Wholly owned Subsidiary has the following balances at control date 20X1:
$$\begin{array} { l l }
\text { Capital } & \$ 500000 \
\text { Asset revaluation reserve } & \$ 200000 \
\text { Retained profits } & \$ 100000
\end{array}$$
Parent paid $900 000 for the shares of Subsidiary.The tax rate is 30%.
Subsidiary assets are at fair value except for inventory, which the Subsidiary measures at $20 000.Under group policy the amount would be $10 000.
In the consolidation there will be a deferred tax liability of $3000.

Question

Wholly owned Subsidiary has the following balances at control date 20X1:
 $$\begin{array} { l l } 
\text { Capital } & \$ 500000 \
\text { Asset revaluation reserve } & \$ 200000 \
\text { Retained profits } & \$ 100000
\end{array}$$ 
Parent paid $900 000 for the shares of Subsidiary.The tax rate is 30%.
Subsidiary assets are at fair value except for inventory, which the Subsidiary measures at $20 000.Under group policy the amount would be $10 000.
In the consolidation there will be a deferred tax liability of $3000.

Quizplus · Accepted Answer

The deferred tax liability should be calculated on the temporary difference between the tax base and the carrying amount of the inventory. The difference is $10,000 ($20,000 - $10,000), and applying the tax rate of 30% results in a deferred tax liability of $3,000. However, the question implies that this is incorrect, possibly due to a misunderstanding or miscalculation in the context provided.

Wholly Owned Subsidiary Has the Following Balances at Control Date