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Explain the impact that the change in deferred tax liability

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A local bakery constructed an oven on January 1, 2017. The construction cost includes direct material, direct labour and overheads of $20 million, $30 million and $100 million respectively. Only 70% of the total overheads is considered reasonable. The oven is expected to have useful life of 25 years and depreciated on a straight line basis to residual value of $2 million. However, the oven has a burner that is to be replaced every four years. The burner represents 45% of the assets total capitalized cost. The burner is to be depreciated using a straight line basis to a residual value of $8 million. Both the burner and the main oven attract capital allowance at 20% per annum on a straight line basis. The current tax rate is 25%.

Required:

Problem a. Determine the carrying value of the asset at the end of 2017 and 2018

Problem b. Determine the deferred tax liability balance at the end of 2017 and 2018

Problem c. Prepare the relevant financial statement extracts for 2017 and 2018

Problem d. Explain the impact that the change in the deferred tax liability between 2017 and 2018 would have on the 2018 financial statements

 

Reference no: EM132941696

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