ExpertMedium2 marksMultiple Choice
ACCA · Question 08 · Financial Reporting
Section A
BioMeat R&D Co develops lab-grown proteins. During the year ended 31 December 20X8, the company capitalized development costs of $800,000. For tax purposes, development costs are fully deductible in the year they are incurred. The company's tax rate is 25%. At 1 January 20X8, the deferred tax liability balance was $150,000. The carrying amount of the capitalized development costs at 31 December 20X8, after amortization, is $720,000.
What is the deferred tax charge or credit to the statement of profit or loss for the year ended 31 December 20X8?
Section A
BioMeat R&D Co develops lab-grown proteins. During the year ended 31 December 20X8, the company capitalized development costs of $800,000. For tax purposes, development costs are fully deductible in the year they are incurred. The company's tax rate is 25%. At 1 January 20X8, the deferred tax liability balance was $150,000. The carrying amount of the capitalized development costs at 31 December 20X8, after amortization, is $720,000.
What is the deferred tax charge or credit to the statement of profit or loss for the year ended 31 December 20X8?
Answer options:
A.
Credit of $30,000
B.
Charge of $180,000
C.
Charge of $30,000
D.
Credit of $150,000
How to approach this question
Determine the carrying amount and the tax base of the asset at year-end. Calculate the closing deferred tax liability. Compare it to the opening balance to find the movement (charge or credit) for the year.
Full Answer
C.Charge of $30,000✓ Correct
Carrying amount of development costs = $720,000.
Tax base = $0 (as costs were fully deducted for tax when incurred).
Taxable temporary difference = $720,000.
Closing Deferred Tax Liability (DTL) = $720,000 × 25% = $180,000.
Opening DTL = $150,000.
Movement = $180,000 - $150,000 = $30,000 increase in liability, which is a charge (expense) to profit or loss.
Common mistakes
Selecting the closing balance ($180,000) instead of the movement for the year.
Practice the full ACCA FR — Financial Reporting Practice Exam 6
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