Deferred taxes

Dr. Reena kohli

Illustration
Moolchand Cements Limited purchased a machinery for Rs. 3,00,000 on
1
st
April 2014, having expected life of 3 years. As per IT Act, the
depreciation on this machinery is allowable at 100% in the year of
purchase but the management wants to spread the cost over 3 years.
Tax rate = 30 per cent
Profits before depreciation and taxes = Rs. 4,00,000 p.a. for all 3 years.
Calculate:
Book profits
Taxable profits (for the use of tax authorities)
Solution
Year ending 31st March 2015 2016 2017
Profit 400000 400000 400000
Depreciation 100000 100000 100000
Book Profits 300000 300000 300000
Income Tax Expense (@ 30%) 90000 90000 90000
Year ending 31st March 2015 2016 2017
Profit 400000 400000 400000
Depreciation 300000 0 0
Taxable Profit 100000 400000 400000
Income Tax Paid (@ 30 %) 30000 120000 120000
Moolchand Cements Tax as per Profit and Loss Account
Moolchand Cements Tax as per the Income Tax Act
Causes of Deferred taxes
Sales revenue recorded when goods are delivered
or services rendered
Other incomes (interest, dividend, rent
commission) recorded on due basis
Expenses on due basis
Conservatism leading to creation of provisions
Revaluation of assets
Deferred tax asset
Sandra Company had accounting profits (before taxes)
of Rs. 60,000 per year for three years. While calculating
the profits of year 1, it recognized a provision for
doubtful debts of Rs. 12000. Actual loss on account bad
debts was Rs. 9000 and Rs. 3000 in the years 2 and 3.
The tax authorities allow only actual uncollectible
amounts for determining taxable profits. Assuming a
tax rate of 30%,
Calculate the balance in deferred income tax account in
the year 1
Also show how would the balance in deferred income
tax account be adjusted in the years 2 and 3
respectively

Other reasons for deferred
taxes
Carry forward of unused tax losses
Unused tax credit carry forward
Carry forward of unused tax
losses
ABC Ltd., prepares its accounts annually on 31st March.
The company has incurred a loss of Rs. 1,00,000 in the
year 2001 and made profits of Rs. 50,000 and 60,000 in
years 2002 and 2003 respectively.
As per the provisions of tax laws, ABC Ltd. can carry
forward the tax losses for a period of 8 years provided
it is virtually certain, supported by convincing evidence,
that the company would have sufficient taxable income
in the future years against which carry forward of losses
can be set-off. It is also assumed that there is no
difference between taxable income and accounting
income except that set-off of loss allowed in years 2002
and 2003 for tax purposes. Tax rate is 40% in all three
years
What is the balance in deferred income tax account in
the year 2001
How would the balance in deferred income tax account
be adjusted in the years 2002 and 2003 respectively
Other reasons for deferred
taxes
Carry forward of unused tax losses
Unused tax credit carry forward







How much did Clemente Inc. pay in income tax each year, if tax
rate is 40% for all three years?
How much income tax expense did Clemente Inc. record each
year?
What is the balance in deferred income tax account at the end
of years 1, 2 and 3 respectively?


Example:
Answer:
Years
Tax
expense Tax paid DTL
1 48 42 6 DTL
2 48 46 2 DTL
3 48 50 -2
Recovery of
DTL
Thank You!!!