To calculate the deferred tax implications of the revaluation of the asset for Peter Ltd, we will consider two scenarios: (a) when the asset is used and (b) when the entity sells or intends to sell the asset.
Given Data:
- Cost Price: R30,000
- Carrying Amount: R24,000
- Net Replacement Value: R40,000
- Tax Allowance: R7,500
- Tax Rate: 28%
- Capital Gains Tax: 66.6% of gains are taxable
Total Gain on Revaluation
The revaluation gain can be calculated as follows: \[ \text{Revaluation Gain} = \text{Net Replacement Value} - \text{Carrying Amount} = R40,000 - R24,000 = R16,000 \]
(a) Deferred Tax Implications if the Asset is Used
When the asset is used and not sold, the revaluation does not trigger any immediate tax liability, and we calculate deferred tax based on the temporary difference created by the revaluation.
Temporary Difference Calculation:
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Tax Base of the Asset:
- The tax base is the original cost minus the tax allowance.
- Tax Base = Cost Price - Tax Allowance = R30,000 - R7,500 = R22,500
-
Calculate Temporary Difference: \[ \text{Temporary Difference} = \text{Carrying Amount} - \text{Tax Base} = R24,000 - R22,500 = R1,500 \]
-
Deferred Tax Asset/Liability: \[ \text{Deferred Tax} = \text{Temporary Difference} \times \text{Tax Rate} = R1,500 \times 28% = R420 \]
Journal Entry for Deferred Tax (Using the Asset):
Dr Deferred Tax Expense R420
Cr Deferred Tax Liability R420
(b) Deferred Tax Implications if the Asset is Sold or Intending to Sell
If the asset is sold (or there is intention to sell), we must account for the tax implications resulting from the capital gains.
Capital Gains Calculation:
- Taxable portion of capital gain = 66.6% of revaluation gain. \[ \text{Taxable Gain} = \text{Revaluation Gain} \times 66.6% = R16,000 \times 66.6% = R10,656 \]
Deferred Tax Calculation on Sale: The tax on the taxable gain needs to be calculated: \[ \text{Deferred Tax on Gain} = \text{Taxable Gain} \times \text{Tax Rate} = R10,656 \times 28% = R2,979.68 \approx R2,980 \]
Journal Entry for Deferred Tax on Sale or Intention to Sell:
Dr Deferred Tax Expense R2,980
Cr Deferred Tax Liability R2,980
Summary
- For the scenario when the asset is used: The deferred tax is R420.
- For the scenario when the asset is sold or intended to sell: The deferred tax is R2,980.
Consider reviewing these calculations based on the latest applicable local accounting standards for any additional considerations or requirements.
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