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

Kaveri Textiles Ltd. (tax rate 25%) charged depreciation of Rs 8,00,000 in its books for the year, while depreciation allowed under the Income-tax Act was Rs 12,00,000. There are no other differences and no opening deferred tax balances. Under AS 22, the deferred tax for the year is:

A deferred tax liability of Rs 1,00,000 arises. Tax depreciation exceeds book depreciation by Rs 4,00,000, a timing difference that will reverse, so tax is deferred. Applying the 25% rate to this difference gives Rs 1,00,000 as the liability.

  1. ADeferred tax liability of Rs 1,00,000Correct
  2. BDeferred tax asset of Rs 1,00,000
  3. CDeferred tax liability of Rs 3,00,000
  4. DDeferred tax liability of Rs 2,00,000

Explanation

Tax depreciation exceeds book depreciation by Rs 4,00,000, a timing difference that reverses later, so taxable income is lower now. DTL = 4,00,000 x 25% = Rs 1,00,000. Rs 3,00,000 wrongly applies the rate to 12,00,000; Rs 2,00,000 uses book depreciation; an asset would arise if book exceeded tax.

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