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MC Question 30

Mighty IT Co provides hardware, software and IT services to small business customers.

Mighty IT Co has developed an accounting software package.

The company offers a supply and installation service for $1,000 and a separate two-year technical support service for $500.

Alternatively, it also offers a combined goods and services contract which includes both of these elements for $1,200.

Payment for the combined contract is due one month after the date of installation.

In December 20X5, Mighty IT Co revalued its corporate headquarters.

Prior to the revaluation, the carrying amount of the building was $2m and it was revalued to $2·5m.

Mighty IT Co also revalued a sales office on the same date.

The office had been purchased for $500,000 earlier in the year, but subsequent discovery of defects reduced its value to $400,000.

No depreciation had been charged on the sales office and any impairment loss is allowable for tax purposes.

Mighty It Co’s income tax rate is 30%.

In January 20X6, the accountant at Mighty IT Co produced the company’s draft financial statements for the year
ended 31 December 20X5.

He then realised that he had omitted to consider deferred tax on development costs.

In 20X5, development costs of $200,000 had been incurred and capitalised. Development costs are deductible in full
for tax purposes in the year they are incurred.

The development is still in process at 31 December 20X5.

What adjustment is required to the income tax expense in Mighty IT Co’s statement of profit or loss for the year
ended 31 December 20X5 to account for deferred tax on the development costs?

A     Increase of $200,000
B     Increase of $60,000
C     Decrease of $60,000
D    Decrease of $200,000