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I failed to understand how the revaluation surplus works with their accounting entries. Could you please assist me in this?
For example, a business purchase a piece of land 5 years ago for $2 million but over the years it was then revalued to $3.5m.
The Land would be recorded in SOFP based on historical cost on which it was bought.
Debit Land $2m
CR Cash $2mThe accounting entry for revaluation would be the difference:
Debit Land (asset account) $1.5m
Credit Revaluation surplus (equity account) $1.5mBy doing this we would get the total amount of asset after adjusted its market value.
Debit Land $3.5m
Credit ?What would be the credit entry to record $3.5m once market value has been adjusted and secondly when will we record the revaluation gain in SOPL?
There is no third entry!
As you have written, we debit land with $2M when it was bought. We then debit land with $1.5M to revalue.
The balance on the land account is now $3.5M which is what is required. There is no further entry needed.
The revaluation surplus does not appear in the SOPL. It appears on the Statement of Changes in Equity, the SOFP, and on the Statement of Comprehensive Income.
Have you watched my free lectures on all of this?
I watched it but didn’t understand.
Could you further elaborate the point that when do we record the revaluation surplus in SOFP and OCI? (that’s what i meant when i mentioned SOPL instead of OCI).
We will record the revaluation surplus of $1.5m in changes in equity statement and SOFP as equity item respectively but when do we record this increase in OCI?
Lastly could you please explain what is accrued tax and is it true that it is usually the case with income tax that is deferred because the accounting period of a business is different than the tax period?
The revaluation surplus is not a realised profit (because the asset hasn’t actually been sold) and in the Statement of Comprehensive Income it is simply shown as an extra line below the profit in the SOPL.
Accrued tax simply means tax owing. It is nothing to do with the accounting and tax periods. It is because the tax due for the period cannot be estimated until the end of the period (when they know what the profit for the period is) and therefore they will be owing the tax (the amount owing will be the tax on the profit for the period less any tax that they have paid during the period).
So basically we will record revaluation surplus entry like this:
Debit Land $1.5m
Credit Revaluation surplus $1.5mMy question is that the revaluation surplus will be recorded in the SOFP as equity item or it should be shown in OCI as a separate item?
Secondly, is it true that the taxes that a business pay during the period actually owed from the last year (they belong to previous year ?)
Is it also true that accrued tax is also called deferred tax?
That is the correct entry.
It appears in the SOFP as a revaluation reserve (in the equity section with the other reserves) and on the Statement of Comprehensive Income as I explained in my previous reply.
(And I do explain both of these in my lectures on limited companies).Deferred tax is something different and is not examinable in Paper FA.
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