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EB Inc makes batteries and other parts for mobile devices. EB Inc operates in a non UK tax jurisdiction called FarAway. It prepares its financial statements using IFRS. Set out below are draft extracts from EB Inc's financial statements for the year ended 31 March 2022. Extracts from: Statement of comprehensive income for the year ended 31 March 2022 £000 Profit before tax 4,917 Income tax - to be completed Profit for the year 4,917 Other comprehensive income to be completed Total comprehensive income 4,917 Statement of financial position for the year ended 31 March 2022 £000 Property plant and equipment (Note 3) Plant and machinery Building Investment (Note 1) Receivables and cash (Note 3) Total assets Share capital Retained earnings Other reserves Non-current liabilities Deferred tax at 1 April 2021 (Note 2) Current liabilities (Note 3) Total equity and liabilities 45,554 9,500 12,100 10,900 78,054 20,000 24,405 6,000 5,250 3,482 18,917 78,054
Note 2 - Deferred tax liability The deferred tax liability at 1 April 2021 arises from a temporary difference in respect of plant and machinery as follows: £000 At 1 April 2021 43,554 Carrying amount of plant and machinery Tax base of plant and machinery (29,626) 13,928 Deferred tax liability at 25% at 1 April 2021 3,482 Note 3 - Timing differences Property plant and equipment In the year ended 31 March 2022, the additions to PPE comprise of: o £17,000,000 in respect of plant and machinery which qualifies for tax depreciation; and o £10,000,000 in respect of a building. No tax depreciation (tax relief) is available for the cost of the building and no tax is payable on the future disposal of the building. There were no disposals of PPE. In the year ended 31 March 2022, the depreciation expense was £15,000,000 for plant and machinery and £500,000 for the building in the statement of profit or loss.
Tax depreciation available for plant and machinery in the year ended 31 March 2022 is £8,852,000. Therefore, at 31 March 2022 o The carrying amount of plant and machinery in the statement of financial position is £45,554,000 o The tax base of plant and machinery is £37,774,000. Provisions A serious fault was discovered with one of EB Inc's battery products. On 31 March 2022 EB Inc established a provision of £6,000,000 which represents the cost of batteries expected to be returned in the year ended 31 March 2023. EB Inc also provided £800,000 for legal fees associated with claims to be made by customers. Both amounts are included in expenses and in current liabilities for the year ended 31 March 2022. In the tax jurisdiction where EB Inc operates, no tax relief is available for legal fees which are permanently disallowed for tax purposes. Tax allowance for the provision for returns will be £2,000,000 for the year ended 31 March 2022 and £4,000,000 in the year ending 31 March 2023. Other income Accrued rental income of £650,000 is included as operating income and as a receivable for the year ended 31 March 2022. EB Inc will receive the rental income in cash in June 2022. The rental income will be taxable in the financial year in which it is received in cash.
b) In respect of current and deferred tax (Notes 2 and 3): i) Set out the financial reporting adjustments required in respect of current and deferred tax for EB Inc for the year ended 31 March 2022. Include journal entries. (18 marks) 8 Please turn over ii) Explain how the Initial Recognition Exemption (IRE) applies to the building purchased by EB Inc for £10 million. (6 marks)