Mock exam cbe question

Open two T accounts – deferred tax and current tax

Put in the balances brought forward of 31,600 and 6,200

In the deferred tax account, carry down from above the line debit to below the line credit the value of 40,000

That means we have an increase of 8,400 in that account of which 1/3 relates to revaluation of an asset and should be debited to revaluation reserve. So: Dr revaluation reserve and Cr Deferred tax account

That means that, of the 8,400 increase, only 5,600 is now unaccounted for in the defend tax account

Get rid of that figure by:

Dr Current tax account 5,600
Cr Deferred tax account 5,600

And now the deferred tax account balances with total figures of 40,000 on both sides

Now to the Current tax account

We have started with a brought forward figure of 6,200

Debit the account with the 5,600 from the deferred tax account (see above)

Carry down from debit above the line to credit below the line the current tax liability of 22,200

and balance off the account. Put in the total on the debit side of 27,800 Put the same figure in the total of the credit side. Now add up the credits and put in the missing figure that will make the credits add up to 27,800

The missing figure should be 21,600. Put that figure into the credit side of the current tax account and the narrative is Profit or Loss

Ok?

T accounts are simply WONDERFUL!

It’s the estimated deferred tax liability. It’s often given as “the carrying values of the assets exceeds the tax written down values by $xxxxx” and the examiner will give you the tax rate so you can calculate the deferred tax liability to carry forward (debit above the line, credit below the line)

8,400 change / increase will more often than not be taken in full to the current tax account. Balance off the current tax account and the missing figure is the tax charge in this year’s profit or loss (rarely a credit to profit or loss, but it does happen very occasionally)

But because there is a deferred tax implication this time (there isn’t always even though sometimes assets are revalued) 2,800 is debited to revaluation reserve and only the remainder is debited to current tax account

I don’t like you saying that part of the deferred tax is charged to profit or loss. It isn’t. It’s transferred to current tax account and the balance from the current tax account is charged (or credited) to the profit or loss

Work through mini exercises 6 at the back of the free course notes – they include every example from December 2007 up to June 2014 of the deferred tax and current tax calculations in F7 papers

Ok?