Example of deferred tax on Inventory revaluation

Example of deferred tax on Development Expenditure

Inventory at cost	$ 10,000
Inventory revalued	$ 20,000
Tax Rate	15%

Calculate the deferred tax?

Solution

Basic Steps for Solution

1. Calculate the carrying amount

2. Find Temporary difference i.e. taxable or deductible temporary difference?

3.  Tax Rate application on the temporary Difference

Basic Rules of Temporary difference Determination

1. Carrying amount is greater than Tax Base = taxable temporary difference = Deferred Tax liability

2. Carrying amount is less than Tax Base = deductible temporary difference= Deferred Tax Asset

Tip of solving example

In this example the carrying amount is quiet obvious and need not to calculate but in some cases carrying amount need to be calculated.

1. Calculate the carrying amount 

Tax authorities normally account for inventory on the cost and not on the bases of revaluation and therefore the carrying amount would be different for tax base.

Carrying amount inventory

20,000

2. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	20,000	10,000	10,000	T.T.D*

Taxable Temporary Difference

3. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax Asset
	10,000	15%	1500