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Question
“The price of property has increased significantly in recent years and on 1 October 2013, the directors decided to revalue the land and buildings. The directors accepted the report of an independent surveyor who valued the land at $8 million and the buildings at $39 million on that date. The remaining life of the buildings at 1 October 2013 was 15 years. Kandy does not make an annual transfer to retained profits to reflect the realisation of the revaluation gain; however, the revaluation will give rise to a deferred tax liability. The income tax rate of Kandy is 20%.”
Answer
“Deferred tax
Provision required at 30 September 2014- ((10,000 + 12,000) x 20%) 4,400
Provision at 1 October 2013 -(2,500)
––––––– Movement in provision- 1,900
Charge to revaluation of land and buildings -(12,000 x 20%) (2,400)
––––––– Balance – credit to profit or loss (500)
Well what i cannot understand here is that why the deferred tax was charged again on the revaluation of land and buildings after the 1900 figure?We already included that in the current year provision did not we?It’s back to debits and credits
The increase of $1,900 means that, instead of having $2,500 carried forward from debit (above) to credit (below like we had last year, this year we’re going to have $4,400 carried forward from debit (above) to credit (below)
That deals with the required provision and the movement in that provision.
Notice that the figure of $1,900 has not yet appeared within any T account, neither for Deferred Tax nor for Current Tax
But there IS a difference in the Deferred Tax Account because now we have a figure of $2,500 on the credit side brought forward from last year and a figure of $4,400 on the debit side to be carried forward into next year.
However, there has been a revaluation that has caused the need to increase that provision and the amount of deferred tax relating to that revaluation is $2,400
Because it specifically relates to the revaluation and the revaluation surplus, we should not leave it to be transferred as part of the balance to the Current Tax Account
Instead we should transfer it fro Deferred Tax Account (credit) to Revaluation Reserve (debit)
And now, instead of having a missing figure in the Deferred Tax Account of $1,900 on the credit side, we suddenly have a balancing figure of $500 on the debit side and that is debited to Deferred Tax Account and credited to Current Tax Account
OK?
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