Harmonise plc is a plastic toy manufacturer. Its toy sales have been adversely affected by imports and it has been changing towards the supply of plastic office equipment. Profits are expected to continue to fall for the next four years when they are expected to stabilise at the 1999 level. There will be a regular programme of plant renewal.

The following information is available:

Assume a corporation tax rate of \(33 \%\). On 1 March 1995 there was a nil balance on the deferred tax account.
Required

(a) (i) Prepare the profit and loss and balance sheet extracts for corporation tax and deferred taxation for the four years 1996-1999 using the following methods (1) Flow-through (2) Full provision [This part of the question is no longer applicable.]
(3) Partial provision Notes to the profit and loss account and balance sheet are not required.
(ii) Calculate the deferred taxation using the partial provision method for the balance sheet as at 30 April 1996 arising from the following information on debentures.
Harmonise plc had \(£ 1\) million \(10 \%\) debentures in issue at 30 April 1996 on which interest was payable half yearly in arrears on 1 May and 1 November each year. The company proposes to repay \(£ 400000\) on 30 April 1998 with all interest due and a further \(£ 200000\) on 30 April 1999 with all interest due.

(b) Discuss arguments for and against each of the three methods in

(a) (i) above.

(c) Assuming that all of the shares in Harmonise plc were acquired for cash by Grab plc on 1 May 1995, explain the factors that would be taken into account in determining the fair value of deferred tax as at the date of acquisition. Grab plc applies the partial provision method.

Transcribed Image Text:

Year ended 30 April Profit before depreciation and tax Capital allowances Depreciation 1996 1250 000 400 000 80000 1997 1200000 80000 160000 1998 1100000 80000 240000 1999 1 000 000 560000 160000