Use the following information to answer this question. The draft statement of financial position for Banjo Ltd as at 30 June 2021 discloses the following:
Machinery (at cost) $750 000
Less Accumulated depreciation 400 000 $350 000
On the same date, Banjo Ltd assessed the fair value of the machinery to be $400 000.
The tax rate is 30%. Depreciation rates are 10% p.a. (accounting) and 12.5% p.a. (tax) using the straight-line method.
The journal entries to adjust for the tax effect of the revaluation at 30 June 2021 is:

Question

Quizplus · Accepted Answer

The correct journal entries include recognizing the deferred tax liability due to the revaluation increase and accounting for the gain on revaluation net of its tax effect. The revaluation increases the carrying amount of the machinery to $400,000, creating a temporary difference that will result in taxable amounts when the asset is recovered. The tax effect of this revaluation is calculated on the revaluation surplus ($400,000 fair value - $350,000 carrying amount = $50,000 revaluation surplus) at the tax rate of 30%, resulting in a deferred tax liability of $15,000. The gain on revaluation is recognized in other comprehensive income (OCI), net of tax.

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