On 1st April 20X1, S Ltd. leased a machine over a 5 year period. The present value of lease liability is 120Cr (discount rate of 8%) and is…

CA Final · Financial Reporting · MTP · May 2025
On 1st April 20X1, S Ltd. leased a machine over a 5 year period. The present value of lease liability is 120Cr (discount rate of 8%) and is recognized as lease liability and corresponding Right of Use (RoU) Asset on the same date. The RoU Asset is depreciated under straight line method over the 5 years. The annual lease rentals are 30Cr payable starting 31st March 20X2. The tax law permits tax deduction on the basis of payment of rent. Assuming tax rate of 30%, you are required to explain the deferred tax consequences for the above transaction for the year ended 31st March 20X2.

Suggested Answer and Working Notes:

A temporary difference effectively arises between the value of the machine for accounting purposes and the amount of lease liability, since the rent payment is eligible for tax deduction. Tax base of the machine is nil as the amount is not eligible for deduction for tax purposes. Tax base of the lease liability is nil as it is measured at carrying amount less any future tax deductible amount Recognition of deferred tax on 31st March 20X2: Carrying amount in balance sheet RoU Asset [120 Cr – 24 Cr (Depreciation)] ₹ 96.00 Cr Lease Liability [120 Cr + 9.60 Cr (120 Cr x 8%) - 30 Cr] ₹ 99.60 Cr Net Amount - 3.60 Cr Tax Base 0.00 Cr Temporary Difference (deductible) ₹ 3.60 Cr Deferred Tax asset to be recognized (₹ 3.60 Cr x 30%) ₹ 1.08 Cr

Topics: Ind AS 12

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic