On 1 January 20X2, Company A buys machinery for 90,000 and depreciates it using a diminishing balance method at 30% a year. For tax purposes, the machinery is depreciated at 25% per annum on a straight-line basis. The tax rate is 30%.
What is the amount of deferred tax assets the Company A should recognize as of 31 December 20X2 relating to the machinery if it is not probable that future taxable profit will allow any deferred tax assets to be recovered?
A. Zero
B. 4,500
C. 1,350
D. 450
C. 1,350
Company A should recognize a deferred tax asset of 1,350 as of 31 December 20X2, calculated as the difference between the tax depreciation (25%) and the accounting depreciation (30%) multiplied by the carrying amount of the machinery, discounted by the tax rate (30%). However, since it is not probable that future taxable profit will allow any deferred tax assets to be recovered, the amount recognized would be zero (A. Zero). According to the principles outlined in the accounting standards, if an entity is uncertain about the recoverability of future taxable profits, no deferred tax asset should be recognized, even if there are temporary differences that would otherwise give rise to such an asset.
