Deferred tax for 2011 December F7 paper

“where increase require for tax is $4.2m” do you mean $4.2m or do you mean $2.4m?

You may still get your $1.8m but you won’t have the correct provision to carry forward of $6.9m

“but why do we have to minus the transferred from revaluation reserve of $2.4m again?” what do you mean “minus the transferred ….”

The entry of $2.4m on the debit side in the deferred tax account is there to increase the deferred tax provision to carry forward. The $2.4m on the credit side of the deferred tax account is to set off against (be debited to) the revaluation reserve.

There’s no concept here of “minussing” anything

Is that better?

Oen two T accounts, one for deferred tax and one for current tax

In DT put in credit side 2,700 brought forward

In debit side, put in 4,500 carried forward

Now we have the problem of the revalued asset – we need an additional amount of 2,400 to carry forward as a provision so …. put in, debit side 2,400 carried forward

Now, that 2,400 relates to a revaluation so should ideally go to the revaluation reserve

So, put in, credit side, 2,400 and double enter to the revaluation reserve, debit side

Now balance off the deferred tax account and take the “missing” figure, 1,800 from the credit side of the deferred tax account to the debit side of the current tax account

Balance off the current tax account and take 26,100 to the statement of profit or loss

Better?

Please – you’re trying to be an accountant! Can we leave “plus” and “minus”, “add’ and “take away” in the junior school classroom!

🙂

No, you can’t take it as anything at all to do with deducting it from the tax payable (“minus it off again from the tax payable”).

Tax payable is more often than not given to you. In this question we’re told that the tax payable (the provision) is $24.3m so clearly you would be wrong to minus anything off that

Don’t think in terms of “minusing it from the tax payable”

Go to the F3 early lectures and let John explain about debits and credits. Pretend that you’re in England and you’re driving a car. You DRive on the left and you CRash on the right

Now you’ve gone through John’s F3 lectures and free course notes (I find this incredible that I’m writing this to an F7 student!), write out my workings that I posted in my last post.

If there has been a revaluation during the year and the examiner tells you that it has deferred tax implications, you can take it as a given that you will need to credit the deferred tax account with the deferred tax on the revaluation increase and debit the revaluation reserve.

Then you will need to balance the deferred tax account and transfer the “missing” figure from deferred tax account to the current tax account

Once you have sorted this question out in your mind, may I suggest that you get stuck into the mini-exercises at the end of the free F7 course notes, section 8, and practice those questions – all from recent past exams – until you can account for tax in your sleep

And one more hint – I would be very careful who you tell “I just realized that debit is on the left side and credit is on the right side”! What are you going to do when a computer prompts you and says “Which account do you want to debit?”

Come back to me again if you’re still struggling

You’re very welcome