September 2016 exam

“But it’s not stated in the question,that this revaluation gain/loss will give rise to a defered tax.”

I can only assume that you are meant to interpret the question of a revaluation as having a deferred tax implication

If there were no deferred tax implications, then only the impairment of the office space would have an affect on the income tax expense and, in that case, the answer would be C, a decrease of taxation expense of 30% x $100,000

Now, consider the situation where there is NO deferred tax implication

Then the increase in the value of the property will not affect the taxation expense so … the answer is still C

OK?

This next part deserves a separate thread!

In the tax computation, the accountant will make the adjustment to include $200,000 as a tax allowable expense and that will reduce the tax charge for the year by $200,000 x 30% = $60,000

That $200,000 is capitalised and, once the project is completed, that asset will be used up over its estimated useful life and be written off (amortised) over that period

But we’ve already had the benefit of tax allowances in the calculation above.

So whilst we are charging amortisation to future years’ profits in the financial statements, that amortisation will not be allowed to be claimed as a tax deductible expense against those future years’ profits

Thus a deferred tax liability arises where we claim as deductible today (for tax reasons) expenditure that we shall be amortising in the future (for financial statement reasons)

OK?