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I have a question.Please,help me.
Company X made revaluation of the buildings at the end of year 1.At the end of the year 1 carrying value of the buildings were 10 m. and fair value of the buildings was 15 m. Depreciation is 5 %, straight-line method.At the end of year 1 company creates revaluation reserve 5 m. and creates deferred tax liability(20% tax rate) as following
Dr Revaluation reserve 1m
Cr Deferred tax liability 1m
SOFP as at the end of year 1 will be
Deferred tax liability 1m
Revaluation reserve 4m
And then at the end of year 2 company amortizes this revaluation surplus. For amortization of the revaluation surplus and to show deferred tax effect of this entry I made the following entries:Dr Revaluation reserve 0,25 m (5m*5%)
Cr Retained earnings 0,25 m
Dr Deferred tax liability 0,05 m (0,25*20%)
Cr Revaluation reserve 0,05 mAre these entries correct?
Please,help me!I don’t think that you need those last two entries! The deferred tax liability will not change over the life of the building except by way of recalculation of the lability to carry forward in the style of the mini exercises 6 and, where there is such a re-evaluation of the DT liability, that adjustment will affect the current tax charge in the statement of profit or loss.
See those mini exercises to confirm the effect of a re-assessment of the deferred tax liability
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