SA PCC-Group-I May 2010

SUGGESTED ANSWERS TO QUESTIONS SET AT THE
COMMON FOR
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP I & ACCOUNTING TECHNICIAN EXAMINATION

MAY, 2010
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.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
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Contents
Page Nos. Paper 1. Paper 2. Paper 3. Paper 4 Accounting ......................................................................................... 1 22 Business Laws, Ethics and Communication.........................................23 36 Cost Accounting and Financial Management.......................................37 60 Taxation .............................................................................................61 79
Summary of Examiners comments on the performance of the candidates
PAPER 1 : ACCOUNTING Answer all questions Wherever appropriate, suitable assumption(s) should be made by the candidates. Working notes should form part of the answer Question 1 (i) A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. Their capitals are Rs. 60,000 and Rs. 40,000 respectively. They admit C as a new partner who will get 1/6th share in the profit of the firm. C brings in Rs. 25,000 as his capital. Find out the amount of goodwill on the basis of the above information. Rs. Hire purchase price of the asset Down payment Four annual instalments at the end of each year Rate of interest 50,000 10,000 10,000 5% p.a
(ii) From the following, calculate the cash price of the asset:
(iii) Mr. X purchased 1,000, 6% Government Bonds of Rs. 100 each on 31st January, 2009 at Rs. 95 each. Interest is payable on 30th June and 31st December. The price quoted is cum interest. Journalise the transaction. (iv) Swaminathan owed to Subramanium the following sums : Rs. 5,000 on 20th January, 2009 Rs. 8,000 on 3rd March, 2009 Rs. 6,000 on 5th April, 2009 Rs. 11,000 on 30th April, 2009 Ascertain the average due date. (v) A company acquired a machine on 1.4.2006 for Rs. 5,00,000. The company charged depreciation upto 2008-09 on straight line basis with estimated working life of 10 years and scrap value of Rs. 50,000. From 2009-10, the company decided to change depreciation method at 20% on reducing balance method. Compute the amount of depreciation to be debited to Profit and Loss Account for the year 2009-10. (vi) An unquoted long-term investment is carried in the books at cost of Rs. 2 lacs. The published accounts of unlisted company received in May, 2009 showed that the company has incurred cash losses with decline market share and the long-term investment may not fetch more than Rs. 20,000. How you will deal with it in the financial statement of investing company for the year ended 31.3.2009?
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010
(vii) In the absence of a partnership deed, what will be your decision in disputes amongst partners regarding the following matters: (a) Profit sharing ratio; (b) Interest rate, at which interest is to be allowed to a partner, on loan given to the firm by a partner. (viii) According to Accounting Standard 9, when revenue from sales should be recognised? (ix) In January, 2010 a firm took an insurance policy for Rs. 60 lakhs to insure goods in its godown against fire subject to average clause. On 7th March, 2010 a fire broke out destroying goods costing Rs. 44 lakhs. Stock in the godwon was estimated at Rs.80 lakhs. Compute the amount of insurance claim. (x) On 1st April, 2009 a car company sold to Arya Bros., a motor car on hire-puchase basis. The total hire-puchase price was Rs. 4,60,000 with down payment of Rs. 1,60,000. Balance amount was to be paid in three annual instalments of Rs. 1,00,000 each. The first instalment payable on 31st March, 2010. The cash price of the car was Rs. 4,00,000. How will Arya Bros. account for interest over three accounting years assuming books of accounts are closed on 31st March every year. (10 x 2 = 20 Marks) Answer (i) Calculation of Goodwill C brings capital for 1/6th share in profit Therefore, total capital of the firm Capital of old partners should be Actual combined capital of old partners So, the goodwill of the firm (ii) Calculation of cash price of the asset Number of instalments 4 3 2 1 Closing balance 0 9,524 18,594 27,232 Amount of instalment 10,000 10,000 10,000 10,000 Total 10,000 19,524 28,594 37,232 Interest 5/105 476 930 1,362 1,773 Opening balance 9,524 18,594 27,232 35,459 = = = = = Rs.25,000 Rs.25,000 6 = Rs.1,50,000 Rs.1,50,000 Rs.25,000 = Rs.1,25,000 Rs.60,000 + Rs.40,000 = Rs.1,00,000 Rs.1,25,000- Rs.1,00,000=Rs.25,000
Cash price of the asset = Down payment + Rs.35,459 = Rs.10,000 + Rs.35,459 = Rs.45,459
PAPER 1 : ACCOUNTING
(iii) Date Particulars
Journal Entry Amount (Dr.) Rs. 31st Jan., 2009 Investment A/c Interest A/c (Rs. 1,00,000 To Bank A/c (Being purchase of 1,000, 6% Government bonds of Rs.100 each at Rs.95 each cum interest)
6 1 ) 100 12
Amount (Cr.) Rs.
Dr. Dr.
94,500 500 95,000
(iv) Calculation of average due date taking 20th January as the base date Due Date 20th January 3rd March 5th 30th April April Amount Rs. 5,000 8,000 6,000 11,000 30,000 Average due date = 20th January + = 20th January +
Total Product Total Amount
18,86,000 30,000
No. of days from 20th January 0 42 75 100
Product 0 3,36,000 4,50,000 11,00,000 18,86,000
= 20th January, 2009 + 63 days (approx) = 24th March, 2009 (v) Annual depreciation charged by the company up to 2008-09 = =
Cost price of the machine - Scrap value Useful life of the machine Rs.5,00,000 Rs.50,000 = Rs.45,000 10
WDV of machine at the end of 2008-09 by Straight Line Method (SLM) = Rs.5,00,000 (Rs.45,000 3) = Rs.3,65,000
Depreciation by Reducing Balance Method (RBM) Cost / WDV at the beginning of the year Rs. 2006-07 2007-08 2008-09 2009-10 5,00,000 4,00,000 3,20,000 2,56,000 5,00,000 20% 4,00,000 20% 3,20,000 20% 2,56,000 20% Depreciation WDV at the end of the year Rs. 4,00,000 3,20,000 2,56,000 2,04,800
Rs. 1,00,000 80,000 64,000 2,44,000 51,200
Depreciation to be charged in 2009 2010 Rs. Book value of the machine as per SLM as on 2008-09 Less: Add: Book value of the machine as per RBM as on 2008-09 Depreciation for the year 2009-10 as per RBM 3,65,000 (2,56,000) 1,09,000 51,200 1,60,200 Total depreciation debited to Profit and Loss account in the year 2009-10
(vi) As per para 32 of AS 13 Accounting for Investments, investment classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. As per para 17 of the standard, indicators of the value of an investment are obtained by reference to its market value, the investees assets and results and the expected cash flows from the investment. The facts of given case clearly suggest that there is decline in the market share of the company and the investment will not fetch more than Rs.20,000. Therefore, the provision of Rs.1,80,000 should be made to reduce the carrying amount of long term investment to Rs.20,000 in the financial statements for the year ended 31st March, 2009. (vii) In the absence of a partnership deed: (a) The partners will share profits/losses equally; and (b) Interest @ 6% per annum is to be paid on the loan advanced to the firm by a partner.
(viii) As per para 11 of AS 9 Revenue Recognition, revenue from sales should be recognised only when requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. These requirements can be given as follows: (i) the seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods. (ix) Amount of insurance claim = Amount of loss due to fire = Rs.44 lakhs
Amount of insurance policy Totalstock in the godown
Rs.60lakhs = Rs.33 lakhs Rs.80lakhs
(x) Total interest on hire purchase transactions= Rs.4,60,000 Rs.4,00,000 = Rs.60,000 As balance payment is made in three equal instalments, so interest is to be allocated in the ratio of 3:2:1
3 Therefore, interest for Ist year = Rs.60,000 = Rs.30,000 6
2 IInd year = Rs.60,000 = Rs.20,000 6 IIIrd year = Rs.60,000

Question 2 The books of account of Ruk Ruk Maan of Mumbai showed the following figures: 31.3.2008 Rs. Furniture & fixtures Stock Debtors Cash in hand & bank Creditors Bills payable Outstanding salaries
5
1 = Rs.10,000 6
31.3.2009 Rs. 2,34,000 3,20,000 ? ? 1,90,000 80,000 20,000
2,60,000 2,45,000 1,25,000 1,10,000 1,35,000 70,000 19,000
An analysis of the cash book revealed the following: Rs. Cash sales Collection from debtors Discount allowed to debtors Cash purchases Payment to creditors Discount received from creditors Payment for bills payable Drawings for domestic expenses Salaries paid Rent paid Sundry trade expenses 16,20,000 10,58,000 20,000 6,15,000 9,73,000 32,000 4,30,000 1,20,000 2,36,000 1,32,000 81,000
Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method. Ruk Ruk Maan maintains a steady gross profit rate of 25% on sales. You are required to prepare Trading and Profit and Loss account for the year ended 31st March, 2009 and Balance Sheet as on that date. (16 Marks) Answer In the books of Ruk Ruk Maan Trading & Profit & Loss Account for the year ended 31st March, 2009 Particulars Amount Rs. Particulars Amount Rs.
To To
Opening stock Purchases: Cash Credit (W.N. 2)
2,45,000 By 6,15,000 15,00,000 By 6,80,000 30,40,000
Sales: Cash Credit (W.N.3) Closing stock 16,20,000 11,00,000 3,20,000 30,40,000
To To To To To
Gross profit c/d Salaries (W.N.5) Rent Sundry trade expenses Discount allowed
2,37,000 81,000 20,000

6
By
Gross profit b/d Discount received
6,80,000 32,000
1,32,000 By
To To
Depreciation on furniture & fixtures Net profit
26,000 2,16,000 7,12,000

Balance Sheet as at 31st March, 2009
7,12,000
Liabilities
Amount Rs.
Amount Rs.
Capital Opening balance (W.N.7)

Add: Net profit Less: Drawings
Fixed assets 5,16,000 2,16,000 7,32,000 1,20,000 Furniture & fixtures Current assets: Stock 6,12,000 Debtors (W.N.4) Cash & bank (W.N.6) 1,90,000 80,000 20,000 9,02,000 9,02,000 3,20,000 1,47,000 2,01,000 2,34,000
Current liabilities & provisions:
Creditors Bills payable Outstanding salaries

Working Notes: 1.
Bills Payable Account Rs. Rs.
To Cash/Bank To Balance c/d

2.
4,30,000 80,000 5,10,000
By By
Balance b/d Trade creditors (Bal. fig.)
70,000 4,40,000 5,10,000
Creditors Account Rs. Rs.
To Cash/Bank To Bills payable (W.N.1) To Discount received To Balance c/d A/c
9,73,000 By 4,40,000 By 32,000 1,90,000 16,35,000

7
Balance b/d Credit purchases (Bal. fig.)
1,35,000 15,00,000
16,35,000
3.
Calculation of credit sales Rs.
Opening stock
Add:
2,45,000 Cash purchases Credit purchases 6,15,000 15,00,000 21,15,000 23,60,000 3,20,000 20,40,000 25% 27,20,000 16,20,000 11,00,000
Debtors Account Rs. Rs.
Purchases
Less:
Closing Stock
Cost of goods sold Gross profit ratio on sales

100 Total sales Rs.20,40,000 75
Less: 4.
Cash sales
Credit sales
To Balance b/d To Credit sales (W.N.3)
1,25,000 11,00,000 12,25,000
By By By
Cash/Bank Discount allowed Balance c/d (Bal. fig.)
10,58,000 20,000 1,47,000 12,25,000
5.
Salaries Rs.
Salaries paid during the year

Add: Less: 6.
2,36,000 20,000 2,56,000 19,000 2,37,000

Cash / Bank Account Rs. Rs.
Outstanding salaries as on 31.3.2009 Outstanding salaries as on 31.03.2008
To To To
Balance b/d Cash sales Debtors
1,10,000 By 16,20,000 By 10,58,000 By

8
Cash purchases Creditors Bills payable
6,15,000 9,73,000 4,30,000
By By By By By 27,88,000
7. Balance Sheet
Drawings Salaries Rent Sundry trade expenses Balance c/d
1,20,000 2,36,000 1,32,000 81,000 2,01,000 27,88,000
as at 31st March, 2008 Rs. Rs.
Creditors Bills payable Outstanding salaries Capital (Bal. fig.)

Question 3
1,35,000 Furniture & fixtures 70,000 Stock 19,000 Debtors 5,16,000 Cash & bank 7,40,000
2,60,000 2,45,000 1,25,000 1,10,000 7,40,000
The Balance Sheet of Reckless Ltd. as on 31st March, 2008 is as follows: Rs. Assets: Freehold premises Machinery Furniture & fittings Stock Sundry debtors Less : Provision for doubtful debts Cash in hand Cash at bank Bills receivable Liabilities: 60,000 Equity shares of Rs. 10 each Pre-incorporation profit Contingency reserve
9
2,20,000 1,77,000 90,800 3,87,400 80,000 4,000 76,000 2,300 1,56,500 15,000 11,25,000 6,00,000 21,000 1,35,000
Profit and loss appropriation account Acceptances Creditors Provision for income-tax
1,26,000 20,000 1,13,000 1,10,000 11,25,000
Careful Ltd. decided to take over Reckless Ltd. from 31st March, 2008 with the following assets at value noted against them : Rs. Bills receivable Freehold premises Furniture and fittings Machinery Stock 15,000 4,00,000 80,000 1,60,000 3,45,000
of the consideration was satisfied by the allotment of fully paid preference shares of Rs. 100 each at par which carried 13% dividend on cumulative basis. The balance was paid in the form of Careful Ltd.s equity shares of Rs. 10 each, Rs. 8 paid up. Sundry Debtors realised Rs. 79,500. Acceptances were settled for Rs. 19,000. Income-tax authorities fixed the taxation liability at Rs. 1,11,600. Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to Rs. 4,000. You are required to : (i) Calculate the number of equity shares and preference shares to be allotted by Careful Ltd. in discharge of consideration. (ii) Prepare the important ledger accounts in the books of Reckless Ltd.; and (iii) Pass journal entries in the books of Careful Ltd. with narration. (16 Marks) Answer (i) Calculation of the number of equity shares and preference shares to be allotted by Careful Ltd. in discharge of purchase consideration Calculation of purchase consideration: Agreed value of assets taken over: Bills receivable Freehold premises Furniture & fittings Machinery Stock Rs.
15,000 4,00,000 80,000 1,60,000 3,45,000 10,00,000
10
Discharge of purchase consideration:
1.
Amount paid by allotment of 13% preference shares = Rs.10,00,000 = Rs.2,50,000 Number of 13% preference shares of Rs.100 each =
Rs.2,50,000 = 2,500 preference shares Rs.100
1 4
2.
Amount paid by allotment of equity shares = Rs.10,00,000 Rs.2,50,000 = Rs.7,50,000 Paid up value of one equity share = Rs.8 each Hence, the number of equity shares allotted =
Rs.7,50,000 = 93,750equity shares Rs.8
(ii) Ledger accounts in the books of Reckless Ltd. Realisation Account Rs. Rs.
To Freehold premises To Machinery To Furniture & fittings To Stock To Sundry debtors To Bills receivable To Cash/ Bank: Acceptances Provision for tax Creditors To Cash/Bank: Liquidation expenses To Profit
2,20,000 By Creditors 1,77,000 By Acceptances 90,800 By Provision for tax 3,87,400 By Provision for doubtful debts 80,000 By Careful Ltd. 15,000 By Cash/Bank: Sundry debtors 19,000 1,11,600 1,03,700 4,000 1,18,000 13,26,500
1,13,000 20,000 1,10,000 4,000 10,00,000 79,500
13,26,500
11
Cash and Bank Account Rs. Rs.
To
Balance b/d Cash at bank Cash in hand Realisation A/c (Debtors)
By 1,56,500 2,300 79,500 By By 2,38,300
Realisation A/c Acceptances Provision for tax Realisation A/c (Expenses) Realisation A/c [Creditors (bal fig.)]
19,000 1,11,600 4,000 1,03,700 2,38,300
To
Equity Shareholders Account Rs. Rs.
To
13% Cumulative preference shares in Careful Ltd. Equity shares Careful Ltd. in
2,50,000 By
Equity share capital
6,00,000
To
By 7,50,000 By By By 10,00,000
Pre-incorporation profit Contingency reserve Profit & loss Appropriation A/c Realisation A/c
21,000 1,35,000 1,26,000 1,18,000 10,00,000

Rs.
Careful Ltd. Account Rs.
To
Realisation A/c
10,00,000 By By 10,00,000
13% Cumulative preference shares in Careful Ltd. Equity shares in Careful Ltd.
2,50,000 7,50,000 10,00,000
(iii)
Journal Entries in the books of Careful Ltd. Rs. Rs.
Business purchase Account To Liquidator of Reckless Ltd. Account (Being amount payable to liquidator of Reckless Ltd. for assets taken over)
12
Dr. 10,00,000 10,00,000
Bills receivable Account Freehold premises Account Furniture & fittings Account Machinery Account Stock Account To Business purchase Account (Being assets taken over from Reckless Ltd.) Liquidator of Reckless Ltd. To 13% Cumulative preference share capital Account To Equity share capital Account (Being allotment of 13% cumulative preference shares of Rs.100 each fully paid up and equity shares of Rs.10 each, Rs.8 paid up)
Question 4
Dr. Dr. Dr. Dr. Dr.
15,000 4,00,000 80,000 1,60,000 3,45,000 10,00,000
Dr. 10,00,000 2,50,000 7,50,000
(a) Easilife Ltd. has a hire-purchase department which fixes hire-purchase price by adding 40% to the cost of the goods. The following additional information is provided to you : Rs. On 1st April, 2009 : Goods out on hire-purchase (at hire-purchase price) Instalments due Transactions during the year : Hire-purchase price of goods sold Instalments received Value of goods repossessed due to defaults (hire-purchase instalments unpaid Rs. 5,600) On 31st March, 2010: Goods out on hire-purchase (at hire-purchase price) 3,78,000 You are required to prepare Hire-purchase Trading Account, ascertaining the profit made by the department during the year ended 31st March, 2010. (b) Gaama Investment Company holds 1,000, 15% debentures of Rs. 100 each in Beta Industries Ltd. as on April 1, 2009 at a cost of Rs. 1,05,000. Interest is payable on June, 30 and December, 31 each year. On May 1, 2009, 500 debentures are purchased cum-interest at Rs. 53,500. On November 1, 2009, 600 debentures are sold ex-interest at Rs. 57,300. On November 30,
13
2,10,000 14,000 9,80,000 8,12,000 7,800
2009, 400 debentures are purchased ex-interest at Rs, 38,400. On December 31, 2009, 400 debentures are sold cum-interest for Rs. 55,000. Prepare the investment account showing value of holdings on March 31, 2010 at cost, using FIFO method. (10+6 =16 Marks) Answer (a) Easilife Ltd. Hire Purchase Trading Account
Rs. To Opening Balances: Hire purchase stock Instalments due To Goods sold purchase A/c on hire 9,80,000 By 1,08,000 2,34,200 15,46,200
Working Notes:
Rs. By Opening hire purchase stock reserve A/c (W.N.1) Bank A/c received) (Instalments 8,12,000 7,800 2,80,000 60,000
2,10,000 By 14,000 By By
Goods repossessed A/c Goods sold on hire purchase A/c (Loading) (W.N.2) Closing Balances: Hire purchase stock Instalments due (W.N.4)
To To
Closing hire purchase stock reserve A/c (W.N.3) Profit and loss A/c (Transfer of profit)
3,78,000 8,400 15,46,200
Rs.
1. 2. 3. 4.
Opening hire purchase stock reserve = Rs.2,10,000 Loading on goods sold = Rs.9,80,000
40 140
40 140
60,000 2,80,000
Closing hire purchase stock reserve = Rs.3,78,000 Closing instalments due: Opening hire purchase stock Opening instalments due Goods sent on hire purchase
40 140
1,08,000
2,10,000 14,000 9,80,000 12,04,000
14
Less:
Instalments received Unpaid instalments on repossessed goods Closing hire purchase stock
8,12,000 5,600 3,78,000 (11,95,600) 8,400
(b)
In the books of Gaama Investments Ltd. Investment Account (15% Debentures in Beta Industries Ltd.)
Date
Particulars
Nominal Interest Value Rs. Rs.
Cost Date
Particulars
Nominal Interest Value
Cost
Rs. 30.06.09 By Bank A/c
Rs.
Rs.
Rs.
1.04.09
To Balance (W.N.1)
b/d 1,00,000 A/c 50,000 A/c 40,000 2,500 38,400 2,500 51,000 3,750 1,05,000
(W.N.3) 1.11.09 By Bank (W.N.4) 1.11.09 By Profit & Loss A/c (W.N.11) 31.12.09 By Bank A/c A/c
- 11,250
1.05.09
To Bank (W.N.2)
60,000
3,000
57,300
30.11.09 To Bank (W.N.5)
5,700
31.12.09 To Profit & Loss A/c (W.N.12) 31.03.10 To Profit & Loss A/c - 18,625 10,000
(W.N. 6 & 7) 31.12.09 By Bank (W.N.8) 31.03.10 By Bank (W.N.9 & 10) A/c A/c
40,000
3,000
52,000
6,750
90,000
3,375
89,400
1,90,000 27,375 2,04,400
1,90,000 27,375 2,04,400
Working Notes:
1. 2.
Accrued interest as on 1.4.09 = Rs.1,00,000 Accrued interest = Rs.50,000
15 3 = Rs.3,750 100 12
15 4 = Rs.2,500 100 12
Cost of investment for purchase on 1.5.09 = Rs.53,500 Rs.2,500 = Rs.51,000 3. 4. 5. Interest received = Rs.1,50,000 Accrued interest = Rs.60,000 Accrued interest = Rs.40,000
15 6 = Rs.11,250 100 12
15 4 = Rs.3,000 100 12 15 5 = Rs.2,500 100 12

15
6. 7. 8. 9. 10. 11.
Accrued interest = Rs.40,000
15 6 = Rs.3,000 100 12 15 6 = Rs.6,750 100 12 15 3 = Rs.3,375 100 12
Sale price of investment on 31.12.09 = Rs.55,000 Rs.3,000 = Rs.52,000 Accrued interest = Rs.90,000 Accrued interest = Rs.90,000
Cost of investment as on 31.3.10= Rs.51,000 + Rs.38,400 = Rs.89,400 Loss on debentures sold on 1.11.2009: Sales price of debentures
Less: Cost of investment sold =
Rs.1,05,000 600 = 1,000
Rs.57,300 (Rs.63,000) (Rs. 5,700)
Loss on sale 12. Profit on debentures sold on 31.12.2009: Sales price of debentures Less: Cost of investment sold = Profit on sale
Question 5
Rs.1,05,000 400 = 1,000
Rs.52,000 (Rs.42,000) Rs. 10,000
(a) On the basis of the following informations, prepare Income and Expenditure Account for the year ended 31st March, 2010 :
Receipts and Payments Account for the year ended 31st March, 2010 Receipts To Cash in hand (opening) To Cash at bank (opening) To Subscriptions To Interest on 8% Government bonds To Bank interest Rs. Payments Rs. 2,58,000 71,500 3,870 10,600 50,000 1,00,000 1,300 By Salaries 3,850 By Rent 4,94,700 By Printing & stationery 4,000 By Conveyance 160 By Scooter purchased By 8% Government bonds
16
By Cash in hand (closing) By Cash at bank (closing) 5,04,010 (i)
840 9,200 5,04,010
Salaries paid includes Rs. 6,000 paid in advance for April, 2010. Monthly salaries paid were Rs. 21,000.
(ii) Outstanding rent on 31st March, 2009 and 31st March, 2010 amounted to Rs. 5,500 and Rs. 6,000 respectively. (iii) Stock of printing and stationery material on 31st March, 2009 was Rs. 340; it was Rs. 365 on 31st March, 2010. (iv) Scooter was purchased on 1st October, 2009. Depreciation @ 20% per annum is to be provided on it. (v) Investments were made on 1st April, 2009. (vi) Subscriptions due but not received on 31st March, 2009 and 31st March, 2010 totalled Rs. 14,000 and Rs. 12,800 respectively. On 31st March, 2010, subscriptions amounting to Rs. 700 had been received in advance for April, 2010. (b) The following particulars relate to Bee Ltd., for the year ended 31st March, 2010 : (i) Furniture of book value of Rs. 15,500 was disposed off for Rs. 12,000. (ii) Machinery costing Rs. 3,10,000 was purchased and Rs. 20,000 were spent on its erection. (iii) Fully paid 8% preference shares of the face value of Rs. 10,00,000 were redeemed at a premium of 3%. In this connection 60,000 equity shares of Rs. 10 each were issued at a premium of Rs. 2 per share. The entire money being received with applications. (iv) Dividend was paid as follows: On 8% preference shares On equity shares for the year 2009-10 Rs. 40,000 Rs. 1,10,000
(v) Total sales were Rs. 32,00,000 out of which cash sales were Rs. 11,50,000. (vi) Total purchases were Rs. 8,00,000 including cash purchase of Rs. 60,000. (vii) Total expenses were Rs. 12,40,000 charged to Profit and Loss A/c. (viii) Taxes paid including dividend distribution tax of Rs.22,500 were Rs.3,30,000. (ix) Cash and cash equivalents as on 31st March, 2010 were Rs. 1,25,000.
17
You are requested to prepare Cash Flow Statement as per AS 3 for the year ended 31st March, 2010 after taking into consideration the following also: On 31st March, 2009 (Rs.) Sundry debtors Sundry creditors Unpaid expenses Answer (a) Income and Expenditure Account for the year ended 31st March, 2010
Expenditure To Salaries (W.N.1) To Rent (W.N.2) To Printing and stationery (W.N.3) To Conveyance To Depreciation on Scooter (W.N.4) Rs. Income Rs. 4,92,800 8,000 160 2,52,000 By Subscription (W.N.6) 72,000 By Interest on 8% Government bonds (W.N.5) 3,845 By Bank interest 10,600 5,000
On 31st March, 2010 (Rs.) 1,47,000 83,000 55,000 (8+8=16 Marks)
1,50,000 78,000 63,000
To Surplus i.e. excess of income over expenditure 1,57,515 5,00,960 5,00,960
Working Notes:
1.
2.
Salaries paid Less: Salary paid in advance for April, 2010 Salaries for the year Rent paid Add: Outstanding rent as on 31.3.2010
Less: Outstanding rent as on 31.3.2009 Rent for the year 2009-2010 Printing and stationery Add: Stock as on 31.3.2009 Less: Stock as on 31.3.2010 Printing and stationery consumed during the year 2009-2010
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3.
Rs. 2,58,000 6,000 2,52,000 71,500 6,000 77,500 5,500 72,000 3,870 340 4,210 365 3,845
4. 5.
Depreciation on scooter = Rs.50,000
20 6 = Rs.5,000 100 12
Interest on Government bonds received

Add:
4,000 4,000 8,000 4,94,700 12,800 5,07,500 14,000 700
Interest due but not received as on 31.3.2010
Interest income for the year 2009-2010 6. Subscription received

Add: Less:
Accrued subscription as on 31.3.2010 Accrued subscription as on 31.3.2009 Unearned subscription for April, 2010
(14,700) 4,92,800
Income for the year 2009-2010

(b)
I.
Cash Flow Statement for the year ended 31st March, 2010
Rs. Cash flow from operating activities Cash receipts from customers (W.N.1) Less: Cash paid to suppliers and payment for expenses (W.N.3) Cash generated from operations Income tax paid (Rs.3,30,000 Rs.22,500) Net cash from operating activities 32,03,000 (20,43,000) 11,60,000 (3,07,500) 8,52,500 12,000 (3,30,000) (3,18,000) 7,20,000 (10,30,000) (1,50,000) (22,500) (4,82,500) 52,000 March, 2009 (Bal. fig.) 73,000 1,25,000 Rs.
II.
Cash flows from investing activities Sale of furniture Purchase of machinery Net cash used in investing activities
III.
Cash flow from financing activities Proceeds from issue of equity shares Redemption of 8% preference shares Dividend paid (Rs.40,000 + Rs.1,10,000) Dividend distribution tax paid Net cash used in financing activities
Net increase in cash and cash equivalents Add: Cash and cash equivalents as on Cash and cash equivalents as on 31st 31st March, 2010
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Working Notes: 1. Cash receipt from customers:
Credit sales = Total sales Rs.32,00,000 Cash sales Rs.11,50,000 = Rs.20,50,000 Total Debtors Account
Rs. Rs.
To To
Balance b/d Credit sales
1,50,000 By 20,50,000 By 22,00,000
Cash/Bank (Bal. fig.) Balance c/d
20,53,000 1,47,000 22,00,000
Total sale receipts = Rs.20,53,000 + Rs.11,50,000 = Rs.32,03,000

2. Cash payment to suppliers:
Credit Purchases
= Total purchases Rs.8,00,000 Cash purchases Rs.60,000 = Rs.7,40,000 Total Creditors Account
Rs. Rs.
To To
Cash/Bank (Bal. fig.) Balance c/d
7,35,000 By 83,000 By 8,18,000
Balance b/d Credit purchases
78,000 7,40,000 8,18,000
Total payments to suppliers = Rs.7,35,000 + Rs.60,000 = Rs.7,95,000 3. Cash paid to suppliers and payment for expenses Rs. Outstanding expenses as on 31.3.2009
Add: Less:
63,000 12,40,000 13,03,000 55,000 12,48,000
Expenses charged to profit and loss account Outstanding expenses as on 31.3.2010
Payment on account of expenses Total of payment to suppliers and payment for expenses = Rs.7,95,000 + Rs.12,48,000 = Rs. 20,43,000
Question 6 Answer the following:
(a) Weak Ltd. acquired the fixed assets of Rs. 100 lakhs on which it received the grant of Rs. 10 lakhs. What will be the cost of the fixed assets as per AS 12 and how it will be disclosed in the financial statements?
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(b) During the current year 2009-10 M/s L & C Ltd. made the following expenditure relating to its plant and machinery: Rs. General repairs Repairing of electric motors Partial replacement of parts of machinery Substantial improvements to the electrical wiring system which will increase efficiency of the plant and machinery What amount should be capitalised according to AS 10? (c) What are the advantages of pre-packaged accounting software? (d) Raw materials inventory of a company includes certain material purchased at Rs. 100 per kg. The price of the material is on decline and replacement cost of the inventory at the year end is Rs. 75 per kg. It is possible to convert the material into finished product at conversion cost of Rs. 125. Decide whether to make the product or not to make the product, if selling price is (i) Rs. 175 and (ii) Rs. 225. Also find out the value of inventory in each case. (4 x 4 = 16 Marks) Answer (a) Paragraphs 8 and 14 of AS 12 Accounting for Government Grants deal with the presentation of government grants related to specific fixed assets. It prescribes two different methods for recognition of a government grant. In the first method, Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Hence in the given case, fixed assets should be presented at Rs.90 lakhs (Rs.100 lakhs less Rs.10 lakhs) in the balance sheet of Weak Ltd. 4,00,000 1,00,000 50,000 10,00,000
Under the second method, government grants related to depreciable fixed assets may be treated as deferred income which should be recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. In this case, fixed assets will be shown at Rs.100 lakhs in the balance sheet of Weak Ltd. and the corresponding grant amounting Rs.10 lakhs will be treated as deferred income to be recognized over useful life of the fixed asset.
(b) As per para 12.1 of AS 10 Accounting for Fixed Assets, expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity. Hence, in the given case, repairs amounting Rs.5 lakhs and partial replacement of parts of machinery worth Rs.50,000 should be charged to profit & loss account. Rs.10 lakhs
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incurred for substantial improvement to the electrical wiring system which will increase efficiency should be capitalized.
(c) Advantages of Pre-Packaged Accounting Software:
1.
Easy to install: The CD or floppy disk is to be inserted and the setup file should be run to complete the installation. Certain old DOS based accounting softwares require some settings to be added in the system configuration file and the system batch file. These instructions are generally provided in the user manuals. Relatively inexpensive: These packages are sold at very cheap prices nowadays. Easy to use: Mostly menu driven with help options. Further the user manual provides most of the solutions to problems that the user may face while using the software. Backup procedure is simple: Housekeeping section provides a menu for backup. The backup can be taken on floppy disk or CD or hard disk. Flexibility: There is certain flexibility in formatting of report as provided by some of the softwares. This allows the user to make the invoice, challan, GRNs look the way they want. Very effective for small and medium size businesses: Most of their functional areas are covered by these standardised packages.
2. 3.
4. 4.
6.
(d) As per para 24 of AS 2 Valuation of Inventories, materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.
(i)
When selling price is Rs.175 Incremental Profit = Rs.175 Rs.125 = Rs.50 Current price of the material = Rs.75 Therefore, it is better not to make the product. Raw material inventory would be valued at net realisable value i.e. Rs.75 because the selling price of the finished product is less than Rs.225 (100+125) per kg.
(ii) When selling price is Rs.225 Incremental Profit = Rs.225 Rs.125 = Rs.100 Current price of the raw material = Rs.75. Therefore, it is better to make the product. Raw material inventory would be valued at Rs.100 per kg because the selling price of the finished product is not less than Rs.225.
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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION PART I Answer all the questions Question 1 (a) Z rented out his house situated at Mumbai to W for Rs. 10,000 per month. A sum of Rs. 5 lacs, the house tax payable by Z to the Municipal Corporation being in arrears, his house is advertised for sale by the Corporation. W pays the Corporation, the sum due from Z to avoid legal consequences. Referring to the provisions of the Indian Contract Act, 1872 decide whether W is entitled to get the reimbursement of the said amount from Z. (5 Marks) (b) State with reasons whether the following statements are correct or incorrect: (i) Employees can relinquish their right to receive minimum bonus by an agreement with employer.
(ii) Ratification of agency is valid even if knowledge of the principal is materially defective. (2 x 1 = 2 Marks) (c) Pick out the correct answer from the following and give reasons: (i) X sells the goodwill of his retail store to Y for Rs. 5 lacs and promises not to carry on the same business forever and anywhere in India. Is the agreement : 1. 2. 3. 4. Valid Void Voidable Illegal (3 x 1 = 3 Marks)
(ii) A without Bs authority let outs Bs flat to C. Afterwards B accepts rent of the flat from C. It is an agency by : 1. 2. 3. 4. 1. 2. 3. 4. Holding out Estoppel Ratification Necessity holder in due course holder for value holder None of the above
(iii) P, obtains a cheque drawn by M by way of gift. Here P is a :
Answer (a) Section 69 of the Indian Contract Act, 1872 provides that A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. In the given problem W has made the payment of lawful dues of Z in which W had an interest. Therefore, W is entitled to get the reimbursement from Z. (b) (i) Incorrect: According to Section 31A of the Payment of Bonus Act, 1965 any such agreement whereby the employees relinquish their right to receive minimum bonus under Section 10, shall be null and void in so far as it purports to deprive the employees of their right to receiving minimum bonus.
(ii) Incorrect : Section 198 of the Indian Contract Act, 1872 provides that for a valid ratification, the person who ratifies the already performed act must have undefective and clear knowledge of the facts of the case. If the principals knowledge is materially defective, the ratification is not valid and hence no agency. (c) (i) Void : As per Section 27 of the Indian Contract Act, 1872, an agreement in restraint of trade is void. However, a buyer can put such a condition on the seller of good, will not be carry on same business. However, the conditions must be reasonable regarding the duration and the place of the business.
(ii) An agency by ratification: The acceptance of rent by B amounts to implied ratification by B of As act of letting out flat to C. (iii) Holder : Yes, P can be termed as a holder because he has a right to possession and to receive the amount due in his own name. Question 2 (a) UMC, Limited has only 7 shareholders having fully paid-up shares. On 30th April, 2009, all the shares of X (a shareholder of the company) are sold to Y (another shareholder of the company) in an auction by the order of the court. Z , (a shareholder of the company) was in USA for a business trip from January and thus he was not aware of the developments. The company continues to carry on its business thereafter. In December, 2009, the company borrowed a sum of Rs. 5 lacs from the Unique Bank. Later, the company was wound up and the assets of the company were not sufficient for the payment of its liabilities. The Bank filed a suit against Y and Z for recovery of the said loan from them. Decide the liabilities of Y and Z under the provisions of Companies Act, 1956. Would your answer be the same, if the said loan was taken in the month of March, 2009? (5 Marks) (b) State with reasons whether the following statements are correct or incorrect: (i) Issue of debentures with voting rights in not permissible. (ii) A private company is required to hold the statutory meeting.
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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION
(c) Pick out the correct answer from the following and give reasons: (i) Contracts entered into by a company after its incorporation and before it is entitled to commence business are called: 1. 2. 3. 4. 1. 2. 3. 4. 1. 2. 3. 4. Answer (a) The problem relates to reduction of membership below the statutory minimum. Section 12 of the Companies Act, 1956 requires a public company to have a minimum of seven members. If at any time the membership of a public company falls below seven and it continues its business for more than six months, then according to Section 45 of the Act every such member who was aware of this fact would be personally and severally liable for all debts contracted by the company during the period and may be severally sued for all debts contracted after six months. Accordingly in the given problem: (i) Y is personally liable for the payment of loan to the Unique Bank because the members of the UMC Limited continued to carry on the business of the company with that reduced membership beyond the six months period and Y knows this fact. provisional contracts pre-incorporation contracts both 1 and 2 None of the above 2.0 percent of the issued price of shares 2.5 percent of the issued price of shares 5.0. percent of the issued price of shares 5.5 percent of the issued price of shares to change the name of the company to alter the articles of association to reduce the share capital to declare dividends
(ii) The underwriting commission on shares must not exceed:
(iii) Which one of the following requires ordinary resolution ?
(ii) Z is not responsible for any debt because he is not aware about the reduced membership. (iii) If the said loan was taken in March 2009, only the company is responsible for the payment of the loan. No members shall be personally liable for the repayment.
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(b) (i)
Correct. Reason: Given under Section 117 of the Companies Act, 1956, that no company can issue any debentures carrying voting rights at any meeting of the company, whether generally or in respect of any particular classes of business.
(ii) Incorrect. Reason: Given under Section 165 of the Companies Act, 1956,that every Public Company limited by shares or limited by guarantee and having a share capital must hold a general meeting of the members of the company, which may be called the statutory meeting. Thus, Private Companies are not required to hold such a meeting. (c) (i) Provisional Contracts. Reason: As per Section 149 (4) of the Companies Act, 1956, contracts entered into by a company after its incorporation and before it is entitled to commence business are provisional only and are not binding on the company until the trading certificate is issued.
(ii) 5.0 percent of the issued price of shares. Reason: As per Section 76 of the Companies Act, 1956, the amount of commission should not exceed, in the case of shares, 5 percent of the price at which the shares have been issued or the amount or rate authorised by the articles, whichever is less. (iii) To declare dividends. Reason: The Companies Act, 1956 requires that the following matters, inter alia, have to be resolved by the company by a special resolution: (i) to change the name of the company (Section 21) (ii) to alter the articles of association (Section 31) and (iii) to reduce the share capital (Section 100). While for declaration of dividends, ordinary resolution is sufficient. Question 3 J accepted a bill of exchange and gave it to K for the purpose of getting it discounted and handing over the proceeds to J. K having failed to discount it, returned the bill to J. J tore the bill in two pieces with the intention of cancelling it and threw the pieces in the street. K picked up the pieces and pasted the two pieces together, in such manner that the bill seemed to have been folded for safe custody, rather than cancelled. K put it into circulation and it ultimately reached L, who took it in good faith and for value. Is J liable to pay the bill under the provisions of the Negotiable Instruments Act, 1881 ? (5 Marks) Answer The problem is based upon the privileges of a holder in due course, Section 120 of the Negotiable Instruments Act, 1881, provides that no drawer of a bill shall in a suit thereon by a holder in due course be permitted to deny the validity of the instrument as originally drawn. A holder in due course gets a good title of the bill. Therefore, in the given problem, J is liable to pay for the bill. L is a holder in due course, who got the bill in good faith and for value(Ingham v Primrose). Question 4 In 2009, the Electronics Corporation, a Public Sector establishment under the Department of Science and Technology, Government of Rajasthan starts to sell mobile sets manufactured by it, in addition to T.V. sets, so as to compete with private sector establishments of mobile sets
26
in the market. The income from sale of mobile sets is 30 percent of the gross income of the Corporation. The employees of the Corporation went on strike to demand Bonus. Decide, whether the demand of the employees is tenable under the provisions of the Payment of Bonus Act, 1965. Would your answer be different, if the income from sale of mobile sets is only 10 percent of the gross income of the Corporation? (5 Marks) Answer The provisions of the Payment of Bonus Act, 1965 do not ordinarily apply to on establishment in public sectors But Section 20 of the Payment of Bonus Act, 1956 provides that if in any accounting year, an establishment in public sector may sell any goods produced or manufactured by it or it may render any services in competition with an establishment in private sector, and if the income from such sale or service or both is not less than 20% of the gross income of establishment in public sector, then the provisions of the Payment of Bonus Act, 1956 shall apply in relation to establishment in private sector". In the given problem, the demand of the employees is tenable in first case but it is not tenable in second case. Question 5 R, a 57 years old district judge was appointed by the Central Government as Presiding Officer of the Employees Provident Funds Appellate Tribunal for a period of five years. After three years, he (R) resigns from his office and ceases to work with immediate effect without handing over the charge to his successor, who was not appointed by the Government till that date. Examine the validity of R's action to cease work under the provisions of the Employee's Provident Funds and Miscellaneous Provisions Act, 1952. (5 Marks) Answer Section 7 F of the Employee's Provident Funds and Miscellaneous Provisions Act, 1952 provides that the Presiding Officer of a Employee's' Provident Funds Appellate Tribunal may by notice in writing under his hand addressed to the Central Government, resign his office provided that the Presiding Officer shall, unless he is permitted by the Central Government to relinquish his office sooner, continue to hold office until the expiry of three months from the date of receipt of such notice or until a person duly appointed as his successor enters upon his office or until the expiry of his term of office, whichever is the earliest. Hence, R's action is invalid as per above provisions. He should obtain permission from the Central Government to resign from his office. Question 6 S is employed in Golden ice-cream factory, a seasonal establishment. The factory was in operation for four months only during the financial year 2009-10. S was not in continuous service during this period. However, he has worked only for sixty days. Referring to the provisions of the Payment of Gratuity Act, 1972 decide, whether S is entitled to gratuity payable under the Act. Would you answer be the same in case S works for 100 days ?
27
Answer Section 2 A of the Payment of Gratuity Act, 1972 provides that where an employee, employed in a seasonal establishment, is not in continuous service within the meaning of clause (1), for any period of one year or six months, he shall be deemed to be in continuous service under the employer for such period if he has actually worked for not less than seventy-five per cent of the number of days on which the establishment was in operation during such period. In the given problem, as per above provision, the factory was in operation for 4 months i.e, 120 days and S has to work for not less than 75% of the numbers of days on which the establishment was in operation that means atleast S has worked for 90 days. As in the problem S has worked for 60 days that are less than 90 days therefore he shall not be eligible for getting any gratuity in first case. In the second case, since the S has worked for 100 days that are more than 90 days therefore, he is entitled for gratuity. Question 7 J held 100 partly paid up shares of LKM Limited. The company asked him to pay the final call money on the shares. Due to some unavoidable circumstances he was unable to pay the amount of call money to the company. At a general meeting of the shareholders, the chairman disallowed him to cast his vote on the ground that the articles do not permit a shareholder to vote if he has not paid the calls on the shares held by him. J contested the decision of the Chairman. Referring to the provisions of the Companies Act, 1956 decide, whether the contention of J is valid? (5 Marks) Answer Section 181 of the Companies Act, 1956 lays down the grounds on which right of a shareholder to vote at the general meeting may be excluded. These are : (a) Non-payment of calls by a member; (b) Non-payment of other sums due against a member; (c) Where company has exercised the right of lien on his shares. The article of association of the company also confirms one of the grounds stated in above section. Hence Js contention is not valid and the decision of the chairman is valid. Question 8 The object clause of the Memorandum of Association of RST Limited authorises it to publish and sell text-books for students. The company, however, entered into an agreement with Q to supply 100 laptops worth Rs. 5 lacs for resale purposes. Subsequently, the company refused to make payment on the ground that the transaction was ultravires the company. Examine the validity of the company's refusal of payment to Q under the provisions of the Companies Act, 1956. (5 Marks)
28
Answer In terms of Companies Act, 1956, the powers of the company are limited to: (i) powers expressly given by the Memorandum (which is popularly known as express power) or conferred by the Companies Act 1956, or other statute and ;
(ii) powers reasonably incidental or necessary to the companys main purpose (termed as implied powers). The Act further provides that the acts beyond the powers of a company are ultra vires and void and cannot be ratified even though every member of the company may given his consent. [Ashbury Railway Carriage Company vs Riche]. The object clause enables shareholders, creditors or others to know what its powers are and what is the range of its activities and enterprises. The objects clause therefore is of fundamental importance to the shareholder, creditors and others. In the given problem RST Limited is authorised to publish and sell textbooks for students. It has no power to enter into an agreement with Q to supply 100 laptops. Such act can never be treated as express or implied power of the company. Q is deemed to be aware of the lack of powers of RST Limited. In the light of above, Q cannot enforce the agreement or liability against RST Limited. Hence the refusal of the company for the payment to Q is valid. It is also supported by the Ganga Metal Refining Company (Private) Limited CIT case (1963)38 CC. Question 9 K, a member of MNO Limited, appoints L as his proxy to attend the general meeting of the company. Later he (K) also attends the meeting. Both K (the member) and L (the proxy) voted on a particular resolution in the meeting. K's vote was declared invalid by the chairman stating that since he has appointed the proxy and L's vote has been considered as valid. K objects to the decision of the Chairman. Decide, under the provisions of the Companies Act, 1956 whether K's objection shall be tenable? (5 Marks) Answer The given problem is based on Cousins vs International Brick Company Limited. In the above case, the court held that a proxy is appointed to attend a meeting on an implied condition that he will attend if the person appointing the proxy is himself unable to attend the meeting. But if the person appointing also attends the meeting and casts the vote the proxys stand will be cancelled. This is because the right of the shareholder to vote in person is paramount to the right of the proxy. Hence, in the given problem, the decision of chairman is invalid. Here Ks vote was valid, Ls vote was invalid. Therefore Ks objection is tenable. Question 10 Explain the 'MCA 21 Program' introduced by the Government of India to develop computerized environment for company law. How does it serve the interest of all the stakeholders of a company, corporate professionals and the public at large? (5 Marks)
29
Answer MCA 21 project is an innovative project and initiative of the Ministry of Corporate Affairs carried out under the national e-governance programme of the Government with a comprehensive online portal to enable e-filing. This project covers all the services provided by the Registrar of Companies (ROC) starting from the incorporation of a new company. The project would provide e-services including names, registration of new companies, filing of various return and statutory documents under the Companies. The system would also enable online filing and access for statutory documents like memorandum of association, articles of association, certificate of incorporation etc. The project serves the interest of all the key stakeholders corporate professional and the public at large as follows: Expeditious incorporation of companies Simplified and ease of convenience in filing of Forms/Returns/Statutory documents Better compliance management total transparency through e-Governance Customer centric approach Increased usage of professional certificate for ensuring authenticity and reliability of the Forms/Returns. Building up a centralized database repository of corporate operating enhanced service level fulfillment. Inspection of public documents of companies anytime from anywhere. Registration as well as verification of charges anytime from anywhere Timely redressal of investor grievance and to get easy access to relevant records by the public. Availability of more time for MCA employees for monitoring and supervision.
Professionals need no longer to visit the officers of ROC and would be able to interact with the Ministry using MCA 21 portal from their offices or home. They are able to provide efficient services to their client companies. Financial Institutions may easily find charges registration and verification. Proactive and effective compliance of relevant laws and corporate governance by the employees. PART II Answer all the questions Question 11 (a) What is meant by Corporate Governance? Explain the benefits of Good Corporate Governance. (5 Marks) (b) Explain the concept of Green Accounting System.
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(5 Marks)
Answer (a) Meaning According to J. Wolfensohn, President of the Word bank, Corporate Governance is about promoting corporate fairness, transparency and accountability. It is concerned with structures and processes for decisionmaking, accountability, control and behavior at the top level of organizations. It influences how the objectives of an organisation are set and achieved, how risk is monitored and assessed and how performance is optimized. Corporate Governance can also be defined as the formal system of accountability and control for ethical and socially responsible organisational decisions and use of resources. Benefits of goods Corporate Governance: 1. 2. 3. Protection of investor interests and strong capital markets, Studies show clear evidence that good governance is rewarded with a higher market valuation. Ensure commitment of the board in managing the company in a transparent manner.
(b) Green Accounting System is a new concept. It focused on addressing such deficiencies in conventional accounts with respect to the environment. If the environmental costs were 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. Price signal will also influence behavior to avoid exploitation or excessive utilization of natural resources. Such measures would facilitate the approach of Polluter Pay Principle. Removing subsidies that encourage environmental damage is another measure. Question 12 Explain the various safeguards that should be adopted for overcoming threats faced by an accounting and finance professional. (5 Marks) Answer The following safeguards may reduce the threats faced by an accounting and finance professional to an acceptable level. I. Some of the safeguards created by the profession, legislation or regulation are as follows: (i) Educational, training and experience requirements for entry into the profession. (ii) Continuing professional development requirements. (iii) Corporate governance regulations. (iv) Professional standards. (v) Professional or regulatory monitoring and disciplinary procedures.
31
(vi) External review by a legally empowered third party of the reports, returns, communications or information produced by concerned professionals. II. Safeguards in the work environment are as follows: (i) The employing organizations systems of corporate oversight or other oversight structures.
(ii) The employing organisations ethics and conduct programs. (iii) Recruitment procedures in the employing organisation emphasizing the importance of employing high caliber competent staff. (iv) Strong internal controls. (v) Appropriate disciplinary processes. (vi) Leadership that stresses the importance of ethical behavior and the expectation the employees will act in any ethical manner. (vii) Policies and procedures to implement and monitor the quality of employee performance. (viii) Timely communication of the employing organisations policies and procedures, including any changes thereto, to all employees and appropriate training and education on such policies and procedures. Question 13 State with reasons whether the following statements are correct or incorrect: (i) Corporate Social Responsibility is closely linked with the principles of substainable development. (2 x 2 = 5 Marks) Answer (i) The statement is correct. Corporate Social Responsibility (CSR) is a concept that organizations, have an obligation to consider the interests of customers, employees, shareholders, communities and ecological considerations in all aspects of their operations. This obligation is seen to extend beyond their statutory obligation to comply with legislation. CSR is closely linked with the principles of Sustainable Development, which argues that enterprises should make decisions based not only on financial factors such as profits or dividends, but also based on the immediate and long-term social and environmental consequences of their activities. It is an integrated combination of policies, programs, education, and practices that extend throughout a corporations operations and into the communities in which they operate, about how companies voluntarily manage the business processes to produce on overall positive impact on society.
(ii) A good environmental practice improves corporate performance.
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(ii) The statement is correct. Environmental consideration have become a part of corporate strategy, which means incorporating environmental issues in the process of developing a product, in new investments and in the organisational set up. A good environmental practice improves corporate performance. In many industries it has been found that environmental friendly practices have resulted in more saving; for example the process of recycling the waste. Thus environmental considerations play a key role in corporate strategy. Markets of new millennium will be able to create wealth if they respond to the challenges of sustainable development, as unsustainable products will become obsolete. PART III Answer all the questions Question 14 (a) Explain the functions of interpersonal communication. (5 Marks) (b) The statutory meeting of PQR Limited was held on 20th January, 2010 at its registered office at Kolkata. As a secretary of the company, draft the minutes of the statutory meeting of the shareholders of the company. (5 Marks) Answer (a) Interpersonal communication is important because of the following functions its achieves: (i) Gaining Information: One reason we engage in interpersonal communication is to gain knowledge about another individual. We attempt to gain information about others so that we can interact with them more effectively. We can predict better how they will think, feel and act if we know who they are. We gain this information passively, by observing them; actively, by having others engage them; or interactively, by engaging them ourselves.
(ii) Building Understanding: Interpersonal communication helps us to understand better what someone says in a given context. Words can mean very different things depending on how they are said or in what context. Content messages refer to the surface level meaning of a message. Relationship Messages refer to how a message is said. The two are sent simultaneously, but each affects the meaning assigned to the communication and helps us to understand each other better. (iii) Establishing Identity: We also engage in interpersonal communication to establish an identity based on our relationships and the image we present to others. (iv) Interpersonal Need: We also engage in interpersonal communication to express interpersonal need. William Schutz has identified three such needs: inclusion, control and affection. Inclusion is the need to establish identity with others. Control is the need to exercise leadership and prove ones abilities. Affection is the need to develop relationships with people. (b) Minutes of the Statutory Meeting Minutes of the proceeding of the statutory meeting of PQR Limited held on 20th January 2010 at 11.00 a.m. at the Registered Office of the company at Bada bazaar Kolkata.
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Mr. A Mr. B Mr. C Mr. C Mr. D
Chairman Director Director Director Secretary
and 120 members and 30 proxies. The secretary read the notice convening the meeting. The Chairman welcomed the members and reviewed the activities of the company since its incorporation. The chairman informed the members that a list of members of the company has been placed on the table for the inspection of members. With the permission of the members, the Chairman took as read the Statutory Report. Adoption of Statutory Report. Proposed by Mr. B Seconded by MR. C Resolved that the Statutory Report sent to the members with the notice of the meeting be and is hereby approved. All the pre-incorporation and provisional contracts were approved by the members of the company. The meeting came to an end with a vote of thanks by the members and Chairman declared the meeting as closed. Date Question 15. The Board of Directors of RSP Limited agrees with X to hire his (X's) flat at NOIDA on lease for ten years @ Rs. 20,000 per month for marketing office of the company. You are a senior executive of the Board and the Board asks you to prepare the lease deed for the agreement. Draft a lease deed. (5 Marks) Answer Format of a Commercial Rental Lease Deed This Lease deed is made on this the day of 01 March 2010, between, X s/o Y, aged about 45 years, residing at Noida (hereinafter called the LESSOR); which expression shall, whenever the context so requires or admits mean and include his heirs, executors, Administrators and permitted assignees of the one part;
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Secretary
Chairman
And RSP Limited, Noida and herein after called the LESSEE Whereas, the lessor is the absolute owner of the property Noida (more fully described in the schedule hereunder and hereinafter referred to as Schedule Property) and Whereas, the Lesssee is desirous of taking on lease the Schedule property for a period of 10 years and, whereas, the Lessor is agreeable for the same. Now therefore this deed witnessed that in pursuance of aforesaid agreement and in consideration of the rent hereinafter contained, the Lessor hereby demises by way of lease who Lessee the Schedule Property for a period of from today, on the following terms and conditions: 1. That the lessee has undertaken to pay the lessor a monthly rent of Rs. 20,000/- (Rupees twenty thousand only) for the Scheduled Property on or before the 10 day of the following calendar month, and 10 months rent of Rs. 2.00 lac only deposit by the lessee on the date of execution of this lease; the receipt where of the lessor hereby acknowledges and agrees to repay the same without interest at the time of vacating the Scheduled Property, after deducting for damages, if any. The lease shall commence from the 1st April 2010 and shall be in force for a period of 10 years. The lessee shall use the Scheduled Property only for official purpose and shall not assign or sublease or use the Scheduled Premises for any unlawful purposes or alter the Scheduled Property without the consent of the lessor in writing. During the lease period, the lessee shall pay the electricity and water charges to the respective departments promptly and obviate disconnection at any time. The lessee shall deliver back in good condition as it was on the day of the occupation, the possession of the Scheduled Premises to the Lessor immediately upon the expiry of the said terms and conditions or on earlier termination.
2. 3.
4. 5.
Schedule: 1500 Squares of house bearing No. 56 at Noida measuring East to West 50 meter North to South 30 meter and bounded on: East by: Road, West by: Road, North by: Plot No. 55, South by: Plot No. 57. In witness whereof the parties hereto have their respective hands and seals to this Agreement on the day, month, year first written above. Witness 1. 2. ----------------------------------------------------Signature of Lessor Signature of Lessee
Question 16. State the contents that are required for drafting an Annual Report of a Company. (5 Marks)
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Answer The following are the main contents are required for drafting an annual report of a company. 1. 2. 3. 4. 5. Leadership team: Including top management, management team. Directors report. Financial statements- Balance sheet and Profit and Loss Account. Including auditors report. Corporate social responsibility. Graphs-Independent financials/ Projection of Financial growth of company etc.
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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT PART I : COST ACCOUNTING Answer all questions. Question 1 (i) What is Cost accounting? Enumerate its important objectives. (ii) Distinguish between Fixed overheads and Variable overheads. (iii) Re-order quantity of material X is 5,000 kg.; Maximum level 8,000 kg.; Minimum usage 50 kg. per hour; minimum re-order period 4 days; daily working hours in the factory is 8 hours. You are required to calculate the re-order level of material X. (iv) What do you understand by Key factor? Give two examples of it. (v) What are the main advantages of integrated accounts? Answer (i) Cost Accounting is defined as "the process of accounting for cost which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs." The main objectives of the cost accounting are as follows: (a) Ascertainment of cost: There are two methods of ascertaining costs, viz., Post Costing and Continuous Costing. Post Costing means, analysis of actual information as recorded in financial books. Continuous Costing, aims at collecting information about cost as and when the activity takes place so that as soon as a job is completed the cost of completion would be known. (b) Determination of selling price: Business enterprises run on a profit making basis. It is thus necessary that the revenue should be greater than the costs incurred. Cost accounting provides the information regarding the cost to make and sell the product or services produced. (c) Cost control and cost reduction: To exercise cost control, the following steps should be observed: (i) Determine clearly the objective. (ii) Measure the actual performance. (iii) Investigate into the causes of failure to perform according to plan; (iv) Institute corrective action. (d) Cost Reduction may be defined as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product. ( 5 x 2 =10 Marks )
(e) Ascertaining the profit of each activity: The profit of any activity can be ascertained by matching cost with the revenue of that activity. The purpose under this step is to determine costing profit or loss of any activity on an objective basis. (f) Assisting management in decision making: Decision making is defined as a process of selecting a course of action out of two or more alternative courses. For making a choice between different courses of action, it is necessary to make a comparison of the outcomes, which may be arrived under different alternatives.
(ii) Fixed Overheads v/s Variable Overheads Fixed overheads are not affected by any variation in the volume of activity, e.g., managerial remuneration, rent etc. These remain the same from one period to another except when they are deliberately changed. Fixed overheads are generally variable per unit of output or activity. On other hand the variable overheads that change in proportion to the change in the volume of activity or output, e.g., power consumed, consumable stores etc. The variable overheads are generally constant per unit of output or activity. (iii) Re-order Level = Maximum Level [Re-order quantity (Minimum usage per day Minimum Re-order Period) = 8000 kg. [5000 kg. (400 kg* 4)] = 8000 kg. 3400 kg. = 4600 kg. Hence, Re-order level is 4600 kg. *Minimum usage per day = 50 kg. 8 = 400 kg. (iv) Key factor is a factor which at a particular time or over a period limits the activities of an undertaking. It may be the level of demand for the products or service or it may be the shortage of one or more of the productive resources. Examples of key factors are: (a) Shortage of raw material. (b) Shortage of Labour. (c) Plant capacity available. (d) Sales capacity available. (e) Cash availability. (v) Main advantages of integrated accounts are as follows: (a) The question of reconciling costing profit and financial profit does not arise, as there is one figure of profit only. (b) Due to use of one set of books, there is a significant extent of saving in efforts made.
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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
(c) No delay is caused in obtaining information as it is provided from books of original entry. (d) It is economical also as it is based on the concept of Centralisation of Accounting Functions. Question 2 SB Constructions Limited has entered into a big contract at an agreed price of Rs. 1,50,00,000 subject to an escalation clause for material and labour as spent out on the contract and corresponding actuals are as follows: Standard Material: Quantity (Tonnes) 3,000 2,400 500 100 Hours 60,000 40,000 Rate per Tonne (Rs.) A B C D Labour: L1 L2 You are required to: (i) 1,000 800 4,000 30,000 Hourly Rate (Rs.) 15 30 56,000 38,000 3,400 2,300 600 90 Hours Actual Quantity (Tonnes) Rate per Tonne (Rs.) 1,100 700 3,900 31,500 Hourly Rate (Rs.) 18 35
Give your analysis of admissible escalation claim and determine the final contract price payable. (4 Marks)
(ii) Prepare the contract account, if the all expenses other than material and labour related to the contract are Rs. 13,45,000. (3 Marks) (iii) Calculate the following variances and verify them : (a) Material cost variance (b) Material price variance (c) Material usage variance (d) Labour cost variance (e) Labour rate variance (f) Labour efficiency variance. (8 Marks)
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Answer (i) Material Statement showing additional claim due to escalation clause. Std. Qty/Hours (a) A B C D Labour: L1 L2 60,000 40,000 15 30 Labour escalation claim Statement showing Final Contract Price Rs. Agreed contract price Add: Agreed escalation claim: Material Cost Labour Cost Final Contract Price (ii) Dr. Rs. To Material: A 3,400 Rs.1,100 B 2,300 Rs. 700 C 600 Rs. 3,900 DTo 90 Rs.31,500 1,05,25,000 Labour:
40
Std. Rate (b) 1000 800 4000 30000
Actual Rate (c) 1100 700 3900 31500
Variation in Rate (Rs.) (d)= (c-b) +100 -100 -100 +1500
Escalation claim (Rs.) (e)= (ad) +3,00,000 -2,40,000 -50000 +1,50,000 1,60,000
3000 2400 500 100
Material escalation claim 18 35
+3 +1,80,000 +5 +2,00,000 3,80,000
1,50,00,000 Rs. 1,60,000 3,80,000 5,40,000 1,55,40,000 Contract Account Cr. Rs. By Contractees A/c 1,55,40,000
L1 56,000 Rs.18 L2 38,000 Rs.35 To To Other expenses Profit and Loss A/c 23,38,000 13,45,000 13,32,000 1,55,40,000 (iii)
SQ SP Rs. A-30001000 = 30,00,000 B-- 2400800 = 19,20,000 C- 500 4000 = 20,00,000 D-10030000 = 30,00,000 Total 99,20,000
1,55,40,000
Material Variances
AQ AP 3,4001,100 = 2,300700 = 6003,900 = 9031,500 = Rs. 37,40,000 16,10,000 23,40,000 28,35,000 1,05,25,000 AQ SP 34001000 2,300800 6004,000 9030,000 = = = = Rs, 34,00,000 18,40,000 24,00,000 27,00,000 1,03,40,000
Material Cost Variance (MCV) = (SQ SP) (AQ AP) = Rs.99, 20,000 Rs.1, 05, 25,000 = Rs.6, 05,000(A) Material Price Variance (MPV) = AQ (SP AP) or (AQ SP) (AQ AP) = Rs.1, 03, 40,000 Rs.1, 05, 25,000 = Rs.1, 85,000 (A) Material usage variance (MUV)= (SQ SP) (AQ SP) = Rs.99, 20,000 Rs.1, 03, 40,000 = Rs.4, 20,000(A) Verification Or Rs.6, 05,000(A) Or Rs.6, 05,000(A) = MCV = MPV + MUV = Rs.1, 85,000(A) + Rs.4, 20,000(A) = Rs.6, 05,000(A) Labour Variances
SH SR L1 60,000 15 L2 40,000 30 Total = Rs. 9,00,000 21,00,000 = 12,00,000 AH AR 56,000 18 38,000 35 Rs. = 10,08,000 = 13,30,000 23,38,000 AH SR 56,00015 38,00030 = = Rs. 8,40,000 11,40,000 19,80,000
Labour Cost Variance (LCV) Labour Rate Variance (LRV)
= (SH SR) (AH AR) = Rs.21,00,000 Rs.23,38,000 = Rs.2,38,000 (A) = (AH SR) (AH AR) = Rs.19,80,000 Rs.23,38,000 = Rs.3,58,000(A)
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Labour Efficiency Variance (LEV) Verification LCV Rs.2,38,000(A) Or Rs.2,38,000(A) Question 3
= (SH SP) (AH SP) = Rs.21,00,000 Rs.19,80,000 = Rs.1,20,000(F) = LRV + LEV = Rs.3,58,000(A) + Rs.1,20,000(F) = Rs.2,38,000(A)
(a) Pharma Limited produces product Glucodin which passes through two processes before it is completed and transferred to finished stock. The following data relates to March, 2010: (8 Marks) Process-I Rs. Opening Stock Direct materials Direct Wages Factory Overheads Closing Stock Inter process profit included in Opening stock 1,50,000 3,00,000 2,24,000 2,10,000 74,000 NIL Process-II Rs. 1,80,000 3,15,000 2,25,000 90,000 90,000 30,000 Finished Stock Rs. 4,50,000 2,25,000 1,65,000
Output of process I is transferred to process II at 25 percent profit on the transfer price, whereas output of process II is transferred to finished stock at 20 percent on transfer price. Stock in processes are valued at prime cost. Finished stock is valued at the price at which it is received from process II. Sales for the month is Rs. 28,00,000. You are required to prepare Process-I a/c, Process-II a/c, and Finished Stock a/c showing the profit element at each stage. (b) A transport company has been given a 40 kilometre long route to run 5 buses. The cost of each bus is Rs. 6,50,000. The buses will make 3 round trips per day carrying on an average 80 percent passengers of their seating capacity. The seating capacity of each but is 40 passengers. The buses will run on an average 25 days in a month. The other information for the year 2010-11 are given below: Garage rent Annual repairs and maintenance Salaries of 5 drivers Wages of 5 conductors Rs. 4,000 per month Rs. 22,500each bus Rs. 3,000 each per month Rs. 1,200 each per month
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Managers salary Road tax, permit fee, etc. Office expenses Cost of diesel per litre Kilometre run per litre for each but Annual depreciation Annual Insurance
Rs. 7,500 per month Rs. 5,000 for a quarter Rs. 2,000 per month Rs. 33 6 kilometres 15% of cost 3% of cost
You are required to calculate the bus fare to be charged from each passenger per kilometre, if the company wants to earn profits of 33 from passengers). Answer (a)
Particulars To Opening Balance Direct Material Direct Wages Total (Rs.) Cost (Rs.)
1 percent on taking (total receipts 3

(8 Marks)
Process I A/c
Profit (Rs.) Particulars Total (Rs.) Cost (Rs.) Profit (Rs.)
1,50,000 1,50,000
- By Transfer to 10,80,000 8,10,000 2,70,000 Process II A/c -
To To
3,00,000 3,00,000 2,24,000 2,24,000 6,74,000 6,74,000
Less: Closing Stock Prime Cost To Factory Overhead Total Cost: Profit 25% on transfer price i.e.
1 33 on 3
74,000
74,000
6,00,000 6,00,000 2,10,000 2,10,000 8,10,000 8,10,000 2,70,000
- 2,70,000
total cost 10,80,000 8,10,000 2,70,000 10,80,000 8,10,000 2,70,000
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Process II A/c
Particulars Total (Rs.) To Opening Stock To Direct Material To Direct Wages 1,80,000 Cost (Rs.) 1,50,000 Profit (Rs.) Particulars Total (Rs.) Cost (Rs.) Profit (Rs.)
30,000 By Transfer to 22,50,000 15,15,000 7,35,000 Process II A/c -
3,15,000 2,25,000
3,15,000 2,25,000
To Transfer 10,80,000 from Process I A/c
8,10,000 2,70,000
18,00,000 15,00,000 3,00,000 Less: Closing Stock Prime Cost To Factory Overhead 90,000 75,000 15,000
17,10,000 14,25,000 2,85,000 90,000 90,000 -
Total Cost: 18,00,000 15,15,000 2,85,000 Profit 20% on transfer price i.e. 25% on cost 4,50,000 - 4,50,000
22,50,000 15,15,000 7,35,000
22,50,000 15,15,000 7,35,000
Working Note Profit element in closing stock =
3,00,000 90,000 = 15,000 18,00,000
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Finished Stock A/c

Particulars To To Opening Stock Total (Rs.) 4,50,000 Cost (Rs.) 2,85,000 Profit Particulars (Rs.) 1,65,000 By Sales 7,35,000 9,00,000 75,000 8,25,000 3,25,000 Total (Rs.) Cost (Rs.) Profit (Rs.)
28,00,000 16,50,000 11,50,000
Transfer from 22,50,000 15,15,000 Process-II 27,00,000 18,00,000
Less: Closing Stock Total Cost Profit (Balancing Figure)
2,25,000
1,50,000
24,75,000 16,50,000 3,25,000 -
28,00,000 16,50,000 11,50,000
28,00,000 16,50,000 11,50,000
Working Note : profit element in closing finished Stock =
9,00,000 2,25,000 = 75,000 27,00,000
Calculation of Profit on Sale Process Apparent Profit Addunrealised Profit in Opening Stock Rs. 30,000 1,65,000 Less Actual Profit Unrealised Profit in Closing Stock Rs. 15,000 75,000 Rs. 2,70,000 4,65,000 4,15,000 11,50,000
Rs. Process I Process II Finished Stock 2,70,000 4,50,000 3,25,000
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(b)
Operating Cost Sheet for the year 2010- 11 (Total Passenger Km = 115,20,000) Particulars Total Cost Cost per (Rs.) PassengerKm (Rs.) 48,000 1,80,000 72,000 90,000 20,000 24,000 97,500 5,31,500 1,12,500 0.046 0.010
A.
Fixed Charges: Garage rent (4,000 12) Salary of drivers (3,000 512) Wages of Conductors (1200512) Managers salary (7,500 12) Road Tax, Permit fee, etc. (5,0004) Office expenses (2,000 12) Insurance (6,50,000 Total A
3 5) 100
B.
Variable Charges: Repairs and Maintenance (22,500 5) Depreciation (6,50,000
15 5) 100
4,87,500 19,80,000 25,80,000 31,11,500 15,55,750 46,67,250
0.042 0.172 0.224 0.270 0.135 0.405
Diesel: Total B
3,60,000 Rs.33 6
Total Cost (A+B)

Add: 33
1 per cent Profit on takings or 50% on cost 3
Bus fare to be charged from each passenger per km Working Notes: (i) Total Kilometres to be run during the year 2010-11 = 40 2 325125 = 3, 60,000 Kilometres (ii) Total passenger Kilometres = 3, 60,000 40 80 =1, 15, 20,000 Passenger km. 100
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Question 4 Answer of the following:
(i)
Following informations are available for the year 2008 and 2009 of PIX Limited: (3 Marks) Year Sales Profit/(Loss) 2008 Rs. 32, 00,000 (Rs. 3,00,000) 2009 Rs. 57, 00,000 Rs. 7, 00,000
Calculate (a) P/V ratio, (b) Total fixed cost, and (c) Sales required to earn a Profit of Rs. 12,00,000 (ii) Explain the treatment of over and under absorption of Overheads in Cost accounting (3 Marks) (iii) Which is better plan out of Halsey 50 percent bonus scheme and Rowan bonus scheme for an efficient worker? In which situation the worker get same bonus in both schemes? (3 Marks) Answer (i)
Change inprofit 100 Change insales 7,00,000 + 3,00,000 100 (57,00,000 32,00,000) 10,00,000 100 25,00,000
(a) P/V Ratio = = =
= 40% (b) Total fixed cost = Total contribution - Profit =(Sales P/V ratio) Profit = (Rs.57, 00,000
40 ) Rs.7, 00,000 100
=Rs.22, 80,000 Rs.7, 00,000 =Rs.15, 80,000 (c) Contribution required to earn a profit of Rs.12, 00,000 = Total fixed cost + Profit required =Rs.15, 80,000 + 12, 00,000 = Rs.27, 80,000 Required Sales =
27,80,000 27,80,000 = Rs.69, 50,000 = P / V Ratio 40%
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(ii) Treatment of over and under absorption of overheads are:-
(i)
Writing off to costing P&L A/c: Small difference between the actual and absorbed amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss shall be transferred to costing P&L A/c.
(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P. , finished stock and cost of sales proportionately with the help of supplementary rate of overhead. (iii) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation that next year the position will be automatically corrected. This would really mean that costing data of two years would be wrong.
(iii) Rowan Bonus Scheme pays more bonus if the time saved is below the 50 per cent of time allowed and if the time saved is more than 50 percent of time allowed then Halsey bonus scheme pays more bonus. Generally, time saved by a worker is not more than 50 per cent of time allowed. So, the Rowan bonus scheme is better for an efficient worker. When the time saved is equal to 50 per cent of time allowed then both plans pays same bonus to a worker.
Bonus under Halsey Plan = Standard wage rate 50/100 Time saved
Bonus under Rowan Plan
Time taken Time taken Time allowed
...(i)
= Standard wage rate
...(ii)
Bonus under Halsey Plan will be equal to the Bonus under Rowan Plan when the following condition holds good = Standard wage rate 50/100 Time saved = Standard wage rate or or Time taken Time saved Time allowed
1 Time taken = 2 Time allowed
Time taken =
1 of time allowed. 2
Hence, when the time taken is 50% of the time allowed, the bonus under Halsey and Rowan Plans is equal.
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PART II : FINANCIAL MANAGEMENT Question 5 Answer the following: (i) What do you understand by Capital structure? How does it differ from Financial structure?
(ii) Explain briefly the accounts receivable systems. (iii) Briefly discuss the concept of seed capital assistance. (iv) Enumerate the various forms of bank credit in financing working capital of a business organization. (v) Ascertain the compound value and compound interest of an amount of Rs. 75,000 at 8 percent compounded semiannually for 5 years. (5 x 2 = 10 Marks) Answer (i) Meaning of Capital Structure and its Differentiation from Financial Structure
Capital Structure refers to the combination of debt and equity which a company uses to finance its long-term operations. It is the permanent financing of the company representing long-term sources of capital i.e. owners equity and long-term debts but excludes current liabilities. On the other hand, Financial Structure is the entire left-hand side of the balance sheet which represents all the long-term and short-term sources of capital. Thus, capital structure is only a part of financial structure.
(ii) Accounts Receivable Systems
Manual systems of recording the transactions and managing receivables are cumbersome and costly. The automated receivable management systems automatically update all the accounting records affected by a transaction. This system allows the application and tracking of receivables and collections to store important information for an unlimited number of customers and transactions, and accommodate efficient processing of customer payments and adjustments.
(iii) Concept of Seed Capital Assistance
It is a scheme designed by IDBI for professionally or technically qualified entrepreneurs and/or persons possessing relevant experience, skills and entrepreneurial traits. All the projects eligible for financial assistance from IDBI, directly or indirectly through refinance, are eligible under the scheme. The assistance is interest-free but carries a service charge of one percent per annum for the first five years and at an increasing rate thereafter. The project cost should not exceed Rs. 2 crores and the maximum assistance under the project will be restricted to 50 percent of the required promoters contribution or Rs.15 lacs whichever is lower.
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(iv) Forms of Bank Credit
The various forms of bank credit in financing the working capital of a business organisation are: (a) Cash credit; (b) Bank overdraft; (c) Bills discounting; (d) Bill acceptance; (e) Line of credit; (f) Letter of credit; and (g) Bank guarantees.
(v) Computation of Compound Value and Compound Interest
Semiannual Rate of Interest (i) = 8/2 = 4 % n = 5 x 2 = 10, Compound Value = P (1+i)n = 75,000 (1+4 %)10 = 75,000 x 1.4802 = Rs. 1,11,015 Compound Interest = Rs. 1,11,015 Rs. 75,000 = Rs. 36,015
Question 6 The following figures and ratios are related to a company: (i) Sales for the year (all credit) Rs. 30,00,000 25 percent 1.5 6 1:1 1.5 : 1 2 months 0.6 : 1 0.5 1.20 : 1
50
P = Rs. 75,000
(ii) Gross Profit ratio (iii) Fixed assets turnover (based on cost of goods sold) (iv) Stock turnover (based on cost of goods sold) (v) Liquid ratio (vi) Current ratio (vii) Debtors collection period (viii) Reserves and surplus to Share capital (ix) Capital gearing ratio (x) Fixed assets to net worth
You are required to prepare: (a) Balance Sheet of the company on the basis of above details. (b) The statement showing working capital requirement, if the company wants to make a provision for contingencies @ 10 percent of net working capital including such provision. (11 + 4 = 15 Marks) Answer (a) Preparation of Balance Sheet of a Company Working Notes:
(i)
Cost of Goods Sold = Sales Gross Profit (= 25% of Sales) = Rs. 30,00,000 Rs. 7,50,000 = Rs. 22,50,000
(ii) Closing Stock
= Cost of Goods Sold / Stock Turnover = Rs. 22,50,000/6 = Rs. 3,75,000
(iii) Fixed Assets = Cost of Goods Sold / Fixed Assets Turnover = Rs. 22,50,000/1.5 = Rs. 15,00,000 (iv) Current Assets : Current Ratio = 1.5 and Liquid Ratio = 1 Stock = 1.5 1 = 0.5 Current Assets = Amount of Stock x 1.5/0.5 = Rs. 3,75,000 x 1.5/0.5 = Rs. 11,25,000 (v) Liquid Assets (Debtors and Cash) = Current Assets Stock = Rs. 11,25,000 Rs. 3,75,000 = Rs. 7,50,000 (vi) Debtors = Sales x Debtors Collection period /12 = Rs. 30,00,000 x 2 /12 = Rs. 5,00,000 (vii) Cash = Liquid Assets Debtors = Rs. 7,50,000 Rs. 5,00,000 = Rs. 2,50,000
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(viii) Net worth
= Fixed Assets /1.2 = Rs. 15,00,000/1.2 = Rs. 12,50,000
(ix) Reserves and Surplus Reserves and Share Capital Reserves and Surplus = 0.6 + 1 = 1.6 = Rs. 12,50,000 x 0.6/1.6 = Rs. 4,68,750 (x) Share Capital = Net worth Reserves and Surplus = Rs. 12,50,000 Rs. 4,68,750 = Rs. 7,81,250 (xi) Current Liabilities = Current Assets/ Current Ratio = Rs. 11,25,000/1.5 = Rs. 7,50,000 (xii) Long-term Debts Capital Gearing Ratio = Long-term Debts / Equity Shareholders Fund Long-term Debts = Rs. 12,50,000 x 0.5 = Rs. 6,25,000
Balance Sheet of a Company Liabilities Amount Assets (Rs.) Amount (Rs.)
Equity Share Capital Reserves and Surplus Long-term Debts Current Liabilities
7,81,250 Fixed Assets 4,68,750 Current Assets 6,25,000 7,50,000 26,25,000 Stock Debtors Cash
15,00,000 3,75,000 5,00,000 2,50,000 26,25,000
(b) Statement Showing Working Capital Requirement A. Current Assets
Stock Debtors Cash

B. Current Liabilities Working Capital before Provision (A B)
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3,75,000 5,00,000 2,50,000 11,25,000 7,50,000 3,75,000
Add:
Provision for Contingencies @ 10% of Working Capital including Provision i.e. 1/9th of Working Capital before Provision : 3,75,000 x 1/9
Working Capital Requirement including Provision
41,667
4,16,667
Question 7 (a) The management of P Limited is considering selecting a machine out of two mutually exclusive machines. The companys cost of capital is 12 percent and corporate tax rate for the company is 30 percent. Details of the machines are as follows: Machine I Cost of machine Expected life Annual income before tax and depreciation Depreciation is to be charged on straight line basis. You are required to: (i) Calculate the discounted pay-back period, net present value and internal rate of return for each machine. Rs. 10,00,000 5 years Rs. 3,45,000 Machine II Rs. 15,00,000 6 years Rs. 4,55,000
(ii) Advise the management of P Limited as to which machine they should take up. The present value factors of Re. 1 are as follows: Year At 12% At 13% At 14% At 15% 1 .893 .885 .877 .870 2 .797 .783 .769 .756 3 .712 .693 .675 .658 4 .636 .613 .592 .572 5 .567 .543 .519 .497 6 .507 .480 .456 .432
At 16% .862 .743 .641 .552 .476 .410 (b) The following details are forecasted by a company for the purpose of effective utilization and management of cash: (i) Estimated sales and manufacturing costs: Year and month 2010 April May Sales Rs. 4,20,000 4,50,000 Materials Rs. 2,00,000 2,10,000 Wages Rs. 1,60,000 1,60,000 Overheads Rs. 45,000 40,000
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June July August September (ii) Credit terms:
5,00,000 4,90,000 5,40,000 6,10,000
2,60,000 2,82,000 2,80,000 3,10,000
1,65,000 1,65,000 1,65,000 1,70,000
38,000 37,500 60,800 52,000
Sales 20 percent sales are on cash, 50 percent of the credit sales are collected next month and the balance in the following month. Credit allowed by suppliers is 2 months. Delay in payment of wages is (one-half) month and of overheads is 1 (one) month.
(iii) Interest on 12 percent debentures of Rs. 5,00,000 is to be paid half-yearly in June and December. (iv) Dividends on investments amounting to Rs. 25,000 are expected to be received in June, 2010. (v) A new machinery will be installed in June, 2010 at a cost of Rs. 4,00,000 which is payable in 20 monthly instalments from July, 2010 onwards. (vi) Advance income-tax, to be paid in August, 2010, is Rs. 15,000. (vii) Cash balance on 1st June, 2010 is expected to be Rs. 45,000 and the company wants to keep it at the end of every month around this figure. The excess cash (in multiple of thousand rupees) is being put in fixed deposit. You are required to prepare monthly Cash budget on the basis of above information for four months beginning from June, 2010. (9 +7=16 Marks) Answer (a) (i) Computation of Discounted Payback Period, Net Present Value (NPV) and Internal Rate of Return (IRR) for Two Machines Calculation of Cash Inflows Machine I (Rs.) Machine II (Rs.)
Annual Income before Tax and Depreciation

Less : Depreciation
3,45,000 2,00,000
4,55,000 2,50,000 2,05,000
Machine I:
10,00,000 /5
Machine II: 15,00,000 / 6 Income before Tax

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1,45,000
Less: Tax @ 30 %
43,500 1,01,500 2,00,000 3,01,500
61,500 1,43,500 2,50,000 3,93,500
Income after Tax

Add: Depreciation
Annual Cash Inflows

Machine - I Year P.V. of Re.1 @12% Cash flow P.V. Cumulative P.V
Machine - II Cash flow P.V. Cumulative P.V.
1 2 3 4 5 6
0.893 3,01,500 2,69,240 0.797 3,01,500 2,40,296 0.712 3,01,500 2,14,668 0.636 3,01,500 1,91,754 0.567 3,01,500 1,70,951 0.507 -
2,69,240 3,93,500 3,51,396 5,09,536 3,93,500 3,13,620 7,24,204 3,93,500 2,80,172 9,15,958 3,93,500 2,50,266 10,86,909 3,93,500 2,23,115 - 3,93,500 1,99,505
3,51,396 6,65,016 9,45,188 11,95,454 14,18,569 16,18,074
Discounted Payback Period for: Machine - I
Discounted Payback Period
= 4+ = 4+
(10,00,000 9,15,958 )
1,70,951 84,042 1,70,951
= 4 + 0.4916
= 4.49 years or 4 years and 5.9 months Machine - II
Discounted Payback Period
= 5+ = 5+
(15,00,000 14,18,569 )
1,99,505
81,431 1,99,505
= 5 + 0.4082
= 5.41 years or 5 years and 4.9 months
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Net Present Value for: Machine - I
NPV = Rs. 10,86,909 10,00,000 = Rs. 86,909

Machine - II
NPV = Rs. 16,18,074 15,00,000 = Rs. 1,18,074

Internal Rate of Return (IRR) for: Machine I
Initial Investment 10,00,000 = = 3.3167 Annual Cash Inflow 3,01,500
P.V. Factor =
PV factor falls between 15% and 16% Present Value of Cash inflow at 15% and 16% will be: Present Value at 15% = 3.353 x 3,01,500 = 10,10,930 Present Value at 16% = 3.274 x 3,01,500 = 9,87,111 IRR = 15 + = 15 +
10,10,930 10,00,0000 (16 15) 10,10,930 9,87,111 10,930 1 23,819
= 15.4588% = 15.46%
Machine - II
15,00,000 = 3.8119 3,93,500
P.V. Factor =
Present Value of Cash inflow at 14% and 15% will be: Present Value at 14% = 3.888 x 3,93,500 = 15,29,928 Present Value at 15% = 3.785 x 3,93,500 = 14,89,398 IRR = 14 + = 14 +
15,29,928 15,00,000 (15 14) 15,29,928 14,89,398 29,928 1 40,530
= 14.7384 % = 14.74%
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(ii) Advise to the Management Ranking of Machines in terms of the Three Methods Machine - I Machine - II
Discounted Payback Period Net Present Value Internal Rate of Return
I II I
II I II
Advise: Since Machine I has better ranking than Machine II, therefore, Machine I should be selected. (b) Preparation of Monthly Cash Budget Cash Budget for four months from June, 2010 to September, 2010 Particulars June (Rs.) July (Rs.) August (Rs.) September (Rs.)
Opening Balance
Receipts:
45,000 1,00,000 3,48,000 25,000 5,18,000 2,00,000 1,62,500 40,000 30,000 4,32,500 85,500 40,000 45,500
45,500 98,000 3,80,000 5,23,500 2,10,000 1,65,000 38,000 20,000 4,33,000 90,500 45,000 45,500
45,500 1,08,000 3,96,000 5,49,500 2,60,000 1,65,000 37,500 20,000 15,000 4,97,500 52,000 7,000 45,000
45,000 1,22,000 4,12,000 5,79,000 2,82,000 1,67,500 60,800 20,000 5,30,300 48,700 3,000 45,700
Cash Sales Collection from debtors Dividends

Total (A) Payments:
Creditors for Materials Wages Overheads Installment for Machine Interest on Debentures Advance Tax
Total (B)
Surplus (A B) Fixed Deposits Closing Balance
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Working Notes: (1) Cash Sales and Collection from Debtors:

Month April, 2010 May, 2010 June, 2010 July, 2010 Aug., 2010 Sept., 2010 Total Sales (Rs.) 4,20,000 4,50,000 4,90,000 Cash Sales (Rs.) 84,000 90,000 98,000 Credit Sales (Rs.) 3,36,000 3,60,000 4,00,000 3,92,000 4,32,000 4,88,000 Total Collection from Debtors June (Rs.) 1,68,000 July (Rs.) Aug. (Rs.) Sept. (Rs.) -
1,80,000 1,80,000 -
5,00,000 1,00,000 5,40,000 1,08,000 6,10,000 1,22,000
- 2,00,000 2,00,000 -
- 1,96,000 1,96,000 - 2,16,000 -
3,48,000 3,80,000 3,96,000 4,12,000
(2) Payment of Wages
June = 80,000 + 82,500 = 1,62,500; July = 82,500 + 82,500 = 1,65,000; Aug. = 82,500 + 82,500 = 1,65,000; and Sept.= 82,500 + 85,000 = 1,67,500. (Note: It has been assumed that the company wants to keep minimum cash balance of Rs. 45,000 at the end of every month.)
Question 8 Answer the following: (i) SK Limited has obtained funds from the following sources, the specific cost are also given against them: Source of funds Equity shares Preference shares Retained earnings Amount (Rs.) 30,00,000 8,00,000 12,00,000 Cost of Capital 15 percent 8 percent 11 percent
Debentures 10,00,000 9 percent (before tax) You are required to calculate weighted average cost of capital. Assume that Corporate tax rate is 30 percent. (ii) State the role of a Chief Financial Officer.
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(iii) Distinguish between Funds Flow Statement and Cash Flow Statement. (3 3 = 9 Marks) Answer (i) Calculation of Weighted Average Cost of Capital (WACC) Sources of Funds Amount (Rs.) Weight Cost of Capital (after tax) % WACC %
Equity Shares Preference Shares Retained Earnings Debentures Total
30,00,000 8,00,000 12,00,000 10,00,000 60,00,000
0.500 0.133 0.200 0.167 = Kd (before tax) x (I T) = 9% (1 - 0.3) = 6.3%

= 11.81%
15 8 11 6.3*
7.50 1.06 2.20 1.05 11.81%
*Cost of Debentures (Kd) (after tax)

Weighted Average Cost of Capital (ii) Role of a Chief Financial Officer (CFO)
The chief financial officer of an organisation plays an important role in the companys goals, policies and financial success. His responsibilities include: (a) Financial Analysis and Planning: Determining the proper amount of funds to employ in the firm. (b) Investment Decisions: The efficient allocation of funds to specific assets. (c) Financing and Capital Structure Decisions: Raising funds on favourable terms as possible. (d) Management of Financial Resources such as working capital. (e) Risk Management: Protecting assets.
(iii) Differentiation between Funds Flow Statement and Cash Flow Statement
(a) Funds flow statement is based on the accrual accounting system. In case of preparation of cash flow statement all transactions affecting the cash equivalents only are taken into consideration. (b) Funds flow statement analyses the sources and applications of funds which are long-term in nature and the net increase in long-term funds will be reflected on the working capital of the firm. The Cash flow statement will only consider the increase or decrease in current assets and current liabilities in calculating the cash flow of funds from operations.
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(c) Funds flow analysis is more useful for long-range financial planning. Cash flow analysis is more useful for identifying and correcting the current liquidity problems of the firm. (d) Funds flow statement tallies the funds generated from various sources with various uses to which they are put. Cash flow statement tallies difference between opening balance of cash and closing balance of cash by proceeding through sources and uses.
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PAPER 4 : TAXATION Answer all questions. Working notes should form part of the answer. Wherever necessary, suitable assumptions may be made by the candidates. Question 1 Mr. Dinesh Karthik, a resident individual aged 45, furnishes the following information pertaining to the year ended 31.3.2010: (i) He is a partner in Badrinath & Co. He has received the following amounts from the firm: Interest on capital at 15% Salary as working partner (at 1% of firm's sales) : : Rs.3,00,000 Rs. 90,000
(ii) He is engaged in a business of manufacturing wheat flour from wheat. The Profit and Loss account pertaining to this business (summarised form) is as under: To Salaries Bonus Car expenses Machinery repairs Advance tax Depreciation Car Machinery Net profit Rs. 1,20,000 48,000 50,000 2,34,000 70,000 By Gross profit Interest on Bank FD (Net of TDS 5,000) Agricultural income Pension from LIC Jeevan Dhara Rs. 12,50,000 45,000 60,000 24,000
3,00,000 1,25,000 4,32,000 13,79,000 Opening WDV of assets are as under:
13,79,000 Rs. 3,00,000 6,50,000 2,00,000 3,00,000 1,25,000
Car Machinery (Used during the year for 170 days) Additions to machinery New purchased on 23.9.2009 New purchased on 12.11.2009 Old purchased on 12.4.2009 (All assets added during the year were put to use immediately after purchase)
The Suggested Answers for Paper 4: - Taxation are based on the provisions applicable for A.Y. 2010-11, which is the assessment year relevant for May, 2010 examination.
Of the total bonus amount, Rs. 15,000 was paid on 11.10.2009. One-fifth of the car expenses are towards estimated personal use of the assessee. (iii) In March, 2008, he had sold a house at Chennai. Arrears of rent relating to this house amounting to Rs. 75,000 was received in February, 2010. (iv) Details of his Savings and Investments are as under: Rs. Life insurance premium for policy in the name of his major son employed in LMN Ltd. at a salary of Rs.6 lacs p.a. (Sum assured Rs.2,00,000) Contribution to Pension Fund of National Housing Bank (This was met partially from out of premature withdrawal of deposit in Post Office Time Deposit made on 12.3.2006 Principal component Rs. 55,000 and Interest Rs. 5,000) Medical Insurance premium for his father aged 70, who is not dependent on him 22,000 50,000 70,000
You are required to compute the total income of Mr. Dinesh Karthik for the assessment year 2010-11 and the tax payable by him. Also indicate whether interest, if any, under sections 234A and 234B are payable, assuming that the return was filed on 28th September, 2010. Computation of interest, if any, is NOT required. Answer Computation of total income of Mr. Dinesh Karthik for the A.Y. 2010-11 Particulars Income from house property Arrears of rent received in respect of the Chennai house taxable under section 25B Less: Deduction @ 30% Profits and gains of business or profession (a) Own business (b) Income from partnership firm (See Note 1) Interest on capital [As per section 28(v), chargeable in the hands of the partner only to the extent allowable as deduction in the firms hand i.e. @12%] Salary of working partner [Assumed as fully allowed in firms hands]
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(20 Marks)
Rs. Note 2 75,000 22,500
Rs.
52,500 Note 3 2,40,000 5,33,250
90,000
3,30,000
PAPER 4 : TAXATION
Income from other sources (a) LIC Jeevan Dhara pension (b) Interest from bank FD (gross) Gross Total Income Less: Deductions under Chapter VIA Section 80C Life insurance premium for policy in the name of major son not dependent on the assessee, restricted to 20% of sum assured i.e. 20% of Rs.2,00,000. Contribution to pension fund of NHB Total qualifying amount Restriction as per section 80CCE (A) Section 80D Mediclaim premium for father, a senior citizen (qualifies for deduction, even though the father is not dependent on the assessee) Maximum amount allowable Total deduction under Chapter VI-A Total Income Computation of tax payable Tax on aggregate of non-agricultural income and agricultural income i.e., Rs.9,29,750 (being, Rs.8,69,750 + Rs.60,000) Less:Tax on the aggregate of agricultural income and basic exemption limit i.e., Rs.2,20,000 (i.e., Rs.60,000 + Rs.1,60,000) Add: Education cess@2% Secondary and higher education cess@1% Less: Advance tax TDS Tax payable
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24,000 50,000 ___74,000 9,89,750
40,000
70,000 1,10,000 1,00,000 22,000
(B) (A) + (B)
20,000 1,20,000 8,69,750 1,82,925
6,000 1,76,925 3,539 1,769 1,82,233 70,000 5,000 75,000 1,07,233
Interest under section 234A Mr. Dinesh Karthik receives salary of Rs.90,000 from the firm, Badrinath & Co., which is given as 1% of the firms sales. Therefore, the turnover of the firm is Rs.90 lakh, being 90,000/1%. Since the turnover of the firm exceeds Rs.40 lakhs, the firm is subject to tax audit. Since Mr. Dinesh Karthik is a working partner in a partnership firm whose accounts are subject to tax audit, his due date for filing of return would be 30th September, 2010. Since the return was filed before the due date, no interest is payable under section 234A. Interest under section 234B Under section 208, obligation to pay advance tax arises in every case where the advance tax payable is Rs.10,000 or more. Interest under section 234B is attracted for non-payment of advance tax or payment of advance tax of an amount less than 90% of the assessed tax. Therefore, in this case, interest under section 234B would be attracted on the balance tax payable. Notes: (1) The income by way of interest on capital and salary of Mr. Dinesh Karthik from the firm, Badrinath & Co., in which he is a partner, to the extent allowed as deduction in the hands of the firm under section 40(b), has to be included in the business income of the partner as per section 28(v). Accordingly, Rs.3,30,000 [i.e., Rs.90,000 (salary) + Rs.2,40,000 (interest@12%)] should be included in his business income. It has been assumed that salary has been allowed in full in the hands of the firm. (2) As per section 25B, any arrears of rent received will be chargeable to tax, after deducting a sum equal to 30% of such arrears, as income from house property in the year of receipt, whether or not the assessee remains the owner of the house property. (3) Computation of income from own business Particulars Net profit as per profit and loss account Less: Items credited to profit and loss account not treated as business income Interest on bank FD (net of TDS 5,000) Agricultural income Pension from LIC Jeevan Dhara 45,000 60,000 24,000 1,29,000 3,03,000 Add: Items debited to profit and loss account to be disallowed/considered separately Advance tax
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Rs.
Rs. 4,32,000
70,000
PAPER 4 : TAXATION
Depreciation Car Machinery Car expenses disallowed Less: Depreciation (See Working Note below) Income from own business Working Note Computation of depreciation allowable under the Income-tax Act, 1961 Block I Car 15% on 3,00,000 Less: 1/5th for personal use Block II Machinery Opening WDV Additions during the year (Used for more than 180 days) Depreciation at 15% on Additions during the year (used for less than 180 days) Hence, depreciation at 7.5% on Total normal depreciation (A) Where an asset acquired during the year is put to use for less than 180 days, 50% of the rate of depreciation is allowable. This restriction does not apply to assets acquired in an earlier year. Additional depreciation New machinery Used for more than 180 days at 20%
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3,00,000 1,25,000 __10,000 5,05,000 8,08,000 2,74,750 5,33,250
45,000 _9,000 36,000
6,50,000 3,25,000 9,75,000 1,46,250
3,00,000
22,500 2,04,750
2,00,000
40,000
Used for less than 180 days at 10% Total additional depreciation (B) Total permissible depreciation (A) + (B) (4) Withdrawal from Post Office Time Deposit
3,00,000
30,000 70,000 2,74,750
The deduction under section 80C is allowable in respect of any sum deposited in a five year time deposit in an account under Post Office Time Deposit Rules, 1981 w.e.f. A.Y.2008-09. Clause (xxiv) was inserted by the Finance Act, 2008 in section 80C(2) providing this deduction with effect from A.Y.2008-09. Simultaneously, sub-section (6A) was inserted in section 80C w.e.f. A.Y.2008-09 to bring to tax pre-mature withdrawal (before five years) of the amount so deposited and interest thereon. In the question, it is clearly mentioned that the deposit was made on 12.3.2006. Therefore, no deduction under section 80C would have been allowable in the P.Y.2005-06 in respect of such deposit, since clause (xxiv) providing for deduction was inserted by the Finance Act, 2008 only w.e.f. A.Y.2008-09. Consequently, sub-section (6A) bringing to tax the withdrawal would not apply in respect of such deposit for which no deduction was allowed under section 80C. Question 2 (a) Mr. Tenzingh is engaged in composite business of growing and curing (further processing) coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information pertaining to the year ended 31.3.2010 are given below: Rs. WDV of car as on 1.4.2009 WDV of machinery as on 31.3.2009 (15% rate) Expenses incurred for growing coffee Expenditure for curing coffee Sale value of cured coffee 3,00,000 15,00,000 3,10,000 3,00,000 22,00,000
Besides being used for agricultural operations, the car is also used for personal use; disallowance for personal use may be taken at 20%. The expenses incurred for car running and maintenance are Rs.50,000. The machines were used in coffee curing business operations. Compute the income arising from the above activities for the assessment year 2010-11. Show the WDV of the assets as on 31.3.2010. (6 Marks) (b) Mr. Raj Kumar sold a house to his friend Mr. Dhuruv on 1st November, 2009 for a consideration of Rs. 25,00,000. The Sub-Registrar refused to register the document for the said value, as according to him, stamp duty had to be paid on Rs. 45,00,000, which was the Government guideline value. Mr. Raj Kumar preferred an appeal to the Revenue Divisional Officer, who fixed the value of the house as Rs. 32,00,000 (Rs. 22,00,000 for land and the balance for building portion). The differential stamp duty was paid,
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PAPER 4 : TAXATION
accepting the said value determined. Assuming that the fair market value is Rs. 32,00,000, what are the tax implications in the hands of Mr. Raj Kumar and Mr. Dhuruv for the assessment year 2010-11? Mr. Raj Kumar had purchased the land on 1st June, 2006 for Rs. 5,19,000 and completed the construction of house on 1st October, 2007 for Rs. 14,00,000. Cost inflation indices may be taken as 519 for the financial year 2006-07, 582 for the financial year 2007-08 and 632 for the financial year 2009-10. Note Cost inflation of index for the financial year 2007-08 has been wrongly printed as 582 instead of 551. (6 Marks) Answer (a) Where an assessee is engaged in the composite business of growing and curing of coffee, the income will be segregated between agricultural income and business income, as per Rule 7B of the Income-tax Rules, 1962. As per the above Rule, income derived from sale of coffee grown and cured by the seller in India shall be computed as if it were income derived from business, and 25% of such income shall be deemed to be income liable to tax. The balance 75% will be treated as agricultural income. Particulars Sale value of cured coffee Less: Expenses for growing coffee Car expenses (80% of Rs.50,000) Depreciation on car (80% of 15% of Rs.3,00,000) Total costs of agricultural operations Expenditure for coffee curing operations Add: Depreciation on machinery (15% of 15,00,000) (See Note below) Total cost of the curing operations Total cost of composite operations Total profits from composite activities Amount regarded as business income (25% of above) Amount treated as agricultural income (75% of above) Computation of value of depreciable assets as on 31.3.2010 Particulars Car Opening value as on 1.4.2009
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Rs.
Rs. 3,10,000 40,000 _36,000 3,86,000
Rs. 22,00,000
3,00,000 2,25,000 5,25,000 _9,11,000 12,89,000 3,22,250 9,66,750
Rs.
Rs. 3,00,000
Rs.
Depreciation thereon at 15% Less: Disallowance @20% for personal use Depreciation actually allowed Closing value as on 31.3.2010 Machinery Opening value as on 1.4.2009 Less: Depreciation @ 15% Closing value as on 31.3.2010
45,000 9,000 36,000 2,64,000 15,00,000 2,25,000 12,75,000
Explanation 7 has been inserted in section 43(6) to provide that in cases of composite income, for the purpose of computing written down value of assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire composite income of the assessee (and not just 25%) is chargeable under the head Profits and gains of business or profession. The depreciation so computed shall be deemed to have been actually allowed to the assessee. Note It has been assumed that the written down value of machinery as on 31.3.2009 i.e.., Rs.15 lakh given in the question represents the closing balance after providing depreciation for the previous year 2008-09. It is also possible to assume that the written down value of Rs.15 lakh as on 31.3.2009 represents the written down value on which depreciation has to be charged for the previous year 2008-09 and solve the problem accordingly. (b) In the hands of the seller, Mr. Raj Kumar As per section 50C(1), where the consideration received or accruing as a result transfer of land or building or both, is less than the value adopted or assessed assessable by the stamp valuation authority, the value adopted or assessed assessable by the stamp valuation authority shall be deemed to be the full value consideration received or accruing as a result of transfer. of or or of
Where the assessee appeals against the stamp valuation and the value is reduced in appeal by the appellate authority (Revenue Divisional Officer, in this case), such value will be regarded as the consideration received or accruing as a result of transfer. In the given problem, land has been held for a period exceeding 36 months and building for a period less than 36 months immediately preceding the date of transfer. So land is a long-term capital asset, while building is a short-term capital asset. Particulars Long term capital gain on sale of land Consideration received or accruing as a result of transfer of land Less: Indexed cost of acquisition 5,19,000 x 632/519 Long-term capital gain (A) 22,00,000 6,32,000 15,68,000 Rs.
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PAPER 4 : TAXATION
Short-term capital loss on sale of building Consideration received or accruing from transfer of building Less: Cost of acquisition Short term capital loss (B) 10,00,000 14,00,000 4,00,000
As per section 70, short-term capital loss can be set-off against long-term capital gains. Therefore, the net taxable long-term capital gains would be Rs.11,68,000 (i.e., Rs.15,68,000 Rs.4,00,000). In the hands of the buyer Mr. Dhuruv As per section 56(2)(vii), inserted by the Finance (No.2) Act, 2009, where an individual receives on or after 1st October, 2009, from a non-relative, any immovable property for inadequate consideration, and the difference between the stamp value (or the value reduced by the appellate authority, as in this case) and the consideration exceeds Rs.50,000, such difference is chargeable to tax as income from other sources. The problem states that the immovable property in question was received on 1st November, 2009 from a non-relative. Hence the above provisions will be attracted. The inadequate consideration to the tune of Rs.7 lacs (32 lacs less 25 lacs) will be assessed as income from other sources. Note : The Finance Act, 2010 has amended section 56(2)(vii) to remove transfer of immovable property for inadequate consideration from its scope right from the date of introduction of this provision i.e., date of insertion of section 56(2)(vii), being 1st October, 2009. Therefore, transfer of immovable property for inadequate consideration would never fall within the scope of section 56(2)(vii). Accordingly, the provisions of section 56(2)(vii) would not be attracted in such a case. It may be noted that the amendments made by the Finance Act, 2010, including retrospective amendments, are not applicable for May 2010 examination. Therefore, this amendment has not been considered in the answer given above, even though the same is applicable retrospectively from 1st October, 2009, being the date of introduction of this provision. Question 3 From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended 31.3.2010, compute the total income for the assessment year 2010-11, if he is: (i) Resident and ordinary resident; (ii) Resident but not ordinarily resident; (iii) Non-resident Particulars (a) (b) Profit on sale of shares in Indian Company received in Germany Dividend from a Japanese Company received in Japan
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Amount (Rs.) 15,000 10,000
(c) (d) (e)
Rent from property in London deposited in a bank in London, later on remitted to India through approved banking channels Dividend from RP Ltd., an Indian Company Agricultural income from lands in Gujarat
75,000 6,000 25,000 (10 Marks)
Answer Computation of total income of Mr. Anirudh for the A.Y. 2010-11 Particulars Resident & ordinarily resident 15,000 10,000 52,500 77,500 Resident but not ordinarily resident 15,000 15,000 NonResident
1) Profit on sale of shares of an Indian company, received in Germany 2) Dividend from a Japanese company, received in Japan. 3) Rent from property in London deposited in a bank in London [See Note (i) below] 4) Dividend from RP Ltd., an Indian Company [See Note (ii) below] 5) Agricultural income from land in Gujarat [See Note (iii) below] TOTAL INCOME Notes (i)
15,000 15,000
It has been assumed that the rental income is the gross annual value of the property. Therefore, deduction @30% under section 24, has been provided and the net income so computed is taken into account for determining the total income of a resident and ordinarily resident. Rent received (assumed as gross annual value) Less: Deduction under section 24 (30% of Rs.75,000) Income from house property 75,000 22,500 52,500
(ii) Dividend from Indian company is exempt under section 10(34) (iii) Agricultural income is exempt under section 10(1).
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PAPER 4 : TAXATION
Question 4 Answer the following questions with regard to the provisions of the Income-tax Act, 1961: (a) State the concessions granted to transport operators from 1st October, 2009 onwards in the context of cash payments under section 40A(3) and deduction of tax at source under section 194-C. (b) What are the conditions to be fulfilled by a Charitable Trust under section 12A for applicability of exemption provisions contained in sections 11 and 12? (c) What are the particulars required to be furnished with the return of income, as per section 139(6)? (3 x 4 = 12 Marks) Answer (a) Section 40A(3) provides for disallowance of expenditure incurred in respect of which payment or aggregate of payments made to a person in a day exceeds Rs.20,000, and such payment or payments are made otherwise than by account payee cheque or account payee bank draft. This limit of Rs.20,000 has been raised to Rs.35,000 in case of payment made to transport operators for plying, hiring or leasing goods carriages. Therefore, payment or aggregate of payments up to Rs.35,000 in a day can be made to a transport operator otherwise than by way of account payee cheque or account payee bank draft, without attracting disallowance under section 40A(3). Under section 194C, tax had to be deducted in respect of payments made to contractors including contractors in transport business at the rate of 2% up to 30.9.2009. However, with effect from 1.10.2009, no deduction is required to be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor, during the course of the business of plying, hiring or leasing goods carriages, if the contractor furnishes his permanent account number (PAN) to the person paying or crediting such sum. (b) Conditions for applicability of sections 11 and 12 [Section 12A] The exemption provisions contained in sections 11 and 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled (i) An application for registration of the trust or institution in the prescribed form and in the prescribed manner should be made to the Commissioner and the trust or institution should be registered under section 12AA. The requirement of filing an application for registration within one year of creation of the religious or charitable trust or institution has been removed. The application can be filed at any time now.
(ii)
(iii) Accordingly, in respect of applications made on or after 1st June, 2007, the provisions of sections 11 and 12 shall apply from the assessment year relevant to the financial year in which the application is made i.e. the exemption would be available only with effect from
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the assessment year relevant to the previous year in which the application is filed. It would not be available in respect of any earlier assessment year. (iv) Where the total income of the trust or institution, without giving effect to the provisions of sections 11 and 12, exceeds the maximum amount which is not chargeable to incometax in any previous year, the accounts of the trust or institution must be audited by a Chartered Accountant and the report of such audit in the prescribed form duly signed and verified by such accountant setting forth such prescribed particulars, should be furnished along with the return of income. (c) Particulars to be furnished with the return of income [Section 139(6)] As per section 139(6), the prescribed form of return of income, shall in certain prescribed cases, require the assessee to furnish the particulars of: (i) income exempt from tax; (ii) assets of the prescribed nature and value, belonging to the assessee; (iii) details of bank account and credit card held by the assessee; (iv) expenditure exceeding the prescribed limits incurred by the assessee under prescribed heads; and (v) such other outgoings, as may be prescribed. Question 5 Provide brief answer to the following questions on service tax: (a) Is service tax payable in respect of services provided in the Indian territorial waters? (b) Is service tax leviable on fee collected by public authorities while performing statutory functions under the provisions of law? (c) Can an assessee file a revised service tax return? (d) Explain the term commercial training or coaching center. (4 x 2 = 8 Marks) Answer (a) Yes, services provided within Indian territorial waters are liable to service tax, as the levy of service tax extends to the whole of India except Jammu and Kashmir and India includes Indian territorial waters. Indian territorial waters extend upto 12 nautical miles from the Indian land mass. (b) Circular No. 96/7/2007 ST dated 23.08.2007 has clarified that service tax shall not be leviable on fee collected by public authorities while performing statutory functions under the provisions of law. However, if the service is not in the course of statutory function but is undertaken for a consideration, service tax may be leviable if it is a taxable service. (c) An assessee can submit a revised return, in Form ST-3 in triplicate, to correct a mistake or omission in the original return, within a period of 90 days from the date of submission of the original return.
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PAPER 4 : TAXATION
(d) Commercial training or coaching centre means any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the sports, with or without issuance of a certificate and includes coaching or tutorial classes but does not include preschool coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for the time being in force [Section 65(27)]. Question 6 (a) Virat Kohli & Co., a partnership firm, is providing taxable legal consultancy services, for the second consecutive assessment year. The firm furnishes the following information relating to the services rendered, bills raised, amounts received relating to this service, for the year ended 31.3.2010: Rs. (i) (ii) (iii) Free services rendered to poor people (Value of the services computed on comparative basis) Advances received from clients for which no taxable service has been rendered so far Services billed to clients Gross amount (Service tax has been charged separately in all the bills; the firm follows mercantile system of accounting) 40,000 5,00,000
12,00,000
(iv) The firm has received the following amounts during the year: Relating to taxable services rendered in March, 2009 (excluding service tax at applicable rates and TDS under section 194-J of the IT Act, 1961 to the tune of Rs. 45,320) Relating to taxable services rendered in current year 2009 (excluding service tax at applicable rates and TDS under section 194-J of the IT Act, 1961 to the tune of Rs. 1,20,000) (*includes Rs. 50,000 as appearance fee before Labour Court received from another firm) Service tax has been separately received for applicable items in (iv) above.
5,44,680
9,80,000*
You are required to compute the value of taxable services for the year ended 31.3.2010 and the service tax payable, briefly explaining the treatment of each item above.(8 Marks) (b) Answer the following questions on service tax: (i) What is the scope of taxable service in respect of membership of clubs or associations? State the exception to the same.
(ii) Does a service provider have an option to pay service tax at a rate different from the general rate applicable on gross value of taxable services, in the case of purchase or sale of foreign currency?
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(iii) What is the late fee payable for delay in furnishing the service tax return? Can the same be waived? (3 3 = 9 Marks) Answer (a) The legal consultancy services were brought under service tax net only with effect from 01.09.2009. Thus, service tax would be leviable only on the services rendered on or after 01.09.2009. Assuming that all receipts are evenly distributed throughout the year, the calculations have been made on pro-rata basis. (i) Break up of amounts received during the year between the periods April 09 to August 09 and September 09 to March 2010:Particulars Receipts during April 09 to August 09 (Rs.) 2,08,333 Total Receipts (Rs.) during September 09 to March 10 (Rs.) 2,91,667 5,00,000
Free services rendered to poor people Advances received from clients Consideration received for services rendered in earlier year [Rs.5,44,680 + Rs.45,320] Consideration received for services rendered in current year excluding fee for appearing before Labour Courts [(Rs.9,80,000 + Rs.1,20,000) Rs.50,000] Fee for appearing before Labour Courts Total Particulars Free services rendered to poor people (Note 1) Taxable advances received from clients (Note 2)
2,45,833
3,44,167
5,90,000
4,37,500 20,833 9,12,499
6,12,500 29,167 12,77,501
10,50,000 50,000 21,90,000 Rs. 2,91,667 6,12,500 9,04,167 Nil
(ii) Computation of value of taxable services and service tax payable thereon:
Consideration received for services rendered in earlier year (Note 3) Consideration received for taxable services rendered in current year (Note 4) Fee for appearing before Labour Courts (Note 5) Total value of taxable services Service tax payable (Note 6)
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Notes:1. Service tax is chargeable on the value of service. Thus, service tax is not payable in case of free services as there is no consideration in such case. 2. Service tax is payable on advances as taxable service includes "service to be provided" and the payments received before, during or after provision of the taxable service form part of the gross amount charged for the taxable services. Since, the turnover of taxable services do not exceed Rs.10,00,000 for the taxable period i.e., from September 09 to March 2010, it is logical to presume that the taxable advances of Rs.2,91,667 received form client are exclusive of service tax. Consideration received for services rendered in March 2009 will not be liable to service tax as the service became taxable only with effect from 01.09.2009. Service tax is payable on the value of taxable services charged by the assessee. Any income tax deducted at source is included in the charged amount. Thus, service tax is to be paid on TDS also. It is presumed here that amount of Rs.1,20,000 represents only TDS. The definition of taxable legal consultancy service specifically excludes the services provided for appearance before any Court, Tribunal or authority. Taxable services up to Rs.10,00,000 are exempt from service tax during the year 2009-10 as there was nil turnover of taxable services in the year 2008-09. The scope of taxable service shall include any service provided or to be provided to its members by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount. Taxable service provided or to be provided by a resident welfare association to its members are exempt from service tax, provided the consideration received from an individual member does not exceed Rs.3000 per month. Further, service provided by twenty two prescribed export promotion councils to its members are also exempt from service tax. (ii) Yes, there is an option to pay an amount calculated at 0.25% of the gross amount of currency exchanged, instead of paying service tax at 10% on the value of taxable services. The option is available to a person liable to pay service tax in relation to purchase or sale of foreign currency, including money changing provided by a foreign exchange broker, including an authorized dealer in foreign exchange. However such option is not available in a case where the consideration for the service provided or to be provided is shown separately in the invoice, bill/challan issued by the service provider.
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3. 4.
5. 6. (b) (i)
(iii) The late fee payable for delay in submitting the service tax return is furnished below: S.No. (a) (b) (c) Period of delay (No. of days from Late fee (Rs.) the due date of filing the return) 15 days 16 30 days Beyond 30 days 500 1000 Rs.1000 plus Rs.100 for every day of delay beyond 30 days.
However, the total late fee payable shall not exceed Rs.2,000. Waiver of late fee: Where the gross amount of service tax payable is nil, the Central Excise Officer may, on being satisfied that there was sufficient cause for the delay, reduce or waive the late fee. Question 7 Answer the following questions on VAT: (a) What are the items aggregated in the addition method to calculate the VAT payable? When is this method mainly used? (b) Is any threshold exemption limit fixed for dealers to obtain VAT registration, as per the White Paper? If yes, why is the same provided? (c) Is the VAT chain continued when a purchasing dealer opts for VAT composition scheme? What is the loss to the seller and buyer opting for the composition scheme, and the subsequent buyers? (d) Can it be said that VAT brings about certainty to a great extent in the matter of interpretational issues? If so, how? Answer (a) In the addition method, (i) All the factor payments, and (ii) Profit, are added to arrive at the value addition on which VAT rate is applied to compute the VAT payable. This method is mainly used with income variant of VAT. (b) The threshold limit far small traders, as per the White Paper is Rs.5 lakh. The same was subsequently increased to Rs.10 lakh. The same is fixed to provide relief to small traders. (c) As soon as the dealer opts for the composition scheme, the VAT chain is broken. When a composition scheme is availed by a seller or buyer, he cannot claim input credit of the tax paid on the purchases. This will add to the cost of the goods. The benefit of tax paid earlier will not be passed on to subsequent buyers.
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(d) VAT is a system, based simply on transactions; hence there is no need to go through complicated definitions like sales, turnover, etc. The tax is also broad based and is applicable to all sales of the commodity in question, leaving little room for different interpretations. Hence it can be said that VAT brings certainty to a great extent. Question 8 (a) Mr. X, a dealer in Mumbai dealing in consumer goods, submits the following information pertaining to the month of March, 2010: (i) Exempt goods 'A' purchased for Rs. 2,00,000 and sold for Rs. 2,50,000. (ii) Goods 'B' purchased for Rs. 2,25,000 (including VAT) and sold at a margin of 10% profit on purchases (VAT rate 12.5%) (iii) Goods 'C' purchased for Rs, 1,00,000 (excluding VAT) and sold for Rs. 1,50,000 (VAT rate 4%); (iv) His unutilized balance of VAT input credit on 1.3.2010 was Rs. 1,500. Compute the turnover, Input VAT, Output VAT and Net VAT payable by Mr. X. (8 Marks) (b) Answer the following questions on VAT: (i) What are the merits of VAT in the context of tax evasion, neutrality and transparency?
(ii) State the importance of VAT invoice/tax invoice in administering VAT. (iii) Discuss the tax consequences of stock transfer under the VAT scheme. Answer (a) Goods Purchases Rs. A B (See Note) C 2,00,000 2,00,000 1,00,000 5,00,000 Input VAT credit Rs. 25,000 4,000 29,000 Sales (Turnover) Rs. 2,50,000 2,20,000 1,50,000 6,20,000 Rs. Exempt turnover Taxable turnover Total turnover
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Output VAT Rs. 27,500 6,000 33,500 Rs.
2,50,000 3,70,000 6,20,000
Opening balance of Input VAT credit Add: Input VAT credit for March, 2010 Total Input VAT credit available Less: Output VAT payable on taxable turnover Net VAT payable Note:Goods B purchase value (including VAT) Less: VAT included in above 12.5 2,25,000 112.5
1,500 29,000 30,500 33,500 3,000 2,25,000 25,000
Purchase price excluding VAT Add: Profit on above @ 10% Selling price before VAT VAT @ 12.5% on selling price Note : Profit margin of 10% is taken at purchase value excluding VAT. (b) (i)
2,00,000 20,000 2,20,000 27,500
(1) No tax evasion: - Under VAT, credit of duty paid is allowed against the liability on the final product manufactured or sold. Therefore, unless proper records are kept in respect of various inputs, it is not possible to claim credit. Hence, suppression of purchases or production will be difficult because it will lead to loss of revenue. (2) Neutrality: - The greatest advantage of VAT system is that it does not interfere in the choice of decision for purchases. This is because the system has anti-cascading effect. How much value is added and at what stage it is added in the system of production/distribution is of no consequence. The system is neutral with regard to choice of production technique, as well as business organization. All other things remaining the same, the issue of tax liability does not vary the decision about the source of purchase. (3) Transparency: - Under VAT system, the buyer knows the tax component out of the total consideration paid for purchase of material. Thus, the system ensures transparency also.
(ii) Invoices are crucial documents for administering VAT. In the absence of invoices VAT paid by the dealer earlier cannot be claimed as set off. A VAT invoice: (i) helps in determining the input tax credit and prevents cascading effect of taxes;
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(ii) facilitates multi-point taxation on the value addition;
PAPER 4 : TAXATION
(iii) promotes assurance of invoices; (iv) assists in performing audit and investigation activities effectively and checks evasion of tax. (iii) Inter-State stock transfers do not involve sale and, therefore they are not subjected to sales tax. The same position is continued under VAT. However, the tax paid on: (i) inputs used in the manufacture of finished goods which are stock transferred; or (ii) purchases of goods which are stock transferred is available as input tax credit after retention of 2% of such tax by the State Governments.
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SUMMARY OF EXAMINERS COMMENTS ON THE PERFORMANCE OF THE CANDIDATES I. General Comments : (1) Generally, answers in all subjects have exhibited lack of systematic and logical approach and conceptual clarity. Intense learning of the study material will help to develop conceptual clarity. (2) In Paper 1: Accounting, knowledge of Accounting Standards is one area the candidates were found lacking. A thorough reading of the basic text of the Accounting Standards is required to strengthen their fundamentals. Lack of knowledge of the basic accounting concepts is another area of deficiency. (3) In Paper 2: Business Laws, Ethics and Communication, the candidates were found lacking in their ability to apply the provisions of law correctly to solve practical problems. The candidates were also not able to comprehend the questions in the Ethics portion and hence their answers were general in nature. In the portion relating to Communication, the candidates were not able to understand the correct meaning of certain terms used, like notice and minutes. (4) In Paper 3: Cost Accounting and Financial Management, the performance of the candidates revealed lack of in depth knowledge and presentation skills. (5) In Paper 4: Taxation, the candidates were found lacking in the knowledge of the latest amendments in income-tax. (6) The presentation of answers was also very poor in many cases. deficiencies were (i) not starting the answer to a new question on a fresh page; The major
(ii) answering the different sub-parts of the questions in different places instead of answering the same one after the other; (iii) leaving blank pages in between the answers; (iv) writing the question number outside the margin, which is intended for answers; (v) not marking the questions answered in the cover page inspite of specific instructions to do so; (vi) very poor handwriting; (vii) lack of expression; (viii) spelling mistakes; and (ix) grammatical mistakes.
SUMMARY OF EXAMINERS COMMENTS
II.
Paper-Wise Specific Comments : PAPER 1 : ACCOUNTING Question 1. Few candidates did not give the required answer for parts (i), (ii), (iii), (v), (vi), (viii) and (x). Question 2. Some of the candidates erred in calculation of credit sales, credit purchases and depreciation. Consequently, they could not prepare the trading and profit and loss account in the correct manner. Question 3. Many candidates did not compute the correct amount of purchase consideration and the correct number of equity and preference shares issued by Careful Ltd. to Reckless Ltd. They were not able to give the required journal entries and ledger accounts. Question 4.(a) Some candidates were not able to calculate the closing balance of instalments due and hence profit on hire purchase was wrongly computed. Few among them solved the problem under stock and debtors method which was not asked for in the question. (b) Many candidates failed to work out the profit /loss on sale of investments. They could not prepare the investment account showing value of holdings at the year end. Question 5.(b) Few candidates committed mistakes in calculation of cash flows from operating, investing and financing activities. Candidates erred in applying direct method for calculation of cash flow from operating activities. Question 6.(b) Very few candidates did not answer the question in line with AS 10 Accounting for Fixed Assets as they treated partial replacement of parts of the machinery as capital expenditure. (d) Many candidates failed to arrive at the correct value of inventory by applying the provisions of AS 2 Valuation of Inventories. PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION Part I Laws Question 1. The first part of the question was with reference to Section 69 of the Indian Contract Act, 1872 and most of the candidates did not refer the said section in support of their answers. Though the answers given by them were correct, it was generalized one. In the given problem arrears of house tax were cleared by the lessee on behalf the lessor to the Municipal Corporation. Candidates did not underscore the point that the lessee in the given case is an interested party and paid the said sum on behalf of another who is bound to pay. Hence the lessee (W) is entitled to get reimbursed from the lessor (Z) for the arrears of tax paid to the Municipal Corporation.
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In the second part of the question relating to given statements, whether they are correct or incorrect, candidates were able to state only correct or incorrect as the case may be, but reasoning was not with reference to the particular section dealt by the respective law(s) namely, the Payment of Bonus Act, 1965 and the Indian Contract Act, 1872. This suggests that candidates while reading the subject of law should understand the textual material with the help of the provision as given in the Bare Act. In the third part of the question consisting of multiple choice questions, some candidates were not able to reason out the choice of their answers. In respect of question relating to Negotiable Instruments Act, 1881, candidates should equip themselves thoroughly the rudimentary and practicality of sections. Question 2. The problem as stated in the question related to the consequences if there is reduction in the membership of a public company below the statutory minimum (i.e. 7) as prescribed in Section 45 of the Companies Act, 1956. The crucial part of the answer which candidates should have included in their answer is that the company should have carried on its business with reduced membership for more than 6 months and then members remaining who are aware of this fact will be personally and severally liable for all debts. In the multiple objective type questions, performance in general were satisfactory, as questions were straight-forward. Question 3. On the review of the candidates preparation in this subject in general, it is apparent that candidates are experiencing difficulty in consuming the subject of Negotiable Instruments Act, 1881 as it criss-crosses different types of instruments and their application in practical situations. May be due to the voluminous of the Act, numbering around 142 sections, candidates are feeling it heavy-weight on their load for understanding. The problem as given in the question was treated very generally as candidates were not able to spot the correct section which dealt with the situation. (i.e. rights of a holder-in-due course in a suit as stated by Section 120 of the Negotiable Instruments Act, 1881). Question 4. The question was with reference to the applicability of the Payment of Bonus Act, 1965 to the establishment in Public Sector. This question required two explanations. On the first part, that establishment in the Public Sector is not covered by the provisions of the Act which is provided in Section 20. However, if the income from such sale or service or both is not less than 20% of its gross income, then the provisions of the Act shall apply in relation to such establishments. Candidates could not understand the intricacies and nuances of the said provision and hence wrote general answers with weak support. Question 5. The question was with reference to Section 7F of the Employees Provident Funds and Miscellaneous Provisions Act, 1952. In the instant problem, the question was whether a person who was appointed as a Presiding Officer of EPF Appellate Tribunal can resign from his office without handing over his charge to the incumbent. The answer is No. Some candidates have treated the question in a general way stating that it is
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prerogative of the Officer to resign as such and need not necessarily hand over the charge. Question 6. From the review of analysis of the performance in the Law segment, it is understood, that candidates have not paid their attention and preparation in analyzing the various practical situations for which one has to resort to the guidance of section. How to categorize an establishment as an seasonal establishment was not known to many. Question 7. The grounds on which the Chairman of a meeting can invalidate the casting of vote by a member were not known to many candidates. Section 181 of the Companies Act, 1956 lays down the grounds on which the right of a shareholder to vote at the meeting can be excluded. Question 8. The question was with reference to the extent of the powers or objects of company can extend. The candidates overall did their fine part in the question by giving not only the correct answers but were also able to cite the case law on the matter i.e. Ashbury Railways Carriage Company vs. Riche). This is particularly encouraging and pleasing to see their performance and it is hoped that that they extend their knowledge to other parts of the subject as well to give an impression that they are totally prepared and equipped in answering the questions. Question 9. The answer to the question is to be decided based on an English Case law, as the Companies Act, 1956 is apparently silent on the matter. Though it is difficult to pin point the exact case law on the matter ie. Cousins vs. International Brick Company Ltd, students used their commonsense approach in solving the problem correctly. Question 10 It is quite important for the CA students that the programmes that are floated, implemented and in operation should be well within domain of their knowledge as it one who is in the profession is ultimately and closely associated with such programmes of the Government in one way or other. The question was with reference to the MCA 21 introduced by the Ministry of Corporate Affairs on e-governance which received an overall appreciation and acclamation from various quarters. Candidates were not able to do full justice to the question, though they could only outline or give sketchy answers based on general awareness. PART II ETHICS Question 11. Ethics is one area where candidates are experiencing lot of difficulties, as it primarily deals with various concepts, terminologies and unless one has gone through the study material it could be difficult to write with crispness and clarity. Candidates could not explain the concept of green accounting system and most of the answers were vague and revealed complete out of reach area for them. Question 12. The safeguards that should be adopted for overcoming threats faced by an accounting and finance profession are again an area for which they were not fully prepared and equipped. It should be remembered that those safeguards are only at an acceptable level and safeguards be classified into those at the profession, legislation or regulative level and the other at the work environment level. Most of the answers were based on guess work and recollection of points here and there.
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Question 13. Many candidates could answer this question based on correct or incorrect statement very well with one exception that reasons adduced to their answers were general and not logical. Many were not aware of what is sustainable development and they simple thought in laymans knowledge that it is closely linked to Corporate Social Responsibility (CSR). Similarly to statement whether a good environmental practice improves corporate performance, the obvious answer which many wrote was yes. It is encouraging to note that the awareness has percolated among the students community. PART III - COMMUNICATION Question 14..This question splits into two parts, each part carrying 5 marks each. (a) In this part, examinees were required to explain the functions of interpersonal communication. This question was answered by most of the students. However, some students provided meaning and principles of interpersonal communication which is not required. Students are advised to understand the language of the question and to remain specific in attempting such questions. (b) Most of the examinees were unable to write the answer correctly. They failed to differentiate the difference between notice and minutes of a business meeting. Hence, wrote the Minutes of Annual General Meeting instead of Statutory Meeting. The significant number of the students approached the question from the perspective of Annual General Meeting. The students must read the actual words and deal with what was asked and not waste their time on writing unnecessary information. Question 15. Most of the examinees attempted this answer but majority of them did not mention the schedule and witness that needs to be given towards the concluding part of the lease deed. The problem stemmed from a general lack of practical knowledge. The students are advised to be specific in mentioning only relevant terms and conditions of the lease deed as per the agreement given in the question. Question 16. In general, the students were able to highlight the contents of annual report but a few examinees misunderstood the question and defined the meaning of annual report or mentioned contents of Audit Report rather contents of Annual Report of company. The students seemed to know and write a lot about what was irrelevant but not enough about what was relevant. In answering such a question, the students are expected to mention only important and relevant heads. PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Question 1.(i) This theory question related to Basic Concepts of Cost Accounting invited the examinees to demonstrate their knowledge in the concept of Cost Accounting and stating its objectives. It was attempted by majority of the examinees. But the most of them had written the definition of cost accounting incorrectly. (ii) This theory question requires a sound knowledge of overheads. This question related to Difference between Fixed Overheads and Variable Overheads was attempted
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by the majority of the candidates. Many out of them were able to answer it correctly. However examples of variable overheads and fixed overheads were missing from the answers given by them in many cases. (iii) This practical question part related to Material was attempted by majority of the students. But the examinees were confused about the concept of Re-order Quantity and only a handful number of examinees were able to calculate it accurately. (iv) This theory question related to Marginal costing was answered by many of the students. Many of the examinees were not clear about the concept of Key Factor. Definition and examples of Key Factor given by the examinees was not entirely correct. (v) This theory question part related to Non-Integrated Accounts was answered by many of the students. But the advantages of the Integrated Accounts given by the candidates were very sketchy. Very few had mentioned that how Integrated Accounts could be economical for the organisation. Question 2. This numerical question was a multifunctional one and comprised of two parts. The part (i) asked the candidates to prepare contract A/c and do an analysis for Admissible Escalation Claim. Part (ii) intended to test the candidates capability to calculate Material and Labour Variances. The candidates performed relatively better in part (ii) than in part (i). (i) In this part, the majority of the candidates were not able to calculate the exact escalation amount and the final contract price. Many examinees had taken the figure of Contractees A/c as 15, 00,000 instead of 15, 54,000 after adjusting Escalation Claim. (ii) The second part of the question related to the calculation of material and labour variances was well attempted by the students. But many of the examinees had forgotten to give the verification for both material and labour variances. Question 3. The question was divided into two parts. Part (a) asked the candidates to demonstrate their knowledge in the area of Process Costing by preparing Process Accounts while calculating profit element at each stage. Part (b) tested the candidates knowledge in the area of Operating Costing in which examinees were required to calculate the bus fare to be charged from each passenger per kilometre. Part (a) of this question was attempted by all most all the candidates. However, many of the examinees were not able to prepare all the Process A/c correctly. Candidates had also committed mistakes in the valuation of inter-process profit. In relation to part (b), which was answered by majority of the students, candidates failed to calculate the per passenger kilometre cost. Some of the students had calculated the Salaries of Drivers and Diesel Cost incorrectly. Question 4. (i) This numerical question related to Marginal Costing was answered by majority of candidates. The examinees were able to calculate p/v ratio, total fixed cost and desired sales appropriately.
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(ii) This theory question part related to Overheads was not correctly answered by majority number of candidates. The examinees had not perfectly explained the treatment of over and under absorption of overheads in cost accounting. (iii) This theory question related to labour is attempted by the large number of students. However, some of the examinees were not able to state precisely as to which is better plan out of Halsey 50 percent bonus and Rowan bonus scheme. But the situation in which worker get the same bonus in both the schemes was correctly answered by the most of the students. Question 5. (i) Most of the candidates have just explained Capital Structure and could not differentiate it with Financial Structure. (ii) Many of the candidates explained the meaning of accounts receivables instead of writing on Accounts Receivable System. (iv) Majority of the candidates only enumerated two or three Forms of Bank Credit. Some even mentioned maximum permissible banking finance (MPBF) as forms of bank credit. (v) A large percentage of the candidates computed the Compound Value and Compound Interest by taking into consideration 8 percent compounded annually rather than semiannually as mentioned in the question. Question 6.(a) Majority of the candidates prepared the Balance Sheet on correct lines. However, few of the candidates could not compute Reserves and Surplus and Share Capital figures correctly. (b) A large number of the candidates could not compute the provision for contingencies correctly. They straightaway calculated 10 percent of working capital before provision instead of one-ninth to arrive at the figure for working capital requirement. Question 7.(a) A large percentage of the candidates did not arrive at the correct figures of discounted payback period and internal rate of return for the two machines and hence ended up giving the wrong advice to the management. (b) This part of the question was attempted by majority of the candidates. However, only few candidates could calculate amount collected from debtors, payment of wages and the amount of fixed deposit to be maintained correctly. Further, few candidates have also not presented their answers supported by proper working notes in preparation of cash budget. Question 8.(ii) Most of the candidates limited the Role of a Chief Financial Officer (CFO) to procurement and effective utilization of funds only. PAPER 4 : TAXATION Question 1. Most of the candidates were not aware of the head of income under which salary received by a working partner is taxable. They have wrongly answered that the
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same is taxable under the head Salaries. Some of the candidates have not aggregated agricultural income for computation of tax liability. Further, they have not been able to explain applicability of provisions of section 234A and 234B. Some other common mistakes committed by the candidates are as under: (i) Non-provision of deduction of 30% from arrears of rent while computing income under the head Income of house property. (ii) Non-deduction of advance tax and TDS while computing the tax payable. (iii) Failure to disallow proportionate depreciation in respect of personal use of car. (iv) Failure to compute additional depreciation Question 2.(a) Most of the candidates have not applied Rule 7B of Income-tax Rules, 1962 in computing the income from composite business of growing and curing coffee. Rule 7B requires segregation of agricultural income (75%) and business income (25%), which the candidates were not aware of. Some of the candidates who have segregated the income have applied the wrong percentage for segregation. (b) Most of the candidates were not aware of the provisions of section 50C. Many of them have not bifurcated long term capital gains on sale of land from short term capital gains on sale of building. Some candidates who have bifurcated the capital gains, have taken the benefit of indexation even in the case of short term capital gains on sale of building. Question 3 The answers exhibited lack of clarity of the provisions of residential status and scope of total income. In some answers, the agricultural income and dividend from an Indian company have been taken as taxable in all the three cases, whereas these income are exempt under section 10. Question 4.(a) Many of the candidates were neither aware of the amendment in section 40A(3) increasing the limit specified therein from Rs.20,000 to Rs.35,000 in case of payments to transport contractors nor of the amendment in section 194C exempting the application of the provisions of tax deduction at source in case of payments to transport contractors who have furnished their permanent account number. Their answers were instead based on the earlier provisions. (b) Most of the candidates were not aware of the conditions to be fulfilled under section 12A for applicability of the exemption provisions contained in sections 11 and 12. Instead, they have written about charitable institutions in general, books of accounts to be maintained etc. which are totally irrelevant to the question asked. (c) Majority of the candidates were not aware of the requirements of section 139(6) and their answers were general and vague. Question 5.(a) Indian territorial waters extend up to 12 nautical miles from the Indian land mass. However, varied answers on the same were provided by candidates. For instance, few candidates wrote that Indian territorial waters extend up to 8 nautical miles while few others wrote that they extend up to 1,200 nautical miles.
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Question 6. (a) Many candidates were not aware of the provisions relating to the service tax liability on the advances received from clients. Few candidates were not conversant with the concept that the service tax liability arises only on receipt basis irrespective of the system of accounting being followed. Further, in order to arrive at the value of taxable services, TDS has to be added to the amount received. However, almost all the candidates had committed mistake in this point. (b) (i) Few candidates were not even aware of the fact that there exists an option to pay service tax at a rate different from the general rate. Many candidates provided the incorrect special rate of service tax in the case of purchase and sale of foreign currency. Question 7.(b) Few candidates provided the threshold exemption limit as 40 lakh or 50 lakh. Question 8.(a) Few candidates applied same VAT rate on all goods namely A, B & C. (b) (ii) Instead of writing the importance of VAT invoice, few candidates mentioned the importance of VAT.
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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

Summary of Examiners comments on the performance of the candidates

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010

(iii) Date Particulars

Amount (Cr.) Rs.

94,500 500 95,000

No. of days from 20th January 0 42 75 100

Product 0 3,36,000 4,50,000 11,00,000 18,86,000

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010

Rs. 1,00,000 80,000 64,000 2,44,000 51,200

Rs.60lakhs = Rs.33 lakhs Rs.80lakhs

2 IInd year = Rs.60,000 = Rs.20,000 6 IIIrd year = Rs.60,000

31.3.2009 Rs. 2,34,000 3,20,000 ? ? 1,90,000 80,000 20,000

2,60,000 2,45,000 1,25,000 1,10,000 1,35,000 70,000 19,000

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010

Opening stock Purchases: Cash Credit (W.N. 2)

2,45,000 By 6,15,000 15,00,000 By 6,80,000 30,40,000

2,37,000 81,000 20,000

Gross profit b/d Discount received

Depreciation on furniture & fixtures Net profit

26,000 2,16,000 7,12,000

Capital Opening balance (W.N.7)

Current liabilities & provisions:

Creditors Bills payable Outstanding salaries

Bills Payable Account Rs. Rs.

To Cash/Bank To Balance c/d

4,30,000 80,000 5,10,000

Balance b/d Trade creditors (Bal. fig.)

70,000 4,40,000 5,10,000

Creditors Account Rs. Rs.

To Cash/Bank To Bills payable (W.N.1) To Discount received To Balance c/d A/c

9,73,000 By 4,40,000 By 32,000 1,90,000 16,35,000

Balance b/d Credit purchases (Bal. fig.)

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010

Calculation of credit sales Rs.

Cost of goods sold Gross profit ratio on sales

To Balance b/d To Credit sales (W.N.3)

1,25,000 11,00,000 12,25,000

Cash/Bank Discount allowed Balance c/d (Bal. fig.)

10,58,000 20,000 1,47,000 12,25,000

Salaries paid during the year

2,36,000 20,000 2,56,000 19,000 2,37,000

Outstanding salaries as on 31.3.2009 Outstanding salaries as on 31.03.2008

Balance b/d Cash sales Debtors

1,10,000 By 16,20,000 By 10,58,000 By

Cash purchases Creditors Bills payable

6,15,000 9,73,000 4,30,000

Drawings Salaries Rent Sundry trade expenses Balance c/d

1,20,000 2,36,000 1,32,000 81,000 2,01,000 27,88,000

as at 31st March, 2008 Rs. Rs.

Creditors Bills payable Outstanding salaries Capital (Bal. fig.)

2,60,000 2,45,000 1,25,000 1,10,000 7,40,000

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010

1,26,000 20,000 1,13,000 1,10,000 11,25,000

15,000 4,00,000 80,000 1,60,000 3,45,000 10,00,000

Discharge of purchase consideration:

1,13,000 20,000 1,10,000 4,000 10,00,000 79,500

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2010

Cash and Bank Account Rs. Rs.