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CA Intermediate · Advanced Accounting · AS 25 Interim Financial Reporting

Narmada Pharma Ltd. reports quarterly. For the year ending 31 March, estimated annual income before tax is ₹80,00,000 and the estimated average annual effective tax rate is 30%. Profit before tax for the first quarter is ₹16,00,000. What tax expense should be recognised in the first quarter's interim statement?

Tax expense for the quarter is ₹4,80,000. AS 25 requires applying the estimated average annual effective tax rate of 30% to the interim period's pre-tax income of ₹16,00,000, rather than simply dividing the annual tax by four.

  1. A₹4,80,000Correct
  2. B₹6,00,000
  3. C₹2,40,000
  4. D₹24,00,000

Explanation

AS 25 requires income tax expense to be accrued using the estimated average annual effective tax rate applied to interim pre-tax income. Tax = 30% × ₹16,00,000 = ₹4,80,000. Using one quarter of annual tax (₹24,00,000 ÷ 4 = ₹6,00,000) ignores that the quarter's income differs from a quarter of the annual estimate.

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