deferred tax & income tax

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  • Avatar of QIN
    QIN
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    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?


    Avatar of Najiya
    Najiya
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    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.


    Avatar of QIN
    QIN
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    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!


    Avatar of Najiya
    Najiya
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    Welcome!


    Avatar of Vipin
    Vipin
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    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.


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


    Avatar of QIN
    QIN
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    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?


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


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


    Avatar of Vipin
    Vipin
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    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.


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

    plz read that again.

    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.


    Avatar of QIN
    QIN
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    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.


    Avatar of Vipin
    Vipin
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    I deliberately wrote charged to equity and i was expecting your reply :)


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


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

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