Question

MINT acquired a building for USD 60 million on January 1, 2018. The building was depreciated on a straight line for 20 years. On January 1, 2020, the building was revalued at $ 58 million. The total tax depreciation for the two years ended December 31, 2019 was $ 10 million. The interest tax rate is 20%. The value of the building is expected to be restored through use. Assets are not revalued at the replacement cost after depreciation. MINT has deferred income tax liabilities related to the asset. Assume that the company has no other deferred income tax assets or deferred income tax liabilities.

Required:
a) Prepare the journal entries for the revaluation of building on 1 January 2020.

b) Use the above transaction to illustrate your understanding of the relationship between tax base of an asset, timing difference, temporary difference and deferred tax liability.

Answer 1

Book Value as on 31st December 2019 = 60 Million $*18/20 = 54 Million $

Revaluation at 58 Million $

So Journal Entry for that

Bulding A/c ........ Dr 4 Million $

To Revaluation Reserve A/c 4 Million $

Revaluation Reseve A/c ...... Dr 4 Million $

To OCI A/c 4 Million $

Calculation of Defered Tax

Carrying Amount of Building = 58 Million $

Tax Base of Building = 60 Millionn$ - 10 Million $ = 50 Million $

Taxable Temporary difference = 58 - 50 = 8 Million $

Tax Rate = 20%

So Defered Tax Liability = 8 Million $ * 20% = 1.60 Million $