- October 26, 2015 at 7:15 am #278957
I am very confused with the solution for question 2. I understand that there is a 30% tax for the additional $10m and $8m, and I understand until the part where increase require for tax is $4.2m, but why do we have to minus the transferred from revaluation reserve of $2.4m again? if that is the case, I might as well dont include my $2.4m in my provision required and minus $2.7m directly, I still get my $1.8m. What is the logic behind this? Hope you can enlighten me, thank you so much.
RegardsOctober 26, 2015 at 8:16 am #278971
“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?October 26, 2015 at 9:50 am #278997
I am still confused. Here is the answer from ACCA:
Provision at 30 Sep 2011($4500+$2400)………….6,900
Provision at 1 Oct 2010…………………………………(2,700)
Transferred from revaluation reserve……………..(2,400)
Balance:charge to income statement………………1,800
I am not sure why do we have to minus the transfer from revaluation reserve of $2,400. This makes the tax cheaper for the company to pay, in the first place, revaluation gain is table, this is logical, but why reduce the same $2400 again?October 26, 2015 at 11:53 am #279013
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?October 26, 2015 at 12:39 pm #279022
Dear Mike, thank you so much for the explanation. I tried to watch the video for the past exams, however, I am having great difficulties as T account never appear in my life before, I just realized that debit is on the left side and credit is on the right side. I understand that since provision for tax is on the right side, it is a negative 2700, so I understand until tax carried forward is $4200.
What I dont understand is why the transferred from revaluation reserve is a negative $2400? Do I take it as given that whenever I have a revaluation gain tax, I have the minus it off again from the tax payable?October 26, 2015 at 1:58 pm #279042
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 strugglingOctober 26, 2015 at 2:14 pm #279052
You have been extremely helpful, thank you so much. Yes, the drive on the left and crash on the right has been very useful, thank you so much! Love this website a lot!
RegardsOctober 26, 2015 at 2:16 pm #279054
You’re very welcome
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