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:
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Calculate the revaluation surplus: \[ \text{Revaluation surplus} = \text{Net replacement value} - \text{Carrying amount} \] \[ \text{Revaluation surplus} = R40,000 - R24,000 = R16,000 \]
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Calculate the deferred tax asset/liability:
(a) If the asset is used:
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The deferred tax effect due to revaluation is calculated as follows: \[ \text{Taxable temporary difference} = \text{Revaluation surplus} - \text{Tax allowance} \]
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Taxable temporary difference: \[ \text{Taxable temporary difference} = R16,000 - R7,500 = R8,500 \]
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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:
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In the case of a sale, we considered the capital gains tax:
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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: \[ \text{Capital gain} = R40,000 - R30,000 = R10,000 \]
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The taxable portion of this capital gain: \[ \text{Taxable capital gain} = 66.6% \times R10,000 = R6,660 \]
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Tax on the taxable capital gain: \[ \text{Tax on capital gain} = R6,660 \times 28% = R1,864.80 \approx R1,865 \]
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In addition to the above, since the total revaluation surplus is still in place: \[ \text{Total taxable temporary difference} = R16,000 \]
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The calculation of deferred tax liability will also apply similarly: \[ \text{Deferred tax liability on revaluation} = R8,500 \times 28% = R2,380 \]
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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:
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For (a): Asset used
- Debit: Revaluation Surplus R16,000
- Credit: Deferred Tax Liability R2,380
- Credit: Asset R13,620
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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.
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