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The extract from Highwood trial bal at 31 March 2011.
Property at cost 1April 2005 ( land element $25m ( note ii)) $75m
Acc dep – 1 April 2010 Building $10mNote ii On 1 April 2010 Highwood decided to revalue it’s property . The market value of the property on this date was $80m , of which $30m related to the land. At this date the remaining estimated life of the property was 20yrs. Highwood does not make a transfer to retained earnings in respect of the excess depr on the revavluation of its assets. All depr is charged to cost of sales.
Solution the revaluation will create an initial revaluation reserve of $15m (80-75-10). $3.75 million of this (25%) will be transferred to deferred tax leaving a Net revaluation of $11.25 million.
Depr charge for the current yr will leave the CA in d SOFP of $77.5 million (80-2.5).The only place I don’t understand is the 25% and $11.25 million.
What I learn is depreciation of the revalued asset less depr of the historical cost.
80-75-10= $15millionHistorical cost 75000/20yr = $3.75
Diff 15-3.75 = 11.25In SOPF Ca 80-( 80/20yr)= $77.5.
Pls , assist on a more simpler way bcos Kaplan complicate it more for me concerning the $3.75 that will be transferred to deferred tax .
We can agree on the $15 revaluation, can we?
Is there any reason why you failed to give me the following crucial information?
“The difference between the carrying amounts of the net assets of Highwood (including the revaluation of the property in note (iii) above) and their (lower) tax base at 31 March 2011 is $27 million. Highwood’s rate of income tax is 25%.”
The revaluation increase gives rise to a deferred tax liability increase of 25% of the $15 increase = 25% * $15 = $3.75. This figure is credited in the Deferred Tax account and debited to the REvaluation Reserve
This line of yours makes no sense:
“What I learn is depreciation of the revalued asset less depr of the historical cost.
80-75-10= $15million”And nor does this line:
“In SOPF Ca 80-( 80/20yr)= $77.5.”
Is that any clearer for you now?
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