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shreya says

also please explain that if the DT is calculated by calculating the difference between CA less tax base then are we taking the FV in the revaluation example 3.

(FV – Tax base) *rate% i.e (800-500)*30%

why don’t we take the CV for calculating the temporary difference.

I am so confused by reading the article on DT lol… they took the CV for the revaluation example

shreya says

hello mike,

could you please explain how do we calculate the tax written down value.. how it is 0 in this case (ex 2).

thank you

bianco says

Dear sir,

I can’t understand the answer for Q2 of Mini exercise part 8 Taxation. Why do we deduct deferred tax from tax estimated? Can you give me an explanation for the answer?

Thanks!

MikeLittle says

The second line in the answer should read “Current tax 1,200″

The question gives us the liability, not the tax charge. The 1,200 transfer from Deferred Tax is because we are reducing the deferred tax provision from 11,200 down to 10,000.

In prior years we have charged Profit or Loss Accounts / retained earnings with 11,200 deferred tax (charged through the tax charge in the Profit or Loss)

Now we decide that we didn’t need 11,200. We only need 10,000. So debit the deferred tax account and credit the current tax account. That has the effect of reducing the tax charge in this year’s Profit or Loss but has no affect on the Current Tax liability on the Statement of Financial Position

bianco says

Now, i understand the movement of deferred tax, but i still not clear about the first line of the entry in the answer. If you debit 17100 tax account and then credit it 1200, then tax charge in the SoCI is 15,900. I think the tax charge should be 18700-400-1200=17100

And the entry i would make is:

Dr Tax charge 18300

Dr Deferred tax 1200

Cr Tax charge 1200

Cr Tax payable 18300

I don’t know if i do wrong somewhere. Can you correct me?

Thanks!

MikeLittle says

Did you read my previous post? In particular, did you read the first line?

Your comment “still not clear about the first line of the entry in the answer”

The first line of the answer does not say debit the tax account. It says debit the SoCI (or Statement of Profit or Loss if you prefer to call it that)

The first line of my previous post says that the second line of the answer should not read “Cr SoCI Taxation” – it should read Cr Current Tax account (or Cr Current Liabilities if you prefer)

That leaves me with a balance to carry forward on the Current Tax Account of 18,700 liability (given in the question) and a tax charge in the Statement of Profit or Loss of 17,100

OK?

bianco says

Yes, it is pretty much clear now. I’m sorry for not reading your post carefully, if i did, i would understand it sooner.

Thanks you very much for the reply.

Mohsin says

Dear Mike,

Request your guidance to understand how do we know the amount of deferred tax to be released in future years. In example 2, 100,000 was DT in 2009, then you released 50,000 each in 2010 and 2011 . why cant we release entire 100,000 in 2010. Thanks

MikeLittle says

Because we’re comparing the company’s book value of their asset with the taxman’s value of their asset (comparing net book value with tax written down value)

In year 2, according to the working shown at the top of page 177(!) the figures are $200,000 compared with a tax value of $zero

The difference is now $200,000. Apply the tax rate to that amount and there is a deferred tax liability to carry forward of $200,000 * 25% = $50,000

But we brought forward a deferred tax liability of 25% * $400,000 = $100,000

Therefore we can release $50,000 of that $100,000 this year and next year we shall release the remainder

Is that ok?

Mohsin says

Perfectly Ok.

arman90fy says

Hi mike ,

I would like to interrupt here that , where is the £50 DT for 2010 gone !! Could plz go through again ,

Thanks

MikeLittle says

The double entry is from the deferred tax account to the current tax account and the current tax charge to PorL is reduced by this released deferred tax credit

magdeline says

Thanx for the lecturer but he is a bit fast,so i missed important points.

Thank you

MikeLittle says

Well, play it again! And again! There’s no limit to the number of times you can listen to the lecture.

And, if there’s any particular point that you don’t understand, post your question on this site on the Ask the Tutor page and I’ll get back to you

adekunle says

Hi,

Please i need help with this question which goes thus:

In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?

will this result in any treatment as Non-current asset item?

Thanks

MikeLittle says

Is this an F7 question? If it is, it almost certainly will not appear in an F7 exam!

In addition, I think that you have missed off one or two words.

I’m not really sure what “In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?” means

Are you sure that you have copied the question correctly?

adekunle says

Yea its an F7 question.

What am trying to say is this:

how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do treat the unrecoupable part as Non-current asset.

adekunle says

Yea its an F7 question.

What am trying to say is this:

how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do you treat the unrecoupable part as Non-current asset?

MikeLittle says

Well (I don’t recognise this as any F7 question I remember seeing!) if the time for recovering the overpayment has passed the I imagine you will have to write off that over-payment. It cannot be an asset if the company can no longer recover it

adekunle says

thanks. i appreciate.

MikeLittle says

You’re welcome

Asheem says

lecturer is very boring. I must confess that I feel like he is running fast on his own. sir, can u help us with better video lecture?

MikeLittle says

Sorry – but it’s as excited as I can get about deferred tax

Asheem says

I am also sorry MikeLittle, Ya it was a bit fast and my comment was also impulsive. I should not have ignore the fact that you are providing such a precious lectures free of cost from which hundreds of people from least developing countries or those who cannot attend classes due to their busy schedule are getting the benefit from.

hats off to your work.

God bless you

Asheem

MikeLittle says

Don’t worry about it!

I’ll survive

tejot says

Sir I am currently sitting for P2 exam and I got confused with the below question given in the course notes?

”

Q1.)Jurgis bought property in old town for $500,000 on 1 January, 2005. On 31 December, 2007 the property had a carrying value of $470,000 and was revalued to $800,000. The tax written down value at 31 December, 2007 was $500,000, and the tax rate is 30%.”

The Answer in course notes is

“Property (800,000 – 34,000) 766,000

Deferred tax liability (300,000 @ 30%) (90,000)

Revaluation surplus (330,000 – 14,000) 316,000

NB depreciation of 800 over 47 years = 17 pa

The 14,000 is 2 years × the difference between new depreciation (17,000) – old depreciation (10,000) ie 2 × (17,000 – 10,000) ”

However what has been taught in the question in this lecture the treatment should have been

Dr.Revaluation Reserve 90,000

Cr. Deferred Tax Liability 90,000

thereby the ending balance in Revaluation reserve (330,000 – 90,000)=240,000 Cr.

Please help me understand which treatment is coherent with the latest standards.

Thank you

narek01 says

Hi my friends, unfortunately I could not understand Example 2 deferred tax computation. Please explain again with more details.

fahim231 says

I am so confused!

nabila5690 says

Hi,

I have a small query regarding example 2.

I understand how we arrive at the deferred tax calculation and that the 100 000 has to be released.

However I am struggling to understand why the 100 000 is released in amounts of 50 000 each year?

Also what happens to the deferred tax of 50 000 from 2005?

Help will be much appreciated.

Thanks

manonaseriousmission says

hi melodyamio and hassanhere, i think what i explained here below might help:

Melodyamio, no the TD in 06 is not 400 but 200. It’s temporary difference being 50 (200×25%)

Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:

CV 2100 – Tax base (2300) = 200 x 25% = 50

but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:

CV 2300 – Tax base (2500) = 200 x 25% = 50

Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

2004 2005 2006

PBT (after taking out deprcn) 1600 2100 2300

LESS: Income Tax

– CT (300) (575) (675)

– DT (100) 50 50

PAT 1200 1575 1675

Hope this helps mate

All the best

manonaseriousmission says

for some weird reason, a key part in my explanation (before i started calculating the DT figure for 2005 and 2006) have yet again been omitted. It is really freaky cos that’s the only bit that keeps getting wiped out, thereby potentially making it a little difficult to follow through my entire explanation. or could it be my computer?

anyway, if you drop me your email i can send the full explanation and hopefully you will get it right this time.

cheers

manonaseriousmission says

melodamiyo and hassanhere, i think what i have explained here might help.

help I gave on Open Tuition (IAS 12 – F7)

hi, no the TD in 06 is not 400 but 50.

Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:

CV 2100 – Tax base (2300) = 200 x 25% = 50

but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:

CV 2300 – Tax base (2500) = 200 x 25% = 50

Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

2004 2005 2006

PBT (after taking out deprcn) 1600 2100 2300

LESS: Income Tax

– CT (300) (575) (675)

– DT (100) 50 50

PAT 1200 1575 1675

Hope this helps mate

All the best

maat9 says

hello sir . IAS 36 is existed in f7 lecturesss why???

melodymiao says

I’ve got a question in the example 2, when calculating deferred tax, I think the temporary difference in 06 is 400 and the deferred tax asset is 100, but the number shown in the video clip is 50, how can this be? thx.

hassanhere says

Did anyone figure out? :/

manonaseriousmission says

hi, no the TD in 06 is not 400 but 50.

Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:

CV 2100 – Tax base (2300) = 200 x 25% = 50

but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:

CV 2300 – Tax base (2500) = 200 x 25% = 50

Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

2004 2005 2006

PBT (after taking out deprcn) 1600 2100 2300

LESS: Income Tax

– CT (300) (575) (675)

– DT (100) 50 50

PAT 1200 1575 1675

Hope this helps mate

All the best

manonaseriousmission says

quick correction on my first paragraph, i meant that the TD in 06 is (still) not 400 but 200, it is the TD I meant to put as 50 (i.e. 200×25%)

Every other point remains valid..i hope

manonaseriousmission says

I THINK MY COMPUTER OMITTED SOME VITAL PART OF MY EXPLANATION, PLEASE SEE BELOW FOR REVISED. IT SHOULD MAKE MORE SENSE NOW. SORRY FOR ABOVE POST.

hi, no the TD in 06 is not 400 but 200. It’s temporary difference being 50 (200×25%)

CV 2100 – Tax base (2300) = 200 x 25% = 50

CV 2300 – Tax base (2500) = 200 x 25% = 50

So the final computation will look something like this

2004 2005 2006

LESS: Income Tax

– CT (300) (575) (675)

– DT (100) 50 50

PAT 1200 1575 1675

Hope this helps mate

All the best

jivanjee says

hi all -the 100 is the figure for 2004 (400 temporary diff times 25%) – you have to bring it down to 50 (which is 200 temp diff times 25%) in 2005 thus you release 50 only. and then in 2006 you have to bring the 50 of 2005 idown to 0 ( 0 temp diff of 2006 times 25%)

hope i make sense – took me 2 days to figure out

fatema

Mahoysam says

Hi Mr Mike!

I really find this tax topic is a pain!!

I have a question, when we were calculating the deferred tax, for first year it was $100, for the second year you said “reduced liability of $50″, when you said reduced liability you mean as compared to the $100, but it is still a deferred tax liability, it is not a reduction of liability because we did ignore it at the end, we only released the liability of the $100, I am not sure why. I am also confused about the way we released the $100 liability, why did we release it over two years? Is there a rule or something, or is it left to our choice, why not release the full $100 in next year in one go and that’s it. I am not sure based on what!

I hope this topic does not come in the exam!

Thanks a lot!

Maha

Mahoysam says

Also, since we are releasing $50 in year 05, does that mean that the current tax figure includes this $50? I am really confused!

yan says

I hope the same thing

tejot says

I have the same query. Did you guys figure out an answer?

shyamkumar says

The Asset has a life of only 3 years as per ques… In the first year the full Cap allowance has been applied and that leaves us with only 2 year balance.. so we need to divide the deferred tax Liability over the next 2 years in order for it to get realised … Hope this make more sense now….

didkata says

Not happy with the explanation

Monic says

Thank you for the lecture. I have a question from Ex. 2. After releasing the deferred tax liability of 100 in 2005 2006 with 50, 50, what happens to the deferred tax liability of 50 which was in 2005?

nari says

hello monic, did u figure it out?

Monic says

Hi, let me try to analyze Jivanjee’s explanation of Oct. 22nd and see if I figure it out, but Income tax & deferred tax are giving me hard time.

crye says

Thanks.

Ref. IAS 12 INCOME TAXES, EXAMPLE 2 — Up to the point of DT, everything is totally clear for me. I’m just wondering:

1-Why is Tax Value = 0? (Only guess is because 100% tax all’nce was claimed and so asset written down to 0?)

2-Could an amount of DT other than 50 be released in later years 05, 06 etc? In other words, why 50 specifically?

Thanks!

Shivam says

Just a quick question relating to Example two. Just a bit confused as to why the tax value is 0?

Thanks!

manonaseriousmission says

Hi, first i noticed you posted this before the June exam and you may well have cleared the paper. But just for others are yet to sit for the exam like myself I will give my opinion.

I’m presuming that what you are referring to is the Deferred Tax liability value of zero given at the end of 2006, right?

If so, we have established that the DT for 2004 is 100, DT asset in 2005 of 50 and another DT asset in 2006 of 50.

Since asset life is only 3 years as per Q, the DT assets of 50 in both 2005 and 2006 would have netted off completely the DT liab of 100 that’s in the first year.

So in 2004, DT will remain as 100,

then in 2005, the Deferred Tax liability will be reduced to 50 (since there is a DT ASset of 50), which is why I think Mr Moffat put DT out as 50 in 2005

and by the final year 2006, there will no longer be any DT liability since the remaining, hence the reason he recorded it as 0

Monic says

Thx Manona for your explanation.

But you will notice that when the lecturer was computing the DT, he used the carrying value of the asset which was 400, 200, 0, comparing it with the tax value of 0,0,0, thus bringing about the TD of 400,200,0. These give rise to the DT liability of 100 (25% of 400), 50 (25% of 200) and 0 in 2006.

According to his explanation, he said that out of 100 of 2004, 50 was released in 2005 and another 50 in 2006. My concern still remains, what is the fate of the DT liability of 2005?

halarbijarani says

Not very well explained.. didn’t understand the Lecture. Plz update it with new one.. Although all other lectures are best then ever.. but not this one.

admin says

Read this chapter in the course notes

Maybe this will help

halarbijarani says

@admin, Yup .. thats the only option Thanks btw.

nari says

my question is the same as the others (ryanpieblock and Monic)….after the 100 has been released in 05 and 06 , what happens to the 50 that was calculated as 25% of the 200 in 2005??? Please explain. Thanks.

Monic says

I have tried to read and even follow the lecture many times, but up to now I don’t get it. Deferred tax of $100 in Yr 1, then release $50 in Yr 2, implying there is a balance of $50 which is presumably released in Yr 3. What happens to the $50 which was for Yr 2?

noldis says

Very quick overview of taxes – hard to follow and understand the topic. I guess I will have to look at F6 course notes to review this topic once again

abesha says

ryanpieblock let me explain what I understand from the tutor & the logic too. the 100 deffred tax was crated due to the tax allowance for the year 2X4 this 100 deffred tax is an asset for Andris but for the year 2X5 and 2X6 cretd a liablity of 50 each then this 100 off split the 50 for the year 2X5 and the remaining for the year 2X6

nari says

i understand what u say up to “a liability of 50 each”. After that i’m lost. If u cud explain the last part in another way i wud appreciate it very much , thanks.

ryanpieblock says

hello sir if we release 50 out of the 100 deferred tax liability in 05 and then another 50 in 06. what happen to the deferred tax liability of 50 25% of 200 in 05??? when do we release it???

marjorie1 says

Hey all,

Trust F7 tutor is helping u as must as he’s helping me revise for the grand day. June 13th.