Mahagony Ltd purchased a new freestanding industrial waste disposal unit at a cost of 1,392,000 on 1 September 2018. The company is planning to use the new waste disposal unit for 6 years after which they expect to sell it for 150,000. The new unit qualifies for an annual investment allowance of 200,000 in the year ending 31 March 2019. The capital allowances available thereafter are 18% per annum.

Mahagony Ltd prepares accounts annually to 31 March and charges depreciation monthly on a straight-line basis.

The corporation tax rate applicable to Mahagony for the year ending 31 March 2019 is 22% and for the year ending 31 March 2020 is 24%.

Required:

(a) Calculate the deferred tax liability for the financial year ending 31 March 2019 and 31 March 2020, in relation to the waste disposal unit acquired by Mahagony Ltd. Prepare the appropriate journal entries and extracts from the financial statements for each year.

(12)

(b) As you might expect, there has been a history of disagreement within accounting profession over the method to use to calculate the [deferred tax] provision.

(Elliott and Elliott, 2019)

Explain the accounting treatment of deferred tax required by IAS 12 Income Taxes. Critically appraise this approach and explain what other methods could be used.