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Practical caseIAS 34L3 · Advanced

Interim income tax: estimated annual effective rate, year-to-date and period charge, and revision of the rate during the year

7 documents15 tasks≈ 75 min
0 / 17 items completed
Standards
IAS 34 — Interim Financial Reporting
Assistance levelNo help · reduced assistance
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: shown

Case brief

Situation

Verdane SA (fictitious entity), a maker of electronic boards, closes its accounts on 31 December and publishes a report at the end of each quarter. You follow the income tax expense of the first three quarters of 20X6. Management first estimates an annual effective rate of 26%, revises it to 28% in the second quarter when it raises its estimate of the annual profit, then to 25% in the third quarter when it lowers it. You must compute the expenses and record the entries of each quarter without restating the reports already published.

Your assignment

Retain the rate to apply in the first quarter and explain how it is built; compute the expected annual tax, the year-to-date expense and the expense of the first quarter and record it; in the second quarter, compute the year-to-date expense at the revised rate and the adjustment, and record it; in the third quarter, do the same; say whether the published reports are restated and what IAS 12 changes; present the cumulative effect of the entries on the financial statements; conclude. One document is not useful.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Advanced level: no help, the work is grouped by kind.

Documents

File documents

7 documents: open each one to read it.

Document 1Memo

Company profile and case conventions

Verdane SA (fictitious entity) makes electronic boards; it closes its accounts on 31 December and publishes a report at the end of each quarter; its functional currency is the euro. Case conventions: amounts in EUR; the estimated annual effective rates are estimates of management given by the case; case convention (pedagogical assumption, not attributed to the standard): the entries are illustrative, use an income tax expense account and an income tax payable account and exclude deferred tax.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Estimated annual pre-tax profit€2,500,000.00
Estimated annual effective rate in the first quarter26%
Nominal statutory rate30%
Pre-tax profit of the first quarter€400,000.00
Revised annual effective rate in the second quarter28%
Year-to-date pre-tax profit in the second quarter€1,400,000.00
Tax expense recognised in the first quarter€104,000.00
Revised annual effective rate in the third quarter25%
Year-to-date pre-tax profit in the third quarter€1,500,000.00
Year-to-date tax expense recognised in the second quarter€392,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort7

  • Company profile and case conventions

  • Estimate of the annual rate in the first quarter

  • Estimate of the annual rate in the second quarter

  • Estimate of the annual rate in the third quarter

  • Question of the management controller on IAS 12

  • Quarterly reports already published

  • Invoice for a tax conference

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      15 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        Which rate applies to the profit of the first quarter, and how did management build it?

      2. Task 2Calculation

        Compute the expected annual tax at the estimated annual effective rate.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the expected annual tax at the estimated annual effective rate.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      3. Task 3Calculation

        Compute the year-to-date tax expense of the first quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the year-to-date tax expense of the first quarter.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Calculation

        Compute the tax expense of the first quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the tax expense of the first quarter.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Journal entries

        Record the tax expense of the first quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      6. Task 6Calculation

        Second quarter: compute the year-to-date expense at the revised rate.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Second quarter: compute the year-to-date expense at the revised rate.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Second quarter: compute the adjustment recognised in the period of revision.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Second quarter: compute the adjustment recognised in the period of revision.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      8. Task 8Journal entries

        Record the adjustment of the second quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      9. Task 9Calculation

        Third quarter: compute the year-to-date expense at the revised rate.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Third quarter: compute the year-to-date expense at the revised rate.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      10. Task 10Calculation

        Third quarter: compute the adjustment recognised in the period of revision.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Third quarter: compute the adjustment recognised in the period of revision.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Part of the adjustment that decreases the expense

      11. Task 11Journal entries

        Record the adjustment of the third quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      12. Task 12Professional judgement

        Must the reports of the first and second quarters already published be restated?

      13. Task 13Analysis

        Is the estimated annual rate of IAS 34 enough to account for current and deferred tax?

      14. Task 14Effects on the financial statements

        What is the cumulative effect of the three entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      15. Task 15Conclusion

        Write the conclusion.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 17).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 34 §30
      • IAS 34 §B12