Question

Papa Corporation owns 85% of Bambina Company. Papa sold Bambina goods for $180,000 over the last year. The goods cost Papa $120,000. The tax rate is 40%, and by the end of the year 1/3 of the goods are still in Bambina inventory. If Papa and Bambina file separate income tax returns, what deferred income tax is created?                

		A deferred tax asset of $8,000.
		A deferred tax asset of $20,000.
		A deferred tax liability of $8,000.
		A deferred tax liability of $20,000.
		$0

Answer 1

Answer
Option A is correct answer
1. Deferred tax is calculated on timing differences.
2. Timing differences arises because of differences in taxable period of various income and expense items.
Calculation of amount of timing differences
Sl No	Particulars	$ Amount
1	Sale value	1,80,000
2	Cost of goods	1,20,000
3	Profit	60,000
4	Unrealized profit (1/3 of 3) (Note 1)	20000
5	Deferred tax asset (40% of 4) (Note 2)	8000
Note1: The unrealized profit will be taxed in the current fiscal year. The same will be reduced from operating profit for the purpose of accounting books.
Note2: Since company is paying tax on unrealized profit in the this fiscal year. It is equivalent to making advance payment of tax. Therefore, it is asset to the entity.

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