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

Rohan Industries Ltd. had a deferred tax liability of ₹90,000 at the start of the year, computed at 30% on a cumulative timing difference of ₹3,00,000 on depreciation. During the year, the tax rate enacted for future periods changes to 25%. Current year depreciation is ₹4,00,000 as per books and ₹5,50,000 as per tax. Other timing differences are nil. What is the closing deferred tax liability and the deferred tax expense charged to profit and loss for the year?

Closing deferred tax liability is ₹1,12,500 and the deferred tax expense is ₹22,500. The cumulative timing difference is ₹4,50,000, remeasured at the newly enacted 25% rate. The increase over the opening ₹90,000 liability is the charge to profit and loss for the year.

  1. AClosing DTL ₹1,12,500; deferred tax expense ₹22,500Correct
  2. BClosing DTL ₹1,12,500; deferred tax expense ₹37,500
  3. CClosing DTL ₹1,12,500; deferred tax expense ₹60,000
  4. DClosing DTL ₹1,35,000; deferred tax expense ₹45,000

Explanation

Cumulative timing difference at close = 3,00,000 + (5,50,000 - 4,00,000) = ₹4,50,000. Under AS 22 deferred tax is measured at the enacted rate, so closing DTL = 4,50,000 x 25% = ₹1,12,500. Expense = 1,12,500 - 90,000 = ₹22,500, which includes the rate-change effect (a reduction of 3,00,000 x 5% = ₹15,000) and the new difference of 1,50,000 x 25% = ₹37,500. Option 4 keeps the old 30% rate.

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