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CMA Intermediate · Financial Accounting · Accounting for Taxes on Income (AS 22)

Mehta Traders provided Rs 2,00,000 for doubtful debts in its books this year. The expense is allowed for tax only when the debts are written off as bad, which will happen next year. The tax rate is 25%. Ignoring prudence considerations on future taxable income, what is the tax effect to be recognised?

A deferred tax asset of Rs 50,000 is recognised. The provision is expensed in the books this year but is tax-deductible only next year, creating a timing difference of Rs 2,00,000. At 25%, the future tax saving is Rs 50,000, recorded as an asset.

  1. ADeferred tax liability of Rs 50,000
  2. BNo deferred tax, as it is a permanent difference
  3. CCurrent tax reduced by Rs 50,000
  4. DDeferred tax asset of Rs 50,000Correct

Explanation

The expense is recorded in the books now but deductible for tax later, so it is a timing difference. Taxable income now exceeds accounting income, giving a deferred tax asset of 2,00,000 x 25% = Rs 50,000. It is not a liability, and current tax is not reduced since no deduction is allowed this year.

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