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Hello tutor, for the following question, can you please enlighten me on why the revaluation surplus is 64,000 which is 80,000 (280,000-200,000) net of 16,000 of deferred tax liability?
I am confused as I remembered in the calculation of FA, we just need to deduct the original amount from the revalued amount to get the revaluation surplus. I did not understand why in FR, we need to net the deferred tax liability also.
Thank you tutor!
“The information below relates to the financial statements of Sheen Co as at 30 Octorber
20X4:Carrying amount
Plant (cost lessdepreciation) 110,000
Land (original cost $200,000) 280,000Taxbase
Plant 90,000
Land 200,000Tax rate 20%
Deferred tax liability 20,000
Revaluation surplus 64,000Pleaseidentify whether the amount of the deferred tax liability and the Revaluation surplus
are correct or incorrect.The amount of the deferred tax liability is CORRECT INCORRECT
The revaluation surplus is CORRECT INCORRECT”Hi,
The deferred tax liability will be the temporary difference multiplied by the tax rate. So, I believe that the 20,000 figure you quote above is correct.
The revaluation surplus is initially 80,000 (280,000 – 200,000) but this is then reduced by the deferred tax. The deferred tax on the revaluation is 16,000 (20% x 80,000), which reduces the revaluation by the same amount. Remember that we don’t take the deferred tax on a revaluation to profit or loss. It goes through OCI to match up with where the gain has been taken.
Thanks
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