Skip to content

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

Sagar Pharma Ltd. paid ₹2,40,000 as bonus to employees in the current year, to be allowed for tax only on actual payment in the following year, and the amount was fully provided for in books this year. Tax rate is 30%, and the company is certain of future taxable profits. Which statement correctly applies AS 22?

A deferred tax asset of ₹72,000 is created and credited to the profit and loss account. The bonus is expensed now but tax-deductible next year, a timing difference producing future tax savings of 30% of ₹2,40,000, recognised given virtual certainty of future profits.

  1. ADeferred tax liability of ₹72,000 is created
  2. BDeferred tax asset of ₹72,000 is created and credited to P&LCorrect
  3. CNo deferred tax arises as it is a permanent difference
  4. DDeferred tax asset of ₹72,000 is created and debited to P&L

Explanation

The expense is charged in books this year but deductible for tax next year, so it is a timing difference giving rise to a deductible amount in future. Deferred tax asset = 30% of 2,40,000 = 72,000, recognised by crediting deferred tax (reducing tax expense) in the P&L. Option C is wrong as the expense will eventually be allowed.

Did you get it right without looking?

One question tells you little. A timed set on AS 22 Accounting for Taxes on Income shows your real accuracy, how long you take and where you lose marks.

Practise AS 22 Accounting for Taxes on IncomeFree diagnostic mock

More AS 22 Accounting for Taxes on Income questions