On 1 October 2016, Abudu Ltd decided to revalue its land for the first time. The land was originally purchased six years ago for GH¢65,000 and was revalued to its current market value of GH¢80,000 on 1 October 2016. The difference between Abudu Ltd’s Net assets (including revaluation of land) and the lower tax base at 30 September 2017 was GH¢27, 000. The opening deferred tax liability at 1 October 2016 was GH¢2,600 and Abudu Ltd’s tax rate is 25%
Required:
Explain how to account for the above transaction in the financial statements of Abudu Ltd for the year to 30 September 2017. (5 marks)
View Solution
- Deferred tax liability c/d GH¢27,000 of which 25% =GH¢6,750 of which amount relating to revaluation surplus on land = (80,000-65,000)x 25% = 3,750.
- Increase in deferred tax liability will be recorded =GH¢6,750-GH¢2,600 =GH¢4,150 OF WHICH GH¢3,750 should be charged to OCI and the remainder charged to profit or loss account. (3 marks)
Journal Entry: GH¢ GH¢
Dr income tax expense (SPL) 400
Dr Income tax on OCI (SOCI) 3,750
Cr deferred tax liability (SFP) 4,150 (2 marks)