# deferred tax & income tax

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This topic contains 14 replies, has 3 voices, and was last updated by  Vipin 2 years, 11 months ago.

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• QIN
Participant

Dec 07 Q2-Llama, from question condition ii, how to understand income statement:
income tax expense (18,700-400-(11,200-10,000))

especially, I cant understand:
1) from the question, deferred tax is 11,200,from item ii, deferred tax is 25%X40m,what’s there difference?
2)each’s in Cr side or Dr side?

Najiya
Participant

Tax expense in IS is calculated as follows:
Current year tax + prior year under-provision or (- prior year over-provision) + movement in Deferred tax

In this question, current year tax given as \$18.7m
In the trial balance, there is a credit balance of \$400,000 in Income Tax account. i.e, a prior year over-provision. [If debit balance, it is an under-provision].
Deferred tax shown in the trial balance is the opening balance. We need to calculate the closing balance with the help of given information.
Deferred tax is the tax on temporary differences. In the question, it is given that “there were \$40m taxable temporary differences.” Tax @ 25% = \$40m*25% = \$10m. This should be the closing balance.
Trial balance shows 11.2m deferred tax.
movement in deferred tax = closing 10m – opening 11.2m = (1.2m)

Tax expense in IS (in \$000)
Current year tax 18,700 – over-provision 400 + movement in deferred tax (1,200) = 17,100.

QIN
Participant

Thank you so much, Najiya. I v written what you said down on my paper for review later. I have troubled with this problem all the time. Now I can understand and work it out.Thank you!

Najiya
Participant

Welcome!

Vipin
Participant

In case,
trial balance shows tax , either credit or debit, then it implies that it is either overprovision or underprovision.

i remember it as COP, (C)redit implies(O)ver(P)rovision. quick way to recollect.

QIN
Participant

yes, u r right, should be deducted when calculating income tax expense if credit side.

QIN
Participant

Hi Vipin,Najiya, Dec. 2011-Q2 Keystone, from examiner’s Deferred tax calculation is
(v) Deferred tax
Provision required at 30 September 2011 ((15,000 + 8,000) x 30%) 6,900
Provision at 1 October 2010 (2,700)

Increase required 4,200
Transferred from revaluation reserve (w (iv)) (2,400)

Balance: charge to income statement 1,800

My working is
1) NCL-leased property NBV 40,000
revaluation 48,000
Gain on R.R. 8,000
including deferred tax:8,000×30%=2,400, so net gain 5,600

2) closing bal. of deferred tax: tax base difference 6,900=15,000X30%+2,400 (from revaluation of leased property deffered
opening bal. 2,700
so, movement is 4,200 charging to IS.

What do you think? I cant understand Transferred from revaluation reserve (w (iv)) (2,400). From the question, we know condition ii The revaluation gain will create a deferred tax liability. So 2,400 should be added to deferred tax, why transfer out then?

Vipin
Participant

opening deferred tax ________2700
charged to IS(balancing fig)___1800
charged to equity(8000*30%)__2400
closing deferred tax _____ ____6900

QIN
Participant

charged to equity(8000*30%)__2400 Why to equity? I think it’s part of deferred tax

Vipin
Participant

you refer the solution of DEXON, this amount is charged to revaluation reserve.

if u ask me,why they do that step? i dont know.

Najiya
Participant

http://opentuition.com/groups/f7-financial-reporting/forum/topic/deferred-tax-incl-revaluation-reserve-part/

entry is
Dr. Revaluation reserve
Cr. Deferred tax
It is part of deferred tax…no doubt.
instead of charging to IS, we are charging it to revaluation resreve.
you said net gain is 5600. while revaluing we credit revaluation reserve wit 8000. for deferred tax, we debit revaluation reserve with 2400. now 5600 – credit balance. same as you said…net gain 5600.

QIN
Participant

yes, yes, my mistake. Same as Dexon June 08. Total movement is 4,200, but 8000X30%=2400 debit to R.R., R.R.’s movement is 5,600, so IS charge is 1,800. Thank you so much! will never wrong for it, i promise.

Vipin
Participant

I deliberately wrote charged to equity and i was expecting your reply

QIN
Participant

You may be disappointed in me. Sorry, Vipin:(

Vipin
Participant

no disappoinments, caoqin. Are u from china? ur name is like chinese name !!!

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