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CA Intermediate · Advanced Accounting · AS 25 Interim Financial Reporting

Nirmal Chemicals Ltd estimates its tax for the full year at an average annual effective rate. Profit before tax for Q1 is Rs 40 lakh, for Q2 Rs 60 lakh. At the end of Q2 the expected annual profit before tax is Rs 400 lakh, and the estimated tax for the year is Rs 100 lakh. Ignoring other factors, what tax expense should be shown for the half year ended in Q2 under AS 25?

The tax expense for the half year is Rs 25 lakh. Interim income tax is accrued using the estimated average annual effective rate, which is 100/400, or 25 percent, applied to the half-year pre-tax profit of Rs 100 lakh.

  1. ARs 25 lakhCorrect
  2. BRs 50 lakh
  3. CRs 100 lakh
  4. DRs 20 lakh

Explanation

The average annual effective rate = 100/400 = 25%. Applied to the half-year profit of 40 + 60 = Rs 100 lakh, tax = Rs 25 lakh. Rs 50 lakh wrongly takes half of the annual tax regardless of actual profit earned so far.

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