XY Limited reported a Profit Before Tax (PBT) of 18 lakhs for the third quarter ending 31st December 2024. Following observations are noted; (i)…

CA Intermediate · Advanced Accounting · PYQS · May 2025
XY Limited reported a Profit Before Tax (PBT) of 18 lakhs for the third quarter ending 31st December 2024. Following observations are noted; (i) Dividend income of 8 lakhs received during the quarter has been recognized to the extent of 2 lakh only. (ii) Sales promotion expenses 15 lakhs incurred in the third quarter, 70% has been deferred to the fourth quarter as the sales in the last quarter is high. (iii) In the third quarter, the company changed depreciation method from WDV to SLM, which resulted in excess depreciation of 4 lakhs. The entire amount has been debited in the third quarter, though the share of the third quarter is only 1 lakhs. (iv) 3 lakhs extra-ordinary gain received in third quarter was allocated equally to the third and fourth quarter. (v) Cumulative loss resulting from change in method of inventory valuation was recognized in the third quarter of 5 lakhs. Out of this loss 2 lakhs relates to previous quarters. (vi) Sale of investment in the first quarter resulted in a gain of 30 lakhs. The company had apportioned this equally to the four quarters. Calculate the result of the third quarter as per AS 25 and also comment on the company's view on each observation.

Suggested Answer and Working Notes:

As per para 36 of AS 25 "Interim Financial Reporting”, seasonal or occasional revenue and cost within a financial year should not be deferred as of interim date until it is appropriate to defer at the end of the enterprise's financial year. Comments on observations: (i) Dividend income received during 3rd quarter should be recognised in the 3rd quarter only. (ii) Sales promotion expenses cannot be deferred on the basis that fourth quarter has more sales. This expense should be recognized in 3rd quarter only. (iii) Further, as per AS 10, Property, Plant and Equipment, if there is change in the depreciation method, such a change should be accounted for as a change in accounting estimate in accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies, and applied prospectively. Therefore, no adjustment would be required due to change in the method of depreciation. (iv) Extra ordinary gain of 3lakhs should be wholly recognized in 3rd quarter only. (v) Loss of 2lakhs belong to previous quarters and not 3rd quarter, so it should not be deducted from the profit of 3rd quarter. (vi) Gain on sale of investment is in the nature of occasional gain, so it cannot be deferred and hence the amount of 7.5 lakhs considered as income of 1st quarter, will be reversed from the profit of the 3rd quarter. Accordingly, the adjusted profit before tax for the 3rd quarter will be as follows: Statement showing Adjusted Profit Before Tax for the third quarter (₹) Profit before tax (as reported) 18,00,000 Add: Dividend income (₹ 8,00,000 - 2,00,000) 6,00,000 Excess depreciation charged in the 3rd quarter, due to change in the method - Extra ordinary gain (₹ 3,00,000-1,50,000) 1,50,000 Cumulative loss due to change in the method of inventory valuation should be applied retrospectively ₹ (5,00,000-3,00,000) 2,00,000 Less: Sales promotion expenses (70% of 15lakhs) (10,50,000) Gain on sale of investment (occasional gain should not be deferred) (7,50,000) Adjusted Profit before tax for the third quarter 9,50,000

Topics: AS 25

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