Question

QUESTION 3 (20 marks)
Peter Ltd owns an asset with a cost price and base cost of R30 000 and a carrying amount of
R24 000 which was revalued to a net replacement value of R40 000. The South African
Revenue
Service allowed a tax allowance of R7 500 on the asset and the tax rate is 28%. 66.6% of all
capital gains are taxable.
Calculate the deferred tax implications of the revaluation of the asset of Peter Ltd
if:
(a) the asset is used; and
(b) the entity sold/is of the intention to sell the asset.
Do the journal entries for both cases.
Round off all calculations to the nearest rand

Answer 1

To calculate the deferred tax implications of the revaluation of the asset for Peter Ltd, we will consider both scenarios: (a) when the asset is used, and (b) when the asset is sold or if there is an intention to sell the asset.

### Given data:
- Cost price/ Base cost of asset: R30,000
- Carrying amount of asset: R24,000
- Net replacement value: R40,000
- Tax allowance: R7,500
- Tax rate: 28%
- Percentage of capital gains taxable: 66.6%

### Implications of Revaluation:

1. **Calculate the revaluation surplus:**
\[
\text{Revaluation surplus} = \text{Net replacement value} - \text{Carrying amount}
\]
\[
\text{Revaluation surplus} = R40,000 - R24,000 = R16,000
\]

2. **Calculate the deferred tax asset/liability:**

(a) **If the asset is used:**
- The deferred tax effect due to revaluation is calculated as follows:
\[
\text{Taxable temporary difference} = \text{Revaluation surplus} - \text{Tax allowance}
\]
- Taxable temporary difference:
\[
\text{Taxable temporary difference} = R16,000 - R7,500 = R8,500
\]

- Calculate the deferred tax liability:
\[
\text{Deferred tax liability} = \text{Taxable temporary difference} \times \text{Tax rate}
\]
\[
\text{Deferred tax liability} = R8,500 \times 28\% = R2,380
\]

**Journal Entry for (a):**
- **Debit** Revaluation Surplus: R16,000
- **Credit** Deferred Tax Liability: R2,380
- **Credit** Asset: R13,620 *(to balance out the revaluation surplus)*


(b) **If the entity sold/is of the intention to sell the asset:**
- In the case of a sale, we considered the capital gains tax:
- The gain realized upon sale would be the difference between the selling price and the original cost (base cost) of the asset:
\[
\text{Capital gain} = \text{Selling price} - \text{Base Cost}
\]
For our case, we can consider selling at the revalued amount:
\[
\text{Capital gain} = R40,000 - R30,000 = R10,000
\]

- The taxable portion of this capital gain:
\[
\text{Taxable capital gain} = 66.6\% \times R10,000 = R6,660
\]

- Tax on the taxable capital gain:
\[
\text{Tax on capital gain} = R6,660 \times 28\% = R1,864.80 \approx R1,865
\]

- In addition to the above, since the total revaluation surplus is still in place:
\[
\text{Total taxable temporary difference} = R16,000
\]
- The calculation of deferred tax liability will also apply similarly:
\[
\text{Deferred tax liability on revaluation} = R8,500 \times 28\% = R2,380
\]

- The total deferred tax liability to be acknowledged upon sale:
\[
\text{Total deferred tax liability} = R2,380 + R1,865 = R4,245
\]

**Journal Entry for (b):**
- **Debit** Revaluation Surplus: R16,000
- **Credit** Deferred Tax Liability: R4,245
- **Credit** Asset: R11,755 *(to balance out the revaluation surplus)*

### Summary of Journal Entries:
1. **For (a)**: Asset used
- **Debit**: Revaluation Surplus R16,000
- **Credit**: Deferred Tax Liability R2,380
- **Credit**: Asset R13,620

2. **For (b)**: Asset sold/ intention to sell
- **Debit**: Revaluation Surplus R16,000
- **Credit**: Deferred Tax Liability R4,245
- **Credit**: Asset R11,755

This shows the impact of the asset revaluation and subsequent tax implications based on its usage or sale.