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hello
Here is the question:
Prude plc’s trial balance as at 31
December, 2014 showed balances
brought forward from last year on both
the Current Tax account and the Deferred
Tax account.
The liability of $3,000 brought forward on
the Deferred Tax account was increased
to $4,500 at the end of the year due in
part to the deferred tax implications
arising from the revaluation of some of
Prude plc’s properties. The property had
been revalued by $3,200.
Prude plc’s accounts department had
calculated the tax liability based on this
year’s profits at the rate of 25% to be
$4,600 and $1,500 tax had been paid to
the State Revenue Service during the year
The tax charge in the statement of profit
or loss was shown as $7,700
What was the balance brought forward
from 2013 on the Current Tax account?Here is the answer:
Incorrect
deferred tax debits: 4,500(ok)
deferred tax credits: 3,000(ok); 800; 700
current tax debits: 700; 4,600(ok); 1,500(ok)
current tax credits: 7,700
therefore balance brought forward on
Current Tax account is $900 debitI have drawn the T accounts for current tax and deferred tax and plugged in numbers from the information but not for all.There are some numbers i can understand how to deal with them.
How should i deal with this?
The property had
been revalued by $3,200.Also help me with this:
The tax charge in the statement of profit
or loss was shown as $7,700.Isn’t the tax charge a combination of the balancing figures we get from the both the current tax account and the deferred tax account? How come in the answer, the amount of 7700 was credited the the current tax account.
Hi,
If the property has been revalued by 3,200 then the tax on this at 25% of 800 will go through OCI and not through profit or loss. So of the movement in deferred tax of 1,500 (4,500 c/f – 3,000 b/f) then 800 goes through OCI and 700 goes through SPL.
If the total tax charge is 7,700 the amount that is in relation to the current tax charge is 7,000 (7,700 – 700 deferred tax movement). If you plug this 7,000 in the tax payable T-account alongside the tax payment of 1,500 and closing balance of 4,600 then you should get the opening balance of 900.
Hope that helps.
Thanks
Can you elaborate on this part please?
If the total tax charge is 7,700 the amount that is in relation to the current tax charge is 7,000 (7,700 – 700 deferred tax movement).
The deferred tax movement is $1500, shouldn’t this amount be in the tax charge?
I think the part where the deffered tax is split is confusing. Shouldn’t the deffered tax relating to the revaluation be also in the tax charge?Hi.
The total tax expense in the statement of profit or loss is made up of the current tax (year-end tax liability adjusted for any under/over provision from PY) and movement in deferred tax. So if we are looking for the current tax element, as we are above, then we need to remove the deferred tax element from the total tax charge.
The full 1,500 deferred tax movement is all tax related but the amount in relation to the revaluation goes through OCI to match against the revaluation gain that also goes through OCI.
Thanks
So my Current tax account is now
DR Paid $1500 and c/d $4600
CR b/d ??? and SPL $ 7000Can you verify it?
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