The Hindu Business Line : How to apply AS-25

1) If Rs 210 lakh being the pre-tax income in the first quarter with anticipated loss of Rs 70 lakh for the remaining three quarters leaving nil income for the year how much shall be taken as tax liability for the first quarter IP on the assumption that tax rate is 30 per cent: a) nil; b) Rs 63 lakh; c) Rs 42 lakh; d) Rs 21 lakh.

2) An inventory loss from a market price decline occurred in the first quarter. The loss was not expected to be restored in the accounting year. However in the third quarter, the recovery of market price exceeded the earlier decline. For IFR, amount of net inventory should be in the first and third quarters: a) decrease in the first quarter by the amount of decline in market price and increase in the third quarter by the amount of the recovery in market price; b) decrease in the first quarter by the amount of the decline and increase in the third quarter by the amount of decrease in the first quarter; c) not be affected in the first quarter and increase in the third quarter by the amount of the recovery that exceeded the amount of the previous decline; d) not be affected in either the first quarter or the 3rd quarter.

3) Impairment of assets shall normally be recognised only at the end of the financial year. If it is identified in an IP, it shall be accounted: a) at the end of the financial year; b) in the following financial year; c) in the following IP; and d) in the IP itself.

4) If a company plans for induction of a plant and machinery costing Rs 12 lakh in the third quarter, what shall be the depreciation charge at 10 per cent per annum in the first quarter: a) Rs 1.20 lakh; b) nil; c) Rs 0.30 lakh;

d) Rs 0.60 lakh.

5) Blue Ltd following calendar year has the following pre-tax income and estimated tax rates applicable for the corresponding periods: First quarter: Pre-tax income, Rs 60,000; effective tax rate, 30 per cent; Second quarter: Pre-tax income, Rs 75,000; effective tax rate, 35 per cent; Third quarter: Pre-tax income, Rs 40,000; effective tax rate, 35 per cent.

What is the income-tax provision for the third quarter of the calendar year of Blue Ltd?: a) Rs 14,000; b) Rs 13,500; c) Rs 17,000; d) Rs 12,000

6) An enterprise is developing a new production process. During 2003-04, the expenditure incurred was Rs 27 lakh, of which, Rs 21 lakh was incurred before December 1, 2003, and Rs 6 lakh was incurred between December 1, and December 31, 2003. Only by December 1 the company could demonstrate that the production process met the criteria for recognition as an intangible asset. Find out the amount to be recorded as intangible asset for the third quarter ending December 31, 2003: a) Rs 6 lakh; b) Rs 27 lakh;

c) Rs 9 lakh; d) Rs 24 lakh

7) MN Ltd had estimated Rs 45,000 as expenditure on account of warranty repairs/replacements for the sales effected during the quarter ending June 30, 2003. But actual expenditure incurred was Rs 54,500 in the next quarter besides an estimate made for that quarter for a sum of Rs 50,000. Find out the amount of expenditure to be considered for the quarter ending September 30, 2003: a) Rs 50,000; b) Rs 54,500; c) Rs 45,000; d) Rs 59,500

8) MN Ltd had estimated Rs 45,000 as expenditure on account of warranty repairs/replacements for the sales effected during the quarter ending 30.6.2003. But actual expenditure incurred was Rs 54,500 in the next quarter besides an estimate made for that quarter for a sum of Rs 50,000. Find out the amount of expenditure to be considered for the six months ending September 30, 2003, for the 2nd interim period in a financial year 2003-04: a) Rs 95,000; b) Rs 1,04,500; c) Rs 99,000; d) Rs 149,500

Verify your answers

1(b) Tax expense shall be calculated based on the tax rate applicable on the pre-tax income of the IP irrespective of the future anticipated losses

2(b) A decline in inventory price expected to be permanent shall reduce the value of inventory in the period of decline. A subsequent increase in the value of the inventory should be recognised as a cost recovery in the period of decrease, but never above original cost price. Decline to be recognised in the first quarter and increase in the value shall be recognised in the third quarter.

3(d) In the interim period itself. Every interim period shall be considered as if annual financial statements are prepared, though detailed working of recoverable amount may not be possible.

4(b) Depreciation shall be considered only for those items of assets owned by the enterprise during that IP and no depreciation shall be charged for the first quarter.

5(b) Average rate of tax for the calendar year accounting year for Blue Ltd is 33.75 per cent (30 + 35 + 35 + 35)/4 = 33.75. Such average rate is applied on the pre-tax income of the third quarter to confirm the value of Rs 13,500

6(a) No matter as by what time the criteria is met, recognition of Intangible asset shall only done from that time. This principle is covered in AS 26 as well.

7(d) The current IP estimate of Rs 50,000 plus change in the estimate of Rs 9,500 related to the previous IP shall be considered as current period expenditure.

However, only when the change in the estimate is significant, separate disclosure is required.

8(b) Rs 1,04,500. Expenditure for the six months ending would automatically be a simple summation of Rs 45,000 and Rs 59,500.

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