The pre-tax profits of Radfern Ltd for the last three years (as reported in its financial statements) have been as follows:
£
Year to 31 August 2016…………… 125,000
Year to 31 August 2017…………… 130,000
Year to 31 August 2018…………… 135,000
In the year to 31 August 2016, there was a taxable temporary difference of £50,000 between accounting profits and taxable profits. £10,000 of this difference was reversed in the year to 31 August 2017 and the remaining £40,000 was reversed in the year to 31 August 2018.
(a) Assuming a tax rate of 20% throughout, demonstrate that if the company did not account for deferred tax, its profits after tax would appear to be on a downward trend, even though pre-tax profits are rising and tax rates have remained unchanged.
(b) Show the transfers that should be made to or from the deferred tax account in each year.
