fra mid term

QUESTION 1: Tax (theory)

(10 marks)

Recall that Deferred Tax Asset and Deferred Tax Liability are accounts that result from the application of AASB112 Income Taxes.
Required:

(a) Consider the components of the definitions of Assets and Liabilities from the AASB
Framework. Discuss whether DTA and DTL meet the definitions of Assets and
Liabilities, respectively, from the AASB Framework.
(6 marks)

SOLUTION TO QUESTION 1a
Asset definition:
 Arise from past event
 Expected to provide future economic benefit
 Must be controlled by the entity
Liability definition:
 Arise from past event
 Expected outflow of economic benefits
 Present obligation
Both DTA and DTL meet the first two criteria of the respective definitions, but it is questionable whether they meet the third (in both cases they need future revenues, and in the DTL case there is no current claim on the firm).

(b) Explain whether DTA and DTL meet the recognition criteria for Assets and Liabilities.
(4 marks)

SOLUTION TO QUESTION 1b
The two criteria are probability or economic benefit flow and reliable measurement
Probability: more of an issue for DTA as requires future profits
Reliability: given the numbers they are based on are reliable, there should be no issue here

1

QUESTION 2: Leases (practical)

(10 marks)

On 1 July 2011, Slade Ltd leased a machine from Carter Ltd. The machine had a fair value of $840 000 at that date. The terms and conditions of the lease are:
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The lease term is 5 years.
An annual payment of $200 000 is to be made by Slade to Carter. This payment includes a charge for insurance costs in the amount of $5000.
The asset has a 6 year useful life; the salvage value at the end of this time is zero.
The implicit interest rate on the lease is 10%
It is highly likely that Slade will keep the machine at the end of the lease.

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The present value factor of an annuity of $1 per period for 5 periods at 10% is 3.7908

You may use the following table for