Income Taxes — ACCA Practice Question 10

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.

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?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 2

More questions from this exam

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?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 2

More questions from this exam

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?