On January 1 20X7,a parent entity Emborough Ltd acquired 20% of the share capital of Bernborough Ltd and the power to participate in the operating and financial policies of that company for $4,500,000 cash.In the period from the date of acquisition to June 30 20X7,Bernborough Ltd earned a profit for the period of $400,000 (after tax of $200,000),recognised a post-acquisition asset revaluation increment of $500,000 (deferred tax liability $100,000)and declared a dividend of $200,000.At June 30 20X7,Emborough Ltd recognised its equity in the dividend. In respect of the increase in the investment recognised in the consolidated balance sheet at June 30 20X7 of the group controlled by Emborough Ltd,a deferred tax liability would be recognised of:
A) $36,000
B) $60,000
C) No deferred tax liability would be recognised since the increase is not a temporary difference.
D) None of the above.

Question

Quizplus · Accepted Answer

The deferred tax liability is calculated on the revaluation increment. The increment is $500,000, and the tax rate is 20% (from the deferred tax liability of $100,000 on the revaluation increment). Emborough Ltd's share is 20%, so the deferred tax liability is 20% of $100,000, which is $20,000. However, the question asks for the increase in the investment, which includes the share of profit and revaluation increment. The share of profit is $80,000 (20% of $400,000), and the revaluation increment is $100,000 (20% of $500,000). The total increase is $180,000, and the deferred tax on this is 20% of $180,000, which is $36,000.

On January 1 20X7,a Parent Entity Emborough Ltd Acquired 20