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Hi.
I need your help to tackle this question.
-A company’s trial balance at 31 December 20X3 shows a debit balance of $700,000 on current tax and a
credit balance of $8,400,000 on deferred tax. The directors have estimated the provision for income tax for
the year at $4.5 million and the required deferred tax provision is $5.6 million, $1.2 million of which relates to
a property revaluation.
What is the profit or loss income tax charge for the year ended 31 December 20X3?1. The answer is $1.2M
2. My working is as follows: (000′)
– Under-Prov is $700+ Tax charge $4500- D.T $1600= $36003.Kindly locate where l’ve got things wrong.
Thanks in advance.
Hi,
It is a tricky one as they’ve incorporated deferred tax on the revaluation of PPE, and any deferred tax on this goes through OCI and not through profit or loss, so would not be included within the answer.
You’ve got the answer partially correct in relation to your current tax, as you should end up with a net expense of $3.8 million.
Your error is on the tax in relation to deferred tax. To calculate this correctly we firstly need to remove the $1.2 million in relation to the PPE revaluation from the closing balance of $5.6 million, to get $4.4 million. The deferred tax on the $1.2 million will go through OCI.
We then look at the movement on the deferred tax, which has reduced from the opening balance of $8.4 million, to the $4.4 million calculated above. The reduction of $4.0 million will reduce/credit the tax charge by $4.0 million, and so the net to profit or loss should be a credit of $0.2 million ($4.0 million deferred tax credit and $3.8 million current tax expense).
This then doesn’t give the answer that you give so I can only presume that there may be something that you’ve typed incorrectly in the question above, as using the information you’ve given this is the answer that I get and I think it is correct.
Thanks
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