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Hello,
Can someone help me with this question:
In accordance with IAS 12 Income Taxes, what is the impact of the property revaluations on the income tax expense of Mighty IT Co for the year ended 31 December 20X5?
In December 20X5, Mighty IT Co revalued its corporate headquarters. Prior to the revaluation, the carrying amount of the building was $2m and it was revalued to $2.5m.
Mighty IT Co also revalued a sales office on the same date. The office had been purchased for $500,000 earlier in the year, but subsequent discovery of defects had reduced its value to $400,000. No depreciation had been charged on the sales office and any impairment loss is allowable for tax purposes.
Mighty IT Co’s income tax rate is 30%.
My answer is $120,000 because:
Revaluation surplus:$2.5M – $2M= $0.5M
Revaluation loss: $400,000 – $ 500,000= $100,000
So $500,000-$100,000= $400,000 x 30% $120,000 income tax increase
The correct answer is: $ 30,000 income tax decrease. Why??
Thanks a lot.
Hi,
The question asks for the impact on the income tax expense, which is recorded through profit or loss. Effectively this means that we can ignore the revaluation impact on deferred tax as this will go through OCI and not through profit or loss.
We then only need to look at the $100,000 temporary difference and at 30% this gives the $30,000 impact on the tax expense.
I like this question. Do you know where it came from?
Thanks
Thank you!
Just to be sure to get it.
Revaluation gain $ 500,000 go through the OCI and impact the deferred tax of 500,000×30%= $150,000
Then we have a revaluation loss of 400,000-500,000= $ 100,000
The revaluation loss go through the profit or loss so the decrease (30,000$) impact only the tax expense not the deferred tax, is it right? While the revaluation gain impact the deferred tax.But, if we have a revaluation gain, we can reverse the revaluation loss and then the excess of loss go through the profit or loss(it is not the case), cannot we?
So should it impact also the deferred tax? (as difference between 150,000 deferred tax(credit) and 30,000(debit)?It is a tricky question! hahah
I found it in practice platform in MYACCA.
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