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CA Intermediate · Advanced Accounting · AS 25 Interim Financial Reporting

Godavari Foods Ltd. reports quarterly. In Q1 it estimated an average annual effective tax rate of 30% and Q1 pre-tax income was ₹10,00,000. In Q2 it revised the estimated annual rate to 25%; Q2 pre-tax income was ₹20,00,000. Cumulative pre-tax income to end of Q2 is ₹30,00,000. What tax expense should be reported for Q2 alone, applying AS 25 on the change in estimate?

Q2 tax expense is ₹4,50,000. The revised 25% rate applies to cumulative income of ₹30,00,000, giving ₹7,50,000, from which the ₹3,00,000 already recognised in Q1 is deducted. The Q1 report is not restated for the change in estimate.

  1. A₹5,00,000
  2. B₹4,50,000Correct
  3. C₹7,50,000
  4. D₹3,00,000

Explanation

AS 25 treats a change in the estimated annual rate as a change in estimate; the revised rate is applied to cumulative income and the earlier quarter is not restated. Cumulative tax to Q2 = 25% × ₹30,00,000 = ₹7,50,000. Less Q1 tax already reported ₹3,00,000 (30% × ₹10,00,000) gives Q2 tax of ₹4,50,000. Applying 25% to Q2 alone gives ₹5,00,000, which ignores the catch-up of Q1.

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