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Hi,
I have trouble answering this deferred tax question, is it possible to use the 4 steps for deferred tax approach? I don’t quiet understand what each figure means and I’m also not sure how to work out the tax base for this question:
‘On 1 January 2008, Simone Ltd decided to revalue its land for the first time. A qualified property valuer reported that the market value of the land on that date was $80,000. The land was originally purchased 6 years ago for $65,000.
The required provision for income tax for the year ended 31 December 2008 is $19,400. The difference between the carrying amounts of the net assets of Simone (including the revaluation of the land in note (above) and their (lower) tax base as 31 December 2008 is $27,000. The opening balance on the deferred tax account was $2,600. Simone’s rate of income tax is 25%.’
Thanks.
It’s a bit unusual for an exam question that there’s no opening balance on the Current Tax Account (unless there is and you didn’t tell me!)
Land has been revalued upwards by $15,000 creating a deferred tax implication of 25% * $15,000 = $3,750. Hold that thought
Open 2 T accounts – one for Deferred Tax and one for Current Tax
Put in the credit side of the Deferred Tax account, narrative “brought forward”, the figure of $2,600
We’re told the difference at the end of the year between tax value and carrying value and that figure is $27,000
So we need a deferred tax liability to carry forward of $27,000 * 25% = $6,750
Put that figure in the debit side of the Deferred Tax Account with the narrative “carried forward”
Now, remember the figure of $3,759 from the second paragraph?
Out that figure in the credit side of the Deferred Tax Account, narrative “Revaluation Reserve”
Balance off the Deferred Tax Account ($400 should be the missing figure) and credit that in the Deferred Tax Account with the debit in the Current Tax Account
Put into the debit side of the Current Tax Account the provision needed for this year’s tax, per the question, $19,400 narrative “carried forward”
Balance off the Current Tax Account … the missing figure should be $19,800 and that is double entered to the statement of profit or loss with the narrative “this year’s tax charge”
Is that better?
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