An entity reporting half-yearly operates in a jurisdiction subject to a tax rate of 30%. Legislation is enacted during the first half of the current year, which reduces the tax rate to 28% on income earned from the beginning of the entity’s next financial year. Based on a gross temporary difference of 1,000, the entity reported a deferred tax liability in its most recent annual financial statements of 300 (1,000 @ 30%). Of this temporary difference, 200 is expected to reverse in the second half of the current year and 800 in the next financial year. Assuming that no new temporary differences arise in the current period, what is the deferred tax balance at the interim reporting date?
Whilst the entity uses an effective tax rate of 30% to determine the tax expense relating to income earned in the period, it should use a rate of 28% to measure those temporary differences expected to reverse in the next financial year. Accordingly, the deferred tax liability at the half-year reporting date is 284 (200 @ 30% + 800 @ 28%).
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