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CMA Final · Corporate Financial Reporting · Income Taxes (Ind AS 12)

Yamuna Retail Ltd provides for product warranties, which are deductible for tax only when paid. The opening provision was Rs 4,00,000 and the closing provision is Rs 6,00,000. The tax rate is 25% throughout, and sufficient future taxable profit is probable. What deferred tax is recognised in profit or loss for the year?

Deferred tax income of Rs 50,000 is recognised. The warranty provision is a deductible temporary difference, so the deferred tax asset rises from Rs 1,00,000 to Rs 1,50,000 at 25%. The increase in the asset reduces tax expense and is credited to profit or loss.

  1. ADeferred tax income of Rs 50,000Correct
  2. BDeferred tax expense of Rs 50,000
  3. CDeferred tax income of Rs 1,50,000
  4. DDeferred tax income of Rs 1,00,000

Explanation

The provision has a nil tax base, so it creates a deductible temporary difference. Closing DTA = 6,00,000 x 25% = 1,50,000. Opening DTA = 4,00,000 x 25% = 1,00,000. The increase of 50,000 is deferred tax income, not an expense.

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