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Hi, I’m confused about the questions in Revision Kit with regards to tax. For example:
Comp’s TB shows a debit bal of $0.7m on curr tax and a credit bal of $8.4m on deferred tax. The directors estimated the provision for income tax for the year at $4.5m and the required deferred tax provision is $5.6m, $1.2m of which relates to property revaluation.
What is the p/l income tax liability for the year?In the answer they compute it like this: 0.7+4.5-2.8-1.2 = 1.2m (2.8 being a movement on deferred tax liab).
However, the under provision of previous year’s tax plus current tax liability plus movement on deferred tax is an income tax expense/charge to be shown on SPL and not an income tax liability to be shown on the SFP.
And also, shouldn’t the $1.2 (relating to property revaluation) be eliminated from the movement on the deferred tax acc and so added and not subtracted from 2.8 when calculating tax to be charged to SPL?
Could you please clarify? Thank you in advance!
Hi,
I always believe that best solution is to use a T-account. You can include the opening balances per the TB, the closing balances as given in the additional information, and then you can adjust for the impact of the revaluation by removing the $1.2m from the closing deferred tax liability.
Have a go and see if you get the answer as per the revision kit. If you don’t then come back to me, but T-accounts are always the solution to life’s mysteries!
Thanks
Hi, I tried to use t-acc but its a nonsense what I’ve got there. That’s what I have:
1)left side:
b/f 0.7 (opening debit bal on current tax)
c/f (closing bal on current tax acc should be current year provision+under-prov from last year so 0.7+4.5) 5.2
c/f 5.6 (closing balance on DT acc should be required DT provision)2)right side
b/f 8.4 (opening credit bal on DT acc)
4.5 (current year provision)Difference between left and right side is 1.4.
HELP!
Please advise, thanks a lot!
Hi,
Good to see you’ve given it a proper attempt.
1) Left (debit) side – you’ve got the 0.7 b/f balance correct but the c/f balances are both incorrect. You need to adjust the 5.6 by removing the amount related to the revaluation of 1.2, so this becomes 4.4, and you also only need to include the 4.5. I’m not sure why you’re including the 0.7 again.
2) Right (credit) side – you’ve got the b/f balance correct but that is then the only entry before the T-account is balanced-off.
This will now give you the 1.2 that you are looking for.
Thanks
Hi,
I’m getting lost so please let me ask you some additional questions.
1.
When they ask for tax liability for a year – do they mean the current +deferred tax liability?2.
I’m including 0.7 again because the provision for current’s year tax should be 4.5 – if there is already a debit (so an underprovision) of 0.7 (b/f) we have to book (4.5 +0,7) to get the 4.5 credit balance on the current tax account, don’t we? Please let me know if you agree with me?3.
With regard to your entries – so the account should look like this? Please see the following:DR 0.7 b/f
DR 4.4 (new entry)
DR 4.5 (new entry)
CR 8.4 b/fThe difference between debits and credits is indeed 1.2 but why do we book 4.5 on the left side (debit) if this is a current year provision and a provision for tax should be a credit entry as this is a liability?
And if the required deferred tax provision should be 5.6 instead of last year’s 8.4 – why do we book 4.4 on the left (debit) side if 4.4 should be the closing credit balance for deferred tax?
I just don’t get it. I quess I’m missing something but I can’t figure out what it is.
I’d be grateful for your help. Thanks.
Hi,
1. If it does not say deferred tax liability, then I’d assume that it is the current tax liability.
2. No, the 0.7 is already recorded in the TB and is the underprovision, the additional information is just confirming this. By adding it in again then we would be double counting it.
3. The key is that the closing liability is on the debit side ready to bring forward as the opening credit balance at the start of the next accounting year.
Hope that gives you the answers that you require.
Thanks
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