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Hello,
I came across an MCQ where there are two issues which I don’t understand (Q29 Sept 16)
1) The company has revalued its corporate headquarters to from $2m to $2.5m
2) The company has revalued a sales office from $500k to $400k
What is the impact on the income tax expense? Tax rate 30%
The answer is: Income tax expense decreased by $30k
My question is: why do we ignore the corporate headquarters Revaluation.
I hope you can help with this question.
Thank you in advance
The revaluation of the headquarters by $500,000 has this affect:
Open a T account Deferred Tax
Assume that there is no deferred tax balance brought forward
Assume that the tax on profits for this year, before adjusting for the allowable impairment of the sales office, is 30% of $800 = $240
Now when we adjust for that allowable impairment, that 30% x $800 becomes 30% of $700 = $210 ie a decrease of $30
Now, in the Deferred Tax Account we have $0 brought forward on the credit side and a debit entry of 30% x $500 = $150 on the debit side with a narrative of “carried forward” and the same figure below the total lines of $150 on the credit side with the narrative “brought forward” relating to the revaluation of the headquarters
Balance off that account and credit the Deferred Tax account with $150 and debit the Revaluation Reserve with that $150
So there is no affect on the current year’s tax expense because that $150 is set off in the Revaluation Reserve against the $500 revaluation increase that was credited to the Revaluation Reserve
OK?
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