
Cash cost of loan note redemption (20,000 × 25%) 5,000
Six months’ interest on loan note (20,000 × 8% × 6
/12) 800
––––––
5,800