Jurgita’s profit from operations before royalty income is $700,000 per annum. In 2009 she was entitled to a one off royalty receipt of $60,000, which she eventually received in 2010. Income tax is 25% Extracts from Statement of Profit or Loss and Other Comprehensive Income 2009 2010 $’000 $’000 Profit from operations 700 700 Royalty receivable 60 760 700 Income tax @ 25% on taxable profits (175) (190) Profit after tax 585 510
Taxable profits
$’000 $’000 Profit from operations 700 700 Royalty received – 60 700 760 Income tax @ 25% 175 190 Show how the entity provides for deferred tax on the temporary timing difference.

Question: why should the $60 000 royalty received be added to the $700 000 profit from operation to calculate the income tax in 2005 but not in 2004, the year the company accounted for it?

Indeed, a too fast explanation. I was able to understand everything only after reading the Kaplan Study Text. Kaplan for F7 is way better than BPP Study Text.

Beside the fact that it stimulates investment to new assets as you said in 9:26 of your lecture but you see that it increases profit,so i i would think is an income like revaluation gain.

In example 2 Andris buys an asset at the beginning of 2009 for $600 000. It has a useful life of three years and is scrapped at the end of its useful life. its profits over the next three years are:
1,800 (2009), 2,300 (2010), 2,500 (2011).

A first year tax allowance of 100% is available on this asset.
The tax rate for Andris is 25%.

Question : When calculating deferred tax for 2009, the book value is $400 000 and the tax value is 0 due to the first year 100% allowance. The deferred tax liability is therefore $100 and you release this over the next two years to write it off. But the book value in 2010 is $200 000, which gives a deferred tax liability of $50 for 2010. What happened to the deferred tax liability for 2010? i do not see where you wrote it off.

Your assistance will be deeply appreciated as usual sir.

The movement in the dferred tax account is double entered to the current tax account

That account in turn is balance off with the missing figure geeing double entered to the statement of profit or loss

Does that answer you?

It was fortunate that I saw this question – I rarely look at “latest comments”. In future, if you want to be sure that I answer your questions, post them on the “ask ACCA tutor” page

How do I treat under/over provision of taxes? I know that over provision is always on credit side of trial balance, so do I deduct over provision and add under provision of tax in profit or loss statement?
Thank you.

Which question? Please give me a question name and the page number in the course notes – and post your response on the Ask the Tutor forum – that way I shall be sure of seeing your post

Hello,
Can anyone help me with this question?
-“-“-
For the year ended 31 july 2011 Norman made taxable trading profit of $1200000 on which income tax is payable at 30%..
a) A transfer of $20000 will be made to deferred taxation account. The balance on this account was $100000 before making adjustments for items listed in this paragraph.
b) The estimated tax on profits for the year ended 31 July 2010 was $80000, but tax has now agreed at $84000 and fully paid.
c) tax on profits for year 31 July 2011 is payable on 1 may 2011.
Required:
1) tax charged for 1 may 2012
2) tax liability in sfp at 31 july 2011

Brought down balance of $100,000
Transfer to Current Tax Account $20,000

In the Current Tax Account:

Debit side:

Transfer from Deferred Tax Account $20,000
Cash paid $84,000
Carry down liability $360,000

Credit side:

Brought down liability $80,000
Current year tax $384,000 to SoPoL

So that was my answer.

But I have serious doubts about $20,000 transfer TO the deferred tax account.

I have interpreted this as an increase in the deferred tax balance but it could equally well be a decrease. If it is intended to be a decrease, then the double entry to record that $20,000 would be Debit Deferred Tax Account $20,000 and Credit Current Tax Account $20,000

This would change the balance to carry forward in Deferred Tax Account to $80,000 and would change the charge to the Statement of Profit or Loss to $344,000 ( the $360,000 would remain the same)

also please explain that if the DT is calculated by calculating the difference between CA less tax base then are we taking the FV in the revaluation example 3.
(FV – Tax base) *rate% i.e (800-500)*30%

why don’t we take the CV for calculating the temporary difference.
I am so confused by reading the article on DT lol… they took the CV for the revaluation example

Dear sir,
I can’t understand the answer for Q2 of Mini exercise part 8 Taxation. Why do we deduct deferred tax from tax estimated? Can you give me an explanation for the answer?
Thanks!

The second line in the answer should read “Current tax 1,200”

The question gives us the liability, not the tax charge. The 1,200 transfer from Deferred Tax is because we are reducing the deferred tax provision from 11,200 down to 10,000.

In prior years we have charged Profit or Loss Accounts / retained earnings with 11,200 deferred tax (charged through the tax charge in the Profit or Loss)

Now we decide that we didn’t need 11,200. We only need 10,000. So debit the deferred tax account and credit the current tax account. That has the effect of reducing the tax charge in this year’s Profit or Loss but has no affect on the Current Tax liability on the Statement of Financial Position

Now, i understand the movement of deferred tax, but i still not clear about the first line of the entry in the answer. If you debit 17100 tax account and then credit it 1200, then tax charge in the SoCI is 15,900. I think the tax charge should be 18700-400-1200=17100

And the entry i would make is:
Dr Tax charge 18300
Dr Deferred tax 1200
Cr Tax charge 1200
Cr Tax payable 18300

I don’t know if i do wrong somewhere. Can you correct me?
Thanks!

Did you read my previous post? In particular, did you read the first line?

Your comment “still not clear about the first line of the entry in the answer”

The first line of the answer does not say debit the tax account. It says debit the SoCI (or Statement of Profit or Loss if you prefer to call it that)

The first line of my previous post says that the second line of the answer should not read “Cr SoCI Taxation” – it should read Cr Current Tax account (or Cr Current Liabilities if you prefer)

That leaves me with a balance to carry forward on the Current Tax Account of 18,700 liability (given in the question) and a tax charge in the Statement of Profit or Loss of 17,100

Yes, it is pretty much clear now. I’m sorry for not reading your post carefully, if i did, i would understand it sooner.
Thanks you very much for the reply.

Request your guidance to understand how do we know the amount of deferred tax to be released in future years. In example 2, 100,000 was DT in 2009, then you released 50,000 each in 2010 and 2011 . why cant we release entire 100,000 in 2010. Thanks

Because we’re comparing the company’s book value of their asset with the taxman’s value of their asset (comparing net book value with tax written down value)

In year 2, according to the working shown at the top of page 177(!) the figures are $200,000 compared with a tax value of $zero

The difference is now $200,000. Apply the tax rate to that amount and there is a deferred tax liability to carry forward of $200,000 * 25% = $50,000

But we brought forward a deferred tax liability of 25% * $400,000 = $100,000

Therefore we can release $50,000 of that $100,000 this year and next year we shall release the remainder

The double entry is from the deferred tax account to the current tax account and the current tax charge to PorL is reduced by this released deferred tax credit

Please i need help with this question which goes thus:

In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?

will this result in any treatment as Non-current asset item?

Is this an F7 question? If it is, it almost certainly will not appear in an F7 exam!

In addition, I think that you have missed off one or two words.

I’m not really sure what “In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?” means

Are you sure that you have copied the question correctly?

how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do treat the unrecoupable part as Non-current asset.

how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do you treat the unrecoupable part as Non-current asset?

Well (I don’t recognise this as any F7 question I remember seeing!) if the time for recovering the overpayment has passed the I imagine you will have to write off that over-payment. It cannot be an asset if the company can no longer recover it

I am also sorry MikeLittle, Ya it was a bit fast and my comment was also impulsive. I should not have ignore the fact that you are providing such a precious lectures free of cost from which hundreds of people from least developing countries or those who cannot attend classes due to their busy schedule are getting the benefit from.

Sir I am currently sitting for P2 exam and I got confused with the below question given in the course notes?
”
Q1.)Jurgis bought property in old town for $500,000 on 1 January, 2005. On 31 December, 2007 the property had a carrying value of $470,000 and was revalued to $800,000. The tax written down value at 31 December, 2007 was $500,000, and the tax rate is 30%.”

The Answer in course notes is
“Property (800,000 – 34,000) 766,000
Deferred tax liability (300,000 @ 30%) (90,000)
Revaluation surplus (330,000 – 14,000) 316,000
NB depreciation of 800 over 47 years = 17 pa
The 14,000 is 2 years × the difference between new depreciation (17,000) – old depreciation (10,000) ie 2 × (17,000 – 10,000) ”

However what has been taught in the question in this lecture the treatment should have been

hi melodyamio and hassanhere, i think what i explained here below might help:

Melodyamio, no the TD in 06 is not 400 but 200. It’s temporary difference being 50 (200×25%)

Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:
CV 2100 – Tax base (2300) = 200 x 25% = 50
but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:
CV 2300 – Tax base (2500) = 200 x 25% = 50
Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

for some weird reason, a key part in my explanation (before i started calculating the DT figure for 2005 and 2006) have yet again been omitted. It is really freaky cos that’s the only bit that keeps getting wiped out, thereby potentially making it a little difficult to follow through my entire explanation. or could it be my computer?
anyway, if you drop me your email i can send the full explanation and hopefully you will get it right this time.
cheers

melodamiyo and hassanhere, i think what i have explained here might help.

help I gave on Open Tuition (IAS 12 – F7)

hi, no the TD in 06 is not 400 but 50.
Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:
CV 2100 – Tax base (2300) = 200 x 25% = 50
but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:
CV 2300 – Tax base (2500) = 200 x 25% = 50
Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

I’ve got a question in the example 2, when calculating deferred tax, I think the temporary difference in 06 is 400 and the deferred tax asset is 100, but the number shown in the video clip is 50, how can this be? thx.

hi, no the TD in 06 is not 400 but 50.
Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:
CV 2100 – Tax base (2300) = 200 x 25% = 50
but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:
CV 2300 – Tax base (2500) = 200 x 25% = 50
Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

I THINK MY COMPUTER OMITTED SOME VITAL PART OF MY EXPLANATION, PLEASE SEE BELOW FOR REVISED. IT SHOULD MAKE MORE SENSE NOW. SORRY FOR ABOVE POST.

hi, no the TD in 06 is not 400 but 200. It’s temporary difference being 50 (200×25%)

Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:
CV 2100 – Tax base (2300) = 200 x 25% = 50
but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:
CV 2300 – Tax base (2500) = 200 x 25% = 50
Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

hi all -the 100 is the figure for 2004 (400 temporary diff times 25%) – you have to bring it down to 50 (which is 200 temp diff times 25%) in 2005 thus you release 50 only. and then in 2006 you have to bring the 50 of 2005 idown to 0 ( 0 temp diff of 2006 times 25%)
hope i make sense – took me 2 days to figure out
fatema

I have a question, when we were calculating the deferred tax, for first year it was $100, for the second year you said “reduced liability of $50”, when you said reduced liability you mean as compared to the $100, but it is still a deferred tax liability, it is not a reduction of liability because we did ignore it at the end, we only released the liability of the $100, I am not sure why. I am also confused about the way we released the $100 liability, why did we release it over two years? Is there a rule or something, or is it left to our choice, why not release the full $100 in next year in one go and that’s it. I am not sure based on what!

The Asset has a life of only 3 years as per ques… In the first year the full Cap allowance has been applied and that leaves us with only 2 year balance.. so we need to divide the deferred tax Liability over the next 2 years in order for it to get realised … Hope this make more sense now….

Thank you for the lecture. I have a question from Ex. 2. After releasing the deferred tax liability of 100 in 2005 2006 with 50, 50, what happens to the deferred tax liability of 50 which was in 2005?

Ref. IAS 12 INCOME TAXES, EXAMPLE 2 — Up to the point of DT, everything is totally clear for me. I’m just wondering:

1-Why is Tax Value = 0? (Only guess is because 100% tax all’nce was claimed and so asset written down to 0?)
2-Could an amount of DT other than 50 be released in later years 05, 06 etc? In other words, why 50 specifically?

Hi, first i noticed you posted this before the June exam and you may well have cleared the paper. But just for others are yet to sit for the exam like myself I will give my opinion.

I’m presuming that what you are referring to is the Deferred Tax liability value of zero given at the end of 2006, right?

If so, we have established that the DT for 2004 is 100, DT asset in 2005 of 50 and another DT asset in 2006 of 50.

Since asset life is only 3 years as per Q, the DT assets of 50 in both 2005 and 2006 would have netted off completely the DT liab of 100 that’s in the first year.

So in 2004, DT will remain as 100,
then in 2005, the Deferred Tax liability will be reduced to 50 (since there is a DT ASset of 50), which is why I think Mr Moffat put DT out as 50 in 2005
and by the final year 2006, there will no longer be any DT liability since the remaining, hence the reason he recorded it as 0

Thx Manona for your explanation.
But you will notice that when the lecturer was computing the DT, he used the carrying value of the asset which was 400, 200, 0, comparing it with the tax value of 0,0,0, thus bringing about the TD of 400,200,0. These give rise to the DT liability of 100 (25% of 400), 50 (25% of 200) and 0 in 2006.
According to his explanation, he said that out of 100 of 2004, 50 was released in 2005 and another 50 in 2006. My concern still remains, what is the fate of the DT liability of 2005?

Not very well explained.. didn’t understand the Lecture. Plz update it with new one.. Although all other lectures are best then ever.. but not this one.

my question is the same as the others (ryanpieblock and Monic)….after the 100 has been released in 05 and 06 , what happens to the 50 that was calculated as 25% of the 200 in 2005??? Please explain. Thanks.

I have tried to read and even follow the lecture many times, but up to now I don’t get it. Deferred tax of $100 in Yr 1, then release $50 in Yr 2, implying there is a balance of $50 which is presumably released in Yr 3. What happens to the $50 which was for Yr 2?

Very quick overview of taxes – hard to follow and understand the topic. I guess I will have to look at F6 course notes to review this topic once again 🙂

ryanpieblock let me explain what I understand from the tutor & the logic too. the 100 deffred tax was crated due to the tax allowance for the year 2X4 this 100 deffred tax is an asset for Andris but for the year 2X5 and 2X6 cretd a liablity of 50 each then this 100 off split the 50 for the year 2X5 and the remaining for the year 2X6

i understand what u say up to “a liability of 50 each”. After that i’m lost. If u cud explain the last part in another way i wud appreciate it very much , thanks.

hello sir if we release 50 out of the 100 deferred tax liability in 05 and then another 50 in 06. what happen to the deferred tax liability of 50 25% of 200 in 05??? when do we release it???

Driselle says

Jurgita’s profit from operations before royalty income is $700,000 per annum. In 2009 she was entitled to a one off royalty receipt of $60,000, which she eventually received in 2010. Income tax is 25% Extracts from Statement of Profit or Loss and Other Comprehensive Income 2009 2010 $’000 $’000 Profit from operations 700 700 Royalty receivable 60 760 700 Income tax @ 25% on taxable profits (175) (190) Profit after tax 585 510

Taxable profits

$’000 $’000 Profit from operations 700 700 Royalty received – 60 700 760 Income tax @ 25% 175 190 Show how the entity provides for deferred tax on the temporary timing difference.

Question: why should the $60 000 royalty received be added to the $700 000 profit from operation to calculate the income tax in 2005 but not in 2004, the year the company accounted for it?

Driselle says

And how did you calculate the book value when calculating the deferred tax?

Samii says

Hi,

Can i leave IAS 12 and IFRS 9 ?

Can they come as a full fledged scenario in Section B ?

They are way too complicated for me :/

If they can’t be tested in section B, i won’t give them much attention.

a7mdsuliman says

am i the only one who think it’s too fast explanation, i can not follow anything

any advice ?

MikeLittle says

Check out the previous posts on this thread but, if you need to, come back with a specific question / problem and I’ll answer it

Kimmy says

I agree too fast especially for self study. much to fast no happy.

no1lover says

It was fast but it is a user friendly video where you can pause stop rewind. Goodluck in exams tomorrow I still cramming sighss….

Natalia says

Indeed, a too fast explanation. I was able to understand everything only after reading the Kaplan Study Text. Kaplan for F7 is way better than BPP Study Text.

Njabulo says

Yes Mike why is that tax allowance increases increases profit?

Njabulo says

Beside the fact that it stimulates investment to new assets as you said in 9:26 of your lecture but you see that it increases profit,so i i would think is an income like revaluation gain.

Joseph says

Greetings Mr. Little.

In example 2 Andris buys an asset at the beginning of 2009 for $600 000. It has a useful life of three years and is scrapped at the end of its useful life. its profits over the next three years are:

1,800 (2009), 2,300 (2010), 2,500 (2011).

A first year tax allowance of 100% is available on this asset.

The tax rate for Andris is 25%.

Question : When calculating deferred tax for 2009, the book value is $400 000 and the tax value is 0 due to the first year 100% allowance. The deferred tax liability is therefore $100 and you release this over the next two years to write it off. But the book value in 2010 is $200 000, which gives a deferred tax liability of $50 for 2010. What happened to the deferred tax liability for 2010? i do not see where you wrote it off.

Your assistance will be deeply appreciated as usual sir.

MikeLittle says

The movement in the dferred tax account is double entered to the current tax account

That account in turn is balance off with the missing figure geeing double entered to the statement of profit or loss

Does that answer you?

It was fortunate that I saw this question – I rarely look at “latest comments”. In future, if you want to be sure that I answer your questions, post them on the “ask ACCA tutor” page

Parviz says

How do I treat under/over provision of taxes? I know that over provision is always on credit side of trial balance, so do I deduct over provision and add under provision of tax in profit or loss statement?

Thank you.

Jean says

Please Mike can you please tell me why the 600 tax allowance applies only the the year 2004 and not to the subsequent years in the example?

MikeLittle says

Which question? Please give me a question name and the page number in the course notes – and post your response on the Ask the Tutor forum – that way I shall be sure of seeing your post

Priyanka says

Hello,

Can anyone help me with this question?

-“-“-

For the year ended 31 july 2011 Norman made taxable trading profit of $1200000 on which income tax is payable at 30%..

a) A transfer of $20000 will be made to deferred taxation account. The balance on this account was $100000 before making adjustments for items listed in this paragraph.

b) The estimated tax on profits for the year ended 31 July 2010 was $80000, but tax has now agreed at $84000 and fully paid.

c) tax on profits for year 31 July 2011 is payable on 1 may 2011.

Required:

1) tax charged for 1 may 2012

2) tax liability in sfp at 31 july 2011

Priyanka says

Is it $360000 to sfp and $366000 to spl? ?

MikeLittle says

I make it 384,000 and 360,000, if I have understood the question properly

What does the official answer say?

Priyanka says

I don’t have the answers but please explain how you come to 360000 and 384000.

Thank You ?

MikeLittle says

In the Deferred Tax Account:

Debit side:

Carry down the balance of $120,000

Credit side:

Brought down balance of $100,000

Transfer to Current Tax Account $20,000

In the Current Tax Account:

Debit side:

Transfer from Deferred Tax Account $20,000

Cash paid $84,000

Carry down liability $360,000

Credit side:

Brought down liability $80,000

Current year tax $384,000 to SoPoL

So that was my answer.

But I have serious doubts about $20,000 transfer TO the deferred tax account.

I have interpreted this as an increase in the deferred tax balance but it could equally well be a decrease. If it is intended to be a decrease, then the double entry to record that $20,000 would be Debit Deferred Tax Account $20,000 and Credit Current Tax Account $20,000

This would change the balance to carry forward in Deferred Tax Account to $80,000 and would change the charge to the Statement of Profit or Loss to $344,000 ( the $360,000 would remain the same)

Ok?

Priyanka says

Correct !

Answer is 360000 to spl as income tax expense .

In sfp – NCL – Deferred tax 120000,

and CL – income tax – 360000

Thank you ?

Priyanka says

Ooup sorry its 384000 to spl

MikeLittle says

You said that you didn’t have the answer! Are you testing me?

marigold says

Lol Mr Mike.. My thoughts exactly……..Was she Testing you?

shreya says

also please explain that if the DT is calculated by calculating the difference between CA less tax base then are we taking the FV in the revaluation example 3.

(FV – Tax base) *rate% i.e (800-500)*30%

why don’t we take the CV for calculating the temporary difference.

I am so confused by reading the article on DT lol… they took the CV for the revaluation example

shreya says

hello mike,

could you please explain how do we calculate the tax written down value.. how it is 0 in this case (ex 2).

thank you

bianco says

Dear sir,

I can’t understand the answer for Q2 of Mini exercise part 8 Taxation. Why do we deduct deferred tax from tax estimated? Can you give me an explanation for the answer?

Thanks!

MikeLittle says

The second line in the answer should read “Current tax 1,200”

The question gives us the liability, not the tax charge. The 1,200 transfer from Deferred Tax is because we are reducing the deferred tax provision from 11,200 down to 10,000.

In prior years we have charged Profit or Loss Accounts / retained earnings with 11,200 deferred tax (charged through the tax charge in the Profit or Loss)

Now we decide that we didn’t need 11,200. We only need 10,000. So debit the deferred tax account and credit the current tax account. That has the effect of reducing the tax charge in this year’s Profit or Loss but has no affect on the Current Tax liability on the Statement of Financial Position

bianco says

Now, i understand the movement of deferred tax, but i still not clear about the first line of the entry in the answer. If you debit 17100 tax account and then credit it 1200, then tax charge in the SoCI is 15,900. I think the tax charge should be 18700-400-1200=17100

And the entry i would make is:

Dr Tax charge 18300

Dr Deferred tax 1200

Cr Tax charge 1200

Cr Tax payable 18300

I don’t know if i do wrong somewhere. Can you correct me?

Thanks!

MikeLittle says

Did you read my previous post? In particular, did you read the first line?

Your comment “still not clear about the first line of the entry in the answer”

The first line of the answer does not say debit the tax account. It says debit the SoCI (or Statement of Profit or Loss if you prefer to call it that)

The first line of my previous post says that the second line of the answer should not read “Cr SoCI Taxation” – it should read Cr Current Tax account (or Cr Current Liabilities if you prefer)

That leaves me with a balance to carry forward on the Current Tax Account of 18,700 liability (given in the question) and a tax charge in the Statement of Profit or Loss of 17,100

OK?

bianco says

Yes, it is pretty much clear now. I’m sorry for not reading your post carefully, if i did, i would understand it sooner.

Thanks you very much for the reply.

Priyanka says

Testing you!..

No..

I dint hve the answers the time i was working on that question..

Sorry..

N thank you ?

Mohsin says

Dear Mike,

Request your guidance to understand how do we know the amount of deferred tax to be released in future years. In example 2, 100,000 was DT in 2009, then you released 50,000 each in 2010 and 2011 . why cant we release entire 100,000 in 2010. Thanks

MikeLittle says

Because we’re comparing the company’s book value of their asset with the taxman’s value of their asset (comparing net book value with tax written down value)

In year 2, according to the working shown at the top of page 177(!) the figures are $200,000 compared with a tax value of $zero

The difference is now $200,000. Apply the tax rate to that amount and there is a deferred tax liability to carry forward of $200,000 * 25% = $50,000

But we brought forward a deferred tax liability of 25% * $400,000 = $100,000

Therefore we can release $50,000 of that $100,000 this year and next year we shall release the remainder

Is that ok?

Mohsin says

Perfectly Ok.

arman90fy says

Hi mike ,

I would like to interrupt here that , where is the £50 DT for 2010 gone !! Could plz go through again ,

Thanks

MikeLittle says

The double entry is from the deferred tax account to the current tax account and the current tax charge to PorL is reduced by this released deferred tax credit

magdeline says

Thanx for the lecturer but he is a bit fast,so i missed important points.

Thank you

MikeLittle says

Well, play it again! And again! There’s no limit to the number of times you can listen to the lecture.

And, if there’s any particular point that you don’t understand, post your question on this site on the Ask the Tutor page and I’ll get back to you

adekunle says

Hi,

Please i need help with this question which goes thus:

In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?

will this result in any treatment as Non-current asset item?

Thanks

MikeLittle says

Is this an F7 question? If it is, it almost certainly will not appear in an F7 exam!

In addition, I think that you have missed off one or two words.

I’m not really sure what “In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?” means

Are you sure that you have copied the question correctly?

adekunle says

Yea its an F7 question.

What am trying to say is this:

how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do treat the unrecoupable part as Non-current asset.

adekunle says

Yea its an F7 question.

What am trying to say is this:

how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do you treat the unrecoupable part as Non-current asset?

MikeLittle says

Well (I don’t recognise this as any F7 question I remember seeing!) if the time for recovering the overpayment has passed the I imagine you will have to write off that over-payment. It cannot be an asset if the company can no longer recover it

adekunle says

thanks. i appreciate.

MikeLittle says

You’re welcome

Asheem says

lecturer is very boring. I must confess that I feel like he is running fast on his own. sir, can u help us with better video lecture?

MikeLittle says

Sorry – but it’s as excited as I can get about deferred tax 🙁

Asheem says

I am also sorry MikeLittle, Ya it was a bit fast and my comment was also impulsive. I should not have ignore the fact that you are providing such a precious lectures free of cost from which hundreds of people from least developing countries or those who cannot attend classes due to their busy schedule are getting the benefit from.

hats off to your work.

God bless you

Asheem

MikeLittle says

Don’t worry about it!

I’ll survive 🙂

tejot says

Sir I am currently sitting for P2 exam and I got confused with the below question given in the course notes?

”

Q1.)Jurgis bought property in old town for $500,000 on 1 January, 2005. On 31 December, 2007 the property had a carrying value of $470,000 and was revalued to $800,000. The tax written down value at 31 December, 2007 was $500,000, and the tax rate is 30%.”

The Answer in course notes is

“Property (800,000 – 34,000) 766,000

Deferred tax liability (300,000 @ 30%) (90,000)

Revaluation surplus (330,000 – 14,000) 316,000

NB depreciation of 800 over 47 years = 17 pa

The 14,000 is 2 years × the difference between new depreciation (17,000) – old depreciation (10,000) ie 2 × (17,000 – 10,000) ”

However what has been taught in the question in this lecture the treatment should have been

Dr.Revaluation Reserve 90,000

Cr. Deferred Tax Liability 90,000

thereby the ending balance in Revaluation reserve (330,000 – 90,000)=240,000 Cr.

Please help me understand which treatment is coherent with the latest standards.

Thank you

narek01 says

Hi my friends, unfortunately I could not understand Example 2 deferred tax computation. Please explain again with more details.

fahim231 says

I am so confused!

nabila5690 says

Hi,

I have a small query regarding example 2.

I understand how we arrive at the deferred tax calculation and that the 100 000 has to be released.

However I am struggling to understand why the 100 000 is released in amounts of 50 000 each year?

Also what happens to the deferred tax of 50 000 from 2005?

Help will be much appreciated.

Thanks

manonaseriousmission says

hi melodyamio and hassanhere, i think what i explained here below might help:

Melodyamio, no the TD in 06 is not 400 but 200. It’s temporary difference being 50 (200×25%)

Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:

CV 2100 – Tax base (2300) = 200 x 25% = 50

but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:

CV 2300 – Tax base (2500) = 200 x 25% = 50

Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

2004 2005 2006

PBT (after taking out deprcn) 1600 2100 2300

LESS: Income Tax

– CT (300) (575) (675)

– DT (100) 50 50

PAT 1200 1575 1675

Hope this helps mate

All the best

manonaseriousmission says

for some weird reason, a key part in my explanation (before i started calculating the DT figure for 2005 and 2006) have yet again been omitted. It is really freaky cos that’s the only bit that keeps getting wiped out, thereby potentially making it a little difficult to follow through my entire explanation. or could it be my computer?

anyway, if you drop me your email i can send the full explanation and hopefully you will get it right this time.

cheers

manonaseriousmission says

melodamiyo and hassanhere, i think what i have explained here might help.

help I gave on Open Tuition (IAS 12 – F7)

hi, no the TD in 06 is not 400 but 50.

Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:

CV 2100 – Tax base (2300) = 200 x 25% = 50

but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:

CV 2300 – Tax base (2500) = 200 x 25% = 50

Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

2004 2005 2006

PBT (after taking out deprcn) 1600 2100 2300

LESS: Income Tax

– CT (300) (575) (675)

– DT (100) 50 50

PAT 1200 1575 1675

Hope this helps mate

All the best

maat9 says

hello sir . IAS 36 is existed in f7 lecturesss why???

melodymiao says

I’ve got a question in the example 2, when calculating deferred tax, I think the temporary difference in 06 is 400 and the deferred tax asset is 100, but the number shown in the video clip is 50, how can this be? thx.

hassanhere says

Did anyone figure out? :/

manonaseriousmission says

hi, no the TD in 06 is not 400 but 50.

Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

2005:

CV 2100 – Tax base (2300) = 200 x 25% = 50

but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

2006:

CV 2300 – Tax base (2500) = 200 x 25% = 50

Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

So the final computation will look something like this

2004 2005 2006

PBT (after taking out deprcn) 1600 2100 2300

LESS: Income Tax

– CT (300) (575) (675)

– DT (100) 50 50

PAT 1200 1575 1675

Hope this helps mate

All the best

manonaseriousmission says

quick correction on my first paragraph, i meant that the TD in 06 is (still) not 400 but 200, it is the TD I meant to put as 50 (i.e. 200×25%)

Every other point remains valid..i hope 🙂

manonaseriousmission says

I THINK MY COMPUTER OMITTED SOME VITAL PART OF MY EXPLANATION, PLEASE SEE BELOW FOR REVISED. IT SHOULD MAKE MORE SENSE NOW. SORRY FOR ABOVE POST.

hi, no the TD in 06 is not 400 but 200. It’s temporary difference being 50 (200×25%)

CV 2100 – Tax base (2300) = 200 x 25% = 50

CV 2300 – Tax base (2500) = 200 x 25% = 50

So the final computation will look something like this

2004 2005 2006

LESS: Income Tax

– CT (300) (575) (675)

– DT (100) 50 50

PAT 1200 1575 1675

Hope this helps mate

All the best

jivanjee says

hi all -the 100 is the figure for 2004 (400 temporary diff times 25%) – you have to bring it down to 50 (which is 200 temp diff times 25%) in 2005 thus you release 50 only. and then in 2006 you have to bring the 50 of 2005 idown to 0 ( 0 temp diff of 2006 times 25%)

hope i make sense – took me 2 days to figure out

fatema

mahoysam says

Hi Mr Mike! 🙂

I really find this tax topic is a pain!!

I have a question, when we were calculating the deferred tax, for first year it was $100, for the second year you said “reduced liability of $50”, when you said reduced liability you mean as compared to the $100, but it is still a deferred tax liability, it is not a reduction of liability because we did ignore it at the end, we only released the liability of the $100, I am not sure why. I am also confused about the way we released the $100 liability, why did we release it over two years? Is there a rule or something, or is it left to our choice, why not release the full $100 in next year in one go and that’s it. I am not sure based on what!

I hope this topic does not come in the exam!

Thanks a lot!

Maha

mahoysam says

Also, since we are releasing $50 in year 05, does that mean that the current tax figure includes this $50? I am really confused!

yan says

I hope the same thing

tejot says

I have the same query. Did you guys figure out an answer?

shyamkumar says

The Asset has a life of only 3 years as per ques… In the first year the full Cap allowance has been applied and that leaves us with only 2 year balance.. so we need to divide the deferred tax Liability over the next 2 years in order for it to get realised … Hope this make more sense now….

didkata says

Not happy with the explanation

Monic says

Thank you for the lecture. I have a question from Ex. 2. After releasing the deferred tax liability of 100 in 2005 2006 with 50, 50, what happens to the deferred tax liability of 50 which was in 2005?

nari says

hello monic, did u figure it out?

Monic says

Hi, let me try to analyze Jivanjee’s explanation of Oct. 22nd and see if I figure it out, but Income tax & deferred tax are giving me hard time.

crye says

Thanks.

Ref. IAS 12 INCOME TAXES, EXAMPLE 2 — Up to the point of DT, everything is totally clear for me. I’m just wondering:

1-Why is Tax Value = 0? (Only guess is because 100% tax all’nce was claimed and so asset written down to 0?)

2-Could an amount of DT other than 50 be released in later years 05, 06 etc? In other words, why 50 specifically?

Thanks!

Shivam says

Just a quick question relating to Example two. Just a bit confused as to why the tax value is 0?

Thanks!

manonaseriousmission says

Hi, first i noticed you posted this before the June exam and you may well have cleared the paper. But just for others are yet to sit for the exam like myself I will give my opinion.

I’m presuming that what you are referring to is the Deferred Tax liability value of zero given at the end of 2006, right?

If so, we have established that the DT for 2004 is 100, DT asset in 2005 of 50 and another DT asset in 2006 of 50.

Since asset life is only 3 years as per Q, the DT assets of 50 in both 2005 and 2006 would have netted off completely the DT liab of 100 that’s in the first year.

So in 2004, DT will remain as 100,

then in 2005, the Deferred Tax liability will be reduced to 50 (since there is a DT ASset of 50), which is why I think Mr Moffat put DT out as 50 in 2005

and by the final year 2006, there will no longer be any DT liability since the remaining, hence the reason he recorded it as 0

Monic says

Thx Manona for your explanation.

But you will notice that when the lecturer was computing the DT, he used the carrying value of the asset which was 400, 200, 0, comparing it with the tax value of 0,0,0, thus bringing about the TD of 400,200,0. These give rise to the DT liability of 100 (25% of 400), 50 (25% of 200) and 0 in 2006.

According to his explanation, he said that out of 100 of 2004, 50 was released in 2005 and another 50 in 2006. My concern still remains, what is the fate of the DT liability of 2005?

Halar Khan Bijarani says

Not very well explained.. didn’t understand the Lecture. Plz update it with new one.. Although all other lectures are best then ever.. but not this one.

admin says

Read this chapter in the course notes

Maybe this will help

Halar Khan Bijarani says

@admin, Yup .. thats the only option 🙂 Thanks btw.

nari says

my question is the same as the others (ryanpieblock and Monic)….after the 100 has been released in 05 and 06 , what happens to the 50 that was calculated as 25% of the 200 in 2005??? Please explain. Thanks.

Monic says

I have tried to read and even follow the lecture many times, but up to now I don’t get it. Deferred tax of $100 in Yr 1, then release $50 in Yr 2, implying there is a balance of $50 which is presumably released in Yr 3. What happens to the $50 which was for Yr 2?

noldis says

Very quick overview of taxes – hard to follow and understand the topic. I guess I will have to look at F6 course notes to review this topic once again 🙂

abesha says

ryanpieblock let me explain what I understand from the tutor & the logic too. the 100 deffred tax was crated due to the tax allowance for the year 2X4 this 100 deffred tax is an asset for Andris but for the year 2X5 and 2X6 cretd a liablity of 50 each then this 100 off split the 50 for the year 2X5 and the remaining for the year 2X6

nari says

i understand what u say up to “a liability of 50 each”. After that i’m lost. If u cud explain the last part in another way i wud appreciate it very much , thanks.

ryanpieblock says

hello sir if we release 50 out of the 100 deferred tax liability in 05 and then another 50 in 06. what happen to the deferred tax liability of 50 25% of 200 in 05??? when do we release it???

marjorie1 says

Hey all,

Trust F7 tutor is helping u as must as he’s helping me revise for the grand day. June 13th.