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Hi Mike
Question was found in ACCA global for Sept16 Specimen-Section C: Q31 was too long to paste. Here is the website link:
https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f7/specimen/F7-specimen-s16.pdfPlease help to explain the following, Answer provided:
1) Answer (iii) Deferred tax – Query: why appear twice $32,000
Provision required at 30 Sept 20×5 ((10,000 + 32,000) x 20%) – this part I understand
Charge to revaluation of land & building (32,000 x 20%) – Query, I do not understand why have to calculate again for this portion. Please evaluate2) Answer (a) Gain on revaluation of investment property prior to transfer (6,000 – 5,000), Query: I do not understand why and how to get minus 5,000 as question did not say
Thank you
“Provision required at 30 Sept 20×5 ((10,000 + 32,000) x 20%) – this part I understand” ok, that’s simply the basis of the calculation of the provision for deferred tax to carry forward
“Charge to revaluation of land & building (32,000 x 20%)” – this is the calculation of the amount of the deferred tax calculation that should be debited to Revaluation Reserve since it relates directly to an asset revaluation this year of $32,000
That 432,000 has beed debited to the asset account and credited to Revaluation reserve
But that “gain” in Revaluation Reserve is the cause of an increase in the required deferred tax liability so $32,000 x 20% will be debited to Revaluation Reserve.
Where’s the credit? Well, when we calculated the deferred tax liability to carry forward we based our calculation on ($10,000 + $32,000) x 20% giving us $8,400. This figure we debited above the total lines in the Deferred tax account with the narrative “Carried down” and credited below the lines in that same account with the narrative “Brought down”
If we had stopped there then, when we balanced off the deferred tax account, we would have had a transfer of the balancing figure taken to the Current Tax account and the balance in Current Tax account, in turn, would have been charged against statement of profit or loss
Now ask yourself, why should this year’s profits be made to suffer an extra tax charge of $32,000 x 20% deferred tax arising from a revaluation which will not be achieved until sometime in the distant future, if at all?
So that’s why we make that transfer of the $8,400 from the Deferred Tax account to the Revaluation Reserve
Better?
I’ll get back to your second problem when I have looked at the exam question
Here’s your second question:
“2) Answer (a) Gain on revaluation of investment property prior to transfer (6,000 – 5,000), Query: I do not understand why and how to get minus 5,000 as question did not say”
Here’s an extract from the trial balance:
“Investment properties at fair value (note (ii)) $20,000”
And here’s an extract from the notes below the trial balance:
“On 1 October 20X4, Kandy owned TWO investment properties. The FIRST property had a carrying amount of $15 million and was sold on 1 December 20X4 for $17 million. The disposal proceeds have been credited to a suspense account in the trial balance above. On 31 December 20X4, the SECOND property became owner occupied and so was transferred to land and buildings at its fair value of $6 million”
Now, if the total in the trial balance for investment properties is $20,000 and the FIRST is carried at $15,000, how much do you think the second one is carried at?
OK?
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