F7 Exam December 2011 – Question 2 – deferred tax

Each year, the tax-written-down value of all the TNCA will be compared with the net book values (carrying values). At the year end, the difference is then multiplied by the tax rate. So, the carrying value as at 1 October, before the year’s depreciation is 8 million.

I don’t know if that answers it – if not, post again

Hi – never thought of this before so thank you for bringing it to my attention. I’ll maybe need to look again at this again!

Hi – sorry, I’ve not forgotten you – just got some friends over from the UK and personal time for opentuition is very limited. Anyway, try this! When the asset is revalued, the deferred tax is calculated and adjusted as at the date of revaluation by increasing the liability to carry forward and charging the debit either to current tax account or to revaluation reserve. Important to see that the deferred tax liability has been adjusted.

As at the end of the year, the deferred tax liability to carry forward is re-assessed (this is done annually) and, at that time, the taw written down values of the assets will be compared with the net book values of the assets. The difference between these two amounts is then ….. as above. In an F7 exam, you will be given either the difference and the tax rate OR you will be given the liability to carry forward

But in both cases, the deferred tax liability will be increased on the event of the revaluation and the deferred tax related to that revaluation should be charged to the revaluation reserve (it isn’t always in an F7 exam, but the examiner will tell you what to do)

Is that better?

Hi

I’m sorry about this but I’m not prepared to go through all the lengthy disclosure required by this question!

Tell me which bit of the answer it is that you don’t understand and I’ll explain it to you but you cannot in all honesty expect me to detail all the disclosure notes

For 2003 the difference between net book value of assets 1,230 (5,566 – 4,336) and the tax base of those assets (441) is 789

789 multiplied by the tax rate for 2003 is 789 x 22% = 173.58 (as per the question) and that’s the deferred tax liability on the PPE for 2003

Using the same principles for 2004, the deferred tax position would seem to be 2,944 (given in the question) – 220 (again, per question) multiplied by 20%

So 2,724 x 20% = 545 to carry forward in the deferred tax account related to PPE. This represents a movement on deferred tax of 371 (545 – 174). 371 will therefore be credited to deferred tax account and debited to current tax account. This will increase the charge to the statement of profit or loss in the tax figure by 371

I don’t have enough information to be able to calculate the current tax and I’m not convinced that you’ve given me enough information to be certain that I have completed the deferred tax calculation correctly

I just hope that what I have given you is enough to answer your problems

No, I’ve already dealt with the 174 brought forward deferred tax balance and I’ve also already said that I don’t have all the information necessary to calculate the current tax liability

You’re getting worked up over (probably) only a two mark mcq! It’s been a long long time since a question purely on the calculation of tax was asked – there’s a whole paper (F6) asking about your tax knowledge so why ask more in F7?

(The taxable difference in the depreciation is taken into account in the deferred tax calculation)