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

Rao Pharma Ltd. has unabsorbed depreciation of Rs 5,00,000 and carried forward business loss of Rs 3,00,000 at the year end. It has no deferred tax liabilities, and has no virtual certainty supported by convincing evidence of future taxable profits. Tax rate is 30%. What should the company recognise as deferred tax asset?

Nil deferred tax asset is recognised. AS 22 requires virtual certainty, supported by convincing evidence, of sufficient future taxable income before a deferred tax asset on unabsorbed depreciation or carried forward losses is recognised. Without that evidence, the potential Rs 2,40,000 asset is not recorded.

  1. ANilCorrect
  2. BRs 90,000
  3. CRs 1,50,000
  4. DRs 2,40,000

Explanation

Under AS 22, where there is unabsorbed depreciation or carried forward loss, a deferred tax asset is recognised only to the extent there is virtual certainty supported by convincing evidence of future taxable income. No such evidence exists, so nothing is recognised. The 1,50,000 and 2,40,000 values apply the rate to loss or depreciation alone or in total without that test.

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