Reference no: EM132722582

Question - Crystal Ltd whose financial year ends on December, acquired a building with a ten-year useful life on 1 January 2015, for $200,000. Residual value for the building is nil. For the accounting purpose, the building is depreciated on a straight-line basis over its useful life, whereas, for tax purposes, the building is depreciated at 20 per cent per annum on the straight-line basis. On 31 December 2018 (which is four years later), the management of Crystal Ltd decided to revalue the building and it was revalued to $210,000. At the time of revaluation there was no change in useful life and residual value of the building. The tax rate applicable to Crystal Ltd is 30 per cent.

Required -

i. Assume that the building is expected to continue to be used by Crystal Ltd, determine the tax base of the asset and state the amount of temporary difference at 31 December 2018.

ii. Provide the necessary journal entries to record the revaluation including the journal entry to account for the tax effect at 31 December 2018. Show calculations.

iii. Provide the journal entries for the depreciation and deferred tax for 31 December 2019. Show workings/calculations.

iv. Provide the journal entries for the depreciation and deferred tax for 31 December 2020. Show workings/calculations.

Briefly explain how change in tax rate in future can impact the existing deferred tax asset and liability balances in a company's financial reports.