Additional Deferred Tax Examples.2
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ADVANCED ACCOUNTING UNSEEN WEEK 7 – TAXATION
(25 minutes)
Trumpet Limited accounts for its investment properties using the fair value model and its property, plant and equipment on the revaluation model. It also has certain financial assets which comprise minority share investments (less than 20% holding) in various companies. The tax rate is 30%. Assume that capital gains tax has always been in existence. The deferred tax balance at 31 December 20.6 is R361 500 credit. The following information (all figures in thousands) is relevant for the year ended 31 December 20.7. Investment Properties On 1 January 20.1, Trumpet Ltd purchased the following investment properties: Cost Land Industrial Park – Buildings
1 000
Carrying amount 31/12/20.7 1 340
3 500
3 720
An annual tax allowance of 5% applies to the industrial buildings. The carrying amount of the investment properties will be recovered by way of the receipt of operating lease rentals. Property, plant and equipment On 1 January 20.1, Trumpet Limited acquired the owner-occupied properties identified in the table below. It was estimated that the factory buildings, which enjoy an annual tax allowance of 5%, had a useful life of 30 years with a nil residual value. Cost Land Factory buildings
2 000 4 200
Carrying amount 31/12/20.6 2 700 2 000
Carrying amount 31/12/20.7 3 100 5 000
On 31 December 20.4, Trumpet Limited impaired its factory buildings. On 31 December 20.7, the company revalued both the owner-occupied land and factory buildings. There is no intention to dispose of these assets. Financial assets (JSE listed share investments) Financial asset category Ordinary shares in A Ltd Ordinary shares in X Ltd
Fair value through profit or loss Available-for-sale
Cost
Carrying amount 31/12/20.6
Carrying amount 31/12/20.7
400 1 200
720 1 370
840 1 500
Fair value gains and losses on equity investments are treated as capital gains or losses for tax purposes and the company raises any related deferred tax accordingly as share investments are disposed of after 5 years. REQUIRED 1.
Calculate the deferred tax balance at 31 December 20.7.
2.
Calculate the deferred tax expense/ (income) to be charged/(credited) to profit or loss for the year ended 31 December 20.7.
3.
Draft the ‘Other comprehensive income’ section of Trumpet Limited’s ‘single statement’ Statement of Comprehensive Income for the year ended 31 December 20.7. Each component of other comprehensive income is to be disclosed net of tax.
ADVANCED ACCOUNTING UNSEEN WEEK 7 – TAXATION – Suggested Solution
(Page 1 of 1 page)
Part 1 CA
TB
TD
Investment properties Land • Cost • FV adjustment
DT
1 340 1 000 340
-
1 000 340
exempt 15%
51
Industrial buildings (TB = 3500x65%)
3 720
2 275
1 445
30%
433.5
Property, plant & equipment Land • Cost • Cumulative revaluation
3 100 2 000 1 100
-
2 000 1 100
exempt 15%
165
Factory buildings (TB = 4200x65%)
5 000
2 730
2 270
30%
681
Financial assets Shares in A Ltd Shares in X Ld
840 1 500
400 1 200
440 300
15% 15%
66 45
Deferred tax balance at 31 December 20.7
1441. 5 credit
Part 2 Deferred tax movement for the year ended 31 December 20.7 (1441.5 cr – 361.5cr) • Relating to land (PPE) current year revaluation (15% (3 100 – 2700)) • Relating to factory buildings current year revaluation (30% x 1 780)* • Relating to FV adjustment on available-for-sale shares (15% x (1 500 – 1 370)) Deferred tax charge to profit or loss – 20.7
1 080 (60) (534) (19.5) 466.5
* Revalued carrying amount at 31 December 20.7 5 000 DHC at 31 December 20.7 (4 200 x 23/30) 3 200 Therefore revaluation that is not a reversal of impairment = 1 780 Although the total ‘revaluation’ is (5000 – (2000 x 23/24)) = 3 083, the balance of the revaluation (3 083 – 1780) is a reversal of impairment ie. it affects profit or loss.
Part 3 Trumpet Limited – Statement of comprehensive income for the year ended 31 December 20.7 Other comprehensive income R’000 Gain on revaluation (85% (400 PPE land)) + (70%(1 780 factory building))
1 586
Fair value gain on available-for-sale assets (85% (1 500 – 1 370))
110.5
Other comprehensive income for the year, net of tax
1 696.5
(25 minutes)
Trumpet Limited accounts for its investment properties using the fair value model and its property, plant and equipment on the revaluation model. It also has certain financial assets which comprise minority share investments (less than 20% holding) in various companies. The tax rate is 30%. Assume that capital gains tax has always been in existence. The deferred tax balance at 31 December 20.6 is R361 500 credit. The following information (all figures in thousands) is relevant for the year ended 31 December 20.7. Investment Properties On 1 January 20.1, Trumpet Ltd purchased the following investment properties: Cost Land Industrial Park – Buildings
1 000
Carrying amount 31/12/20.7 1 340
3 500
3 720
An annual tax allowance of 5% applies to the industrial buildings. The carrying amount of the investment properties will be recovered by way of the receipt of operating lease rentals. Property, plant and equipment On 1 January 20.1, Trumpet Limited acquired the owner-occupied properties identified in the table below. It was estimated that the factory buildings, which enjoy an annual tax allowance of 5%, had a useful life of 30 years with a nil residual value. Cost Land Factory buildings
2 000 4 200
Carrying amount 31/12/20.6 2 700 2 000
Carrying amount 31/12/20.7 3 100 5 000
On 31 December 20.4, Trumpet Limited impaired its factory buildings. On 31 December 20.7, the company revalued both the owner-occupied land and factory buildings. There is no intention to dispose of these assets. Financial assets (JSE listed share investments) Financial asset category Ordinary shares in A Ltd Ordinary shares in X Ltd
Fair value through profit or loss Available-for-sale
Cost
Carrying amount 31/12/20.6
Carrying amount 31/12/20.7
400 1 200
720 1 370
840 1 500
Fair value gains and losses on equity investments are treated as capital gains or losses for tax purposes and the company raises any related deferred tax accordingly as share investments are disposed of after 5 years. REQUIRED 1.
Calculate the deferred tax balance at 31 December 20.7.
2.
Calculate the deferred tax expense/ (income) to be charged/(credited) to profit or loss for the year ended 31 December 20.7.
3.
Draft the ‘Other comprehensive income’ section of Trumpet Limited’s ‘single statement’ Statement of Comprehensive Income for the year ended 31 December 20.7. Each component of other comprehensive income is to be disclosed net of tax.
ADVANCED ACCOUNTING UNSEEN WEEK 7 – TAXATION – Suggested Solution
(Page 1 of 1 page)
Part 1 CA
TB
TD
Investment properties Land • Cost • FV adjustment
DT
1 340 1 000 340
-
1 000 340
exempt 15%
51
Industrial buildings (TB = 3500x65%)
3 720
2 275
1 445
30%
433.5
Property, plant & equipment Land • Cost • Cumulative revaluation
3 100 2 000 1 100
-
2 000 1 100
exempt 15%
165
Factory buildings (TB = 4200x65%)
5 000
2 730
2 270
30%
681
Financial assets Shares in A Ltd Shares in X Ld
840 1 500
400 1 200
440 300
15% 15%
66 45
Deferred tax balance at 31 December 20.7
1441. 5 credit
Part 2 Deferred tax movement for the year ended 31 December 20.7 (1441.5 cr – 361.5cr) • Relating to land (PPE) current year revaluation (15% (3 100 – 2700)) • Relating to factory buildings current year revaluation (30% x 1 780)* • Relating to FV adjustment on available-for-sale shares (15% x (1 500 – 1 370)) Deferred tax charge to profit or loss – 20.7
1 080 (60) (534) (19.5) 466.5
* Revalued carrying amount at 31 December 20.7 5 000 DHC at 31 December 20.7 (4 200 x 23/30) 3 200 Therefore revaluation that is not a reversal of impairment = 1 780 Although the total ‘revaluation’ is (5000 – (2000 x 23/24)) = 3 083, the balance of the revaluation (3 083 – 1780) is a reversal of impairment ie. it affects profit or loss.
Part 3 Trumpet Limited – Statement of comprehensive income for the year ended 31 December 20.7 Other comprehensive income R’000 Gain on revaluation (85% (400 PPE land)) + (70%(1 780 factory building))
1 586
Fair value gain on available-for-sale assets (85% (1 500 – 1 370))
110.5
Other comprehensive income for the year, net of tax
1 696.5
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