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Query =” The tax base of keystone’s net assets was $15 million less than their carrying amounts. This excludes effects of the revaluation of the leased property ”
My english is not very strong and I am self studying from Opentuition, Ok soo my issue is that as far as i understand we multiply tax rate with Temporary difference, but in the the back at answers the examiner took $ 15 million + 8 million(Gain on revaluation) as a temporary difference and multiplied it directly with tax rate of 30% giving Deferred tax liability of 6.9m. Now i don’t have any issue with the 8 million(Gain on revaluation amount) as i know that in case of revalued asset we take fair value not the Carrying value. But here why is the examiner directly multiplying tax rate with 15 million as it is not the temporary difference amount or maybe am not understanding what the question is trying to tell me.
The initial temporary difference is 15million (as per the first line of the question), so you multiply by tax rate to get the deferred tax.
After the revaluation the carrying value of the asset increases but the tax base remains the same, creating a higher temporary difference. And that difference is the amount of the gain on revaluation (8m) so all you do is multiply the tax rate by the gain on revaluation to calculate the deferred tax.
Then you add both together to get the total deferred tax.