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Hello Sir!
Can you help me with this question please?
An entity, Dodge, owns property, plant and equipment that cost $100,000 when purchased. Depreciation of $40,000 has been charged up to the reporting date of 31 March 20X1. The entity has claimed total tax allowances on the asset of $50,000. On 31 March 20X1, the asset is revalued to $90,000. The tax rate is 30%.
Required: Explain the deferred tax implications of this situation.I kind of understood the concept of revaluing the carrying value to the revalued amount (as the first step), which is [90,000-(100,000 – 40,000)] =30,000 {revaluation gain}.
Then can you please help me continue the steps? And their accounting entries are most important for the Financial statements.
Thank you.
Hi,
There is more benefit in this if you try and continue the steps, including the entries, and then I can tell you if you are right or wrong. I won’t be there in the exam to do it so it is best if you attempt it and then we can see where you can improve.
Remember that any deferred tax on the revaluation goes through OCI.
Look forward to seeing how you get on.
Thanks
Ok.
Would it be this way?
PPE cost 100,000 Tax base: 50,000
Less: Depr (40,000)
…………………………
= 60,000
30,000 (revaluation gain)
……………………………
90,000 (revalued amount)/carrying amountCarrying amount > tax base by 40,000 (90-50) {taxable temporary difference}
Therefore, deferred tax liability= 40,000*30% = 12,000
Accounting entries would be:
DR OCI 30,000*30% 9000
DR P/L (bal fig) 3000
CR deferred tax liability 12,000 (as above working)Hi,
You don’t need my help!
What you’ve done is entirely correct. The DR through OCI is the deferred tax on the gain in the year and the DR through P/L can also be calculated as 10,000 x 30%. The 10,000 being the temporary difference if we’d not have revalued the asset (60,000 – 50,000).
Well done.
Thanks
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