Example of deferred tax on Subsidiary

Example of deferred tax on Subsidiary

Cost of investment	60,000
Tax Rate	15%
Subsidiary net assets	80,000

Net asset increase is due to the undistributed profit earned after the purchase of subsidiary.

Calculate the deferred tax?

Solution

Steps for Solution

1. Determine nature of Temporary difference i.e. taxable or deductible temporary difference

2. Apply the Tax Rate

Rules for determining the Temporary Difference

a. Carrying amount is greater than Tax Base = Taxable Temporary Difference = Deferred Tax liability

b. Carrying amount is less than Tax Base = deductible temporary difference= Deferred Tax Asset
c. profit will be distributed during the foreseeable future

Tip of solving the example

i.                    Carrying amount is the fair value of net assets

ii.                  Tax base is cost of investment

1. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	80,000	60,000	20,000	T.T.D*

Taxable  Temporary Difference

2. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax Liability
	20,000	15%	3,000

In above example the temporary taxable difference arises due to difference in carrying amount of subsidiary (fair value of net assets) and tax bases (cost of investment of subsidiary)