ExpertMedium2 marksMultiple Choice
ACCA · Question 14 · Income Taxes
Section A
Gamma Co revalued its land upwards by $2 million during the year. The tax base of the land remains at its original historical cost. The corporate tax rate is 25%. Gamma Co has no intention of selling the land in the foreseeable future.
How should the deferred tax implication of this revaluation be accounted for?
Section A
Gamma Co revalued its land upwards by $2 million during the year. The tax base of the land remains at its original historical cost. The corporate tax rate is 25%. Gamma Co has no intention of selling the land in the foreseeable future.
How should the deferred tax implication of this revaluation be accounted for?
Answer options:
A.
Recognize a deferred tax liability of $500,000 with the corresponding charge to profit or loss.
B.
Recognize a deferred tax liability of $500,000 with the corresponding charge to Other Comprehensive Income (OCI).
C.
No deferred tax is recognized because there is no intention to sell the land.
D.
Recognize a deferred tax asset of $500,000 in OCI.
How to approach this question
Identify the temporary difference (Carrying Amount > Tax Base = Taxable Temporary Difference). Calculate the tax amount. Determine where the underlying transaction was recognized (OCI) to know where to post the tax.
Full Answer
B.Recognize a deferred tax liability of $500,000 with the corresponding charge to Other Comprehensive Income (OCI).✓ Correct
Under IAS 12 Income Taxes, a revaluation of an asset creates a taxable temporary difference because the carrying amount increases while the tax base remains the same. A deferred tax liability must be recognized ($2m * 25% = $500,000). Since the revaluation gain is recognized in Other Comprehensive Income (OCI), the related deferred tax expense must also be recognized in OCI.
Common mistakes
Assuming no deferred tax is needed if the asset won't be sold, or putting the tax charge in P&L.
Practice the full ACCA FR — Financial Reporting Practice Exam 4
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