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

Meridian Traders Ltd. has accounting profit of Rs 8,00,000 for the year. Its only difference between accounting and taxable income is depreciation: book depreciation is Rs 1,00,000 and tax depreciation is Rs 1,60,000. Tax rate is 30%. Ignoring any other item, what is the deferred tax amount arising in the year and its nature?

A deferred tax liability of Rs 18,000 arises. Tax depreciation exceeds book depreciation by Rs 60,000, so taxable income is lower now and will be higher when the difference reverses. Applying the 30% rate to the Rs 60,000 timing difference gives Rs 18,000 as a liability.

  1. ADeferred tax liability of Rs 18,000Correct
  2. BDeferred tax asset of Rs 18,000
  3. CDeferred tax liability of Rs 30,000
  4. DDeferred tax asset of Rs 30,000

Explanation

Tax depreciation exceeds book depreciation by Rs 60,000, so taxable income is lower than accounting income. This is a timing difference that will reverse, creating a deferred tax liability: 60,000 x 30% = Rs 18,000. Option B reverses the nature; options C and D wrongly apply tax rate to Rs 1,00,000 book depreciation.

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