Hi friends please help me by answering my Queries
Induga limited prepares its accounts annually on 31st march. On 1st April 2002, it purchases a machine at a cost of Rs.150000. The machine has a useful life of three years and an expected scrap value of zero. Although it is eligible for a 100% first year depreciation allowance for the tax purpose, the straight line method is considered appropriate for accounting purpose. Induga Limited has profits before depreciation and taxes of Rs. 200000 each and the corporate tax rate is 40% each year.
Year 2003
Profit before depreciation and taxes=200(in thousands)
Less: depreciation for accounting purpose=50
Profit before tax=150
Less: tax expenses
Current tax 0.40(200-150) =20
Deferred tax 0.40(150-50) =40
Tax expenses=60
Profit after tax=90
Working note:
Taxable accounting income=150
Taxable income as per tax law=50
Originating timing difference=150-50=100
Year 2004
Profit before depreciation and taxes=200
Less: depreciation for accounting purpose=50
Profit before taxes=150
Less: tax expense
Current tax 0.40*200=80
Tax effect of timing difference reversing 0.40*(0-50) = (20)
Tax expense=60
Query no 1. In the year 2003, accounting income is higher than income as per tax law, so we have created deferred tax liability and credited it in profit and loss account. But, what is the exact amount of tax payable by the company for the year 2003.
Query no 2. In the year 2004, current tax is 80 and we have created deferred tax liability in the previous year that means tax liability in 2004 should be high. But, instead of adding deferred tax liability in the current tax we are reducing it. Why?
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