Question

As a tax consultant, you receive tax forms and financial reports from various companies. Following are independent cases in which you have to check the given numbers in bold and decide whether it is correct or not. If it is wrong, then you have to provide (a) the correct answer with detailed calculations and (b) explanations of your answers including the appropriate accounting treatment of the various transactions.

B. ZMAN Company reported a taxable income of $400,000 for 2019. The cumulative taxable temporary differences on 1/1/2019 were $225,000 and on 31/12/2019 were $160,000. The tax rate is 40% for 2019 and 30% for future years. Based on the above information, the company’s accountant reported a pretax financial income of $560,000. Do you agree with the reported numbers?

Answer 1

Reporting Of Taxable temporary Difference on 31/12/2019 of $ 160,000 is correct as it was arrived as Taxable Income - Financial Income = 560,000 - 400,000 = $ 160,000

The Tax rate for future period is 30%, the Deferred tax Asset of $160,000*30% = $ 48,000 is to be recognised.

And the Comparitive DTA for the Previous year has to be re instated as if the tax rate is 30% in the current year too

That is DTA is 225000*30% = $ 67,500 for the last year as a comparitive figure.