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 000Less Accumulated depreciation 400 000 $350 000On 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:A) Income tax expense - OCI D r 15 , 000 Deferred tax liability C r 15 , 000 \begin{array}{cccc} ext { Income tax expense - OCI } & \mathrm{Dr} & 15,000 & \ ext { Deferred tax liability } & \mathrm{Cr} & & 15,000\end{array} Income tax expense - OCI Deferred tax liability Dr Cr 15 , 000 15 , 000 B) Asset revaluation surplus D r 15 , 000 Income tax expense - OCI C r 15 , 000 \begin{array}{clll} ext { Asset revaluation surplus } & \mathrm{Dr} & 15,000 & \ ext { Income tax expense - OCI } & \mathrm{Cr} & & 15,000\end{array} Asset revaluation surplus Income tax expense - OCI Dr Cr 15 , 000 15 , 000 C) Income tax expense - OCI D r 15 , 000 Asset revaluation surplus C r 15 , 000 \begin{array}{rlll} ext { Income tax expense - OCI } & \mathrm{Dr} & 15,000 & \ ext { Asset revaluation surplus } & \mathrm{Cr} & & 15,000\end{array} Income tax expense - OCI Asset revaluation surplus Dr Cr 15 , 000 15 , 000 D) Income tax exp ense - OCI D r 15 , 000 Deferred tax liability C r 15 , 000 Gain on revaluation - OCI D r 50 , 000 Income tax expense - OCI C r 15 , 000 Asset revaluation surplus C r 35 , 000 \begin{array}{cll} ext { Income tax exp ense - OCI } & \mathrm{Dr} & 15,000 \ ext { Deferred tax liability } & \mathrm{Cr} & & 15,000\\ ext { Gain on revaluation - OCI } & \mathrm{Dr} & 50,000 \ ext { Income tax expense - OCI } & \mathrm{Cr} & & 15,000 \ ext { Asset revaluation surplus } & \mathrm{Cr} & & 35,000\end{array} Income tax exp ense - OCI Deferred tax liability Gain on revaluation - OCI Income tax expense - OCI Asset revaluation surplus Dr Cr Dr Cr Cr 15 , 000 50 , 000 15 , 000 15 , 000 35 , 000

Question

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 000Less Accumulated depreciation 400 000 $350 000On 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:A)     Income tax expense - OCI  D r 15 , 000  Deferred tax liability  C r 15 , 000 \begin{array}{cccc}	ext { Income tax expense - OCI }  &  \mathrm{Dr}  &  15,000  &  \	ext { Deferred tax liability }  &  \mathrm{Cr}  &   &  15,000\end{array}  Income tax expense - OCI   Deferred tax liability  ​ Dr Cr ​ 15 , 000 ​ 15 , 000 ​ B)     Asset revaluation surplus  D r 15 , 000  Income tax expense - OCI  C r 15 , 000 \begin{array}{clll}	ext { Asset revaluation surplus }  &  \mathrm{Dr}  &  15,000  &  \	ext { Income tax expense - OCI }  &  \mathrm{Cr}  &   &  15,000\end{array}  Asset revaluation surplus   Income tax expense - OCI  ​ Dr Cr ​ 15 , 000 ​ 15 , 000 ​ C)     Income tax expense - OCI  D r 15 , 000  Asset revaluation surplus  C r 15 , 000 \begin{array}{rlll}	ext { Income tax expense - OCI }  &  \mathrm{Dr}  &  15,000  &  \	ext { Asset revaluation surplus }  &  \mathrm{Cr}  &   &  15,000\end{array}  Income tax expense - OCI   Asset revaluation surplus  ​ Dr Cr ​ 15 , 000 ​ 15 , 000 ​ D)     Income tax exp ense - OCI  D r 15 , 000  Deferred tax liability  C r 15 , 000  Gain on revaluation - OCI  D r 50 , 000  Income tax expense - OCI  C r 15 , 000  Asset revaluation surplus  C r 35 , 000 \begin{array}{cll}	ext { Income tax exp ense - OCI }  &  \mathrm{Dr} & 15,000 \	ext { Deferred tax liability }  &  \mathrm{Cr} & & 15,000\\	ext { Gain on revaluation - OCI }  &  \mathrm{Dr}  &  50,000 \	ext { Income tax expense - OCI }  &  \mathrm{Cr}  & & 15,000 \	ext { Asset revaluation surplus }  &  \mathrm{Cr}  & & 35,000\end{array}  Income tax exp ense - OCI   Deferred tax liability   Gain on revaluation - OCI   Income tax expense - OCI   Asset revaluation surplus  ​ Dr Cr Dr Cr Cr ​ 15 , 000 50 , 000 ​ 15 , 000 15 , 000 35 , 000 ​

Telmo Santos · Accepted Answer

Final Answer : D, Explanation :  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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