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

Gupta Traders Ltd. had a deferred tax liability of Rs 2,00,000 at the start of the year, computed at 25%. During the year, the enacted tax rate changed to 30% and no timing differences originated or reversed. What is the treatment of the effect of the rate change?

The DTL is restated to Rs 2,40,000 and the Rs 40,000 increase is charged to the statement of profit and loss. The timing difference is Rs 8,00,000, and deferred tax is remeasured at the enacted rate of 30%.

  1. AIncrease DTL to Rs 2,40,000 and charge Rs 40,000 to profit and lossCorrect
  2. BKeep DTL at Rs 2,00,000
  3. CIncrease DTL to Rs 2,40,000 and credit Rs 40,000 to reserves
  4. DReduce DTL to Rs 1,66,667 and credit profit and loss

Explanation

Underlying timing difference = 2,00,000 / 25% = Rs 8,00,000. At the enacted 30% rate, DTL = Rs 2,40,000. The Rs 40,000 increase is a change in tax expense and goes to the statement of profit and loss, not reserves.

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