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CA Intermediate · Advanced Accounting · AS 25 Interim Financial Reporting

Kaveri Engineering Ltd (April–March year) estimates its profit before tax for the full year at ₹300 lakh and its income tax for the full year at ₹75 lakh, after considering all expected exemptions and deductions. The statutory rate is 30%. Profit before tax for the quarter ended 30 June is ₹60 lakh. Under AS 25, the tax expense for this quarter is:

The quarterly tax expense is ₹15 lakh. AS 25 requires the estimated average annual effective tax rate to be applied to interim pre-tax profit. The effective rate is ₹75 lakh divided by ₹300 lakh, or 25%, and 25% of ₹60 lakh gives ₹15 lakh.

  1. A₹18.00 lakh, by applying the 30% statutory rate to the quarter's profit
  2. B₹18.75 lakh, by taking one quarter of the estimated annual tax
  3. C₹12.00 lakh, by applying 20% to the quarter's profit
  4. D₹15.00 lakh, by applying the estimated average annual effective tax rate of 25%Correct

Explanation

AS 25 requires interim income tax expense to be based on the estimated average annual effective income tax rate applied to the interim pre-tax income. The effective rate is 75/300 = 25%. Tax for the quarter is 25% of ₹60 lakh = ₹15 lakh. Using the statutory rate of 30% would give ₹18 lakh, which ignores the expected deductions and is wrong.

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