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

Madhav Pharma Ltd. (tax rate 30%) has a opening DTL of Rs 2,40,000 on depreciation. At year end, the cumulative depreciation timing difference is Rs 10,00,000. During the year it also made a provision for warranty of Rs 1,50,000, disallowed in the current year and allowable only when paid next year. There is virtual certainty of future taxable profits. The net deferred tax charge (expense) to the Statement of Profit and Loss for the year is:

The net deferred tax expense is Rs 15,000. The depreciation DTL rises from Rs 2,40,000 to Rs 3,00,000, an expense of Rs 60,000, while the warranty provision creates a deferred tax asset of Rs 45,000. Netting the two gives Rs 15,000.

  1. ARs 60,000
  2. BRs 45,000
  3. CRs 15,000Correct
  4. DRs 1,05,000

Explanation

Closing DTL on depreciation = 10,00,000 x 30% = 3,00,000; opening 2,40,000, so increase of 60,000 (expense). Warranty DTA = 1,50,000 x 30% = 45,000 (reduces expense). Net charge = 60,000 - 45,000 = Rs 15,000. Rs 60,000 ignores the DTA; Rs 1,05,000 adds the DTA instead of subtracting.

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