CMA Intermediate · Financial Accounting · Accounting for Taxes on Income (AS 22)
Sharma Ltd charged depreciation of Rs 5,00,000 in its books for the year, while the depreciation allowed for tax purposes was Rs 8,00,000. The tax rate is 30%, and the difference is a timing difference that will reverse. What deferred tax should be recognised for the year?
A deferred tax liability of Rs 90,000 arises. Tax depreciation exceeds book depreciation by Rs 3,00,000, so tax is deferred to later years when the timing difference reverses. At 30% this gives Rs 90,000 as the liability to be recognised for the year.
- ADeferred tax liability of Rs 90,000Correct
- BDeferred tax asset of Rs 90,000
- CDeferred tax liability of Rs 1,50,000
- DNo deferred tax, as the difference is permanent
Explanation
Tax depreciation exceeds book depreciation by Rs 3,00,000, so taxable income is lower now and will be higher when the difference reverses. This creates a deferred tax liability of 3,00,000 x 30% = Rs 90,000. A deferred tax asset would arise only if book depreciation exceeded tax depreciation.
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