prepare all necessary entries in the financial statements as at dec 31 01 of a w and 613290

Non-deductible PP&

An entity paying tax at 35% acquires a building for €1 million. Any accounting depreciation of the building is not deductible for tax purposes, and no deduction will be available for tax purposes when the asset is sold or scrapped.

Recovery of the building, whether in use or on sale, has tax consequences since the building is recovered through future taxable profits of €1 million. There is a taxable temporary difference of €1 million between the €1 million carrying value of the asset and its tax base of zero.

Under the initial recognition exception, no deferred tax liability is provided for. The non-deductibility of the asset is reflected in an effective tax rate higher than the statutory rate (assuming that all other components of pre-tax profit are taxed at the statutory rate) as the asset is depreciated in future periods.

If the asset had been acquired as part of a larger business combination, the initial recognition would not have applied. Deferred tax of €350,000 (€1 million @ 35%) would have been provided for, with a corresponding increase in goodwill. As the asset is depreciated, the deferred tax liability is released to deferred tax income in the income statement, as illustrated in above. This results in an effective tax rate equal to the statutory rate of 35% (assuming that all other components of pre-tax profit are taxed at the statutory rate).