Spring Day Ltd has a piece of equipment that it has revalued to its fair value of $90,000 this period. It originally cost $80,000 and the accumulated depreciation for both accounting and tax purposes is $20,000. There is no intention to sell the equipment in the near future. The tax rate is 30 per cent. What is the journal entry to reflect the revaluation's tax implications?
E) None of the given answers.

Question

Quizplus · Accepted Answer

When a company revalues an asset, it must also account for any tax implications of the revaluation. In this scenario, Spring Day Ltd revalued the equipment to $90,000, which is $10,000 more than its carrying amount of $80,000. The accumulated depreciation for both accounting and tax purposes is $20,000, so the tax base of the equipment is $60,000 (($80,000 - $20,000)).

To account for the tax implications of the revaluation, we need to calculate the deferred tax liability. The deferred tax liability is the tax that will eventually be paid when the asset is sold or disposed of, and it arises because the tax base is less than the carrying amount. In this case, the deferred tax liability is $900 (($90,000 - $60,000) x 30%)).

Therefore, the journal entry to reflect the revaluation's tax implications is:
Dr. Equipment Revaluation Reserve $1,000
Cr. Deferred Tax Liability $900
Cr. Income Tax Expense $100

Spring Day Ltd Has a Piece of Equipment That It