Income tax of an interim period: estimated annual effective rate, year-to-date and period charge, revision of the rate and entries: Second quarter — revised rate

Context

Altavia SA (fictitious entity), a maker of packaging machines, closes its accounts on 31 December and publishes a condensed report at the end of each quarter. The preparer builds the file of the 20X6 half-year report (period ended 30 June 20X6) submitted to a review check: content and headings of the condensed statement, year-to-date amount of the quarters, change in accounting policy on raw materials and restatement of the first quarter, income tax at the estimated annual effective rate revised in the second quarter, goodwill impairment loss and the question of its reversal at the annual closing. Teaching simulation: the review trail of the file (preparation, reviewer notes and final sign-off) is simulated for demonstration purposes; it is neither a real review nor a validation of the content.

Assignment

Income tax of the half-year and revision of the estimated annual rate

Purpose of the workpaper

Record the estimated annual pre-tax profit, the estimated average annual effective rate of management (scale, jurisdictions), the year-to-date pre-tax profit and the charge already recognised. Compute the year-to-date charge at the estimated rate, the charge of the period and, if the rate is revised, the year-to-date charge at the revised rate and the adjustment recognised in the period of revision; periods already published are not restated. The rate is case data and a judgment of management; it is never presented as imposed by the standard. The entry is illustrative and excludes deferred tax.

Questions of the file covered by this workpaper

• Compute the expected annual tax at the estimated annual effective rate of the first quarter.
• Compute the year-to-date tax expense of the first quarter at the estimated rate.
• Can the estimated annual effective rate be revised to 30% in the second quarter, and is the published first quarter restated for that reason?
• Compute the year-to-date expense of the half-year at the revised rate.
• Compute the adjustment recognised in the second quarter.
• Record the adjustment of the income tax expense of the second quarter.

• MemoCompany profile and case conventionsOpen
• ScheduleComponents and income statement lines of the draftOpen
• ScheduleYear-to-date amounts and quarterly results of 20X6Open
• MemoEstimate of the annual tax rateOpen
• MemoTechnical note: change in the cost formula of raw materialsOpen
• MemoGoodwill: impairment test of the half-year and annual projectionOpen
• MinutesAudit committee: questions on the year-to-date measurementOpen
• InvoiceProgramme of a trade fairOpen