IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation
Kaveri Ltd has a corporate tax rate of 25%. It buys a machine for ₹40 lakh. Accounting depreciation is straight line over 5 years with no residual value. For tax, the allowance in year 1 is 40% of cost. Ignoring other items, what is the deferred tax balance at the end of year 1 and its nature?
The deferred tax is a liability of ₹2 lakh. Carrying amount is ₹32 lakh while the tax base is ₹24 lakh, a taxable timing difference of ₹8 lakh, and 25% of that is ₹2 lakh.
- ALiability of ₹2 lakhCorrect
- BAsset of ₹2 lakh
- CLiability of ₹6 lakh
- DLiability of ₹4 lakh
- Asset of ₹6 lakh
Explanation
Accounting carrying amount = 40 - 8 = 32 lakh. Tax written-down value = 40 - 16 = 24 lakh. Taxable temporary difference = 32 - 24 = 8 lakh, times 25% = 2 lakh liability. Using 16 or 24 as the difference gives 4 or 6 lakh; asset would be the wrong direction.
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