Tax

Where the tax base differs, that will create a deferred tax implication

The most normal result is a deferred tax liability (only exceptionally rarely is it a deferred tax asset, in life and in exams)

The implication is that you need to multiply that difference between base amounts and carrying values by the tax rate and that will give you the deferred tax balance to carry forward

One step at a time ….

Open up two T accounts, the first for deferred tax, the second for current tax

Put in the deferred tax account, credit side, the liability brought forward from last year and shown in the trial balance of the question (2,700 on the credit side with a narrative “brought down”)

In the current tax account, put on the debit side with a narrative of “carried down” the 24,300 estimated tax liability and put the same figure on the credit side underneath the total lines in that account with a narrative “brought down”

We now need to find the deferred tax liability to carry forward and that’s going to be the tax rate (30%) multiplied by the “$15m less than their carrying amounts” and that comes to 4,500

So, on the debit side of the deferred tax account with a narrative of “carried down” put in the figure 4,500 and on the credit side, below the total lines, put in 4,500 with a narrative “brought down”

That leaves us with this gain on the revaluation of the leased property and that creates another deferred tax liability

The gain is (50,000 – 10,000) compared with the valuer’s valuation of 48,000.

So, a gain of 8,000

That’s multiplied by the tax rate of 30% and gives us a further deferred tax liability of 2,400

In the deferred tax account, debit side with a narrative of “carried down” put in the figure of 2,400 and the same figure underneath the total lines in that account, credit side with a narrative of “brought down”

But that 2,400 relates to the revaluation gain and (this doesn’t always happen in the exam. The examiner sometimes gives you a contrary instruction) should therefore be transferred from deferred tax account to revaluation reserve

So, deferred tax account, credit side, narrative “revaluation reserve” put in the figure of 2,400 and, if you wanted to show a revaluation reserve in your workings, you would have 8,000 on the credit side from the revaluation itself and now 2,400 on the debit side (with a a narrative of “deferred tax”) on the debit side

How’s that?

“Can you tell me also which part of the note indicates that 2400 should be transferred from deferred tax account to revaluation reserve please?”

– the question tells us that the revaluation has deferred tax implications.

That is “telling us” that the deferred tax on the revaluation gain should be debited to the revaluation reserve

“Can you tell me why the deferred tax is debited with 2400 instead of being credited please? Usually deferred tax account is credited with this amount and the oci/rr is debited with same amount..”

– I’m sorry to have to say this but I’ve given you the figures, I’ve given you the accounts, I’ve given you the narratives. There really is nothing more that I can add ….

…. except that, if you cannot follow the explanation I have given, it seems to me that you would be well served by watching John Moffat’s F3 video lectures and particularly the one about “Balancing the T accounts”

I presume that you were exempt from F3 and were ill-advised to take advantage of your exemption