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Question 3b

(b) Kappa prepares consolidated financial statements to 30 September each year. During the year ended 30 September 2013 Kappa entered into the following transactions:

(i) On 1 October 2012, Kappa purchased an equity investment for $200,000. The investment was designated as fair value through other comprehensive income. On 30 September 2013, the fair value of the investment was $240,000. In the tax jurisdiction in which Kappa operates, unrealised gains and losses arising on the revaluation of investments of this nature are not taxable unless the investment is sold. Kappa has no intention of selling the investment in the foreseeable future. (5 marks)

(ii) On 1 August 2013, Kappa sold products to Omega, a wholly owned subsidiary operating in the same tax jurisdiction as Kappa, for $80,000. The goods had cost Kappa $64,000. By 30 September 2013, Omega had sold 40% of these goods, selling the remaining 60% in October and November 2013. (6 marks)

(iii) On 31 March 2013, Kappa received $200,000 from a customer. This payment was in respect of services to be provided by Kappa from 1 April 2013 to 31 January 2014. Kappa recognised revenue of $120,000 in respect of this transaction in the year ended 30 September 2013 and will recognise the remainder in the year ended 30 September 2014. Under the tax jurisdiction in which Kappa operates, the $200,000 received on 31 March 2013 was included in the taxable profits of Kappa for the year ended 30 September 2013. (4 marks)

Required: 
Explain and show how the tax consequences (current and deferred) of the three transactions would be reported in the statement of financial position of Kappa at 30 September 2013 and its statement of profit or loss and other comprehensive income for the year ended 30 September 2013.

Note: The mark allocation is shown against each of the three transactions above.

You should assume that:
– The rate of income tax in the jurisdiction in which Kappa operates is 25%.
– Both Kappa and Omega are profitable companies which consistently generate annual taxable profits of at least $1,000,000.

In answering this part, you do NOT need to consider the possible offset of deferred tax assets against deferred tax liabilities.