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CA Intermediate · Advanced Accounting · AS 22 Accounting for Taxes on Income

Ganga Traders Ltd. has a deferred tax liability of Rs 90,000 at the start of the year at a 30% tax rate. During the year the enacted rate for future years changes to 25% (substantively enacted). Timing differences underlying the opening balance have not reversed and no new differences arise. What is the deferred tax position at year end and the effect on profit and loss?

The deferred tax liability becomes Rs 75,000 and Rs 15,000 is credited to profit and loss. The cumulative timing difference is Rs 3,00,000, and remeasuring it at the new 25% rate reduces the liability, lowering the tax expense.

  1. ADTL Rs 75,000; credit of Rs 15,000 to profit and lossCorrect
  2. BDTL Rs 75,000; debit of Rs 15,000 to profit and loss
  3. CDTL Rs 90,000; no effect
  4. DDTL Rs 1,08,000; debit of Rs 18,000

Explanation

Cumulative timing difference = 90,000/30% = Rs 3,00,000. At 25%, DTL = Rs 75,000. The liability falls by Rs 15,000, which is a reduction in tax expense, so it is credited to profit and loss. The option with a debit has the wrong direction.

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