AB's financial information shows that the non current assets' carrying value is greater than the tax base at the year end. What is the journal entry…

The scenario where a non-current asset's carrying value is greater than its tax base creates a taxable temporary difference. According to International Accounting Standard 12 (IAS 12), an entity must recognize a deferred tax liability for all taxable temporary differences. The journal entry to create or increase this liability involves crediting the 'Deferred tax provision' (a liability account). The corresponding debit is recognized as 'Tax expense' in the income statement, as the tax effect should follow the accounting treatment of the underlying item (in this case, the asset's depreciation, which affects profit or loss).

A. Dr Deferred tax provision Cr Tax expense: This entry incorrectly decreases the deferred tax liability, which is the opposite of what is required when a taxable temporary difference arises.

B. Dr Deferred tax provision Cr Other comprehensive income: This entry is incorrect as it reverses the proper journal and wrongly routes the credit to Other Comprehensive Income (OCI) instead of tax expense.

D. Dr Other comprehensive income Cr Deferred tax provision: This entry incorrectly debits OCI. The tax effect is only recognized in OCI if the underlying transaction was also recognized in OCI, which is not indicated here.

1. International Accounting Standards Board (IASB). (2021). International Accounting Standard 12: Income Taxes. IFRS Foundation.

Paragraph 15: States that "A deferred tax liability shall be recognised for all taxable temporary differences..."

Paragraph 58: Specifies that "Current and deferred tax shall be recognised as income or an expense and included in profit or loss for the period

except to the extent that the tax arises from: (a) a transaction or event which is recognised

in the same or a different period

outside profit or loss..." Since depreciation on a non-current asset is a profit or loss item

the related deferred tax is also a profit or loss item.

2. Kieso

D. E.

Weygandt

J. J.

& Warfield

T. D. (2019). Intermediate Accounting: IFRS Edition (4th ed.). John Wiley & Sons.

Chapter 19

Section 1

"Future Taxable Amounts and Deferred Taxes": This chapter explains that a taxable temporary difference results in a deferred tax liability. The standard journal entry illustrated for the origination of this difference is a debit to Income Tax Expense and a credit to Deferred Tax Liability.

3. University of Melbourne. (n.d.). ACCT20002 Intermediate Financial Accounting Course Notes. Department of Accounting.

Module on Accounting for Income Taxes: The course materials detail that when the carrying amount of an asset exceeds its tax base

a deferred tax liability is created by debiting income tax expense and crediting the deferred tax liability account. This reflects the future tax consequences of recovering the asset's carrying amount.