Taxation and Deferred Tax- More clarification Required

MMoji6y ago

Dear Tutor I am using the BPP FR revision kit and I noticed that most of the workings and answers I got under the topic of Taxation vs a vis deferred tax/tax on revaluation/current tax account were wrong when compared with the answer in the kit. I think i am getting confused about the way the questions were framed. Take for example this question: DR bal in current Tax account- $700,000; CR bal in deferred tax account-$8.4m; Prov for income tax for the year- $4.5m; deferred tax prov- $5.6m, $1.2m of which relates to a property revaluation. what is the income tax recognized in P&L for the yr? My workings: (i) deferred tax: $8.4-$5.6m = $2.8 increase to tax expenses, $1.2m to OCI and $1.6m to P&L (ii) Income tax account: 700k+$4.5m-$1.6m = $3.6m - so income tax to be recognised in P&L is $3.6m But the answer is $1.2m. I don't know what I did wrong, kindly assist with more clarification. Thanks

P2-D2Tutor6y ago#1

Hi, I think you're going wrong in not using T-accounts. I'd have a go using those if you can. Alternatively, you have made a mistake on the deferred tax. If $1.2m is related to a revaluation then the entry would have been CR DT $1.2m DR OCI $1.2m. Based on this the opening balance of $8.4m is increased to $9.6m. There is then a reduction of $4m in deferred tax (9.6 - 5.6), which reduces the tax charge through profit or loss. The current tax expense is $5.2m, as you have above, and this is then reduced by the $4m to give $1.2m. Thanks

MMoji6y ago#2

Thanks for the response. I actually used T- account, I just didn't put it in my illustration. So what I did was to just DR deferred tax account with the diff (8400-5600=2800) then split the 2800 into OCI & P&L. So just to confirm I understand your explanation, I have to CR deferred tax with the revaluation amount before calculating the movement that will go to P&L. am I correct? Thanks.

P2-D2Tutor6y ago#3

Yes, you're right. The deferred tax is credited with the amount as we are reducing the expense that is taken through profit or loss and the debit is taken to OCI to match up to the revaluation gain. Thanks

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