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Why have they not shown that the excess of tax deduction will be charged from equity?
The following entries should have been done?1year
Dr. DTA 2.4m
Cr. P&L. 2.4m2year
Dr DTA. 11.4m
Cr. P&L. 10.86m
Cr. Equity(def tax). 0.54mAnd then exercise entries?
As I’m sure you know this is an ancient question!
What you need to know is that the tax credit in the P&L (cumulative) cannot exceed tax rate x cumulative share based pay expense.
Cumulative SBP = 40
@30% = 12
Tax credit taken last year = 2.4
So (ignoring exercise) I would
Dr DTA 11.4
Cr P&L (12-2.4) 9.6
Cr Equity – balanceDon’t worry about the exercise – I always cross it out when I use this question
1. But if in question its written that its exercised so will we be required to give the entry of this deferred tax?
2. In answer its written that 13.8 m will be recognised at that year end but we have recognised 2.4m already so only 11.4m should be taken as tax benefit?
3. What happens to the previous deferred tax asset recognised after the shares are recognised?
On the exercise of an option the deferred tax will be transferred to current tax
Unfortunately BPP have taken this question out of the kit now because it is so unrepresentative of the current style of the exam but I am convinced from memory that my numbers are right
You could watch a debrief of this question if you follow this link
https://www.youtube.com/watch?v=vsb6Wb0zMjE
Please always remember that in the new syllabus there are very few marks available for calculation .
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