ExpertMedium2 marksMultiple Choice
ACCA · Question 09 · Income Taxes
SECTION A
During the year ended 31 December 20X9, Alpha Co revalued its headquarters building upwards by $2,000,000. The corporate tax rate is 25%. The tax base of the building did not change as a result of the revaluation.
What is the correct accounting entry to record the deferred tax impact of this revaluation?
SECTION A
During the year ended 31 December 20X9, Alpha Co revalued its headquarters building upwards by $2,000,000. The corporate tax rate is 25%. The tax base of the building did not change as a result of the revaluation.
What is the correct accounting entry to record the deferred tax impact of this revaluation?
Answer options:
A.
Debit Profit or Loss $500,000; Credit Deferred Tax Liability $500,000
B.
Debit Other Comprehensive Income $500,000; Credit Deferred Tax Liability $500,000
C.
Debit Deferred Tax Asset $500,000; Credit Other Comprehensive Income $500,000
D.
No entry is required as revaluations do not affect current tax payable.
How to approach this question
1. Calculate the temporary difference ($2m). 2. Calculate the deferred tax amount ($2m * 25% = $500k). 3. Determine if it's an asset or liability (carrying amount > tax base = liability). 4. Determine where the entry goes (matches the underlying transaction, so OCI).
Full Answer
B.Debit Other Comprehensive Income $500,000; Credit Deferred Tax Liability $500,000✓ Correct
Under IAS 12, a revaluation of an asset creates a taxable temporary difference because the carrying amount increases while the tax base remains the same. This results in a deferred tax liability ($2m * 25% = $500k). Because the revaluation gain is recognized in Other Comprehensive Income (OCI), the corresponding deferred tax must also be recognized in OCI.
Common mistakes
Charging the deferred tax to Profit or Loss instead of OCI.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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