Knights Ltd purchased inventory from its subsidiary,Gidley Ltd,for $20 000.The goods originally cost Gidley Ltd $12 000.The company tax rate is 30%.Assuming that all of the inventory was still on hand at the end of the year,which of the following consolidation adjustment entries is required?
A)Dr Tax expense $2400; Cr Deferred tax liability $2400
B)Dr Tax expense $2400; Cr Deferred tax asset $2400
C)Dr Deferred tax asset $2400; Cr Tax expense $2400
D)Dr Deferred tax liability $2400; Cr Tax expense $2400

Question

Quizplus · Accepted Answer

The unrealized profit on the inventory is $8,000 ($20,000 - $12,000). The tax effect on this unrealized profit is $2,400 ($8,000 x 30%). Since the profit is unrealized, a deferred tax asset is recognized, hence Dr Deferred tax asset $2400; Cr Tax expense $2400.

Knights Ltd Purchased Inventory from Its Subsidiary,Gidley Ltd,for $20 000