Sea Otter Ltd uses the revaluation model for all classes of property, plant and equipment. The following information relates to two items of nlant the CRM650 and DRM700

$\begin{array}{llcc}
\text { } & \text { CRM650}& \text {DRM700} \
\text {Cost (acquisition date $ 1 / 1 / 20 \mathrm{X} 1 $ ) } &\$5000000&\$8000000\
\text { Useful life - taxation } &8\text {years}&8\text {years} \
\text { Useful life - accounting } &10\text {years}&5\text {years}\
\text { Fair value $ 36 / 06 / 20 \mathrm{X} 2 $ } &\$5400000&\$7500000\
\text { } &\
\end{array}$

-For the CRM650, the revaluation on 30/06/20X2 results in:

Question

Sea Otter Ltd uses the revaluation model for all classes of property, plant and equipment. The following information relates to two items of nlant the CRM650 and DRM700

$\begin{array}{llcc}
  \text {  } & \text { CRM650}& \text {DRM700}    \
 \text {Cost (acquisition date $ 1 / 1 / 20 \mathrm{X} 1 $ )  } &\$5000000&\$8000000\
 \text { Useful life - taxation } &8\text {years}&8\text {years}  \
 \text { Useful life - accounting } &10\text {years}&5\text {years}\
 \text { Fair value $ 36 / 06 / 20 \mathrm{X} 2 $ } &\$5400000&\$7500000\
 \text {  } &\
\end{array}$

-For the CRM650, the revaluation on 30/06/20X2 results in:

Quizplus · Accepted Answer

Under the revaluation model, the difference between the fair value and the carrying amount (cost less accumulated depreciation and impairment losses) is recognized in other comprehensive income (OCI) as an increment to the asset revaluation reserve (ARR).

For CRM650:

Increment to ARR = fair value - carrying amount = $5,400,000 - $4,000,000 (assume no accumulated depreciation) = $1,400,000

This increment to the ARR generates a taxable temporary difference (TTD) equal to $1,400,000 x 21% (tax rate) = $294,000. This means that, for tax purposes, the asset will be depreciated over a shorter period than for accounting purposes, resulting in lower taxable profits in the earlier years of the asset's life.

The DTL is calculated as the product of the TTD and the tax rate, which is $294,000 x 21% = $61,740.

The deferred tax expense equals the change in the DTL balance over the period, which is $61,740 - $0 (since there was no DTL balance at the beginning of the year) = $61,740.

The increment to the ARR is the net of the deferred tax expense and the DTL, which is $1,400,000 - $61,740 = $1,338,260. Therefore, the correct answer is B.

Sea Otter Ltd Uses the Revaluation Model for All Classes