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