On 1 January 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 30 June 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 30 June 20X7,Emborough Ltd recognised its equity in the dividend. In respect of the increase in the investment recognised in the consolidated balance sheet at 30 June 20X7 of the group controlled by Emborough Ltd,a deferred tax liability would be recognised of:

A) $36 000.
B) $60 000.
C) zero because the increase is not a temporary difference.
D) none of the above.

Question

yamillet estrada · Accepted Answer

Final Answer : A, Explanation :  The increase in the investment recognized in the consolidated balance sheet includes the share of profit and the post-acquisition asset revaluation increment. The share of profit after tax is $400,000, of which Emborough Ltd's share is 20%, equaling $80,000. The post-acquisition asset revaluation increment is $500,000, with a deferred tax liability of $100,000, of which Emborough Ltd's share is 20%, equaling $20,000. The total increase is $100,000, and the deferred tax liability on this increase is 20% of $100,000, which is $20,000. However, the question specifically asks about the deferred tax liability recognized due to the increase in the investment, which would be based on the revaluation increment's deferred tax portion that Emborough Ltd recognizes, which is $20,000. The provided choices do not directly match this calculation, suggesting a possible misunderstanding in the question's interpretation or a mistake in the calculation. Given the options, none directly align with the calculated figure, indicating a need for clarification or reevaluation of the provided choices and the calculation method.

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