S A Ipcc Nov 2011 - GR I

9
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP I
Volume 5
& ACCOUNTING TECHNICIAN EXAMINATION
Suggested Answers
November, 2011
The Institute of Chartered Accountants of India

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

NOVEMBER, 2011
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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: :
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: : : :
bosnoida@icai.org ` 40/978-81-8441-521-6 The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi- 110 002, India Typeset and designed at Board of Studies.
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Contents
Page Nos. Paper 1. Paper 2. Paper 3. Paper 4 Accounting ........................................................................................... 1 24 Business Laws, Ethics and Communication .........................................25 38 Cost Accounting and Financial Management .......................................39 60 Taxation ..............................................................................................61 84
Examiners comments on the performance of the candidates
PAPER 1 : ACCOUNTING Question No. 1 is compulsory Answer any five questions from the remaining six questions. Wherever appropriate, suitable assumption/s should be made and indicated in answer by the candidate. Working notes should form part of the answer. Question 1 Answer the following questions: (a) Calculate the maximum remuneration payable to the Managing Director based on effective capital of a non-investment company for the year, from the information given below:
(` in000)
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Profit for the year (calculated as per Section 349, 350 & 351 of the Companies Act, 1956) Paid up capital Reserves & surplus Securities premium Long term loans Investment Preliminary expenses not written off Remuneration paid to the Managing Director during the year 3,000 18,000 7,200 1,200 6,000 3,600 3,000 600
(b) M/s Vijoy Electricals sends goods to its customers on sale or returnable basis. The following transactions took place during January to March 2011: 2011 January-10 January -30 February -28 March -31 Sent goods to customers on sale or returnable basis at cost plus 25% Goods returned by customers Received letter of approval from customers Goods with customers awaiting approval
`
5,00,000 2,00,000 2,00,000 1,00,000
Vijoy Electricals records sale or return transactions as ordinary sales transaction. You are required to pass the necessary journal entries in the books of account assuming that the accounting year closes on 31st March, 2011.
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011
(c) In the Trial Balance of M/s. Sun Ltd. as on 31-3-2011, balance of machinery appears ` 5,60,000. The company follows rate of depreciation on machinery @ 10% p.a. on Straight Line Method. On scrutiny it was found that a machine appearing in the books on 1-4-2010 at ` 1,60,000 was disposed of on 30-9-2010 at ` 1,35,000 in part exchange of a new machine costing ` 1,50,000. You are required to calculate: (i) (ii) Total depreciation to be charged in the Profit and Loss Account. Loss on exchange of machine.
(iii) Book value of machinery in the Balance Sheet as on 31.3.2011. (d) A and B are in partnership sharing profits and losses in the ratio of 3:2. The capitals of A and B are ` 80,000 and ` 60,000 respectively. They admit C as a partner who contributes ` 35,000 as capital for 1/5th share of profits to be acquired equally from both A & B. The capital accounts of old partners are to be adjusted on the basis of the proportion of Cs capital to his share in the business. Calculate the amount of actual cash to be paid off or brought in by the old partners for the purpose and pass the necessary journal entries. (4 x 5 = 20 Marks) Answer (a) Calculation of Effective Capitalof the Company ` in '000 Paid-up capital Add: Reserves and surplus Securities premium Long term loans Less: Investments Preliminary expenses 3,600 3,000 (6,600) 25,800 18,000 7,200 1,200 6,000 32,400
Effective capital for the purpose of managerial remuneration
Straight line method given in the question should be read as Written Down Value method due to absence of related information for solving the question on the basis of straight line method. It is assumed that the company is having inadequate net profit and is not exceeding the ceiling limit of ` 24,00,000 p.a.
PAPER 1 : ACCOUNTING
As effective capital is less than ` 5 crores but more than ` 1 crore, therefore maximum remuneration payable to the Managing Director should be @ ` 1,00,000 per month. So, maximum remuneration payable to the Managing Director for the year (` 1,00,000 x 12) = ` 12,00,000. (b) Date 2011 Jan.10 In the books of M/s. Vijoy Electricals Journal Entries Particulars Sundry Debtors Account Dr. Debit Credit
`
5,00,000 To Sales Account (Being the goods sent to customers on sale or returnable basis)
`
5,00,000
Jan.30
Returns Inward Account* To Sundry Debtors Account
Dr.
2,00,000 2,00,000
(Being the goods returned by customers as not approved or cancellation of sales on return of goods) Feb.28 No entry on receiving letter of approval from the customer Mar. 31 Sales Account To Sundry Debtors Account (Being cancellation of original entry at the year end on goods with customer awaiting approval) Mar. 31 Stock with customer on sale or return Account Dr. To Trading Account (Refer W.N.) (Being the adjustment for cost of goods lying with customers awaiting approval at the year end) * Alternatively, Sales account can be debited in place of Returns Inward account. Working Note: Cost of goods with customers = 80,000 80,000 Dr. 1,00,000 1,00,000
` 1,00,000 100 = ` 80,000. 125
(c) (i)
Total Depreciation to be charged in the Profit and Loss Account
` Depreciation on old machinery in use [10% of (5,60,000-1,60,000)]

Add: Depreciation on new machine @ 10% for six months 6 1,50,000 10% 12
40,000 7,500 47,500
Total depreciation on machinery in use

Add: Depreciation on machine disposed of (10% for 6 months) 6 1,60,000 10% 12
8,000 55,500 `
So, total depreciation to be charged in Profit and Loss A/c

(ii) Loss on Exchange of Machine
Book value of machine as on 1.4.2010

Less: Depreciation for 6 months @ 10%
1,60,000 (8,000) 1,52,000 (1,35,000) 17,000 `
Written Down Value as on 30.9.2010

Less: Exchange value
Loss on exchange of machine

(iii) Book Value of Machinery in the Balance Sheet as on 31.03.2011
Balance as per trial balance

Less: Book value of machine sold Add: Purchase of new machine Less: Depreciation on machinery in use (d) Share of profit taken from A and B each= 1/5 x 1/2 = 1/10 each Calculation of New Profit Sharing Ratio
5,60,000 (1,60,000) 4,00,000 1,50,000 5,50,000 (47,500) 5,02,500
Existing ratio Less: Share of profit transferred to C New share
A 3/5 (1/10) 5/10
B 2/5 (1/10) 3/10
New profit sharing ratio of A:B:C = 5/10 : 3/10 : 2/10

Calculation of Total Capital of the Reconstituted Firm
Capital brought in by C for 1/5th share = ` 35,000 Total Capital = ` 35,000 x (5/1) = ` 1,75,000
Calculation of Actual Cash to be paid or brought in by old partners
A (`) New capital of ` 1,75,000 distributed in the ratio 5:3:2 87,500 Less: Adjusted old capital of A & B (80,000) Cash brought in 7,500 Cash to be paid Journal Entries
B (`) 52,500 (60,000) (7,500)

Dr.
C (`) 35,000 35,000
Cr. Amount
Particulars
L.F.
Amount
`
Cash A/c To As Capital A/c (Being the shortage of capital brought in cash by A) Bs Capital A/c To Cash A/c (Being the excess capital withdrawn by B)
Note: Entries for cash brought in and paid off only, have been passed. Question 2 The Balance Sheet of M/s. Ice Ltd. as on 31-03-2011 is given below: Liabilities 1,00,000 Equity shares ` 10 each fully paid up of
`
7,500
Dr.
7,500
Dr.
7,500 7,500
` Assets
10,00,000 Freehold property Plant and machinery 4,00,000 Trade investment (at cost) Sundry debtors
`
5,50,000 2,00,000 2,00,000 4,50,000
4,000, 8% Preference shares of ` 100 each fully paid
6% Debentures (secured by freehold property) Arrear interest Sundry creditors Directors loan
4,00,000
Stock-in trade Deferred advertisement expenses
3,00,000 50,000 4,75,000 22,25,000
24,000
4,24,000 3,00,000 22,25,000
1,01,000 Profit and loss account
The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective stakeholders: (i) Preference shares are to be written down to ` 80 each and equity shares to ` 2 each. (ii) Preference dividend in arrear for 3 years to be waived by 2/3rd and for balance 1/3rd, equity shares of ` 2 each to be allotted. (iii) Debentureholders agreed to take one freehold property at its book value of ` 3,00,000 in part payment of their holding. Balance debentures to remain as liability of the company. (iv) Arrear debenture interest to be paid in cash. (v) Remaining freehold property to be valued at ` 4,00,000. (vi) Investment sold out for ` 2,50,000. (vii) 75% of Directors loan to be waived and for the balance, equity shares of ` 2 each to be allotted. (viii) 40% of sundry debtors, 80% of stock and 100% of deferred advertisement expenses to be written off. (ix) Companys contractual commitments amounting to ` 6,00,000 have been settled by paying 5% penalty of contract value. Show the Journal Entries for giving effect to the internal re-construction and draw the Balance Sheet of the company after effecting the scheme. (16 Marks) Answer In the books of Ice Ltd. Journal Entries Particulars Debit Credit
`
i 8% Preference share capital A/c (` 100 each) To 8% Preference share capital A/c (` 80 each)
`
3,20,000
Dr.
4,00,000
As per para 56 of AS 26, deferred advertisement expenses should not appear in the Balance Sheet.
To Capital reduction A/c (Being the preference shares of ` 100 each reduced to ` 80 each as per the approved scheme) ii Equity share capital A/c (` 10 each) To Equity share capital A/c (` 2 each) To Capital reduction A/c (Being the equity shares of ` 10 each reduced to ` 2 each) iii Capital reduction A/c To Equity share capital A/c (` 2 each) (Being arrears of preference share dividend of one year to be satisfied by issue of 16,000 equity shares of ` 2 each) iv 6% Debentures A/c To Freehold property A/c (Being claim settled in part by transfer of freehold property) v Accrued debenture interest A/c To Bank A/c (Being accrued debenture interest paid) vi Freehold property A/c To Capital reduction A/c (Being appreciation in the value of freehold property) vii Bank A/c To Trade investment A/c To Capital reduction A/c (Being trade investment sold on profit) viii Directors loan A/c To Equity share capital A/c (` 2 each) To Capital reduction A/c (Being directors loan waived by 75% and balance being discharged by issue of 37,500 equity shares of ` 2 each) Dr. 3,00,000 Dr. 2,50,000 Dr. 1,50,000 Dr. 24,000 Dr. 3,00,000 Dr. 32,000 Dr. 10,00,000
80,000
2,00,000 8,00,000
32,000
3,00,000
24,000
1,50,000
2,00,000 50,000
75,000 2,25,000
ix
Capital Reduction A/c To Profit and loss A/c To Sundry debtors A/c To Stock-in-trade A/c To Deferred advertisement expenses A/c To Bank A/c To Capital reserve A/c (Being various assets, penalty on cancellation of contract, profit and loss account debit balance written off, and balance transferred to capital reserve account as per the scheme)
Dr.
12,73,000 4,75,000 1,80,000 2,40,000 50,000 30,000 2,98,000
Balance Sheet of Ice Ltd. (As reduced) Liabilities
` Assets
Freehold property 3,07,000 Plant and machinery Sundry debtors Stock-in-trade Cash at bank 3,20,000 (2,50,000 24,000 2,98,000 30,000) 1,00,000 1,01,000 11,26,000
`
4,00,000 2,00,000 2,70,000 60,000 1,96,000
Share capital 1,53,500 Equity shares of ` 2 each (out of which 53,500 shares have been issued for consideration other than cash) 4,000, 8% Preference shares of ` 80 each fully paid up Capital reserve 6% Debentures Sundry creditors
Question 3
11,26,000
Bear Bar club was registered in a city and the accountant prepared the following Receipts and Payments Account for the year ended 31st March, 2011 and showed a deficit of ` 14,520. Receipts Subscriptions Fair receipts Variety show receipt (net) Interest Bar collection Amount Payments Amount
`
62,130 Premises 7,200 Honorarium to Secretary 12,810 Rent 690 Rates & taxes 22,350 Printing & stationary
`
30,000 12,000 2,400 3,780 1,410
Excess cash spent Deficit
1,000 Sundry expenses 14,520 Wages Fair expenses Bar purchases payments Repair New car (less proceeds of old car ` 9,000) 1,20,700
5,350 2,520 7,170 17,310 960 37,800 1,20,700 01-04-2010 450 24,690 270 3,600 87,000 56,400 36,570 30,870 2,130 1,770 31-03-2011 10,440 90 2,940 1,17,000 46,800 2,610 1,290
The following additional information are: Cash in hand Bank balances as per pass book Cheque issued but not presented - for sundry expenses Subscriptions due Premises at cost Accumulated depreciation on premises Car at cost Accumulated depreciation on car Bar stock Creditors for the bar purchases
Cash excess spent represent honorarium to secretary not withdrawn due to cash deficit. His annual honorarium is ` 12,000. Depreciation on premises and car is to be provided at 5% and 20% on written down value method. You are required to prepare the correct Receipts and Payments Account, Income and (16 Marks) Expenditure Account and Balance Sheet as on 31st March, 2011. Answer In the books of Bear Bar Club Receipts & Payments Account for the year ended 31.03.2011 Receipts Amount Payments Amount
`
To Balance b/d Cash in hand Bank (W.N.6) 450 24,420 By Honorarium to Secretary (12,000 1,000) 24,870 By Rent
`
11,000 2,400
10
To Subscriptions To Fair receipts To Variety show receipts To Interest To Bar collection To Car sold (old)
62,130 By Rates & taxes 7,200 By Printing & stationery 12,810 By Sundry expenses 690 By Wages 22,350 By Fair expenses 9,000 By Bar purchases By Repairs By Premises By Car (37,800 + 9,000) By Balance c/d Bank (W.N.6) 1,39,050
Income & Expenditure Account for the year ended 31.03.2011
3,780 1,410 5,350 2,520 7,170 17,310 960 30,000 46,800 10,350 1,39,050
Expenditure
Amount Income
Amount
`
To Honorarium to secretary To Rent To Rates & taxes To Printing & stationery To Sundry expenses To Wages To Repairs To Depreciation on: Premises (1,530+1,500) Car To Surplus (excess of income over expenditure) 9,360 43,490 84,300 12,000 By Subscription 2,400 3,780 5,350
Less: Outstanding as on 1.4.10 Add: Outstanding as on 1.3.11 Less: Fair expenses
`
62,130 (3,600) 2,940 61,470 7,200 (7,170) 30 12,810 690 6,000 3,300
1,410 By Fair receipts 2,520 By Variety show 960 By Interest By Profit from bar (W.N.3) 3,030 By Profit on sale of car (W.N.5)
84,300
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Balance Sheet as on 31.03.2011 Liabilities Amount Assets Amount
`
Capital fund Opening balance (W.N.1)
Add: Surplus
`
Premises 87,000 30,000 1,17,000 (59,430) 36,570 46,800 83,370
Less: Book value of the car sold Less: Depreciation of new car Add: Addition in the year
65,130 43,490 1,08,620
Sundry creditors Outstanding Honorarium
1,290 Less: Accumulated depreciation (W.N.4) 1,000 Car

Add: Addition in the year
57,570
(36,570) (9,360) 37,440 2,610 2,940 10,350 1,10,910
Bar stock Subscription due Cash at bank (W.N.6) 1,10,910

Working Notes: 1. Liabilities Balance Sheet as on 31.03.2010 Amount Assets
Amount
`
Capital fund (bal. fig.) Sundry creditors for bar Accumulated depreciation on Premises Car 56,400 30,870 65,130 Premises 1,770 Car Bar stock Subscription due 87,270 Cash at bank (W.N.6) Cash in hand 1,54,170
`
87,000 36,570 2,130 3,600 24,420 450 1,54,170
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2.
Creditors for Bar Purchases
` To Bank To Balance c/d 17,310 By Balance b/d 1,290 By Purchases (Bal. fig.) 18,600
3. Trading Account (of Bar)
` 1,770 16,830 18,600
` To Opening stock To Purchases (W.N.2) To Profit (Bal. fig.) 2,130 By Bar collections 16,830 24,960
4. Accumulated Depreciation on Premises
` 22,350 2,610 24,960 (Cash)
6,000 By Closing stock
` Opening Balance
Add: Depreciation on old premises [(87,000 56,400) 5%]
56,400 1,530 1,500 59,430
Depreciation on new premises (30,000 5%)
5.
Profit on sale of car
` Sales price of a car

Less: Book value of old car sold Less: Accumulated depreciation
` 9,000
36,570 (30,870) (5,700) 3,300
Profit on sale
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6.
Bank balance as per cash book 1.4.2010 31.3.2011
`
Bank balance as per Pass book
Less: Cheque issued but not presented for payment
`
10,440 (90) 10,350
24,690 (270) 24,420
Bank balance as per cash book

Question 4
(a) Balance Sheet of M/s Hero Ltd. as on 31st March, 2010 and 2011 are as follows: (` in 000) Liabilities Equity share capital Capital reserve General reserve Profit and loss A/c Long term loan from bank Sundry creditors Provision for taxation Proposed dividends Additional information: (i) (ii) Dividend of ` 1,00,000 was paid during the year ended 31st March, 2011. Machinery purchased during the year for ` 1,25,000. 31-3-10 31-03-11 Assets 1,000 250 150 500 500 50 100 2,550 1,150 Land & buildings 10 Machinery 300 Investments 180 Stock 400 Sundry debtors 400 Cash in hand 60 Cash at bank 125 2,625 2,550 2,625 31-3-10 31-03-11 500 750 100 300 400 200 300 480 820 50 280 420 165 410
(iii) Company sold some investment at a profit of ` 10,000 which was credited to capital reserve. (iv) Depreciation written off on land and building ` 20,000. (v) Income tax provided during the year ` 55,000. From the above particulars, prepare a cash flow statement for the year ended 31st March, 2011 as per AS 3 using indirect method. (b) A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets Itself incorporated as a company on 1st November, 2010. The first accounts are drawn upto
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31st March 2011. The gross profit for the period is ` 56,000. The general expenses are ` 14,220; Director's fee ` 12,000 p.a.; Incorporation expenses ` 1,500. Rent upto 31st December was ` 1,200 p.a after which it is increased to ` 3,000 p.a. Salary of the manager, who upon incorporation of the company was made a director, is ` 6,000 p.a. His remuneration thereafter is included in the above figure of fee to the directors. Give profit and loss account showing pre and post incorporation profit. The net sales are ` 8,20,000, the monthly average of which for the first four months is one-half of that of the remaining period. The company earned a uniform profit. Interest and tax may be ignored. (10 + 6 = 16 Marks) Answer (a) Cash Flow Statement for the year ended on 31st March, 2011
`
I Cash flow from Operating Activities
Net profit made during the year (W.N.1)

Add: Depreciation on machinery (W.N.2) Add: Depreciation on land and building
2,60,000 55,000 20,000 3,35,000 20,000 (20,000) (1,00,000) (45,000) 1,90,000 (1,25,000) 60,000 (65,000) 1,50,000 bank (1,00,000) (1,00,000) (50,000)
Operating profit before change in working capital

Add: Decrease in stock (3,00,000 2,80,000) Less: Increase in sundry debtors(4,20,000 4,00,000) Less: Decrease in sundry creditors (5,00,000 4,00,000) Less: Income tax paid (W.N.3)
Net cash generated from operating activities

II Cash flow from Investing Activities
Purchase of machinery Sale of investment (50,000 + 10,000) Net cash used in investing activities
III Cash flow from Financing Activities
Issue of equity shares (11,50,000 10,00,000) Repayment of long (5,00,000 4,00,000) Dividend paid Net cash used in financing activities term loan from
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Net increase in cash and cash equivalent

Add: Cash and Cash Equivalents at the beginning of the period (2,00,000 + 3,00,000)
75,000 5,00,000 5,75,000
Cash and cash equivalents at the end of the period (1,65,000 + 4,10,000)
Working Notes: 1. Net profit (before tax) made during the year
`
30,000 50,000 55,000 1,25,000 2,60,000
Increase in Profit and Loss A/c balance (1,80,000 1,50,000)

Add: Transfer to General Reserve (3,00,000 2,50,000) Add: Provision for taxation made during the year
Add: Provided for proposed dividend during the year (W.N.4)

2. Machinery Account
`
To Balance b/d To Bank (machinery purchased)
3.
`
55,000 8,20,000 8,75,000
7,50,000 By Bank (machinery sold) (Bal. Fig.) 1,25,000 By Balance c/d 8,75,000
Provision for Taxation
`
To Cash (Bal. fig.) To Balance c/d
4.
`
50,000 55,000 1,05,000
45,000 By Balance b/d 60,000 By Profit & Loss A/c 1,05,000

Proposed Dividend A/c
`
To Bank To Balance c/d 1,00,000 By Balance b/d 1,25,000 By Profit & Loss A/c (Bal. fig.) 2,25,000
`
1,00,000 1,25,000 2,25,000
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(b)
Particulars Basis
Profit & Loss Account for 9 months ended on 31st March, 2011
Pre Postincorporati incorporat on period ion period Total Particulars Basis PrePostIncorporati Incorporati on period on period Total
`
To General expenses To Directors fee To Formation expenses To Rent (600 + 750) To Managers salary To Net Profit transfd to: Capital Reserve P & L Appr. A/c Time ratio Actual Actual W.N. 2 Actual 6,320 400 2,000 7,280 16,000
`
7,900 5,000 1,500 950 24,650 40,000
`
14,220 By Gross Profit 5,000 1,500 1,350 2,000 31,930 56,000 Sales ratio
`
16,000
`
40,000
`
56,000
16,000
40,000
56,000
Working Notes: 1. Calculation of sales ratio
Let the average monthly sales of first four months = 100 and next five months The ratio of sales = 400 : 1,000 =2 : 5
2. Rent
= 200
Total sales of first four months = 100 x 4 = 400 and total sales of next five months = 200 x 5 = 1,000
Till 31st December, 2010, rent was ` 1,200 p.a. i.e. ` 100 p.m. So, Pre-incorporation rent = ` 100 x 4 months Post-incorporation rent = ` 400 = (`100 x 2 months) + (` 250 x 3 months) = ` 950
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Question 5 (a) A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2010. From the following particulars relating to the period from 1st April, 2010 to 31st August, 2010, you are requested to ascertain the amount of claim to be filed with the insurance company for the loss of stock. The concern had taken an insurance policy for ` 60,000 which is subject to an average clause.
`
(i) (ii) (iii) (iv) (v) (vi) (vii) Stock as per Balance Sheet at 31-03-2010 Purchases Wages (including wages for the installation of a machine ` 3,000) Sales Sale value of goods drawn by partners Cost of goods sent to consignee on 16th August, 2010, lying unsold with them Cost of goods distributed as free samples 31st 99,000 1,70,000 50,000 2,42,000 15,000 16,500 1,500
While valuing the stock at March, 2010, ` 1,000 were written off in respect of a slow moving item. The cost of which was ` 5,000. A portion of these goods were sold at a loss of ` 500 on the original cost of ` 2,500. The remainder of the stock is now estimated to be worth the original cost. The value of goods salvaged was estimated at ` 20,000. The average rate of gross profit was 20% throughout. (b) Explain the factors to be considered before selecting the pre-packaged accounting software. (10 + 6 = 16 Marks) Answer (a) Memorandum Trading Account for the period 1st April, 2010 to 31st August, 2010
Normal Items Abnormal Items Total Normal Abnormal Items Items Total
`
To Opening stock To Purchases (Refer W.N.) To Wages To Gross profit @ 20% 95,000 1,56,500 47,000 48,000 3,46,500
`
5,000 5,000
`
1,00,000 By Sales 1,56,500 By Goods sent to consignee 47,000 By Loss 48,000 By Closing stock (Bal.fig.) 3,51,500
`
2,40,000 16,500 90,000 3,46,500
`
2,000 500 2,500 5,000
`
2,42,000 16,500 500 92,500 3,51,500
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Statement of Claim for Loss of Stock
` Book value of stock as on 31.08.2010

Less: Stock salvaged
92,500 (20,000) 72,500
Loss of stock Amount of claim to be lodged with insurance company Policy value = Loss of stock x Value of stock on the date of fire = ` 72,500 x = ` 47,027
Working Note: Calculation of Adjusted Purchases
60,000 92,500
`
Purchases
Less: Drawings
1,70,000 (12,000) (1,500) 1,56,500
Free samples Adjusted purchases
(b) Some of the factors to be considered before selecting the pre-packaged accounting software are:
(a) Fulfillment of business requirements: The enterprise may try to match his requirement with the available solutions. (b) Completeness of reports: Some packages might provide extra reports or the reports match the requirements more then the others. (c) Ease of use: Some packages could be very detailed and cumbersome compare to the others. (d) Cost: The budgetary constraints could be an important deciding factor. (e) Reputation of Vendor: Vendor support is essential for any software. A stable vendor with good reputation and track records will always be preferred. (f)
Regular updates: Law is changing frequently. A vendor who is prepared to give updates will be preferred to a vendor unwilling to give updates.
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Question 6 (a) Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31st March, 2011: (`) Authorised capital: 50,000, 10% Preference shares of ` 10 each 2,00,000 Equity shares of ` 10 each Issued and subscribed capital: 40,000, 10% Preference shares of ` 10 each fully paid 1,80,000, Equity shares of ` 10 each, of which ` 7.50 paid up Reserves and Surplus: General reserve Capital reserve Securities premium Profit and loss account 2,40,000 1,50,000 50,000 3,00,000 4,00,000 13,50,000 5,00,000 20,00,000
On 1st April, 2011, the company has made a final call @ ` 2.50 each on 1,80,000 equity shares. The call money was received by 30th April, 2011. There after the company decided to capitalize its reserves by issuing bonus shares at the rate of one share for every three shares held. Securities premium of ` 50,000 includes a premium of ` 20,000 for shares issued to vendor for purchase of a special machinery. Capital reserve includes ` 60,000 being profit on exchange of plant and machinery. Show necessary Journal Entries in the books of the company and prepare the extract of the Balance Sheet after bonus issue. Necessary assumption, if any, should form part of your answer. (b) Mr. Black accepted the following bills drawn by Mr. White: Date of Bill 09-03-2010 16-03-2010 07-04-2010 18-05-2010 Period 4 months 3 months 5 months 3 months Amount (`) 4,000 5,000 6,000 5,000
He wants to pay all the bills on a single date. Interest chargeable is @ 18% p.a. and Mr. Black wants to save ` 150 on account of interest payment. Find out the date on
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which he has to effect the payment to save interest of ` 150. Base date to be taken shall be the earliest due date. (8 + 8 = 16 Marks) Answer (a) Date Particulars In the books of M/s. Yahoo Ltd. Journal Entries
`
Dr. 4,50,000
`
4,50,000
1.4.2011
Equity share final call A/c To Equity share capital A/c
(Being the final call of ` 2.50 per share on 1,80,000 equity shares made) 30.4.2011 Bank A/c To Equity share final call A/c (Being final call money on 1,80,000 shares received) 30.4.2011 Securities premium A/c (50,000 20,000) Capital reserve A/c (1,50,000 60,000) General reserve A/c Profit and loss A/c To Bonus to shareholders A/c (Being utilisation of reserves for bonus issue of one share for every three shares held) 30.4.2011 Bonus to equity shareholders A/c To Equity share capital A/c (Being bonus shares issued)
Extract of Balance Sheet (After bonus issue)
Dr.
4,50,000 4,50,000
Dr. Dr. Dr. Dr.
30,000 90,000 2,40,000 2,40,000 6,00,000
Dr.
6,00,000 6,00,000
Authorised capital: 50,000, 10% Preference shares of ` 10 each 2,40,000, Equity shares of ` 10 each (refer W.N.) Issued and subscribed capital: 40,000, 10% Preference shares of ` 10 each fully paid 2,40,000, Equity shares of ` 10 each fully paid
5,00,000 24,00,000 4,00,000 24,00,000
The word save should be read as earn for better understanding of the requirement of the question.
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(Out of the above, 60,000 equity shares of ` 10 each have been issued by way of bonus) Reserves and Surplus: Capital reserve Securities premium Profit and loss A/c (3,00,000 2,40,000)
Assumption:
60,000 20,000 60,000
1.
As per SEBI Guidelines, Capital Reserve and Securities Premium collected in cash only can be utilized for the purpose of issue of bonus shares. It is assumed that balance of capital reserve and securities premium is collected in cash only. It is also assumed that necessary resolutions have been passed and requisite legal requirements related to the issue of bonus shares have been complied with before issue of bonus shares.
2.
Working Note:
On the basis of the above assumptions, the Authorised Capital should be increased as under: Required for bonus issue
Less: Balance of authorised equity share capital (available)
` 6,00,000
(` 2,00,000)
` 4,00,000
Authorised capital to be increased

(b) Calculation of Average Due Date taking base date as 19.06.2010 Date of Bill Period Maturity date No. of days from the base date
Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) = ` 24,00,000.

Amount (`) Products
09.03.2010 16.03.2010 07.04.2010 18.05.2010
4 months 3 months 5 months 3 months
12.07.2010 19.06.2010 10.09.2010 21.08.2010

Total of pr oduct Total of amount
23 0 83 63
4,000 5,000 6,000 5,000 20,000
92,000 0 4,98,000 3,15,000 9,05,000
Average due date = Base date +
= 19.06.2010 +
9,05,000 = 45 days (approx.) 20,000
= 3rd August, 2010.
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Computation of date of payment to earn interest of ` 150
Interest per day = [` 20,000 x (18/100)]/365 days = ` 3,600/365 = ` 10 per day (approx.) To earn interest of ` 150, the payment should be made 15 days (` 150 / ` 10 per day) earlier to the due date. Accordingly, the date of payment would be: Date of payment to earn interest of ` 150 = 3rd August, 2010 15 days = 19th July, 2010.
Question 7 Answer any four of the following: (a) M/s. Tiger Ltd. allotted 7,500 equity shares of ` 100 each fully paid up to Lion Ltd. in consideration for supply of a special machinery. The shares exchanged for machinery are quoted at National Stock Exchange (NSE) at ` 95 per share, at the time of transaction. In the absence of fair market value of the machinery acquired, show how the value of the machinery would be recorded in the books of Tiger Ltd.? (b) M/s. Sea Ltd. recognized ` 5.00 lakhs, on accrual basis, income from dividend during the year 2010-11, on shares of the face value of ` 25.00 lakhs held by it in Rock Ltd. as at 31st March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011. However, dividend was declared on 30th June, 2011. Please state with reference to relevant Accounting Standard, whether the treatment accorded by Sea Ltd. is in order. (c) What disclosures should be made in the first financial statements following the amalgamation? (d) From the following data, show Profit and Loss A/c (Extract) as would appear in the books of a contractor following Accounting Standard-7:
(` in lakhs) Contract price (fixed) Cost incurred to date Estimated cost to complete 480.00 300.00 200.00
(e) M/s. Son Ltd. charged depreciation on its assets on SLM basis. In the year ended 31st March, 2011, it changed to WDV basis. The impact of the change when computed from the date of the assets putting into use amounts to ` 18 lakhs being additional depreciation. Discuss, when should an enterprise change method of charging depreciation and how it should be dealt with in the Profit and Loss Alc. (4 x 4 = 16 Marks) Answer (a) As per para 11 of AS 10 Accounting for Fixed Assets, fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its fair market value,
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or the fair market value of the securities issued, whichever is more clearly evident. Since, in the given situation, the market value of the shares exchanged for the asset is more clearly evident, the company should record the value of machinery at ` 7,12,500 (i.e., 7,500 shares x ` 95 per share) being the market price of the shares issued in exchange.
(b) Para 8.4 of AS 9 Revenue Recognition states that dividend from investments in shares are not recognized in the statement of Profit and Loss until the right to receive dividend is established.
In the given case, the dividend is proposed on 10th April, 2011, while it was declared on 30th June, 2011. Hence, the right to receive dividend is established on 30th June, 2011 only. Therefore, on applying the provisions stated in the standard, income from dividend on shares should be recognized by Sea Ltd. in the financial year 2011-2012 only. Therefore, the recognition of income from dividend of ` 5 lakhs, on accrual basis, in the financial year 2010-11 is not in accordance with AS 9.
(c) Para 24 of AS 14 Accounting for Amalgamations states that for all amalgamations (whether for amalgamations accounted for under the pooling of interests method or amalgamations accounted for under the purchase method), the following disclosures are considered appropriate in the first financial statements following the amalgamation:
(a) Names and general nature of business of the amalgamating companies; (b) Effective date of amalgamation for accounting purposes; (c) The method of accounting used to reflect the amalgamation; and (d) Particulars of the scheme sanctioned under a statute.
(d) Calculation of Estimated Total Cost (` in lakhs)
Cost incurred to date Estimate of cost to completion Estimated total cost in completing the contract Percentage of completion (300/500) x 100 = 60% Revenue recognised as a percentage to contract price = 60% of ` 480 lakhs = ` 288 lakhs
300 200 500
As per para 35 of AS 7 Construction Contracts, when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognised as an expense immediately. Accordingly, expenses to be recognized in the Profit and Loss Account will be
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(` in lakhs)
Total foreseeable loss (500-480)

Less: Loss for the current year (300-288)
20 (12) 8
Expected loss to be recognized immediately as per para 35 of AS 7

Profit and Loss A/c (An Extract) (` in lakhs)
(` in lakhs)
To Construction cost To Estimated loss on completion of contract
300 By Contract price 8 ?
288
(e) As per para 21 of AS 6 Depreciation Accounting, an enterprise can change one method of charging depreciation to another method only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts through statement of profit and loss in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss.
PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Question 1 (a) State, in brief, the grounds on the basis of which a contract is discharged under the provisions of the Indian Contract Act, 1872. (5 Marks) (b) What is the law and procedure for issuing a duplicate share certificate under the provisions of the Companies Act, 1956 in case the original share certificate is lost or destroyed? (5 Marks) (c) State with reasons whether the following statements are correct or incorrect: (1) Business ethics helps to promote public reputation. (2) A nation should satisfy its social and economic requirements without damaging the interest of future generations. (2 2 = 5 Marks) (d) What do you understand by ethical communication? What are its elements Answer (a) Discharge of Contract : A contract under the provisions of Indian Contract Act, 1872, may be discharged in any of the following ways: (1) Discharge by performance: Discharge by performance will take place when there is : (i) (ii) Actual performance (parties fulfilling obligations within time and in the manner prescribed); or Attempted performance (promisor offers to perform but promisee refuses to accept it). This is also known as tender. (5 Marks)
(2) Discharge by mutual agreement: Discharge also takes place where there is substitution [novation], rescission, alteration and remission. In all these cases old contract need not be performed. (3) Discharge by impossibility of performance: A situation of impossibility may have existed at the time of entering into the contract or it may have transpired subsequently (also known as supervening impossibility). Situations are destruction of the subject-matter, incapacity, declaration of war etc. (4) Discharge by lapse of time: Performance of contract has to be done within certain prescribed time. In other words it should be performed before it is barred by law of limitation. In such a case there is no remedy for the promisee. For example where the debt is barred by law of limitation.
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(5) Discharge by operation of law: Where the promisor dies or goes insolvent there is a discharge of contract by operation of law. (6) Discharge by breach of contract: Where there is a default by one party from performing his part of contract on due date then there is breach of contract. Breach of contract can be actual breach or anticipatory breach. Where a person repudiates a contract before the stipulated due date, it is anticipatory breach. (7) Discharge by remission or satisfaction: A promisee may remit the performance of the promise by the promisor. Here there is a discharge. Similarly the promisee may accept some other satisfaction. Then again there is a discharge on the ground of accord and satisfaction. (8) Under the provisions of the Indian Contract Act,1872 as contained in Section 67,when a promisee neglects or refuses to afford the promisor reasonable facilities or opportunities for performance, promisor is excused by such neglect or refusal. (b) Law for issuing a duplicate share certificate under the Companies Act, 1956:Section 84(2) of the Companies Act,1956 provides that a company may renew or issue a duplicate certificate if it is proved to have been lost or destroyed or having been defaced, mutilated or torned, after the certificate is surrendered to the company. Section 84(4) makes it obligatory for companies to follow the rules prescribed by Government known as - The Company (Issue of Certificate) Rules, 1960. Further, Section 84(4) of the Companies Act,1956 makes it obligatory for companies to follow the rules prescribed by the Government in regard to the following matters: (i) (ii) The form of a certificate (original or renewed or a duplicate thereof). The particulars to be entered in the Register of Members or in the register of renewed or duplicate certificate.
(iii) The form of such registers. (iv) The fee on payment of which the terms and conditions, if any including terms and conditions as to evidence and indemnity and reimbursement for expenses incurred in connection with investigating evidence on which a certificate may be renewed or duplicate thereof may be issued. Procedure: (i) The duplicate share certificate must not be issued in lieu of the lost or destroyed share certificate, without prior consent of the Board having been obtained or without payment having been made of fees not exceeding ` 2 on such reasonable terms as regards evidence, etc., as the Board thinks fit. [Rule 4(3)] When a certificate is issued in lieu of one lost or destroyed, it must contain the statement Duplicate issued is lieu of certificate N.... In addition, the word
(ii)
PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION
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duplicate shall be stamped or punched in bold letters across the face of the share certificate. [Rule 5(3)] (iii) Entries must also be made in a register in respect of certificates issued under renewed and duplicate certificates indicating against the names of members, the number and date of issue of certificate, in lieu whereof the new certificate has been issued. The entries should be authenticated either by the Secretary or by a person appointed by the Board. (c) (1) Correct: Ethics helps to promote a strong public image. An organization that pays attention to its ethics can portray a strong and positive image to the public. People see such organizations as valuing people more than profit and striving to operate with the integrity and honour. (2) Correct: An element of resource regeneration and positive approach to environment has to be incorporated in developmental programmes. Sustainable development is necessary because it meets the needs of the present without compromising the ability of future generations to meet their own needs. (d) According to the National communication Association, ethical communication is fundamental to responsible thinking, decision making and the development of relationship and communities within and across contexts, cultures, channels and media. Ethical communication enhances human worth and dignity by fostering, truthfulness, fairness, responsibility, personal integrity and respect for self and others. While unethical communication threatens the quality of all communication and consequently the well-being of individuals and the society in which we live. In nutshell ethical communicators have a well developed sense of social responsibility. An ethical communication is one which: (a) (i) (ii) includes all relevant information is true in every sense and is not deceptive in any way. is accurate and sincere. Avoids language that manipulates, discriminates or exaggerates. does not hide negative information behind an optimistic attitude . does not state opinions as facts. portrays graphic data fairly. What is the amount of minimum bonus to be paid to the employees under the provisions of the Payment of Bonus Act, 1965? (4 Marks) What is the law relating to recovery of amount of gratuity under the payment of Gratuity Act, 1972 in case the said amount is not paid by the employer? (4 Marks)
Question 2
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(b) What is the difference between Morals and Ethics? Answer (a) (i)
(4 Marks)
(c) Explain the significance of active listening in inter-personal communication skills. (4 Marks) Minimum Bonus under the Payment of Bonus Act, 1965: In accordance with the provisions of the Payment of Bonus Act,1965, every employer shall be bound to pay to every employee in respect of every accounting year, minimum bonus which shall be 8.33% of the salary or wage earned by the employee during the accounting year or ` 100, whichever is higher, whether or not the employer has any allocable surplus in the accounting year. But if the employee has not completed 15 years of age at the beginning of the accounting year he will be entitled to a minimum bonus which shall be 8.33% of the salary or wage during the accounting year or ` 60, whichever is higher. Even if the employer suffers losses during the accounting year he is bound to pay minimum bonus as prescribed by Section 10 of the Payment of Bonus Act,1965[State vs. Sardar Dalip Singh Majilhia, 1979, Lab. I.C. (913) (All)]. (ii) Law relating to recovery of gratuity under the Payment of Gratuity Act, 1972: As per the provision given under the Act, if the gratuity payable under the Act is not paid by the employer within the prescribed time, to the person entitled thereto, there the Controlling Authority shall issue a certificate for the amount to the Collector to recover the same along with the compound interest at such rate as prescribed by the Central Government from the date of expiry of the prescribed time as land revenue arrears to enable the person entitled to get the amount after receiving the application from the aggrieved person [Section 8]. Before issuing the certificate for such recovery the Controlling Authority shall give the employer a reasonable opportunity of showing cause against the issue of such certificate. The amount of interest payable under this Section shall not exceed the amount of gratuity payable under this Act in no case.[Section 8] (b) Moral vs. Ethics: Following are the points of difference between Ethics and Moral : (i) (ii) The word thics is derived from Ancient Greek thikos meaning haracter. The word moral is derived from Latin mos meaning ustom. Character is the essence of values and habits of a person or group. It severs the analysis and employment of concepts such as right and wrong, good and evil and acting with responsibility. Moral is defined as relating to principles of right and wrong.
(iii) Character is a personal attitude, while custom is defined by a group over a period of time. For example People have character, Societies have custom.
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(iv) Morals are accepted from an authority (such as cultural, religious etc.) while ethics are accepted because they follow from personally accepted principles. An ethical view might be based on an idea of personal property that should not be taken without social consent. Moral norms can usually be expressed as general rules and statements such as always tell the truth. (v) Morals work on smaller scale than ethics, more reliably, but by addressing human needs for belonging and emulation, while ethics has a much wider scope. (c) Significance of active listening: If one does not learn how to listen, a great deal of what people are trying to tell you would be missed. In addition, appropriate response would not be possible. Active listening is important for several reasons. First, it aids the organization in carrying out its mission. In addition, it helps individuals to advance in their careers. It provides information that helps them to learn about important happenings in the organization, as well as assisting them in doing their own jobs well. It also helps build strong personal relationships. Question 3 (a) What do you understand by coercion and undue influence under the provisions of the Indian Contract Act, 1872? What are the differences between them? (8 Marks) (b) State the Common Corporate Social responsibility (CSR) policies for business organizations. (4 Marks) (c) Point out the factors which lead to grapevine communication. Answer (a) Coercion and Undue Influence Meaning and Differences: Coercion is the committing, or threatening to commit any act forbidden by the Indian Penal Code 1860, or the unlawful detaining, or threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. (Section 15, The Indian Contract Act, 1872). A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage of the other. A person is deemed to be in a position to dominate the will of the other, when he holds authority, real or apparent over the other, or when he stands in a fiduciary relation to other (Section 16, The Indian Contract Act, 1872) Differences between Coercion and Undue Influence Nature of action: Coercion involves physical force and sometimes only threat. Undue influence involves only moral pressure. (4 Marks)
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Involvement of criminal action: Coercion involves committing or threatening to commit any act prohibited or forbidden by law, or detention or threatening to detain a person or property. In undue influence there is no such illegal act involved. Relationship between parties: In coercion there need not be any relationship between parties; whereas in undue influence, there must be some kind of relationship between parties, which enables to exercise undue influence over the other. Exercise by whom: Coercion need not proceed from the promisor. It also need not be directed against the promisee. Undue influence is always exercised by one on the other, both of whom are parties to a contract. Enforceability: Where there is coercion, the contract is voidable at the option of the party whose consent has been obtained by coercion. Where there is undue influence the contract is voidable or court may set it aside or enforce it in a modified form. Position of benefits received: In case of coercion, where the contract is rescinded by the aggrieved party any benefit received has to be restored back. In the case of undue influence, the court has discretion to pass orders for return of any such benefit or not to give any such directions. (b) Common Policies under CSR are as under: Commitment to diversity in hiring employees and barring discrimination; Adoption of internal controls reform in the wake of Enron and other accounting scandals; Management teams that view employees as assets rather than costs; High performance workplaces that integrate the views of line employees into decision-making processes; Adoption of operating policies that exceed compliance with social and environmental laws; Advanced resource productivity, focused on the use of natural resources in a more productive, efficient and profitable fashion (such as recycled content and product recycling); and Taking responsibility for conditions under which goods are produced directly or by contract employees domestically or abroad. Management teams that view employees as assets rather than costs; High performance workplaces that integrate the views of line employees into decision-making processes; Adoption of operating policies that exceed compliance with social and environmental laws;
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Advanced resource productivity, focused on the use of natural resources in a more productive, efficient and profitable fashion (such as recycled content and product recycling); and Taking responsibility for conditions under which goods are produced directly or by contract employees domestically or abroad.
(c) Factors that lead to grapevine communication: The grapevine becomes active when the following factors are present: (i) (ii) Feeling of uncertainty or lack of sense of direction when the organization is passing through a difficult period. Feeling of inadequacy or lack of self confidence on the part of the employee, leading to the formation of groups.
(iii) Formation of a coterie or favoured group by the manager, giving other employees a feeling of insecurity or isolation. People operating in such circumstances will be filled with all sorts of ideas and will share them with likeminded companions, at whatever level they may be. Mostly they find them at their own level, but other levels are not barred. This type of communication is being seriously studied by psychologists and management experts. Question 4 (a) What is the importance of registered office of a company? State the procedure for shifting of registered office of the company from one State to another State under the provisions of the Companies Act, 1956. (8 Marks) (b) Explain the concept of Sexual harassment in relation to work place. (c) What are the features of groups in an organization? Answer (a) Importance of registered office and its change from one state to another: Every company must have registered office where : (a) necessary documents may be served upon, or deposited; (b) notices, letters, etc., may be issued ; (c) inspection may be had, and (d) communication may be made. The domicile and the nationality of a company is determined by the place of its registered office. This is also important for determining the jurisdiction of the Court. A company must have a registered office as from the day on which it commences business, or as from the 30th day after the date of its incorporation whichever is earlier, it may be noted that the address of the registered office ordinarily is not to be stated in the Memorandum of Association. For if this was done, every change therein would require amendment of the Memorandum. It is advisable to provide in the articles that the registered office should be situated at such place, as the Board (4 Marks) (4 Marks)
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should from time to time fix. Otherwise, the registered office cannot be removed outside the city etc., where it is situated, without special resolution. Notice of the situation of the registered office and of every change therein must be sent to the Registrar (otherwise than through a statement as to the address of the registered office in the annual report) within 30 days of the date of incorporation of the date of change. This provision is designed to locate the spot where the records of the company could be inspected and where the letters should be addressed and notices served upon the company.
Procedure for shifting the registered office from one state to another state(Section 17, the Companies Act,1956): The Company may by a special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another State. The change needs confirmation of the Company Law Board. When an application is made for a change as aforesaid, it is the State where the registered office is at present situated, where interests are likely to be affected by the change and thus will have the locus standi to oppose such an application [orissa Paper Mills Ltd. vs. State AIR 1957, 482]. Furthermore, it shall be necessary to satisfy the Company Law Board as to the bona fides of the companys application for the proposed change [Orissa Chemicals and Distilleries Pvt. Ltd., in Re. AIR 1961 Orissa 621]. The Company Law Board has the power either to confirm or refuse to confirm alteration relating to change/shifting of registered office. The company cannot do such change/shifting of office unless the Regional Director confirms it. To obtain confirmation, the company has to apply in the prescribed form. The confirmation must be communicated to the company within 4 weeks from the date of receipt of the application. Certified copy of the confirmation along with the attested copy of the Memorandum of Association must be filed with the ROC for registration within 2 months from the date of confirmation. Within one month of filing, the ROC shall certify registration, which shall be the conclusive evidence that all requirements with respect to alteration and confirmation have been complied with.
(b) Concept of Sexual harassment: Sexual harassment is a situation in which an employee is coerced into giving into another employee's sexual demands by the threat of losing some significant job benefit, such as a promotion, raise, or even the job. This kind of degrading coercion exerted on employees who are vulnerable and defenseless inflicts great psychological harm on the employee, violates the employees most basic right to freedom and dignity and is an unjust misuse of the unequal power that an employer can
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exercise over the employee. Sexual harassment is prohibited, and an employer is held responsible for all sexual harassment engaged in by employees. (c) Following are the features of groups in an organization : Group Goals every group establishes its own group goals, which provide motivation for their existence. Group Structure is based on the roles to be performed and member positions. Group Patterns of communication is the pattern of message flow in a group. Group Norms are the informed rules of interaction in a group. Group Climate is the emotional atmosphere of a group based on (1) Bonding and trust among members (2) Participating spirit (3) Openness (4) High performance goals. Question 5 (a) State, in brief, the grounds on the basis of which a banker can dishonor a cheque under the provisions of the Negotiable Instruments Act, 1881. (8 Marks) (b) Distinguish between pre-incorporation contracts and provisional contracts under the Companies Act, 1956. (4 Marks) (c) Draft a business letter, presuming your facts that you have received the goods from the company and you are sending payments. (4 Marks) Answer (a) Dishonour of Cheque Grounds: A banker will be justified or bound to dishonor a cheque in the following cases, viz; If a cheque is undated, if it is stale, that is if it has not been presented within reasonable period, which may vary three months to a year after its issue dependent on the circumstances of the case If the instrument is inchoate or not free from reasonable doubt If the cheque is post-dated and presented for payment before its ostensible date If the customers funds in the bankers hands are not properly applicable to the payment of cheque drawn by the former. Thus, should the funds in the bankers hands be subject to a lien or should the banker be entitled to a set-off in respect of them, the funds cannot be said to be properly applicable to the payment of the customers cheque, and the banker would be justified in refusing payment.
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If the customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank in which either he has account or his account is overdrawn. If the bankers receive notice of customers insolvency or lunacy If the customer countermands the payment of cheque for the bankers duty and authority to pay on a cheque ceases If a garnishee or other legal order from the Court attaching or otherwise dealing with the money in the hand of the banker, is served on the banker If the authority of the banker to honor a cheque of his customer is undermined by the notice of the latters death. However, any payment made prior to the receipt of the notice of death is valid. If notice in respect of closure of the account is served by either party on the other. If it contains material alterations, irregular signature or irregular endorsement.
(b) Pre-incorporation vs. Provisional Contracts: Following are the points of distinction between Pre-incorporation contracts and Provisional-contracts: (i) Pre-incorporation contracts are those contracts, which are entered into, by the persons proposing to float a company for prospective company before it has come into existence. Contracts which are entered into by a company after obtaining the certificate of incorporation but before getting the certificate to commence business are known as provisional contracts. The company which is not in existence, is not bound by the pre-incorporation contracts unless the company adopts the same after incorporation. There can be no ratification in case of pre-incorporation contracts. Provisional contracts on the other hand shall be binding upon the company from the date on which the company is entitled to commence business.
(ii)
(iii) 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[Sec. 149(4) of the Companies Act, 1956]. The expressional provisional denotes that the contract should be read subject to an implied term that it shall not be binding until the company becomes entitled to commence business. Consequently, should the company go into liquidation without commencing business, such contracts cannot be enforced at all.
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(c) Business Letter - acknowledging receipt of goods: MEHTA CHEMICALS LIMITED Regd. Office : 15, Okhla Estate, New Delhi - 110016 Phone : 6132757, Fax : 6132767 E-mail: mehtachem@rediffmail.com , Messrs. Shippers & Perfect Delivers 16, Nariman Point Mumbai Sir Subject: Acknowledging the receipt of Consignment No ______ Reference: Our request 24/FD/55 dated 1st June, 2011 We acknowledge with thanks the receipt of above consignment in our godown and we are arranging the payment of proceeds towards the said consignment by way of crossed cheque in favour of your company within a period of next 15 days. We solicit your relationship in our future dealings. Thanking you Yours faithfully For on behalf of Mehta Chemicals Ltd. Question 6 (a) Explain the position of a minor in relation to obtaining membership in a company under the provisions of the Companies Act, 1956. (8 Marks) (b) Which parameters are applicable in relation to Competition Law in India? (c) State whether the following statements are correct or incorrect: (i) (ii) (4 Marks) (4 1 = 4 Marks) website: www.mehtachem.org Dated:
A specific offer can be accepted only by that person to whom offer has been made. In case of breach of contract, the Court awards remote damages to the aggrieved party.
(iii) A company is a legal person but not a citizen. (iv) If the Central Government permits, a public company can be converted into a private company.
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Answer (a) Position of a minor as a member in a company: The Company Law Board has laid down in Nandita Jain v. Bennet Coleman & Company Limited that a minor can become a member provided four conditions are fulfilled: Company must be a Company Limited by shares. Shares are fully paid up. Application for transfer is made on behalf of minor by lawful guardian. The transfer is manifestly for the benefit of the minor.
In Diwan Singh v. Minerva Films Ltd. [(1958) 28 Comp. Cases 191 (Punj.), (1959) 29 Comp. Cases 263 (Punj.)], the Punjab High Court held that there is no legal bar to minor becoming a member of a company by acquiring shares (by way of transfer) provided the shares are fully paid and no further obligation or liability is attached to them. Minor can become member by transfer or transmission, but a company may not allow a minor to be a member by allotment. (b) Parameter under Competition Law in India: Prohibition of certain agreements, which are considered to be anti-competitive in nature. Such agreements namely tie in arrangements, exclusive dealings (supply and distribution), refusal to deal and resale price maintenance shall be presumed as anti-competitive if they cause or likely to cause an appreciable adverse effect on competition within India. Abuse of dominant position by imposing unfair or discriminatory conditions or limiting and restricting production of goods or services or indulging in practices resulting in denial of market excess or through in any other mode are prohibited. Regulation of combinations which cause or likely to cause an appreciable adverse affect on competition within the relevant market in India is also considered to be void. Correct Incorrect
(c) (i) (ii)
(iii) Correct (iv) Correct
37
Question 7 Answer any FOUR of the following: (a) The Employees Deposit Linked Insurance Scheme, under Section 6C of the Employees Provident funds and Miscellaneous Provisions Act, 1952 has been amended by the Central Government. State these amendments. (4 Marks) (b) State the conditions which are applicable for the purpose of commencement of business by a public company under the Companies Act, 1956. (4 Marks) (c) What is the law relating to criminal liability for mis-statement in the prospectus under the Section 63 of the Companies Act, 1956? (4 Marks) (d) Write a note on Social Accountability-8000 (e) What do you understand by the Semantic Barriers to the communication? Answer (a) Amendment in the Employees Deposit Linked Insurance Scheme: As per the Notification No.G.S.R.523 (E),dated 18th June,2010 amendment made in Employees Deposit Linked Insurance Scheme, 1976 by the Employees Deposit Linked Insurance (Amendment) Scheme,2010, by the Ministry of Labour and Employment in Paragraph 22, Sub-paragraph (1). This modified Employees Deposit Linked Insurance (Amendment) Scheme, 2010, Substituted the provision byThe Central Government amended the Employees Deposit Linked Insurance Scheme, 1976 by Employees Deposit Linked Insurance (Amendment) Scheme, 2010. According to which on the death of an employee, who is member of the Fund or of a provident fund exempted under section 17 of the Act, the person entitled to receive the provident fund accumulations of the deceased shall, in addition to such accumulations be paid an amount, equal to the average balance in the account of the deceased in the fund or a provident fund exempted under section 17 of the Act, as the case may be, during preceding twelve months or during the period of his membership, whichever is less, except where the average balance exceeds rupees fifty thousand, the amount payable shall be rupees fifty thousand plus 40% of the amount in excess of fifty thousand subject to a ceiling of Rupees one lakh. This above provision says that the EDLI amount is equal to the average balance of incumbents PF in the last 12 months or the overall balance, whichever is less. But if the balance exceeds Rs.50,000, the incumbents nominee will get Rs. 50,000 plus 40% of the excess balance up to a total of Rs. 1 lakh. (b) Conditions for commencement of business: A company having a share capital which has issued a prospectus inviting the public to subscribe for its shares cannot commence any business or exercise any borrowing power unless: (4 Marks) (4 Marks)
38
(a) the minimum number of shares which have to be paid for in cash has been subscribed and allotted ; (b) every director has paid, in respect of shares for which he is bound to pay an amount equal to what is payable on shares offered to the public on application and allotment ; (c) no money is or may become liable to be paid to application of any shares or debentures offered for public subscription by reason of any failure to apply for or to obtain permission for the shares or debentures to be dealt in on any recognised Stock Exchange, and (d) a statutory declaration by the secretary or one of the directors that the aforesaid requirements have been complied with, is filed with the Registrar. (c) Criminal Liability for misstatements in the prospectus [Section 63, of the Companies Act, 1956]: Apart from the liability to compensate shareholders who have suffered a loss due to untrue statement in the prospectus, directors and other persons responsible for the issue of the prospectus may also render themselves punishable with imprisonment for a term which may extend to two years or with fine up to fifty thousand rupees, or with both. That is to say, every person who had authorised the issue of the prospectus containing an untrue statement is prima facie guilty of criminal offence under Section 63 of the Act. However, such persons may plead that the statement was immaterial or that they had reasonable ground to believe and did, up to the time of the issue of the prospectus, believe that the statement was true in order to exonerate them from this criminal liability. (d) Social Accountability 8000: SA 8000 is a comprehensive, global, verifiable performance standard for auditing and certifying compliance with corporate responsibility. The heart of the standard is the belief that all workplaces should be managed in such a manner that basic human rights are supported and that management is prepared to accept accountability for this. SA8000 is an international standard for improving working conditions. This standard is based on the principles of the international human rights norms as described in International Labour Organization conventions, the United Nations Convention on the Rights of the Child and the Universal Declaration of Human Rights. The requirements of this standard apply regardless of geographic location, industry sector, or company size. (e) Semantic Barriers to the communication: Semantics is the systematic study of meaning. That is why the problems arising from expression or transmission of meaning in communication are called semantic problems. Oral or written communication is based on words. And words, limited in number, may be used in unlimited ways. The meaning is in the mind of the sender and also in that of the receiver. But it is not always necessary for the meaning in the mind of the sender to be the same as in the mind of receiver. Much, therefore, depends on how the sender encodes his message. The sender has to take care that the receiver does not misconstrue his message, and gets the intended meaning. Quite often it does not happen in this way. That leads to semantic problems. It can be ensured only if we aim at clarity, simplicity and brevity so that the receiver gets the intended meaning.
PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. Working Notes should form part of the answer. Question 1 (a) The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40%. The company sold 500 units for ` 5,00,000. You are required to calculate: (i) (ii) Break even point, and Sales in units to earn a profit of 10% on sales
(b) X executes a piece of work in 120 hours as against 150 hours allowed to him. His hourly rate is ` 10 and he gets a dearness allowance @ ` 30 per day of 8 hours worked in addition to his wages. You are required to calculate total wages received by X under the following incentive schemes: (i) (ii) Rowan Premium Plan, and Emerson's Efficiency Plan
(c) A new customer with 10% risk of non-payment desires to establish business connections with you. He would require 1.5 month of credit and is likely to increase your sales by ` 1,20,000 p.a. Cost of sales amounted to 85% of sales. The tax rate is 30%. Should you accept the offer if the required rate of return is 40% (after tax)? (d) Beeta Ltd. has furnished the following information: Earning per share (ESP) Dividend payout ratio Market price per share Rate of tax Growth rate of dividend
`4 ` 25% ` 40
30% 8%
The company wants to raise additional capital of ` 10 lakhs including debt of ` 4 lakhs. The cost of debt (before tax) is 10% upto ` 2 lakhs and 15% beyond that. Compute the after tax cost of equity and debt and the weighted average cost of capital. (4 x 5 = 20 Marks) Answer (a) (i) P/V Ratio Margin of Safety - 50% - 40%
40
Sales 500 Units for ` 5,00,000 Sales Per Unit - ` 1000 Calculation of Break Even Point (BEP) Margin of Safety Ratio = 40 =
Sales BEP 100 Sales
5,00,000 BEP 100 5,00,000

` 3,00,000
BEP =
BEP Per Unit = 3,00,000/1000 = 300 Units (ii) Sales in units to earn a profit of 10 % on sales Sales =
Fixed Cost + Desired Pr ofit P / VRatio 10% of x i.e. 0.1X.
Let the sales be x Profit Thus x = =
1,50,000 + 0.1X 50%

` 3,75,000
or
To find out sales in units amount of sales ` 3,75,000 is to be divided by Selling Price Per unit Thus Sales (in units ) = =
Working Notes
3,75,000 1000
375 Units
` 5,00,000/` 500 ` 1000 per unit
1. 2.
Selling price
= =
Variable cost per unit Selling Price - (Selling Price x P/V Ratio) 1000 (1000 x 50%) = ` 500
PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
41
3.
Profit at present level of sales Margin of Safety Margin of Safety 2,00,000 Profit = = = = = = Pr ofit 50% Pr ofit P / V Ratio 40% of ` 5,00,000 = ` 2,00,000
` 1,00,000
(Sales x P/V Ratio) Profit 5,00,000 x 50% 1,00,000 = `1,50,000
4.
Fixed Cost
Note: Alternative ways of calculation of Break Even Point and required sales to earn a profit of 10% of sales can be adopted to solve the problem. (b) (i)
Rowan Premium Plan Normal wages (10 x 120) D.A. for 15 days (30 x 15 )
Bonus :
`
1,200 450
120 30 = 24 Hours 150
Bonus hours Bonus (24 x 10) Total Wages

(ii) Emersion`s Efficiency Plan
240 = 1890 1200 450 = = = = Time Allowed 100 Time Taken
Normal wages D.A. (15 x 30) Bonus : Efficiency Level Rate of Bonus up to 100% From 101% to 125%
150 hours 100 = 125 % 120

20% 25% 45%
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Bonus being 45% normal wages = Total Wages

A. Profit on Additional Sales
45 1200 100
540 2190
(c) Evaluation of Credit to New Customer
Increase in Annual Sales

Less: Cost of Sales being 85% Less: Bad Debts Loss (10% on sales)
1,20,000 1,02,000 18,000 12,000 6,000 1,800 4,200 5,100 (900)
Profit before Tax

Less: Tax @ 30%
Net Profit after Tax

B. C. Opportunity Cost of Investment in Receivables (12,750 x 40) Net Benefit/Loss (A-B)
Decision: Since the estimated profit after tax on additional sales ` 4200 is less than the required return on additional investment of ` 5,100 in receivables, hence the offer should not be accepted. Working Notes:
12 = 8 Times 1.5
(i) (ii)
Receivables Turnover
Average Investment in Receivables = =
Cost of Sales 1,02,000 = 8 Receivables Turnover

` 12,750
(iii) Opportunity Cost of Funds Blocked = 12,750x 40/100 = 5,100

(d) (i) Cost of Equity Share Capital (Ke)
Ke (after tax) DPS
= =
DPS 100 + G MPS 25% of ` 4 = ` 1.00
43
Ke Ke
= =
1 100 + 8 40
10.5% Interest 100 (1 T) Net Pr oceeds 20,000 30,000 50,000
(ii) Cost of Debt (Kd)
Kd (After tax) =
Interest on ` 2,00,000 @ 10% = Interest on ` 2,00,000 @ 15% =
Kd
50,000 100 (1 0.3) 4,00,000 8.75 % Amount (2) In ` 6,00,000 4,00,000 Weights (3) 0.6 0.4 Cost of Capital (4) 0.105 0.0875 Weighted Average Cost (5) = (3)x(4) 0.063 0.035
0.098 or 9.8%
= Source (1) Equity Debt
(iii) Weighted Average Cost of Capital (WACC)
Weighted Average Cost of Capital
[Note: Ke can be computed alternatively taking growth rate into consideration (D0(1+g)/P0 +g). The values of Ke and WACC then would change accordingly as 10.7% and 9.92% respectively.]
Question 2 (a) X Ltd. recovers overheads at a pre-determined rate of ` 50 per man-day. The total factory overheads incurred and the man-days actually worked were ` 79 lakhs and 1.5 lakhs days respectively. During the period 30,000 units were sold. At the end of the period 5,000 completed units were held in stock but there was no opening stock of finished goods. Similarly, there was no stock of uncompleted units at the beginning of the period but at the end of the period there were 10,000 uncompleted units which may be treated as 50% complete. On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective planning and the balance were attributable to increase in overhead cost. How would unabsorbed overheads be treated in cost accounts? (8 Marks)
44
(b) The financial statements of a company contain the following information for the year ending 31st March, 2011: Particulars Cash Sundry Debtors Short-term Investment Stock Prepaid Expenses Total Current Assets Current Liabilities 10% Debentures Equity Share Capital Retained Earnings Statement of Profit for the year ended 31st March, 2011 Sales (20% cash sales) Less: Cost of goods sold Profit before Interest & Tax Less: Interest Profit before tax Less: Tax @ 30% Profit After Tax You are required to calculate: (i) (ii) Quick Ratio Debt-equity Ratio (8 Marks) 40,00,000 28,00,000 12,00,000 1,60,000 10,40,000 3,12,000 7,28,000
`
1,60,000 4,00,000 3,20,000 21,60,000 10,000 30,50,000 10,00,000 16,00,000 20,00,000 8,00,000
(iii) Return on Capital Employed, and (iv) Average collection period (Assuming 360 days in a year). Answer (a) Absorbed overheads
= Actual Man days x Rate = 1,50,000 x 50 = ` 75,00,000
Under absorption of overheads
= =
Actual overheads Absorbed overheads 79,00,000 75,00,000 = ` 4,00,000
45
Reasons for under-absorption: 1. 2. (i) Defective Planning Increase in overhead cost 4,00,000 x 60% 4,00,000 x 40% = `2,40,000 = `1,60,000
Treatment in Cost Accounts:
The unabsorbed overheads of ` 2,40,000 on account of defective planning to be treated as abnormal and thus be charged to costing profit & loss account.
(ii) The balance of unabsorbed overheads i.e. ` 1,60,000 be charged as below on the basis of supplementary overhead absorption rate Supplementary Rate = ` 1,60,000/(30,000+5,000+50% of 10,000) = ` 4 per unit (a) To Cost of Sales Account = 30,000 x4 = ` 1,20,000 (b) To Finished Stock Account = 5,000 x 4 = ` 20,000 (c) To WIP Account = 50% of 10,000 x 4 = ` 20,000
` 1,60,000
(b) (i) Quick Ratio
Quick Assets Current Liabilities
= = = = = =
Quick Assets Quick Assets Quick Ratio
Current Assets Stock Prepaid Expenses 30,50,000- 21,60,000-10,000 8,80,000 8,80,000/10,00,000 0.88 : 1 Long term debt Shareholders Funds 16,00,000 (20,00,000 + 8,00,000) 0.57:1
(ii) Debt-Equity Ratio =
= =
(iii) Return on Capital Employed (ROCE)
ROCE
= =
PBIT 100 Capital Employed 12,00,000 100 = 27.27% 44,00,000
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[Note: ROCE can be computed alternatively taking Average total assets into consideration (EBIT (1 T)/Average Total Assets). The value of ROCE would then change accordingly as 15.56%]
(iv) Average Collection Period
Sundry Debtors 360 Credit Sales
= =
4,00,000 360 32,00,000
= 45 days
Question 3 (a) The following details are available of Process X for August 2011: (1) Opening work-in-progress Degree of completion and cost: Material (100%) Labour (60%) Overheads (60%) (2) Input 1,82,000 units at (3) Labour paid (4) Over heads incurred (5) Units scrapped Degree of completion: Material Labour and overhead (6) Closing work-in-process Degree of completion: Material Labour and overhead (7) 1,58,000 units were completed and transferred to next process. (8) Normal loss is 8% of total input including opening work-in-process (9) Scrap value is `. 8 per unit to be adjusted in direct material cost You are required to compute, assuming that average method of inventory is used: (i) Equivalent production, and 100% 70% 100% 80% 18000 units 8,000 units
` 63,900 ` 10,800 ` 5,400 ` 7,56,900 ` 3,28,000 ` 1,64,000

14,000
47
(ii)
Cost per unit Liabilities
(8 Marks)
(b) Alpha Ltd. has furnished the following Balance Sheet as on March 31, ,2011:
Assets Current Assets
`
30,00,000 18,00,000
Equity Share Capital (1,00,000) equity shares of ` 10 each) General Reserve 15% Debentures Current Liabilities Additional Information: (1) (2) (3) (4) (i) (ii) Answer (a) (i)
10,00,000 Fixed Assets 2,00,000 28,00,000 8,00,000 48,00,000
48,00,000
Annual Fixed Cost other than Interest Variable Cost Ratio Total Assets Turnover Ratio Tax Rate Earnings per Share (EPS), and Combined Leverage. Statement of Equivalent Production
28,00,000 60% 2.5 30%
You are required to calculate: (8 Marks)
Particulars
Units
Material % Units 1,58,000 18,000

1,76,000
Labour and Overhead % 100 70

-
Units 1,58,000 12,600

1,70,600
Production units completed Normal Loss 8% of (1,82,000 + 8,000) Closing WIP

Total
1,58,000 15,200 18,000

1,91,200
100 100
-
Less : Abnormal Gain

Total
1,200
1,90,000
100
1,200
1,74,800
100
1,200
1,69,400
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(ii) Statement of cost Particulars Materials Labour Overhead
Opening WIP Input of Materials Expenses

Total
63,900 7,56,900 8,20,800
10,800 3,28,000
3,38,800
5,400 1,64,000
1,69,400
Less : Sale of Scrap (15,200 x 8 ) Net cost Equivalent Units Cost Per Unit Total cost per unit = 4+2+1 = ` 7.00
1,21,600 6,99,200 1,74,800

` 4.00
3,38,800 1,69,400
` 2.00
1,69,400 1,69,400
` 1.00
Note: The treatment of scrap can be done alternatively as follows and rest of the problem (Calculation of Cost per Equivalent units and Statement of Cost) can be solved accordingly. Statement of Equivalent Production:
Output Units to Next process Closing WIP Abnormal gain Equivalent Units Normal Loss
(b) Total Assets
Units 158000 18000 (1200) 174800 = = = = =
Materials % Units 100 158000 100 18000 100 (1200) 174800
Labour % Units 100 158000 70 80 12600 (960) 169640
Overheads % Units 100 158000 70 80 12600 (960) 169640
8% of (opening WIP + New Inputs) 8% of (8000+182000) = 15200 Units

` 48,00,000
Total Assets Turnover Ratio Total Sales Particulars
2.5 48,00,000 2.5 = ` 1,20,00,000 Amount 1,20,00,000 72,00,000
Computation of Profit after Tax (PAT)
Sales Less: Variable Cost ( 60% of Sales Contribution)
49
Contribution Less: Fixed Cost (other than Interest)

Less: Interest on Debentures (15% of 28,00,000) PBT Less: Tax @ 30% PAT
48,00,000 28,00,000 20,00,000 4,20,000 15,80,000 4,74,000 11,06,000
(i)
EPS
= =
PAT No. of Equity Shares 11,06,000 = ` 11.06 1,00,000 Contribution EBIT x EBIT PBT
(ii)
DCL Or
= = =
Contribution PBT
48,00,000 = 3.04 15,80,000
Question 4 (a) The Trading and Profit and Loss Account of Beta Ltd. for the year ended 31st March, 2011 is given below: Particulars To Opening Stock: Raw Materials Work- inprogress Finished Goods To Purchases (credit) To Wages To Production Expenses To Gross Profit c/d To Administration Expenses To Selling Expenses To Net Profit Particulars (`) By Sales (Credit) 1,80,000 By Closing Stock: 60,000 Raw Materials 2,60,000 5,00,000 Work-in-progress 11,00,000 Finished Goods 3,00,000 2,00,000 5,00,000 26,00,000 1,75,000 By Gross Profit b/s 75,000 2,50,000 5,00,000 Amount (` ) Amount (` ) 20,00,000 2,00,000 1,00,000 3,00,000
6,00,000
26,00,000 5,00,000
5,00,000
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The opening and closing balances of debtors were ` 1,50,000 and ` 2,00,000 respectively whereas opening and closing creditors were ` 2,00,000 and ` 2,40,000 respectively. You are required to ascertain the working capital requirement by operating cycle method. (8 Marks) (b) The following information have been extracted from the cost records of a manufacturing company: * * * * * * * * * * * * * Stores Opening balance Purchases Transfer from WIP Issue to work-in-progress Issue for repairs Deficiency found in stock Work-in-Progress: Opening balance Direct Wages applied Overhead charged Closing balance Finished Production : Entire production is sold at a profit of 10% on cost from work-inprogress Wages paid. Overhead incurred
`
9,000 48,000 24,000 48,000 6,000 1,800 18,000 18,000 72,000 12,000
21,000 75,000
Draw the Stores Leger Control A/c, Work-in-Progress Control A/c, Overheads Control A/c and Costing Profit and Loss A/c. (8 Marks) Answer (a) Computation of Operating Cycle
(1) Raw Material Storage Period (R) Raw Material Storage Period (R)= =
Average Stock of Raw Material Daily Average Consumption of Raw material
(1,80,000 + 200000 )/2 = 63.33 Days 10,80,000 /360

1,80,000 + 11,00,000 2,00,000 = `10,80,000
Raw Material Consumed = Opening Stock + Purchases Closing Stock =
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(2) Conversion/Work-in-Process Period (W) Conversion/Processing Period = =

Production Cost:
Average Stock of WIP Daily Average Pr oduction cos t
(60,000 + 1,00,000 )/2 = 18.7 days 15,40,000/360

= = = = = 60,000 10,80,000 3,00,000 2,00,000 16,40,000 1,00,000 15,40,000
Opening Stock of WIP Add: Raw Material Consumed Add: Wages Add: Production Expenses
Less: Closing Stock of WIP Production Cost (3) Finished Goods Storage Period (F)
Finished Goods Storage Period = =
Average Stock of Finished Goods Daily Average Cost of Good Sold
(2,60,000 + 3,00,000) / 2 = 67.19 Days 15,00,000 / 360

` 2,60,000 15,40,000 18,00,000 3,00,000 15,00,000
Cost of Goods Sold Opening Stock of Finished Goods Add: Production Cost Less: Closing Stock of Finished Goods
(4) Debtors Collection Period (D) Debtors Collection Period =

Average Debtors (150000 + 200000)/ 2 = = 31.5 Days Daily Average Sales 20,00,000/ 360
(5) Creditors Payment Period (C) Creditors Payment Period =

=
Average Creditors Daily Average Purchase

(2,00,000 + 2,40,000)/ 2 = 72 Days 11,00,000/ 360
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(6) Duration of Operating Cycle (O) O = = =

(i)
R+W+F+DC 63.33 + 18.7 + 67.19 + 31.5 72 108.72 days
Computation of Working Capital Number of Operating Cycles per Year
360/Duration Operating Cycle = 360/108.72 = 3.311

`
(ii) Total Operating Expenses
Total Cost of Production

Add: Administration Expenses
15,00,000 1,75,000 75,000

17,50,000
Selling Expenses
(iii) Working Capital Required
Working Capital Required = =
Total Operating Expenses Number of Operating Cycles per year

17,50,000 = ` 5,28,541 3.311
[Note: For computational purposes, the above solution is based on 360 days a year. The solution can also be solved on the basis of 365 days a year. Work-in-process (W) can be computed alternatively taking Administration Expenses as part of Cost of Production. This would lead to further changes in figures of Finished Goods Storage Period, Duration of operating cycle, Number of operating cycles per year and amount of capital required.]
(b) Particulars Stores Ledger Control A/c
Particulars
To Balance b/d To General Ledger Adjustment A/c To Work in Process A/c
9,000 By Work in Process 48,000 By Overhead Control A/c By Overhead Control A/c (Deficiency ) 24,000 By Balance c/d 81,000
48,000 6,000 1,800* 25,200 81,000
*Deficiency assumed as normal (alternatively can be treated as abnormal loss)
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Work in Progress Control A/c Particulars
Particulars
To Balance b/d To Stores Ledger Control A/c To Wages Control A/c To Overheads Control a/c
18,000 By Stores Ledger Control a/c 48,000 By Costing P/L a/c (Balancing figures being Cost of finished goods) 18,000 72,000 By Balance c/d 1,56,000
Overheads Control A/c
24,000 1,20,000
12,000 1,56,000
Particulars
Particulars
To Stores Ledger Control A/c To Stores Ledger Control A/c To Wages Control A/c (21,000-18000) To General Ledger Adjustment A/c
6,000 By Work in Process A/c 1,800 By Balance c/d (Under absorption) 3,000 75,000 85,800
72,000 13,800
85,800
Costing Profit & Loss A/c Particulars
Particulars
To Work in progress To General Ledger Adjustment A/c (Profit)
1,20,000 By General ledger Adjustment A/c (Sales) 12,000 (1,20,000+12,000) 1,32,000
1,32,000
1,32,000
Question 5 Distinguish between: (i) (ii) Cost Control and cost reduction Fixed and flexible budget. (4 4 = 16 Marks)
(iii) Operating lease and financial lease, and (iv) Net present value method and internal rate of return method.
54
Answer (i) Difference between Cost Control and Cost Reduction
(1) Cost control aims at maintaining the costs in accordance with the established standards. While cost reduction is concerned with reducing costs. (2) Cost control seeks to attain lowest possible cost under existing conditions, while cost reduction recognizes no condition as permanent, since a change will result in lower cost. (3) In case of cost control, emphasis is on past and present, while in case of cost reduction, it is on present and future. (4) Cost control is a preventive while cost reduction is corrective. (5) Cost control ends when targets are achieved, while cost reduction has visible end.
(ii) Difference between fixed and flexible budgets S.No. Fixed Budget Flexible Budget
1.
It does not change with actual volume It can be recasted on the basis of activity level to be achieved. Thus it of activity achieved. Thus it is rigid is not rigid. It operates on one level of activity and It consists of various budgets for under one set of conditions different level of activity. If the budgeted and actual activity It facilitates the cost ascertainment levels differ significantly, then cost and price fixation at different levels of ascertainment and price fixation do activity. not give a correct picture. Comparisons of actual and budgeted It provided meaningful basis of targets are meaningless particularly comparison of actual and budgeted when there is difference between two targets. levels.
2 3
4.
(iii) Difference between Financial Lease and Operating Lease S.No. Finance Lease Operating Lease
1.
The risk and reward incident to ownership are passed on the lessee. The lessor only remains the legal owner of the asset. The lessee bears obsolescence. the risk
The lessee is only provided the use of the asset for a certain time. Risk incident to ownership belongs only to the lessor.
of The lessee is only allowed the use of asset.
55
3 4. 5.
The lease is non-cancellable by either The lease is kept cancellable by the party under it. lessor. The lessor does not bear the cost of Usually, the lessor bears the cost of repairs, maintenance or operations. repairs, maintenance or operations. The lease is usually full payout. The lease is usually non-payout.
(iv) Difference between Net Present Value (NPV) Method and Internal Rate of Return (IRR) Method
1. 2. 3. 4.
The results of NPV and IRR methods regarding the choice of an asset under certain circumstances are mutually contradictory under two methods. The NPV is expressed in financial values whereas IRR is expressed in percentage terms. In the NPV, cash flows are assumed to be reinvested at cost of capital rate whereas in IRR, reinvestment is assumed to be made at IRR rates. Under IRR method, a project is selected when IRR is greater than cut-off date, whereas, under NPV method, a project is accepted with positive NPV.
Question 6 (a) A Ltd. is considering the purchase of a machine which will perform some operations which are at present performed by workers. Machines X and Y are alternative models. The following details are available: Machine X (` ) 1,50,000 5 years 7,000 6,000 10,000 12,000 90,000 Machine Y (` ) 2,40,000 6 years 11,000 8,000 15,000 16,000 1,20,000
Cost of machine Estimated life of machine Estimated cost of maintenance p.a. Estimated cost of indirect material, p.c. Estimated savings in scrap p.a. Estimated cost of supervision p.a. Estimated savings in wages pa.
Depreciation will be charged on straight line basis. The tax rate is 30%. Evaluate the alternatives according to: (i) (ii) Average rate of return method, and Present value index method assuming cost of capital being 10%. (8 Marks)
(The present value of ` 1.00 @ 10% p.a. for 5 years is 3.79 and for 6 years is 4.354)
56
(b) Gama Ltd. has furnished the following standard cost data per' unit of production:
* * * *
Material 10 kg @ ` 10 per kg. Labour 6 hours @ ` 5.50 per hour Variable overhead 6 hours @ `. 10 per hour. Fixed overhead ` 4,50,000 per month (Based on a normal volume of 30,000 labour hours.)
The actual cost data for the month of August 2011 are as follows:
* Material used 50,000 kg at a cost of ` 5,25,000. * Labour paid ` 1,55,000 for 31,000 hours worked * Variable overheads` 2,93,000 * Fixed overheads ` 4,70,000 * Actual production 4,800 units. Calculate:
(i) (ii) Material cost variance. Labour cost variance.
(iii) Fixed overhead cost variance. (iv) Variable overhead cost variance. Answer (a) Working Notes:
1,50,000 = ` 30,000 5
Depreciation on Machine X = Depreciation on Machine Y =

Particulars Annual Savings:
2,40,000 = ` 40,000 6
Machine X (`) Machine Y (`)
Wages Scrap
Total Savings (A) Annual Estimated Cash Cost :
90,000 10,000
1,00,000
1,20,000 15,000
1,35,000
Indirect Material Supervision Maintenance
6,000 12,000 7,000
8,000 16,000 11,000
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Total Cash Cost (B) Annual Cash Savings (A-B) Less : Depreciation
25,000 75,000
35,000 1,00,000
30,000 45,000 13,500 31,500 30,000

61,500
40,000 60,000 18,000 42,000 40,000

82,000
Annual Savings Before Tax

Less : Tax @ 30%
Annual Savings/Profit (After Tax)

Add : Depreciation Annual Cash Inflows Evaluation of Alternatives (i) Average Rate of Return Method (ARR)
ARR =
Average Annual Net Savings Average Investment

= = 31,500 100 = 42% 75,000 42,000 100 = 35% 1,20,000
Machine X Machine Y
Decision : Machine X is better.
[Note: ARR can be computed alternatively taking initial investment as the basis for computation (ARR = Average Annual Net Income/Initial Investment). The value of ARR for Machines X and Y would then change accordingly as 21% and 17.5% respectively]
(ii) Present Value Index Method
Present Value = Machine X Machine Y = = = = P.V. Index Machine X = =
Annual Cash Inflow x P.V. Factor @ 10% 61,500 x 3.79

` 2,33,085
82,000 x 4.354
` 3,57,028
Pr esent Value Investment
2,33,085 = 1.5539 1,50,000
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Machine Y
3,57,028 = 1.4876 2,40,000 5,000 units

` 90 per unit
Decision : Machine X is better. (b) Budgeted Production 30,000/6 =
Budgeted Fixed Overhead Rate = 4,50,000/5,000 = 1. MCV = = = = 2. LCV = = = = 3. FOCV = = = 4. VOCV = = = = Total Standard Cost for Actual Output Total Actual Cost 4,800x10x10-5,25,000 4,80,000 5,25,000 45,000 (A) Total Standard Cost of labour for Actual Output Total Actual Cost of labour 48,00x 6.0 x 5.50 1,55,000 1,58,400 1,55,000 3400 (F) Recovered Fixed overhead - Actual Fixed overhead 90 x 4,800 4,70,000 38,000 (A) Recovered Variable overheads Actual Variables overheads 4,800 x 6 x 10 2,88,000 - 2,93,000 5,000 (A)
[MCV- Material Cost Variance, LCV- Labour Cost Variance, FOCV- Fixed Overhead Cost Variance, VOCV- Variable Overhead Cost Variance]
Question 7 Answer any four of the following: (a) Elucidate the responsibilities of Chief Financial Officer. (b) Explain the relevance of time value of money. (c) Discuss ABC analysis as a system of inventory control (d) Explain the terms notional profit and retention money in contract costing. .
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(e) Explain the following: (i) (ii) Answer (a) Main Responsibilities of Chief Financial Officer (CFO) Bridge finance Essentials of budget (4 4 = 16 Marks)
The main responsibilities of Chief Financial Officer (CFO) are as follows: 1 2. 3. 4. 5. Financial analysis and planning. Investment decisions - Efficient utilization of funds to specific assets/projects. Capital structure decisions. Management of short-term financial resources (working capital). Risk management.
(b) Relevance of Time Value of Money in Financial Decisions
A rupee today is more valuable than rupee after a year due to several reasons: 1. 2. 3. 4.
Risk: There is uncertainty about the receipt of money in future. Preference for Present Consumption: Most of the person and companies in general, prefer current consumption over future consumption. Inflation: In an inflationary period a rupee today represents a greater real purchasing power than a rupee after a year. Investment Opportunities: Most of the persons and companies have a preference for present money because of availabilities of opportunities of investment for earning additional cash flow.
Many financial problems involve cash flow accruing at different points of times for evaluating such cash flow an explicit consideration of time value of money is required.
(c) ABC analysis exercises discriminating control over different items of stores classified on the basis of investment involved.
A category items consists of only a small proportion i.e. approximately 10% of total items of stores but needs huge investment. Say about 70% of inventory vogue, because of their high prices or heavy requirement.
'B' category items are relatively 20% of the total items of stores. The proportion of investments requires is also approximately 20% of total inventory investment. C category items do not require much investment. It may be about 10% total inventory value but they are nearly 70% of the total items of stores.
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(d) Notional Profit in contract costing ;
It represents the difference between the value of work certified and cost of work certified. Notional Profit = Value of work Certified Less Cost of work Certified
Retention money in contract Costing:
A contractor does not receive the full payment of work certified by the surveyor of work certified by the surveyor. Contractee retains some amount to be paid after some time, when it is ensured that there is no default in the work done by the contractor. If any deficiency or defect is noticed it is to be rectified by the contractor before the release of the retention money. Thus retention money provides a safe guard against the default risk in contract
(e) (i) Bridge Finance
It refers to loans taken by a company normally from commercial banks for a short period because of pending disbursement of loans sanctioned by financial institutions. (ii)
Essentials of budget
It is prepared in advance and is based on a future plan of actions It relates to a future period and is based on objectives to be attained. It is a statement expressed in monetary and/or physical units prepared for the implementation of policy formulated by management.
PAPER 4 : TAXATION Question No.1 is compulsory. Attempt any five questions from the remaining six questions. Wherever required, suitable assumptions may be made by the candidates. Working notes should form part of the answer. Question 1 (a) Rao & Jain, a partnership firm consisting of two partners, reports a net profit of ` 7,00,000 before deduction of the following items: (1) Salary of ` 20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership). (2) Depreciation on plant and machinery under section 32 (computed) ` 1,50,000. (3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital eligible for interest ` 5,00,000. Compute: (i) (ii) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961. Allowable working partner salary for the assessment year 2011-12 as per section 40(b) of the Income-tax Act, 1961. (5 Marks)
(b) Shri Madan (age 67 years) gifted a building owned by him to his son's wife Smt. Hema on 01-10-2010. The building fetched a rental income of ` 10,000 per month throughout the year. Municipal tax for the first half-year of ` 5,000 was paid in June 2010 and the municipal tax for the second half-year was not paid till 30-09-2011. Incomes of Shri Madan and Smt. Hema other than income from house property are given below: Name Shri Madan Smt. Hema Business income (`) 1,00,000 (75,000) Capital gain (`) 50,000 (long term) 2,00,000 (short term) Other sources (`) 1,50,000 50,000
Note: Capital gain does not relate to gain from shares and securities. Compute the total income of Shri. Madan and Smt. Hema taking into account income from property given above and also compute their income-tax liability for the assessment year 2011-12. (5 Marks) The Suggested Answers for Paper 4: Taxation are based on the provisions of law as amended by the Finance Act, 2010 and applicable for A.Y. 2011-12 (in the case of Income-tax), which is the assessment year relevant for November, 2011 examination.
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(c) Vikas Coaching Centre, engaged in commercial training and coaching service, furnishes you the following information and the amounts received by it for the half-year ended 3103-2011:-
`
Coaching fee for Civil Service examinations Postal coaching fee for University examinations Sports coaching fee from a local college Fee for management diploma of a foreign university (not recognized by law in force in India) Coaching and training provided by sending staff to the residence of service receivers. Determine the value of taxable service. Your answer must be with reasons. 3,50,000 2,40,000 1,10,000 4,40,000 6,40,000 (5 Marks)
(d) Laxman, a registered dealer submits the following information for the month of February, 2011: Particulars Details of purchase Raw material purchased from another State (CST @ 2%) Raw material X purchased within the State Raw material Y imported from Singapore (includes customs duty paid @ 10%) Raw material Z purchased within the State. Details of Sales Sale of goods produced from raw material X Sale of goods produced from inter-state purchase and imported raw materials Sale of goods produced from raw material Z 27,00,000 32,00,000 8,00,000 4% 1% 12.5% 10,00,000 15,00,000 11,00,000 6,00,000 12.5% 1% Amount (`) Rate of VAT
Note: The purchase and sales figures given above do not include VAT / CST. Assume that there was no opening or closing inventory. Compute the amount of Value Added Tax (VAT) payable by Laxman for the month of February, 2011. (5 Marks) Answer (a) (i) As per the provisions of Explanation 3 to section 40(b), book profit shall mean the net profit as per the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the
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remuneration paid or payable to the partners of the firm if the same has been already deducted while computing the net profit. In the present case, the net profit given is before deduction of depreciation on plant and machinery, interest on capital of partners and salary to the working partners. Therefore, the book profits shall be as follows: Computation of Book Profit of the firm under section 40(b) of the Income-tax Act, 1961. Particulars Net Profit (before deduction of depreciation, salary and interest) Less: Depreciation under section 32 Interest @ 12% p.a. [being the maximum allowable as per section 40(b)] (5,00,000 12%) Book Profit 1,50,000 ` ` 7,00,000
60,000
2,10,000 4,90,000
(ii) Salary actually paid to working partners = 20,000 2 12 = ` 4,80,000. As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed subject to the following limits On the first ` 3,00,000 of book profit On the balance of book profit ` 1,50,000 or 90% of book profit, whichever is more 60% of the balance book profit
Therefore, the maximum allowable working partners salary for the A.Y. 2011-12 in this case would be: Particulars On the first ` 3,00,000 of book profit [(` 1,50,000 or 90% of ` 3,00,000) whichever is more] On the balance of book profit [60% of (` 4,90,000 - ` 3,00,000)] Maximum allowable partners salary ` ` 2,70,000 ` 1,14,000 ` 3,84,000
Hence, allowable working partners salary for the A.Y. 2011-12 as per the provisions of section 40(b)(v) is ` 3,84,000.
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(b)
Computation of total income and tax liability of Shri Madan for A.Y. 2011-12 Particulars Income from house property (Refer Note 1) Business Income Long-term Capital Gains Income from Other Sources Total Income Computation of tax liability Long-term Capital Gain of ` 50,000 @ 20% Other income of ` 3,30,500 (` 3,30,500 ` 2,40,000) 10% (Refer Note 2) Add: Education Cess @ 2% Secondary and Higher Education Cess @ 1% Tax liability Tax liability (Rounded Off) 381 191 572 19,622 19,620 10,000 9,050 19,050 ` ` 80,500 1,00,000 50,000 1,50,000 3,80,500
Computation of Total Income and Tax Liability of Smt. Hema for A.Y. 2011-12 Particulars Short-term Capital Gains Less: Business loss Income from Other Sources Total Income Tax liability (Since total income is less than basic exemption limit of ` 1,90,000) Note: 1. As per section 64(1)(vi), the income arising to the sons wife of an individual, directly or indirectly, from assets transferred to her, otherwise than for adequate consideration, by such individual, shall be included in the total income of the individual. Therefore, the rental income from building transferred by Shri Madan to his sons wife Smt. Hema without consideration on 01.10.2010 is includible in the hands of Shri Madan. ` 2,00,000 75,000 1,25,000 50,000 1,75,000 Nil `
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Computation of Income from House Property Particulars Madan (`) Period (01.04.201030.09.2010) 60,000 Hema (`) Period (01.10.201031.03.2011) 60,000
Gross Annual Value (` 10,000 6 months) (Rental income taken as GAV in the absence of information relating to Municipal Value, fair value and standard rent) Less: Municipal taxes paid (paid in June for first half year only) Net Annual Value (NAV) Less: Deduction under section 24(a), 30% of NAV Income from House Property Income from House Property of Hema to be clubbed in the hands of Madan as per section 64(1)(vi) Income from house property 2.
5,000 55,000 16,500 38,500 42,000 80,500
Nil 60,000 18,000 42,000
The basic exemption limit for A.Y. 2011-12 in respect of an individual who is of the age of 65 years or more during the relevant previous year is ` 2,40,000. The same has been considered while calculating Madans tax liability. Computation of value of taxable services of Vikas Coaching Centre for the half-year ended 31.03.2011
(c)
S. No. (i) (ii) (iii) (iv) (v)
Particulars Coaching fee for civil service examinations [Refer Note 1] Postal coaching fees for university examinations [Refer Note 1] Coaching and training provided by sending staff to the residence of service receivers [Refer Note 1] Sports coaching fee from a local college [Refer Note 2] Fee for management diploma of a foreign university not recognized by law in force in India [Refer Note 3] Total taxable services including service tax @ 10.30% Value of taxable services Value of taxable services (rounded off)
` 3,50,000 2,40,000 6,40,000 4,40,000 16,70,000 15,14,053 15,14,050
Notes 1. The definition of commercial training or coaching centre specifically includes inter alia any institute or establishment providing coaching or tutorial classes and hence, items mentioned in point (i), (ii) and (iii) would be liable to service tax.
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2. 3.
Sports coaching is not taxable as the same is specifically excluded from the definition of commercial training or coaching centre. Fee for management diploma of a foreign university not recognized by law in force in India would be liable to service tax as only the institute or establishment issuing certificate/diploma/degree/educational qualification recognized by law for the time being in force in India are outside the purview of service tax. As the details furnished are the amounts received, the same are taken to be inclusive of service tax and hence, the value of taxable service has been computed 100 . by making back calculations 16,70,000 110.3 It has been presumed that Vikas Coaching Centre is not eligible for exemption available to small service providers. Computation of VAT payable by Laxman for the month of February, 2011:-
4.
5. (d)
Particulars Total Output VAT payable [A] Goods produced from raw material x (27,00,000 4%) Goods produced from inter-State purchases and imported raw materials (32,00,000 1%) Goods produced from raw material Z (8,00,000 12.5%) Input VAT [B] Raw material purchased from another State [Refer Note 1] Raw material Y imported from Singapore [Refer Note 2] Raw material X purchased within the State (15,00,000 1%) Raw material Z purchased within the State (6,00,000 12.5%) Net VAT payable [A-B] Notes: 1. 2.
` 1,08,000 32,000 1,00,000 Nil Nil 15,000 75,000
2,40,000
90,000 1,50,000
Input tax credit is not available on purchases made from another State liable to central sales tax. Purchases made from outside India liable to customs duty are not eligible for input tax credit.
Question 2 (a) Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following information for the year ended 31-03-2011: (i) Basic salary upto 31-10-2010
` 50,000 p.m.
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Basic salary from 01-11-2010 (ii)
` 60,000 p.m.
Note: Salary is due and paid on the last day of every month. Dearness allowance @ 40% of basic salary. (iii) Bonus equal to one month salary. Paid in October 2010 on basic salary plus dearness allowance applicable for that month. (iv) Contribution of employer to recognized provident fund account of the employee@16% of basic salary. (v) Profession tax paid ` 3,000 of which ` 2,000 was paid by the employer. (vi) Facility of laptop and computer was provided to Balaji for both official and personal use. Cost of laptop ` 45,000 and computer ` 35,000 were acquired by the company on 01-12-2010. (vii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres) provided to the employee from 01-11-2010 meant for both official and personal use. Repair and running expenses of ` 45,000 from 01-11-2010 to 31-03-2011, were fully met by the employer. The motor car was self-driven by the employee. (viii) Leave travel concession given to employee, his wife and three children (one daughter aged 7 and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer ` 30,000 for adults and ` 45,000 for three children. Balaji is eligible for availing exemption this year to the extent it is permissible in law. Compute the salary income chargeable to tax in the hands of Mr. Balaji for the assessment year 2011-12. (8 Marks) (b) (i) (ii) When does e-payment of service tax become mandatory? State the 'due date' for e-payment of service tax by individuals and companies. (4 Marks) (c) Explain the role of Chartered Accountants in proper compliance of VAT. (Any 4 points.) (4 Marks) Answer (a) Computation of Taxable Salary of Mr. Balaji for A.Y. 2011-12 Particulars Basic salary [(` 50,000 7) + (` 60,000 5)] Dearness Allowance (40% of basic salary) Bonus (` 50,000 + 40% of ` 50,000) (See Note 1) Employers Contribution to Recognised Provident Fund in excess of 12% of salary = 4% of ` 6,50,000 (See Note 4) ` 6,50,000 2,60,000 70,000 26,000
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Professional tax paid by employer Perquisite of Motor Car (` 2,400 for 5 months) (See Note 5) Gross Salary Less: Deduction under section 16 Professional tax (See Note 6) Taxable Salary Notes: 1. 2. 3.
2,000 12,000 10,20,000 3,000 10,17,000
Since bonus was paid in the month of October, the basic salary of ` 50,000 for the month of October is considered for its calculation. As per Rule 3(7)(vii), facility of use of laptop and computer is an exempt perquisite, whether used for official or personal purpose or both. Mr. Balaji can avail exemption under section 10(5) on the entire amount of ` 75,000 reimbursed by the employer towards Leave Travel Concession since the same was availed for himself, his wife and three children and the journey was undertaken by economy class airfare. The restriction imposed for two children is not applicable in case of multiple births which take place after the first child. It is assumed that the Leave Travel Concession was availed for journey within India. It is assumed that dearness allowance does not form part of salary for computing retirement benefits. As per the provisions of Rule 3(2), in case a motor car (engine cubic capacity exceeding 1.60 liters) owned by the employer is provided to the employee without chauffeur for personal as well as office use the value of perquisite shall be ` 2,400 per month. The car was provided to the employee from 01.11.2010 therefore, the perquisite value has been calculated for 5 months. As per section 17(2)(iv), a perquisite includes any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee. Therefore, professional tax of ` 2,000 paid by the employer is taxable as a perquisite in the hands of Mr. Balaji. As per section 16(iii), a deduction from the salary is provided on account of tax on employment i.e. professional tax paid during the year. Therefore, in the present case, the professional tax paid by the employer on behalf of the employee ` 2,000 is first included in the salary and deduction of the entire professional tax of ` 3,000 is provided from salary.
4. 5.
6.
(b) (i)
E-payment of service tax becomes mandatory if the assessee has paid a total service tax of ` 10 lakh or more (including the amount of service tax paid by utilizing CENVAT credit) in the previous financial year.
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(ii) Assessee (i) Individuals (ii) Companies Due date for e-payment of service tax 6th day of the month immediately following the quarter in which the value of taxable services are received 6th day of the month immediately following the month in which the value of taxable services are received
However, service tax on the value of taxable services received in the month of March is payable by 31st March by both, individuals and companies. (c) A Chartered Accountant plays a key role in proper compliance of VAT:(i) Record keeping: For effective utilization of input tax credit, systematic records of the same have to be maintained. Chartered Accountants are well-equipped to ensure compliance of such record keeping requirements prescribed under VAT laws of different States. Handling audit by Departmental officers: By maintaining proper records of the client, a Chartered Accountant is able to satisfy the Departmental auditors. His professional expertise helps him in effectively replying to audit queries and resolving audit objections.
(ii)
(iii) Procedural requirements of VAT laws: Chartered Accountants ensure compliance of various procedural requirements prescribed under VAT laws of different States like submission of periodical returns, statements etc. by utilizing their technical knowledge and analytical abilities. (iv) External audit of VAT records: Under VAT, assessee is required to self-assess the VAT liability and only a few returns would be scrutinized on a selective basis. Hence, a check on compliance gains paramount importance. Chartered Accountants help in ensuring tax compliance by audit of VAT accounts. Question 3 (a) Mr. Selvan, acquired a residential house in January, 2000 for ` 10,00,000 and made some improvements by way of additional construction to the house, incurring expenditure of ` 2,00,000 in October, 2004. He sold the house property in October, 2010 for ` 75,00,000. The value of property was adopted as ` 80,00,000 by the State stamp valuation authority for registration purpose. He acquired a residential house in January, 2010 for ` 25,00,000. He deposited ` 20,00,000 in capital gains bonds issued by National Highways Authority of India (NHAI) in June, 2011. Compute the capital gain chargeable to tax for the assessment year 2011-12. What would be the tax consequence and in which assessment year it would be taxable, if the house property acquired in January, 2010 is sold for ` 40,00,000 in March, 2012?
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Cost inflation index :
F.Y. 1999-2000 F.Y. 2004-2005 F.Y. 2010-2011 F.Y. 2011-1012
= 389 = 480 = 711 = 785 (8 Marks)
(b) ABC Private Ltd., is engaged in providing a taxable service. For the month of January 2011, its gross receipts were ` 18,00,000. The break-up of these receipts are as follows: Month in which services are performed March, 2010 (includes ` 1,00,000 for the services rendered to an international organization) April, 2010 (includes ` 1,25,000 for the services rendered within the Indian territorial waters) January, 2011 (includes ` 1,75,000 for services rendered to its associated enterprise) February, 2011 (includes ` 1,50,000 for services rendered in the State of Jammu & Kashmir) Receipt (`) 4,00,000 3,00,000 5,00,000 6,00,000
In the financial year 2009-10, ABC Private Ltd., had paid ` 2,06,000 as service tax (@ 10.3%). State the amount of service tax payable; for the month of January, 2011. (4 Marks) (c) State any two benefits and two drawbacks for a dealer who opts for composition scheme under VAT as per White Paper. (4 Marks) Answer (a) (I) Computation of Capital Gains Chargeable to tax for A.Y. 2011-12 Particulars Sale consideration (i.e. Stamp Duty Value) (Note-1) Less: Indexed Cost of Acquisition 10,00,000 711/389 Indexed Cost of Improvement 2,00,000 711/480 Less: Capital Gains exemption under section 54 (Note-2) Taxable Capital Gains Notes 1. As per the provisions of section 50C, in case the stamp duty value adopted by the stamp valuation authority is higher than the actual sale consideration, the ` ` 80,00,000
18,27,763 2,96,250 21,24,013 58,75,987 25,00,000 33,75,987
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stamp duty value shall be deemed as the full value of consideration. 2. Exemption under section 54 is available if a new residential house is purchased within one year before or two years after the date of transfer. Since the cost of new residential house is less than the capital gain, capital gain to the extent of cost of new asset is exempt under section 54. Exemption under section 54EC is available in respect of investment in bonds of National Highways Authority of India only if the investment is made within a period of six months after the date of such transfer. In this case, since the investment is made after six months, exemption under section 54EC would not be available.
3.
(II) If the new asset purchased by the assessee on the basis of which exemption under section 54 is claimed, is transferred within 3 years from the date of its acquisition, then for computing the taxable short-term capital gain on such transfer, the capital gain exempted earlier shall be reduced from the cost of acquisition of such asset. Hence, in the present case, if the house property acquired in January, 2010 is sold for ` 40,00,000 in March, 2012 (i.e. before the expiry of 3 years from the date of acquisition), the capital gains exempted earlier (i.e. ` 25,00,000) would be reduced from the cost of acquisition (i.e. ` 25,00,000) to arrive at the short-term capital gains for A.Y. 2012-13. Particulars Sale consideration Less: Cost of acquisition Capital gains exempted earlier Short-term Capital Gains Particulars Services performed in March, 2010 [Refer Note 1] Services performed in April, 2010 [Refer Note 2] Services performed in January, 2011 [Refer Note 3] Services performed in February, 2011 [Refer Note 4] Total taxable services including service tax Service tax (including 3% education cesses) payable on above, rounded off [Refer Note 5] Notes: 1. Services rendered to an international organization have been exempted from payment of service tax by the Central Government. ` 25,00,000 (25,00,000) ` 40,00,000 Nil 40,00,000
(b) Computation of service tax payable by ABC private Ltd. for the month of January, 2011 ` 3,00,000 3,00,000 5,00,000 4,50,000 15,50,000 1,44,742
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2.
Levy of service tax extends to whole of India excluding Jammu and Kashmir and India includes Indian territorial waters. Hence, services rendered within Indian territorial waters would be liable to service tax. Services rendered to associated enterprise are liable to service tax. Levy of service tax extends to whole of India excluding Jammu and Kashmir. Hence, services rendered in Jammu and Kashmir would not be liable to service tax. As the particulars relate to gross receipts, the same are taken to be inclusive of service tax and hence service tax has been computed by making back calculations
3. 4. 5.
10.3 15,50,000 110.3 6. The aggregate value of taxable services of ABC Private Ltd. in the preceding financial year i.e., F.Y. 2009-10 is more than `10,00,000 as it has paid service tax of ` 2,06,000. Hence, it will not be entitled to exemption for small service providers in F.Y. 2010-11 and would be liable to service tax. VAT system requires detailed accounting and record keeping which increases the labour and the compliance cost. The composition scheme saves a lot of labour and efforts in keeping records thereby reducing the cost of doing business. Under this scheme, a very small amount of tax is payable.
(c) Benefits of composition scheme for a dealer:(i)
(ii) Composition scheme simplifies the calculation of tax liability of a dealer. Moreover, there is a simple return form to cover longer return period. Drawbacks of composition scheme for a dealer:(i)
The dealer under a composition scheme cannot avail input tax credit and issue tax invoices in order to pass on tax credit. This adds to the cost of the goods sold by him.
(ii) As the purchaser would not get any tax credit for the purchases made by him from the dealer operating under the composition scheme, the purchasers desirous of availing input tax credit on their purchases may not prefer to buy from composition dealers. Hence, the profitability of the dealer may get affected. Question 4 (a) Ramji Ltd., engaged in manufacture of medicines (pharmaceuticals), furnishes the following information for the year ended 31-03-2011: (i) (ii) Municipal tax relating to office building ` 51,000 not paid till 30-09-2011. Patent acquired for ` 20,00,000 on 01-09-2010 and used from the same month.
(iii) Capital expenditure on scientific research ` 10,00,000 which includes cost of land ` 2,00,000.
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(iv) Amount due from customer X outstanding for more than 3 years written off as bad debt in the books ` 5,00,000. (v) Income tax paid ` 90,000 by the company in respect of non-monetary perquisites provided to its employees. (vi) Provident fund contribution of employees ` 5,50,000 remitted in July ,2011. (vii) Expenditure towards advertisement in souvenir of a political party ` 1,50,000. (viii) Refund of sales tax ` 75,000 received during the year, which was claimed as expenditure in an earlier year. State with reasons the taxability or deductibility of the items given above under the Income-tax Act, 1961. Note: Computation of total income is not required. (8 Marks) (b) Explain optional composition scheme under service tax for distributor or selling agents of lotteries. (4 Marks) (c) State with reasons whether the following are true or false in the context of VAT as per White Paper: (i) (ii) No declaration form is prescribed under VAT system. Taxpayer's Identification Number (TIN) is a 10 digit alpha numeral.
(iii) Self assessment concept on deemed basis is one of the important features of VAT. (iv) Set off of input tax credit on capital goods is available only to manufacturers and not to traders (4 Marks) Answer (a) (i)
As per section 43B, municipal tax is not deductible for A.Y. 2011-12 since it is not paid on or before 30.09.2011, being the due date of filing the return for A.Y. 2011-12.
(ii) Patent is an intangible asset eligible for depreciation@25%. Since it has been acquired and put to use for more than 180 days during the previous year 2010-11, full depreciation of ` 5,00,000 (i.e. 25% of ` 20,00,000) is allowable as deduction under section 32. (iii) Weighted deduction@200% is available under section 35(2AB) in respect of expenditure incurred by a company on scientific research on in-house research and development facility as approved by the prescribed authority. However, cost of land is not eligible for deduction.
Deduction under section 35(2AB) = 200% of ` 8 lakhs = ` 16,00,000.

Note: It is presumed that the in-house research and development facility is approved by the prescribed authority and is hence, eligible for the weighted deducted@200% under section 35(2AB).
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(iv) Bad debts i.e. ` 5,00,000 written off in the books of account as irrecoverable is deductible under section 36(1)(vii), provided the debt has been taken into account in computing the income of the company in the current previous year or any of the earlier previous years. (v) As per section 40(a)(v), income-tax of ` 90,000 paid by the company in respect of non-monetary perquisites provided to its employees, exempt in the employees hands under section 10(10CC), is not deductible while computing business income of the employercompany. (vi) The employees contribution to provident fund is taxable in the hands of the company since it is included in the definition of income under section 2(24)(x).
As per section 36(1)(va), provident fund contribution of employees is deductible only if such sum is credited to the employees provident fund account on or before the due date under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. In this case, since it is remitted after the due date under the said Act, it is not deductible.
Note: There is an alternate view that remittance of provident fund contribution of employees is deductible even though it is remitted beyond the due date under the Employees Provident Fund and Miscellaneous Provisions Act, 1952, in case the same is remitted before the due date of filing return of income in view of the Delhi High Court decision in CIT vs. Aimil Ltd.(2010) 321 ITR 508. (vii) Expenditure towards advertisement in souvenir of a political party is disallowed under section 37(2B) while computing business income.
However, the same is deductible under section 80GGB from gross total income.
(viii) Refund of a trading liability is taxable under section 41(1), if a deduction was allowed in respect of the same to the taxpayer in an earlier year.
Since sales tax was claimed as expenditure in an earlier year, refund of the same during the year would attract the provisions of section 41(1).
(b) The distributor or selling agents promoting, marketing or organising/assisting in organising lottery have an option to pay service tax in the following manner instead of paying the same @10%: Guaranteed lottery prize payout Amount of service tax payable on every ` 10 Lakh (or part of ` 10 Lakh) of aggregate face value of lottery tickets printed by the organising State for a draw ` 6000/-. ` 9000/-
More than 80% Less than 80%
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In case of online lottery, the aggregate face value of lottery tickets will be the aggregate value of tickets sold. The distributor/selling agent will have to exercise such option within a period of one month of the beginning of each financial year. The new service provider can exercise such option within one month of providing the service. The option once exercised cannot be withdrawn during the remaining part of the financial year.
(c) (i)
The statement is true. In view of the fact that lot of time and energy is wasted by the dealer in getting the declaration forms from the Department, most of earlier forms have been dispensed with. There is no declaration form prescribed under VAT.
(ii) The statement is false. Taxpayers Identification Number (TIN) is a 11 digit numeral. The first two characters represent State Code as used by the Union Ministry of Home Affairs and the next nine characters will be different in different states. (iii) The statement is true. Under VAT, a dealer assesses the VAT liability on his own and submits the return. The dealer is deemed to be self-assessed on the basis of the return filed by him if he does not receive any notice proposing departmental audit of his books of account within the time-limit specified in the VAT Act of the respective State. (iv) The statement is false. As per the White Paper on VAT, set off of input tax credit on capital goods is available to both manufacturers and traders. Question 5 (a) Mr. Chandran (aged 38) owned 6 heavy goods vehicles as on 01-04-2010. He acquired 2 more heavy goods vehicles on 1-7-2010. He is solely engaged in the business of plying goods vehicles on hire since financial year 2006-07. He did not opt for presumptive provision contained in section 44AE for the financial year 2009-10. His books were audited under section 44AB and the return of income was filed on 5-8-2010. He has unabsorbed depreciation of ` 70,000 and business loss of ` 1,00,000 for the financial year 2009-10. Following further information is provided to you: (i) (ii) Deposited ` 20,000 in Tax Saver Deposit with UCO Bank in the name of married son. Paid medical insurance premium of ` 23,000 for his parents (both aged above 70) by means of bank demand draft.
(iii) Paid premium on life insurance policy of his married daughter ` 25,000. (iv) Repaid principal of ` 40,000 and interest of ` 15,000 to Canara Bank towards education loan of his daughter, who completed B.E. two years ago. She is employed after completion of her studies.
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Assuming that Mr. Chandran has opted for presumptive provision contained in section 44AE of the Income-tax Act, 1961, compute the total income of Mr. Chandran for the assessment year 2011-12. (8 Marks) (b) State the contents of Service tax return. (any eight points). (4 Marks) (c) Ashok, purchased raw material 'A' for ` 30,00,000 plus VAT @ 4%. Out of such raw material 60% was used for manufacture of taxable goods and the remaining for manufacture of goods which are exempt from VAT. Another raw material 'B' was purchased for ` 15,00,000 on which VAT was paid at 1 %. Entire raw material' 'B' was used for manufacture of taxable goods only. The entire taxable goods were sold for ` 50,00,000 plus VAT @ 12.5%. Compute VAT liability of Ashok on the assumption that there was no opening or closing inventory. Note: Ashok is not a dealer who opted for Composition Scheme. Answer (a) Computation of total income of Mr. Chandran for the A. Y. 2011-12 Particulars Income from business of plying goods vehicle (Refer Note 1) Less: Brought forward business loss of financial year 2009-10 (Refer Note 2 & 3) Gross Total Income Less: Deduction under Chapter VI-A Section 80C:Life insurance premium paid for insurance of married daughter (Refer Note 5) Section 80D:Medical insurance premium paid for insurance of parents (Refer Note 6) Section 80E:Interest paid towards education loan taken for studies of his daughter (Refer Note 7) Total Income Working Notes: ` ` 4,50,000 (4 Marks)
1,00,000 3,50,000
25,000
20,000
15,000
60,000 2,90,000
(1) Computation of income from business of plying goods vehicles under section 44AE.
Particulars `
6 heavy goods vehicle held throughout the year (` 5,000612)
3,60,000
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2 heavy goods vehicle held for 9 months (` 5,00029) Income under section 44AE
90,000 4,50,000
(2) As per section 44AE, any deduction allowable under the provisions of sections 30 to 38 shall be deemed to have been already allowed. Therefore, the unabsorbed depreciation of ` 70,000 shall not be allowed as a deduction since it is covered by section 32. (3) Brought forward business loss of ` 1,00,000 shall be allowed as deduction, by virtue of section 72, as it is allowed to be carried forward for 8 assessment years following the assessment year to which it relates, since the return for A.Y. 2010-11 was filed before the due date specified under section 139(1). (4) Fixed deposit in the name of married son does not qualify for deduction under section 80C. (5) Premium paid for insurance on the life of any child of the individual, whether married or not, qualifies for deduction under section 80C. Therefore, the life insurance premium paid for insurance policy of married daughter is allowed as deduction. (6) Deduction is allowed under section 80D for payment made for medical insurance of parents. Medical insurance premium paid for insuring the health of a person who is a senior citizen i.e. of age 65 years or more, qualifies for deduction under section 80D, subject to a maximum of ` 20,000. Hence, deduction of ` 20,000 is provided to Mr. Chandran, as his parents are senior citizens. (7) It is only the payment of interest on education loan which qualifies for deduction under section 80E. Deduction under section 80E is allowed in respect of interest on loan taken for education of children of the individual even if they are not dependent. Principal repayment of the education loan is not eligible for deduction under section 80E.
(b) General details, like financial year, half year period (April-September or October-March), name of the assessee, registration number of the premises for which return is being filed, category of taxable services are required to be furnished. Apart from this, some significant month-wise details also need to be furnished. For instance:
(i) (ii)
amount received towards taxable service amount received in advance towards taxable service to be provided
(iii) amount billed for exempted services and services exported without payment of tax (iv) amount billed for services on which tax is to be paid (v) abatement claimed - value (vi) notification number of abatement and exemption (vii) service tax payable
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(viii) education cess payable (ix) GAR-7 challan date and number (x) credit details for service tax provider/recipient
(c) Particulars Output VAT (50,00,000 12.5%) [A] Input VAT [B] Computation of VAT liability of Ashok ` `
6,25,000 72,000 15,000 87,000 5,38,000
Raw material A (30,00,000 60% 4%) [Refer Note 1] Raw material B (15,00,000 1%)
Net VAT payable by Ashok [A] [B]
Note: Input tax credit is allowed only in respect of the raw material used in manufacture of taxable goods and hence, the same is restricted to the extent of 60%. Question 6 (a) (i) Brett Lee, an Australian cricket player visits India for 100 days in every financial year. This has been his practice for the past 10 financial years. Find out his residential status for the assessment year 2011-2012. On 10-10-2010, Mr. Govind (a bank employee) received ` 5,00,000 towards interest on enhanced compensation from State Government in respect of compulsory acquisition of his land effected during the financial year 2005-06. Out of this interest, ` 1,50,000 relates to the financial year 2007-08; ` 1,65,000 to the financial year 2008-09; and ` 1,85,000 to the financial year 2009-10. He incurred ` 50,000 by way of legal expenses to receive the interest on such enhanced compensation. How much of interest on enhanced compensation would be chargeable to tax for the assessment year 2011-12? (2 4 = 8 Marks) (b) Write short notes on Service Tax Code Number and the objective sought to be achieved thereunder. (4 Marks) (c) Briefly explain the benefits of the system of cross-checking under VAT as per White Paper. (4 Marks) Answer (a) (i) Determination of Residential Status of Mr. Brett Lee for the A.Y. 2011-12:-
(ii)
Period of stay during previous year 2010-11 = 100 days. Calculation of period of stay during 4 preceding previous years (100 x 4=400 days)
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2009-10 2008-09 2007-08 2006-07 Total
100 days 100 days 100 days 100 days 400 days
Since Mr. Brett Lee has been in India for a period more than 60 days during previous year 2010-11 and for a period of more than 365 days during the 4 immediately preceding previous years. Therefore, since he satisfies one of the basic conditions under section 6(1), he is a resident for the assessment year 2011-12. Computation of period of stay during 7 preceding previous years = 100 x 7=700 days 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 Total 100 days 100 days 100 days 100 days 100 days 100 days 100 days 700 days
Since his period of stay in India during the past 7 previous years is less than 730 days, he is a not-ordinarily resident during the assessment year 2011-12. (See Note below) Therefore, Mr. Brett Lee is a resident but not ordinarily resident during the previous year 2010-11 relevant to the assessment year 2011-12.
Note: A not-ordinarily resident person is one who satisfies any one of the conditions specified under section 6(6), i.e.,
(i) (ii)
If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the relevant previous year, or If such individual has during the 7 previous years preceding the relevant previous year been in India for a period of 729 days or less.
In this case, since Mr. Brett Lee satisfies condition (ii), he is a not-ordinary resident for A.Y. 2011-12.
(ii) Section 145A provides that interest received by the assessee on enhanced compensation shall be deemed to be the income of the assessee of the year in which it is received, irrespective of the method of accounting followed by the assessee and irrespective of the financial year to which it relates.
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Section 56(2)(viii) states that such income shall be taxable as Income from other sources. 50% of such income shall be allowed as deduction by virtue of section 57(iv) and no other deduction shall be permissible from such Income. Therefore, legal expenses incurred to receive the interest on enhanced compensation would not be allowed as deduction from such income.
Computation of interest on enhanced compensation taxable as Income from other sources for the A.Y 2011-12: Particulars `
Interest on enhanced compensation taxable under section 56(2)(viii)

Less: Deduction under section 57(iv) (50% x 5,00,000)
5,00,000 2,50,000 2,50,000
Taxable interest on enhanced compensation
(b) Service Tax Code Number is a 15-digit alphanumerical number allotted by the system to the assessee based on the PAN number or temporary number (if PAN is not submitted). The assessee applies for it in a prescribed form. This code is available in the registration certificate issued to the assessee by the Assistant Commissioner/Deputy Commissioner of the Division. It is also known as assessee code or registration number.
The first 10 digits of the STC code are 10 character PAN issued by Income tax authorities. Next two are ST. Last three are numeric code 001, 002, 003 etc.
Objective sought to be achieved
1. 2.
(c) (i)
The objective is to identify the assessees, exporters or importers as also the concerned office where the person would be assessed or registered. It helps in online processing of the information in relation to the assessee. A comprehensive cross-checking system is a pre-requisite for an efficient VAT system as VAT system requires the assessees to self-assess the VAT liability and only a few returns are scrutinized on a selective basis. The system of cross checking reduces tax evasion and ultimately leads to significant growth of tax revenue. The system of cross checking under VAT system protects the honest dealers and penalizes the fictitious or dishonest ones. Hence, it creates a level playing field and brings more equal competition in the sphere of trade and industry.
(ii)
Question 7 (a) Answer any two of the following three sub-divisions: (i) (ii) State any four of the specified businesses eligible for deduction under section 35AD of the Income-tax Act, 1961. State the applicability of TDS provisions and TDS amount in the following cases:
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(a) Rent paid for hire of machinery by B Ltd. to Mr. Raman ` 2,10,000. (b) Fee paid to Dr. Srivatsan by Sundar (HUF) ` 35,000 for surgery performed to a member of the family. (iii) State with reasons whether you agree or disagree with the following statements: (a) Return of income of Limited Liability Partnership (LLP) could be signed by any partner. (b) Time limit for filing return under section 139(1) in the case of Mr. A having total turnover of ` 45 lakhs for the year ended 31-03-2011, whether or not opting to offer presumptive income under section 44AD is 30th September 2011. (2 4 = 8 Marks) (b) Vaibhav Cargo Ltd., is engaged in providing cargo handling service. In January 2011, it received ` 150 lakh for the service rendered. The break-up of the total receipts are given below: Nature of receipt For export cargo and handling of passenger baggage For storage and cleaning of empty containers of shipping lines. For packing and transport of cargo For handling cargo of agriculture produce Other receipts for providing cargo handling service
` (in lakh)
55 13 10 20 52
Calculate the value of taxable service under "cargo handling services" for the month of January, 2011. (4 Marks) (c) X Co. furnishes you the following information: Raw material purchased ` 5,00,000 plus VAT @4%. Manufacturing expenses (revenue nature) ` 2,00,000. Sale price ` 8,00,000 plus VAT @ 4%. Plant & machinery acquired ` 2,50,000 plus VAT @ 4% eligible for input tax credit in the year of acquisition itself. Compute VAT liability under : (i) (ii) gross product variant. consumption variant. (4 Marks)
State which variant is beneficial to the dealer?
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Answer (a) (i)
Following are the specified business eligible for deduction under section 35AD:(1) setting up and operating cold chain facilities for specified products. (2) setting up and operating warehousing facilities for storing agricultural produce. (3) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facility being an integral part of such network. (4) building and operating a new hotel of two star or above category, anywhere in India. (5) building and operating a new hospital, anywhere in India, with atleast 100 beds for patients. (6) developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be, and notified by the CBDT in accordance with the prescribed guidelines.
Note: Any four of the above mentioned points can be given in the answer.
(ii) (a) Since the rent paid for hire of machinery by B. Ltd. to Mr. Raman exceeds ` 1,80,000, the provisions of section 194-I for deduction of tax at source are attracted.
The rate applicable for deduction of tax at source under Section 194-I on rent paid for hire of plant and machinery is 2% assuming that Mr. Raman had furnished his permanent account number to B Ltd. Therefore, the amount of tax to be deducted at source: = ` 2,10,000 x 2% = ` 4200.
Note: In case Mr. Raman does not furnish his permanent account number to B Ltd., tax shall be deducted@20% on ` 2,10,000, by virtue of provisions of section 206AA. (b) As per the provisions of section 194J, a Hindu Undivided Family is required to deduct tax at source on fees paid for professional services only if it is subject to tax audit under section 44AB in the financial year preceding the current financial year.
However, if such payment made for professional services is exclusively for the personal purpose of any member of Hindu Undivided Family, then, the liability to deduct tax is not attracted. Therefore, in the given case, even if Sundar (HUF) is liable to tax audit in the
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immediately preceding financial year, the liability to deduct tax at source is not attracted in this case since, the fees for professional service to Dr. Srivatsan is paid for a personal purpose i.e. the surgery of a member of the family.
(iii) (a) Disagree
The return of income of LLP should be signed by a designated partner. Any other partner can sign the Return of Income of LLP only in the following cases:(i) (ii) where for any unavoidable reason such designated partner is not able to sign and verify the return, or, where there is no designated partner.
(b) Disagree
In case Mr. A opts to offer his income as per the presumptive taxation provisions of section 44AD, then, the due date under section 139(1) for filing of return of income for the year ended 31.03.2011 shall be 31st July, 2011. It is only in case Mr. A does not opt for presumptive taxation provisions under section 44AD and offers income to be lower than 8% of total turnover and his total income exceeds the basic exemption limit, he has to keep books of account as per section 44AA and get his accounts audited under section 44AB, in which case the due date for filing return would be 30th September, 2011.
(b) Value of taxable cargo handling services of Vaibhav Cargo Ltd. for the month of January, 2011 Particulars ` `
Total collections for handling cargo (including service tax) Less:Exclusions and exemptions (i) Export cargo and handling of passenger baggage [Refer Note 1] shipping Note 3] 55,00,000 13,00,000 20,00,000
1,50,00,00
(ii) Storage and cleaning of empty containers of lines [Refer Note 2] (iv) Handling cargo of agricultural produce [Refer Total taxable services including service tax Value of taxable service (rounded off) [Refer Note 5]
Notes:
88,00,000 62,00,000 56,21,034
1.
The definition of taxable cargo handling service specifically excludes handling of export cargo and passenger baggage.
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2. 3. 4. 5.
Storage and cleaning of empty containers of shipping lines does not fall within the ambit of cargo handling service. Cargo handling service provided in relation to agricultural produce is exempt from service tax vide a notification issued by the Central Government in this regard. Packing and transport of cargo is covered by the definition of cargo handling service and hence liable to service tax. As the particulars relate to total receipts, the same are taken to be inclusive of service tax and hence value of taxable service has been computed by making back 100 calculations 62,00,000 110.3 It has been presumed that Vaibhav Cargo Ltd. is not eligible for exemption available to small service providers.
6.
(c) Under gross product variant of VAT, deduction for taxes on all purchases of raw materials and components is allowed. However, deduction for tax paid on capital goods is not allowed. Hence, the VAT liability under gross product variant would be calculated as under: Computation of VAT liability under Gross Product Variant Particulars `
VAT payable on sales (8,00,000 4%) Less: Input VAT allowed on raw material (5,00,000 4%) Net VAT payable
32,000 20,000
12,000
Under consumption variant of VAT, deduction for taxes paid on all business purchases including capital goods is allowed. Hence, VAT liability under consumption variant would be calculated as under:
Computation of VAT liability under Consumption Variant Particulars ` `
VAT payable on sales (8,00,000 4%) Less: Input VAT allowed on raw material (5,00,000 4%) Input VAT allowed on capital goods (2,50,000 4%) (whole input tax credit is allowed in the year of acquisition itself) Net VAT payable 20,000 10,000
32,000
30,000
2,000
Since, the net VAT liability under consumption variant is less than the VAT liability under gross product variant, consumption variant is beneficial to the dealer.
EXAMINERS COMMENTS ON THE PERFORMANCE OF THE CANDIDATES PAPER 1: ACCOUNTING Specific Comments Question 1.(a) Most of the candidates could not correctly ascertain effective capital and remuneration payable to the managing director. Some candidates misunderstood monthly maximum permissible managerial remuneration as yearly maximum permissible managerial remuneration and hence wrongly concluded their answer. (d) Some candidates failed to calculate new profit sharing ratio after admission of a new partner and some erred while ascertaining the amount to be brought in or withdrawn by the old partners. Question 2. Satisfactory performance of the candidates has been observed in this question. However, few candidates made mistake while passing journal entries for arrears of preference share dividend and transfer to capital reserve. Though the entries passed were correct but many candidates have not written narrations for the journal entries. Few candidates were not able to calculate correct cash at bank after reconstruction. Question 3. Many candidates were not able to calculate bar trading profit, depreciation on premises and car correctly. However, most of the candidates made a mistake in adjusting cheque issued but not presented to bank balance as per pass book to arrive at bank balance as per cash book. Candidates were also not able to draw all working notes. Question 4.(a) Some of the candidates did not present their answer in a sequential manner while some of the candidates erred in calculating net profit made during the year. However, overall performance of the candidates was good. (b) Few candidates were not able to allocate pre and post incorporation expenses correctly. Question 5.(a) A number of candidates were unable to calculate the correct amount of closing stock. Many candidates did not segregate between normal and abnormal items. Question 6.(a) Candidates erred in issuing bonus shares from cash profit only. They had taken non-cash profit also into consideration for capitalizing bonus shares. Some candidates failed in calculating authorised share capital after bonus issue. Extracts of balance sheet, after bonus issue, was also not correctly drawn by some of the candidates. (b) Some candidates took base date, different from the base date required to be taken as per the question. Question 7.(a) Many candidates had not supported their answer with the provisions of relevant AS 10. (b) Answers of large number of candidates reflected their confusion on recognition of dividend either on proposed date or declaration date. They were not able to apply the provisions of AS 9 in the given situation.
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(c) Candidates failed to give disclosure requirements at the time of amalgamation. They explained types of amalgamation instead of disclosure requirements on amalgamation. (d) Majority of the candidates failed to take into account the current year loss along with the estimated loss on the contract. PAPER 2: BUSINESS LAWS, ETHICS AND COMMUNICATION Specific Comments Question 1.(a) Performance of the students was highly satisfactory as most of the students answered correctly. Some of the students were confused and did not understand the question properly and rather than answering on the grounds for the discharge of a contract they answered the essentials of a contract. They mixed the discharge of contract with void contract. (b) Students performance is not satisfactory. Majority of the students not referred the relevant provisions i.e., Section 84(2) and 84(4) of the Companies Act, 1956 and even not written the law and procedure for issuing the duplicate share certificate as asked in the question. (c) Performance of majority of students has been highly satisfactory. (d) Performance of the students is below the average. Majority of students failed to explain the meaning of Ethical Communication and no mention of relevant information of the elements of Ethical Communication. In fact, students explained meaning, types and modes of communication. Question 2.(a) Performance of the students in both the parts (i) and (ii) of the question is satisfactory. In respect to part (i) of the question, some of the students missed age bifurcation for the payment of bonus and failed to mention that minimum bonus is payable even if employer suffers losses during the accounting year. Whereas in respect to part (ii) of the question, students concept on the law relating to recovery of amount of gratuity along with the interest as per Section 8 of the Payment of Gratuity Act,1972 was not clear. In fact some of the students made a guess that an employee may file a suit in court against an employer to recover gratuity. (b) Performance of the students in this part is quite satisfactory. Some of the students were not able to differentiate the points in a proper manner as they were found to be bit confused in both the two terminologies, the moral and the ethics. (c) In respect to this part of the question students performance is quite satisfactory. Most students answered on active listening rather than focusing on the significance of the active listening on interpersonal communication skills. Question 3.(a) Performance of the students has been highly satisfactory, though only few students explained relevant Sections 15 & 16 of the Indian Contract Act,1872.
EXAMINERS COMMENTS
87
(b) In respect to this part of the question student performance is average. Most of the students laid incomplete answer and not referring to the core points and thus answer seems to be given in general. (c) Students performance in relation to this part of the question is average. Most of the students mentioned the types of grapevine rather than pointing the factors that lead to grapevine communication as asked in the question. Some students intermingled the definition and the factors of the grapevine communication. Question 4.(a) Students performance in respect to this part of question is below average. Majority of the students failed to lay down the legal provision related to the procedure for shifting of the Registered Office as per Section 17 of the Companies Act,1956. Many students were also confused between Registered Officer and ROC and missed to answer the importance of Registered Office of a company. Overall answer was not up to the expected level of the students. (b) Students performance in respect to this part of the question is satisfactory, though some of the candidates were not clear about the concept. (c) This part of the question found to be satisfactory but most of them did not give the features of Group and also instead of focusing their answer on the features of group they mentioned the advantages and types of groups like formal and informal. Question 5.(a) Students performance in respect to this part was highly satisfactory. Though most of the students mentioned only three to four grounds of dishonor of cheques, not justifying the weightage of marks allotted for the answer. (b) Performance of the students was satisfactory. Many students could not properly interpret the difference between pre-incorporation and post incorporation contracts. (c) Students performance to this question was below average. Students lack the drafting skill and drafted like a layman and no professional touch as is expected from the students of this level. Question 6.(a) Respect to this part of question, students performance found to be unsatisfactory i.e. below average because of conceptual haziness as regards to the legal position of minor for the membership in a company as per the Companies Act, 1956. Mostly students focused their answer on the basis of the Indian Partnership Act, 1932. (b) Students performance in concern to this part of the question was average .Majority of the students gave answer in general. They were unable to understand the question as to parameters to Competition Law and thus failed to answer well. (c) Pertaining to this part of the question, students performance was highly satisfactory. Almost all the students replied the question correctly. Question 7.(a) In respect to this part of the question, students performance was unsatisfactory. As the students not updated themselves on the amended law of the Employees Deposit Linked Insurance (Amendment) Scheme, 2010, majority of the students didnt make an effort to attempt the question.
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(b) In concern to this part of the question students performance found to be unsatisfactory because of lack of knowledge of the provisions of the Companies Act, 1956 related the commencement of business by a public company . Many of the students laid the procedure for incorporation and issue of certificate of incorporation and some answered the requirements for formation of a Public Company. (c) Students performance in relation to this part of the question was unsatisfactory. Majority of the students lack legal knowledge relating to criminal liability for mis-statement in the prospectus as per the provision given under Section 63 of the Companies Act, 1956. Most of the students missed quantum of penalties. (d) Performance of the students pertaining to this part of the question found to be unsatisfactory. Answers given were too general. Answer of the students lacked the benefits of Social Accountability-8000, an international standard improving the working conditions. (e) Students performance to this part of the question found to be unsatisfactory. Students were not able to properly elaborate the meaning of semantic barriers. PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT General Comments: The overall performance of the examinees was average. Lack of conceptual clarity of the examinees was observed. The explanation and logic given by the examinees was not of a very high standard. All examinees need to understand all basic concepts of Cost Accounting and Financial Management and to practice practical questions in examination condition to perform better in the subject. Specific Comments: Question 1. It is a compulsory question divided into four numerical subparts: (a) It is a practical question related to calculation of break-even point and desired sales on expected level of profit. Most of the students correctly calculated the break even point but some of them failed to calculate the desired sales correctly. (b) This practical problem related to calculation of wages under Rowan plan and Emerson Efficiency plan was attempted by many examinees. Average performance of the candidates was observed. (c) It is practical question relating to management of debtors. Most of the candidates could not correctly work out the Opportunity Cost of Investment in Receivables for evaluation of the proposal. (d) It is a practical question relating to calculation of weighted average cost of capital. The question is well attempted by most of the students. However, a few of the candidates could not work out the exact Cost of Equity figure resulting into wrong computation of Weighted Average Cost of Capital.
EXAMINERS COMMENTS
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Question 2.(a) This is a practical question relating to treatment of under/over absorption of over heads. Satisfactory performance of the examinees was observed. (b) It is practical question relating to calculation of ratios. It was well attempted by most of the candidates. However, most of the candidates wrongly computed the figure of Quick Assets resulting in incorrect calculation of Quick Ratio. Some of them were not able to compute DebtEquity ratio and Return on Capital Employed. Question 3.(a) It is practical question relating to calculation of equivalent production and cost per unit as per average method of equivalent production. Performance of the examinees was satisfactory in this question. (b) This is a practical question relating to calculation of earning per share and combined leverage. Most of the candidates were able to compute the values of Earnings per share and Combined Leverage on correct lines. Question 4.(a) It is a practical question relating to calculation of working capital as per operating cycle method. Majority of the candidates did not work out the problem as per the requirement of the question. They failed to compute the working capital on the basis of operating cycle method. (b) It is practical question relating to preparation of cost ledger control accounts. It was well attempted by most of the examinees. Question 5.(a) This question comprises of four theoretical parts. i. Question relating to difference between cost control and cost reduction. It was not well attempted by the examinees as some of them were confused between the two concepts. ii. Question regarding difference between fixed and flexible budget was well answered by the examinees. iii This part was on Differences between operating lease and financial lease. Though it was well attempted by most of the candidates, however, few of them answered Financial Leverages versus Operating Leverages instead of Financial Leases versus Operating Leases. iv This part of the question was on Differences between Net Present Value and Internal Rate of Return. Candidates were not able to fully bring out the differences with clarity and gave vague answers. Question 6.(a) It is a practical question relating to capital budgeting. Majority of the candidates solved it correctly. However, few of them computed depreciation on incorrect lines while many candidates applied Net Cashflows in computation of ARR and also calculated Net Present Value instead of P.V. Index. (b) It is a practical question relating to calculation of variances. It was well attempted by most of the students. Question 7. This question comprises five theoretical parts and the candidates were required to answer any four.
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(a) Most of the candidates explained the responsibilities of Chief Financial Officer (CFO) correctly. They were clearly able to bring out the different responsibilities of a CFO. (b) Question relating to relevance of time value of money was not well answered by most of the candidates. The candidates lacked clarity and displayed lack of knowledge about this concept. Majority of the candidates explained the concept of time value of money instead of its relevance. (c) Question relating to ABC analysis as the students very well answered a system of inventory control. (d) Question relating to notional profit and retention money was well answered by the students. (e) This part was related to bridge finance and essentials of budget. Average performance was observed.
PAPER 4 : TAXATION Specific Comments Question 1(a) The question seeks computation of book profits under section 40(b) applicable to partnership firms. Also, the allowable working partner salary is to be computed. Candidates did not know the concept of book profit. Most of them were unaware of the provisions of section 40(b). (b) This question on clubbing of income and computation of tax liability was not answered well by many candidates. Even the basic exemption limit for woman tax payer was not stated correctly. Candidates were not able to apply clubbing provisions to calculate Income from house property correctly. Some candidates have failed to apply the flat rate of 20% in respect of tax calculation on long-term capital gain. (c) This question on computation of value of taxable services was answered reasonably well by the candidates. (d) This question on computation of value of taxable services was answered reasonably well by the candidates. Question 2.(a) Some candidates were not aware of the value of perquisite of motor car owned by the employer and provided to the employee for both official and personal use. They have also not mentioned the correct reason for exemption of leave travel concession. (b) The first part of the question on e-payment of service tax on mandatory basis was not answered well by the candidates. Most of the candidates did not mention that limit of Rs.10 lakh for e-payment is inclusive of CENVAT credit. As regards due date for e-payment, it was answered well by candidates.
EXAMINERS COMMENTS
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(c) This question on the role of Chartered Accountant in proper compliance of VAT was answered on general lines by many candidates. The performance of the candidates was average for this question. Question 3.(a) Very few candidates were able state the reason for non availability of exemption under section 54EC correctly. Further, in the second part of the question the candidates were not able to compute short-term capital gain on sale of house property in March 2012. (b) This question intending to test chargeability to service tax on services rendered at various points of time vis a vis different locations was answered reasonably well by many candidates. However, few candidates ignored the word Gross Receipt mentioned in question resulting in computation of wrong amount of service tax. (c) This question on the benefits and drawbacks of composition scheme was answered well by many candidates. Question 4.(a) This question on taxability and deductibility of various items was not answered well by many candidates. Most candidates were not aware of the taxability or deductibility of certain payments or expenditure, especially in parts (iv), (v), and (vii) of the question. (b) Most of the candidates were confused and answered the composition scheme under VAT instead of mentioning composition scheme under service tax for distributor or selling agents of lotteries. (c) This question intending to test the conceptual knowledge of candidates was answered very briefly by them. Although the question specifically required reasons to support the answer, majority of candidates did not provide the same. Question 5.(a) This question involving computation of presumptive income, treatment of brought forward business loss and depreciation and computation of deductions under Chapter VI-A was not answered well by many candidates. Some candidates were not aware of the presumptive tax provisions under section 44AE. Others were not aware of the conditions for claiming deductions under section 80C and section 80E. (b) Most of the candidates wrongly mentioned the features of service tax return instead of providing the contents of service tax return. (c) This question on VAT liability, where a part of raw material was used for manufacture of exempt goods, was answered well by candidates. However, few candidates wrongly claimed full input tax credit of raw material A instead of taking 60% credit. Question 6.(a)(i) This part of the question was on residential status. Most of the candidates did not assign proper reasons (i.e. provisions for section 6) correctly for answering this part of the question. (ii) This part of the question was not answered well by majority of candidates indicating that they were not abreast with the latest amendments. Most of the candidates were not aware of the provisions of section 56(2)(viii) and section 57(iv) and were not able to calculate the interest on enhanced compensation chargeable to tax correctly.
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(b) The question on service tax code number and objective was answered very poorly by many candidates. It only exhibited lack of preparation. (c) This question on cross checking under VAT system was answered very poorly by the candidates. Question 7.(a)(ii) This question on applicability of TDS provisions was not answered well by many candidates. They lacked knowledge of TDS provisions and hence were not able to apply the provisions of section 194-J and section 194-I correctly. (iii) This question on signing of return/filing of return was not answered impressively by the candidates. The answers exhibited lack of preparation by them. (b) This question on computation of taxable value of cargo handling service was answered reasonably well by the candidates. (c) This question on gross product and consumption variant was answered well by many candidates.

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9

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP I

& ACCOUNTING TECHNICIAN EXAMINATION

The Institute of Chartered Accountants of India

SUGGESTED ANSWERS TO QUESTIONS SET AT THE

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP I & ACCOUNTING TECHNICIAN EXAMINATION

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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

www.icai.org Board of Studies

Examiners comments on the performance of the candidates

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011

Effective capital for the purpose of managerial remuneration

Returns Inward Account* To Sundry Debtors Account

` 1,00,000 100 = ` 80,000. 125

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011

Total Depreciation to be charged in the Profit and Loss Account

` Depreciation on old machinery in use [10% of (5,60,000-1,60,000)]

40,000 7,500 47,500

Total depreciation on machinery in use

So, total depreciation to be charged in Profit and Loss A/c

Book value of machine as on 1.4.2010

1,60,000 (8,000) 1,52,000 (1,35,000) 17,000 `

Written Down Value as on 30.9.2010

Loss on exchange of machine

Balance as per trial balance

5,60,000 (1,60,000) 4,00,000 1,50,000 5,50,000 (47,500) 5,02,500

Existing ratio Less: Share of profit transferred to C New share

A 3/5 (1/10) 5/10

B 2/5 (1/10) 3/10

New profit sharing ratio of A:B:C = 5/10 : 3/10 : 2/10

B (`) 52,500 (60,000) (7,500)

C (`) 35,000 35,000

4,000, 8% Preference shares of ` 100 each fully paid

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011

Stock-in trade Deferred advertisement expenses

3,00,000 50,000 4,75,000 22,25,000

4,24,000 3,00,000 22,25,000

1,01,000 Profit and loss account

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011

12,73,000 4,75,000 1,80,000 2,40,000 50,000 30,000 2,98,000

Balance Sheet of Ice Ltd. (As reduced) Liabilities

Excess cash spent Deficit

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011

Balance Sheet as on 31.03.2011 Liabilities Amount Assets Amount

65,130 43,490 1,08,620

Sundry creditors Outstanding Honorarium

1,290 Less: Accumulated depreciation (W.N.4) 1,000 Car

(36,570) (9,360) 37,440 2,610 2,940 10,350 1,10,910

Bar stock Subscription due Cash at bank (W.N.6) 1,10,910

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011

Creditors for Bar Purchases

` 1,770 16,830 18,600

` 22,350 2,610 24,960 (Cash)

6,000 By Closing stock

56,400 1,530 1,500 59,430

Depreciation on new premises (30,000 5%)

Profit on sale of car

` Sales price of a car

36,570 (30,870) (5,700) 3,300

Bank balance as per cash book 1.4.2010 31.3.2011

24,690 (270) 24,420

Bank balance as per cash book