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calculated that the liability and equity components of the bond are $3 million for the liability component and $1 million for the equity component, giving a total amount
of the bond of $4 million. The interest rate on the bond is 6%, and local tax legislation allows a tax deduction for the interest paid in cash. Calculate the deferred tax
liability arising on the bond at the year ending December 31, 20X4. The local tax rate is 30%.
a. $1.2 million.
b. $900,000
c. $300,000
d. $4 million.
3. An entity is undertaking a reorganization. Under the plan, part of the entity’s business will be demerged and will be transferred to a separate entity, Entity Z. This
also will involve a transfer of part of the pension obligation to Entity Z. Because of this, Entity Z will have a deductible temporary difference at its year-end of
December 31, 20X4. It is anticipated that Entity Z will be loss-making for the first four years of its existence, but thereafter it will become a profitable entity. The
future forecasted profit is based on estimates of sales to intergroup companies. Should Entity Z recognize the deductible temporary difference as a deferred tax asset?
a. The entity should recognize a deferred tax asset.
b. Management should not recognize a deferred tax asset, as future profitability is not certain.
c. The entity should recognize a deferred tax asset if the authenticity of the budgeted profits can be verified.
d. The entity should recognize a deferred tax asset if the intergroup profit in the budgeted profit is eliminated.
4. An entity has revalued its property and has recognized the increase in the revaluation reserve in its financial statements. The carrying value of the property was $8
million, and the revalued amount was $10 million. Tax base of the property was $6 million. In the country, the tax rate applicable to profits is 35% and the tax rate
applicable to profits made on the sale of property is 30%. Where will the tax liability be recognized and at what amount?
a. In the statement of comprehensive income at $600,000.
b. In equity at $1.2 million.
c. In the statement of recognized income and expense at $1.4 million.
d. In retained earnings at $700,000.
5. The current liabilities of an entity include fines and penalties for environmental damage. The fines and penalties are stated at $10 million. The fines and penalties are
not deductible for tax purposes. What is the tax base of the fines and penalties?
a. $10 million.
b. $3 million.
c. $13 million.
d. Zero.
6. An entity acquired plant and equipment for $2 million on January 1, 20X9. The asset is depreciated at 25% a year on the straight-line basis, and local tax legislation
permits the management to depreciate the asset at 30% a year for tax purposes. Calculate any deferred tax liability which might arise on the plant and equipment at
December 31, 20X9, assuming a tax rate of 30%.
a. $ 500,000
b. $ 600,000
c. $ 30,000
d. $ 25,000
7. An entity has spent $10 million in developing a new product. These costs meet the definition of an intangible asset under IAS 38 and have been recognized in the
statement of financial position. Local tax legislation allows these costs to be deducted for tax purposes when they are incurred and, therefore, they have been
recognized as an expense for tax purposes. At the year-end the intangible asset is deemed to be impaired by $3 million. What is the tax base of the intangible asset at
the accounting year-end?
a. $10 million.
b. $3 million.
c. $7 million.
d. Zero
8. Which of the following examples would not give rise to a temporary difference?
a. Revenue from installment sales recognized under the installment method for taxation.
b. Recognition of goodwill in a business combination.
c. Depreciation used for accounting purposes whilst an accelerated method is used for tax purposes.
d. Warranty costs recognized for accounting purposes but not recognized for tax purposes until paid.
9. Entity X is involved in a business acquisition on January 1, 20X9. At the date of acquisition the deferred tax assets were $300,000. On January 1, 20X9, the
directors considered that realization of the deferred tax assets were not probable. What effect would this decision have on the allocation of the purchase price?
a. The unrecognized deferred tax would be allocated to goodwill, which would increase by $300,000.
b. The value of goodwill would decrease by $300,000.
c. There would be no effect on goodwill.
d. Negative goodwill of $300,000 would arise.
10. An entity has calculated its deferred tax provision as $7 million. It feels that if discounting is taken into account, the provision would only need to be $5 million.
The provision does not take into account a dividend receivable, which has been recognized in its own financial statements for $1.5 million from an 80%-owned
subsidiary. The dividend is not taxable in the country in which the entity operates. The tax rate is 30%. What is the deferred tax provision in the financial statements of
the entity?
a. $5 million.
b. $7 million.
c. $5.45 million.
d. $7.45 million.
11. An entity has the following assets and liabilities recorded in its statement of financial position at December 31, 20X9: property, plant, and equipment has a carrying
value of $15 million; inventory has a carrying value of $7 million; trade receivables has a carrying value of $6.5 million; trade payables has a carrying value of $4
million; and cash has a carrying value of $2.5 million. The value for tax purposes of property, plant, and equipment is $12 million. The entity has made a provision for