SA May 2012-IPCC GROUP-I

Volume 6
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP I & ACCOUNTING TECHNICIAN EXAMINATION
11
SUGGESTED ANSWERS
May, 2012
The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
New Delhi
SUGGESTED ANSWERS TO QUESTIONS SET AT THE
COMMON FOR
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP I & ACCOUNTING TECHNICIAN EXAMINATION

MAY, 2012
BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

(Set up by an Act of Parliament)
The suggested Answers published in this volume do not constitute the basis for evaluation of the students answers in the examination. The answers are prepared by the Faculty of the Board of Studies with a view to assist the students in their education. While due care is taken in preparation of the answers, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not in anyway responsible for the correctness or otherwise of the answers published herein.
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Contents
Page Nos. Paper 1. Paper 2. Paper 3. Paper 4 Accounting ........................................................................................... 1 27 Business Laws, Ethics and Communication .........................................28 43 Cost Accounting and Financial Management .......................................44 67 Taxation ..............................................................................................68 96
Examiners comments on the performance of the candidates
PAPER 1 : ACCOUNTING Question No. 1 is compulsory Answer any five questions from the remaining six questions. Wherever appropriate, suitable assumption/s should be made and indicated in answer by the candidate. Working notes should form part of the answer. Question 1 (a) M/s Excellent Construction Company Limited under took a contract to construct a building for ` 3 crore on 1st September, 2011. On 31st March, 2012 the company found that it had already spent ` 1 crore 80 lakhs on the construction. Prudent estimate of additional cost for completion was ` 1 crore 40 lakhs. What amount should be charged, to revenue in the final accounts for the year ended on 31st March, 2012, as per the provisions of Accounting Standard 7 "Construction Contracts (Revised)" ? (b) M/s Innovative Garments Manufacturing Company Limited invested in the shares of another company on 1st October, 2011 at a cost of ` 2,50,000. It also earlier purchased Gold of ` 4,00,000 and Silver of ` 2,00,000 on 1st March, 2009. Market value as on 31st March, 2012 of above investments are as follows:
`
Shares Gold Silver 2,25,000 6,00,000 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments Manufacturing Company Limited for the year ending 31st March, 2012 as per the provisions of Accounting Standard 13 "Accounting for Investments"? (c) MIs Progressive Company Limited has not charged depreciation for the year ended on 31st March, 2012, in respect of a spare bus purchased during the financial year 2011-12 and kept ready by the company for use as a stand-by, on the ground that, it was not actually used during the year. State your views with reference to Accounting Standard 6 "Depreciation Accounting". Further during the year company made additions to its factory by using its own workforce, at a cost of ` 4,50,000 as wages and materials. The lowest estimate from an outside contractor to carry out the same work was ` 6,00,000. The directors contend that, since they are fully entitled to employ an outside contractor, it is reasonable to debit the Factory Building Account with ` 6,00,000. Comment whether the directors' contention is right in view of the provisions of Accounting Standard 10 "Accounting for Fixed Assets"? (d) Briefly explain the types of Amalgamations? (4 x 5 = 20 Marks)
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
Answer (a) Calculation of Estimated Cost of Construction
` in crores
Cost of construction incurred till date Add: Estimated future cost Total estimated cost of construction Percentage of completion of contract till date to total estimated cost of construction = ` (1.80/3.20)100 = 56.25% Proportion of total contract value recognised as revenue as per AS 7 (Revised) = Contract price x percentage of completion = ` 3 crores x 56.25% = ` 1.6875 crores (b) As per AS 13 Accounting for Investments, for investment in shares - if shares are purchased with an intention to hold for short-term period then it will be shown at the realizable value of ` 2,25,000 as on 31st March, 2012. However, if equity shares are acquired with an intention to hold for long term period then it will be shown at cost of ` 2,50,000 in the Balance Sheet of the company. However, provision for diminution shall be made to recognize a decline, if other than temporary, in the value of shares. As per the standard, investment acquired for long term period shall be shown at cost. Gold and silver are generally purchased with an intention to hold it for long term period untill and unless given otherwise. Hence, the investment in Gold and Silver (purchased on 1st March, 2009) shall continue to be shown at cost as on 31st March, 2012 i.e., ` 4,00,000 and ` 2,00,000 respectively, though their realizable values have been increased. (c) According to para no. 3.1 of AS 6, Depreciation Accounting, depreciation is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Accordingly, depreciation may arise even when asset has not been used in the current year but was ready for use in that year. The need for using the stand by bus may not have arisen during the year but that does not imply that the useful life of the bus has not been affected. Therefore, non-provision of depreciation on the ground that the bus was not used during the year is not tenable. As per para no. 10.1 of AS 10, Accounting for Fixed Assets, clearly states that the gross book value of the self constructed fixed asset includes the costs of construction that relate directly to the specific asset and the costs that are attributable to the construction activity in general can be allocated to the specific asset. If any internal profit is there it 1.80 1.40 3.20
PAPER 1 : ACCOUNTING
should be eliminated. Saving of ` 1,50,000 on account of using its on work force is an unrealized/ internal profit, which should not be capitalized/recorded as per the standard. Thus, only ` 4,50,000 should be debited to the factory building account and not ` 6,00,000. Hence, the contention of the directors of the company to capitalize ` 6,00,000 as cost of factory building, on the ground that the company is fully entitled to employ an outside contractor is not justifiable. (d) As per AS 14, Accounting for Amalgamations there are two types of amalgamation. In first type of amalgamation there is a genuine pooling not merely of assets and liabilities of the amalgamating companies but also of the shareholders interests and of the businesses of the companies. Such amalgamations are amalgamations which are in the nature of merger and the accounting treatment of such amalgamations should ensure that the resultant figures of assets, liabilities, capital and reserves more or less represent the sum of the relevant figures of the amalgamating companies. In the second category are those amalgamations which are in effect a mode by which one company acquires another company and, as a consequence, the share holders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company, or the business of the company which is acquired is not intended to be continued. Such amalgamations are amalgamations in the nature of purchase. Note: It is possible to answer this question by specifying all the conditions to be satisfied for an amalgamation to be an amalgamation in the nature of merger. The amalgamation would to be an amalgamation in the nature of purchase if any one or more of the said conditions are not satisfied. Question 2 M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the Balance Sheet of the company as on 31st March, 2012 before reconstruction : Liabilities Share Capital 50,000 shares of ` 50 each fully paid up 1,00,000 shares of ` 50 each ` 40 paid up Capital Reserve 8% Debentures of ` 100 each 12% Debentures of ` 100 each Trade Creditors Amount (`) Assets Amount (`) 22,00,000 42,70,000 8,50,000 5,20,000 3,20,000 10,90,000 2,68,000 7,82,000
25,00,000
Goodwill Land & Building Machinery 40,00,000 Computers 5,00,000 Stock 4,00,000 Trade Debtors 6,00,000 Cash at Bank 12,40,000 Profit & Loss A/c
Outstanding Expenses Total
10,60,000 1,03,00,000 Total
1,03,00,000
Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited: Mr. Shiv Mr. Ganesh 8% Debentures 3,00,000 1,00,000 12% Debentures 4,00,000 2,00,000 Total 7,00,000 Total 3,00,000 The following scheme of internal reconstruction was framed and implemented, as approved by the court and concerned parties : (1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of ` 40 each. (2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of ` 40 each for ` 12,50,000. (3) Trade Creditors are given option of either to accept fully paid equity shares of ` 40 each for the amount due to them or to accept 70% of the amount due to them in cash in full settlement of their claim. Trade Creditors for ` 7,50,000 accept equity shares and rest of them opted for cash towards full and final settlement of their claim. (4) Mr. Shiv agrees to cancel debenture amounting to ` 2,00,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due. He also agree to subscribe further 15% Debentures in cash amounting to ` 1,00,000. (5) Mr. Ganesh agrees to cancel debenture amounting to ` 50,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due. (6) Land & Building to be revalued at ` 51,84,000, Machinery at ` 7,20,000, Computers at ` 4,00,000, Stock at ` 3,50,000 and Trade Debtors at 10% less to as they are appearing in Balance Sheet as above. (7) Outstanding Expenses are fully paid in cash. (8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c will be adjusted against Capital Reserve. You are required to pass necessary Journal Entries for all the above transactions and draft the company's Balance Sheet immediately after the reconstruction. (16 Marks) Answer Journal Entries Particulars 1. Equity Share final call A/c
`
Dr. 10,00,000
To Equity Share Capital A/c (Being final call made for `10 each on 1,00,000 shares) 2. Bank A/c To Equity Share final call A/c (Being money on final call received) 3. Equity share capital (` 50) A/c To Equity Share Capital (`40) A/c To Capital Reduction A/c (Being conversion of equity share capital of `50 each into `40 each as per reconstruction scheme) 4. Bank A/c To Equity Share Capital A/c (Being new shares allotted at `40 each) 5. Trade Creditors A/c To Equity Share Capital A/c To Bank A/c To Capital Reduction A/c (Being payment made to creditors in shares or cash to the extent of 70% as per reconstruction scheme) 6. 8% Debentures A/c 12% Debentures A/c To 15% Debentures A/c To Capital Reduction A/c (Being cancellation of 8% and 12% debentures of Shiv, & issuance of new 15% debentures and balance transferred to capital reduction account as per reconstruction scheme) 7. Bank A/c To 15% Debentures A/c (Being new debentures subscribed by Shiv) 8. 8% Debentures A/c Dr. 1,00,000 Dr. 1,00,000 Dr. Dr. 3,00,000 4,00,000 Dr. 12,40,000 Dr. 12,50,000 Dr. 75,00,000 Dr. 10,00,000
10,00,000
10,00,000
60,00,000 15,00,000
12,50,000
7,50,000 3,43,000 1,47,000
5,00,000 2,00,000
1,00,000
12% Debentures A/c To 15% Debentures A/c To Capital Reduction A/c (Being cancellation of 8% and 12% debentures of Ganesh, & issuance of new 15% debentures and balance transferred to capital reduction account as per reconstruction scheme) 9. Land and Building (51,84,000-42,70,000) Stock To Capital Reduction A/c (Being value of assets appreciated) 10. Outstanding expenses A/c To Bank A/c (Being outstanding expenses paid in cash) 11. Capital Reduction A/c To Machinery A/c To Computers A/c To Trade Debtors A/c To Goodwill A/c To Profit and Loss A/c (Being amount of Capital Reduction utilized in writing off P & L A/c (Dr.) balance, goodwill and downfall in value of other assets) 12. Capital Reserve A/c To Capital reduction A/c (Being debit balance of capital reduction account adjusted against capital reserve)
Dr.
2,00,000 2,50,000 50,000
Dr. Dr.
9,14,000 30,000 9,44,000
Dr.
10,60,000 10,60,000
Dr.
33,41,000 1,30,000 1,20,000 1,09,000 22,00,000 7,82,000
Dr.
5,00,000 5,00,000
Balance Sheet (as reduced) as on 31.3.2012 Liabilities Share Capital: 2,00,000 Equity shares of ` 40 each 15% Debentures 80,00,000 8,50,000 ` Assets Land & Building Machinery Computers Trade Debtors ` 51,84,000 7,20,000 4,00,000 9,81,000
Stock Cash at Bank (W.N.1) 88,50,000 Working Notes: 1. Particulars To To To To 2. Particulars To To To To To Machinery A/c Computers A/c Trade Debtors A/c Goodwill A/c Profit and Loss A/c Balance b/d Equity Share final call A/c Equity Share Capital A/c 15% Debentures A/c Cash at Bank Account ` 2,68,000 10,00,000 12,50,000 1,00,000 26,18,000 Capital Reduction Account ` 1,30,000 1,20,000 1,09,000 22,00,000 7,82,000 By By By By By By By 33,41,000 Question 3 Particulars Equity Share Capital A/c Trade Creditors A/c 8% and 12% Debentures A/c 8% and 12% Debentures A/c Land & Building Stock Capital Reserve A/c By By By Particulars Trade Creditors A/c Outstanding expenses A/c Balance c/d (bal. fig.)
3,50,000 12,15,000 88,50,000
` 3,43,000 10,60,000 12,15,000 26,18,000
` 15,00,000 1,47,000 2,00,000 50,000 9,14,000 30,000 5,00,000 33,41,000
(a) M/s Ice Limited gives you the following information to find out Total Sales and Total Purchases: Particulars Debtors as on 01.04.2011 Creditors as on 01.04.2011 Bills Receivables received during the year Bills Payable issued during the year Cash received from customers Amount (`) 70,000 81,000 47,000 53,000 1,56,000
Cash paid to suppliers Bad Debts recovered Bills Receivables endorsed to creditors Bills Receivables dishonoured by customers Discount allowed by suppliers Discount allowed to customers Endorsed Bills Receivables dishonoured Sales Return Bills Receivable discounted Discounted Bills Receivable dishonoured Cash Sales Cash Purchases Debtors as on 31.03.2012 Creditors as on 31.03.2012
1,72,000 16,000 27,000 5,000 7,000 9,000 3,000 11,000 8,000 2,000 1,68,500 1,97,800 82,000 95,000 (8 Marks)
(b) Good, Better and Best are in partnership sharing profits and losses in the ratio 3 : 2 : 4. Their capital account balances as on 31st March, 2012 are as follows:
`
Good Better Best 1,70,000 (Cr) 1,10,000 (Cr) 1,22,000 (Cr)
Following further information provided: (1) ` 22,240 is to be transferred to General Reserve. (2) Good, Better and Best are paid monthly salary in cash amounting ` 2,400, ` 1,600 and ` 1,800 respectively. (3) Partners are allowed interest on their closing capital balance @ 6% p.a. and are charged interest on drawings @ 8% p.a. (4) Good and Best are entitled to commission @ 8% and 10% respectively of the net profit before making any appropriation. (5) Better is entitled to commission @ 15% of the net profit before charging Interest on Drawings but after making all other appropriations.
(6) During the year Good withdraw ` 2,000 at the beginning of every month, Better ` 1,750 at the end of every month and Best ` 1,250 at the middle of every month. (7) Firm's Accountant is entitled to a salary of ` 2,000 per month and a commission of 12% of net profit after charging such commission. The Net Profit of the firm for the year ended on 31st March, 2012 before providing for any of the above adjustments was ` 2,76,000. You are required to prepare Profit and Loss Appropriation Account for the year ended on 31st March, 2012 (8 Marks) Answer (a) 1. 2. Total Sales = Cash sales + Credit sales = ` 1,68,500 + ` 2,25,000 (W.N.1)= ` 3,93,500 Purchases = Cash Purchases + Credit Purchases = ` 1,97,800 + ` 2,70,000 (W.N.2) = ` 4,67,800 Working Notes: 1. To To To To To 2. To To To To To Debtors Account Particulars ` Balance b/d 70,000 Bills receivable dishonoured 5,000 3,000 Bills receivable dishonoured (endorsed) 2,000 Bills receivable dishonoured (discounted) Credit sales (bal.fig.) 2,25,000 3,05,000 Particulars By Bills receivable By Cash By Discount allowed By Sales return By Balance c/d ` 47,000 1,56,000 9,000 11,000 82,000 3,05,000
Creditors Account Particulars Particulars ` ` Bills payable 53,000 By Balance b/d 81,000 3,000 Cash 1,72,000 By Bills receivable Discount received 7,000 dishonoured (endorsed) Bills receivable 27,000 By Credit purchases 2,70,000 endorsed (bal.fig.) Balance c/d 95,000 3,54,000 3,54,000
Note: It is assumed that sales return is out of credit sales only.
10
(b)
Profit and Loss Appropriation Account for the year ended on 31st March, 2012 To To Particulars General reserve Salaries to partners Good 28,800 Better 19,200 Best 21,600 Interest on Capital Good 10,200 Better 6,600 Best 7,320 Commission to partners Good 18,000 Better 10,281 (W.N.4) Best 22,500 Partners Capital A/cs (profit) Good 20,223 Better 13,482 Best 26,964 Particulars ` 22,240 By Net Profit (See W.N.1) By Interest on drawings (W.N.3) Good 1,040 Better 770 69,600 Best 600 ` 2,25,000
2,410
To
24,120
To
50,781
To
60,669 2,27,410 Profit and Loss Account
2,27,410
Working Notes: 1. Particulars To To To Salary (Firms Accountant) Commission (Firms Accountant) (W.N.2) Net Profit transferred to P & L Appropriation A/c ` 24,000 27,000 2,25,000 2,76,000 2,76,000 By Particulars Profit ` 2,76,000
11
2.
Commission of Firms Accountant =
Profit after salary of firm's accountant 12% (100+12 ) %
=
3.
( 2,76,000 - 24,000 ) 12% (100+12 ) %
= ` 27,000
Interest on Drawings
Good (at the beginning of every month) Better (at the end of every month) Best (at the middle of every month)
4. Commission of Better
(` 2,000 x 6.5 x 8%) (` 1,750 x 5.5 x 8%) (` 1,250 x 6 x 8%)
` 1,040 770 600 2,410
Commission of Better = [Net profit for appropriation (excluding interest on drawings) - General reserve Interest on capital - Salaries to partners Commission to Good and Best] x 15% Commission to Better = ` [2,25,000 22,240 24,120 69,600 18,000 22,500] x 15% = ` 68,540 x 15% = `10,281.
Question 4 From the following Income & Expenditure A/c of Premium Sports Club for the year ended 31st March, 2012, you are required to prepare Receipts & Payment A/c for the year ended 31st March, 2012 and Balance Sheet as on that date: Expenditure To Salaries To Rent To Printing & Stationery To Postage & Telephone To Membership Fee To Electricity Charges To Garden Upkeep To Sports Material Utilized To Repairs & Maintenance Amount (`) 1,18,800 2,16,000 28,000 41,600 3,200 38,500 19,300 62,800 18,700 Income By Subscriptions By Entrance Fee By Profit on sale of Sports Material By Interest on 8% Government Bonds By Sale of Old Newspaper 12,000 11,600 5,500 Amount (`) 4,20,000 1,20,000
12
To Depreciation To Miscellaneous Expenses To Surplus carried to Capital Fund Total
13,000 5,700 3,500 5,69,100 Total 5,69,100
The following additional information is provided to you: (a) Balances as on 01.04.2011 Fixed Assets Bank Balance Stock of Sports Material Outstanding Subscription Subscription received in advance 8% Government Bonds Outstanding Salaries Outstanding Rent Advance for Stationery Outstanding Repairs & Maintenance Creditors for purchase of Sports Material 2,40,000 8,300 43,450 10,200 2,400 1,50,000 16,000 21,000 1,350 1,200 3,400 Balances as on 31.03.2012 ? ? 35,670 5,700 4,900 1,50,000 14,300 15,000 1,550 Nil 4,200
(b) Some of Fixed Assets were purchased on 01.10.2011 and depreciation is to be charged @ 5% p.a. (c) Sports Material worth ` 72,000 was purchased on credit during the year. (d) The Club became member of State Table Tennis Association on 01.01.2012 when it paid fee up to 31.12.2012. (e) 50% of Entrance Fee is to be capitalized. (f) Interest on 8% Government Bonds was received for two quarters only. (16 Marks) (g) A Fixed Deposit of ` 80,000 was made on 31st March, 2012.
13
Answer Receipts and Payments Account of Premium Sports Club for the year ended 31st March, 2012 Receipts To Cash at bank (opening) To Subscription (W.N.1) To Entrance fee (W.N.2)
` Payments
8,300 By Salaries (W.N.6) 4,27,000 By Rent (W.N.7) 2,40,000 By Printing and stationary (W.N.8) 6,000 By Postage and telephone 11,600 By Membership fee (W.N.9) 22,480 By Electricity charges By Garden upkeep By Payment to creditors for sports material (W.N.5) By Purchase of Fixed assets (W.N.10) By Repairs and Maintenance (W.N.11) By Misc. expenses By Fixed Deposit made By Cash at bank (closing) (bal.fig.) 7,15,380
`
1,20,500 2,22,000 28,200 41,600 12,800 38,500 19,300 71,200 40,000 19,900 5,700 80,000 15,680 7,15,380
To Interest on 8% Government Bond (W.N.3) To Sale of old Newspaper To Sale of Sports Material (W.N.4)
Balance Sheet of Premium Sports Club as on 31st March, 2012 Liabilities
`
balance 4,09,300 3,500
` Assets
Fixed Assets Add: (W.N.10) 4,12,800 1,20,000
Less: Depreciation
`
2,40,000 40,000 2,80,000 13,000 Additions
Capital fund: Opening (W.N.12)

Add: Surplus
Entrance fee Subscription received in advance Outstanding expenses
2,67,000 80,000 1,50,000
4,900 Fixed Deposit Investments in 8% Government Bonds
14
Salary Rent Creditors for purchase of sports material
14,300 15,000
Stock of 29,300 material
sports
35,670
4,200 Subscription receivable Membership fee paid in advance Prepaid printing and stationary charges Outstanding interest on 8% Govt. Bond Cash at bank 5,71,200
5,700 9,600 1,550 6,000 15,680 5,71,200
Working Notes: 1. Subscription received during the year
`
Subscription for the year ended 31st March, 2012
Less: Subscription receivable on 31.3.2012 Less: Subscription received in advance on 1.4.2011 Add: Subscription receivable on 1.4.2011 Add: Subscription received in advance on 31.3.2012 2. Entrance Fee received during the year
4,20,000 5,700 2,400 10,200 4,900 15,100 4,27,000 (8,100) 4,11,900
Entrance fee as per Income and Expenditure Account Add: Capitalised entrance fee (50%)
3. Interest on 8% Government Bond
` 1,20,000 ` 1,20,000 ` 2,40,000 `
Interest as per Income and Expenditure Account Less: Outstanding interest for 2 quarters [12,000x (6/12)]
12,000 (6,000) 6,000
15
4.
Sales price of Sports Material sold `
Stock of Sports Material on 1.4.2011 Add: Purchase of Sports Material during the year
Less: Stock of Sports Material on 31.3.2012
43,450 72,000 1,15,450 (35,670) 79,780 (62,800) 16,980
Cost of Sports Material consumed in the club and for sale

Less: Sports material consumed in the club
Cost of Sports material sold Sales Price of sports material sold = ` 16,980 + ` 5,500 = ` 22,480
5. Payment to creditors for Sports Material
Purchase of Sports Material Less: Closing creditors for purchase of Sports Material on 31.3.2012 Add: Opening creditors for purchase of Sports Material on 1.4.2011
6. Salaries paid during the year
72,000 (4,200) 67,800 3,400 71,200

`
Salary as per Income and Expenditure Account

Less: Outstanding balance as on 31.3.2012 Add: Outstanding balance as on 1.4.2011 7. Rent paid during the year
1,18,800 (14,300) 1,04,500 16,000 1,20,500

`
Rent as per Income and Expenditure Account

Less: Outstanding balance as on 31.3.2012 Add: Outstanding balance as on 1.4.2011
2,16,000 (15,000) 2,01,000 21,000 2,22,000
16
8.
Printing and Stationary paid during the year `
Printing and stationary as per Income and Expenditure Account

Less: Prepaid balance as on 1.4.2011 Add: Prepaid balance as on 31.3.2012 9. Membership fee paid during the year
28,000 (1,350) 26,650 1,550 28,200

`
Membership fee as per Income and Expenditure Account

Add: Prepaid balance as on 31.3.2012 [(3,200/3) x 9] 10. Fixed Asset purchased during the year
3,200 9,600 12,800

`
Depreciation during the year Less: Depreciation on Opening balance of fixed asset Depreciation on new purchase of fixed asset during the year Cost of asset purchased during the year (1,000 x
11. Repairs and Maintenance paid during the year
13,000 (12,000) 1,000 40,000
12 100 x ) 6 5
Repairs and Maintenance as per Income and Expenditure Account

Add: Outstanding balance as on 1.4.2011 12. Balance Sheet of Premium Sports Club as on 1st April, 2011
18,700 1,200 19,900
Liabilities Capital fund (Bal.fig.) Subscription advance Salary received in
` Assets
4,09,300 2,400 Fixed Assets Investments in 8% Government Bonds Stock of sports material 16,000 Subscription receivable
`
2,40,000 1,50,000 43,450 10,200
Outstanding expenses:
17
Rent Repairs and maintenance Creditors for purchase of sports material
21,000 1,200 3,400 4,53,300
Prepaid printing and stationary charges Bank
1,350 8,300
4,53,300
Note: It is assumed that Premium Sports Club has purchased all the sports equipment on credit basis only. Question 5 (a) M/s Multistore Limited sells goods both on cash and hire purchase basis and record hirepurchase transactions on "Stock and Debtors System". It closes its books of accounts on 31st March every year. On 1st May, 2011, it sold to Manas a Scooter and a LCD TV. The other information are as follows: Particulars Cost Price Down Payment Number of Installments Payable Amount of each Installment Mode of Payment 1st Installment due on Scooter 30,000 5,000 12 2,800 Monthly st 1 June, 2011 LCD TV 40,000 6,000 6 7,600 Quarterly st 1 July, 2011
Manas paid all the installments due except for those due on 1st January, 2012. It was decided that M/s Multistore Limited will take back Scooter at an agreed price of ` 22,000 and excess amount, if any, will be adjusted against the installments due of LCD TV. Scooter repossessed was sold for ` 24,500 after incurring repair charges of ` 1,000. Prepare necessary ledger accounts to record the above transactions and find out the profit. (8 Marks) (b) Mr. Brown has made following transactions during the financial year 2011-12: Date 01.05.2011 15.06.2011 10.07.2011 Particulars Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest. Interest is payable on 30th September and 31st March every year. Purchased ` 1,50,000 equity shares of ` 10 each in Alpha Limited for ` 25 each through a broker, who charged brokerage @ 2%. Purchased 60,000 equity shares of ` 10 each in Beeta Limited for ` 44 each through a broker, who charged brokerage @2%.
18
14.10.2011 31.10.2011 01.01.2012 15. 01.2012
Alpha Limited made a bonus issue of two shares for every three shares held. Sold 80,000 shares in Alpha Limited for ` 22 each. Received 15% interim dividend on equity shares of Alpha Limited. Beeta Limited made a right issue of one equity share for every four shares held at ` 5 per share. Mr. Brown exercised his option for 40% of his entitlements and sold the balance rights in the market at ` 2.25 per share. Sold 15,000 12% Bonds at ` 90 ex-interest. Received 18% interim dividend on equity shares of Beeta Limited. Interest on 12% Bonds was duly received on due dates.
01.03.2012 15.03.2012
Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited and Equity Shares of Beeta Limited in the books of Mr. Brown for the year ended on 31st March, 2012. (8 Marks) Answer (a) In the books of M/s Multistore Limited Hire Purchase Stock Account
Date
Particulars
` Date
Particulars By Hire Purchase Debtors A/c (Down payment) (5,000+6,000) By Hire Purchase Debtors A/c (Scooter) By Hire Purchase Debtors A/c (Scooter & LCD T.V.) (` 2,800+ ` 7,600) By Hire Purchase Debtors A/c (Scooter)
1.5.2011 To Goods Sold on Hire Purchase A/c (38,600+51,600)
90,200 1.5.2011
11,000
1.6.2011 1.7.2011
2,800 10,400
1.8.2011
2,800 2,800 10,400 2,800
1.9. 2011 By Hire Purchase Debtors A/c (Scooter) 1.10.2011 By Hire Purchase A/c (Scooter & LCD T.V.) 1.11.2011 By Hire Purchase Debtors A/c (Scooter)
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1.12.2011 By Hire Purchase Debtors A/c (Scooter) 1.1.2012 By Hire Purchase debtor A/c (Scooter & LCD T.V.)
2,800 10,400
1.1.2012
By Hire Purchase debtor A/c (Scooter & LCD T.V.) (4 x 2,800)+(3 x 7,600) 34,000* (W.N.3) 90,200
90,200
Hire Purchase Debtors Account
Date
Particulars
` Date
Particulars By Cash A/c By Cash A/c By Cash A/c By Cash A/c By Cash A/c
1.5.2011 To Hire Purchase Stock A/c 1.6.2011 To Hire Purchase Stock A/c 1.7.2011 To Hire Purchase Stock A/c 1.8.2011 To Hire Purchase Stock A/c 1.9. 2011 To Hire Purchase Stock A/c 1.10.2011 To Hire Purchase Stock A/c 1.11.2011 To Hire Purchase Stock A/c 1.12.2011 To Hire Purchase Stock A/c 1.1.2012 To Hire Purchase Stock A/c 1.1.2012 To Hire Purchase Stock A/c
11,000 1.5.2011 2,800 1.6.2011 10,400 1.7.2011 2,800 1.8.2011 2,800 1.9. 2011
11,000 2,800 10,400 2,800 2,800 10,400 2,800 2,800 22,000
10,400 1.10.2011 By Cash A/c 2,800 1.11.2011 By Cash A/c 2,800 1.12.2011 By Cash A/c 10,400 1.1.2012 By Good Repossessed A/c
34,000 90,200
31.03.2012 By Balance c/d (For LCD T.V. only)
22,400 90,200
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Hire Purchase Adjustment Account
Date
Particulars
` Date
Particulars
31.03.2012 To Profit & Loss A/c
21,700 1.5.2011 By Goods sold on hire purchase A/c (profit on hire purchase) (8,600+11,600) By Goods Repossessed A/c 21,700
20,200
1,500 21,700
` 24,500
Goods Repossessed Account Date Particulars Particulars ` Date 1.1.2012 To Hire Purchase 22,000 By Cash A/c (Sales) Debtors A/c 1,000 To Cash A/c (Expenses) To Hire Purchase Adjustment A/c 1,500 24,500 Working Notes:
24,500
1.
Hire purchase Price of Scooter = Down payment + Sum of Amount of all instalments = ` 5,000 + (` 2,800 x 12) = ` 38,600 LCD TV = ` 6,000 + (` 7,600 x 6) = ` 51,600
2. 3.
Profit on H.P. Sale = Hire Purchase Price - Cash Price (38,600 + 51,600) (30,000 + 40,000) = ` 20,200 Same customer has purchased both Scooter & LCD TV. Therefore, when there is default on 01.01.2012, all the remaining installments are to be shown as due.
Note: Alternatively the monthly entries in the Hire purchase stock A/c can be consolidated by opening a Goods sold on Hire purchase stock A/c. Likewise the monthly entries in the Hire purchase Debtor A/c can also be consolidated. (b)
Date Particulars
In the books of Mr. Brown 12% Bonds for the year ended 31st March, 2012
No. Interest Income ` 24,000 Amount Date ` Particulars No. Interest Income ` 1,44,000 Amount `
2011 May, 1
To Bank A/c
24,000
19,92,000 2011 By BankSept. 30 Interest
2012 March 31 To P & L A/c (W.N.1) To P & L A/c 1,05,000 2012 Mar. 1 2012 Mar. 31 By Bank A/c By BankInterest By Balance c/d (W.N.2) 24,000 2,73,000 20,97,000 15,000 75,000
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13,50,000
2,49,000
54,000
9,000 24,000
2,73,000
7,47,000 20,97,000
Investment in Equity shares of Alpha Ltd. for the year ended 31st March, 2012
Date Particulars No. Dividend Income ` -Amount Date ` 38,25,000 2011 Oct. 31 - 2012 Jan. 1 5,36,000 March 31 2,55,000 2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000 Particulars No. Dividend Income ` Amount ` 17,60,000
2011 June 15
To Bank A/c
1,50,000
By Bank A/c
80,000
Oct. 14 To Bonus Issue (1,50,000/3 x2) 2012 Mar. 31 To P & L A/c (W.N.3) To P & L A/c
1,00,000
By Bank A/c -dividend By Balance c/d (W.N.4) 1,70,000
2,55,000 26,01,000
Investment in Equity shares of Beeta Ltd. for the year ended 31st March, 2012
Date Particulars No. Dividend Income ` -Amount Date ` 26,92,800 2012 Jan. 15 30,000 Mar. 15 2012 March 31, - 2012 27,22,800 Particulars No. Dividend Income ` 1,18,800 Amount ` 20,250
2011 July 10
To Bank A/c
60,000 6,000
By Bank A/c (W.N 6) By Bank dividend By Balance c/d (bal.fig.)
2012 To Bank A/c Jan. 15 (W.N. 5) March 31 To P & L A/c
66,000
1,18,800 1,18,800
66,000 66,000
1,18,800
27,02,550 27,22,800
Working Notes: 1. Profit on sale of 12% Bond
Sales price Less: Cost of bond sold = Profit on sale
` 13,50,000
19,92,000 x 15,000 24,000
` 12,45,000 ` 1,05,000
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2.
Closing balance as on 31.3.2012 of 12 % Bond
19,92,000 x 9,000 = ` 7,47,000 24,000

3. Profit on sale of equity shares of Alpha Ltd.
Sales price (80,000 shares x `22) Less: Cost of bond sold = Profit on sale
4.
` 17,60,000 ` 12,24,000 ` 5,36,000
38,25,000 x 80,000 2,50,000
Closing balance as on 31.3.2012 of equity shares of Alpha Ltd.
38,25,000 x 1,70,000 = ` 26,01,000 2,50,000

5. Calculation of right shares subscribed by Beeta Ltd.
Right Shares =
60,000 shares x 1= 15,000 shares 4
Shares subscribed by Mr. Brown = 15,000 x 40%= 6,000 shares Value of right shares subscribed = 6,000 shares @ ` 5 per share = ` 30,000
6. Calculation of sale of right entitlement by Beeta Ltd.
No. of right shares sold = 15,000 - 6,000 = 9,000 shares Sale value of right = 9,000 shares x ` 2.25 per share = ` 20,250
Note: Shares are assumed to be purchased on cum right basis, therefore, amount received from sale of rights is credited to Investment A/c. Question 6 Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss of profit, for ` 2,10,000 and ` 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a result of which sales were seriously affected for a period of 3 months. Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is given below: Particulars Amount(`) Particulars Amount (`)
To Opening Stock To Purchases To Wages To Manufacturing Expenses
96,000 7,56,000 1,58,000 75,000
By Sales By Closing Stock
12,00,000 1,85,000
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To Gross Profit c/d

Total
3,00,000
13,85,000 Total 13,85,000
To Administrative Expenses To Selling Expenses (Fixed) To Commission on Sales To Carriage Outward To Net Profit
Total Further detail provided is as below:
83,600 72,400 34,200 49,800 60,000

3,00,000
By Gross Profit b/d
3,00,000
Total
3,00,000
(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 1.04.2011 to 30.06.2011 were ` 3,36,000, ` 2,14,000, ` 51,000 and ` 12,000 respectively. (b) Other Sales figure were as follows
`
From 01.04.2010 to 30.06.2010 From 01.07.2010 to 30.09.2010 From 01.07.2011 to 30.09.2011 3,00,000 3,20,000 48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase by 5% on sales. (d) ` 1,98,000 were additionally incurred during the period after fire. The amount of policy included ` 1,56,000 for expenses leaving ` 42,000 uncovered. Compute the claim for stock, loss of profit and additional expenses (16 Marks) Answer Claim for loss of stock Memorandum Trading Account for the period 1st April to 1st July, 2011
`
To Opening Stock To Purchases To Wages To Manufacturing expenses To Gross Profit @ 30% on sales (W.N) 1,85,000 By Sales 2,14,000 By Closing stock 51,000 (Bal.fig.) 12,000 1,00,800 5,62,800
`
3,36,000 2,26,800
5,62,800
Claim for loss of stock will be limited to ` 2,10,000 only which is the amount of Insurance policy and no average clause will be applied.
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Loss of Profit (a) Short Sales : Amount (`)
Sales from 1st July, 2010 to 30th Sept. 2010

Add: 12% rise observed in 2011-12 over 2010-11
3,20,000 38,400 3,58,400 (48,000) 3,10,400
( April- June ` 3,36,000 instead of ` 3,00,000)

Less: Actual Sales from 1st July, 2011 to
30th
Sept. 2011
Short-Sales (b) Gross profit ratio Net Profit + Insured standing charges (2010-11) 100 Sales (2010-11)
` 60,000 + ` 1,56,000 100 = 12,00,000 Add: Expected rise due to decline in material cost Hence, Gross Profit Ratio
(c) Loss of Gross Profit
18% 5% 23% ` 71,392

Amount (` ) 12,00,000 (3,00,000) 9,00,000 1,08,000 10,08,000 3,36,000 13,44,000 3,09,120 Amount (`)
23% on short sales ` 3,10,400=

(d) Annual turnover (12 months to 1st July, 2011):
Sales for April 2010 - March, 2011 Less: From 1-4-2010 to 30-6-2010
Add: 12% increasing trend Add: From 1-4-2011 to 30-6-2011
Gross Profit on annual turnover @ 23%

(e) Amount allowable in respect of additional expenses
Least of the following: (i) Actual expenses (ii) Gross Profit on sales during indemnity period 23% of ` 48,000
1,98,000 11,040
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(iii)
Gross profit on annual (adjusted) turnover Additional Expenses Gross profit as above + Uninsured charges
3,09,120 1,98,000 = 3,51,120 Least i.e. ` 11,040 is admissible.
Claim
1,74,316
Loss of Gross Profit Add: Additional expenses Insurance claim for loss of profit will be of ` 82,432 only.
Working Note: Rate of Gross Profit in 2010-11
` 71,392 ` 11,040 ` 82,432
Gross Pr ofit 100 Sales

3,00,000 100 = 25% 12,00,000 In 2011-12, Gross Profit is expected to increase by 5% as a result of decline in material cost, hence the rate of Gross Profit for loss of stock is taken at 30%.
Question 7 Answer any FOUR out of the following: (a) M/s Stairs & Co. draw upon M/s Marble & Co. several bills of exchange due for payment on different dates as under : Date of Bill 12th May 10th June 1st July 19th July Amount(`) 44,000 45,000 14,000 17,000 Tenure of Bill 3 months 4 months 1 month 2 months
Find out the average due date on which payment may be made in one single amount by M/s Marble & Co. to M/s Stairs & Co. 15th August, Independence Day, is national holiday and 22nd September declared emergency holiday, due to death of a national leader. (b) X, Y and Z are partners sharing profits and losses equally. On 1st December, 2011 Z retired from the partnership firm. The capitals of the partners, after all necessary adjustments stood at ` 45,000, ` 75,000 and ` 50,000 respectively. X and Y continued to
26
carry on the business without settling the accounts of Z. Final payment to Z made on 1st March, 2012. The partnership firm made profit amounting to ` 30,000 during the period from 1st December, 2011 to 29th February, 2012. What are the rights of Z to share subsequent profit as per the provisions of Section 37 of the Indian Partnership Act? (c) A computer costing ` 60,000 is depreciated on straight line basis, assuming 10 years working life and Nil residual value, for three years. The estimate of remaining useful life after third year was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting Standard 6 "Depreciation Accounting". (d) What are the maximum limits of managerial remuneration for companies having adequate profits? (e) "ERP package is gaining popularity in big organizations." Briefly explain the advantages of using an ERP package, in the light of above statement. (4 4 = 16 Marks) Answer (a) Calculation of Average Due Date (Taking 4th August as the base date) Date of bill Term Due date Amount
`
12th May 10th June 1st July 19th July 3 months 14th August 4 months 13th October 1 month 4th August 2 months 23th September 44,000 45,000 14,000 17,000 1,20,000
No. of days from the base date i.e. 4th August 10 70 0 50
Product
4,40,000 31,50,000 0 8,50,000 44,40,000
Average due date=Base date+ Days equal to = 4th August +
Total of products Total amount
44,40,000 1,20,000
=4th August +37 days = 10th September (b) Under Section 37 of the Partnership Act, Z can exercise any of the following two options in the absence of a contract:
1.
Z is entitled at his option to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or
27
2.
Z is entitled to interest at the rate of six per cent per annum on the amount of his share in the property of the firm.
It may be noted that Z is not bound to make election until the share of the profit that would be payable to him has been ascertained.
(c) Depreciation per year = ` 60,000 / 10 = ` 6,000
Depreciation on SLM charged for three years = ` 6,000 x 3 years = ` 18,000 Book value of the computer at the end of third year = ` 60,000 ` 18,000 = ` 42,000. Remaining useful life as per previous estimate = 7 years Remaining useful life as per revised estimate = 5 years Depreciation from the fourth year onwards = ` 42,000 / 5 = ` 8,400 per annum
(d) For companies having adequate profits, maximum limits of managerial remuneration in different circumstances are as under:
(i)
Overall (excluding fee for attending meetings)
11% of net profit 5% of net profit 10% of net profit
(ii) If there is one managerial person (iii) If there are more than one managerial person (iv) Remuneration of part-time directors:
(a) If there is no managing or whole-time director 3% of net profit (b) If there is a managing or whole-time director 1% of net profit
(e) The advantages of using an ERP for maintaining accounts are as follows:
1. 2.
Standardised processes and procedures : An ERP is a generalised package which covers most of the common functionalities of any specific module. Standardised reporting : Majority of the desired reports are available in an ERP package. These reports are standardised across industry and are generally acceptable to the users. No Redundancy : Duplication of data entry is avoided as it is an integrated package. Better Information : Greater information is available through this package.
3. 4.
PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Question 1 (a) Explain in brief the rules relating to 'Acceptance' of an offer under the provisions of the Indian Contract Act, 1872. (5 Marks) (b) Explain the provisions of the Companies Act, 1956, relating to the utilization, by a company, of the amount standing to the credit of Securities Premium Account. (5 Marks) (c) State with reasons whether the following statements are correct or incorrect: (1) Fairness and honesty are the pillars of success in the business. (2) Ethical behaviour is essential to working environment at the working place. (2 2 = 5 Marks) (d) Explain the socio-psychological barriers of communication in relation to an organization. (5 Marks) Answer (a) Following are the general rules regarding acceptance under the Indian Contract Act, 1872. (i) (ii) Acceptance must be absolute and unqualified. As per section 7 of the Act, acceptance is valid only when it is absolute and unqualified or unconditional. Acceptance must be in the prescribed manner. If the offer is not accepted in the prescribed manner, then the offeror may reject the acceptance within a reasonable time.
(iii) Acceptance must be communicated to the offeror. If acceptance is communicated to the person, other than the offeror, it will not create any legal relationship. Thus, to conclude a contract between the parties, the acceptance must be communicated in some perceptible form. (iv) Acceptance must be given by the party to whom the offer is made. (v) Acceptance must be given within the prescribed time or within a reasonable time. (vi) Acceptance cannot be given before communication of an offer (vii) Acceptance must be made before the offer lapses or is withdrawn. (viii) Acceptance must show intention to fulfill the promise. (ix) Acceptance cannot be presumed from silence
PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION
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(x) Acceptance by conduct/performance of condition: Acceptance may also be by performance of some condition / act as required by the Offeror. (b) Securities Premium Account Utilization In accordance with the provisions of the Companies Act, 1956, as contained in section 78 (2), the amount standing to the credit of the Share Premium Account can be utilized by a company for the following purposes : a. b. c. d. in paying up un-issued securities of the company to be issued to members of the company as fully paid bonus shares; in writing off the Preliminary Expenses of the company; in writing off the expenses of or commission paid or discount allowed on any issue of shares or debentures of the company; in providing for premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
(c) (1) Correct. The success of the business depends very much on fairness and honesty in the business. Fairness and honesty are at the heart of the business ethics and relate to the general values of decision makers. The business professionals and persons are expected to follow all applicable rules and regulations, without causing harm to the customers, employees, clients or competitors knowingly through deception, misrepresentation, coercion or discrimination. One aspect of fairness and honesty is related to disclosure of potential harm caused by product use. Another aspect of fairness relates to competition. Although, numerous laws have been passed to foster competition and make monopolistic practices illegal, companies sometimes gain control over markets by using questionable practices that harm competition. Therefore, we may say that fairness and honesty are the pillars of success in the business. (2) Correct. Every organization, whether a business or a Government agency is first and foremost a human society. In all these setups ethical behavior is essential to working environment. If an employer does not take steps to create a working environment where the employees have a clear, common understanding of what is right and wrong, and feel free to discuss and ask questions about ethical issues and report violations, significant problems may arise. Lacking of ethical behavior in working environment may give rise to some significant problems, namely : (i) (ii) Increases risk of making unethical decisions by employees Increases tendency of employees to report violations to outside regulatory authorities (whistle blowing) because of lacking of an adequate internal forum.
(iii) Inability to recruit and retain top people (iv) Diminishes reputation in the industry and the community
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(v) Significant legal exposure and loss of competitive advantage in the market place Therefore, ethical behavior is essential to working environment at the workplace (d) Socio Psychological barriers of Communication: The attitudes and opinions, place in society and status consciousness arising from ones position in the hierarchical structure of the organization, ones relations with peers, seniors, juniors and family background all these deeply affect ones ability to communicate both as a sender and receiver. Status consciousness is widely known to be a serious communication barrier in organizations. It leads to psychological distancing which further leads to breakdown of communication or miscommunication. Often, it is seen that a man high up in an organization builds up a wall around himself. This restricts participation of the less powerful in decision making. In the same way, ones family background formulates ones attitude and communication skills. Frame of reference is another barrier to clear communication. Every individual has a unique frame of reference formed by a combination of his experiences, education, culture, attitude and other elements, resulting in biases and different experiences in a communication situation. Emotions play a very important role in communication. Both encoding and decoding of messages are influenced by our emotions. A message received when we are emotionally worked up will have a different meaning for us than when we are calm and composed. Perception provides each of us with a unique view of the world a view sometimes related to, but not necessarily identical with that held by others. Selective perception means that the receivers selectively see and hear depending upon their needs, background, motivations, experience and other personal characteristics. Question 2 (a) (i) Explain the provisions of the Payment of Bonus Act, 1965 relating to the time limit within which an employer must pay the amount of bonus due to an employee. (4 Marks) (ii) Explain as to when is the gratuity payable to an employee of an establishment, under the provisions of the Payment of Gratuity Act, 1972. (4 Marks)
(b) What reasons force a marketing executive to adopt ethical practices in marketing? Explain. (4 Marks) (c) In what way is the 'Ethical Communication' advantageous to a business establishment? Explain. (4 Marks)
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Answer (a) (i) As per section 19 of the Payment of Bonus Act, 1965, the employer is bound to pay his employee bonus within one month from the date on which the award becomes enforceable or the settlement comes into operation, if a dispute regarding payment of bonus is pending before any authority under Section 22 of the Act. In other cases, however, the payment of the bonus is to be made within a period of 8 months from closing of the accounting year. But this period of 8 months may be extended upto a maximum of 2 years by the Appropriate Government or by any authority specified by the Appropriate Government. This extension is to be granted on the application of the employer and only for sufficient reasons. (ii) According to section 4 (1) of the Payment of Gratuity Act, 1972, Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous services for not less than 5 years: On his superannuation, or On his retirement or resignation, or On his death or disablement due to accident or disease The condition of the completion of five years continuous service is not essential in case of the termination of the employment of any employee due to death or disablement. Generally, gratuity is payable to the employee himself. However, in case of death of the employee, it shall be paid to his nominee or if no nomination has been made, to his legal heirs. The payability of gratuity to the employee is his right as well as the obligation of the employer. By the change of ownership, the relationship of employer and employees subsist and the new employer cannot escape from the liability of payment of gratuity to the employees. (Pattathurila K. Damodharan Vs M. Kassin Kanju, 1993). An employee resigning from service is also entitled to gratuity (Texmaco Ltd. V/s Sri Ram Dham, 1992) and non acceptance of the resignation is no hurdle in the way of an employee to claim gratuity (Mathur Spinning Mills V/s Deputy Commissioner of Labour, 1983). (b) Behaving Ethically in Marketing: Marketing Executives should practice ethical behavior because it is morally correct. While this is simple and beautiful in concept, it is not sufficient motivation for everyone. So let us consider four pragmatic reasons for ethical behavior :(i) To reverse dealing public confidence in marketing: periodically we hear about misleading package labels, false claims in ads, phony list prices and infringement of well established trademarks. Though, such practices are limited to only a small
32
proportion of all marketing, the reputation of all marketers is damaged. To reverse this situation, business leaders must demonstrate convincingly, that they are aware of their ethical responsibility and will fulfill it. Companies must set high ethical standards and enforce them. (ii) To avoid increase in Government regulation: Business apathy, resistance or token responses to unethical behavior simply increase the probability of more Government regulation. Indeed, most of Governmental limitations on marketing are the result of managements failure to live up to ethical responsibilities at one time or other. Moreover, once some form of Government control has been introduced, it is rarely removed. (iii) To regain the power granted by society: Marketing executives wield a great deal of social power as they influence markets and speak out on economic issues. However, there is responsibility tied to that power. If marketers do not use their power in a socially acceptable manner, that power will be lost in the long run. (iv) To protect the image of the organization: Buyers often form an impression of an entire organization based on their contact with one person i.e. salesman or marketing executive. A customers opinion of a retail store is based on the behaviour of single sales clerk as observed by Procter and Gamble. (c) Advantages of ethical communication: Ethical Communication promotes long term business success and profit. However, improving profits isnt reason enough to be ethical; as soon as the cost of being ethical outweighed the benefits, ethical choices would no longer be possible. Surveys report that all employees want to work for organizations with high ethical standards because ethical communication is fundamental to responsible thinking, decision making and the development of relationship and communities within and across contexts, cultures, channels and media. Further, it enhances human worth and dignity by fostering truthfulness, fairness, responsibility, personal integrity and respect for self and others. Competent people are likely to search for organizations that maintain high ethical standards. When competent people migrate towards ethical firms, everyone benefits because both, competence and ethics go hand in hand. They know that ethical practices are the only way to meet the level of ethical awareness that has risen over the last few years. Many companies are reassessing their communication budgets, moving away from traditional, functional approaches to public relations and public affairs and pursuing internal and external corporate communication strategies. The theory and practice arising from corporate communications lies at the heart of effective strategic management, planning and control. New digital media technologies are having greater impact on managements and the monitoring and evaluation of corporate identity, corporate advertising, organizational reputation and overall performance.
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Question 3 (a) What do you understand by the term 'Consideration'? Are there any circumstances under which a contract, under the provisions of the Indian Contract Act, 1872, without consideration is valid? Explain. (8 Marks) (b) State the special responsibilities of industries that are based on natural resources. How does the adoption of 'Green Accounting System' help in avoiding policy decisions which are non-sustainable for the country? Explain. (4 Marks) (c) What do you understand by non-verbal communication? Explain its methods in brief. (4 Marks) Answer (a) Meaning of consideration : The expression consideration in general means price paid for an obligation. According to Section 2 (d) of the Indian Contract Act, 1872 when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or abstain from doing something, such an act or abstinence or promise is called consideration for the promise. Thus, on analyzing the above definition, the following ingredients are essential in understanding the meaning of the term consideration :(i) (ii) An act i.e. doing something An abstinence or forbearance i.e. abstaining or refraining from doing something, and
(iii) A return promise. The general rule is that an agreement made without consideration is void. Sections 25 and 185 of the Indian Contract Act, 1872, provide for exceptions to this rule where an agreement without consideration is valid. These are : (1) Love & Affection [Section 25 (1)] Where an agreement is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between the parties standing in near relation to each other, the agreement is enforceable, even through, the consideration is absent. (2) Compensation for voluntary service [Section 25 (2)] A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promissor, is enforceable even without consideration. (3) Promise to pay, a time barred Debt [Section 25 (3)] The agreement is valid provided it is made in writing and is signed by the debtor or by his agent authorized in that behalf.
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(4) Completed Gift [Explanation 1 to Section 25] As per explanation 1 to section 25, nothing in section 25 shall affect the validity as between donor and donee, on any gift actually made. (5) Agency (Section 185) No consideration is necessary to create an agency. (b) Special responsibilities of the industries based on natural resources : Industries that are based on natural resources like minerals, timber, fiber and foodstuffs etc., have a special responsibility for : (i) (ii) Adopting practices that have built-in environmental considerations. Introducing processes that minimize the use of natural resources and energy, reduce waste and prevent pollution.
(iii) Making products that are environment-friendly with minimum adverse impact on people and ecosystem. Green Accounting Systems: Conventional accounts may result in policy decisions which are non- sustainable for the country. Green accounting, on the other hand is, focused on addressing such deficiencies in conventional accounts with respect to environment. If the environmental costs are properly reflected in the prices paid for goods and services, then companies and ultimately the consumer would adjust market behavior in a way that would reduce damage to environment, pollution and waste production. Such measures would facilitate the approach of polluter pays principle. Removing subsidies that encourage environmental damage is another measure. (c) Non verbal communication: Words are not the only way we communicate. Even while we use language to communicate explicit information and message content, we use nonverbal communication along with it to convey relational messages, our feelings about another person as well as status and power. Methods of non-verbal communication : (i) Kinesics or Body language: It must be noted, though it is known to almost all, that all our bodily movements, gestures, postures etc., are guided by our feelings and thought processes. The nodding of our head, blinking of our eyes, waving of our hands, shrugging of our shoulders etc., are expressions of our thought and feelings. All these movements are the signals that our body sends out to communicate. That is why this area of study has been called body language. Paralanguage: The term Paralanguage' is used to describe a wide range of vocal characteristics like tone, pitch and speed etc., Vocal cues that accompany spoken language which help to express and reflect the speakers attitude are termed as paralanguage. It consists of pitch variation, speaking speed, pause, word stress etc.,
(ii)
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(iii) Artificial communication : Sometimes we react to people on the basis of their appearance. The use of personal adomment like clothing, accessories, makeup, hairstyle etc., provides important non verbal cues about ones age, social and economic status, education level and personality etc., (iv) Proxemics: It refers to the space that exists between us when we talk or relate to each other as well as the way we organize space around us. We can also call it space language. (v) Chronemics or time language: It is the study of how we use time to communicate. Punctuality is an important factor in time communication. Misunderstandings or disagreements involving time can create communication and relationship problems. (vi) Haptics: It is communication through touch. The impact of touch sends important messages about us. It reveals our perception of status, our attitudes and even our needs. (vi) Silence: The absence of paralinguistic and verbal cues also serves important communicative functions. Question 4 (a) Explain the doctrine of 'Indoor Management' as applicable in case of companies. Explain also the circumstances in which an outsider dealing with a company cannot claim any relief on the basis of doctrine of 'Indoor Management'. (8 Marks) (b) What do you understand by the term 'discrimination' in employment as sometime found in an establishment ? Explain the basic elements of 'discrimination'. (4 Marks) (c) Why is the' Active Listening' important for an individual? State the guidelines for' Active Listening'. (4 Marks) Answer (a) Doctrine of Indoor Management & Exceptions: One limitation to the doctrine of constructive notice of the memorandum and articles of a company is the doctrine of indoor management. According to the doctrine of indoor management, the outsider, dealing with the company is entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done. They are bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the Memorandum and Articles. This limitation of the doctrine of constructive notice is known as the Doctrine of Indoor Management, popularly known as rule in Royal British Bank v/s Turquand. Thus, the doctrine of indoor management aims to protect outsiders against the company. Exceptions: In the following circumstances an outsider dealing with the company cannot claim any relief on the ground of Indoor Management.
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(i)
Knowledge of irregularity: Where a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, he cannot claim the benefit under the rule of Indoor Management (T.R. Pratt, Bombay Ltd., V/s E.D. Sassoon & Co. Ltd.). Negligence: Where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry and the outsider dealing with the company does not make proper inquiry (Anand Bihari Ltd., V/s. Dinshaw & Co.). Also, the case of Underwood V/s. Bank of Liverpool.
(ii)
(iii) Act void ab initio and forgery: Where the acts done in the name of a company are void ab initio, the doctrine of indoor management does not apply. The doctrine applies only to irregularities that otherwise might affect a genuine transaction. It does not apply to a forgery. A company can never the held liable for forgeries committed by its officers (Ruben V/s. Great Fingall Consolidated Co.) (iv) Acts outside the scope of apparent authority: If an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound (Kreditbank Cassel V/s. Schenkers Ltd.) (v) A person having no knowledge of articles cannot seek protection under Indoor Management. (b) The root meaning of the term discriminate is to distinguish one object from another Employment discrimination is treating one person better than another because of their age, gender, race, religion or other protected class of status. Discrimination in employment is wrong because it violates the basic principle of equality. Discrimination is to treat people differently. It is usually intended to refer to the wrongful act of making a difference in treatment or favour on a basis other than individual merit. Discrimination in employment involves the following three basic elements: (i) It is a decision against one or more employees (or prospective employees) that is not based on individual merit, such as the ability to perform a given job, seniority or other morally legitimate qualifications. The decision derives solely or in part from racial or sexual prejudice, false stereotypes or some other kind of morally unjustified attitude against members of the class to which employee belongs.
(ii)
(iii) The decision has a harmful or negative impact on the interests of the employees, perhaps costing them jobs, promotions, or better pay. (c) Importance of Active Listening: Active listening is important for several reasons :-
37
(i) (ii)
It aids the organization in carrying out its mission It helps individuals to advance in their careers
(iii) It provides information that helps them to learn about important happenings in the organization, as well as assisting them in doing their own jobs well. (iv) It also helps to build strong personal relationships. Guidelines for Active Listening: (i) (ii) Look at the person and suspend other things you are doing in order to understand the other persons concerns, intentions. Be interested in what the person is saying. If you just cant make yourself interested, you will lose important information, so try taking notes. Doing so will keep your body and mind active.
(iii) Listen to the tone of voice and inflections; look at gestures and body language, these may carry an unspoken message. (iv) Restate what the person said. Restating their meaning is a way for you to make sure you understand the person clearly. (v) Ask questions once in a while to clarify meaning. Doing so, will keep you alert and let the other person know you have been listening and are interested in getting all the facts and ramifications. (vi) Be aware of your own feelings and opinions. Question 5 (a) Examining the provisions of the Negotiable Instruments Act, 1881, distinguish between a 'Bill of Exchange' and a 'Promissory Note'. (8 Marks) (b) What do you understand by the term 'Floating charge'? State the circumstances under which 'Floating charge' becomes 'Fixed charge'. (4 Marks) (c) Mr. X has received a cheque book from his bank (Sun Bank) where he (X) has his savings account. Write a letter to the Bank acknowledging the receipt of the cheque book. (4 Marks) Answer (a) Distinction between a Promissory Note and a Bill of Exchange: The distinctive features of these two types of negotiable instruments are tabulated below:Sl. No. 1. 2. Promissory Note It contains a promise to pay The liability of the maker of a note is primary and absolute Bill of Exchange It contains an order to pay The liability of the drawer of a bill is secondary and conditional. He would be liable if the drawee, after
38
3.
It is presented for payment without any previous acceptance by maker
4.
5.
6.
The maker of a promissory note stands in immediate relationship with the payee and is primarily liable to the payee or the holder. It cannot be made payable to the maker himself, that is the maker and the payee cannot be the same person In the case of a promissory note there are only two parties, viz. the maker (debtor) and the payee (creditor).
accepting the bill fails to pay the money due upon it provided notice of dishonor is given to the drawer within the prescribed time. If a bill is payable sometime after sight, it is required to be accepted either by the drawee himself or by someone else on his behalf, before it can be presented for payment. The maker or drawer of an accepted bill stands in immediate relationship with the acceptor and the payee In the case of bill, the drawer and payee or the drawee and the payee may be the same person. In the case of a bill of exchange, there are three parties, viz., drawer, drawee and payee, and any two of these three capacities can be filled by one and the same person. The bills can be drawn in sets A bill of exchange too cannot be drawn conditionally, but it can be accepted conditionally with the consent of the holder. It should be noted that neither a promissory note nor a bill of exchange can be made payable to bearer on demand.
7. 8.
A promissory note cannot be drawn in sets A promissory note can never be conditional
(b) A floating charge is an equitable charge which is not a specific charge on any property of the company. It is a charge on a class of assets, which may be present or future and which changes from time to time in the ordinary course of business, for example Stock in trade. Thus, the company may, despite of the charge, deal with any of the assets in the ordinary course of business. It is of the essence of a floating charge that it remains dormant until the undertaking charged ceases to be a going concern or until the person in whose favour the charge created, intervenes. Process of conversion of floating charge into a fixed charge is termed as Crystallization which is subject to the same restrictions as the fixed charge. A floating charge crystallizes or get fixed under the following circumstances.
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(i) (ii)
When the company goes into liquidation or When the company ceases to carry on business or
(iii) When receiver is appointed or (iv) When default is made in paying the principal and / or interest and the holder of the charge brings an action to enforce his security. (c) The Manager Sun Bank Mumbai Dear Sir, This is to acknowledge the receipt of the cheque book containing 20 cheques from No. 123450 to 123469 which I found to be correct. Date :
Yours faithfully, X (Customer) Question 6 (a) Explain the procedure for change of name of a company, as provided in the Companies Act, 1956. (8 Marks) (b) Mr. V is a shareholder of M/s Brown Limited, holding 150 Equity Shares of ` 10 each, on which the company has declared a total dividend of ` 1,500 for the year 2011-12. Mr. V did not receive the dividend warrant sent by the company. Draft an 'Indemnity Bond' to be sent to the company requesting the company to issue a duplicate dividend warrant. (4 Marks) (c) State whether the following statements are correct or incorrect (i) (ii) (4 1 = 4 Marks) 'An agreement with an alien friend is valid but an agreement with an alien enemy is void'. 'All contracts are agreements, but all agreements may not be contracts'.
(iii) 'A private limited company must have a minimum of two directors, while a public limited company must have atleast three directors,
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(iv) 'A holder of share-warrant of a company is not a member of the company'. Answer (a) Procedure for the Change of name under the Companies Act, 1956: According to Section 21 of the Companies Act, 1956, a company may, by special resolution, and with the approval of the Central Government, signified in writing, change its name. This power has been delegated to the Registrar of Companies. The application for change of name is required to be made to Registrar of Companies in form IA with a fee of Rs. 500. Where the Registrar is satisfied with the companys proposal, he may accord to the proposal which will be valid for a period of six months. However, such an approval of the Central Government would not be necessary where the only change in the name of the company is the addition thereto or the deletion there from of the words private consequent upon the conversion as per the provisions of this Act of a public company into a private company or vice versa (Proviso to Section 21). Further, according to Section 22 of the above Act, if through inadvertence etc., the name is identical with, or too nearly resembles, the name by which a company, in existence, has been previously registered, it may be changed by ordinary resolution with the sanction of the Central Government within twelve months of the registration. The company shall make the change by ordinary resolution and with the previous approval of the Central Government within three months of the date of the direction of the Central Government being received or such longer period as the Central Government may deem fit to allow. According to Section 23 of the above Act, where the name of a company has been changed, the Registrar of Companies shall issue fresh certificate with the change embodied therein. The change in name shall not affect any of the companys rights or obligations of the company or render defective any legal proceedings by or against it. Any legal proceedings, which might have been continued or commenced by or against the company by its former name, may be continued by its name. (b) Indemnity Bond I, Mr. V, S/o ------resident of ------------ do hereby agree to indemnify the M/s. Brown Ltd., for any loss that may occur for seeking release of dividend for 150 shares of Rs. 1,500/-. I further declare that personally I have not received the dividend warrant in question. Mr. V Date Place : (c) Correct / Incorrect (i) Correct : (Signature)
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(ii)
Correct
(iii) Correct (iv) Correct Question 7 Answer any FOUR of the following: (a) Explain clearly the meaning of the term 'Basic wages' as defined under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. State also what is not included in the term 'Basic Wages'. (4 Marks) (b) In what way a 'Member' of a company is different from that of a 'shareholder' of the company? (4 Marks) (c) State the ordinary business which may be transacted at an Annual General Meeting of a public limited company incorporated under the Companies Act, 1956. (4 Marks) (d) Explain the role played by different committees in regulating the 'Corporate Governance'. (4 Marks) (e) Explain the importance of 'Ethics' for finance and accounting professionals. Answer (a) As per section 2 (b) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952, Basic Wages means all emoluments which are earned by an employee while on duty or on leave or holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include :(i) (ii) the cash value of any food concessions any dearness allowance (that is to say all cash payments by whatever name is called, paid to an employee on account of rise in the cost of living), house rent allowance, overtime allowance, bonus, commission or pay and other similar allowance payable to the employee in respect of his employment or of work done in such employment or (4 Marks)
(iii) any presents made by the employer. (b) Members or share holders of a company are the persons who collectively constitute the company as a corporate entity. They are synonymous in the case of a company limited by shares, a company limited by guarantee and having a share capital and unlimited company whose capital is held in definite shares. But in the case of an unlimited company or a company limited by guarantee, a member may not be a shareholder, for such a company may or may not have a share capital. However, in certain respect members and shareholders are separate. They are as follows:(i) A registered shareholder is a member but a registered member may not be a shareholder because the company may not have a share capital.
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(ii)
A person who owns a bearer share warrant is a shareholder but he is not a member as his name is struck off from the register of members [Section 115 (1)]. This means that a person can be a holder of shares without being a member.
(iii) A legal representative of a deceased member is not a member until he applies for registration. He is, however, a shareholder eventhough, his name does not appear on the register of members. (iv) A person who subscribes to the memorandum of association immediately becomes the member, even though no shares are allotted to him. Till shares are allotted to the subscriber, he is a member but not a shareholder of the company. (v) A person who has transferred his shares ceases to be a holder of those shares from the date of the transfer but he continues to be a member till such time the transfer is registered in the books of the company. (c) Ordinary Business to be transacted at an Annual General Meeting. The following business is called the ordinary business, which is transacted at the Annual General Meeting of a company :(1) Consideration of Annual Accounts, Balance sheet & the Reports of the Board of Directors and Auditors (2) Declaration of Dividend (3) Appointment of directors in place of those retiring (4) Appointment of and fixation of remuneration of auditors Any business other than the above shall be called special business. (d) Role of different committees in regulating Corporate Governance : The core roles of the various committees in regulation of Corporate Governance are as follows :(1) Board of directors: The Boards role is that of trusteeship to protect and enhance shareholders value through strategic supervision. The strategy should aim at accountability and fulfillment of goals. (2) Audit committee: They have to provide assurance to Board on adequacy of internal control systems and financial disclosures. (3) Compensation Committee: The committee has to recommend to the Board compensation terms for Executive Directors and the senior most level of management below the Executive Director. (4) Nomination committee: It is to recommend to the Board nominations for membership of the Corporate Management Committee and the Board and oversee succession to the senior most level of management below the Executive Director.
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(5) Corporate management committee: Its primary role is strategic management of companys business within Boards approved direction. (6) Investor services committee: It is to look into redressal of shareholders and investors grievances, approval of transmissions, sub division of shares, issue of duplicate shares etc., (7) Divisional Management Committee: It is to realize tactical and strategic objectives in accordance with Corporate Management Committee / Board approved plan. (e) Finance and Accounts is perhaps the only business function which accepts responsibility to act in public interest. Hence, a finance and accounting professionals responsibility is not restricted to satisfy the needs of any particular individual or organization. While acting in public interest, it becomes imperative that the finance and accounting professional adheres to certain basic ethics in order to achieve his objectives. Until recently, various surveys conducted globally had ranked finance and accounting professionals very high in terms of professional ethics. However, various accounting scandals witnessed during the past few years have put a serious question mark on the role of the finance and accounting professional in providing the right information for decision making both within and outside their respective organizations. As these finance and accounting professionals are in public practice, they should take reasonable steps to identify circumstances that could pose the conflict of interest and thus leading to follow unethical behavior.
PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Working Notes should form part of the answer. Question 1 Answer the following: (a) AK Limited produces and sells a single product. Sales budget for calendar year 2012 by a quarters is as under: Quarters No. of units to be sold I 18,000 II 22,000 III 25,000 IV 27,000
The year is expected to open with an inventory of 6,000 units of finished products and close with inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarters sales demand plus 30% of the following quarter demand. The budgeted selling price per unit is ` 40 . The standard cost details for one unit of the product are as follows: Variable Cost` 34.50 per unit Fixed Overheads `2 hours 30 minutes @` 2 per hour based on a budgeted production volume of 1,10,000 direct labour hours for the year. Fixed overheads are evenly distributed through-out the year. You are required to: (i) (ii) Prepare Quarterly Production Budget for the year. In which quarter of the year, company expected to achieve break-even point.
(b) A Machine costing `10 lacs was purchased on 1-4-2011. the expected life of the machine is 10 years. At the end of this period its scrap value is likely to be `10,000. the total cost of all the machines including new one was `90 lacs. The other information is given as follows: (i) (ii) (iii) Working hours of the machine for the year was 4,200 including 200 non-productive hours. Repairs and maintenance for the new machine during the year was ` 5,000. Insurance Premium was paid for all the machine ` 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ` 3.75 (v) The new machine occupies area of the department. Rent of the department is 2,400 per month.
PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
45
(vi) Depreciation is charged on straight line basis Compute machine hour rate for the new machine. (c) RES Ltd. is an all equity financed company with a market value of ` 25,00,000 and cost of equity Ke = 21%. The company wants to buyback equity shares worth ` 5,00,000 by issuing and raising 15% perpetual debt of the same amount. Rate of tax may be taken as 30%. After the capital restructuring and applying MM Model (with taxes), you are required to calculate: (i) (ii) Market value of RES Ltd. Cost of Equity Ke
(iii) Weighted average cost of capital and comment on it. (d) A company is presently having credit sales of ` 12 lakh. The existing credit terms are 1/10, net 45 days and average collection period is 30 days. The current bad debts loss is 1.5%. In order to accelerate the collection process further as also to increase sales, the company is contemplating liberalization of its existing credit terms to 2/10, net 45 days. It is expected that sales are likely to increase by 1/3 of existing sales, bad debts increase to 2% of sales and average collection period to decline to 20 days. The contribution to sales ratio of the company is 22% and opportunity cost of investment in receivables is 15 percent (pre-tax). 50 per cent and 80 percent of customers in terms of sales revenue are expected to avail cash discount under existing and liberalization scheme respectively. The tax rate is 30%. Should the company change its credit terms? (Assume 360 days in a year). (4 5 = 20 Marks) Answer (a) (i) Production Budget for the year 2012 by Quarters I Sales demand(Unit) I II III Opening Stock 70% of Current Quarter s Demand 30% of Following Quarters Demand 18,000 6,000 12,600 6,600 19,200 7,200 II 22,000 7,200 15,400 7,500 22,900 8,100 III 25,000 8,100 17,500 8,100 25,600 8,700 IV 27,000 8,700 18,900 7,400* 26,300 8,000 Total 92,000 30,000 64,400 29,600 94,000 32,000
IV Total Production(II &III) Closing Stock (I+IVSales) *Balancing Figure V
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(ii) Break Even Point
= Fixed Cost/ PV Ratio =220000/13.75% = 1600000 or 40000 units.
P/V Ratio = (40 - 34.50 = 5.50)/40 100 =13.75% (Or, Break Even Point= Fixed Cost/ Contribution = 2,20,000/5.50 = 40,000 Units) Total sales in the quarter II is 40000 equal to BEP means BEP achieved in II quarter. (b) Computation of machine hour rate of new Machine Total (`) A. Standing Charges I. Insurance Premium 9000 x II. Rent
1 9
Per hour(`)
1,000
1 x2400x12 10
2,880 3,880 0.97*
B. Machine expenses I. Repairs and Maintenance [5,000/4,000] 1.25
10,00,000 10,000 II. Depreciation 10 4,000 III. Electricity 8 units x ` 3.75 Machine hour rate
Working Note
24.75 30.00 56.97
Calculation of productive Machine hour rate Total hours Less: Non-Productive hours
* 3,880/ 4000 = 0.97
4,200 200 4,000
(c) Computation of Market Value, Cost of Equity and WACC of RES Ltd.
Market Value of Equity = 25,00,000 Ke =21%

Net income (NI) for equity holders = Market Value of Equity Ke
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Net income (NI) for equity holders = 25,00,000 0.21 Net income for equity holders = 5,25,000 EBIT= 5,25,000/0.7= 7,50,000
All Equity Debt and Equity
EBIT Interest to debt-holders EBT Taxes (30%) Income available to equity shareholders Income to debt holders plus income available to shareholders
7,50,000 7,50,000 2,25,000 5,25,000 5,25,000
7,50,000 75,000 6,75,000 2,02,500 4,72,500 5,47,500
Present value of tax-shield benefits = ` 5,00,000 x 0.30 = 1,50,000 (i) Value of Restructured firm = 25,00,000 + 1,50,000 = 26,50,000 (ii) Cost of Equity (Ke) Total Value = 26,50,000 Less: Value of Debt = 5,00,000 Value of Equity = 21,50,000 4,72,500 Ke = =0.219 = 22% 21,50,000
(iii) WACC Cost of Debt (after tax)= 15% (1- 0.3)= 0.15 (0.70) = 0.105= 10.5% Components of Costs Amount Cost of Capital Weight Weighted COC
Equity Debt
21,50,000 5,00,000 26,50,000
0.22 0.105
0.81 0.19
0.178 0.020 0.198
WACC = 19.8%
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Comment: At present the company is all equity financed. So, Ke = Ko i.e. 21%. However after restructuring, the Ko would be reduced to 19.81% and Ke would increase from 21% to 21.98%. Reduction in Ko and increase in Ke is good for the health of the company. (d) Evaluation of Credit Policy Working Notes: (i) Calculation of Cash Discount
Cash Discount = Total credit sales % of customers who take up discount Rate Present Policy =
12,00,000 50 .01 = ` 6,000 100
Proposed Policy = 16,00,000 0.80 0.02 = ` 25,600

(Ii) Opportunity Cost of Investment in Receivables
Present Policy = 9,36,000 (30/360) (70% of 15)/100 = 78,000 10.5/100 = ` 8,190 Proposed Policy = 12,48,000 (20/360) 10.50/100 = ` 7,280
Statement showing Evaluation of Credit Policies Particulars Present Policy Proposed Policy
Credit Sales Variable Cost @ 78% of sales Bad Debts @ 1.5% and 2% Cash Discount Profit before tax Tax @ 30% Profit after Tax Opportunity Cost of Investment in Receivables Net Profit
12,00,000 9,36,000 18,000 6,000 2,40,000 72,000 1,68,000 8,190 1,59,810
16,00,000 12,48,000 32,000 25,600 2,94,400 88,320 2,06,080 7,280 1,98,800
Advise: Proposed policy should be adopted since the net benefit is increased by (` 1,98,800 1,59,810) ` 38,990. [Note: Opportunity cost of investment in receivables can be computed alternatively taking contribution @ 22 percent into consideration. The net benefit then would change accordingly to ` 1,95,137.]
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Question 2 (a) A contractor commenced a contract on 1-7-2011. The costing records concerning the said contract reveal the following information as on 31-32012. Amount (`) Material sent to site Labour paid Labour outstanding as on 31-3-2012 Salary to Engineer Cost of plant sent to site (1-7-2011) Salary to Supervisor (3/4 time devoted to contract) Administration & other expenses Prepaid Administration expenses Material in hand at site as on 31-3-2012 7,74,300 10,79,000 1,02,500 20,500 per month 7,71,000 9,000 per month 4,60,600 10,000 75,800
Plant used for the contract has an estimated life of 7 years with residual value at the end of life ` 50,000. Some of material costing ` 13,500 was found unsuitable and sold for ` 10,000. Contract price was ` 45,00,000. On 31-3-2012 two third of the contract was completed. The architect issued certificate covering 50% of the contract price and contractor has been paid ` 20,00,000 on account. Depreciation on plant is charged on straight line basis. Prepare Contract Account. (b) The Balance Sheet of X Ltd. as on 31-3-2011 and 31-3-2012 are as under: Liabilities 2011 2012 Assets 2011 2012 Equity Share 18,00,000 22,00,000 Fixed Assets capital (` 10 each) (Including machine) General Reserve Security premium Profit & Loss A/c 7% Debentures Creditors Provision for tax 7,50,000 50,000 4,50,000 3,00,000 1,50,000 1,45,000 6,00,000 Stock 45,000 Debtors 5,30,000 Cash Balance 2,00,000 Preliminary Expense 2,15,000 1,65,000 36,45,000 39,55,000 20,50,000 18,75,000 7,10,000 7,25,000 1,25,000 35,000 8,95,000 9,80,000 1,80,000 25,000 (8 Marks)
36,45,000 39,55,000 Additional Information: (i)
Depreciation charged on fixed assets during the year was ` 2,05,000. An old machine costing ` 2,00,000 (WDV` 80,000) was sold for ` 65,000 during the year.
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(ii)
Provisions for tax made during the year for ` 1,78,000.
(iii) On 1-4-2011 company redeemed debentures of ` 1,00,000 at a premium of 5%. (iv) Company has issued fully paid bonus shares of ` 2,00,000 by capitalization of profit. Prepare Cash Flow Statement. Answer (a) Contract Account (For the period 1.7.11 to 31.3.12) (8 Marks)
Particulars To Material Issued To Labour

Add: Outstanding
Amount Particulars ` 7,74,300 By Material (Sold) 10,79,000 1,02,500 11,81,500 By P&L A/c (Loss) (13,500-10,000) By Cost of Contract c/d
Amount ` 10,000 3,500 75,800 26,39,600
To Salary to engineer (20,500 x 9) To Salary to Supervisor
1,84,500 By Material in hand 60,750
3 9000 9 4
To Administration & other expenses Less: Prepaid (Working Note 1) To Cost of Contract b/d To Notional Profit c/d 4,60,600 10,000
4,50,600 77,250
27,28,900 27,28,900
To Depreciation on Plant
26,39,600 By work-in Progress: 2,70,300 -Work certified 50% of 45,00,000 -Work uncertified (W.N.-2) (26,39,600-19,79,700)
29,09,900
22,50,000 6,59,900
29,09,900
To P&L A/c(W.N.3) To Reserve
1,60,178 By Notional Profit b/d 1,10,122

2,70,300
2,70,300
2,70,300
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Working Note
1.
Calculation of depreciation on Plant Cost of the Plant Less: Residual Value Estimated life 7,71,000 50,000 7,21,000 7 Years Depreciation per annum 1,03,000 Depreciation for 9 months = 1,03,000 9 = 77,250 12
2.
Cost of work uncertified = Cost incurred to date minus 50% of the total cost of contract = `26,39,600(figure already shown in the contract A/c) - `19,79,700 = `6,59,900
3.
Calculation of Profit to be transferred 2 20,00,000 2,70,300 = 1,60,178 3 22,50,000
(b) Cash flow Statement of X Ltd. for the year ending 31.03.2012
(A) Cash flow from Operating Activities : Net Profit before Tax (80,000 + 50,000 + 1,78,000)
Add : Depreciation
(` )
(` )
3,08,000 2,05,000 15,000 14,000 10,000 5,52,000 (1,85,000) (2,55,000) 65,000 1,77,000
Loss on Sale of Machine Interest Paid on Debentures Preliminary Expenses written off Cash flow before working capital adjustments () Increase in Stock () Increase in Debtors (+) Increase in Creditors Cash flow from Operating Activities
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Less : Tax paid
(1,58,000) 65,000 (1,10,000)
19,000
(B) Cash flow from Investing Activities Sale of Machine Purchase of Fixed Assets Net cash used in Investing activities (C) Cash flow from Financing activities Issue of Equity Shares Redemption of Debentures Interest paid on Debentures Net cash used in Financing Activities Net Increase in Cash and Cash Equivalent during year
Add : Opening Balance of Cash
(45,000) 2,00,000 (1,05,000) (14,000) 81,000 55,000 1,25,000 1,80,000
Closing Balance of Cash

Working Notes : Fixed Assets Account
To Balance b/d To Bank
20,50,000 By Bank 1,10,000 By P&L a/c By Depreciation a/c By Balance c/d

21,60,000 Provision for Tax
65,000 15,000 2,05,000 18,75,000

21,60,000
To Balance b/d To Bank
1,58,000 By balance c/d 1,65,000 By P & L a/c 3,23,000

General Reserve A/c
1,45,000 1,78,000 3,23,000
To Equity share capital a/c To Balance c/d
2,00,000 6,00,000 8,00,000
By Balance b/d By P & L a/c
7,50,000 50,000 8,00,000
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Question 3 (a) The management of a company wants to formulate an incentive plan for the workers with a view to increase productivity. The following particulars have been extracted from the books of company: Piece Wage rate ` 10 Weekly working hours 40 Hourly wages rate ` 40 (guaranteed) Standard/normal time per unit 15 minutes. Actual output for a week: Worker A Worker B 176 pieces 140 pieces
Differential piece rate: 80% of piece rate when output below normal and 120% of piece rate when output above normal. Under Halsey scheme, worker gets a bonus equal to 50% of Wages of time saved. Calculate: (i) (ii) Earning of workers under Halseys and Rowans premium scheme. Earning of workers under Taylors differential piece rate system and Emersons efficiency plan. (8 Marks)
(b) STN Ltd. is a readymade garment manufacturing company. Its production cycle indicates that materials are introduced in the beginning of the production phase; wages and overhead accrue evenly throughout the period of cycle. The following figures for the 12 months ending 31st December 2011 are given. Production of shirts 54,000 units Selling price per unit ` 200 Duration of the production cycle 1 month Raw material inventory held 2 months consumption Finished goods stock held for 1 month Credit allowed to debtors is 1.5 months and credit allowed by creditors is 1 month. Wages are paid in the next month following the month of accrual. In the work-in-progress 50% of wages and overheads are supposed to be conversion costs. The ratios of cost to sales price are-raw materials 60% direct wages 10% and overheads 20%. Cash is to be held to the extent of 40% of current liabilities and safety margin of 15% will be maintained. Calculate amount of working capital required for the company on a cash cost basis. (8 Marks)
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Answer (a) Calculation of earnings for workers under different incentive plans:
(i)
Halseys Premium Plan:
Worker A
Worker B
Actual time taken Standard time Production for actual
40 hours
176 Pcs 15 Min. 60 Min.
40 hours
140 Pcs 15 Min. 60 Min.
= 44 hours Minimum Wages Bonus Earning

Rowans Premium Plan:
= 35 hours
40 hours x ` 40 = ` 1600 50% (44-40) x `40 = ` 80

` 1680 ` 1600
40 hours x ` 40 = ` 1600 No bonus

` 1600 ` 1600 No bonus
Minimum Wages (as above) Bonus
4 40 ` 40 44
= ` 145.45 ` 1745.45
176 100 160 = 110%
Earning (ii)
Taylors differential Piece rate
` 1600
140 100 160 = 87.5%
Efficiency
Earning
Emersons efficiency Plan
`10x120%x176 Pcs = ` 2112
`10x80%x140Pcs ` 1120
Time Wages Bonus Earning
` 40x40 hours = 1600 (20%+10%) of (40x40) = 480 ` 2080
` 40x40 hours = 1600 20% of 1600 = 320 ` 1920
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(b) Computation of Amount of Working Capital required on a Cash Cost basis Working Notes: 1. Raw material inventory: The cost of materials for the whole year is 60% of the Sales value.
Hence it is 54,000 units x ` 200 x
60 = ` 64,80,000 . The monthly consumption of 100 raw material would be ` 5,40,000. Raw material requirements would be for two months; hence raw materials in stock would be ` 10,80,000.
Debtors: Total Cash Cost of Sales = 97,20,000 x
2. 3.
1.5 = ` 12,15,000 12
Work-in-process: (Each unit of production is expected to be in process for one month).
` (a) (b) Raw materials in work-in-process (being one months raw material requirements) Labour costs in work-in-process (It is stated that it accrues evenly during the month. Thus, on the first day of each month it would be zero and on the last day of month the work-in-process would include one months labour costs. On an average therefore, it would be equivalent to of the months labour costs) 5,40,000 45,000
(c)
4.
Overheads (For month as explained above) Total work-in-process Finished goods inventory: (1 months cost of production) Raw materials Labour Overheads
_90,000 6,75,000
5.
5,40,000 90,000 1,80,000 8,10,000 Creditors: Suppliers allow a one months credit period. Hence, the average amount of creditors would be ` 5,40,000 being one months purchase of raw materials.
Direct Wages payable: The direct wages for the whole year is 54,000 units ` 200 x 10% = 10,80,000. The monthly direct wages would be 90,000 (10,80,000 12). Hence, wages payable would be ` 90,000.
6.
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Statement of Working Capital Required
`
Current Assets
Raw materials inventory (Refer to working note 1) Debtors (Refer to working note 2) Workingin-process (Refer to working note 3) Finished goods inventory (Refer to working note 4) Cash
Current Liabilities
10,80,000 12,15,000 6,75,000 8,10,000 2,52,000 5,40,000 90,000 6,30,000

34,02,000 5,10,300 39,12,300 40,32,000
Creditors (Refer to working note 5) Direct wages payable (Refer to working note 6) Estimated working capital requirements (before safety margin of 15%)
Add: Safety margin of 15%
Estimated Working Capital Requirements

Question 4 (a) SJ Ltd. has furnished the following information: Standard overhead absorption rate per unit Standard rate per hour Budgeted production Actual production Actual hours Production (units) Total Overheads (`) 8,000 1,80,000 10,000 2,10,000
` 20 `4
15,000 units 15,560 units 74,000 14,000 2,70,000
Actual overheads were ` 2,95,000 out of which ` 62,500 fixed . Overheads are based on the following flexible budget
You are required to calculate the following overhead variances (on hours basis) with appropriate workings: (i) (ii) Variable overhead efficiency and expenditure variance Fixed overhead efficiency and capacity variance. (8 Marks)
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(b) ANP Ltd. is providing the following information: Annual cost of saving Useful life Salvage value Internal rate of return Profitability index Table of discount factor: Discount factor 1 15% 14% 13% (i) (ii) 0.870 0.877 0.886 2 0.756 0.769 0.783 3 0.658 0.675 0.693 Years 4 0.572 0.592 0.614 5 0.497 0.519 0.544 Total 3.353 3.432 3.52
` 96,000
5 years zero 15% 1.05
You are required to calculate: Cost of the project Payback period (8 Marks)
(iii) Net present value of cash inflow (iv) Cost of capital. Answer (a) Workings:
(a) Variable overhead rate per unit = Difference in total overheads at two levels/ Difference in output at two level = (2,70,000 2,10,000) /(14,000-10,000) = 60,000/ 4,000 = ` 15 per unit (b) Fixed overhead = 2,70,000 (14000 15) = `60,000 (c) Standard Fixed Overhead Rate Per Hour = 4-3 = 1 (d) Standard Hour Per Unit = Standard hours rate per unit / standard overhead rate per hour = 20/4 = 5 hours (e) Actual Variable Overhead = 2,95,000 62,500= 2,32,500 (f) Actual Variable Overhead Per Hour = 2,32,500/74,000= 3.1419 (g) Budgeted hours = 15,000 5 = 75,000 hours (h) Standard variable overhead rate per hour = Variable overheads/budgeted hours =15,000 15 / 75,000 = `3.00 per hour
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(i)
Standard Hours for Actual Production= 15,560 5 = 77,800 hours

(i) Variable Overhead efficiency and expenditure Variance:
Variable overhead efficiency variance Hours Actual Hours)
= Standard Rate Per Hour (Std. = 3 (77,800 74,000)= 11,400 (F)
Variable overhead expenditure variance = Actual Hours (Std.Rate Per HourActual Rate Per Hour) = 74,000 (3-3.1419)= 10,500 (A)
(ii) Fixed overhead efficiency and capacity variance:
Fixed overhead efficiency variance = Std.Rate Per Hour (Std.Hours-Actual Hours) = 1(77,800-74,000)= 3800(F) Fixed overheads Capacity variance = Std. Rate Per Hour(Actual HoursBudgeted Hours) = 1(74,000 75,000 ) = 74,000 75,000 = 1000 A Standard Fixed overhead rate per hour is calculated with the help of budgeted hours and the Fixed overhead efficiency and expenditure variance is calculated as follows: Standard fixed overhead rate per hour = Fixed overheads/budgeted hours= 60,000 / 75,000 = `0.80 per hour
(ii) Fixed overhead efficiency and capacity variance
Fixed overhead efficiency Variance*= Std. Rate per hour (Std. hours - Actual hours) = `0.80 (15,560 x5 - 74,000) = `3,040 (F) Fixed overhead capacity variance*= Std. Rate per hour (Actual hours- Budgeted hours) = `0.80 (74,000-15000 x 5) = `800 (A)
(b) (i) Cost of Project
At 15% internal rate of return (IRR), the sum of total cash inflows = cost of the project i.e initial cash outlay Annual cost savings = ` 96,000 Useful life = 5 years Considering the discount factor table @ 15%, cumulative present value of cash inflows for 5 years is 3.353
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Hence, Total Cash inflows for 5 years for the Project is 96,000 x 3.353 = ` 3,21,888 Hence, Cost of the Project = ` 3,21,888
(ii) Payback Period
Payback period =
Cost of the Project ` 3,21,888 = Annual Cost Savings 96,000
Payback Period = 3.353 years (iii) Net Present Value (NPV)
NPV = Sum of Present Values of Cash inflows Cost of the Project = ` 3,37,982.40 3,21,888 = ` 16,094.40
Net Present Value = ` 16,094.40 (iv) Cost of Capital
Profitability index =
1.05 =
Sum of Discounted Cash inflows Cost of the Project
Sum of Discounted Cash inf lows 3,21,888
Sum of Discounted Cash inflows = ` 3,37,982.40

Since, Annual Cost Saving = ` 96,000 Hence, cumulative discount factor for 5 years =
` 3,37,982.40 96,000
From the discount factor table, at discount rate of 13%, the cumulative discount factor for 5 years is 3.52 Hence, Cost of Capital = 13%
Question 5 (a) What is an Integrated Accounting System? State its advantages. (b) State the types of cost in the following cases: (i) (ii) Interest paid on own capital not involving any cash outflow. Withdrawing money from bank deposit for the purpose of purchasing new machine for expansion purpose.
(iii) Rent paid for the factory building which is temporarily closed
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(iv) Cost associated with the acquisition and conversion of material into finished product. (c) Discuss factors that a venture capitalist should consider before financing any risky project. (d) What is Net Operating income theory of capital structure? Explain the assumptions on which the NOI theory is based. (4 4 = 16 Marks) Answer
Integrated Accounts is the name given to a system of accounting, whereby cost and financial accounts are kept in the same set of books. There will be no separate sets of books for Costing and Financial records. Integrated accounts provide or meet out fully the information requirement for Costing as well as for Financial Accounts. Advantages: The main advantages of Integrated Accounts are as follows:
(a) No need for Reconciliation- The question of reconciling costing profit and financial profit does not arise, as there is one figure of profit only.
(b) Less efforts- Due to use of one set of books, there is a significant extent of saving in efforts made. (c) Less Time consuming- No delay is caused in obtaining information as it is provided from books of original entry. (d) Economical process- It is economical also as it is based on the concept of Centralisation of Accounting function.
(b) Type of costs
(i)
Imputed Cost
(ii) Opportunity Cost (iii) Shut Down Cost (iv) Product Cost
(c) Factors to be considered by a Venture Capitalist before Financing any Risky Project (i)
Quality of the management team is a very important factor to be considered. They are required to show a high level of commitment to the project.
(ii) The technical ability of the team is also vital. They should be able to develop and produce a new product / service. (iii) Technical feasibility of the new product / service should be considered. (iv) Since the risk involved in investing in the company is quite high, venture capitalists should ensure that the prospects for future profits compensate for the risk. (v) A research must be carried out to ensure that there is a market for the new product.
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(vi) The venture capitalist himself should have the capacity to bear risk or loss, if the project fails. (vii) The venture capitalist should try to establish a number of exist routes. (viii) In case of companies, venture capitalist can seek for a place on the Board of Directors to have a say on all significant matters affecting the business. (Note: Students may answer any four of the above factors) (d) Net Operating Income (NOI) Theory of Capital Structure
According to this approach, there is no relationship between the cost of capital and value of the firm. The value of the firm is independent of the capital structure of the firm.
Assumptions of NOI Approach
(a) There are no taxes. (b) The market capitalizes the value of the firm as a whole. Thus the split between debt and equity is not important. (c) The increase in proportion of debt in capital structure leads to change in risk perception of the shareholders i.e. increase in cost of equity (Ke). The increase in cost of equity is such as completely offset the benefits of using cheaper debt. (d) The overall cost of capital remains same for all degrees of debt equity mix.
Question 6 (a) A product passes through two processes A and B. During the year 2011, the input to process A of basic raw material was 8,000 units @ ` 9 per unit. Other information for the year is a s follows: Process A Output units Normal loss (% to input) Scrap value per unit (` ) Direct wages (` ) Direct expenses (` ) Selling price per unit (`) 7,500 5% 2 12,000 6,000 15 Process B 4,800 10% 10 24,000 5,000 25
Total overheads `17,400 were recovered as percentage of direct wages. Selling expenses were `5,000. There are not allocate to the processes. 2/3 of the output of Process A was passed on to the next process and the balance was sold.The entire output of Process B was sold. Prepare Process A an B Accounts. (8 Marks)
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(b) The capital structure of JCPL Ltd. is as follows:
`
Equity share capital of ` 10 each 8% Preferences share capital of ` 10 each 10% Debenture of ` 100 each Additional Information: Profit after tax (tax rate 30%) ` 1,82,000 Operating expenses (including depreciation ` 90,000) being 1.50 times of EBIT Equity share dividend paid 15%. Market price per equity share` 20. Require to calculate: (i) (ii) Operating and financial leverage. Cover for the preference and equity share of dividends. (8 Marks) Process A Account 8,00,000 6,25,000 4,00,000 18,25,000
(iii) The earning yield and price earnings ratio. (iv) The net fund flow. Answer (a)
Units To Input To Direct Wages To Direct Exp. To overheads (1:2)

8000
Amount(`) 72000 By Normal Loss (5%) 12000 By Abnormal loss 6000 @ 12.50 5800 By Process B A/C By Profit and Loss A/C (2500 @ 12.50)
95800
Units Amount(`) 400 100 5000 2500

8000
8000
800 1250 62500 31250

95800
Cost of abnormal Loss in process A =
95800 800 95000 = = 12.50 per unit 8000 400 7600
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Process B A/C
Units To Process A A/C To Direct Wages To Direct Exp. To overheads To Abnormal gain 300
5300
Amount(`) 62500 By Normal Loss 24000 By Finished stock A/C 5000 or Profit & loss A/C 11600 6540
109640
Units 500 4800
Amount(`) 5000 104640
5000
5300
109640
Cost of Abnormal gain =

Working
103100 5000 98100 = = 21.80 5000 500 4500
Profit & Loss A/c
Particulars To Cost of Sales: Process A (2,500@12.50) 31,250 Process B (4,800@21.80) 1,04,640 To Abnormal Loss: Process A [(100 units @(12.50-2)] To Selling expenses To Net Profit
Note:
Amount(`)
Particulars
Amount(`)
By Sales: Process A (2500 x 15) - 37,500 Process B 1,35,890 (4800 x 25) - 1,20,000 By Abnormal gain: Process B 1050 [(300 units @ (21.80-10)] 5,000 19,100
1,61,040
1,57,500
3540
1,61,040
1. 2.
As mentioned selling expenses are not allocable to process which is debited directly to the P/L A/c. It is assumed that Process A and Process B are not responsibility centres and hence, Process A and Process B have not been credited to direct sales. P/L A/c is prepared to arriving at profit/loss.
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(b) [Assumption: All operating expenses (excluding depreciation) are variable] Working Notes
`
1,82,000 78,000
2,60,000
Net profit after tax Tax @ 30%

EBT
Interest on debenture
EBIT
40,000
3,00,000
Operating Expenses 1.50 times Sales (i)
4,50,000 7,50,000
Operating Leverage = Contribution/EBIT = (7,50,000 - 3,60,000) / 3,00,000 = 3,90,000 / 3,00,000 = 1.30 times. Financial Leverage = EBIT / EBT = 3,00,000 / 2,60,000 = 1.15 times
OR
Pr ef Dividend FL = EBIT + EBT - 1 t =

3,00,000 3,00,000 = 50,000 2,60,000 (7,14,29) 2,60,000 ( ) 1 0.3 3,00,000 = 1.59 = 1.6 1,88,571
= (ii)
Preference Dividend Cover = PAT / Preference share Dividend = 1,82,000 / 50,000 = 3.64 times Equity dividend cover = PAT - Pref. div / Equity dividend = 1,82,000 - 50,000/1,20,000= 1.10 times
(iii) Earning yield = EPS / Market price 100 i.e. = 1,32,000 / 80,000 = 1.65 / 20 = 8.25% Price Earnings Ratio = Market price / EPS = 20 / 1.65 = 12.1 Times
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(iv) Net Funds Flow Net Funds flow = Net profit after tax + depreciation Total dividend = 1,82,000 + 90,000 (50,000 + 1,20,000) = 2,72,000 1,70,000
Net funds flow = 1,02,000 Question 7 Answer any four of the following: (a) The profit maximization is not an operationally feasible criterion. Comment on it. (b) Explain the important ratios that would be used in each of the following situations: (i) (ii) A bank is approached by a company for a loan of ` 50 lakh for working capital purposes. A long term creditor interested in determining whether his claim is adequately secured.
(iii) A shareholder who is examining his portfolio and who is to decide whether he should hold or sell his holding in the company. (iv) A finance manager interested to know the effectiveness with which a firm uses its available resources. (c) Write short notes on the following: (i) (ii) Deep Discount Bonds Angle of Incidence (4 4 = 16 Marks)
(d) Discuss basic assumptions of Cost Volume Profit analysis. (e) Distinguish between bill of material and material requisition note. Answer (a) The profit maximisation is not an operationally feasible criterion.
The above statement is true because Profit maximisation can be a short-term objective for any organisation and cannot be its sole objective. Profit maximization fails to serve as an operational criterion for maximizing the owner's economic welfare. It fails to provide an operationally feasible measure for ranking alternative courses of action in terms of their economic efficiency. It suffers from the following limitations: (i)
Vague term: The definition of the term profit is ambiguous. Does it mean short term or long term profit? Does it refer to profit before or after tax? Total profit or profit per share?
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(ii)
Timing of Return: The profit maximization objective does not make distinction between returns received in different time periods. It gives no consideration to the time value of money, and values benefits received today and benefits received after a period as the same.
(iii) It ignores the risk factor. (iv) The term maximization is also vague.
(b) Important Ratios used in different situations (i) Liquidity Ratios- Here Liquidity or short-term solvency ratios would be used by the bank to check the ability of the company to pay its short-term liabilities. A bank may use Current ratio and Quick ratio to judge short terms solvency of the firm.
(ii) Capital Structure/Leverage Ratios- Here the long-term creditor would use the capital structure/leverage ratios to ensure the long term stability and structure of the firm. A long term creditors interested in the determining whether his claim is adequately secured may use Debt-service coverage and interest coverage ratio. (iii) Profitability Ratios- The shareholder would use the profitability ratios to measure the profitability or the operational efficiency of the firm to see the final results of business operations. A shareholder may use return on equity, earning per share and dividend per share. (iv) Activity Ratios- The finance manager would use these ratios to evaluate the efficiency with which the firm manages and utilises its assets. Some important ratios are (a) Capital turnover ratio (b) Current and fixed assets turnover ratio (c) Stock, Debtors and Creditors turnover ratio. (c) (i) Short Note on Deep Discount Bonds
Deep Discount Bonds is a form of zero-interest bonds. These bonds are sold at a discounted value and on maturity face value is paid to the investors. In such bonds, there is no interest payout during lock in period. IDBI was the first to issue a deep discount bond in India in January, 1992. The investor could hold the bond for 26 years or seek redemption at the end of every five years with a specified maturity value.
(ii) Angle of incidence
This angle is formed by the intersection of sales line and total cost line at the breakeven point. This angle shows the rate at which profits are being earned once the break-even point has been reached. The wider the angle the greater is the rate of earning profits. A large angle of incidence with a high margin of safety indicates extremely favourable position.
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(d) CVP Analysis:-Assumptions
(i) (ii)
Changes in the levels of revenues and costs arise only because of changes in the number of products (or service) units produced and sold. Total cost can be separated into two components: Fixed and variable
(iii) Graphically, the behaviour of total revenues and total cost are linear in relation to output level within a relevant range. (iv) Selling price, variable cost per unit and total fixed costs are known and constant. (v) All revenues and costs can be added, sub traded and compared without taking into account the time value of money.
(e) Bills of material Material Requisition Note
1. 2.
It is document by the drawing office
1.
It is prepared by the foreman of the consuming department. It is a document authorizing StoreKeeper to issue Material to the consuming department. It cannot replace a bill of material.
It is a complete schedule of 2. component parts and raw materials required for a particular job or work order. It often serves the purpose of a Store 3. Requisition as it shown the complete schedule of materials required for a particular job i.e. it can replace stores requisition. It can be used for the purpose of 4. quotation It helps in keeping a quantitative 5. control on materials draw through stores Requisition.
3.
4. 5.
It is useful in arriving historical cost only. It shows the material actually drawn from stores.
PAPER 4 : TAXATION Question No.1 is compulsory. Attempt any five questions from the remaining six questions. Wherever appropriate, suitable assumptions may be made by the candidates. Working notes should form part of the answer. All questions pertaining to Income-tax relate to assessment year 2012-13, unless stated otherwise in the question Question 1 (a) Ms. Purvi is a Chartered Accountant in practice. She maintains her accounts on cash basis. Her Income and Expenditure account for the year ended March 31, 2012 reads as follows: Expenditure Salary to staff Stipend to articled assistants Incentive to articled assistants Office rent Printing and stationery Meeting, seminar and Conference Purchase of car Repair, maintenance and petrol of car Travelling expenses Municipal tax paid in respect of house property Net Profit (` ) 5,50,000 Income Fees earned: Audit 37,000 Taxation services Consultancy 3,000 Dividend on shares of 24,000 Indian companies (Gross) 22,000 Income from Unit Trust of India Honorarium received various 31,600 from institutions for 80,000 valuation of answer papers 4,000 35,000 Rent received from residential flat let out (` ) 7,88,000 5,40,300 2,70,000 (` )
15,98,300 10,524 7,600
15,800
85,600
3,000 9,28,224 17,17,824
17,17,824
The Suggested Answers for Paper 4: Taxation are based on the provisions of law as amended by the Finance Act, 2011 and applicable for A.Y. 2012-13 (in the case of Income-tax), which is the assessment year relevant for May, 2012 examination.
PAPER 4 : TAXATION
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Other Information: (i) (ii) Allowable rate of depreciation on motor car is 15%. Value of benefits received from clients during the course of profession is ` 10,500.
(iii) Incentives to articled assistants represent amount paid to two articled assistants for passing IPCC Examination at first attempt. (iv) Repairs and maintenance of car include ` 2,000 for the period from 1-10-2011 to 30-09-2012. (v) Salary include ` 30,000 to a computer specialist in cash for assisting Ms. Purvi in one professional assignment. (vi) The total travelling expenses incurred on foreign tour was ` 32,000 which was within the RBI norms. (vii) Medical Insurance Premium on the health of dependent brother and major son dependent on her amounts to ` 5,000 and ` 10,000, respectively, paid in cash. (viii) She invested an amount of ` 10,000 in National Saving Certificate. Compute the total income and tax payable of Ms. Purvi for the assessment year 20122013. (10 Marks) (b) Infotech Software Systems is an information technology software company. The receipts during financial year 2011-12 are as under: (5 Marks) Particulars (i) (ii) (iii) Receipts for the analysis of information technology software. Receipts for providing advice, consultancy and assistance on matter related to specifications to secure a database. Receipts for providing the right to use the canned software on which the amount of excise duty has been paid and the benefit under Notification No. 31/2010 Cus dated 27-02-2010 has not been availed. (iv) (v) Receipts for the upgradation of the information technology software Infotech software systems in the financial year 2010-11 has provided the taxable services valuing of ` 15,00,000 Determine the value of taxable service and the amount of service tax, education cess and secondary and higher education cess payable by Infotech Software Systems for the financial year 2011-2012. The amount of service tax has been charged separately. (c) R. Ltd. of Mumbai made a total purchases of input and capital goods of ` 60,00,000 during the month of February, 2012. The following further information is available. 2,65,000 4,10,000 5,10,000
`
1,80,000
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(i)
Goods worth ` 15,00,000 were purchases from Assam on which C.S.T. 2% was paid.
(ii) The purchases made in February, 2012 include goods purchased from unregistered dealers amounting to ` 18,50,000. (iii) It purchased capital goods (not eligible for input credit) worth ` 6,50,000 and those eligible for input credit for ` 9,00,000. (iv) Sales made in Mumbai during the month of February, 2012 is ` 10,00,000 on which VAT at 12.5% is payable. Assuming that all purchases given are exclusive of tax and VAT 4% is paid on them calculate: (a) the amount of purchases eligible for input credit. (b) the amount of input credit available for the month of February, 2012. (c) the VAT payable for the month of February, 2012. The input VAT credit on eligible capital goods is available in 36 equal monthly instalments. (5 Marks) Answer (a) Computation of total income and tax liability of Ms. Purvi for the A.Y. 2012-13 Particulars Income from house property (See Working Note 1) Profit and gains of business or profession (See Working Note 2) Income from other sources (See Working Note 3) Gross Total Income Less: Deductions under Chapter VI-A (See Working Note 4) Total Income Tax on total income Upto ` 1,90,000 ` 1,90,001 ` 5,00,000 @10% ` 5,00,001 - ` 8,00,000 @20% ` 8,00,001 - ` 9,83,820 @30% Add: Education cess @ 2% Secondary and higher education cess @ 1% Total tax liability Nil 31,000 60,000 55,146 1,46,146 2,923 ___1,461 1,50,530 ` ` 57,820 9,20,200 15,800 9,93,820 10,000 9,83,820
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Working Notes : (1) Income from House Property Particulars Gross annual value under section 23(1) Less: Municipal taxes paid Net Annual Value (NAV) Less: Deduction under section 24 @ 30% of NAV ` 85,600 3,000 82,600 24,780 57,820 `
Note - Rent received has been taken as the Gross Annual Value in the absence of other information relating to Municipal Value, Fair Rent and Standard Rent. (2) Income under the head Profits & Gains of Business or Profession Particulars Net profit as per Income and Expenditure account Add: Expenses debited but not allowable (i) Salary paid to computer specialist in cash disallowed under section 40A(3), since such cash payment exceeds 30,000 ` 20,000 (ii) Amount paid for purchase of car is not allowable under section 37(1) since it is a capital expenditure 80,000 (ii) Municipal Taxes paid in respect of residential flat let out Add: Value of benefit received from clients during the course of profession [taxable as business income under section 28(iv)] Less: Income credited but not taxable under this head: (i) (ii) Dividend on shares of Indian companies Income from UTI 10,524 7,600 15,800 85,600 1,19,524 9,32,200 Less: Depreciation on motor car @15% (See Note 1 below) _12,000 9,20,200 3,000 1,13,000 10,41,224 ` ` 9,28,224
__10,500 10,51,724
(iii) Honorarium for valuation of answer papers (iv) Rent received from letting out of residential flat
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Notes : (i) It has been assumed that the motor car was put to use for more than 180 days during the previous year and hence, full depreciation @ 15% has been provided for under section 32(1)(ii). Note : Alternatively, the question can be solved by assuming that motor car has been put to use for less than 180 days and accordingly, only 50% of depreciation would be allowable as per the second proviso below section 32(1)(ii). (ii) Incentive to articled assistants for passing IPCC examination in their first attempt is deductible under section 37(1). (iii) Repairs and maintenance paid in advance for the period 1.4.2012 to 30.9.2012 i.e. for 6 months amounting to ` 1,000 is allowable since Ms. Purvi is following the cash system of accounting. (iv) ` 32,000 expended on foreign tour is allowable as deduction assuming that it was incurred in connection with her professional work. Since it has already been debited to income and expenditure account, no further adjustment is required. (3) Income from other sources Particulars ` ` Dividend on shares of Indian companies 10,524 Less: Exempt under section 10(34) 10,524 Nil Income from UTI Less: Exempt under section 10(35) Honorarium for valuation of answer papers (4) Deduction under Chapter VI-A : Particulars Deduction under section 80C (Investment in NSC) Deduction under section 80D (See Notes (i) & (ii) below) Total deduction under Chapter VI-A Notes: (i) ` 10,000 ___Nil 10,000 7,600 _7,600
Nil 15,800 15,800
Premium paid to insure the health of brother is not eligible for deduction under section 80D, even though he is a dependent, since brother is not included in the definition of family under section 80D. Premium paid to insure the health of major son is not eligible for deduction, even though he is a dependent, since payment is made in cash.
(ii)
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(b) Computation of value of taxable service and service tax payable Particulars (i) Receipts for analysis of IT software (Analysis of IT software is taxable as per the definition of IT software services) Receipts for providing advice, consultancy and assistance on matter related to specifications to secure a database (Advice, consultancy and assistance to secure a database is taxable as per the definition of IT software services) Receipts for providing the right to use canned software on which excise duty has been paid [Refer Note 1 below] Receipts for upgradation of software (liable to service tax as per the definition of IT software services) Value of taxable services Service tax @ 10% [Refer Note 2 below] Education cess @ 2% Secondary and Higher Education Cess @ 1% Total service tax payable Notes: (1) Service of providing the right to use domestically produced canned software is exempt from service tax if appropriate excise duty determined on the basis of MRP provisions (Section 4A of the Central Excise Act, 1944) has been paid on the same. It is presumed that excise duty paid in the above case has been determined on the basis of MRP provisions. (2) Since the turnover of taxable services of Infotech Software systems in the FY 2010-11 exceeded `10,00,000, it would not be entitled for exemption available to small service providers and be liable to pay service tax. (c) Computation of purchases eligible for input tax credit, input tax credit available for February, 2012 and net VAT payable for the month:S. No. (i) Particulars Goods purchased from Assam on which CST @ 2% was paid (Purchases made from outside the State on which CST is payable are not eligible for input tax credit) ` ` 1,80,000
(ii)
4,10,000
(iii)
Exempt
(iv)
2,65,000 8,55,000 85,500 1,710 855 88,065
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(ii)
Purchases from unregistered dealers (Purchases from unregistered dealers are not eligible for input tax credit) Capital goods eligible for input credit Balance purchases liable to VAT which are eligible for input tax credit (`60,00,000 (`15,00,000 + `18,50,000 + `6,50,000 + `9,00,000) Purchases eligible for input tax credit VAT paid on purchases of inputs eligible for input tax credit (`11,00,000 x 4%) VAT paid on capital goods eligible for input tax credit (input tax credit available in 36 equal monthly installments) 9,00,000 4% ` 36 Input tax credit available for February, 2012 Output VAT payable (`10,00,000 x 12.5%) Less: Input tax credit available Net VAT payable
(iii) (iv)
9,00,000
11,00,000 20,00,000 44,000
1,000
45,000 1,25,000 45,000 80,000
Question 2 (a) Answer any two sub-parts out of three sub-parts of the question. (i) Paras is resident of India. During the F.Y. 2011-12, interest of ` 1,88,000 was credited to his Non-resident (External) Account with SBI. ` 30,000, being interest on fixed deposit with SBI, was credited to his saving bank account during this period. He also earned ` 3,000 as interest on this saving account. Is Paras required to file return of income? What will be your answer, if he owns one shop in Kerala having area of 150 sq. ft.? (ii) Mr. Sharma has four children consisting 2 daughters and 2 sons. The annual income of 2 daughters were ` 9,000 and ` 4,500 and of sons were ` 6,200 and ` 4,300, respectively. The daughter who has income of ` 4,500 was suffering from a disability specified under section 80U.
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Compute the amount of income earned by minor children to be clubbed in hands of Mr. Sharma. (iii) Explain the treatment of unrealized rent and its recovery in subsequent years under the provisions of Income-tax Act, 1961. (2 x 4 = 8 Marks) (b) A partnership firm, gives the following particulars relating to the services provided to various clients by them for the half-year ended on 30-09-2011. (i) Total Bills raised for ` 8,75,000 out of which bill for ` 75,000 was raised on an approved International organization and payments of bills for ` 1,00,000 were not received till 30-09-2011. Amount of ` 50,000 was received as an advance from XYZ Ltd. on 25-09-2011 to whom the services were to be provided in October, 2011. You are required to find out the: (a) Taxable value of services (b) Amount of service tax and education cess and secondary and higher education cess payable. (4 Marks) (c) Explain the consumption variant of VAT. Mention the reasons for the preference of this variant of VAT. (4 Marks) Answer (a) (i) An individual is required to furnish a return of income under section 139(1) if his total income, before giving effect to the deductions under Chapter VI-A, exceeds the maximum amount not chargeable to tax i.e.,` 1,80,000 (for A.Y. 2012-13). Computation of total income of Mr. Paras for A.Y. 2012-13 Particulars Income from other sources Interest earned from Non-resident (External) Account ` 1,88,000 [Exempt under section 10(4)(ii), assuming that Mr. Paras has been permitted by RBI to maintain the aforesaid account] Interest on fixed deposit with SBI Interest on savings bank account Total Income `
(ii)
NIL 30,000 3,000 33,000
Since the total income of Mr. Paras for A.Y.2012-13, before giving effect to the deductions under Chapter VI-A, is less than the basic exemption limit of ` 1,80,000, he is not required to file return of income for A.Y.2012-13. Owning a shop having area of 150 sq.ft in Kerala would not make any difference to the answer.
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Note: In the above solution, interest of ` 1,88,000 earned from Non-resident (External) account has been taken as exempt on the assumption that Mr. Paras, a resident, has been permitted by RBI to maintain the aforesaid account. However, in case he has not been so permitted, the said interest would be taxable. In such a case, his total income, before giving effect to the deductions under Chapter VIA, would be ` 2,21,000 (` 33,000 + ` 1,88,000), which is higher than the basic exemption limit of ` 1,80,000. Consequently, he would be required to file return of income for A.Y.201213. Here again, ownership of shop in Kerala is immaterial. (ii) As per section 64(1A), in computing the total income of an individual, all such income accruing or arising to a minor child shall be included. However, income of a minor child suffering from disability specified under section 80U would not be included in the income of the parent but would be taxable in the hands of the minor child. Therefore, in this case, the income of daughter suffering from disability specified under section 80U should not be clubbed with the income of Mr. Sharma. Under section 10(32), income of each minor child includible in the hands of the parent under section 64(1A) would be exempt to the extent of the actual income or ` 1,500, whichever is lower. The remaining income would be included in the hands of the parent. Computation of income earned by minor children to be clubbed with the income of Mr. Sharma Particulars (i) Income of one daughter Less: Income exempt under section 10(32) Total (A) Income of two sons (` 6,200 + ` 4,300) Less: Income exempt under section 10(32) ( ` 1,500 + ` 1,500) Total (B) Total Income to be clubbed as per section 64(1A) (A+B) ` 9,000 1,500 7,500 10,500 3,000 7,500 15,000
(ii)
Note It has been assumed that: (1) All the four children are minor children; (2) The income does not accrue or arise to the minor children on account of any manual work done by them or activity involving application of their skill, talent
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or specialized knowledge and experience; (3) The income of Mr. Sharma, before including the minor childrens income, is greater than the income of Mrs. Sharma, due to which the income of the minor children would be included in his hands; and (4) This is the first year in which clubbing provisions are attracted. (iii) Unrealised rent refers to the rent payable but not paid by the tenant and which the owner is also not able to realize from the tenant. As per Explanation below section 23(1), the amount of rent which the owner cannot realize shall not be included in the actual rent while determining the annual value of the property, subject to fulfillment of following conditions prescribed under Rule 4 of the Income-tax Rules, 1962 : (a) the tenancy must be bonafide; (b) the defaulting tenant has vacated or steps have been taken to compel him to vacate the property; (c) the defaulting tenant does not occupy any other property of the assessee; and (d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of unpaid rent or satisfies the Assessing Officer that the legal proceedings would be useless. If the conditions mentioned above are satisfied, then, the actual rent should be reduced by the unrealized rent and thereafter, compared with the Annual Letting Value (being the higher of fair rent and municipal value, but restricted to standard rent) for computing the gross annual value. As per section 25AA, the unrealised rent, when realised in any subsequent year, shall be deemed to be the income chargeable under the head Income from house property in the previous year in which such rent is realised, whether or not the assessee is the owner of the property in that previous year. (b) Computation of value of taxable services and service tax payable for the half-year ended on 30.09.2011 Particulars Total Bills raised Less: Bill raised on an approved International Organization [Services provided to approved International Organization are exempt from service tax] Add: Advance received on 25.09.2011 ` 8,75,000
75,000 8,00,000 50,000 8,50,000
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Value of taxable services [Note 1] 100 ` 8,50,000 110.30
7,70,626 77,063 1541 771 79,375
Service tax @ 10% Education cess @ 2% Secondary and Higher Education Cess @ 1% Total service tax payable
Notes:
(1) Since the question does not provide that service tax has been charged separately, advance and the bills raised have been presumed to be inclusive of service tax. (2) Bills of ` 1,00,000, payment for which has not received till 30.09.2011 will be charged to service tax in the half year ended 30.09.2011 as the point of taxation is the issuance of invoice or receipt of payment whichever is earlier. (3) It has been assumed that the partnership firm is not entitled to exemption for small service providers in FY 2011-12 and is liable to service tax.
(c) Under consumption variant of VAT, tax is levied on all sales and deduction for taxes paid on all business purchases including capital goods is allowed. There is neither any differentiation between capital and revenue expenditures nor the life of assets or depreciation allowances for different assets is specified. This variant is indifferent to the methods of production employed by the manufacturer. Decision to save or consume does not make any difference under this variant.
The consumption variant is widely used for the following reasons:1. This method does not have effect on the investment decisions of the manufacturer because input tax credit of the tax paid on the capital goods is also allowed. Therefore, manufacturer may employ any of the techniques of production-labour intensive or capital intensive. Since there is no need to distinguish between intermediate and capital goods as well as consumption goods, administering the tax becomes simpler under this variant. Most of the countries include services in their tax base and hence, prefer consumption variant over other variants as the business gets set off for the tax on services thereby removing the cascading effect.
2. 3.
Question 3 (a) Anshu transfers land and building on 02-01-2012 and furnishes the following information: (i) (ii) Particulars Net consideration received Value adopted by Stamp Valuation Authority (` ) 14,00,000 16,00,000
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(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer (iv) This land was acquired by Anshu on 1-04-1981. Fair Market value of the land as on 01-04-1081 was (v) A Residential building was constructed on land by Anshu at a cost of ` 3,20,000 (construction completed on 01-12-2002 during financial year 2003-04) Brought forward short term capital loss incurred on sale of shares during financial year 2007-08 ` 1,50,000,
17,00,000 1,10,000
Anshu seeks your advice regarding the amount to be invested in NHAI bonds so as to be exempt from capital gain tax under the Income-tax Act, 1961. Cost inflation index for FY 1981-1982 : 100 Cost inflation index for FY 2002-2003 : 447 Cost inflation index for FY 2011-2012 : 785 (8 Marks) (b) Test the veracity of the following assertions with reference to the statutory provisions relating to service tax. Do not assign any reason for them. (8 =4 Marks) (a) Services provided by consulting engineers in computer hardware engineering and computer software engineering are not includible in their taxable services. (b) Services provided to any person by a mandap keeper for the use of the precincts of a religious place as a mandap are not exempt from service tax. (c) The following are the person(s) who provides scientific or technical consultancy service (i) (ii) (iii) a scientist a technocrat any engineering organisation
(d) Pre-school coaching institutions services are taxable. (e) X took certificate of practice with effect from 25-1-2012. He has to make an application for registration before 24-3-2012. (f) Small scale service provider who is claiming exemption of ` 10 lakh shall have to apply for registration where the aggregate value of taxable services exceeds ` 9 lakhs.
(g) Gross amount charged for taxable services includes only that amount received towards the taxable service which is received after the provision of such services.
To be read as financial year 2002-03.
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(h) Service tax for the month of March or quarter ending March should be deposited by 5th April. (c) Test the veracity of the following assertions with reference to the statutory provisions relating to Value Added Tax. Do not assign any reason for them. (8 =4 Marks) (a) Input credit under VAT is available in respect of Central Sales Tax paid on purchases. (b) VAT is leviable at the first stage of sale. (c) Input credit is available in respect of customs duty paid on goods imported from a country outside India. (d) Input credit is available only if the purchaser has obtained proper tax invoice. (e) No registration is required under any VAT regime. (f) A trader can take credit of the inputs purchased by him only if he has obtained proper tax invoice from the valuer.
(g) VAT is inflationary in nature. (h) White paper on State level VAT provides a framework for drafting various State VAT legislations. Answer (a) Computation of Capital Gains of Ms. Anshu for the A.Y. 2012-13 Particulars ` `
Full value of consideration [See Notes (i) & (ii) below]

Less: Indexed Cost of acquisition [See Note (iii) below]
16,00,000 8,63,500 5,61,969 14,25,469

1,74,531
Indexed cost of land (` 1,10,000 785/100) Indexed cost of building (` 3,20,000 785/447)
Long-term capital gain Less: Brought forward short-term capital loss set off [See Note (iv) below] Taxable capital gains (Amount to be invested in NHAI bonds to get full exemption from tax on capital gains) [See Note (v) below] Notes :
1,50,000
24,531
(i)
As per section 50C(1), where the consideration received or accruing as a result of transfer of a capital asset, being land or building or both, is less than the value adopted by the Stamp Valuation Authority for the purpose of payment of stamp duty,
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such value adopted by the Stamp Valuation Authority shall be deemed to be the full value of the consideration received or accruing as a result of such transfer. Accordingly, full value of consideration would be ` 16 lakhs in this case. (ii) As per section 50C(3), where the valuation is referred by the Assessing Officer to Valuation Officer and the value ascertained by such Valuation Officer exceeds the value adopted by the Stamp Valuation Authority for the purpose of payment of stamp duty, the value adopted by the Stamp Valuation Authority shall be taken as the full value of the consideration received or accruing as a result of the transfer. Since the value ascertained by the Valuation Officer (i.e. ` 17 lakhs) is higher than the value adopted by the Stamp Valuation Authority (i.e. ` 16 lakhs), the full value of consideration in this case would be ` 16 lakhs.
(iii) Since the cost of land acquired by Anshu on 1.4.1981 is not given in the question, the fair market value as on 1.4.1981 is taken as the cost of acquisition. Indexation benefit is available since land and building are both long-term capital assets, as they are held by Anshu for more than 36 months. (iv) As per section 74, brought forward unabsorbed short term capital loss can be set off against any capital gains, short term or long term, for 8 assessment years immediately succeeding the assessment year for which the loss was first computed. Therefore, short-term capital loss on sale of shares during the F.Y.2007-08 can be set-off against the current year long-term capital gains on sale of land and building. (v) As per section 54EC, an assessee can avail exemption in respect of long-term capital gains, if such capital gains are invested in the bonds issued by the NHAI redeemable after 3 years. Such investment is required to be made within a period of 6 months from the date of transfer of the asset. The exemption shall be the amount of capital gains or the amount of such investment made, whichever is less. Therefore, in this case if Anshu invests the entire capital gains of ` 24,531 (rounded off to ` 25,000) in bonds of NHAI, she can get full exemption from tax on capital gains.
(b) (a) False
(b) False (c) True (d) False (e) False (It has been assumed that turnover of X has not exceeded ` 9,00,000 30 days before 24.03.2012). (f) True (g) False (h) False
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(c) (a) False
(b) False (c) False (d) True (e) False (f) False (g) False (h) True
Question 4 (a) Mr. Y carries on his own business. An analysis of his trading and profit & loss for the year ended 31-3-2012 revealed the following information : (1) The net profit was ` 11,20,000. (2) The following incomes were credited in the profit and loss account : (a) Dividend from UTI ` 22,000. (b) Interest on debentures ` 17,500. (c) Winnings from races ` 15,000. (3) It was found that some stocks were omitted to be included in both the opening and closing stocks, the value of which were: Opening stock ` 8,000. Closing stock ` 12,000. (4) ` 1,00,000 was debited in the profit and loss account, being contribution to a University approved and notified under section 35(1)(ii). (5) Salary includes ` 20,000 paid to his brother which is unreasonable to the extent of ` 2,500. (6) Advertisement expenses include 15 gift packets of dry fruits costing ` 1,000 per packet presented to important customers. (7) Total expenses on car was ` 78,000. The car was used both for business and personal purposes. th is for business purposes. (8) Miscellaneous expenses included ` 30,000 paid to A & CO., a goods transport operator in cash on 31-1-2012 for distribution of the companys product to the warehouses. (9) Depreciation debited in the books was ` 55,000. Depreciation allowed as per Income-tax Rules, 1962 was ` 50,000.
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(10) Drawings ` 10,000. (11) Investment in NSC ` 15,000. Compute the total income of Mr. Y for the assessment year 2012-13. (8 Marks) (b) Punjabi Banquets is engaged in providing mandap keeper services. For the month of January, 2012, it provided the following information: (4 Marks) S. No. Particulars `
(1)
Banquet hall let out for marriage function: The gross amount charged for banquet hall including catering charges (Catering charges have been separately indicated in the invoice) 6,00,000
(2) (3) (4)
Amount received for rooms let out for stay of guests attending the marriage. Amount collected for letting out the hall for All India Dance Competition. No food was supplied alongwith it. Mandap for shooting of marriage sequence of a Daily Soap Opera.
40,000 5,00,000 2,40,000
Compute the amount of service tax, education cess and secondary and higher education cess payable by Punjabi Banquets for the month of January, 2012. Additional Information: (1) Point of taxation in all the aforesaid cases is January, 2012. (2) All the amounts stated above are exclusive of service tax. (3) Punjabi Banquets is not eligible for small service providers exemption under Notification No. 6/2005-ST dated 01-03-2005 for the financial year 2011-12. (c) Determine the liability of VAT of X for the month of December 2011 using invoice method of computation from the following data: Purchase price of goods acquired from local market (including VAT) VAT rate on input Transportation, insurance, warehousing and handling Cost incurred by X Goods sold at a profit margin VAT rate on sales
` 52 lakhs
4%
` 20,000
14% 12.50% (4 Marks)
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Answer (a) Computation of total income of Mr.Y for the A.Y. 2012-13. Particulars Profits and gains of business or profession (See Working Note 1 below) Income from other sources (See Working Note 2 below) Gross Total Income Less: Deduction under section 80C (Investment in NSC) Total Income Working Notes : 1. Computation of profits and gains of business or profession Particulars ` Net profit as per profit and loss account Add : Expenses debited to profit and loss account but not allowable as deduction 2,500 Salary paid to brother disallowed to the extent considered unreasonable [Section 40A(2)] Motor car expenses attributable to personal use not 19,500 allowable (` 78,000 ) Depreciation debited in the books of account 55,000 Drawings (not allowable since it is personal in nature) 10,000 [See Note (iii)] Investment in NSC [See Note (iii)] 15,000 Add : Less: Less: ` 10,46,500 __32,500 10,79,000 __15,000 10,64,000
` 11,20,000
Under statement of closing stock Under statement of opening stock Contribution to a University approved and notified under section 35(1)(ii) is eligible for weighted deduction@175%. Since only the actual contribution (100%) has been debited to profit and loss account, the additional 75% has to be deducted.
Incomes credited to profit and loss account but not taxable as business income Income from UTI [Exempt under section 10(35)] Interest on debentures (taxable under the head Income from other sources)
1,02,000 12,22,000 __12,000 12,34,000 ___8,000 12,26,000
__75,000 11,51,000
Less :
22,000 17,500
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Winnings from races (taxable under the head Income from other sources)
Less :
15,000
Depreciation allowable under the Income-tax Rules, 1962
54,500 10,96,500 50,000 10,46,500
Notes : Advertisement expenses of revenue nature, namely, gift of dry fruits to important (i) customers, is incurred wholly and exclusively for business purposes. Hence, the same is allowable as deduction under section 37.
(ii)
Disallowance under section 40A(3) is not attracted in respect of cash payment of ` 30,000 to A & Co., a goods transport operator, since, in case of payment made for plying, hiring or leasing goods carriages, an increased limit of ` 35,000 is applicable (i.e. payment of upto ` 35,000 can be made in cash without attracting disallowance under section 40A(3)) Since drawings and investment in NSC have been given effect to in the profit and loss account, the same have to be added back to arrive at the business income.
Computation of Income from other sources Particulars Interest on debentures Winnings from races ` 17,500 15,000 32,500
(iii)
2.
Note: The following assumptions have been made in the above solution: 1. 2. The figures of interest on debentures and winnings from races represent the gross income (i.e., amount received plus tax deducted at source). In point no. 9 of the question, it has been given that depreciation as per Income-tax Rules, 1962 is ` 50,000. It has been assumed that, in the said figure of ` 50,000, only the proportional depreciation (i.e., 75% for business purposes) has been included in respect of motor car. Computation of the service tax payable Particulars ` `
(b)
Banquet hall let out for marriage function [Refer Note 1] Less: Abatement @ 40% of gross amount (` 6,00,000 40%) [Refer Note 2] Amount received for rooms let out for stay of guests [Refer Note 3] Amount collected for letting out the hall for All India Dance
6,00,000 2,40,000 3,60,000 40,000 5,00,000
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Competition [Refer Note 4] Mandap for shooting of a Daily Soap Opera [Refer Note 5] Value of taxable service Service tax @ 10% =` 9,00,000 10% Education cess @ 2% =` 90,000 2% Secondary and higher education cess @ 1% =` 90,000 1% Service tax payable
Notes:
Nil 9,00,000 90,000 1,800 900 92,700
(1) Mandap let out for marriage function is liable to service tax as per the definition of mandap keeper. (2) An abatement of 40% of gross amount is provided where the mandap keeper also provides catering services and the invoice indicates that it is inclusive of the charges for catering service subject to other conditions being satisfied. (3) Mandap let out for stay of guests attending the marriage for a consideration would attract service tax as guests are a part of marriage function. (4) Temporary occupation of a hall for the purpose of holding dance, drama or music programme or competitions is liable to service tax vide a Departmental Circular. (5) The activity of shooting films, TV serials cannot be considered as official/social/business function and hence, not taxable under the mandap keeper service.
(c) Computation of VAT liability Particulars `
Purchase price of goods acquired from local market excluding VAT (input tax credit does not form part of cost of production) 100 ` 52,00,000 104 Transportation, insurance etc. Cost of production Profit @ 14% on cost of production [assumed to be a percentage of cost of production ] Total Sales Output VAT payable @ 12.5% Less: Input tax credit [VAT paid on goods acquired from local market is eligible for input tax credit] Net VAT payable
50,00,000 20,000 50,20,000 7,02,800 57,22,800 7,15,350 2,00,000 5,15,350
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Question 5 (a) During the previous year 2011-12, the following transactions occurred in respect of Mr. A. (a) Mr. A had a fixed deposit of ` 5,00,000 in Bank of India. He instructed the bank to credit the interest on the deposit @ 9% from 1-4-2011 to 31-3-2012 to the savings bank account of Mr. B, son of his brother, to help him in his education. (b) Mr. A holds 75% share in a partnership firm. Mrs. A received a commission of ` 25,000 from the firm for promoting the sales of the firm. Mrs. A possesses no technical or professional qualification. (c) Mr. A gifted a flat to Mrs. A on April 1, 2011. During the previous year, the flat generated a net income of ` 52,000 to Mrs. A. (d) Mr. A gifted ` 2,00,000 to his minor son who invested the same in a business and he got a share income of ` 20,000 from the investment. (e) Mr. As minor son derived an income of ` 20,000 through a business activity involving application of his skill and talent. During the year, Mr. A got a monthly pension of ` 10,000. H had no other income. Mrs. A received salary of ` 20,000 per month from a part time job. Discuss the tax implications of each transaction and compute the total income of Mr. A, Mrs. A and their minor child. (8 Marks) (b) What are the documents to be attached by a service provider alongwith an application for registration under service tax? (4 Marks) (c) (i) (ii) Answer (a) Computation of Total Income of Mr. A, Mrs. A and their minor son for the A.Y. 2012-13 Particulars Mr. A (`) Mrs. A (`) Minor Son (`) What are the different variants of VAT and how is deduction available for tax paid on inputs including capital inputs? (2 Marks) What are the different stages of VAT? Can it be said that the entire burden falls on the (2 Marks) final consumer?
Salary income (of Mrs. A) Pension income (of Mr. A) (` 10,00012) Income from House Property [See Note (3) below)
Income from other sources
1,20,000 52,000
2,40,000 -
Interest on Mr. As fixed deposit with Bank of
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India (` 5,00,0009%) [See Note (1) below] Commission received by Mrs. A from a partnership firm, in which Mr. A has substantial interest [See Note (2) below]
Income before including income of minor son under section 64(1A)
45,000 25,000 70,000

2,42,000 2,40,000 -
Income of the minor son from the investment made in the business out of the amount gifted by Mr.A [See Note (4) below] Income of the minor son through a business activity involving application of his skill and talent [See Note (5) below]
Total Income Notes:
18,500
20,000
2,60,500
2,40,000
20,000
(1) As per section 60, in case there is a transfer of income without transfer of asset from which such income is derived, such income shall be treated as income of the transferor. Therefore, the fixed deposit interest of ` 45,000 transferred by Mr. A to Mr. B shall be included in the total income of Mr. A. (2) As per section 64(1)(ii), in case the spouse of the individual receives any amount by way of income from any concern in which the individual has substantial interest (i.e. holding shares carrying at least 20% voting power or entitled to at least 20% of the profits of the concern), then, such income shall be included in the total income of the individual. The only exception is in a case where the spouse possesses any technical or professional qualifications and the income earned is solely attributable to the application of her technical or professional knowledge and experience, in which case, the clubbing provisions would not apply. In this case, the commission income of ` 25,000 received by Mrs. A from the partnership firm has to be included in the total income of Mr. A, as Mrs. A does not possess any technical or professional qualification for earning such commission and Mr. A has substantial interest in the partnership firm as he holds 75% share in the firm. (3) According to section 27(i), an individual who transfers any house property to his or her spouse otherwise than for adequate consideration or in connection with an agreement to live apart, shall be deemed to be the owner of the house property so transferred. Hence, Mr. A shall be deemed to be the owner of the flat gifted to Mrs. A and hence, the income arising from the same shall be computed in the hands of Mr. A.
Note: (i) It has been assumed that the net income from the flat i.e., ` 52,000 given in the question is the net income computed under the head Income from house property.
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Note: Alternatively, the net income from the flat i.e., ` 52,000 given in the question may be taken as the net income before providing for deduction @ 30% under section 24(a) and accordingly, the solution can be worked out on this basis. (ii) The provisions of section 56(2)(vii) would not be attracted in the hands of Mrs. A, since she has received immovable property without consideration from a relative i.e., her husband.
(4) As per section 64(1A), the income of the minor child is to be included in the total income of the parent whose total income (excluding the income of minor child to be so clubbed) is greater. Further, as per section 10(32), income of a minor child which is includible in the income of the parent shall be exempt to the extent of ` 1,500 per child. Therefore, the income of ` 20,000 received by minor son from the investment made out of the sum gifted by Mr. A shall, after providing for exemption of ` 1,500 under section 10(32), be included in the income of Mr. A, since Mr. As income of ` 2,42,000 (before including the income of the minor child) is greater than Mrs. As income of ` 2,40,000. Therefore, ` 18,500 (i.e., ` 20,000 ` 1,500) shall be included in Mr. As income. It is assumed that this is the first year in which clubbing provisions are attracted.
Note (i) The provisions of section 56(2)(vii) would not be attracted in the hands of the minor son, since he has received a sum of money exceeding ` 50,000 without consideration from a relative i.e., his father. (ii) Since the question mentions share income from investment, it is possible to take a view that the same represents share income from a firm which is exempt under section 10(2A), in which case the clubbing provisions under section 64(1A) cannot be applied.
(5) In case the income earned by the minor child is on account of any activity involving application of any skill or talent, then, such income of the minor child shall not be included in the income of the parent, but shall be taxable in the hands of the minor child. Therefore, the income of ` 20,000 derived by Mr. As minor son through a business activity involving application of his skill and talent shall not be clubbed in the hands of the parent. Such income shall be taxable in the hands of the minor son.
(b) The following documents have been prescribed by the CBEC to be submitted along with the application for registration under service tax:
(a) Copy of Permanent Account Number (PAN) (b) Proof of Residence
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(c) Constitution of the Applicant (d) Power of Attorney in respect of authorized person (s). The above documents must be submitted within a period of 15 days from the date of filing of the application, otherwise the application may be rejected. The time limit of seven days within which the registration is to be granted by the Superintendent of Central Excise/Service Tax would be reckoned from the date the application for registration is complete in all respects.
(c) (i)
The different variants of VAT are:1. 2. 3.

Gross product variant: Under gross product variant, deduction for taxes on all inputs is allowed, but not for tax paid on capital goods. Income variant: Under income variant, deductions for tax paid on inputs and depreciation on capital goods is allowed. Consumption variant: Under consumption variant, deduction for taxes paid on all business inputs including capital goods is allowed.
(ii) VAT is levied at each stage of production and distribution on the value added at the respective stage. Value added is the difference between the sales price and purchase price or the sum of wages, interest and other costs incurred and profits.
Broadly, VAT is paid at each of the following stages of a sale transaction:Manufacturer Wholesaler Retailer Consumer
Yes, entire burden of VAT falls on the final consumer and he does not get any credit of the same.
Question 6 (a) MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on 1.4.2011. The company incurred capital expenditure of ` 40 lakh during the period January, 2011 to March, 2011 exclusively for the above business, and capitalized the same in its books of account as on 1st April, 2011. Further, during the previous year 2011-12, it incurred capital expenditure of ` 2.5 crore (out of which ` 1 crore was for acquisition of land) exclusively for the above business. Compute the income under the head Profits and gains of business or profession for the assessment year 2012-13, assuming that MNP Ltd. has fulfilled all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A under the heading C. Deductions in respect of certain incomes. The profits from the business of running this hotel (before claiming deducting under section 35AD) for the assessment year 2012-13 is ` 80 lakhs. Assume that the company also has another existing business of running a four-star hotel in Kanpur, which commenced operations 5 years back, the profits from which was ` 130 lakhs for assessment year 2012-13. (8 Marks)
PAPER 4 : TAXATION
91
(b) Avinash is a qualified Chartered Accountant. He acquired the certificate of practice from the ICAI in May, 2010. For the financial year 2011-12 his receipts (including service tax) as follows: Particulars Services rendered in tax planning Representation of client before CESTAT Preparation of financial statements of XYZ Ltd. Certification of documents under Export and Import policy of Government of India. Receipts for the legal advice given to clients in the month of December, 2011. Amount
`
50,000 40,000 4,00,000 1,50,000 50,000
In the financial year 2010-11 he has provided the value of taxable service of value of ` 11,00,000 Using the above information, calculate the value of taxable services for the financial year 2011-2012. (4 Marks) (c) Ms. Pragya, a dealer submits the following information. Compute the net VAT liability from the following information: (4 Marks) Particulars Import of raw material (including 10% import duty) Raw material purchased from Kerala. (including excise duty @ 12%) VAT @ 4% on the above purchase Raw material purchased from Karnataka Transportation and manufacturing expenses 85,000 47,000
`
1,10,000 2,24,000
Pragya sold entire stock to Nishu at a profit of 10% on the cost of production. VAT rate on such sale is 4%. Answer (a) Computation of income under the head Profit and gains of business or profession of MNP Ltd. for A.Y. 2012-13 Particulars ` (in lakh) ` (in lakh)
Profits from the specified business of new four-star hotel in Chennai (before providing deduction under section 35AD)
80
92
Less: Deduction under section 35AD
Capital expenditure incurred during the P.Y. 2011-12 (excluding the expenditure incurred on acquisition of land) = ` 250 lakh ` 100 lakh (See Notes 1 & 2 below) Capital expenditure incurred during January 2011 to March 2011 (i.e., prior to commencement of business) and capitalized in the books of account as on 1.4.2011 (See Note 3 below) Total deduction under section 35AD for A.Y.2012-13
Income from the specified business of new hotel in Chennai
150
40 190
(110)
Profit from the existing business of running a four-star hotel in Kanpur (See Note 4 below) Net profit from business after set-off of loss of specified business against profits of another specified business under section 73A
Notes:
130
20
(1) According to the provisions of section 35AD, an assessee shall be allowed a deduction in respect of 100% of the capital expenditure incurred wholly and exclusively for the purpose of the specified business which, inter alia, includes the business in the nature of building and operating a new hotel of two-star or above category, anywhere in India. Therefore, the newly commenced four-star hotel business of MNP Ltd qualifies for deduction under section 35AD, since it has fulfilled all the conditions for claim of deduction under that section. (2) The expenditure on acquisition of land, however, does not qualify for deduction under section 35AD. (3) The capital expenditure incurred prior to commencement of specified business shall be allowed as deduction under section 35AD(1) in the year of commencement of specified business, if the same is capitalized in the books of accounts of the assessee on the date of commencement of its operations. Therefore, the expenditure of ` 40 lakh is allowable as deduction in A.Y. 2012-13, since it has been capitalized in the books of accounts of MNP Ltd. as on 1.4.2011. (4) As per section 73A, the loss computed under section 35AD in respect of a specified business can be set off against the profit of another specified business. Building and operating a hotel of two-star and above category, anywhere in India, is a specified business, therefore, the loss from the business of new four-star hotel in Chennai can be set-off against the income of the existing four-star hotel in Kanpur.
(b) Computation of value of taxable services for the financial year 2011-12 Particulars `
Services rendered in tax planning [Refer Note 1]
50,000
PAPER 4 : TAXATION
93
Representation of client before CESTAT [Refer Note 2] Preparation of financial statements of XYZ Ltd. [Refer Note 1] Certification of documents under Export and Import policy of Government of India [Refer Note 1] Receipts for the legal advice given to clients in the month of December,2011 [Refer Note 1] Total value of taxable services (including service tax) Value of taxable services [Refer Note 3] 100 ` 6,90,000 110.30 Value of taxable services (rounded off)
Notes:-
40,000 4,00,000 1,50,000 50,000 6,90,000 6,25,566.64 6,25,567
(1) Services provided by a practising Chartered Accountant in his professional capacity are liable to service tax. (2) Representational services provided by a practicing Chartered Accountant are liable to service tax as the exemption provided earlier has been withdrawn vide a notification. (3) As the particulars relate to receipts inclusive of service tax hence, value of taxable services has been computed by making back calculations. (4) The aggregate value of taxable services of Avinash in the preceding financial year i.e., FY 2010-11 is more than `10,00,000. Hence, he will not be entitled to exemption for small service providers in FY 2011-12 and would be liable to service tax.
(c) Computation of net VAT liability Particulars `
Import of raw material [Refer Note 1] Raw material purchased from Kerala [Refer Note 2] Raw material purchased from Karnataka [Refer Note 3] Transportation and manufacturing expenses Cost of production Add : Profit margin @10% Sales value Output VAT payable @ 4% Less: Input tax credit (`2,24,000 x 4%) [Refer Note 1, 2 and 3] Net VAT liability
1,10,000 2,24,000 85,000 47,000 4,66,000 46,600 5,12,600 20,504 8,960 11,544
94
Notes:
(1) Import duty is not eligible for input tax credit. Hence, it will form part of cost of production. (2) VAT paid on intrastate purchases is eligible for input tax credit and hence, it does not form part of cost of production. (3) It has been assumed that value for raw material purchased from Karnataka is inclusive of CST. CST paid on inter-state purchases is not eligible for input tax credit and thus, it forms part of cost of production.
Question 7 (a) Mr. Mohit is employed with XY Ltd. on a basic salary of ` 10,000 p.m. He is also entitled to dearness allowance @ 100% of basic salary, 50% of which is included in salary as per terms of employment. The company gives him house rent allowance of ` 6,000 p.m. which was increased to ` 7,000 p.m. with effect from 1.01.2012. He also got an increment of ` 1,000 p.m. in his basic salary with effect from 1.02.2012. Rent paid by him during the previous year 2011-12 is as under: April and May, 2011 June to October, 2011 November, 2011 to March, 2012 Nil, as he stayed with his parents
` 6,000 p.m. for an accommodation in Ghaziabad ` 8,000 p.m. for an accommodation in Delhi.
(8 Marks)
Compute his gross salary for assessment year 2012-13.
(b) Mention the due dates for filing of service tax returns. Can an assessee submit a revised return? (4 Marks) (c) Briefly explain the system of cross checking under VAT Act. Answer (a) Computation of gross salary of Mr. Mohit for A.Y. 2012-13 Particulars ` (4 Marks)
Basic salary [(` 10,000 10) + (` 11,000 2)] Dearness Allowance (100% of basic salary) House Rent Allowance (See Note below)
Gross Salary
1,22,000 1,22,000 21,300

2,65,300
PAPER 4 : TAXATION
95
Note: Computation of Taxable House Rent Allowance (HRA) Particulars April-May June-Oct Nov-Dec ( `) (`) (` ) 10,000 10,000 10,000 Jan Feb-March ( `) ( `) 10,000 11,000
Basic salary per month Dearness allowance (included in salary as per terms of employment) (50% of basic salary) Salary per month for the purpose of computation of house rent allowance
5,000
5,000
5,000
5,000
5,500
15,000 15,000 15,000 16,500 15,000 5 2 1 2 2 Relevant period (in months) 30,000 75,000 30,000 15,000 33,000 Salary for the relevant period (Salary per month relevant period) 16,000 8,000 16,000 Nil 30,000 Rent paid for the relevant period (`6,0005) (`8,0002) (`8,0001) (` 8,0002) House rent allowance 30,000 12,000 7,000 14,000 12,000 (HRA) received during (`6,0002) (`6,0005) (`6,0002) (`7,0001) (`7,0002) the relevant period (A) Least of the following is exempt [u/s 10(13A)] 1. Actual HRA received 12,000 30,000 12,000 7,000 14,000 N.A. 22,500 13,000 6,500 12,700 2. Rent paid 10% of salary N.A. 30,000 3. 40% of salary (Residence at (40% GhaziabadJune `75,000) to Oct, 2011) 50% of salary 15,000 7,500 16,500 (Residence at (50% DelhiNov11(50% (50% March12) `30,000) `15,000) `33,000) Exempt HRA (B) Nil 22,500 12,000 6,500 12,700 Taxable HRA (Actual HRA 12,000 7,500 Nil 500 1,300 Exempt HRA) (A-B) Taxable HRA (total) = ` 12,000 + ` 7,500 + ` 500 + ` 1,300 = ` 21,300
96
(b) The due dates for filing of half yearly service tax return is 25th of the month following the particular half year. For the half year ending Return should be filed by
30th Sept. 31st March
25th October 25th April
If the 25th of the month is a public holiday, return is to be filed on immediately succeeding working day. An assessee can submit a revised return, in Form ST-3, in triplicate, to correct a mistake or omission, within a period of 90 days from the date of submission of the original return.
(c) A comprehensive cross-checking system is a pre-requisite for an efficient VAT system as VAT system requires the assessees to self-assess the VAT liability and only a few returns are scrutinized on a selective basis.
A threshold limit for purchases/sales may be specified exceeding which the dealers may be asked to submit the list of purchases/sales or the dealer-wise list from whom or to whom the goods have been purchased/sold. A cross-checking computerized system is being worked which would facilitate the comparison between the tax returns and set-off documents of VAT system of the States and those of Central Excise and Income-tax. Cross checking reduces tax evasion which leads to significant growth of tax revenue. It protects the honest dealers and penalizes the fictitious or dishonest ones and creates a level playing field.
EXAMINERS COMMENTS ON THE PERFORMANCE OF THE CANDIDATES PAPER 1: ACCOUNTING Specific Comments Question 1.(a) Most of the candidates could not compute total contract revenue to be recognized and percentage of work in progress correctly. (b) Majority of the candidates had not supported the classification of investments with the provisions specified in the standard. They have simply written whether the investment is long term or short term. Candidates failed, specifically, in explaining when the shares will be classified as short term or long term investment and accordingly what will be the treatment. (c) Provisions of AS 6 & AS 10 were not properly applied by most of the candidates. Useful life of bus was not considered by some of the candidates while some erred in finding out the correct gross book value of the self constructed fixed asset. Question 2. Few candidates failed to give all the correct journal entries. Even the candidates who passed all the journal entries made a mistake while passing entries related to debenture holders - Mr. Shiv & Mr. Ganesh. Computation of correct amount of Capital Reduction account and Bank account was not done by few candidates. Question 3.(a) Some candidates were not able to calculate the correct amount of Total sales and Total purchases. Few candidates had made wrong adjustment for sales into purchases and purchases into sales. (b) Some candidates failed to prepare correct Profit and Loss Appropriation account. Commission payable to partners was wrongly computed by many candidates. Question 4. Many candidates made mistake in correct computation of amount of membership fee, addition of fixed assets, sale of sports material and payment made to creditors for the purchase of sports material. Question 5.(a) Majority of the candidates failed to prepare all the necessary ledger accounts to record hire purchase transactions. Some of the candidates did not record the hire purchase transactions on Stock and Debtors System. (b) Candidates wrongly computed the closing value of investments at the end after part sale of some investments. Some combined all the investments and passed the entries in one single account only. Question 6. The first part for the calculation of claim for loss of stock was correct in many cases. However, the second part relating to the calculation of claim in respect of loss of profit and additional expenses was wrong in most of the cases. Candidates were not able to calculate the correct amount of short sales, annual turnover, and gross profit. Question 7.(b) Though candidates possessed knowledge of Section 37 of the Indian Partnership Act, yet they made mistake in calculating the share of profit to be given to the retired partner as per Section 37.
98
(c) Managerial remuneration payable to part time directors was not known to many candidates. PAPER 2: BUSINESS LAWS, ETHICS AND COMMUNICATION Specific Comments Question 1.(a) In respect to the question relating to rules as to 'Acceptance' of an offer, majority of the students performance found to be very satisfactory. Though some students not read the question properly and gave the answer referring to the essentials of the valid contract and the rules of offer instead of writing the rules of acceptance. (b) Students performance in relation to utilization of Securities Premium Account, was very satisfactory. However the majority of the students also mentioned the section 77A of the Companies Act,1956 relating to power of company to purchase its own securities, which was not required. (c) In respect to both the parts of the question, the fairness and honesty and the essentials of ethical behavior in the working place, performance of majority of students found to be in order though answer were missing the proper reasoning. Students infact, mentioned generic answer focusing on the definition, benefit of fairness, honesty and ethical communication without mentioning its benefits in business. (d) Performance of the students in reference to the question socio-psychological barriers of communication, was below the average. Majority of students answers, failed to meet out the specific issues relating to socio-psycholoical barriers to communication. They only wrote about the barriers to communications but not specifically mentioned about socio-psychological barriers. And also many of the students failed to write on status consciousness as a barrier which is the key communication barrier. Question2.(a) Performance of the students in both the parts (i) and (ii) of the question found to be average. In respect to part (i) of the question relating to the time-limit within which an employer must pay the amount of bonus to an employee ,many of the students failed to mentioned the time-limit within which the payment of bonus is required to be made. Though they described the provisions relating to eligibility, minimum or maximum bonus and sidetracked from writing the main answer. In respect to part (ii) of the question relating to payability of gratuity, performance of the students found to be satisfactory. Many of the students wrote time limit for the payment of gratuity instead of eligibility to get the gratuity. (b) In respect to the question on mentioning the reasons that forces a marketing executive to adopt ethical practices in marketing, performance of the students found to be average. Majority of the student wrote a general and few points only. Hardly any student had given an adequate answer pointing all the reasons that force a marketing executive to adopt ethical practices.
EXAMINERS COMMENTS
99
(c) In respect to this part of the question, most students answered in general and covered only few points as to advantages of ethical communication in the business establishment and while some of the students were confused and laid down the vague answers. In general, lack of preparation were clearly visible in their answers. Question 3.(a) Performance of the students found to be highly satisfactory, though only few students gave the definition of the consideration as per the Indian Contract Act,1872. (b) In respect to the part first of the question relating to special responsibilities of industries, many students answered satisfactorily. Whereas in respect to part second of the question relating to green accounting system, majority of students gave incomplete or wrong answers. (c) Students performance in relation to the question of non verbal communication found to be satisfactory. Though many students not explained the term non-verbal communication and just explained the methods only. Few students mentioned non-verbal communication as nonoral i.e written communications. Few students gave very vague answer. Question 4.(a) Students performance in respect to this part of question relating to doctrine of indoor management found to be very good as the question was direct and textual and attempted by majority. Though the inter-relation between the concept of indoor management with reference to constructive notice and doctrine of ultra vires had not been explained properly. Some students did not answered the second part of the question as to the claim of any relief by an outsider dealing with the company on the basis of the doctrine of indoor management. (b) Students performance in respect to this part of the question was not up to the level as expected by the student of this level. In general, answer were sketchy and not explaining basic elements of discrimination. (c) This part of the question relating to active listening found to be quite good and satisfactory. Majority of the students focused on the meaning of the active listening and omitted to explain the importance of the active listening. Question 5.(a) Students performance in respect to this part of the question was Average. Majority of the students were lacking conceptual clarity as to the provisions relating to bill of exchange and a promissory note and thus the differences between the two were not clearly assigned. (b) Performance of the students in reference to the question relating to the floating charge and the circumstances of crystallization of charge, found to be below average. Only few students described the meaning of floating charge and the circumstances when floating charge becomes fixed charge. (c) Students performance to the question relating to letter drafting was average. Majority of students lacked the drafting ability i.e., letter were in right format but the contents of the letter were not to the point. The presentation were very poor with incorrect sentence construction. Whereas some students mis-interpreted the question and answered for the receipt of the cheque book to the customer from the Bank. Even some students answer were more like an obliging letter.
100
Question 6.(a) Respect to this part of question as to the change of the name of a company, students performance found to be average as it was a direct question. But because of conceptual haziness as regards to the legal provisions relating to the change of the name of a company as per the Companies Act,1956, the answers were not very much organized and segregated into compulsory and suo moto change. (b) Students performance in concern to this part of the question relating to drafting of Indemnity Bond was poor. Majority of the students were lacking the understanding of basic concepts of indemnity bond and its drafting of format. Infact, students have given general answer requesting the company to issue a duplicate dividend warrant without mentioning about indemnifying the company for such an issue of duplicate dividend warrant. (c) Pertaining to this part of the question, students performance was highly satisfactory. Almost all the students replied the question correctly. Question 7.(a) In respect to this part of the question relating to term, basic wages under the Employees Provident Funds and Miscellaneous Provisions Act,1952, students performance found to be satisfactory, though most of the students wrongly stated that dearness allowance is a part of basic wages. Most of the students not gave the definition of the basic wages as per the Act. And even the exceptions were not properly laid down by the majority. (b) In concern to this part of the question dealing with the difference between the member and the shareholder of the company, students performance found to be unsatisfactory because of lack of knowledge of the provisions of the Companies Act,1956. Many of the students answers were vague and failed to differentiate the differences between the two. (c) Students performance on the question relating to transaction of ordinary business at an Annual General Meeting was well satisfactory. Almost all the students replied the question correctly. (d) Performance of the students pertaining to the question on the role of different committees in regulating corporate governance found to be satisfactory. Answer given in most of the cases did not mention about the mandatory committees of corporate governance, rather students laid the importance of corporate governance. (e) Students performance to the question relating to importance of ethics for finance and accounting professionals, found to be unsatisfactory. Answers were generally vague. Very few had knowledge of ethics in finance and accounting professions. Coverage of importance was not upto the mark. Points were repeated in the answers. PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT General Comments: The overall performance of the candidates was not very satisfactory. Performance revealed lack of in-depth knowledge and rigorous study. The candidates need to understand the subjects conceptually and also fine tune their presentation skills. Candidates are advised to practice the practical problems more extensively and pay attention towards properly
EXAMINERS COMMENTS
101
presenting their answers supported by adequate working notes. It is also advised that the candidates read the question paper thoroughly before attempting it and attempt different parts of the same question consecutively rather than in a random manner. Specific Comments: Question 1.(a) This was a practical question related to preparation of quarterly production budget. Examinees were also required to identify the quarter in which breakeven point will be reached. Performance of the examinees was not satisfactory as many of them could not calculate production quantity of fourth quarter and breakeven point correctly. (b) It was a practical question required to calculate machine hour rate for the new machine. This was well attempted by the examinees except few who could not find out correct productive machine hours. (c) Being a compulsory question, a large percentage of candidates have attempted it. It related to calculation of market value, cost of equity and WACC of a company as per MM hypothesis but only a few could attempt it on correct lines. Only a handful of the candidates have calculated the value of the firm and cost of equity capital correctly. (d) This practical question related to management of receivables. Most of the candidates could not work out the opportunity cost of investment and cash discount on correct lines. Question 2.(a) This question was from Contract costing and required to prepare Contract Account. Many examinees could not calculate the correct work uncertified and notional profit. Average performance of the examinees was observed in this question. (b) Majority of the candidates have attempted this question on preparation of Cash Flow Statement on correct lines. However, a small percentage of the candidates could not work out cash flow from operating activities correctly. Further, the candidates have not presented their answers supported by proper working notes and have also failed to present it in the proper format. Question 3.(a) This was a practical problem related to Labour and required to calculate earnings under Halsey & Rowan premium, Taylor's differential and Emerson's efficiency plan. This question was well attempted by the examinees though some could not calculate earnings under each plan. (b) This practical problem relating to estimation of working capital on cash cost basis was well attempted by most of the candidates. Only a handful of the candidates could not compute the cash cost of sales correctly and few have computed debtors on the basis of sales instead of cost. Question 4.(a) This was question was from Standard Costing which required to calculate Variable overhead efficiency, expenditure variance, Fixed overhead efficiency and capacity variance. This question was not attempted by many examinees. Performance of the examinees was very poor in this question as they could not calculate variances correctly. (b) This question on capital budgeting relating to calculation of cost of project, payback period, net present value and cost of capital was well attempted by majority of the candidates.
102
However, a few of them mentioned present value of cash inflows as cost of project and could not compute the payback period on correct lines. Question 5.(a) This was theory question on integral accounting system and its advantages. Examinees gave sketchy answer and only few furnished advantages of integral accounting system correctly. Performance was average in this question. (b) In this question, examinees were asked to state the types of cost from the given situations. Lack of conceptual clarity was observed. Only few examinees could name type of cost correctly. Performance was not satisfactory in this question. (c) Majority of the candidates could not detail out the factors to be considered by a venture capitalist before financing any risky project on correct lines, instead wrote about the basics of venture capital financing. (d) This question required candidates to discuss the Net Operating Income (NOI) theory of capital structure and its assumptions. Most of the candidates confused the assumptions of NOI theory with MM Hypothesis. Average performance was observed. Question 6.(a) This was a practical question from Process costing and examinees had to prepare accounts for two different processes. Some of the examinees could not calculate cost of abnormal loss and abnormal gain correctly and only few could state the treatment of selling expenses. (b) This question relating to calculation of operating and financial leverage, coverage for preference and equity dividend, earning yield and price earnings ratio and net fund flow was well attempted by many candidates. However, a few wrongly computed Net funds flow and some even wrote just preference and equity dividend instead of their coverage. Question 7.(a) Majority of the candidates could not comment on operational feasibility of profit maximization well instead wrote the distinction between profit maximization and wealth maximization. (b) This question related to type of ratios to be used under different situations. Majority of the candidates wrote on correct lines. However, a few of the candidates gave multiple answers. (c) This question related to deep discount bonds and angle of incidence. Most of the candidates explained deep discount bonds very well. (ii) This was a theory question part from Marginal costing which required to write a short note on Angle of incidence. Very few examinees could answered it satisfactorily (d) This theory question was from Marginal costing and examinees were required to state the basic assumptions of Cost Volume Analysis. Performance of the examinees was not satisfactory in this question. (e) This was a theory question from Material, required to state distinction between Bill of material and material requisition note. Though this was attempted by most of the examinees but many exhibits lack of understanding of these two terms.
EXAMINERS COMMENTS
103
PAPER 4 : TAXATION Specific Comments Question 1. (a) Many of the candidates were not able to compute the income under the head Profit and gains of business or profession correctly. Some candidates have added back proportionate expenses relating to repairs and maintenance without considering that Ms. Purvi followed cash system of accounting. Many of the candidates have disallowed incentive to article assistants. Some candidates have wrongly allowed medical insurance premium paid in cash as deduction under section 80D. (b) Most of the candidates were not clear about provisions relating to right to use canned software. Few candidates wrongly added last years turnover while determining the value of taxable services for current year. (c) In most of the cases, candidates were not able to find correct value of net VAT payable. Some candidates wrongly took the entire input tax credit on capital goods in the month of February, 2012. Question 2.(a)(i) Majority of candidates were not aware of the exemption under section 10(4)(ii) in respect of interest on NRE account. Further, the candidates have given the treatment without mentioning their assumption. (ii) Some of the candidates have failed to provide exemption under section 10(32) or provided it wrongly, while computing income of minor children to be included in the hands of Mr. Sharma. (iii) Very few candidates have mentioned conditions required to be fulfilled for reducing unrealized rent from actual rent. (b) Majority of the candidates were confused and not clear on point of taxation of services in respect of advance received as well as bills raised for which payment was not received. Few candidates considered amount received as advance to be exclusive of service tax amount. (c) Many candidates were not able to provide the reasons for preference of consumption variant of VAT over other variants. Question 3.(a) Some of the candidates have not taken stamp value adopted by the Stamp Valuation Authority as the deemed sale consideration. Some of them have not set off the brought forward short-term capital loss against long-term capital gain. Question 4.(a) Some of the candidates have not added the amount of investment in NSC and have also not deducted the additional eligible deduction @ 75% in respect of contribution to a University approved and notified under section 35(1)(ii) from net profit for computing income under the head Profit and gains of business or profession. A few candidates have wrongly disallowed the amount paid to goods transport operator in cash without considering the enhanced permissible limit of ` 35,000 under section 40A(3) for cash payments to goods transport operators.
104
(b) Most of the candidates did not provide 40% abatement on the gross amount received for the banquet hall let out for marriage function. Question 5.(a) Some of candidates have not provided for exemption of ` 1,500 under section 10(32) in respect of the income of minor child from the investment made in business included in the hands of the parent. Question 6.(a) A few candidates could not calculate the deduction allowable under section 35AD correctly. Some candidates have not given effect to the provisions for set-off under section 73A. (c) Many candidates wrongly computed the cost of production thereby leading to incorrect computation of profit margin and VAT liability. Question 7.(a) Most of the candidates have attempted this question but a very few were able to compute the correct taxable house rent allowance by dividing the year into five segments and calculating exempt house rent allowance segment-wise taking into account the lowest of the three limits under section 10(13A) for each segment. (b) Few candidates wrongly mentioned due date for payment of service tax instead of due dates for filing of service tax return.

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Volume 6

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP I & ACCOUNTING TECHNICIAN EXAMINATION

The Institute of Chartered Accountants of India

SUGGESTED ANSWERS TO QUESTIONS SET AT THE

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP I & ACCOUNTING TECHNICIAN EXAMINATION

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Website Committee/ Department E-mail Price ISBN No. Published by

www.icai.org Board of Studies

Examiners comments on the performance of the candidates

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

Answer (a) Calculation of Estimated Cost of Construction

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

Outstanding Expenses Total

10,60,000 1,03,00,000 Total

7,50,000 3,43,000 1,47,000

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

2,00,000 2,50,000 50,000

9,14,000 30,000 9,44,000

33,41,000 1,30,000 1,20,000 1,09,000 22,00,000 7,82,000

3,50,000 12,15,000 88,50,000

` 3,43,000 10,60,000 12,15,000 26,18,000

` 15,00,000 1,47,000 2,00,000 50,000 9,14,000 30,000 5,00,000 33,41,000

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

Note: It is assumed that sales return is out of credit sales only.

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

60,669 2,27,410 Profit and Loss Account

Commission of Firms Accountant =

Profit after salary of firm's accountant 12% (100+12 ) %

( 2,76,000 - 24,000 ) 12% (100+12 ) %

(` 2,000 x 6.5 x 8%) (` 1,750 x 5.5 x 8%) (` 1,250 x 6 x 8%)

` 1,040 770 600 2,410

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

To Depreciation To Miscellaneous Expenses To Surplus carried to Capital Fund Total

13,000 5,700 3,500 5,69,100 Total 5,69,100

Balance Sheet of Premium Sports Club as on 31st March, 2012 Liabilities

Capital fund: Opening (W.N.12)

Entrance fee Subscription received in advance Outstanding expenses

2,67,000 80,000 1,50,000

4,900 Fixed Deposit Investments in 8% Government Bonds

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

Salary Rent Creditors for purchase of sports material

Stock of 29,300 material

5,700 9,600 1,550 6,000 15,680 5,71,200

Working Notes: 1. Subscription received during the year

4,20,000 5,700 2,400 10,200 4,900 15,100 4,27,000 (8,100) 4,11,900

` 1,20,000 ` 1,20,000 ` 2,40,000 `

12,000 (6,000) 6,000

Sales price of Sports Material sold `

43,450 72,000 1,15,450 (35,670) 79,780 (62,800) 16,980

Cost of Sports Material consumed in the club and for sale

72,000 (4,200) 67,800 3,400 71,200

Salary as per Income and Expenditure Account

1,18,800 (14,300) 1,04,500 16,000 1,20,500

Rent as per Income and Expenditure Account

2,16,000 (15,000) 2,01,000 21,000 2,22,000

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

Printing and Stationary paid during the year `

Printing and stationary as per Income and Expenditure Account

28,000 (1,350) 26,650 1,550 28,200

Membership fee as per Income and Expenditure Account

3,200 9,600 12,800

13,000 (12,000) 1,000 40,000