ExpertMedium2 marksMultiple Choice
ACCA · Question 10 · Income Taxes
Section A
During the year, Alpha Co revalued its headquarters building upwards by $500,000. The corporate tax rate is 20%. Alpha Co has no intention of selling the building. How should the deferred tax consequences of this revaluation be recognized in the financial statements?
Section A
During the year, Alpha Co revalued its headquarters building upwards by $500,000. The corporate tax rate is 20%. Alpha Co has no intention of selling the building. How should the deferred tax consequences of this revaluation be recognized in the financial statements?
Answer options:
A.
No deferred tax is recognized because there is no intention to sell the building
B.
Increase deferred tax liability by $100,000 and recognize a $100,000 tax expense in profit or loss
C.
Increase deferred tax liability by $100,000 and decrease Other Comprehensive Income by $100,000
D.
Recognize a deferred tax asset of $100,000 in Other Comprehensive Income
How to approach this question
Remember the rule: 'Tax follows the item'. If the revaluation gain goes to OCI, the deferred tax on that gain also goes to OCI.
Full Answer
C.Increase deferred tax liability by $100,000 and decrease Other Comprehensive Income by $100,000✓ Correct
Under IAS 12, a revaluation of an asset creates a taxable temporary difference, resulting in a deferred tax liability ($500,000 x 20% = $100,000). Because the revaluation surplus is recognized in Other Comprehensive Income (OCI), the corresponding deferred tax expense must also be recognized in OCI, reducing the net revaluation surplus.
Common mistakes
Assuming no deferred tax is needed if the asset won't be sold, or putting the tax expense in the P&L.
Practice the full ACCA FR — Financial Reporting Practice Exam 2
32 questions · hints · full answers · grading
More questions from this exam
Q01**Section A**
GlobalHealth NGO recently changed its accounting policy for valuing medical invent...EasyQ02**Section A**
CloudSync, a tech startup, signs a contract to provide a customer with a customize...MediumQ03**Section A**
AgriCorp owns a specialized automated harvester purchased for $200,000 on 1 Januar...MediumQ04**Section A**
MetroWater, a public utility, operates a water treatment plant with a carrying amo...MediumQ05**Section A**
Oceanic Drillers, a cross-border multinational, has a decommissioning provision fo...Hard