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Dear Tutor
I am using the BPP FR revision kit and I noticed that most of the workings and answers I got under the topic of Taxation vs a vis deferred tax/tax on revaluation/current tax account were wrong when compared with the answer in the kit. I think i am getting confused about the way the questions were framed.
Take for example this question: DR bal in current Tax account- $700,000; CR bal in deferred tax account-$8.4m; Prov for income tax for the year- $4.5m; deferred tax prov- $5.6m, $1.2m of which relates to a property revaluation. what is the income tax recognized in P&L for the yr?My workings: (i) deferred tax: $8.4-$5.6m = $2.8 increase to tax expenses, $1.2m to OCI and
$1.6m to P&L
(ii) Income tax account: 700k+$4.5m-$1.6m = $3.6m – so income tax to be
recognised in P&L is $3.6mBut the answer is $1.2m.
I don’t know what I did wrong, kindly assist with more clarification.
Thanks
Hi,
I think you’re going wrong in not using T-accounts. I’d have a go using those if you can.
Alternatively, you have made a mistake on the deferred tax. If $1.2m is related to a revaluation then the entry would have been CR DT $1.2m DR OCI $1.2m. Based on this the opening balance of $8.4m is increased to $9.6m. There is then a reduction of $4m in deferred tax (9.6 – 5.6), which reduces the tax charge through profit or loss.
The current tax expense is $5.2m, as you have above, and this is then reduced by the $4m to give $1.2m.
Thanks
Thanks for the response.
I actually used T- account, I just didn’t put it in my illustration.
So what I did was to just DR deferred tax account with the diff (8400-5600=2800) then split the 2800 into OCI & P&L.
So just to confirm I understand your explanation, I have to CR deferred tax with the revaluation amount before calculating the movement that will go to P&L. am I correct?
Thanks.
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