Question 5 (11 marks)

Phoenix Arrumax (PAX) Ltd has the following deferred tax balances as at 30 June 2019:

Deferred tax asset: $1 500 000

Deferred tax liability: $1 000 000

The above balances were calculated when the tax rate was 20 per cent. On 1 December 2019 the government raised the corporate tax rate to 25 per cent.

Required:

a) Provide the journal entries to adjust the carry-forward balances of the deferred tax asset and deferred tax liability. ( 6 marks)

b) In your own words, explain the rationale and the argument for recognizing a deferred tax asset and a deferred tax liability (5 marks)

ANSWER: