sa-ipcc-group-i nov. 2009

Volume 1Volume 1IPCE & ATE, Group I, November, 2009

Board of StudiesThe Institute of Chartered Accountants of IndiaA-94/4, Sector-58, Noida- 201 301Phone : 0120 - 3045900Fax : 0120 - 3045940E-mail : [email protected] : http://www.icai.org

ISBN: 978-81-8441-328-1

March / 2010

November, 2009

Suggested Answers

Suggested A

nsw

ers

Novem

ber, 2

00

9

Integrated ProfessionalCompetence Examination Group I &Accounting Technician Examination

1

(Set up by an Act of Parliament)

Board of Studies

New Delhi

Inte

grate

d P

rofe

ssio

nal C

om

pete

nce E

xam

inatio

n G

roup I &

Accountin

g T

echnic

ian E

xam

inatio

n

SUGGESTED ANSWERS TO QUESTIONS SET AT THE

COMMON FOR

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION

GROUP I

&

ACCOUNTING TECHNICIAN EXAMINATION

NOVEMBER, 2009

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

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, form the publisher. Website : www.icai.org Committee/ : Board of Studies Department E-mail : [email protected] Price : Rs.40/- ISBN No. : 978-81-8441-328-1 Published by : 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. Printed by : Sahitya Bhawan Publications, Hospital Road, Agra-282 003

March / 2010 / 11,000 Copies

Contents

Page Nos.

Paper 1. Accounting ......................................................................................... 1 – 20 Paper 2. Business Laws, Ethics and Communication.........................................21 – 38 Paper 3. Cost Accounting and Financial Management .......................................39 – 60 Paper 4 Taxation .............................................................................................61 – 77

Summary of Examiners’ comments on the performance of the candidates

PAPER – 1 : ACCOUNTING All questions are compulsory.

Wherever necessary, suitable assumption(s) should be made by the candidates.

Working notes should form part of the answer. Question 1

(i) On 1st April, 2008, Chhotu started business with an initial Capital of Rs.70,000. On 1st October, 2008, he introduced additional capital of Rs.40,000. On 7th of every month, he withdraws Rs.5,000 for household expenses. On 31st March, 2009 his Assets and Liabilities were Rs.2,00,000 and Rs.70,000 respectively.

Ascertain the profit earned by Chhotu during the year ended 31st March, 2009.

(ii) Year to year results of a company were not found comparable on the basis of gross profit margin. List out the probable reasons.

(iii) MY Ltd. had acquired 200 equity shares of YZ Ltd. at Rs.105 per share on 01.01.2009 and paid Rs.200 towards brokerage, stamp duty and STT. On 31st March, 2009, shares of YZ Ltd. were traded at Rs.110 per share. At what value investment is to be shown in the Balance Sheet of MY Ltd. as at 31st March, 2009.

(iv) On 1st April, 2008, X, Y and Z enter into partnership introducing capital of Rs.80,000, Rs.50,000 and Rs.50,000 respectively. They agree to share Profits and Losses equally. At the end of the accounting year on 31st March, 2009, X claims that he be paid interest on his additional Capital of Rs.30,000 @ 10% per annum, while Z demands salary of Rs.600 per month for the extra hours devoted by him daily at the shop. The partnership deed is silent on these matters.

Decide the matters with reasons.

(v) What are the basic characteristics of a Private Ltd. Company?

(vi) Sumo Ltd. has a profit of Rs.25 lakhs before charging depreciation for financial year 2008-09. Depreciation in the books was Rs.11 lakhs and depreciation chargeable under Section 205 comes to Rs.17 lakhs. Compute divisible profit for the year.

(vii) From the following data, find out value of inventory as on 30.04.2009 using (a) LIFO method, and (b) FIFO method:

(1) 01.04.2009 Purchased 10 units @ Rs.70 per unit (2) 06.04.2009 Sold 6 units @ Rs.90 per unit (3) 09.04.2009 Purchased 20 units @ Rs.75 per unit (4) 18.04.2009 Sold 14 units @ Rs.100 per unit

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009

2

(viii) Explain contract costs as per Accounting Standard-7 related to ‘Construction Contracts’.

(ix) Omshanti Club has 500 members with annual fee of Rs.1,000 per member. At the end of the accounting year, accountant noticed that 40 members have not paid annual fee and 70 members had paid fee in advance. Help the accountant to compute cash receipts of annual fee for the year.

(x) The Companies Act, 1956 limits the payment of managerial remuneration. What is the maximum managerial remuneration, which can be paid in case of a company consistently earning profits and has more than one managerial person? (10 x 2 = 20 Marks)

Answer (i)

Rs.Capital as on 31.3.2009 (Rs.2,00,000 – Rs.70,000) 1,30,000Add: Drawings (Rs.5,000 × 12 months) 60,000 1,90,000Less: Additional capital introduced as on 1.10.2008 (40,000) 1,50,000Less: Capital on 01.04.2008 (70,000)Profit for the year ended as on 31.3.2009 80,000

(ii) The probable reasons could be the change in the accounting policy viz. (a) Change in method of recognition of sales revenue from cash basis to accrual basis or

vice versa; or (b) Change in valuation of closing inventory by adopting different methods year to year

such as LIFO to FIFO to weighted average or vice versa. (iii)

Rs.Purchase price of Equity shares of YZ Ltd.(200 shares x Rs.105 per share) 21,000Add: Brokerage, stamp duty and STT 200Cost of investment 21,200

If the investment is a long term investment than it will be shown at cost. Therefore value of investment will be Rs. 21,200. However, if the investment is a current investment, then it will be shown at lower of cost (i.e. Rs.21,200) or net realizable value (i.e. Rs.200 x 110 = Rs.22,000). Therefore value of investment will be Rs. 21,200.

(iv) When the partnership deed is silent on the matter of interest on capitals and salary to partners, then no partner is entitled to claim interest on capital and salary. Therefore, claim of X and Z is not tenable. However, inclusion of specific provision regarding the said issues in partnership deed can make them entitled for interest on capital and salary.

PAPER – 1 : ACCOUNTING

3

(v) According to Section 3 (1) (iii), a private company means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles:

(a) Restricts the rights of members to transfer its shares.

(b) Limits the number of its member to 50 excluding: (i) persons who are in employment of the company; and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased. For this purpose joint holders of shares will be counted as single members.

(c) Prohibits any invitation to the public to subscribe to any shares in, or debentures of, the company.

(d) Prohibits any invitation or acceptance of deposits from persons other than its member, directors, and relatives.

(vi) Computation of divisible profit (Rs. in lakhs)

Profit for the year 2008-2009 25.00 Less: Depreciation chargeable under Section 205 (17.00)

Divisible profit for the year 8.00

(vii) (a) Statement showing valuation of closing inventory by LIFO method

Date Receipts Issue Balance Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount1.4.09 10 70 700 10 70 700 6.4.09 6 70 420 4 70 280 9.4.09 20 75 1500 4 70 280 20 75 1500 18.4.09 14 75 1,050 4 70 280 6 75 450

Value of closing inventory as per LIFO method:

4 units x Rs.70 = Rs.280 6 units x Rs.75 = Rs.450 Rs.730


4

(b) Statement showing valuation of closing inventory by FIFO method

Date Receipts Issue Balance Unit Cost/unit Amount Unit Cost/unit Amount Unit Cost/unit Amount

1.4.09 10 70 700 10 70 700 6.4.09 6 70 420 4 70 280 9.4.09 20 75 1500 4 70 280 20 75 1500 18.4.09 4 70 280 10 75 750 10 75 750

Value of closing inventory as per FIFO method: 10 Units x Rs.75 = Rs.750

(viii) As per para 15 of AS 7 “Construction Contracts (revised 2002)”, contract cost should comprise:

(a) costs that relate directly to the specific contract;

(b) costs that are attributable to contract activity in general and can be allocated to the contract; and

(c) such other costs as are specifically chargeable to the customer under the terms of the contract.

(ix) Computation of cash receipts of annual fee for the year Rs. Total fee receivable during the year (500 members × Rs.1,000) = 5,00,000 Less: Fee not received (40 members × Rs.1,000) = (40,000) 4,60,000 Add: Fee received in advance (70 members × Rs.1,000) = 70,000 Cash received during the year towards annual fee = 5,30,000(x) Section 198 of the Companies Act, 1956 prescribes the overall maximum managerial

remuneration payable and also managerial remuneration in case of absence or inadequacy of profits. In the given case, the company is earning profits consistently and has more than one managerial person; therefore, the maximum limit is 10% of net profit.

Question 2 The following are the Balance Sheets of M Ltd. and N Ltd. as at 31st March, 2009:

(Rs. in lakhs)Liabilities M Ltd. N Ltd.Fully paid equity shares of Rs.10 each 3,600 900


5

10% preference shares of Rs.10 each, fully paid up 1,200 -Capital Reserve 600 -General Reserve 2,100 -Profit and Loss Account 780 -8% Redeemable debentures of Rs.1,000 each - 300Trade Creditors 2,421 369Provisions 870 93 11,571 1,662Assets Plant and Machinery 4,215 468Furniture and Fixtures 2,400 183Motor Vehicles - 51Stock 2,370 444Sundry Debtors 1,044 237Cash at Bank 1,542 240Preliminary Expenses - 33Discount on Issue of Debentures - 6 11,571 1,662

A new Company MN Ltd. was incorporated with an authorised capital of Rs.15,000 lakhs divided into shares of Rs.10 each. For the purpose of amalgamation in the nature of merger, M Ltd. and N Ltd. were merged into MN Ltd. on the following terms:

(i) Purchase consideration for M Ltd.’s business is to be discharged by issue of 120 lakhs fully paid 11% preference shares and 720 lakhs fully paid equity shares of MN Ltd. to the preference and equity shareholders of M Ltd. in full satisfaction of their claims.

(ii) To discharge purchase consideration for N Ltd.’s business, MN Ltd. to allot 90 lakhs fully paid up equity shares to shareholders of N Ltd. in full satisfaction of their claims.

(iii) Expenses on the liquidation of M Ltd. and N Ltd. amounting to Rs.6 lakhs are to be borne by MN Ltd.

(iv) 8% redeemable debentures of N Ltd. to be converted into 8.5% redeemable debentures of MN Ltd.

(v) Expenses on incorporation of MN Ltd. were Rs.15 lakhs. You are requested to: (a) Pass necessary Journal Entries in the books of MN Ltd. to record above transactions,

and (b) Prepare Balance Sheet of MN Ltd. after merger. (16 Marks)


6

Answer In the books of MN Ltd.

Journal Entries

(Rs. in lakhs) Dr. Cr.Business Purchase Account Dr. 9,300 To Liquidator of M Ltd. 8,400 To Liquidator of N Ltd. 900(Being consideration payable to liquidators of the two companies taken over)

Plant and Machinery Account (4,215+468) Dr. 4,683 Furniture and Fixtures Account (2,400+183) Dr. 2,583 Motor Vehicles Account Dr. 51 Stock Account (2,370+444) Dr. 2,814 Sundry Debtors Account (1,044+237) Dr. 1,281 Cash at Bank Account (1,542+240) Dr. 1,782 Preliminary Expenses Account Dr. 33 Discount on issue of Debentures Account Dr. 6 Profit and Loss Account (Refer W.N.) Dr. 120 To 8% Redeemable Debentures of N Ltd. Account 300 To Trade Creditors Account (2,421+369) 2,790 To Provisions Account (870+93) 963 To Business Purchase Account 9,300(Being incorporation of all the assets and liabilities and the excess of consideration over the share capital being adjusted against reserves and surplus)

Liquidator of M Ltd. Account Dr. 8,400 Liquidator of N Ltd. Account Dr. 900 To Equity Share Capital Account (7,200+900) 8,100 To 11% Preference Share Capital Account 1,200(Being allotment of fully paid shares in discharge of purchase consideration)

Profit and Loss Account Dr. 6 To Bank Account 6(Being payment of liquidation expenses of M Ltd. and N Ltd.)


7

Preliminary Expenses Account Dr. 15 To Bank Account 15(Being expenses on incorporation of MN Ltd.) 8% Redeemable Debentures of N Ltd. Account Dr. 300 To 8.5% Redeemable Debentures Account 300(Being conversion of 8% Debentures of N Ltd. into 8.5% Debentures)

Balance Sheet of MN Ltd.

Liabilities Rs. in lakhs

Assets Rs. in lakhs

Authorised Share Capital: Fixed Assets: 15 crore shares of Rs.10 each 15,000 Plant and Machinery 4,683Issued, subscribed and paid up: Furniture and Fixtures 2,583810 lakhs Equity shares of Rs.10 each, fully paid

8,100 Motor Vehicles 51

120 lakhs 11% Preference shares of Rs.10 each, fully paid 1,200

Current Assets, Loans and Advances:

(All the above mentioned shares have been issued for consideration other than cash)

(A) Current Assets Stock Sundry Debtors

2,814 1,281

Secured Loans: Cash at Bank (1,782–6–15) 1,7618.5% Redeemable Debentures 300 (B) Loans and Advances NilCurrent Liabilities and Provisions: Miscellaneous Expenditure: (A) Current Liabilities Preliminary Expenses (33+15) 48 Trade Creditors 2,790 Discount on Issue of

Debentures 6(B) Provisions 963

Profit and Loss Account (120+6) 126

13,353 13,353

Working Note:

Profit and Loss Account (Rs. in lakhs)Total consideration = Rs.(8,400 + 900) lakhs 9,300Less: Share Capital of Companies taken over [Rs.(3,600+1,200+900) lakhs] 5,700 3,600


8

Amount to be adjusted: Capital Reserve 600 General Reserve 2,100 Profit & Loss A/c 780 3,480Debit balance of Profit & Loss Account 120

Question 3 E, F and G were partners sharing Profits and Losses in the ratio of 5:3:2 respectively. On 31st March, 2009 Balance Sheet of the firm stood as follows:

Liabilities Rs. Assets Rs.Capital A/cs Buildings 55,000E 50,000 Furniture 25,000F 40,000 Stock 42,000G 28,000 1,18,000 Debtors 20,000Creditors 33,500 Cash at Bank 11,200Outstanding Expenses 1,700 1,53,200 1,53,200On 31st March, 2009, E decided to retire and F and G decided to continue as equal partners. Other terms of retirement were as follows:

(i) Building be appreciated by 20%.

(ii) Furniture be depreciated by 10%.

(iii) A provision of 5% be created for bad debts on debtors.

(iv) Goodwill be valued at two years’ purchase of profit for the latest accounting year. The firm’s Profit for the year ended 31st March, 2009 was Rs.25,000. No goodwill account is to be raised in the books of accounts.

(v) Fresh capital be introduced by F and G to the extent of Rs.10,000 and Rs.35,000 respectively.

(vi) Out of sum payable to retiring partner E, a sum of Rs.45,000 be paid immediately and the balance be transferred to his loan account bearing interest @ 12% per annum. The loan is to be paid off by 31st March, 2011.

One month after E’s retirement, F and G agreed to admit E’s son H as a partner with one-forth share in Profits/Losses. E agreed that the balance in his loan account be converted into H’s Capital. E also agreed to forgo one month’s interest on his loan.


9

It was also agreed that H will bring in, his share of goodwill through book adjustment, valued at the price on the date of E’s retirement. No goodwill account is to be raised in the books.

You are requested to pass necessary Journal Entries to give effect to the above transactions and prepare Partners’ Capital Accounts. (16 Marks) Answer

Dr. Cr. Rs. Rs.1. Building Account Dr. 11,000 To Revaluation Account 11,000 (Being building appreciated) 2. Revaluation Account Dr. 3,500 To Furniture Account 2,500 To Provision for Doubtful Debts Account 1,000 (Being furniture depreciated by 10% and Provision for

doubtful debts created @ 5% on Debtors)

3. Revaluation Account Dr. 7,500 To E’s Capital Account 3,750 To F’s Capital Account 2,250 To G’s Capital Account 1,500 (Being profit on revaluation transferred to capital accounts

of partners)

4. F’s Capital Account Dr. 10,000 G’s Capital Account Dr. 15,000 To E’s Capital Account 25,000 (Being adjustment for E’s share of goodwill) 5. Bank Account Dr. 45,000 To F’s Capital Account 10,000 To G’s Capital Account 35,000 (Being fresh capital introduced by F and G) 6. E’s Capital Account Dr. 78,750 To Bank Account 45,000 To E’s Loan Account 33,750 (Being settlement of E’s capital on his retirement)


10

7. E’s Loan Account Dr. 33,750 To H’s Capital Account 33,750 (Transfer of E’s Loan Account to H’s Capital Account) 8. H’s Capital Account Dr. 12,500 To F’s Capital Account 6,250 To G’s Capital Account 6,250 (Being adjustment entry passed for H’s share of goodwill)

Partners’ Capital Accounts

E F G H E F G H

Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

To E (Goodwill) 10,000 15,000 By Balance b/d 50,000 40,000 28,000

To Bank 45,000 By Revaluation A/c 3,750 2,250 1,500

To E’s Loan A/c 33,750 By F (Goodwill) 10,000

To Balance c/d 42,250 49,500 By G (Goodwill) 15,000

By Bank (fresh capital) 10,000 35,000

78,750 52,250 64,500 78,750 52,250 64,500

To F (Goodwill) 6,250 By Balance b/d 42,250 49,500

To G (Goodwill) 6,250 By E’s Loan A/c 33,750

To Balance c/d 48,500 55,750 21,250 By H (goodwill) 6,250 6,250

48,500 55,750 33,750 48,500 55,750 33,750

Working Notes: 1. Calculation of gaining ratio

Partners New ratio Old ratio Gain Sacrifice E

105

105

F 21

103

21 –

103 =

102

G 21

102

21 –

102 =

103

Hence, ratio of gain between F and G = 2:3


11

2. Value of total goodwill of the firm = Rs.25,000 × 2 = Rs.50,000

E’s share = Rs.50,000 000,25 .Rs105 =×

F will bear = Rs.25,000 00010Rs=52

× ,.

G will bear = Rs.25,000 × 00015Rs=53

,.

3. H’s share of goodwill = Rs.50,000 41

× = Rs.12,500

F and G share equal profits. Therefore, their sacrificing ratio will also be equal Hence, each of them will be credited with Rs.6,250

Question 4

(a) A fire broke out in the godown of a business house on 8th July, 2009. Goods costing Rs.2,03,000 in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged condition from the main godown were valued at Rs.1,97,000.

The following particulars were available from the books of accounts:

Stock on the last Balance Sheet date at 31st March, 2009 was Rs.15,72,000. Purchases for the period from 1st April, 2009 to 8th July, 2009 were Rs.37,10,000 and sales during the same period amounted to Rs.52,60,000. The average gross profit margin was 30% on sales.

The business house has a fire insurance policy for Rs.10,00,000 in respect of its entire stock. Assist the Accountant of the business house in computing the amount of claim of loss by fire.

(b) A trader allows his customers, credit for one week only beyond which he charges interest @ 12% per annum. Anil, a customer buys goods as follows:

Date of Sale/Purchase Amount (Rs.)January 2, 2009 6,000January 28, 2009 5,500February 17, 2009 7,000March 3, 2009 4,700

Anil settles his account on 31st March, 2009. Calculate the amount of interest payable by Anil using average due date method. (8 + 8 =16 Marks)


12

Answer (a)

Calculation of amount of claim Rs. Rs.Value of stock as on 8th July, 2009 (Refer W.N.) 16,00,000Less: Value of stock remaining unaffected by fire 2,03,000 Agreed value of damaged goods 1,97,000 4,00,000Loss of stock 12,00,000

Applying average clause:

Amount of claim = stockofLossfireofdatetheonStock

policyofAmount ×

= 000,00,12000,00,16.Rs000,00,10.Rs ×

= Rs. 7,50,000 Working Note: Memorandum Trading Account for the period from 1st April, 2009 to 8th July, 2009

Rs. Rs.To Opening Stock 15,72,000 By Sales 52,60,000To Purchases 37,10,000 By Closing Stock (Bal.Fig.) 16,00,000To Gross Profit (30% of

sales) 15,78,000

68,60,000 68,60,000

(b) Let us assume 9th January, 2009 to be the base date:

Date of Sale

Due date of payment

Amount (Rs.)

No. of days from 9th January, 2009

Product

Jan. 2 Jan. 9 6,000 0 0Jan. 28 Feb. 4 5,500 26 1,43,000Feb. 17 Feb. 24 7,000 46 3,22,000March 3 March 10 4,700 60 2,82,000 23,200 7,47,000

Average Due date = Base date + amount of Sum

oductPr of Sum


13

= 9th January, 2009 +200,23000,47,7

= 9th January 2009 + 32 days i.e. 32 days from 9th January, 2009 = 10th February, 2009 Thus, average due date = 10th February, 2009 No. of days from 10th February, 2009 to 31st March, 2009 = 49 days. Interest payable by Anil on Rs.23,200 for 49 days @ 12% per annum

= Rs.23,200 74.373.Rs10012

36549 =××

Question 5

(a) The Income and Expenditure Account of City Sports Club for the year ended 31st March, 2009 was as follows:

Expenditure Amount (Rs.)

Income Amount (Rs.)

To Salaries 1,20,000 By Subscriptions 1,60,000To Printing and Stationery 6,000 By Entrance Fees 10,000To Rent 12,000 By Contribution for Annual

dinner 20,000

To Repairs 10,000 By Profit on Annual Sports meet

20,000

To Sundry Expenses 8,000 To Annual Dinner Expenses 30,000 To Interest to Bank 6,000 To Depreciation on Sports

equipment 6,000

To Excess of Income over Expenditure 12,000

2,10,000 2,10,000 The above account had been prepared after the following adjustments:

Rs.Subscriptions outstanding on 31.03.2008 12,000Subscriptions received in advance on 31.03.2008 9,000Subscriptions received in advance on 31.03.2009 5,400Subscriptions outstanding on 31.03.2009 15,000


14

Salaries outstanding at the beginning and at the end of the financial year were Rs.8,000 and Rs.10,000 respectively. Sundry expenses included prepaid insurance expenses of Rs.1,200.

The Club owned a freehold ground valued Rs.2,00,000. The Club has sports equipment on 01.04.2008 valued at Rs.52,000. At the end of the year, after depreciation, the sports equipment amounted to Rs.54,000. The Club raised a loan of Rs.40,000 from a bank on 01.01.2008, which was unpaid till 31.03.2009. On 31.03.2009, cash in hand was Rs.32,000.

Prepare Receipts and Payments account of the Club for the year ended 31st March, 2009 and Balance Sheet as on that date.

(b) Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total sales were Rs.36,00,000. The sales per month in the first half year were half of what they were in the later half year. The net profit of the company, Rs.2,00,000 was worked out after charging the following expenses:

(i) Depreciation Rs.1,08,000, (ii) Audit fees Rs.15,000, (iii) Directors’ fees Rs.50,000, (iv) Preliminary expenses Rs.12,000, (v) Office expenses Rs.78,000, (vi) Selling expenses Rs.72,000 and (vii) Interest to vendors upto August 31, 2008 Rs.5,000.

Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March, 2009. (10 + 6 = 16 Marks)

Answer (a) City Sports Club

Receipt and Payments Account for the year ended 31st March, 2009

Receipts Amount (Rs.)

Payments Amount (Rs.)

To Balance b/d (Bal. Fig.) 27,800 By Salaries: for 2007-2008 8,000

To Subscription: for 2008-2009 1,10,000 for 2007-2008 12,000 By Printing and

Stationery 6,000

for 2008-2009 (W.N.3) 1,36,000 By Rent 12,000 for 2009-2010 5,400 By Repairs 10,000To Entrance Fees 10,000 By Sundry Expenses

(8,000 + 1,200) 9,200


15

To Contribution for Annual Dinner

20,000 By Annual Dinner Expenses

30,000

To Profit on Annual Sports Meet

20,000∗ By Interest to Bank 6,000

By Sports Equipment (W.N.2)

8,000

By Balance c/d 32,000 2,31,200 2,31,200

Balance Sheet as at 31st March, 2009

Liabilities Amount (Rs.)

Amount (Rs.)

Assets Amount (Rs.)

Amount (Rs.)

Capital Fund (W.N.1)

2,34,800 Freehold Ground 2,00,000

Add: Excess of income over expenditure

12,000

2,46,800

Sports Equipment Add: Additions during the year (Bal. Fig.)

52,000

8,000 60,000

Bank Loan 40,000 Less: Depreciation (6,000) 54,000Outstanding Salaries

10,000 Subscription in Arrear

15,000

Subscription in Advance

5,400 Prepaid Insurance 1,200

Cash in hand 32,000 3,02,200 3,02,200

Working Notes: (1) Opening Balance of Capital Fund:

Balance Sheet as at 31st March, 2008

Rs. Rs.Capital Fund (Bal. Fig.) 2,34,800 Freehold Ground 2,00,000Bank Loan 40,000 Sports Equipment 52,000Outstanding Salaries 8,000 Subscription in Arrear 12,000Subscription in Advance 9,000 Cash in hand 27,800 2,91,800 2,91,800

∗ It is assumed that the profit on annual sports meet has been realized in cash.


16

(2) Sports Equipment Account

Rs. Rs.To Balance b/d 52,000 By Depreciation Account 6,000To Bank Account 8,000 By Balance c/d 54,000 60,000 60,000

(3) Subscription received during 2008-09

Rs. Rs.Subscription for 2008-09 1,60,000Less:Subscription outstanding as on 31.3.09 15,000Less:Subscription received in advance as on 31.3.08 9,000 24,000 1,36,000

(b) Statement showing pre and post incorporation profit for the year ended 31st March, 2009

Particulars Total Amount

Basis of Allocation

Pre-incorporation

Post-Incorporation

Rs. Rs, Rs.Gross Profit 5,40,000 2:7 1,20,000 4,20,000Less: Depreciation 1,08,000 1:2 36,000 72,000 Audit Fees 15,000 1:2 5,000 10,000 Director’s Fees 50,000 Post - 50,000 Preliminary Expenses 12,000 Post - 12,000 Office Expenses 78,000 1:2 26,000 52,000 Selling Expenses 72,000 2:7 16,000 56,000 Interest to vendors 5,000 Actual 4,000 1,000Net Profit (Rs.33,000 being pre-incorporation profit is transferred to capital reserve Account) 2,00,000

33,000 1,67,000Working Notes: 1. Sales ratio The sales per month in the first half year were half of what they were in the later half

year. If in the later half year, sales per month is Re.1 then it should be 50 paise per month in the first half year. So sales for the first four months (i.e. from 1st April, 2008 to 31st July, 2008) will be 4 × .50 = Rs.2 and for the last eight months (i.e.


17

from 1st August, 2008 to 31st March, 2009) will be (2 × .50 + 6 × 1) = Rs.7. Thus sales ratio is 2:7.

2. Time ratio 1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009

= 4 months : 8 months = 1:2

Thus, time ratio is 1:2. 3. Gross profit Gross profit = Net profit + All expenses

= Rs.2,00,000 + Rs.( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000)

= Rs.2,00,000 +Rs.3,40,000 = Rs.5,40,000. Question 6

Answer any four of the following:

(i) Market is full of ready-made accounting softwares. What factors will you consider to choose one of them for your enterprise?

(ii) As per Accounting Standard-14, what are the conditions which must be satisfied for an amalgamation in the nature of merger?

(iii) What do you mean by Customised Accounting Software?

(iv) Rose Ltd. had made an investment of Rs.500 lakhs in the equity shares of Nose Ltd. on 10.01.2009. The realisable value of such investment on 31.03.2009 became Rs.200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting year. How will you recognize this reduction in Financial statements for the year 2008-09.

(v) A company provided Rs.10,00,000 for dividend payment. Is the Corporate Dividend Tax payable in this case? If yes, please compute Corporate Dividend Tax assuming rate of 15% plus surcharge of 10% and disclose as it would appear in profit and loss account of the company.

(vi) SAD Enterprises, a partnership firm, had purchased business of SWAD enterprises on 01.04.2008 and paid Rs.50,000 towards goodwill. On 01.04.2009, SAD enterprises decided to admit W as partner and the goodwill was valued at Rs.1,00,000 for the purpose.

Please explain with reasons, at what price goodwill can be shown in the books of account. (4 × 4 = 16 Marks)


18

Answer

(i) While choosing the accounting software, the following points should be considered:

1. Fulfilment of business requirements: Some packages have few functionalities more than the others. The purchaser may try to match his requirement with the available solutions.

2. Completeness of reports: Some packages might provide extra reports or the reports match the requirement more than the others.

3. Ease of use: Some packages could be very detailed and cumbersome compare to the others.

4. Cost: The budgetary constraints could be an important deciding factor. A package having more features cannot be opted because of the prohibitive costs.

5. Reputation of the vendor: Vendor support is essential for any software. A stable vendor with reputation and good track records will always be preferred.

6. Regular updates: Law is changing frequently. A vendor who is prepared to give updates will be preferred to a vendor unwilling to give updates.

(ii) According to AS 14 “Accounting for Amalgamations”, Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions:

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.


19

(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

(iii) A customised accounting software is one where the software is developed on the basis of requirement specifications provided by the organisation. The choice of customised accounting software could be because of the typical nature of the business or else the functionality desired to be computerised is not available in any of the pre-packaged accounting software. An organisation desiring to have an integrated software package covering most of the functional area may have the financial module as part of the entire customised system.

(iv) Recognition of reduction in value of investment would depend upon the nature of investment and nature of decline as per Accounting Standard 13 “Accounting for Investments”. As per provisions of the standard, if the investments were acquired for long term and decline is temporary in nature, reduction in value will not be recognized and investments would be carried at cost. If the decline is of permanent nature, it will be charged to profit and loss account. If the investments are current investments, then the reduction should be recognized and charged to Profit and Loss Account as the current investments are carried at cost or fair value, whichever is less.

(v) Yes, Corporate Dividend Tax (CDT)∗ is payable by the company which has provided for the payment of dividend. CDT is payable even if no income tax is payable. This is payable by a domestic company on distribution of profits to its shareholders.

In the given case, Corporate Dividend Tax would be worked out to Rs.1,65,000 [i.e. (Rs.10,00,000 x 15%) x 110%]. CDT should be accounted for in the same financial year in which provision for dividend is recognized and made. CDT shall be disclosed in profit and loss account below the line just after the provision for dividend. Such disclosure would give a proper picture regarding payments involved with reference to dividends. Disclosure of CDT in the profit and Loss Account will be as follows:

Dividend XXXX

Corporate Dividend Tax XXXX XXXX

∗ Corporate Dividend Tax is also known as ‘Dividend Distribution Tax’.


20

(vi) Para 16 of AS 10,’ Accounting for Fixed Assets’ states that goodwill can be recorded in the books only when some consideration in money or money’s worth has been paid for it. Therefore, only purchased goodwill should be recorded in the books. In the said case, payment of Rs.50,000 was made towards purchase of goodwill, hence to this extent goodwill can be recorded in the books. Additional goodwill of Rs.50,000 is self generated goodwill, which should not be recorded. On admission, death or retirement of a partner, goodwill adjustments can be carried out through capital accounts.

PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION Answer all questions

PART – I Question 1

(a) Mr. Singh, an old man, by a registered deed of gift, granted certain landed property to A, his daughter. By the terms of the deed, it was stipulated that an annuity of Rs.2, 000 should be paid every year to B, who was the brother of Mr. Singh. On the same day A made a promise to B and executed in his favour an agreement to give effect to the stipulation. A failed to pay the stipulated sum. In an action against her by B, she contended that since B had not furnished any consideration, he has no right of action.

Examining the provisions of Indian Contract Act, 1872, decide, whether the contention of A is valid? (5 Marks)

(b) State with reasons whether the following statements are correct or incorrect.(2×1=2 Marks)

(i) If the pawnor makes a default in the payment of debt, or performance of duty, as agreed, the pawnee has a right to sell the thing pledged for which no reasonable notice of the sale is required.

(ii) An "agency coupled with interest" may be terminated, at the instance of the principal at any time.

(c) Pick out the correct answer from the following and give reasons: (3×1=3 Marks)

(i) A contracts to save B against the consequences of any proceedings, which C may take against B in respect of a certain sum of 500 rupees. This is a :

(1) Contract of guarantee

(2) Quasi contract

(3) Contract of indemnity

(4) Void contract.

(ii) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract:

(1) can be enforced by A's representative

(2) can be enforced by B

(3) can be enforced either by A's representative or by B

(4) cannot be enforced either by A's representative or by B


22

(iii) A negotiable instrument drawn in favour of a minor is :

(1) void

(2) void but not enforceable

(3) valid

(4) None of the above. Answer (a) Problem as asked in the question is based on the provisions of the Indian Contract Act,

1872 as contained in section 2(d) and on the principle ‘privity of consideration’. Consideration is one of the essential elements to make a contract valid and it can flow from the promisee or any other person. In view of the clear language used in defining ‘consideration’ in Section 2(d) “…. the promisee or any other person…..”, it is not necessary that consideration should be furnished by the promisee only. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it moves form the promisee or any other person. The leading authority is the decision of the Madras High Court in Chinnaya Vs. Ramayya (1882) 4 Mad 137., wherein it was held that the consideration can legitimately move from a third party and it is an accepted principle of law in India.

In the given problem, Mr. Singh has entered into a contract with A, but Mr. B has not given any consideration to A but the consideration did flow from Mr. Singh to A and such consideration from third party is sufficient the enforce the promise of A, the daughter, to pay an annuity to B. Further the deed of gift and the promise made by A to B to pay the annuity were executed simultaneously and therefore they should be regarded as one transaction and there was sufficient consideration for it.

Thus, a stranger to the contract to the contract cannot enforce the contract but a stranger to the consideration may enforce it.

(b) (i) Incorrect: In accordance with the provisions of the Indian Contract Act, 1872 as contained in Section 176, if the pawnor makes any default in payment of the debt or performance of duty as agreed, the pawnee has a right to sell the thing pledged on giving the pawnor reasonable notice of the sale. A sale made by the pawnee without giving a reasonable notice will be void. A reasonable prior notice will confirm a good title on the buyer of such pledged goods.

(ii) Incorrect: Agency coupled with interest is an agency where the agent has interest in the subject matter of agency. Such agency can not be terminated except where there is an express provision to cause prejudice to the interest of the agent. Also, an agency coupled with interest does not come to an end on the death, insanity or the insolvency of the principal.

PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION

23

(c) (i) Answer: No. (3): ‘Contract of Indemnity’ : A Contract of indemnity is a Contract by which one party promises to save or indemnify the other from loss caused to him by the promisor himself or by the conduct of any other person (Section 124, Indian Contract Act, 1872).

(ii) Answer: No. (4): ‘Cannot be enforced either by A’s representative or by B’ : To paint a picture is a personal contract and may be performed only personally. A personal contract can not be performed by anybody other than the promisee. Hence, if A dies, the contract can not be enforced [ illustration (b) given in Section 37 of the Indian Contract Act, 1872].

(iii) Answer: No. 3: ‘Valid’ : Every person capable of contracting according to the law to which he is subject may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a bill of exchange or cheque. A minor may draw, indorse and deliver such instruments so as to bind all parties except himself. Therefore the negotiable instrument drawn in favour of a minor is valid. Section 26 of the Negotiable Instruments Act states that a minor cannot make himself liable as drawer, acceptor or endorser but where the instrument is drawn or endorsed by him, the holder can receive payment from any other party thereto.

Question 2

(a) Noble Meters Limited was incorporated with the equity share capital of Rs. 50 lakh. The company received the certificate of incorporation on 20th May, 2009. The company issued the prospectus inviting the public to subscribe for its equity shares. Meanwhile, the company intended to commence its business. Whether Noble Meters Ltd. is entitled to commence its business without obtaining the certificate to commencement of Business?

Advise the company stating the conditions to be fulfilled for obtaining the certificate to commencement of Business from the Registrar of Companies under Companies Act, 1956. (5 Marks)

(b) State whether the following statements are true or false and give reasons. (2 × 1 = 2 Marks)

(i) The Articles of Association of a Company can be altered by passing an ordinary resolution in the meeting of the shareholders.

(ii) A transferee becomes a member of the company when the instrument of transfer is submitted with the company.

(c) Pick out the correct answer from the following and give reasons: ( 3 × 1 =3 Marks)

(i) Contracts which are entered into, by agents or trustees on behalf of a prospective company before it has come into existence are called:

(1) Provisional contracts


24

(2) Pre-incorporation contracts

(3) Both provisional and pre-incorporation contracts

(4) None of the above.

(ii) A prospectus issued by the financial institutions or bank for one or more issues of the securities or class of securities specified in the prospectus is called:

(1) Deemed prospectus

(2) Red-herring prospectus

(3) Abridged prospectus

(4) Shelf prospectus.

(iii) The gap between two Annual General Meetings must not be more than

(1) 12 months

(2) 15 months

(3) 18 months

(4) 15 months as may be extended by Registrar of Companies to 18 months. Answer (a) A private company or a company having no share capital may commence business

immediately after its incorporation. The public company having share capital must obtain certificate to commence business from the Registrar of Companies before it commences its business or exercises its borrowing powers. Therefore in the given problem Noble Meters Limited is not entitled to commence business without obtaining the certificate to commence the business from the Registrar of Companies.

In order to obtain this certificate the company has to fulfill the following conditions in compliance with the provisions of Section 149 of the Companies Act, 1956: (a) the minimum number of shares which has to be paid for in cash has been

subscribed and allotted; (b) every director of the company has paid to the company, on each of the shares taken

or contracted to be taken by him and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on the shares offered for public subscription;

(c) no money is or may become liable to be paid to applicants 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


25

(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 of Companies.

If a public company commences business or borrows money without obtaining the certificate, every officer in default shall be punishable with a fine of Rs. 5,000/-.

(b) (i) Incorrect: As per the provisions of Section 31 of the Companies Act, 1956, a company may , by special resolution, alter its articles. Therefore ordinary resolution will not suffice in this case. The power of alteration of the company is absolute subject to two restrictions viz.

(a) The alteration must not be in contravention of the Companies Act, 1956.

(b) The power of alteration is subjects to the conditions contained in the memorandum of association.

(ii) Incorrect: A transferee does not become a member of the company only by submitting the instrument of transfer with the company. The company has to approve and register the transfer of shares in the name of the transferee before it becomes effective. Section 206A of the Companies Act, 1956 lays down that where any instrument of transfer of shares has been delivered to the company for registration and the transfer of shares has not been registered by the company, the right to dividend, rights shares and bonus shares shall be kept in abeyance.

(c) (i) Answer: No.2: Pre-incorporation Contracts. Contracts made by promoters who act as agents or trustees of the company before its incorporation, are called pre-incorporation contracts. Such contracts can not bind the company because the company has no legal status prior to its incorporation. [In Re English and Colonial Produce Co. (1906) 2 Ch. 435].

(ii) Answer: No.4: Shelf prospectus. According to Section 60A any public financial institution, public sector bank or scheduled bank, whose main object is financing, shall file a shelf prospectus. Such prospectus issued by financial institutions or bank is called shelf prospectus.

(iii) Answer: No.4:15 months as may be extended by Registrar of Companies to 18 months.

According to Section 166 of the Companies Act, 1956 and its proviso, the gap between two Annual General Meetings must not be more than 15 months but the Registrar of Companies may extend it for further three months in special cases.

Question 3

Standard Airways Limited was incorporated at Chennai in the year 2005, employing 125 workmen. Due to strike of workers, mismanagement in the company and accidental loss of the assets the company suffered heavy losses continuously since its incorporation, resulting in a large part of the capital and assets getting wiped out. Consequently, the company moved an


26

application to the Government of Tamilnadu requesting to exempt the company fully from the application of the provisions of the Payment of Bonus Act, 1965.

Decide, whether the Government of Tamilnadu may grant exemption to the Company. State the provisions of law in this regard as stated under the Payment of Bonus Act, 1965. (6 Marks) Answer An employer who is unable to comply with the provisions of the Payment of Bonus Act, due to paucity of funds or for other reasons, can make an application to the appropriate Government for exemption fully or partly from the provisions of the Payment of Bonus Act,1965 under Section 36. If the appropriate Government having regard to the financial position and other relevant circumstances of any establishment or class of establishments, is of the opinion that it will not be in public interest to apply all or any of the provisions of the Act thereto, it may, by notification in official Gazette, exempt for such period as may be specified therein and subject to such conditions as it may think fit to impose, such establishment or class of establishments from all or any of the provisions of the Act. Such relevant considerations for granting exemptions are industrial peace, law and order situation, effect on production of consumer goods, difficulties of management, etc. Decision under Section 36 must be an objective one. If the employer establishes that losses were being incurred continuously and entire capital and assets have been wiped out, the State Government can not refuse to grant exemption under Section 36 [Nav Bharat Potteries vs. State (1987) ILLN117 (Bombay)]. Employees should be heard before granting such exemption. The facts of the problem meet the criteria spelt out in Section 36 and hence, Standard Airways may be allowed exemption. Question 4

'N' is the holder of a bill of exchange made payable to the order of 'P'. The bill of exchange contains the following endorsements in blank:

First endorsement ‘P’

Second endorsement 'Q'

Third endorsement 'R'

Fourth endorsement 'S'

'N' strikes out, without S's consent, the endorsements by 'Q' and 'R'. Decide with reasons whether 'N' is entitled to recover anything from 'S' under the provisions of Negotiable Instruments Act, 1881. (5 Marks) Answer According to Section 40 of the Negotiable Instruments Act,1881, where the holder of a Negotiable Instrument without the consent of the endorser destroys or impairs the endorser’s remedy against a prior party the endorser is discharged from liability to the holder to the same


27

extent as if the instrument had been paid at maturity. Therefore if the endorsements of ‘R’ and ‘Q’ are struck out without the consent of ‘S’, ‘N’ will not be entitled to recover anything from ‘S’, the reason being that as between ‘R’ and ‘S’ ‘R’ is the principal debtor and ‘S’ is the surety. If ‘R’ is released by the holder under Section 39 of the Act, ‘S’ being surety will be discharged. In this given problem, the rule may be stated thus that when the holder without the consent of the endorser impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder. Question 5 Mr. X was an employee of Mutual Developers Limited. He retired from the company after completing 30 years of continuous service. He applied to the company for the payment of gratuity within the prescribed time. The company refused to pay the gratuity and contended that due to stringent financial condition the company is unable to pay the gratuity. Mr. X applied to the appropriate authority for the recovery of the amount of gratuity.

Examine the validity of the contention of the company and also state the provisions of law to recover the gratuity under the Payment of Gratuity Act, 1972. (5 Marks) Answer (i) Gratuity shall be payable to an employee on the termination of his employment after he

has rendered continuous service for not less than five years on his superannuation or on his retirement or resignation or on his death or disablement due to accident or disease under Section 4(1) of the Payment of Gratuity Act,1972. Further, as soon as gratuity becomes payable, the employer shall whether the application for the payment of gratuity has been given or not by the employee, determine the amount of gratuity and give notice in writing to the person to whom the gratuity is payable under intimation to the controlling officer [Section 7(2)].

The employer shall arrange to pay the amount of gratuity within 30 days for the date of its becoming due/payable to the person to whom it is payable [Section 7(3)], along with simple interest if it is not paid within the period specified except where the delay in the payment is due to the fault of the employee and the employer has obtained permission thereon from the Controlling Authority[Section 7(3A)].

(ii) If the gratuity payable under the Act is not paid by the employer within the prescribed time to the person entitled thereto, the Controlling Authority shall issue a certificate for the amount to the Collector to recover the same along with 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 the Section shall not exceed the amount of gratuity payable under this Act in no case (Section 8).


28

In the given case the facts are commensurate with provisions of law as stated above under Sections 7 and 8 of the Payment of Gratuity Act, 1972. Therefore, Mr. X is entitled to recover gratuity as he has completed the service of 30 years. The company cannot take the plea of stringent financial conditions for not paying the gratuity to Mr. X. On the refusal by the company, Mr. X can apply to the appropriate authority and the company will be liable to pay the gratuity along with interest as decided by such authority.

Question 6 An Executive Committee is to be constituted to assist the Central Board under the provisions of the Employees Provident Funds and Miscellaneous Provisions Act. 1952. State the composition of such Executive Committee. (5 Marks) Answer The Central Government may by notification in the official gazette, constitute with effect from such date as may be specified therein, an Executive Committee to assist the Central Board in the performance of its functions under Section 5AA of the Employees’ Provident Funds and Miscellaneous Provision Act, 1952. The Executive committee shall consist of the following persons as members, namely: (a) A Chairman appointed by Central Government from amongst the members of the Central

Board. (b) Two members appointed by the Central Government from amongst the persons referred

to in clause (b) of Sub-section 1 of Section 5 A. (These two will actually be Central Government officials as per the aforementioned clause).

(c) Three persons appointed by the Central Government from amongst the persons referred to in clause (c) of Subsection (1) of Section 5A. (These three will actually be representatives of the State Governments as per the aforementioned clause).

(d) Three persons representing the employers elected by the Central Board from amongst the persons referred to in clause (d) of subsection (1) of Section 5A.

(e) Three persons representing the employees elected by the Central Board from amongst the persons referred to in clause (e) of subsection (1) of Section 5A.

(f) The Central Provident Fund Commissioner, ex officio. Question 7

The United Traders Association was constituted by two joint Hindu Families consisting of 21 major and 5 minor members. The Association was carrying on the business of trading as retailers with the object for acquisition of gains. The Association was not registered as a company under the Companies Act, 1956 or any other law.

State whether United Traders Association is having any legal status? Will there be any change in the status of this Association if the members of the United Traders Association subsequently were reduced to 15? (5 Marks)


29

Answer Section 11 of the Companies Act, 1956 provides that no company, association or partnership consisting of more than 10 persons for the purpose of carrying on the business of banking and more than 20 persons for the purpose of carrying on any other business can be formed unless it is registered under the Companies Act or is formed in pursuance of some other Indian Law. Thus if such an association violates the provisions of Section 11 it is an “Illegal Association“ although none of the objects for which it may have been formed is illegal. This Section does not apply to a joint Hindu family but where the business is being carried on by two or more joint Hindu families the provisions of Section 11 shall be applicable. For computing the number of members for this purpose, minor members of such families shall be excluded. Hence, the United Traders Association constituted by two joint Hindu Families is an Illegal Association according to the provisions of Section 11 as stated above. Further such Association of more than 20 persons, if unregistered is invalid at its inception and cannot be validated by subsequent reduction in the number of members to below 20 (Madan Lal vs. Janki Prasad 4 All 319). Question 8

Mr. 'Y', the transferee, acquired 250 equity shares of BRS Limited from Mr. 'X', the transferor. But the signature of Mr. 'X', the transferor, on the transfer deed was forged. Mr. 'Y' after getting the shares registered by the company in his name, sold 150 equity shares to Mr. 'Z' on the basis of the share certificate issued by BRS Limited. Mr. ‘Y' and 'Z' were not aware of the forgery. State the rights of Mr. 'X', 'Y' and 'Z' against the company with reference to the aforesaid shares. (5 Marks) Answer According to Section 84(1) of the Companies Act, 1956, a share certificate once issued amounts to a declaration by the company to all the world that the person in whose name the certificate is made out and to whom it is given is a share holder in the company; in other words the company is estopped from denying his title to the shares. However, a forged transfer is a nullity. It does not give the transferee (Y) any title to the shares. If the company acts on a forged transfer and removes the name of the real owner (X) from the Register of Members, then the company is bound to restore the name of X as the holder of the shares and to pay him any dividends which he ought to have received (Barton v. North Staffordshire Railway Co. 38 Ch D 456). In the above case, ‘Z’ being the bona fide purchaser must be compensated by the company. ‘Z’ shall have therefore a right to claim the market price of those shares at that time. However ‘Z’ cannot insist on being placed on the register of members to which ‘X’ alone is eligible as he cannot be said to have consented to the transfer. ‘Y’ shall of course be liable to the company to indemnify the loss on account of payment to ‘Z’. A similar decision was given in Dixon v. Kennaway.


30

Question 9

Modern Furnitures Limited was willing to purchase teakwood estate in Chhattisgarh State. Its prospectus contained some important extracts from an expert report giving the number of teakwood trees and other relevant information in the estate in Chhattisgarh State. The report was found inaccurate. Mr. 'X' purchased the shares of Modern Furnitures Limited on the basis of the above statement in the prospectus. Will Mr. 'X' have any remedy against the company? When will an expert not be liable? State the provisions of the Companies Act, 1956 in this respect. (5 Mark) Answer

In the event of any mis-statement in a prospectus, the allottees have certain remedies against the company as well as against those who were responsible for the issue of such a prospectus. Thus, in the present case the allotee Mr. X shall have the right to claim compensation from Modern Furnitures Ltd., for any loss that he might have sustained in terms of the value of shares. But his claim against those responsible for issue of prospectus shall not succeed since they made the statement on the basis of the report of an expert whom they believed to be competent. Section 62(2) of the Companies Act, 1956 provides that in such circumstances, one shall not incur liability. However, the expert can be proceeded against, for the inaccurate report which he had made.

An expert shall not be liable if he proves:

(i) that having given his consent, he withdrew it in writing before delivery of the copy of prospectus for registration or

(ii) that after delivery of prospectus for registration and before allotment he became aware of the untrue statement and withdrew his consent in writing and gave reasonable public notice of the withdrawal and his reasons therefor; or

(iii) that he was competent to make the statement and believed on reasonable grounds that it was true.

Question 10

M. H. Company Limited served a notice of general meeting upon its shareholders. The notice stated that the issue of sweat equity shares would be considered at such meeting. Mr. 'A', a shareholder of the M. H. Company Limited complains that the issue of sweat equity shares was not specified fully in the notice. Is the notice issued by M. H. Company Limited regarding issue of sweat equity shares valid according to the provisions of the Companies Act, 1956? Explain in detail. (5 Marks )


31

Answer

Section 173 of the Companies Act, 1956 requires a company to annex an explanatory statement to every notice for a meeting of the company at which some special business is to be transacted. This explanatory statement is to bring to the notice of members all material facts relating to each item of special business. Section 173 further specifies that all business in case of any meeting other than (i) consideration and approval of the annual accounts of the company (ii) declaration of dividend (iii) appointment of directors in place of those retiring and (iv) appointment of auditors including the fixing of their remuneration is regarded as special business. Therefore, the complaint of Mr. A, the shareholder is valid, since the details on the item regarding issue of sweat equity shares to be considered is lacking. The information about the issue of sweat equity shares is a material fact. The notice given by M. H. Ltd. of the General Meeting of the shareholders is not a valid notice under Section 173 of the Companies Act, 1956.

PART – II Question 11 (a) Explain the importance of ethical behaviour at the workplace. (5 Marks)

(b) Explain the meaning of the ''Iron Law of Responsibility". State the resulting benefits which may be acquired by achieving the long-term objectives through the business activities. (5 Marks)

Answer

(a) An organisation, whether a business or government agency is first and foremost a human society. If an employer does not take steps to create a work environment where the employees have a clear, common understanding of what is right and wrong and feel free to discuss and ask questions about ethical issues and report violations, significant problems could arise, including:

• increased risk of employees making unethical decisions;

• increased tendency of employees to report violations to out side regulatory authorities (whistle blowing) because they lack an adequate internal forum;

• inability to recruit and retain top executives;

• diminished reputation in the industry and the community; and

• significant legal exposure and loss of competitive advantage in the market place.

(b) The Iron Law of Responsibility: The institution of business exists only because it performs invaluable services for society. Society gives business its license to exist and this can be amended or revoked at any time if it fails to live up to society’s expectations. Therefore, if a business intends to retain its existing social role and power, it must respond to society’s needs constructively. This is known as the “Iron Law of


32

Responsibility”. In the long-term those who do not use power in a manner that society considers responsible, will tend to lose it.

Businesses have been delegated economic power and have access to productive resources of a community. They are obliged to use these resources for the common good of society so that more wealth for its betterment may be generated. Technical and creative resources are also helpful to it. A business organisation sensitive to community needs would in its own self interest like to have a better community within which the business may be conducted. This way, the resulting benefits would be:

(a) Decrease in crime

(b) Easier labour recruitment

(c) Reduced employee absenteeism.

(d) Easier access to international capital, better conditions for loans on international money markets.

(e) Dependable and preferred as supplier, exporter, importer and retailer of responsibly manufactured components and products.

This way a better society would produce a better environment in which the business may gain long term profit maximisation.

Question 12

Explain the pragmatic reasons for maintaining ethical behaviour in marketing through marketing executives. (5 Marks) Answer Pragmatic reasons for maintaining ethical behaviour: Marketing executives should practice ethical bahaviour because it is morally correct. To maintain ethical behaviour in marketing, the following positive reasons may be useful to the marketing executives: 1. To reverse declining public confidence in marketing: Sometime misleading package

labels, false claim in advertisement, phony list prices, infringement of trademarks pervert the market trends and such behaviour damages the marketers’ reputation. To reverse this situation, business leaders must demonstrate convincingly that they are aware of their ethical responsibility and will fulfill it. Companies must set high ethical standards and enforce them. Moreover, it is in management’s interest to be concerned with the well being of consumers, since they are the lifeblood of a business.

2. To avoid increase in government regulation: Business apathy, resistance, or token responses to unethical behaviour increase the probability of more governmental regulation. The governmental limitations may also result from management’s failure to live up to its ethical responsibilities. Moreover, once the government control is introduced, it is rarely removed.


33

3. To retain power granted by society: Marketing executives wield a great deal of social power as they influence markets and speak out on economic issues. However, there is a responsibility tied to that power. If marketers do not use their power in a socially acceptable manner, that power will be lost in the long run.

4. To protect the image of the organisation: Buyers often form an impression of an entire organisation based on their contact with one person. That person represents the marketing function. Some times a single sales clerk may pervert the market opinion in relation to that company which he represents.

Therefore, the ethical behaviour in marketing may be strengthened only through the behaviour of the marketing executives.

Question 13

State with reasons whether the following statements are correct or incorrect.

(a) Fairness and honesty are the pillars of success in business. (2 ½ Marks)

(b) There is no difference between ethics and morals. (2 ½ Marks) Answer (a) Correct: The success of the business depends very much on fairness and honesty in the

business. Fairness and honesty are at the heart of the business ethics and relate to the general values of decision makers. At a minimum, business professionals and persons are expected to follows all applicable laws and regulation. Even then, they are expected not to harm customers, employees, clients or competitors knowingly through deception, misrepresentation, coercion or discrimination.

One aspect of fairness and honesty is related to disclosure of potential harm caused by product use. For example, Mitsubishi Motors, a Japanese automaker, faced criminal charges and negative publicity after executives admitted that the company had systematically covered up customer complaints about tens of thousands of defective automobiles over a 20 year period in order to avoid expensive and embarrassing product recalls.

Another aspect of fairness relates to competition. Although numerous laws have been passed to foster competition and make monopolistic practices illegal, companies sometimes gain control over markets by using questionable practices that harm competition.

Rivals of Microsoft, for example, accused the software giant of using unfair and monopolistic practices to maintain market dominance with its Internet Explore browser.

These aforesaid examples show that fairness and honesty pay in the long run; they secure the stability of the business and overall reputation in the business world. Therefore we may say that fairness and honesty are the pillars of success in the business.


34

(b) Incorrect: There is a fine distinction between ethics and morals which may be enumerated as follows:

(1) The word ‘Moral’ is defined as relating to principles of right and wrong. The root word for moral is Latin word ‘mos’ meaning custom while the root word for ethics is the Greek word ‘ethos’ meaning character. Custom and character however provide two different standards for defining what is wrong and what is right. Character is a personal attribute while custom is defined by a group over time and people have character while societies have custom.

(2) Morals are accepted from an authority i.e. culture, religion etc. while ethics are accepted because they follow from personally accepted principles.

(3) Morals work on a smaller scale than ethics, more reliably but by addressing human needs for belonging and emulation, while ethics has much wider scope.

PART – III Question 14

(a) What are the merits and demerits of grape-vine form of Communication. (5 Marks)

(b) TKR Limited wants to hold its statutory meeting on 20th December, 2009 to discuss the matters relating to formation of the company and incidental matters thereto.

Draft a notice along with notes in brief for calling statutory meeting of the company. (5 Marks) Answer (a) Merits of the Grapevine phenomenon:

(a) Speedy transmission: It transmits information very speedily. A run or spreads like wild fire.

(b) Feedback value: The managers or top bosses of an organisation get the feedback regarding their policies, decisions memos etc. Feedback reaches then much faster.

(c) Support to other channels: It is a supplementary or parallel channel of communication

(d) Psychological satisfaction: It gives immense psychological satisfaction to the workers and strengthens their solidartiy,

(e) It is less credible: It cannot always be taken seriously. (f) It does not always carry the complete information (g) If often distorts the picture or often misinforms.


35

(b) Notice of Statutory Meeting TKR Limited Regd. Office Notice is hereby given that the statutory meeting of the company, will be held at the

registered office of the company at -----on -----20-----at A.M / P.M for considering the statutory report and for conducting any other business which ought to be considered at that meeting.

Please find enclosed a copy of the statutory report By order of the Board

For TKR Company Ltd. Date: Sd/ Place: Company Secretary Note: Note: A member entitled to attend and vote at the meeting is entitled one or more proxies to

attend and vote instead of himself and a proxy need not be a member. The instrument, appointing a proxy should be deposited at the registered office of the company not less than 48 hours of the commencement of the meeting.

Question 15

Fifth Annual General Meeting of the shareholders of Devrishi Limited was held on 20th August, 2009 at its registered office at Mumbai. 55 shareholders attended the meeting in person and 6 shareholders in proxy. Several ordinary business regarding adoption of audited Balance Sheet, declaration of dividend, appointment and re-appointment of directors and auditors were transacted at the meeting.

Draft the minutes of the Fifth Annual General Meeting of the shareholders of Devrishi Limited.

(5 Marks) Answer

Devrishi Ltd. Minutes of 5th Annual General Meeting

Fifth annual general meeting held at 25th Devrishi Apartment Andheri East Mumbai, 20th September 2008. At 11 AM. Present: 1. Shri Devrishi M.D in the chair 2. Shri X Director


36

3. Shri Y Director 4. Shri Z Director 5. Shri T Director 6. Shri R Director 7. Shri Alok representative of Alok & Co. Chartered Accountant 8. Shri S. Secretary of the Company 55 Shareholders attended the meeting in person and 6 shareholders in proxy.

1. Notice: The notice of convening the meeting was read by the Secretary of the company.

2. Director’s Report and Accounts: With the consent of the members present the Director’s Report and Accounts having already been circulated to the members were taken as read.

3. Auditor’s Report: The Auditor’s Report was read. 4. Adoption of Director’s Report, etc: The Chairman the invited queries from the

members present on Director’s Report, Accounts and audit and Auditor’s Report but there was no query. Thereafter the chairman proposed the following resolution which was recommended by some of the members namely.

“Resolved that the Director’s Report audited Balance Sheet as on 31th March, 2008 and profit and loss account for the year ended 31st March 2008 and auditor’s report thereon be and the same are hereby received considered and adopted.”

Carried unanimously. 5. Dividend: Proposed by Shri Devrishi M.D seconded by Shri X Y Directors “Resolved that the dividend as recommended by the Board of Directors for the year

ended 31st March, 2008 at the rate of Rs.5/- per share on the equity share capital of the company subject to deduction of tax at source be and is hereby declared for payment for those shareholders whose name appeared on the Register of Members as on …..2008.

Carried unanimously. 6. Directors:

Proposed by…………… Seconded by………….

“Resolved that Shri Y who retires by rotation and is eligible for reappointment to and is hereby reappointed a director of the company.”

Carried unanimously


37

7. Auditors:

Proposed by ……X Director of the Company. Seconded by………A,B shareholders of the Company “Resolved that M/s Alok & Company Chartered Accountants be and are hereby

appointed Auditors of the company to hold office from the conclusion of this meeting until the conclusion of the next Annual General Meeting at a remuneration of Rs.50,000/-“

Carried unanimously The meeting ended with the vote of thanks to the chair. Dated 20th sept., 200 Sd.

Chairman Question 16

A partnership firm was constituted by A, B and C. A, the partner of the firm, expressed his desire to retire from the partnership firm by Mutual consent.

Draft a "Partnership Retirement Deed". (5 Marks) Answer Partnership Retirement Deed. 1. This retirement deed partnership executed on the…… between Mr. X aged about 45

years S/o….Y residing at Kanpur here in after called the first party. 2. Mr. A aged about 40 years S/o B residing at Kanpur herein after called the second party,

and 3. Mr. R aged about 51 year S/o S residing at Kanpur herein after called the third party. Witnesseth as follows,

Whereas the aforesaid parties were carrying on business in partnership under an instrument of partnership the last of which is dated ….and where as the first party having expressed a desire to retire from the partnership by mutual consent the terms of retirement are hereby agreed to as follows: 1. Mr. X, will retire from the partnership effective from close of business on….. 2. The firm is free to continue the business with all its assets and liabilities and use the

same firm name with the remaining partners. 3. The accounts of the retiring partner is settled in accordance with the looks of accounts

or in full and final settlement of his account…… party has been given the following assets i.e. Rs….


38

4. The retiring partner X is hereby authorises the continuing partners A and R to collect all debts of the firm or realize or sell any asset of the firm including any immovable property.

5. In consideration of moneys received the X party hereby releases all his rights little and interest in the balance of assets of the firm including the goodwill.

6. The continuing partners A and R release X party of all debts and obligations including taxes due from the firm as on the date of this deed to third parties.

7. The parties hereby agree to execute such other document S that may be necessary to give effect to this partnership retirement agreement.

Witness 1……………………………………….. Signature of the first party 2……………………………………………Signature of the second party

PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

All questions are compulsory

Working notes should form part of the answer Question 1

Answer any five of the following:

(i) Define the following:

(a) Imputed cost (b) Capitalised cost

(ii) Calculate efficiency and activity ratio from the following data:

Capacity ratio = 75% Budgeted output = 6,000 units Actual output = 5,000 units Standard Time per unit = 4 hours

(iii) List the Financial expenses which are not included in cost.

(iv) Mention the main advantage of cost plus contracts.

(v) A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution margins per unit are Rs.40 for J and Rs.20 for K. Fixed costs are Rs.6,16,000 per month. Compute the break-even point.

(vi) When is the reconciliation statement of Cost and Financial accounts not required?

(5×2=10 Marks) Answer (i) (a) Imputed Cost: These costs are notional costs which do not involve any cash outlay.

Interest on capital, the payment for which is not actually made, is an example of Imputed Cost. These costs are similar to opportunity costs.

(b) Captialised Cost: These are costs which are initially recorded as assets and subsequently treated as expenses.

(ii) Capacity Ratio = 100HoursBudgeted

HoursActual ×

75% = unitperhour4Units6000

AH×


40

.75 = Hours24000

AH

AH = 18000 Hours

Efficiency Ratio = 100HoursWorkingActual

HoursdardtanSofterminOutputActual ×

= 100Hours18000

unitperhours4units5000×

×

= 100Hours18000Hours20000

× = 111.11%

Activity Ratio = 100HoursdardtanSofterminOutputBudgeted

HoursdardtanSofterminOutputActual×

= 100unitperhour4Units6000

Units20000×

×

= 100Units24000Units20000

× = 83.33%

(iii) Financial expenses which are not included in cost accounting are as follows: • Interest on debentures and deposit • Gratuity • Pension • Bonus of Employee, • Income Tax, • Preliminary Expenses • Discount on issue of Share • Underwriting Commissions.

(iv) Main advantages of cost plus contracts are: • Contractor is protected from risk of fluctuation in market price of material, labour

and services. • Contractee can insure a fair price of the market. • It is useful specially when the work to be done is not definitely fixed at the time of

making the estimate. • Contractee can ensure himself about the cost of the contract’, as he is empowered

to examine the books and documents of the contractor to ascertain the veracity of the cost of the cotract.


41

(v) Let 4x = No. of units of J Then 3x = No. of units of K

BEP in x units =

onContributiCostFixed =

)20(3)40(4616000.Rs+

Or 220

616000 =2800 units

Break even point of Product J = 4 × 2800 = 11200 units Break even point of Product K = 3 × 2800 = 8400 units (vi) Circumstances where reconciliation statement can be avoided When the Cost and Financial Accounts are integrated - there is no need to have a

separate reconciliation statement between the two sets of accounts. Integration means that the same set of accounts fulfill the requirement of both i.e., Cost and Financial Accounts.

Question 2

Mega Company has just completed its first year of operations. The unit costs on a normal costing basis are as under:

Rs. Direct material 4 kg @ Rs.4 = 16.00 Direct labour 3 hrs @ Rs.18 = 54.00 Variable overhead 3 hrs @ Rs.4 = 12.00 Fixed overhead 3 hrs @ Rs.6 = 18.00 100.00 Selling and administrative costs: Variable Rs.20 per unit Fixed Rs.7,60,000 During the year the company has the following activity: Units produced = 24,000 Units sold = 21,500 Unit selling price = Rs.168 Direct labour hours worked = 72,000


42

Actual fixed overhead was Rs.48,000 less than the budgeted fixed overhead. Budgeted variable overhead was Rs.20,000 less than the actual variable overhead. The company used an expected actual activity level of 72,000 direct labour hours to compute the predetermine overhead rates.

Required :

(i) Compute the unit cost and total income under: (a) Absorption costing (b) Marginal costing

(ii) Under or over absorption of overhead.

(iii) Reconcile the difference between the total income under absorption and marginal costing. (15 Marks)

Answer (i) Computation of Unit Cost & Total Income

Unit Cost Absorption Costing (Rs.)

Marginal Costing (Rs.)

Direct Material 16.00 16.00 Direct Labour 54.00 54.00 Variable Overhead 12.00 12.00 Fixed Overhead 18.00 - Unit Cost 100.00 82.00

Income Statements

Absorption Costing

Sales 36,12,000 (21500 × Rs.168) Less: Cost of goods sold (21500 × 100) 21,50,000 Less: Over Absorption 28,000 21,22,000 14,90,000 Less: Selling & Distribution Expenses 11,90,000 Profit 3,00,000


43

Marginal Costing

Sales 36,12,000 Less: Cost of goods sold (21500×82) 17,63,000 Add: Under Absorption 20,000 17,83,000 18,29,000 Less: Selling & Distribution Expenses 4,30,000 Contribution 13,99,000 Less: Fixed Factory and Selling & Distribution Overhead (38,400 + 7,60,000)

11,44,000

Profit 2,55,000

(ii) Under or over absorption of overhead: Budgeted Fixed Overhead Rs. 72,000 Hrs. × Rs.6 4,32,000 Less: Actual Overhead was less than Budgeted Fixed Overhead 48,000 Actual Fixed Overhead 3,84,000 Budgeted Variable Overhead 72,000 Hrs. × Rs.4 2,88,000 Add: Actual Overhead was higher than Budgeted 20,000 Budgeted 3,08,000 Both Fixed & Variable Overhead applied 72,000 Hrs × Rs,10 7,20,000 Actual Overhead (3,84,000 + 3,08,000) 6,92,000 Over Absorption 28,000 (iii) Reconciliation of Profit Difference in Profit: Rs.3,00,000 – 2,55,000 = Rs.45,000 Due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing

not in Marginal Costing. Therefore, Difference in Profit = Fixed Overhead Rate (Production – Sale) 18 (24,000 – 21,500) = Rs.45,000 Question 3 (a) XP Ltd. furnishes you the following information relating to process II.


44

(i) Opening work-in-progress – NIL (ii) Units introduced 42,000 units @ Rs.12 (iii) Expenses debited to the process: Rs. Direct material = 61,530 Labour = 88,820 Overhead = 1,76,400 (iv) Normal loss in the process = 2 % of input. (v) Closing work-in-progress – 1200 units Degree of completion - Materials 100% Labour 50% Overhead 40%

(vi) Finished output – 39,500 units (vii) Degree of completion of abnormal loss:

Material 100% Labour 80% Overhead 60%

(viii) Units scraped as normal loss were sold at Rs.4.50 per unit. (ix) All the units of abnormal loss were sold at Rs.9 per unit. Prepare:

(i) Statement of equivalent production: (ii) Statement showing the cost of finished goods, abnormal loss and closing work-

in-progress. (iii) Process II account and abnormal loss account. (8 Marks)

(b) The following information is available from the cost records of Vatika & Co. For the month of August, 2009:

Material purchased 24,000 kg Rs.1,05,600

Material consumed 22,800 kg

Actual wages paid for 5,940 hours Rs.29,700

Unit produced 2160 units.

Standard rates and prices are:

Direct material rate is Rs.4.00 per unit.


45

Direct labour rate is Rs.4.00 per hour

Standard input is 10 kg. for one unit

Standard requirement is 2.5 hours per unit.

Calculate all material and labour variances for the month of August, 2009. (8 Marks) Answer (a) Statement of Equivalent Production

Material Labour Overhead Particulars Output

Units % Units % Units % Finished Output 39,500 39,500 100% 39,500 100% 39.500 100%Normal Loss 2% of 42,000 units

840 - - - - - -

Abnormal Loss (42,000 – 39,500 – 840 – 1200)

460 460 100% 368 80% 276 60%

Closing W.I.P. 1,200 1,200 100% 600 50% 480 40% 42,000 41,160 40,468 40256

Statement of Cost Rs.

Units Introduced 42,000@12 5,04,000 Add: Material 61,530 5,65,530 Less: Value of Normal Loss 3,780 5,61,750 Cost per Unit Material

=160,41750,61,5 Rs.13.648

Labour =

468,40820,88 Rs.2.195

Overhead =

256,40400,76,1 Rs.4.382

20.225 Abnormal Loss: Material 460 × 13.648 6,278.08 Labour 368 × 2.195 807.76


46

Overheads 276 × 4.382 1,209.42 8,295.26 Closing W.I.P. Material 1,200 × 13.648 16,377.60 Labour 600 × 2.195 1,317.00 Overheads 480 × 4.382 2,103.36 19,797.96 Finished Goods 39,500 × 20.225 Rs.7,98,887.50

Process II Account

Particulars Units Amount Rs.


To Opening WIP

- Nil By Normal Loss 840 3,780

“ Input 42,000 5,04,000 “ Abnormal Loss 460 8,295 “ Direct

Material - 61,530 “ Finished Goods 39,500 7,98,877

“ Labour - 88,820 “ Overhead - 1,76,400 “ Closing WIP 1,200 19,798 42,000 8,30,750 42,000 8,30,750

Abnormal Loss Account



To Process II 460 8,295 By Cash 460 4,140 ([email protected]) . . “ Costing P & L - 4,155 460 8,295 460 8,295

(b) Material Variances:

(i) Material Cost Variance = (SQ × SP) – (AQ × AP) = (2,160 × 4 × 10) – (22,800 × 4.40) = Rs.86,400 – Rs.1,00,320 = 13,920 (A)


47

(ii) Material Price Variance = AQ (SP – AP) = 22,800 Kg (4 – 4.40) = 9,120 (A)

(iii) Material Usage Variance = SP (SQ – AQ) = 4 (21,600 – 22,800) = 4,800 (A)

Note : unit basis for direct material has been taken as kg. hence, direct material rate is Rs. 4 per kg. Verification:- MCV = MPV + MUV 13,920 (A) = 9,120 (A) + 4,800 (A)

Labour Variances: (i) Labour Cost Variance = (SH × SR) – (AH × AR) = (2,160 × 2.50 × 4) – (29,700) = 21,600 – 29,700 = 8,100 (A) (ii) Labour Rate Variance = AH (SR – AR) = 5,940 (4 – 5) = 5,940 (A) (iii) Labour Efficiency Variance = SR (SH – AH) = 4 (5,400 – 5,940) = 2,160 (A) Verification:- LCV = LRV + LEV 8,100 (A) = 5,940 (A) + 2,160 (A) SH = 2,160 Units × 2.50 Hours = 5,400 Hrs.

Question 4 Answer any three of the following:

(i) Standard Time for a job is 90 hours. The hourly rate of Guaranteed wages is Rs.50. Because of the saving in time a worker a gets an effective hourly rate of wages of Rs.60 under Rowan premium bonus system. For the same saving in time, calculate the hourly rate of wages a worker B will get under Halsey premium bonus system assuring 40% to worker.


48

(ii) Explain briefly, what do you understand by Operating Costing. How are composite units computed?

(iii) The following information relating to a type of Raw material is available:

Annual demand 2000 units Unit price Rs.20.00 Ordering cost per order Rs.20.00 Storage cost 2% p.a. Interest rate 8% p.a. Lead time Half-month

Calculate economic order quantity and total annual inventory cost of the raw material.

(iv) List the eight functional budgets prepared by a business. (3×3=9 Marks) Answer (i) Increase in Hourly Rate of Wages (Rowan Plan) is (Rs.60 – Rs.50) = Rs.10 This is Equal to

TimedardtanS

SavedTime × Hourly rate

Or 10 = TimedardtanS

SavedTime × 50

Or 90SavedTime × 50 = 10

Time Saved = 50900 = 18 Hours

Time Taken = (90 – 18) = 72 Hours Effective Hourly Rate under Halsey System Time Saved = 18 Hours Bonus @ 40% = 18 × 40% × 50 = Rs.360 Total Wages = (50 × 72 + 360) = 3,960 Effective Hourly Rate = 3,960 ÷ 72 Hours = Rs.55 (ii) Operating Costing: It is method of ascertaining costs of providing or operating a service.

This method of costing is applied by those undertakings which provide services rather


49

than production of commodities. This method of costing is used by transport companies, gas and water works departments, electricity supply companies, canteens, hospitals, theatres, schools etc.

Composite units may be computed in two ways: (a) Absolute (weighted average) tones kms, quintal kms etc. (b) Commercial (simple average) tones kms, quintal kms etc.

Absolute tonnes-kms are the sum total of tonnes kms arrived at by multiplying various distances by respective load quantities carried.

Commercial tonnes-kms, are arrived at by multiplying total distance kms, by average load quantity.

(iii) EOQ = unitperCostStorage

OrderperCostBuyingnConsumptioAnnual2 ××

=

+×

××

1008220.Rs

20000,22 = 2000,80 = 200 Units

Total Annual Inventory Cost Cost of 2,000 Units @ Rs.20 (2,000 × 20) = Rs.40,000

No. of Order 2002000 = Rs.10

Ordering Cost 10 × 20 = Rs.200

Carrying cost of Average Inventory 2

200 × 20 × 10010 = Rs.200

= Rs.40,400 (iv) The various commonly used Functional budgets are:

• Sales Budget

• Production Budget

• Plant Utilisation Budget

• Direct Material Usage Budget

• Direct Material Purchase Budget

• Direct Labour (Personnel) Budget

• Factory Overhead Budget

• Production Cost Budget Note: In addition to above, there are many more functional budgets which the student

can write alternatively.


50

Question 5 Answer any five of the following:

(i) Explain briefly the limitations of Financial ratios.

(ii) What do you understand by Business Risk and Financial Risk?

(iii) Differentiate between Factoring and Bills discounting.

(iv) Differentiate between Financial Management and Financial Accounting.

(v) Y Ltd. retains Rs. 7,50,000 out of its current earnings. The expected rate of return to the shareholders, if they had invested the funds elsewhere is 10%. The brokerage is 3% and the shareholders come in 30% tax bracket. Calculate the cost of retained earnings.

(vi) From the information given below calculate the amount of Fixed assets and Proprietor’s fund.

Ratio of fixed assets to proprietors fund = 0.75

Net Working Capital = Rs. 6,00,000 (5 × 2 =10 Marks) Answer

(i) Limitations of Financial Ratios

The limitations of financial ratios are listed below:

(a) Diversified product lines: Many businesses operate a large number of divisions in quite different industries. In such cases, ratios calculated on the basis of aggregate data cannot be used for inter-firm comparisons.

(b) Financial data are badly distorted by inflation: Historical cost values may be substantially different from true values. Such distortions of financial data are also carried in the financial ratios.

(c) Seasonal factors may also influence financial data.

(d) To give a good shape to the popularly used financial ratios (like current ratio, debt- equity ratios, etc.): The business may make some year-end adjustments. Such window dressing can change the character of financial ratios which would be different had there been no such change.

(e) Differences in accounting policies and accounting period: It can make the accounting data of two firms non-comparable as also the accounting ratios.

(f) There is no standard set of ratios against which a firm’s ratios can be compared: Sometimes a firm’s ratios are compared with the industry average. But if a firm desires to be above the average, then industry average becomes a low standard.


51

On the other hand, for a below average firm, industry averages become too high a standard to achieve.

(g) It is very difficult to generalise whether a particular ratio is good or bad: For example, a low current ratio may be said ‘bad’ from the point of view of low liquidity, but a high current ratio may not be ‘good’ as this may result from inefficient working capital management.

(h) Financial ratios are inter-related, not independent: Viewed in isolation one ratio may highlight efficiency. But when considered as a set of ratios they may speak differently. Such interdependence among the ratios can be taken care of through multivariate analysis.

(Note : Students to write any four limitations)

(ii) Business Risk and Financial Risk

Business Risk: It is an unavoidable risk because of the environment in which the firm has to operate and the business risk is represented by the variability of earnings before interest and tax (EBIT). The variability in turn is influenced by revenues and expenses. Revenues and expenses are affected by demand of firm’s products, variations in prices and proportion of fixed cost in total cost.

Financial Risk: It is the risk borne by a shareholder when a firm uses debt in addition to equity financing in its capital structure. Generally, a firm should neither be exposed to high degree of business risk and low degree of financial risk or vice-versa, so that shareholders do not bear a higher risk.

(iii) Differentiation between Factoring and Bills Discounting

The differences between Factoring and Bills discounting are:

(a) Factoring is called as “Invoice Factoring’ whereas Bills discounting is known as ‘Invoice discounting.”

(b) In Factoring, the parties are known as the client, factor and debtor whereas in Bills discounting, they are known as drawer, drawee and payee.

(c) Factoring is a sort of management of book debts whereas bills discounting is a sort of borrowing from commercial banks.

(d) For factoring there is no specific Act, whereas in the case of bills discounting, the Negotiable Instruments Act is applicable.

(iv) Differentiation between Financial Management and Financial Accounting

Though financial management and financial accounting are closely related, still they differ in the treatment of funds and also with regards to decision - making.

Treatment of Funds: In accounting, the measurement of funds is based on the accrual principle. The accrual based accounting data do not reflect fully the financial conditions of the


52

organisation. An organisation which has earned profit (sales less expenses) may said to be profitable in the accounting sense but it may not be able to meet its current obligations due to shortage of liquidity as a result of say, uncollectible receivables. Whereas, the treatment of funds, in financial management is based on cash flows. The revenues are recognised only when cash is actually received (i.e. cash inflow) and expenses are recognised on actual payment (i.e. cash outflow). Thus, cash flow based returns help financial managers to avoid insolvency and achieve desired financial goals.

Decision-making: The chief focus of an accountant is to collect data and present the data while the financial manager’s primary responsibility relates to financial planning, controlling and decision-making. Thus, in a way it can be stated that financial management begins where financial accounting ends.

(v) Computation of Cost of Retained Earnings (Kr) Kr = k (1-TP) (1-B)

Kr = 0.10 (1- 0.30) (1- 0.03)

= 0.10 (0.70) × (0.97)

= 0.0679 or 6.79% Cost of Retained Earnings = 6.79%

(vi) Calculation of Fixed Assets and Proprietor’s Fund Since Ratio of Fixed Assets to Proprietor’s Fund = 0.75 Therefore, Fixed Assets = 0.75 Proprietor’s Fund Net Working Capital = 0.25 Proprietor’s Fund 6,00,000 = 0.25 Proprietor’s Fund

Therefore, Proprietor’s Fund = 0.256,00,000 Rs.

= Rs. 24,00,000 Proprietor’s Fund = Rs. 24,00,000 Since, Fixed Assets = 0.75 Proprietor’s Fund Therefore, Fixed Assets = 0.75 × 24,00,000

= Rs.18,00,000 Fixed Assets = Rs. 18,00,000


53

Question 6 The Balance Sheets of a Company as on 31st March, 2008 and 2009 are given below:

Liabilities 31.3.08 31.3.09 Assets 31.3.08 31.3.09 Rs. Rs. Rs. Rs.

Equity share capital 14,40,000 19,20,000 Fixed assets 38,40,000 45,60,000 Capital reserve - 48,000 Less: depreciation 11,04,000 13,92,000 General reserve 8,16,000 9,60,000 27,36,000 31,68,000 Profit & Loss A/c 2,88,000 3,60,000 Investment 4,80,000 3,84,000 9% debentures 9,60,000 6,72,000 Sundry debtors 12,00,000 14,00,000 Sundry creditors 5,50,000 5,90,000 Stock 1,40,000 1,84,000 Bills payables 26,000 34,000 Cash in hand 4,000 - Proposed dividend 1,44,000 1,72,800 Preliminary

Expenses 96,000 48,000

Provision for tax 4,32,000 4,08,000 Unpaid dividend - 19,200

46,56,000 51,84,000 46,56,000 51,84,000

Additional information:

During the year ended 31st March, 2009 the company:

(i) Sold a machine for Rs.1,20,000; the cost of machine was Rs. 2,40,000 and depreciation provided on it was Rs. 84,000.

(ii) Provided Rs. 4,20,000 as depreciation on fixed assets.

(iii) Sold some investment and profit credited to capital reserve.

(iv) Redeemed 30% of the debentures @ 105.

(v) Decided to write off fixed assets costing Rs. 60,000 on which depreciation amounting to Rs. 48,000 has been provided.

You are required to prepare Cash Flow Statement as per AS 3. (15 Marks)


54

Answer Cash Flow Statement for the year ending 31st March, 2009

(A) Cash Flows from Operating Activities Rs.Profit and Loss A/c (3,60,000 – 2,88,000)

72,000

Adjustments: Increase in General Reserve 1,44,000 Depreciation 4,20,000 Provision for Tax 4,08,000 Loss on Sale of Machine 36,000 Premium on Redemption of

Debentures 14,400

Proposed Dividend 1,72,800 Preliminary Expenses written off 48,000 Fixed Assets written off 12,000 Interest on Debentures* 60,480 13,15,680Funds from Operations 13,87,680Increase in Sundry Creditors 40,000 Increase in Bills Payable 8,000 48,000 Increase in Sundry Debtors (2,00,000) Increase in Stock (44,000) (1,96,000)Cash before Tax 11,91,680Less: Tax paid 4,32,000Cash flows from Operating Activities 7,59,680

(B) Cash Flows from Investing Activities

Purchase of Fixed Assets (10,20,000) Sale of Investment 1,44,000 Sale of Fixed Assets 1,20,000 (7,56,000)


55

(C) Cash Flows from Financing Activities

Issue of Share Capital 4,80,000 Redemption of Debentures (3,02,400) Dividend Paid (1,44,000 – 19,200) (1,24,800) Interest on Debentures (60,480) (7,680)Net increase in Cash and Cash Equivalents

(4,000)

Cash and Cash Equivalents at the beginning of the year

4,000

Cash and Cash Equivalents at the end of the year

NIL

* It is assumed that the 30 percent debentures have been redeemed at the beginning of the year.

Fixed Assets Account Particulars Rs. Particulars Rs. To Balance b/d 27,36,000 By Cash 1,20,000 To Purchases (Balance) 10,20,000 By Loss on Sales 36,000 By Depreciation 4,20,000 By Assets written off 12,000 ________ By Balance c/d 31,68,000 37,56,000 37,56,000

Question 7 (a) From the following financial data of Company A and Company B: Prepare their Income

Statements.

Company A Company B Rs. Rs. Variable Cost 56,000 60% of sales Fixed Cost 20,000 - Interest Expenses 12,000 9,000 Financial Leverage 5 : 1 - Operating Leverage - 4 : 1 Income Tax Rate 30% 30% Sales - 1,05,000


56

(b) A hospital is considering to purchase a diagnostic machine costing Rs. 80,000. The projected life of the machine is 8 years and has an expected salvage value of Rs. 6,000 at the end of 8 years. The annual operating cost of the machine is Rs. 7,500. It is expected to generate revenues of Rs. 40,000 per year for eight years. Presently, the hospital is outsourcing the diagnostic work and is earning commission income of Rs.12,000 per annum; net of taxes.

Required:

Whether it would be profitable for the hospital to purchase the machine? Give your recommendation under:

(i) Net Present Value method

(ii) Profitability Index method.

PV factors at 10% are given below:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467

(8 + 8 = 16 Marks) Answer (a) Income Statements of Company A and Company B

Company A Company B Rs. Rs. Sales 91,000 1,05,000 Less: Variable cost 56,000 63,000 Contribution 35,000 42,000 Less: Fixed Cost 20,000 31,500 Earnings before interest and tax (EBIT) 15,000 10,500 Less: Interest 12,000 9,000 Earnings before tax (EBT) 3,000 1,500 Less: Tax @ 30% 900 450 Earnings after tax (EAT) 2,100 1,050

Working Notes: Company A

(i) Financial Leverage = Interest EBIT

EBIT−


57

5 = 12,000EBIT

EBIT−

5 (EBIT – 12,000) = EBIT 4 EBIT = 60,000 EBIT = Rs.15,000 (ii) Contribution = EBIT + Fixed Cost = 15,000 + 20,000 = Rs. 35,000 (iii) Sales = Contribution + Variable cost = 35,000 + 56,000 = Rs. 91,000 Company B (i) Contribution = 40% of Sales (as Variable Cost is 60% of Sales) = 40% of 1,05,000 = Rs. 42,000

(ii) Financial Leverage = EBIT

onContributi

4 = EBIT

42,000

EBIT = 4000,42 = Rs.10,500

(iii) Fixed Cost = Contribution – EBIT = 42,000 – 10,500 = Rs. 31,500 (b) Advise to the Hospital Management

Determination of Cash inflows Sales Revenue 40,000 Less: Operating Cost 7,500 32,500 Less: Depreciation (80,000 – 6,000)/8 9,250 Net Income 23,250 Tax @ 30% 6,975 Earnings after Tax (EAT) 16,275 Add: Depreciation 9,250


58

Cash inflow after tax per annum 25,525 Less: Loss of Commission Income 12,000 Net Cash inflow after tax per annum 13,525 In 8th Year : New Cash inflow after tax 13,525 Add: Salvage Value of Machine 6,000 Net Cash inflow in year 8 19,525

Calculation of Net Present Value (NPV)

Year CFAT PV Factor @10% Present Value of Cash inflows

1 to 7 13,525 4.867 65,826.18 8 19,525 0.467 9,118.18 74,944.36 Less: Cash Outflows 80,000.00 NPV (5,055.64)

outflows cash of valuePresent

inflows cash discounted of SumIndexity Profitabil =

= 0.937 000,80

36.944,74 =

Advise: Since the net present value is negative and profitability index is also less than 1, therefore, the hospital should not purchase the diagnostic machine.

Note: Since the tax rate is not mentioned in the question, therefore, it is assumed to be 30 percent in the given solution.

Question 8 Answer any three of the following:

(i) Explain the two basic functions of Financial Management.

(ii) Explain the following terms:

(a) Ploughing back of profits

(b) Desirability factor.

(iii) What do you understand by Weighted Average Cost of Capital?

(iv) There are two firms P and Q which are identical except P does not use any debt in its capital structure while Q has Rs. 8,00,000, 9% debentures in its capital structure. Both the firms have earning before interest and tax of Rs. 2,60,000 p.a. and the capitalization rate is 10%.


59

Assuming the corporate tax of 30%, calculate the value of these firms according to MM Hypothesis. (3 ×3 = 9 Marks)

Answer (i) Two Basic Functions of Financial Management

Procurement of Funds: Funds can be obtained from different sources having different characteristics in terms of risk, cost and control. The funds raised from the issue of equity shares are the best from the risk point of view since repayment is required only at the time of liquidation. However, it is also the most costly source of finance due to dividend expectations of shareholders. On the other hand, debentures are cheaper than equity shares due to their tax advantage. However, they are usually riskier than equity shares. There are thus risk, cost and control considerations which a finance manager must consider while procuring funds. The cost of funds should be at the minimum level for that a proper balancing of risk and control factors must be carried out.

Effective Utilization of Funds: The Finance Manager has to ensure that funds are not kept idle or there is no improper use of funds. The funds are to be invested in a manner such that they generate returns higher than the cost of capital to the firm. Besides this, decisions to invest in fixed assets are to be taken only after sound analysis using capital budgeting techniques. Similarly, adequate working capital should be maintained so as to avoid the risk of insolvency.

(ii) (a) Ploughing Back of Profits: Long term funds may also be provided by accumulating the profits of the company and by ploughing them back into business. Such funds belong to the ordinary shareholders and increase the net worth of the company. A public limited company must plough back a reasonable amount of its profits each year keeping in view the legal requirements in this regard and its own expansion plans. Such funds also entail almost no risk. Further, control of present owners is also not diluted by retaining profits.

(b) Desirability Factor: In certain cases we have to compare a number of proposals each involving different amount of cash inflows. One of the methods of comparing such proposals is to work out, what is known as the ‘Desirability Factor’ or ‘Profitability Index’. In general terms, a project is acceptable if the Profitability Index is greater than 1.

Mathematically,

outflows Cash Discounted Total orOutlay Cash Initial

inflows Cash Discounted of SumFactorty Desirabili =

(iii) Weighted Average Cost of Capital The composite or overall cost of capital of a firm is the weighted average of the costs of

various sources of funds. Weights are taken in proportion of each source of funds in capital structure while making financial decisions. The weighted average cost of capital is


60

calculated by calculating the cost of specific source of fund and multiplying the cost of each source by its proportion in capital structure. Thus, weighted average cost of capital is the weighted average after tax costs of the individual components of firm’s capital structure. That is, the after tax cost of each debt and equity is calculated separately and added together to a single overall cost of capital.

(iv) Calculation of Value of Firms P and Q according to MM Hypothesis

Market Value of Firm P (Unlevered)

e

u K)t - (1 EBITV =

% 10

) 0.30 -(1 2,60,000 =

18,20,000 Rs. % 10

1,82,000 Rs. ==

Market Value of Firm Q (Levered)

VE = Vu + DT

= Rs.18,20,000 + (8,00,000 × 0.30)

= Rs.18,20,000 + 2,40,000 = Rs. 20,60,000

PAPER – 4 : TAXATION Answer all questions.

Question 1 From the following details, compute the total income of Siddhant of Delhi and tax payable for the A.Y.2009-10:

Rs. Salary including dearness allowance 3,35,000 Bonus 11,000 Salary of servant provided by the employer 12,000 Rent paid by Siddhant for his accommodation 49,600 Bills paid by the employer for gas, electricity and water provided free of cost at the above flat

11,000

Siddhant was provided with company’s car (self-driven) also for personal use and it is not possible to determine expenditure on personal use and all expenses were borne by the employer. Siddhant purchased a flat in a co-operative housing society for Rs.4,75,000 in April, 1990, which was financed by a loan from Life Insurance Corporation of India of Rs.1,60,000 @ 15% interest, his own savings of Rs.85,000 and a deposit from a nationalized bank for Rs.2,50,000 to whom this flat was given on lease for ten years. The rent payable was Rs.3,500 per month. The following particulars are relevant:

(a) Municipal taxes paid Rs.4,300 (per annum)

(b) Society charges for passage lights, watchman’s salary Rs.1,900 (per annum)

(c) Insurance Rs.860

(d) He earned Rs.2,700 in share speculation business and lost Rs.4,200 in cotton speculation business.

(e) In the year 2003-04, he had gifted Rs.30,000 to his wife and Rs.20,000 to his son who was aged 11. The gifted amounts were advanced to Mr. Rajesh, who was paying interest @ 19% per annum.

(f) Siddhant received a gift of Rs.25,000 each from four friends.

The Suggested Answers for of Paper – 4: Taxation are based on the provisions of law as amended by the Finance Act, 2008 and notifications and circulars issued upto 30-04-2009. The relevant assessment year for income-tax is A.Y. 2009-10.

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009

62

(g) He contributed Rs.5,600 to Public Provident Fund and Rs.4,000 to Unit Linked Insurance Plan.

(h) He received national award for humanitarian work from the Central Government in the form of a land whose fair market value is Rs.5,00,000 as on 31st March, 2009. (16 Marks)

Answer Computation of total income and tax liability of Siddhant for the A.Y. 2009-10

Particulars Rs. Rs.

Salary Income

Salary including dearness allowance 3,35,000 Bonus 11,000 Value of perquisites: (i) Salary of servant 12,000 (ii) Car (The company is liable to pay FBT on the same; therefore, it

is not a perquisite in the hands of the employee) Nil

(iii) Free gas, electricity and water 11,000 __23,000 3,69,000

Income from house property

Gross Annual Value (GAV) (Rent receivable is taken as GAV in the absence of other information) (3,500 × 12)

42,000

Less: Municipal taxes paid [See Note 2(i)] _4,300 Net Annual Value (NAV) 37,700 Less: Deductions under section 24 (i) 30% of NAV 11,310 (ii) Interest on loan from LIC @15% of 1,60,000 [See Note 2(ii)]

24,000 35,310 2,390

Income from speculative business

Income from share speculation business 2,700 Less: Loss from cotton speculation business 4,200 Net Loss 1,500 Net loss from speculative business has to be carried forward as it cannot be set off against any other head of income.

PAPER – 4 : TAXATION

63

Income from Other Sources

(i) Income on account of interest earned from advancing money gifted to his minor son is includible in the hands of Siddhant as per section 64(1A)

3,800

Less: Exempt under section 10(32) 1,500 2,300 (ii) Interest income earned from advancing money gifted to wife has to be clubbed with the income of the assessee as per section 64(1)

5,700

(iii) Gift received from four friends (taxable under section 56(2)(vi) as theaggregate amount received during the year exceeds Rs.50,000)

1,00,000

1,08,000

Gross Total Income 4,79,390

Less: Deduction under section 80C Contribution to Public Provident Fund 5,600 Unit Linked Insurance Plan 4,000 ___9,600 Total Income 4,69,790

Particulars Rs. Tax on total income 48,958 Add: Education cess@2% 979 Add: Secondary and higher education cess@1% 490 50,427 Tax liability (rounded off) 50,430

Notes:

(1) National Award for humanitarian work given by the Central Government is exempt under section 10(17A) of the Income-tax Act, 1961.

(2) The following assumptions have been made while computing income under the head “Income from house property” -

(i) It is the owner, namely, Mr.Siddhanth, who has paid the municipal taxes;

(ii) The entire loan of Rs.1,60,000 is outstanding as on 31.3.2009; and


64

(iii) Society charges of Rs.1,900 p.a. is not included in the rent of Rs.3,500 p.m. payable by the tenant. Such charges have either been paid directly by Mr. Siddhant or recovered separately from the tenant.

(3) It has been assumed that Siddhant’s own flat in a co-operative housing society, which he has rented out to a nationalised bank, is also in Delhi. Therefore, he is not eligible for deduction under section 80GG in respect of rent paid by him for his accommodation in Delhi, since one of the conditions to be satisfied for claiming deduction under section 80GG is that the assessee should not own any residential accommodation in the same place.

Question 2 Answer any two of the following

(a) From the following particulars of Pankaj for the previous year ended 31st March, 2009, compute the income chargeable under the head “Income from other sources”:

Rs. (i) Directors fee from a company 10,000 (ii) Interest on bank deposits 3,000 (iii) Income from undisclosed source 12,000 (iv) Winnings from lotteries (Net) 33,500 (v) Royalty on a book written by him 9,000 (vi) Lectures in seminars 5,000 (vii) Interest on loan given to a relative 7,000 (viii) Interest on debentures of a company (listed in a recognised stock

exchange) net of taxes 3,588

(ix) Interest on Post Office Savings Bank Account 500 (x) Interest on Government Securities 2,200 (xi) Interest on Monthly Income Scheme of Post Office 33,000

He paid Rs.1,000 for typing the manuscript of book written by him.

(b) Mr. Raman is a co-owner of a house property alongwith his brother.

Rs. Municipal value of the property 1,60,000 Fair rent 1,50,000 Standard rent under the Rent Control Act 1,70,000 Rent received 15,000 p.m.

The loan for the construction of this property is jointly taken and the interest charged by the bank is Rs.25,000, out of which Rs.21,000 has been paid. Interest on the unpaid


65

interest is Rs.450. To repay this loan, Raman and his brother have taken a fresh loan and interest charged on this loan is Rs.5,000.

The municipal taxes of Rs.5,100 have been paid by the tenant.

Compute the income from this property chargeable in the hands of Mr. Raman for the A.Y. 2009-10.

(c) Compute the net taxable capital gains of Smt. Megha on the basis of the following information -

A house was purchased on 1.5.1997 for Rs.4,50,000 and was used as a residence by the owner. The owner had contracted to sell this property in June, 2007 for Rs.10 lacs and had received an advance of Rs.70,000 towards sale. The intending purchaser did not proceed with the transaction and the advance was forfeited by the owner. The property was sold in April, 2008 for Rs.15,00,000. The owner, from out of sale proceeds, invested Rs.4 lacs in a new residential house in January, 2009. (2 × 6 = 12 Marks)

Answer

(a) Computation of income of Pankaj chargeable under the head “Income from other sources” for the A.Y. 2009-10

Particulars Rs. Rs. 1. Directors’ fees 10,000 2. Interest on bank deposit 3,000 3. Income from undisclosed source 12,000 4. Royalty on books written (See Note below) 9,000 Less: expenses 1,000 8,000 5. Lectures in seminars 5,000 6. Interest on loan given to a relative 7,000 7. Interest on listed debentures Net Received 3,588 Add: T.D.S. @ 10.3%

3.101003.103588

−× 412 4,000

8. Interest on Post Office Savings Bank [exempt under section 10(15)]

-

9. Interest on Government securities 2,200 10. Interest on Post Office Monthly Income Scheme 33,000


66

11. Winnings from lotteries Net 33,500

Add: T.D.S. @ 30.9% 90.30100

90.30500,33−× 14,980 48,480

Income from Other Sources 1,32,680

Note – Royalty income would be charged to tax under the head “Income from Other Sources”,

only if it is not chargeable to tax under the head “Profits and gains of business or profession”. This problem has been solved assuming that the same is not taxable under the head “Profits and gains of business or profession” and hence, is chargeable to tax under the head “Income from other sources”.

(b) Computation of income from house property of Shri Raman for A.Y. 2009-10 Particulars Rs. Rs.

Gross Annual Value (See Note 1 below) 1,80,000 Less: Municipal taxes – paid by the tenant, hence not deductible Nil Net Annual Value (NAV) 1,80,000 Less: Deductions under section 24

(i) 30% of NAV 54,000 (ii) Interest on housing loan (See Note 2 below) Interest on loan taken from bank 25,000 Interest on fresh loan to repay old loan for this property 5,000 84,000

Income from house property 96,000

50% share taxable in the hands of Shri Raman (See Note 3 below) 48,000 Notes: 1. Computation of Gross Annual Value (GAV)

GAV is the higher of Annual Letting Value (ALV) and actual rent received. ALV is the higher of municipal value and fair rent, but restricted to standard rent.

Particulars Rs. Rs. Rs. Rs. (a) Municipal value of property 1,60,000 (b) Fair rent 1,50,000 (c) Higher of (a) and (b) 1,60,000 (d) Standard rent 1,70,000 (e) Annual Letting Value [lower of (c) and (d)] 1,60,000 (f) Actual rent [15,000 x 12] 1,80,000 (g) Gross Annual Value [higher of (e) and (f)] 1,80,000


67

2. Interest on housing loan is allowable as a deduction under section 24 on accrual basis. Further, interest on fresh loan taken to repay old loan is also allowable as deduction. However, interest on unpaid interest is not allowable as deduction under section 24.

3. Section 26 provides that where a house property is owned by two or more persons whose shares are definite and ascertainable, the share of each such person in the income of house property, as computed in accordance with sections 22 to 25, shall be included in his respective total income. In this case, the problem has been solved assuming that Mr. Raman, who is a co-owner of the house property, has 50% share in the house property.

(c) Computation of net taxable capital gains of Smt. Megha for the A.Y.2009-10 Particulars Rs.

Full value of consideration 15,00,000 Less: Expenses on transfer _ Nil Net sale consideration 15,00,000 Less: Indexed cost of acquisition (See Working note below) _6,68,157 Long term capital gain (since the period of holding is more than 3 years) 8,31,843 Less: Exemption under section 54 (See Note 1 below) 4,00,000 Taxable long term capital gain 4,31,843 Working Note: Indexed cost of acquisition Purchase price 4,50,000 Less: Amount forfeited (See Note 2 below) __70,000 Cost of acquisition 3,80,000

Indexed cost of acquisition331

582000,80,3.Rs × 6,68,157

582 is the cost inflation index for F.Y. 2008-09 and 331 is the cost inflation index for F.Y.1997-98.

Notes: (1) Exemption under section 54 is available if a new residential house is purchased

within two years from the date of transfer of existing residential house, which is a long-term capital asset. Since the cost of new residential house is less than the long-term capital gains, capital gains to the extent of cost of new house, i.e., Rs.4 lakh, is exempt under section 54.


68

(2) As per section 51, any advance received and retained by the assessee, as a result of earlier negotiations for sale of the asset, shall be deducted from the purchase price for computing the cost of acquisition of the asset.

Question 3 Mr. Rajat submits the following information for the financial year ending 31st March, 2009. He desires that you should:

(a) Compute the total income and

(b) Ascertain the amount of losses that can be carried forward.

(i) He has two houses : Rs. (a) House No. I – Income after all statutory deductions 72,000 (b) House No. II – Current year loss (30,000) (ii) He has three proprietary businesses : (a) Textile Business : (i) Discontinued from 31st October, 2008 - Current year loss 40,000 (ii) Brought forward business loss of A.Y.2005-06 95,000 (b) Chemical Business : (i) Discontinued from 1st March, 2007 - hence no profit/loss Nil (ii) Bad debts allowed in earlier years recovered during this year 35,000 (iii) Brought forward business loss of A.Y. 2007-08 50,000 (c) Leather Business : Profit for the current year 1,00,000 (d) Share of profit in a firm in which he is partner since 2002 16,550 (iii) (a) Short-term capital gain 60,000 (b) Long-term capital loss 35,000 (iv) Contribution to LIC towards premium 10,000

(10 Marks) Answer

Computation of total income of Mr. Rajat for the A.Y. 2009-10 Particulars Rs. Rs.

1. Income from house property House No.1 72,000 House No.2 (-) 30,000 42,000 2. Profits and gains of business or profession Profit from leather business 1,00,000


69

Less: Current year loss of textile business (-) 40,000 60,000 Bad debts recovered taxable under section 41(4) 35,000 95,000 Less: Brought forward business loss of textile business for A.Y.2005-06 set off against the business income of current year

95,000 Nil

3. Capital Gains Short-term capital gain 60,000 Gross Total Income 1,02,000 Less: Deduction under chapter VI-A Under section 80C – LIC premium paid 10,000 Total Income 92,000

Statement of losses to be carried forward to A.Y. 2010-11 Particulars Rs.

Business loss of A.Y. 2007-08 to be carried forward under section 72 50,000 Long term capital loss of A.Y. 2009-10 to be carried forward under section 74 35,000

Notes: (1) Share of profit from firm of Rs.16,550 is exempt under section 10(2A). (2) Long-term capital loss cannot be set-off against short-term capital gains. Therefore, it

has to be carried forward to the next year to be set-off against long-term capital gains of that year.

Question 4 Answer any three of the following: (a) Explain the consequences of failure to deduct tax at source and payment of the same to

the Government Account under the Income-tax Act, 1961. (b) What are the circumstances under which the Assessing Officer can make a reference to

the Valuation Officer under section 55A of the Income-tax Act, 1961? (c) Explain the concept of reverse mortgage and discuss its tax implications. (d) Discuss briefly on carry forward and set off of losses in the case of change in constitution

of firm or succession. (3 × 4 =12 Marks) Answer (a) Consequences of failure to deduct and pay the tax [Section 201]

(i) The following persons shall be deemed to be an assessee in default if they do not deduct the whole or any part of the tax or after deducting fails to pay the tax –


70

(1) Any person including the principal officer of a company who is required to deduct any sum in accordance with the provisions of Act, and

(2) An employer paying tax on non-monetary perquisites under section 192(1A). (ii) No penalty shall be charged from such person unless the Assessing Officer is

satisfied that such person has failed to deduct and pay the tax without good and sufficient reasons.

(iii) Such person shall also be liable to pay simple interest@1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid and such interest should be paid before furnishing the quarterly statements.

(iv) Where the tax has not been paid after it is deducted, the amount of the tax together with the amount of simple interest, shall be a charge upon all the assets of the person or the company, as the case may be.

(b) Reference to Valuation Officer With a view to ascertaining the fair market value of a capital asset, the Assessing Officer

may refer valuation of the capital asset to the Valuation Officer, in the following cases: (1) Where the value of the asset, as claimed by the assessee, is in accordance with the

estimate made by the registered valuer but the Assessing Officer is of the opinion that the value so claimed is less than its fair market value;

(2) Where the Assessing Officer is of the opinion that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than 15% of the value of the asset as so claimed or by more than Rs.25,000.

(3) Where the Assessing Officer is of opinion that, having regard to the nature of the asset and relevant circumstances, it is necessary to make a reference to the Valuation Officer.

(c) Reverse Mortgage Scheme and its tax implications (i) The Reverse Mortgage scheme is for the benefit of senior citizens, who own a

residential house property. In order to supplement their existing income, they can mortgage their house property with a scheduled bank or housing finance company, in return for a lump-sum amount or for a regular monthly/quarterly/annual income. The senior citizens can continue to live in the house and receive regular income, without the botheration of having to pay back the loan.

(ii) The borrower can use the loan amount for renovation and extension of residential property, family’s medical and emergency expenditure etc., amongst others. However, he cannot use the amount for speculative or trading purposes.

(iii) Clause (xvi) of section 47 clarifies that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government would not amount to a transfer for the purpose of capital gains.


71

(iv) Clause (43) of section 10 provides that any amount received by an individual as a loan, either in lump sum or in installments, in a transaction of reverse mortgage would be exempt from income-tax.

(d) Carry forward and set off of losses in cases of change in constitution of firm or on succession [Section 78] (i) Where there is a change in the constitution of firm, so much of the loss

proportionate to the share of a retired or deceased partner remaining unabsorbed, shall not be allowed to be carried forward by the firm.

(ii) Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, such other person shall not be allowed to carry forward and set off against his income, any loss incurred by the predecessor.

(iii) Where there is a succession by inheritance, the legal heirs (assessable as BOI) are entitled to set off the business loss of the predecessor. Such carry forward and set off is possible even if the legal heirs constitute themselves as partnership firm. In such a case, the firm can carry forward and set off the business loss of the predecessor.

Question 5 Answer the following:

(a) Should service tax be paid even, if it is not collected from the client or service receiver?

(b) Mr. Raju is a multiple service provider and files only a single return. State with reasons whether he can do so?

(c) Explain the term “Vocational Training Institute” under the provisions of service tax.

(d) State with reason in brief whether the following statement is true or false with reference to the provisions of service tax:

Mr. Salim, an architect has received the fees of Rs.4,48,500 after the deduction of income-tax of Rs.51,500. Service tax will be payable on Rs.4,48,500. (2 x 4 = 8 Marks)

Answer (a) Section 68 of the Finance Act, 1994 casts the liability to pay service tax upon the service

provider or upon the person liable to pay service tax as per Rule 2(1)(d) of the Service Tax Rules, 1994. This liability is not contingent upon the service provider realizing or charging the service tax at the prevailing rate. The statutory liability does not get extinguished if the service provider fails to realize or charge the service tax from the service receiver.

(b) Yes, Mr. Raju can file a single return though he is a multiple service provider. He has to furnish the details in each of the columns of the Form No.ST-3 separately for each of the taxable services rendered by him. Thus, instead of showing a lump sum figure for all the services together, service-wise details should be provided in the return.


72

(c) Notification No. 24/2004 ST dated 10.09.2004 defines a vocational training institute to mean a commercial training or coaching centre which provides vocational coaching or training that impart skills to enable the trainee to seek employment or undertake self-employment, directly after such training or coaching.

(d) False. As the charge of the service tax is on the services provided, the gross receipts are to be considered for tax calculation. Hence, service tax will be payable on the gross fee of Rs.5 lakh.

Question 6

(a) Rosy Tours Co. has arranged three package tours during F.Y. 2008 - 09. The particulars of the services and charges are as under:

(i) Tour 1: April, 2008 - Charges received Rs.3.5 Lacs. The package includes transportation, accommodation, food, tourist guide and entry

fees for monuments. (ii) Tour 2: October, 2008 - Charges received Rs.6.5 Lacs. The package includes transportation and accommodation for stay. (iii) Tour 3: December, 2008 - Charges received Rs.4 Lacs. The charges are solely for arranging accommodation for stay. However, the bills

issued to the clients do not mention it clearly that the charges are solely for arranging the accommodation for stay.

All the charges are excluding service tax. The rate of service tax is 12% + education cess. Compute the value of taxable service and service tax payable thereon. (8 Marks)

(b) Answer the following:

(i) Whether export service provided by a service provider is excluded for the purpose of payment of service tax?

(ii) List the documents to be submitted alongwith the first service tax return. (iii) What is the due date for payment in case of e-payment of service tax?

(3 x 3 = 9 Marks) Answer (a) Computation of total value of taxable services provided by Rosy Tours Co. for F.Y. 2008-

09:-

Particulars Value of services

Abatement Taxable value in % age

Value of taxable services

Rs. % Rs.Tour 1 – April, 2008 3,50,000 75 (Note 1) 25 87,500


73

Tour 2 – October, 2008 6,50,000 60 (Note 2) 40 2,60,000Tour 3 - December, 2008 4,00,000 Nil (Note 3) 100 4,00,000Total 14,00,000 7,47,500Service tax payable on Rs.7,47,500/- will be Rs.89,700 + education cess (2%) and secondary and higher education cess (1%) Rs.2,691 = Rs.92,391. Note 1: In case of package tours, an abatement of 75% of the gross amount charged is available. It has been assumed that the bill issued for this purpose indicates that it is inclusive of charges for such a tour. Note 2: Since, this tour package includes only transportation and accommodation for stay, it is not a package tour as per Notification No. 1/2006 ST dated 01.03.2006. In case of services provided in relation to a tour other than in relation to a package tour, an abatement of 60% of the gross amount charged is available. It has been assumed that the bill issued for this purpose indicates that the amount charged in the bill is the gross amount charged for such a tour. Both in case of Tour 1 and Tour 2, the exemption is available on the assumption that (i) no CENVAT credit of duty paid on inputs or capital goods or the CENVAT credit of

service tax on input services, used for providing such taxable service, has been taken under the provisions of CENVAT Credit Rules, 2004; or

(ii) the service provider has not availed the benefit under the Notification No. 12/2003 ST, dated 20.06.2003.

Note 3: The abatement of 90% of the gross amount charged will not be available because the bills issued to clients do not indicate that the charges are solely for arranging the accommodation for stay.

(b) (i) Yes. Export of services is exempt from payment of service tax if services are exported in accordance with the Export of Services Rules, 2005. However, service provided to an exporter is not excluded for the purpose of payment of service tax. The person liable to pay service tax under sub-section (1) or sub-section (2) of section 68 shall pay service tax as applicable on the specified services provided to the exporter and used for export of such goods, and such person shall not be eligible to claim exemption for the specified services.

(ii) Every assessee shall furnish to the Superintendent of Central Excise at the time of filing the return for the first time or 31st January, 2008 whichever is later, a list of following documents in duplicate: (a) all the records prepared or maintained by the assessee for accounting of

transactions in regard to (i) providing of any service, whether taxable or exempted; (ii) receipt or procurement of input services and payment for them; (iii) receipt, purchase, manufacture, storage, sale or delivery, as the case


74

may be, in regard to inputs and capital goods; (iv) other activities such as manufacture and sale of goods, if any.

(b) all other financial records maintained by him in the normal course of business. (iii) As per rule 6(1) of the Service Tax Rules, 1994, where service-tax is paid

electronically through internet banking, the service tax on value of taxable service received: (i) by an individual or a proprietary firm or a partnership firm during any quarter is

payable by the 6th day of the month immediately following the said quarter, and (ii) in other cases (company & HUF) during any calendar month is payable by the

6th day of the month immediately following the said calendar month. The due date for the month of March is 31st March.

Question 7 Answer the following:

(a) What are the different rates under VAT system?

(b) Under what circumstances registration can be cancelled under VAT?

(c) Briefly explain the income variant of VAT.

(d) State with reasons in brief whether the following statement is true or false with reference to the provisions of value added tax.

The VAT rate on sale of lottery ticket is 4%. (2 x 4 = 8 Marks) Answer (a) To reduce the multiplicity of sales-tax rates between various States in India, it was

recommended that VAT will have broadly the following tax rates: (a) Zero rate for tax free goods, (b) 1% on precious or semi-precious metals i.e., bullion etc. (c) 4% on items of basic necessities, agricultural and industrial inputs, capital goods

and declared goods (d) 20% on non VAT goods (e) 12.5% on other goods.

(b) VAT registration can be cancelled on: (i) discontinuance of business; or (ii) disposal of business; or (iii) transfer of business to new location; or (iv) annual turnover falling below the specified limit.


75

(c) The income variant of VAT allows deduction of purchases of raw material and components as well as depreciation of capital goods. This method provides incentive to classify purchases as current expenditure to claim set off. In practice, however, there are many difficulties connected with the specification of any method of measuring depreciation, which basically depends on the life of an asset as well as on the rate of inflation.

(d) False. Since VAT is not applicable on sale of lottery tickets, the question of rate does not arise.

Question 8

(a) Mr. X, a manufacturer sells goods to Mr. B, a distributor for Rs.2,000 (excluding VAT). Mr. B sells goods to Mr. K, a wholesale dealer for Rs.2,400. The wholesale dealer sells the goods to a retailer for Rs.3,000, who ultimately sells to the consumers for Rs.4,000.

Compute the tax liability, input credit availed and tax payable by the manufacturer, distributor, wholesale dealer and retailer under invoice method assuming VAT rate @ 12.5%. (8 Marks)

(b) Answer the following:

(i) What are the different stages of VAT? Can it be said that entire burden falls on the final consumer?

(ii) Discuss filing of return under VAT. (iii) List six purchases which are not eligible for input tax credit. (3 x 3 = 9 Marks)

Answer 8 (a) Computation of tax liability, input tax credit availed and tax payable under invoice method

Stage Particulars VAT Liability

Less VAT Credit

Tax payable to Government

1. X, the manufacturer, sells to B, the distributor, for Rs.2,000. Therefore his tax liability will be Rs.250 (Rs.2,000 @ 12.5%). He will not have any VAT credit.

250 - 250

2. B, the distributor, sells goods to K, the wholesale dealer, for Rs.2,400. B’s tax liability will be Rs.300 (Rs.2,400 @ 12.5%). He will get set off of tax paid at earlier stage of Rs.250. Thus, tax payable by him will be Rs.50.

300 250 50


76

3. K, the wholesaler dealer, sells to retailer at Rs.3,000. K’s tax liability will be Rs.375 (Rs.3,000 @ 12.5%). He will get set off of tax paid at earlier stage of Rs.300. Thus, tax payable by him will be Rs.75.

375 300 75

4. Retailer sells goods to consumers at Rs.4,000. His tax liability will be Rs.500 (Rs.4,000 @ 12.5%). He will get set off of tax paid at earlier stage of Rs.375. Thus, tax payable by him will be Rs.125/-

500 375 125

Note: It has been assumed that sales made by the distributor, the wholesale dealer and the retailer are also exclusive of VAT.

(b) (i) The Value Added Tax (VAT) is a multistage tax levied as a proportion of the value added (i.e. sale minus purchase) which is equivalent to wages plus interest, other costs and profits. In an economy, apart from the manufacturers and final consumers, there would be wholesalers and retailers also. The wholesaler might supply to retailer and each one of them could supply to the manufacturer and end consumer. VAT will be collected at each stage, and wherever applicable, the manufacturer or retailer will claim input credit. Thus, VAT is collected at each stage of production and distribution process, and in principle, its entire burden falls on the final consumer, who does not get any tax credit. Thus, VAT is a broad based tax covering the value added to each commodity by parties during the various stages of production and distribution.

(ii) VAT returns are to be filed monthly/quarterly/annually along with tax paid challans according to the provisions of the State Acts. They should contain details of output tax liability, value of input tax credit and payment of VAT and should be filed within the prescribed time schedule. In case of any mistakes, revised returns may be filed. The returns will be checked and any deficiency in payment of tax may have to be made good.

Filing of returns are designed with a view: (i) to reduce cost of compliance (ii) to encourage businesses to comply with their obligations; and (iii) to ensure efficient processing of data.


77

(iii) The following purchases are not eligible for input tax credit: (a) purchases from unregistered dealers; (b) purchases from registered dealers who opt for composition scheme under the

provisions of the Act; (c) purchase of goods as may be notified by the State Government; (d) purchase of goods where the purchase invoice is not available with the

claimant or there is evidence that the same has not been issued by the registered selling dealer from whom the goods are purported to have been purchased;

(e) purchase of goods where invoice does not show the amount of tax separately; (f) purchase of goods which are being utilized in the manufacture of exempted

goods; (g) purchase of goods used for personal use or consumption or provided free of

charge as gifts; (h) goods imported from other States; (i) goods imported from outside the territory of India; (j) goods in stock which have suffered tax under an earlier Act but under VAT Act

they are covered under exempted items. Out of the above, any six purchases may be mentioned in the answer.

SUMMARY OF EXAMINERS’ COMMENTS ON THE PERFORMANCE OF CANDIDATES


General Comments The performance of the candidates has not been satisfactory. The answers of the candidates showed lack of knowledge and understanding of the subject, particularly the Accounting Standards. The candidates are advised to read and understand the Study Material thoroughly and analytically. Adequate practice of solving practical problems is essential to acquire command over the fundamentals of the subject. The solutions to practical problems must be given in suitable formats along with sufficient working notes. It is suggested that the question paper should be gone through carefully before writing the answers.

Specific Comments:

Question1 In parts (ii), (iii), (v), (viii), (x), candidates could not answer the question in accordance with the relevant provisions of the Accounting Standards. Question 2 Most of the candidates failed to give the required journal entries in the books of MN Ltd. In very few cases, the balance sheet of MN Ltd. (post merger) was prepared correctly by the candidates. Question 3 Few candidates could not pass the necessary journal entries. Consequently, they could not prepare partners; capital accounts in the correct manner. Question 4 In part (b) of the question, some candidates calculated the amount the amount of interest directly, without using the average due date method. Question 5.(a) Some candidates erred in calculation of subscription received, purchase of sports equipment, opening balance of capital fund. They could not give the correct receipts and payments account and balance sheet of the club. (b) Many candidates committed mistakes in allocation of expenses between pre and post incorporation periods and consequently, in computation of pre incorporation and post incorporation profits. Question 6 Many candidates could not score good marks in this question as the answers were not concise and to the point. In parts (iv) and (vi), they could not apply the relevant provisions of the Accounting Standards. They were not aware of the disclosure requirements in the profit and loss statement of a company in respect of corporate dividend tax which was required in part (v) of the question.

SUMMARY OF EXAMINERS’ COMMENTS

79

PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

General Comments

The performance of the examinees, in general, was average. The following improvements are required: 1. Examinees to provide case-laws and specific provisions in their answers. 2. Examinees to hone their English language skills such that their answers have clarity

and precision. 3. Examinees to make use of the various Bare Acts. 4. Examinees must grasp the questions correctly and not get confused as mentioned in

Specific Comment No. 3 below. 5. Examinees to answer to the point, without unnecessary extrapolations. 6. Examinees to focus on certain legislations such as the Negotiable Instruments Act,

1881, and the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. 7. In the Communications part, performance of the students was satisfactory.

Nevertheless, the students should improve their writing and presentation skills. Further, the students are advised to delve deep into the areas of drafting notices/circulars/minutes/ legal deeds and documents etc.

Specific Comments

Question 1. The performance of the examinees was average in 1(a) while 1(b) and 1(c) were answered satisfactorily. Some examinees had come to the erroneous conclusion that there was no consideration involved in question 1(a) and that hence there was no contract in the given problem. Question 2. Examinees’ performance was quite satisfactory compared to question No.1, though both the questions are similarly patterned. Question 3. The performance of the examinees was found to be mixed, with some answering well, while others having failed to mention the relevant legal provision, while still others were referring erroneously to the Central Government rather than the Tamilnadu Government. Question 4. Many examinees had not mentioned the relevant provisions (Sections 39 & 40 of the Negotiable Instruments Act). Question 5. The performance of the examinees was highly satisfactory. Question 6. Many examinees had not attempted this question. Even those who had attempted it fared poorly. Question 7. This question was not answered well. Many examinees could not explain why the entity in question was an ‘illegal association’.


80

Question 8. Examinees’ performance was average. The various rights of the three parties were not clearly enunciated by most examinees. Question 9. Performance of the examinees was satisfactory. Question 10. An overall average performance with regard to this question. Many examinees could not pin-point that the non-attachment of the explanatory note vitiates the notice. Question 11. Performance was average and the answers were vague, in many cases. Question 12. The performance was generally good, though the pragmatic reasons were found mixed up with certain general reasons that the candidates had adduced on their own. Question 13. Performance was satisfactory. Question14.(a) Performance of the students was quite satisfactory. The question was asked to test the students’ knowledge about the merits and demerits of informal form of communication. (b) Most of the students attempted this question in a very poor manner. The students failed to discriminate the difference between Notice and Agenda. The students must develop a logical understanding to tackle such a practical question. Question 15. Overall performance of the students was not satisfactory. The format of the Annual General Meeting was not followed by most of the students. The students are advised to practice the specimen of Minutes of Annual General Meeting. Question16. Performance of the students was middling. They could not get the essence of the question and drafted the Partnership Deed rather than the Partnership Retirement Deed.


General Comments

The overall performance of the candidates was below average. The quality of most of the answers reflected lack of candidates’ knowledge and understanding of the subject. It is also observed that the candidates neglect the theoretical aspects of the subject; they should go through the study material carefully. A thorough practice and lots of reading of the subject is required to maintain the level of knowledge expected from the students of IPCC level.

Specific Comments

Question1.(i) This theory question related to ‘Basic Concepts’ was attempted by majority of the candidates. Most of the students were not able to understand the ‘imputed cost’ as ‘input cost’. Many of them were not able to answer it appropriately. (ii) This practical question related to labour (Variance analysis of labour) was attempted by the majority of the candidates. Maximum of the students were not able to answer it correctly. They failed to depict the relationship of activity ratio, efficiency ratio and capacity ratio correctly.


81

(iii) This theory question part related to ‘Non Integrated Accounts’ was not satisfactorily answered by the majority of the students. Many of the examinees had treated ‘financial expenses’ as financial items’. (iv) This theory question was related to ‘Contract Costing’ was correctly answered by only few of the students. The advantages of cost plus contracts were stated correctly by the students. (v) This practical question part related to ‘Marginal Costing’ was not satisfactorily answered by many of the students. Many of them failed to calculate BEP correctly. (vi) This theory question related to ‘Non – Integrated Accounts’ was not well answered by most of the candidates. Many of them failed to mention a situation where reconciliation statement of cost and financial account are not required. Question2. This numerical question related to ‘Marginal Costing and Absorption Costing’ was attempted by less number of the examinees. The students were confused with the preparation of the respective statements. The candidates could not solve this question correctly. Question3.(a) This numerical problem related to ‘Process Costing’ is covered under ‘Method of Costing (II)’ was attempted by a large number of students. Most of the examinees had failed to take into account of the material introduced at the inception and hence could not prepare the statement of equivalent production account, statement of cost and process account correctly. (b) This practical question related to ‘Standard Costing’ was satisfactorily answered by majority of the students. Variance related to material and labour was correctly calculated by most of the candidates. Question4.(i) This numerical question related to ‘Labour’ was wrongly answered by maximum number of candidates. Most of the students were able to calculate ‘time saved’ but they were not able to accurately calculate the effective hourly rate of wages. (ii) This theory question part related to ‘Operating Costing’ is covered under ‘Method of Costing (I)’ was not answered satisfactorily by maximum number of candidates. They were not able to show that how composite units are computed. (iii) This numerical question related to ‘Material’ is attempted by the maximum number of students satisfactorily. EOQ was calculated by majority of them. (iv) This theory question related to ‘Budgets & Budgetary Control’ was very well answered by the majority number of students. They were even not able to list out the list of functional budgets correctly. Question 5.(i) Short note on Limitations of Financial Ratios was answered correctly by most of the candidates. (ii) Concept of Business Risk and Financial Risk was answered well by majority of the candidates.


82

(iii) Differentiation between Factoring and Bills Discounting was well written by most of the candidates. However, few candidates differentiated between factoring and discounting instead.

(iv) A large percentage of the candidates discussed the differentiation between Financial Management and Financial Accounting well.

(v) Very few candidates could compute the Cost of Retained Earnings on correct lines.

(vi) Majority of the candidates were able to calculate the amount of Fixed Assets and Proprietor’s Fund correctly.

Question 6 Majority of the candidates prepared the Cash Flow Statement on correct lines but failed to present it in the proper format. However, a few candidates could not work out cash flow from operating activities correctly. Further, the candidates have not presented their answers supported by proper working notes in preparation of cash flow statement.

Question 7.(a) Though a large percentage of the candidates prepared correctly the Income Statement, however, few of the candidates did not support their answers by proper working notes.

(b) This part of the question was not well answered by majority of the candidates. Most of them failed to take into consideration the loss of commission. Few of the candidates even added the commission to the income instead of treating it as an opportunity lost.

Question 8.(i) Majority of the candidates answered well the two basic functions of Financial Management. However, a few of them discussed the objectives of Financial Management instead.

(ii) A large percentage of the candidates attempted this part of the question on short notes on Ploughing back of profits and Desirability factor. However, only a handful could discuss logically and in short. Few of the candidates have written ploughing back of profits as profit on sale of old assets.

(iii) A large percentage of candidates explained well the concept of Weighted Average Cost of Capital.

(iv) While most of the candidates attempted the problem, only a few of them could calculate the value of the firms according to MM Hypothesis correctly.

PAPER − 4 : TAXATION

General Comments

Many candidates have exhibited lack of knowledge of the provisions of the Income-tax Act and Service Tax and VAT. They were also not aware of the recent amendments in the Income-tax Act. Further, most of the candidates have not given proper working notes for practical problems. The presentation of answers is also poor in most cases.


83

Specific Comments

Question 1.(i) Many candidates have wrongly considered the purchase price of flat, i.e., Rs.4,75,000, as the annual value of house property. (ii) Most of the candidates have not provided for exemption of Rs.1,500 under section 10(32) in respect of income of minor child, clubbed in the hands of Siddhant; (iii) Some candidates have wrongly taxed national award for humanitarian work from the Central Government under the head “Capital gains” or “Income from other sources”. Some others have totally ignored the same without giving any reason. Question 2.(a)(i) Many candidates have not grossed up winnings from lotteries and interest on debentures while calculating income under the head “Income from other sources”; (ii) Most of the candidates have wrongly treated interest on Government securities and interest on Post Office Monthly Income Scheme as exempt income. (b) (i) Most of the candidates have allowed interest under section 24 on payment basis instead of due basis; (ii) Municipal taxes paid by the tenant was wrongly allowed as deduction from gross annual value in most of the cases. (c) Many candidates have not deducted the advance of Rs.70,000, received and retained on an earlier negotiation for sale of property, to arrive at the cost of acquisition. Question 3.(i) Some candidates have wrongly treated share of profit from firm as taxable income and set off business losses against the same; (ii) Some candidates have wrongly set off brought forward business loss against income from house property of the current year; (iii) Many candidates have wrongly set-off long-term capital loss against short-term capital gain. Question 4.(a) Most of candidates were not aware of the provisions of section 201 relating to consequences of failure to deduct and pay the tax and hence, they could not answer the question correctly. (b) Some candidates have wrongly written about the provisions of section 50C dealing with adoption of value assessed by stamp valuation authority. (d) Most of the candidates were not aware of the provisions of section 78 and have wrongly written about the order of set-off under each head of income. Some candidates have answered that loss can be carried forward without any restriction even in case of change in constitution / succession in business. Question 5.(d) Few candidates wrongly took the net amount (net of TDS) as the taxable receipt. Some candidates further deducted the amount of TDS from Rs.4,48,500 while others wrongly concluded that once TDS is deducted no service tax is liable to be paid.


84

Question 6.(a) Majority of the candidates were ignorant about the percentage of abatements available to various tours. (b)(i) Many candidates were not aware of the provisions relating to export of services. (b)(iii) Many candidates did not mention the due date for the month of March. Some of them wrongly considered HUF along with individual and firm for the purpose of determining the due dates. Question 7.(d) Instead of mentioning that VAT is not applicable on lottery tickets, many candidates wrongly considered lottery ticket as exempt item under VAT. Question 8.(b)(i) Many candidates wrongly concluded that the final burden of VAT does not lie on the consumer. (b)(ii) Most of the candidates provided general answers to this question instead of mentioning the procedure of filing of returns under VAT.

85

PUBLICATIONS OF THE BOARD OF STUDIES Postal Charges

by Regd. Parcel English Hindi English Hindi

Rs. Rs. Rs. Rs. I. STUDY MATERIALS

COMMON PROFICIENCY TEST (CPT)

Fundamentals of Accounting 200 140 Mercantile Laws 50 40 General Economics 100 70 Quantitative Aptitude 250 150 Self Assessment CD in English 40 40 640 440 145 145

PROFESSIONAL EDUCATION (COURSE – II)

Group I Accounting Vol. I & Vol. II 250 150 (English version – Rs.125 each Volume) Auditing Vol. I & Vol. II 150 125 Business and Corporate Laws 100 125 500 400 165 105 Group II Cost Accounting & Financial Management 150 150 (English version Cost A/c – Rs.100, F.M. – Rs.50) Income-Tax and Central Sales Tax 200 100 Information Technology 150 150 500 400 120 135 Both Groups 1000 800 235 200

PROFESSIONAL COMPETENCE COURSE (PCC)

Group I Advanced Accounting Vol. I & Vol. II 500 500 Auditing and Assurance Vol.I 175 175 Auditing and Assurance Standards & Guidance Note (English) Vol.II 100 100 Law, Ethics and Communication 275 275 1050 1050 215 215

86

Postal Charges by Regd. Parcel

English Hindi English Hindi

Rs. Rs. Rs. Rs. Group II Cost Accounting & Financial Management 300 300 Taxation 200 200 Information Technology 150 150 Strategic Management 100 100 750 750 180 180 Both Groups 1800 1800 395 395 Professional Competence Course − Study Material) in CD in English. 40 40

Information Technology Training Course Material Information Technology Training Programme - 500 90

Modules - I & II 100 Hours Information Technology Training

Course Material in Cds (8 Nos.) 320 40 (Self Assessment and Summarised Study Material.) INTEGRATED PROFESSIONAL COMPETENCE COURSE (IPCC) Group I Accounting Vol. I Study Material 250 250 Vol. II Practice Manual 80 Business Laws & Ethics and Communication 325 325 Cost Accounting and Financial Management Part 1 Vol. I Study Material 250 250 Vol. II Practice Manual 125 Cost Accounting and Financial Management Part 2 Vol. I Study Material 175 175 Vol. II Practice Manual 80 Taxation 300 300 1585 1300 460 460 Group II Advanced Accounting Vol. I Study Material 350 350 Vol. II Practice Manual 75 Auditing and Assurance Vol.I 250 250 Auditing and Assurance Vol.II 150 150 Information Technology & Strategic Management 300 300 1125 1050 300 300 Both Groups 2710 2350 750 750 IPCC Study Material CD in English 40 40

87



Rs. Rs. Rs. Rs.

ACCOUNTING TECHNICIAN COURSE (ATC) Accounting 250 250 Business Laws & Ethics and Communication 325 325 Cost Accounting and Financial Management Vol I 250 250 Cost Accounting and Financial Management Vol II 175 175 Taxation 300 300 1300 1300 ATC Study Material CD in English 40 40

FINAL (NEW COURSE) Group I Financial Reporting 600 600 Strategic Financial Management 260 260 Advanced Auditing and Professional Ethics 520 520 Corporate and Allied Laws 200 200 1580 1580 320 320 Group II Advanced Management Accounting 240 240 Information Systems Control and Audit 150 150 Direct Tax Laws 340 340 Indirect Tax Laws 290 290 1020 1020 225 225 Both Groups 2600 2600 540 540

Final (New Course) − Study Material in CD in English. 40 40 FINAL COURSE Group I Advanced Accounting 150 225 Management Accounting & Financial Analysis 200 275 Advanced Auditing 300 350 Corporate Laws and Secretarial Practice 200 250 850 1100 200 140 Group II Cost Management 200 250 Management Information & Control Systems 150 175 Direct Taxes 150 250 Indirect Taxes 150 225 650 900 165 140 Both Groups 1500 2000 300 300

88



Rs. Rs. Rs. Rs.

II. COMPILATIONS OF SUGGESTED ANSWERS

Professional Education (Examination –II)

1. Accounting (May 1999 to Nov. 2008) 60 40 2. Auditing (May, 2000 to November 2008) 50 40 3. Business and Corporate Laws (May 2000 to November 2008) 50 40 4. A.: Cost Accounting (May 1999 to November 2008) 40 40 B : Financial Management (May 1999 to November 2008) 30 40 5. Income Tax and Central Sales Tax (November 2002 to June 2009) 40 40 6. Information Technology (November 2002 to November 2008) 40 40 Complete Set 270 110

Final

1. Advanced Accounting (May 1999 to November 2008) 60 40 2. Management Accounting & Financial Analysis (May 1999 to November 2008) 60 40 3. Advanced Auditing 50 40 (May 2000 to November 2008) 4. Corporate Laws and Secretarial Practice (May 2000 to November 2008) 50 40 5. Cost Management (May 1999 to May 2008) 60 40 6. Management Information and Control Systems (May 1999 to November 2008) 30 40 7. Direct Taxes 60 40 (May 2000 to November 2005) Complete Set 370 150

III COMPILATION OF QUESTIONS SET IN PREVIOUS EXAMINATIONS

Professional Education (Course - II) (Nov. 2002 to Nov. 2005) 40 40 Final (Nov. 2002 to Nov. 2005) 40 40

IV SUGGESTED ANSWERS (November 2002 - November, 2009)

Professional Education (Course –II) (Group I & II) Professional Competence Course(Group I & II) – May 2007 and onwards Integrated Professional Competence Course(Group I & II) – November 2009 only Accounting Technician Course – November 2009 only Final (Group I & II) Final New Course (Group I & II) – November, 2008 and onwards

Each Suggested Answer is priced Rs.40 per volume plus Postal charges for Registered parcel Rs.40.

89



Rs. Rs. Rs. Rs.

V REVISION TEST PAPERS (May, 2010 )

Professional Education (Course –II) (Group I & II) 80 55 Professional Competence Course(Group I & II) 80 55 Final (Old) Course (Group I & II) 80 55 Integrated Professional Competence Course (Group I & II) 80 55 Accounting Technician Course (ATC) 40 40 Final (New) Course (Group I & II) 80 55 Each Revision Test Papers is priced Rs.40 per volume plus Postal charges for Registered parcel Rs.40.

VI PROSPECTUS

1. Common Proficiency Test – A Simplified Entry to the Chartered Accountancy Course 100 40 2. Integrated Professional Competence Course with ICR Forms 100 40 3. Accounting Technician Level with ICR Forms 100 40

VII PROFESSIONAL DEVELOPMENT BOOKLET

1. Student Guide to Accounting Standard 28: Impairment of Assets 25 40

2. Risk Based Audit and Guide to Internal Audit 30 40

VIII MISCELLANEOUS

1. Model Test paper Vol. I for CPT (in English/Hindi) 2. Model Test paper Vol. II for CPT (in English/Hindi)

250 250

(each version) (each version)

68 68

3. Model Test Paper Vol. I for PCC 50 36 4. Supplementary Study Paper-2009 Income tax & Central Sales Tax for PE(Course-II)

30 40

5. Supplementary Study Paper -2009 Taxation for PCC

30 40

6. Supplementary Study Paper -2009 Direct taxes and Indirect taxes for Final Course Direct tax laws and Indirect tax laws for Final (new) Course

60 40

7. Select cases Direct and Indirect Taxes – 2009 For Final Course

40 40

8. Training Guide 80 40 Those who wish to get the publications of the Board of Studies including CDs by post may send a Demand Draft/ Pay Order in favour of ‘The Secretary, Institute of Chartered Accountants of India’, payable at New Delhi towards the price of publications and postage. The letter may be addressed to the Assistant Secretary, Noida Stores, ICAI, ICAI BHAWAN, A-94/4, Sector –58 NOIDA – 201301.

90

Students may also contact/write to the Decentralised Offices of the Institute for obtaining Boards' publications including CDs. (i) Western India Regional Council of The Institute of Chartered Accountants of India, ICAI BHAWAN, Anveshak, 27, Cuffee Parade, Colaba, Post Box No. 6081, Mumbai-400 005. E-Mail: [email protected] 022-39893989, Fax :022-39802953

(ii) Southern India Regional Council of The Institute of Chartered Accountants of India, ICAI BHAWAN, 122, M.G. Road, Nungambakkam, Post Box No. 3314, Chennai-600 034. E-Mail: [email protected] 044-39893989, Fax : 044-30210355.

(iii) Eastern India Regional Council of The Institute of Chartered Accountants of India, ICAI BHAWAN, 7, Anandilal Poddar Sarani, (Russell Street), Kolkata-700 071. E-Mail: [email protected] 033-39893989, Fax : 033-30211145

(iv) Northern India Regional Council of The Institute of Chartered Accountants of India, ICAI BHAWAN, 52-54, Vishwas Nagar Delhi – 110 032. E-Mail: [email protected] 011-39893990, Fax : 011-30210680.

(v) Central India Regional Council of The Institute of Chartered Accountants of India, ICAI BHAWAN, 16/77B, Civil Lines, Post Box No.314, Kanpur-208 001. E-Mail: [email protected] 0512- 3989398, Fax : 0512-3011173, 3011174

sa-ipcc-group-i nov. 2009

Documents