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CA Intermediate · Advanced Accounting · AS 25 Interim Financial Reporting

Kaveri Industries Ltd expects annual profit before tax of Rs 8,00,000 and an average annual effective income tax rate of 25% for the year. In the first quarter its actual pre-tax profit is Rs 1,40,000. Under AS 25, what tax expense should be recognised for the first quarter?

The first quarter tax expense is Rs 35,000. AS 25 requires applying the estimated average annual effective tax rate, here 25%, to the interim pre-tax profit of Rs 1,40,000, rather than computing tax on the quarter separately or spreading it arbitrarily.

  1. ARs 28,000
  2. BRs 35,000Correct
  3. CRs 40,000
  4. DRs 1,40,000

Explanation

AS 25 requires income tax expense in interim periods to be accrued using the estimated average annual effective tax rate applied to interim pre-tax income. Tax = 25% x 1,40,000 = Rs 35,000. Rs 28,000 would arise from wrongly using a 20% rate; Rs 40,000 would be wrongly spreading annual tax of Rs 2,00,000 equally over 5 periods.

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