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

Kaveri Foods Ltd. has accounting income of Rs 8,00,000. Items: (i) Rs 50,000 penalty for violating law, disallowed in tax; (ii) Rs 1,20,000 provision for warranties, allowed for tax only when paid, expected next year; (iii) Rs 40,000 dividend income exempt from tax. Tax rate 30%. What is the deferred tax created for the year?

A deferred tax asset of Rs 36,000 is created. Only the warranty provision is a timing difference, being deductible when paid next year. Penalty and exempt dividend are permanent differences and give no deferred tax. So 1,20,000 multiplied by 30% gives Rs 36,000.

  1. ADeferred tax asset of Rs 36,000Correct
  2. BDeferred tax asset of Rs 51,000
  3. CDeferred tax liability of Rs 36,000
  4. DDeferred tax asset of Rs 87,000

Explanation

Only the warranty provision is a timing difference, as it is allowed in a later year: 1,20,000 x 30% = Rs 36,000 DTA. The penalty and exempt dividend are permanent differences and create no deferred tax. Rs 51,000 wrongly adds the penalty (50,000 x 30% = 15,000).

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