ACCA Applied Skills · Financial Reporting · Taxation
At 31 December Year 1, Arden Co estimated its income tax for the year at $84,000. During Year 1 it paid no tax. In Year 2 the tax authority agreed the Year 1 liability at $79,000 and Arden settled it. Which statement describes the correct treatment of the $5,000 difference in the Year 2 financial statements?
The $5,000 over-provision is treated as a change in estimate, so it is credited against the current tax charge in Year 2 profit or loss. Year 1 is not restated because the original figure was a reasonable estimate, not an error.
- ACredit $5,000 to retained earnings as a prior period adjustment
- BInclude $5,000 as a reduction of the Year 2 current tax charge in profit or lossCorrect
- CRestate the Year 1 financial statements to show tax of $79,000
- DCredit $5,000 directly to a tax reserve in equity
Explanation
Under IAS 12 a difference between the estimate and the final settlement is a change in accounting estimate. It is recognised in the period the amount is agreed, so Year 2 profit or loss bears a $5,000 credit. Restating Year 1 would only apply to an error, not an estimate change.
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