actg number of pages : 6 total marks: 100 number of...

ACTG

Number of Pages : 6 Total Marks: 100

Number of Questions: 6 Time Allowed: 3 Hrs

Answer all questions Working notes should form part of the answer.

Wherever necessary, suitable assumptions may be made by the candidates.

1. The balance sheets of A Ltd and B Ltd as on 31st March, 2009 were as follows.

(Rs. in ’000s)

Liabilities A Ltd Rs

B Ltd Rs

Assets A Ltd Rs

B Ltd Rs

Share capital: Goodwill 70050,000 preference shares of Rs 100 each

5,000

Patents Land and Buildings

2,000 6,000

15,00,000 Equity shares of Rs 10 each

15,000

Plant and Machinery Motor vehicles

15,500 400

4,00,000 Equity shares of Rs 10 each

4,000

Furniture Investments

1,150

250

Stocks 3,500 2,390 Debtors 800 620General reserve 8,000 Cash at Bank 450 170Profit and Loss Account

900 320

Creditors 500 210 29,400 4,530 29,400 4,530

A new company C Ltd was formed to acquire the assets and liabilities of A Ltd and B Ltd. The terms of acquisition of business were as under:

1) C Ltd to have an authorized capital of Rs3,50,00,000 divided into 50,000 13% preference shares of Rs 100 each and 30,00,000 equity shares of Rs 10 each.

2) Business of A Ltd valued at Rs3,00,000 settlement being Rs 60,000 cash and balance by issue of fully paid equity shares at Rs12.

3) Business of B Ltd valued at Rs48,00,000 to be satisfied by issue of fully paid equity shares at Rs12.

4) Preference shares of A Ltd were redeemed. 5) C Ltd has made public issue of 30,000 preference shares at par and 3,00,000 equity shares at

Rs12. The issue of under written at the commission of 3% and was fully subscribed all obligations were met.

6) D, who mooted the scheme was allotted 40,000 equity shares (fully paid) at Rs 12 in consideration of his services.

ME29 / PRIME / IPCC 1

Make shares of books A Ltd and B Ltd (to close their books of accounts) and C Ltd. And prepare the balance sheet of C Ltd.

(20 Marks)

2.(a) X, Y and Z were partner sharing profits in the ratio 3 : 2 : 1. On 31 st March 2009, their Balance Sheet

stood as under.

Liabilities Amount(Rs.) Assets Amount (Rs.) Capitals : Cash at bank 70,000 X : 75,000 Investments 50,000 Y : 70,000 Patents 15,000 Z : 50,000 1,95,000 Stock 25,000 Creditors 72,000 Debtors 20,000 General Reserve 24,000 Buildings 75,000 Machinery 36,000 ________ ________ 2, 91,000 2, 91,000 X died on 31st May 2008. It was agreed that : (a) Goodwill was valued at 3 years’ purchases of the average profits of the last five years, which were,

2003 : Rs. 40,000; 2004 : Rs. 40,000; 2005 : Rs. 30,000; 2006 : Rs. 40,000 and 2007 : Rs. 50,000. (b) Machinery was valued at Rs. 70,000, Patents at Rs. 20,000 and Buildings at Rs. 66,000. (c) For the purpose of calculating X’s share of profits till the date of death, it was agreed that the same be

calculated based on the average profits for the last 2 years. (d) The executor of the deceased partner is to the paid the entire amount due by means of a cheque. Prepare X’s Capital Account to be rendered to his executors and also a journal entry for the settlement of the amount due to the executor.

(8 Marks) 2(b). A ‘loss of profit’ policy was taken for Rs. 80,000. Fire occurred on 15th March, 2009.Indemnity period

was for three months. Net profit for 2008 year ending on 31st December was Rs. 56,000 and standing charges (all insured) amounted to Rs. 49,600. Determine insurance claim from the following details available from quarterly sales tax returns: Sales 2006 (Rs.) 2007 (Rs.) 2008(Rs.) 2009(Rs.) From 1st January to 31st March 1,20,000 1,30,000 1,42,000 1,30,000 From 1st April to 30th June 80,000 90,000 1,00,000 40,000 From 1st July to 30th September 1,00,000 1,10,000 1,20,000 1,00,000 From 1st October to 31st December 1,36,000 1,50,000 1,66,000 1,60,000 Sales from 16.3.2008 to 31.3.2008 were Rs. 28,000. Sales from 16.3.2009 to 31.3.2009 were Rs. Nil.


Sales from 16.6.2008 to 30.6.08 were Rs. 24,000. and sales from 16.2.2009 to 30.6.2009 were Rs. 6,000. (8 Marks)

3(a).The following are the balance sheets of a public company as on 31st December,2007 and 2008

BALANCE SHEETS as at 31st December

Liabilities 2007 RS

2008 RS

Assets 2007 RS

2008 RS

Equity share capital (paid up)

2,40,000 3,00,000 Fixed Assets 2,46,000 2,40,000

Profit & Loss A/C 18,000 19,200 Less: Accumulated 15% Debentures 72,000 66,000 Depreciation (-)66,000 (-)90,000Creditors 36,000 42,000 Provision for Taxation 58,000 65,200 1,80,000 1,50,000Proposed dividend 30,000 34,800 Sundry debtors 1,20,000 1,44,000

Outstanding liabilities Stock 60,000 70,000For compensation 75,000 40,800 Investment (short term) 1,20,000 1,40,000

Bills payable 42,000 21,000 Preliminary Expenses 3,800 3,000 Goodwill 40,000 30,000 Bank 47,200 52,000 5,71,000 5,89,000 5,71,000 5,89,000

Additional information:

1)Provision for taxation Rs38,000 was made during the year 2009.

2)Interim dividend of Rs20,000 was paid during the year.

3)A part of the Fixed Assets was sold for Rs8,000 during the year 2009. It had costed Rs21,000 depreciation of Rs16,000 has been provided on it.

4)Debentures for Rs6,000 were redeemed during 2008 at a premium of 10%.

Prepare a cash-flow statement (8 Marks)

3 b)Dr.Iodine commenced practice as an eye specialist, investing Rs.50,000 in equipment on 1st April,2008. The Receipts and Payments Account for the year was as follows:

RS RSTo Fees 1,60,000 By rent 36,000To Miscellaneous receipts 200 By salaries to assistants 45,000To Equipment sold 4,000 By journals 2,000 By library books 6,000 By equipment purchased 8,000 By drawing 24,000


By Balance: By Bank 43,000 In Hand 200 1,64,200 1,64,200

Rs.3,000 of the fees was still outstanding. Equipment was sold as well as purchased on 1st January,2009,the cost of the equipment sold being Rs 6000. Prepare the Income and Expenditure Account and the Balance Sheet relating to 2008-09. (8 Marks)

4.a) Miss Jayanthi keeps her books on Single Entry System. From the following, prepare trading and profit and loss account for the year ended 31.3.2009 together with the Balance Sheet as on that date.

Cash book analysis shows the following:

Liabilities Rs Assets RsInterest charges 200 Balance at bank as on 31.3.2009 4,850Personal withdrawals 4,000 Cash in hand as on 31.3.2009 150Staff salaries 17,000 Received from debtors 50,000Other business expenses 15,800 Payment to creditors 30,000 Cash sales 30,000

Further details available are:

As on 1.4.2008 Rs

As on 1.4.2009 Rs

Stock on hand 18,000 20.440 Creditors 16,000 11,000 Debtors 44,000 60,000 Furniture 2,000 2,000 Office premises 30,000 30,000

Provide 5 percent interest on Jayanthi’s capital balance as on 1.4.2008. Provide Rs3,000 for doubtful debts, 5 percent depreciation on all fixed assets. 5 percent group incentive commission to staff has to be provided for on net profit after meeting all expenses and the commission. (8 Marks)

4(b) Meena Metals Ltd. sells goods on hire purchase system at cost plus 60% and provides you the following particulars for the year ended 31st December 2008.

2008 RsJan.1 Goods sold on hire purchase at hire purchase price 24,000Dec.31 Instalments not due and unpaid

Instalments due and unpaid 54,000

3,000

Further Information:

Goods sold on hire purchase system at hire purchase price

Rs 1,20,000


Cash received from customers on hire purchase price 84,000Goods repossessed on default (instalments due Rs.3000)valued at

600

You are required to prepare Hire Purchase Trading Account at cost price.

(8 Marks)

5. Answer any eight

(i) Ashok and Bhushan started business on 1st July, 2008, without any partnership deed. They introduced capital of Rs.40,000 and Rs.70,000 respectively. On 1st October, 2008, Bhushan advanced Rs.30,000 as loan to the firm. The profit & loss account for the year ending 31st March, 2009, discloses a profit of Rs.24,900, but the partners cannot be agree upon the question of interest and profit sharing ratio. You are requested to distribute the profit between them as per the partnership Act, 1932.

(ii) Arun and Barun are partners in the ratio of 3:2. They admit Chaman for 1/4th share. In future the ratio between Arun and Barun would be 1:1. Calculate new profit sharing ratio and sacrificing ratio.

(iii) The company deals in three products, A, B and C, which are neither similar nor interchangeable. At the time of closing of its account for the year 2008-09. The Historical Cost and Net Realizable Value of the items of closing stock are determined as follows:

Items Historical Cost (Rs. in lakhs) Net Realisable Value (Rs. in lakhs) A 40 28 B 32 32 C 16 24 What will be the value of Closing Stock?

(iv) Mr.Long sells goods to Mr.Short as follows: Jan., 2, Rs.1,000; Feb 16,Rs.700; March 22 Rs.840.Mr. Short sells to Mr. Long as follows:

Jan 21 Rs.500; March 8 Rs.944; April 15 Rs.340.They agree to settle the amount on the average due date method. Terms are Mr. Long’s bills at 2 months and Mr. Short’s bills at one month. Find out the due date and the amount to be paid.

(v) Name four areas in which different accounting policies may be adopted.

(vi) How are self constructed fixed assets valued? (vii) When can sale be rcognised in the case of transaction of sale of goods?

(viii) Advantages of self balancing ledgers. (ix) Name the Fundamental Accounting Assumptions. (x) What are cash and cash equivalents. (8 x 2=16 Marks)



6. Answer Any four (i) Heera Ltd. has two divisions. It provides depreciation for both divisions on straight line basis as per rates

prescribed by Schedule XIV to the Companies Act. While finalizing the accounts for the year ended 31-3-2007, it however wants to change the method to Written Down Value method for one of its divisions since in the opinion of the management the assets of the said division suffer faster wear and tear. Please advise the company on the above and also whether the change should be prospective or retrospective.

(ii) Advantages of prepackages software. (iii) Write a short note on “Pre incorporation profits” (iv) Valuation of investments for the purpose of balance sheet.

(v) Sakthi Finance and Investments Ltd, held Rs26,000,8% Debentures of ACC Ltd. On July 1,2008 which appeared in the books at Rs25,090. Interest is payable on July 31 and January 31. On October 1,2008, a further Rs13,000 Debentures in ACC Ltd , were purchased at Rs 98cum-interest and on January 1,2009,Rs.20,800,a further Rs.7,800 debentures were purchased atRs.97 ex -interest. Prepare investment account for the period ending on June 30, 2009.

(4 x 4=16 Marks)

PRIME ACADAMY 29TH SESSION MODEL EXAM

IPCC –ACCOUNTING - SUGGESTED ANSWERS

1. In the books of A Ltd ; Realization Account

Rs Rs

To Patents 2000 By Creditors 500

To Land & Buildings 6000 By Purchase consideration 300

To Plant &Machinery 15500 By Preference Shareholders 5,000

To Investments 1150 By equity Shareholders 23600

To Stock 3500

To Debtors 800

To Cash at Bank

450 _____

29400 29,400

Equity Share holders Account Rs Rs

To Realization 23600 By Equity Share capital 15000

To Purchase consideration 300 By General Reserve 8000

BY P & L Account 900

____ _____

23900 23900

In the books of B Ltd. Realization Account

Rs Rs

To Goodwill 700 BY Creditors 210

To Motor Vehicle 400 By Purchase consideration 4800

To Furniture 250

To Stock 2390

To Debtors 620

To Cash 170

To Equity Shareholders 480

____ 5010

____5010

ME 29 / PRIME / IPCC 1

Equity Share Holders Account Rs Rs

To purchase consideration 4800

By Equity share capital 4000

By profit & loss a/c 320

____ By Realization a/c _480

4800 4800

In the books of C Ltd. Balance sheet Rs Rs

Equity Share capital 7600 Land & Buildings 6000

Preference Share Capital 3000 Plant& Machinery 15500

Share premium 1520 Furniture & Fittings 250

Capital Reserve 19610 Motor Vehicles 400

Investments 1150

Creditors Stock 5890

710 Debtors 1420

Cash 1830

_____ 32440

_____32440

2(a) X' Executors Account

Rs Rs

To Bank 175750 By Capital Account 175750

175750 175750

X's Capital Account Rs Rs

To X's Executor's a/c 175750 By Balance b/d 75000

By General Reserve 12000

By Goodwill 60000

By Revaluation 10000

______ By P&L Adjustment a/c _18750

175750 175750

2(b) (1) Gross Profit Ratio Rs Net Profit in 2008 56,000


Insured Standing Charges 49,600 Gross Profit 1, 05,600 Rate of Gross Profit =Sales /Gross Pr ofit x 100=5, 28,000 *1, 05,600 x 100 = 20% *(Rs.1, 42,000+Rs.1, 00,000+Rs.1, 20,000+Rs. 1, 66,000) (2) Short Sales (a) Standard Sales (Adjusted) Rs. Indemnity Period: 16.3.2008 to 15.6.2008. Standard sales are to be calculated on the basis of sales of corresponding period of the previous year i.e. 16.3.2008 to 15.6.2008. (i) Sales for the period 16.3.2008 to 31.3.2008 (given) 28,000 (ii) Sales for the period 1.4.2008 to 15.6.2008 (W.N.1) 76,000 1, 04,000 Add: Upward trend in Sales 10% (W.N.2) 10,400 1, 14,400 (b) Actual sales of disorganised period from 16.3.2008 to15.6.2008 Rs. (i) Sales for the period 16.3.2008 to 31.3.2008 Nil (ii) Sales for the period 1.4.2008 to 15.6.2008 (40,000‐6,000) 34,000 Short Sales = Standard Sales – Actual Sales = Rs. 1, 14,400‐Rs.34, 000 80,400 (3) Loss of Gross Profit = Short Sales x Gross Profit % = Rs. 80,400 x 20% = Rs. 16,080 (4) Application of Average Clause Net Claim = Gross profit on Annual turnover/ Gross claim x Policy

value Rs 16,080 x Rs.1, 19,680 /Rs.80, 000 = Rs. 10,749 (Approx.) Working Notes: (1) Sales for the period 1.4.2008 to 30.6.2008 (given) Rs. 1, 00,000

Less: Sales for the period 16.6.2008 to 30.6.2008 (given) Rs. 24,000 Sales for the period 1.4.2008 to 15.6.2008 Rs. 76,000

(2) Calculation of Upward Trend in Sales (a) Total Sales of 2007 = Rs. 4, 80,000 Less total sales of 2006 = Rs. 4, 36,000 Increase of sales in 2007 over 2006 = Rs. 44,000 Therefore, % of increase = Rs. 44,000 / Rs. 4, 36,000 x 100 = 10.09% (b) Total Sales of 2008 = Rs. 5, 28,000 Less total sales of 2007 = Rs. 4, 80,000 Increase of sales in 2008 over 2007 = Rs 48,000 Therefore, % of increase = Rs. 48,000 / Rs. 4, 80,000 x 100 = 10% Average percentage of increase = 10.09% +10%/2 = 10% (Approx.)


(3) Annual Sales Rs Sales from 16.3.2008 to 31.3.2008 28,000 Sales from 1.4.2008 to 30.6.2008 1, 00,000 Sales from 1.7.2008 to 30.9.2008 1, 20,000 Sales from 1.10.2008 to 31.12.2008 1, 66,000 Sales from 1.1.2009 to 5.3.2009 (Rs. 30,000 – Nil between 16.3.2009 to 31.3.2009) 1, 30,000 Sales for 12 months just before fire took place 5, 44,000 Add: 10% increase (upward trend) 54,400 Adjusted sales of 12 months just before fire 5, 98,400 Gross Profit on Annual Sales = Rs. 5, 98,400 x 20% 1, 19,680

3(a) CALCULATION OF CASH FROM OPERATIONS

RS RS

Profit from Trading Operations 1,42,400

Add:1)increase in creditors 6,000

1,48,400

Less:1)Decrease in out, Liabilities for Exp

34,200

2)Decrease in D/P 21,000

3)Increase in debtors 24,000

4)Increase in Stock 10,000

5)Increase in investments 20,000

1,09,200

Cash from operations 39,200

CASH FLOW STATEMENT

RS RS

Opening balance of bank

47,200 Items of outflow of cash

Items of inflow of cash Purchase of fixed assets 15,000

sales of fixed assets 8,000 Redemption of debentures 6,6000

Issue of share capital 60,000 Payment of tax 30,800

Cash from operations 39,200 Payment of Dividend 30,000

Payment of Interim Dividend

20,000

Closing balance of bank 52,000

1,54,400 1,54,400


Working Notes

Adjusted P&L Account

RS RS

To Accumulated Depreciation

40,0000 By Balance b/d 18,000

To Goodwill 10,000 By profit on sale of asset

3,000

To Preliminary expenses 800 By funds from operation

1,42,400

To Provision for tax 38,000

To Premium on Redemption of Debentures A/C

600

To Proposed Dividend 34,800

To Interim Dividend 20,000

To Balance c/d 19,200

1,63,400 1,63,400

FIXED ASSETS ACCOUNT

RS RS

To Balance b/d 2,46,000 By Accumulated Dep. A/C 16,000

To profit and loss A/C (profit)

3,000 By Bank A/C 8,000

To Bank (Purchase of assets)

15,000 By Balance c/d 2,40,000

2,64,000 2,64,000

ACCUMULATED DEP. ACCOUNT

RS RS

To Fixed Asset A/C 16,000 By Balance b/d 66,000

To Balance c/d 90,000 By P&L A/C (Bal. Fig) 40,000

1,06,000 1,06,000

PROVISION FOR TAXATION ACCOUNT

RS RS

To Fixed Asset A/C 16,000 By Balance b/d 66,000

To Balance c/d 90,000 By P&L A/C (Bal. Fig) 40,000

1,06,000 1,06,000

DEBENTURES ACCOUNT

RS RS

To Bank A/C 6,600 By Balance b/d 58,000

To Balance b/d 66,000 By P&L A/C 38,000

96,000 96,000


3. b) Receipts and expenditure account of Dr. Iodine for the year ended March 31, 2009

RS RS RS

To salaries to Assistants:

Paid 45,000

Add 2,000 Outstanding salaries

47,000

By Fees: Received Add Outstanding

Fees

1,60,000 3,000 1,63,000

Journal 2,000 By Miscellaneous Receipts

200

To Depreciation on: Equipment

Library Books 10,100

300

To Reserve for outstanding fees

3,000

To loss on sale of equipment

1,100

To surplus i.e. excess of income over expenditure

63,700

1,63,000 1,63,000

Balance Sheet of Dr. Iodine as on March 31, 2009

Liabilities RS Rs Assets RS RS

Expenses Outstanding

2,000 Cash in hand 200

Capital: Introduced

50,000 Cash at Bank 43,000

Add surplus for the year

63,700 Equipment: Cost 50,000

1,13,700 Add Additions 8,000

Less drawings 24,000 89,700 58,000

Less cost of equipments sold

6,000

52,000

Less depreciation 9,200 42,800

Library: Cost 6,000

Less Depreciation 300 5,700

Outstanding fees 3,000

Less Reserve 3,000

Total 91,700 Total 91,700


Notes:‐

1) Depreciation on Equipment has been calculated as follows:

Rs

On Rs 44,000 for one year 8,800

On Rs 6,000 for 9 months 900

On Rs 8,000 for 3 months 400

10,100

2) Loss on sale of equipment: Rs

Cost 6,000

Less Depreciation 900

5,100

Less sales proceeds 4,000

Loss 1,100

4. a)TRADING AND PROFIT AND LOSS ACCOUNT OF MISS JAYANTHI FOR THE YEAR ENDED MARCH 31,2009

Liabilities RS RS Assets RS RS

To opening stock

18,000 By sales Cash

Credit (3)

30,000 66,000 96,000

To credit Purchases (4)

25,000 By closing stock

20,440

To Gross Profit 73,440 1,16,440

1,16,440 By Gross profit b/d

73,440

To Interest 200

To Salaries 17,000

To Other business expenses

15,800

To Provision for doubtful

debts

3,000

To Interest on capital

3,500

To Depreciation On furniture On premises

100 1,500 1,600

To Group commission

(5)

1,540

To Net Profit 30,800

73,440 73,440


BALANCE SHEETS OF MISS JAYANTHI AS ON MARCH 31, 2009

Liabilities RS RS Assets RS RS

Capital (2) 70,000 Premises 30,000

Add: N/P Interest

30,800 3,500

Less: Depreciation Furniture

1,500 2,000

28,500

1,04,300 Less: Depreciation

100 1,900

Less: Drawings 4,000 1,00,300 Stock on hand Debtors

60,000

20,440

Sundry creditors

11,000 Less: Provision for doubtful

debts

3,000 57,000

Group commission

1,540 Cash at Bank 4,850

Cash in hand 150

73,440 73,440

WORKING NOTES:‐

1) CASH BOOK

Date Receipts RS Date Payments RS

1998 1997

Mar. 30 To Debtors 50,000 April 1 By Balance b/d 8,000

To sales 30,000 1998

Mar. 31 By Interest 200

By Drawings 4,000

By Salaries 17,000

By Expenses 15,800

By Creditors 30,000

By Balance c/d Cash Bank

1504,850

80,000 80,000

2) BALANCE SHEETS AS ON April 1, 2008

Liabilities RS Assets RS

Capital 70,000 Stock in hand 18,000

Bank overdraft (1) 8,000 Debtors 44,000

Creditors 16,000 Furniture 2,000

Office premises 30,000

94,000 94,000


3) Debtors A/C


To Operating Balance 44,000 By Cash 50,000

To Credit Sales 66,000 By Closing Balance 60,000

1,10,000 1,10,000

4) Creditors A/C


To Cash 30,000 By Operating Balance 16,000

To Closing Balance 11,000 By Credit Sales 25,000

41,000 41,000

4(b)

Hire Purchase Trading A/C

For the year ending 31st December 2008

Particulars RS Particulars RS

To Goods sold on Hire Purchase A/c (at cost

price) (24,000*100/160)

15,000 By Cash A/C 84,000

To Goods sold during the year (at cost)

(1,20,000*100/160)

75,000 By Instalments due 3,000

To Net profit transferred to General

P & L A/C

31,350 By Goods Returned 600

By Instalments not due unpaid (at cost) (54,000*100/160)

33,750

1,21,350 1,21,350

5(i) In case of no agreement the partnership Act would prevail and accordingly no interest on capital,no interest on drawins, no remuneration ,equal share of profits and 6% p.a. interest on loan would prevail.Ashok would be entitled to interest calculated as 30,000*^%*9/12= 1350 and equal share of balace profits (24900‐1350)/2 ,Rs. 11,775 and Bushan would get Rs.11,775.

(ii) The new ratio would be 3:3:2

The sacrificing ratio would be 9:1


(iii) As per Para 5 of AS 2 on Valuation of Inventories, inventories should be valued at the lower of cost and net realizable value. Inventories should be written down to net realizable value on an item‐by‐item basis in the given case.

Items Historical Cost

(Rs. in lakhs)

Net Realisable Value (Rs. in lakhs)

Valuation of closing stock (Rs. in lakhs)

A 40 28 28

B 32 32 32

C 16 24 16

88 84 76

Hence, closing stock will be valued at Rs. 76 lakhs.

(iv)

Date Particulars Due date Rs Days Products Date Particulars Due date Rs. Days Products

2/1 To Sales 5/3 1000 9 9000 21/1 Purchases 24/2 500 0 0



756 50754

2540 122400 2540

122400

(V) Areas in which different accounting policies may be adopted: The following are some areas in

which different accounting policies may be adopted by different enterprises:

(i) Methods of depreciation, depletion and amortisation.

(ii) Valuation of inventories.

(iii) Valuation of Fixed Assets.

(iv) Valuation of retirement benefits.


(vi)Self-Constructed Fixed Assets:-

Included in the gross book value are costs of construction that relate directly to specific assets and costs

that are attributable to the construction activity in general and can be allocated to the specific assets.

Any internal profits are eliminated in arriving at such costs.

(vii) Refer to AS 9.

(Viii) The Advantages of this system are:‐

1) It fixes the responsibility of the ledger keeper, as to the balancing of the ledger or ledger under his

/ her charge and the person responsible for the mistake can be called upon to work over time to

locate it. Errors are localized.

2) It enables preparation of interim accounts without personal ledgers having to be balanced.

3) The figures of total debtors or creditors is readily available.

(iX) Going concern, Accrual, Consistency.

(x) Refer AS 3

6.(i) According to the Guidance Note on Accounting for Depreciation in Companies issued by ICAI, it is permissible for a company to adopt more than one method of depreciation simultaneously that is to say that‐

1. Company may follow different methods for different types of assets; and 2. Company geographical locations can follow different methods.

Only condition is that same methods should be consistently adopted from year to year. Change in the method of depreciation is a change in accounting policy.According to AS 6, such a change is permissible only when at least one of the following 3 conditions is satisfied:‐

(i) Such change is required by law. (ii) Such change is required by the Accounting Standards (iii) Such change will result in more appropriate presentation. Here, from the facts given it appears that condition (iii) is satisfied i.e. change will lead to more appropriate presentation (since WDV method will better represent the pattern of faster wear & tear instead of SLM). According to AS 6, change should be retrospective. Any difference arising thereon should be changed/ credited to P&L account in the year of change.

6(ii) Advantages of Pre‐Packaged Accounting Software:‐

1) Easy to install: The CD or Floppy disk is to be inserted and the step up file should be run to

complete the installation. Certain old DOS based accounting software’s required some setting to


be added in the system configuration file and the system batch file. These instructions are

generally provide in the user manuals.

2) Relatively inexpensive: These packages are sold at very cheap prices nowadays.

3) Easy to use: Mostly menu driven help options. Further the user manual provides most of the

solution to problems that the user may face while using the software.

4) Backup producer is simple: Housekeeping section provides a menu for Backup. The Backup can be

taken on floppy disk or CD or Hard disk.

5) Certain flexibility of report formats provided by some of the software’s: This allows the user to

make the invoice, challan; GRNs look the way the want.

6) Very effective for small and medium business: Most of their functional areas are covered by these

standardised packages.

6(iii) When a running business is taken over by the promoters of a company, from a date before the

company which is to manage and own is registered, the amount of profit or loss of such a business for

the period prior to the date the company came into existence is referred to as pre‐incorporation

profits or losses. Such profits or losses, tough belonging to the company or payable by it, are of capital

nature; it is necessary to disclose them separately as trading profits or losses. The general practice in

this regard is that if there is a loss, it is either written off by debit to the profits or loss Account or to a

Special account described as “Loss prior to in‐corporation” and shown as an “Asset” in the balance

sheet: , in the alternative, it is debited to the Goodwill account on the other hand, if a profit has been

earned by business prior to the same being taken over and the same is not fully absorbed by any

interest payable for the period, it is credited to Capital Reserve Account or to the Goodwill Account, if

any Goodwill has been adjusted as an asset. The profit will not be available for distribution as a

dividend among the members of the company.

6 (iv)Carrying Amount of Investments:‐

The carrying amount for current investments is the lower of cost and fair value. Valuation of current

investment on overall basis is not considered appropriate. The more prudent and appropriate method is

to carry investments individually at the lower of cost and fair value. Any reduction to fair value and any

reversals of such reductions are included in the Profit and Loss Statement.

Long‐term investments are usually carried at cost. Where there is a decline, other than temporary,

in the carrying amounts of long term investments, the resultant reduction in the carrying amount is

charged to the profit and loss statement. The reduction in carrying amount is reversed when there is a

rise in the value of the investments, or if the reasons for the reduction no longer exist.


6(v) Investment Account (8% Debentures In Acc Ltd) Interest Payable On July 31ST 1999 And January 31ST 2000

Date Particulars Nominal RS

InterestRS

Cost RS

Date Particulars Nominal RS

InterestRS

Cost RS

1999 1999

Jul 1 To Balance b/d

26,000 25,090 Jul 31 By Bank‐ Half yearly interest

(1,040)1

To Balance‐ Interest

(867)2

2000

Oct 1 To Bank‐Purchase @ Rs98 cum‐interest

13,000 (173)3 (12,567)3 Jan 31 By Bank‐ Half yearly interest

(1,872)5

2000

To Bank‐Purchase @ Rs97 ex‐interest

7,800 (260)4 (7,566)4 Mar 31 By Bank‐sale @ Rs101

Cum‐interest

20,800 (208)6 20,800

Jan 30 To P & L A/C interest (b. f)

2,583 Jun 1 By Bank‐sale @ Rs102 Ex‐interest

15,600 (416)7 (16,016)7

To P & L A/C profit on sale

(b. f)

1,643 Jun 30 By Interest accrued

(347)8

Jun 30 By Balance c/d 10,400 (10,050)9

46,800 3,883 46,866 46,800 3,883 46,866

Working Notes:‐

1) Interest for the half year from Feb 1, 1999 to July 31, 1999 for 6 months

=Rs 26,000*8/100*6/12=Rs 1,040

2) Interest accrued on July 1, 1999=Rs 26,000*8/100*5/12=Rs 867

3) Cost of investment purchased on October 1, 1999 at cum‐interest price:

Purchase price of debentures (at cum‐interest) @ Rs98=Rs 12,740

[Rs 13,000*98/100]

Less: Interest for 2 months (Aug & Sep) =Rs 173

Rs 13,000*8/100*2/12

Cost Price=Rs 12,567

4) Cost of the debentures purchased on Jan 1, 2000 @ 97 ex‐interest=Rs 7556

[Rs 7,800*97/100]

Interest for 5 months (from Aug 1 to Dec 31) =Rs 260

[Rs 7,800(8/10*5/12)]



5) Interest on debentures held on July 1, 1999 for the second half year=Rs 1,040

[Rs 26,000*8/100*6/12]

Interest on debentures on Oct 1, 1999 for half year=Rs 520

[Rs 13,000*8/10*6/12]

Interest on debentures on Jan 1, 2000 for half year=Rs 312

[Rs 7,800*8/10*6/12]

Total interest on Jan31, 2000=Rs 1,872

6) Sale of debentures on March 31, 2000:

Selling Price (20,800*101/100) =Rs 21,008

Less: Interest = Rs 208

Cost = Rs 20,800

7) Sale of debentures on June 1, 2000:

Cost price (ex‐interest) = Rs 15,600

Add: Interest (15,600*8 %*( 4/12)) = Rs 416

(For 4 months Feb 1 to May 31)

Selling Price =Rs16, 016

8) Interest Accrued on June 30, 2000

Total Investments held=Rs 46,800

Less: Sold (20,800 + 15,600) = Rs 36,400

Remaining investments =Rs 10,400

Interest Accrued on the same =Rs 10,400*8/10*5/12=Rs347

9) Cost of remaining investments on June 30, 2000

Cost of total investment Rs 46,800=Rs 45,223(25,090 + 12,567 +7566)

Cost of remaining investments Rs10, 400=Rs 45,223/ Rs 46,800 * Rs 10,400

=Rs 10,050.

1 ME29 / PRIME / IPCC

LWEC Number of Pages : 3 Total Marks: 100 Number of Questions: 20 Time Allowed: 3 Hrs

PART-I

Question no 1 and 2 are compulsory. Answer Any 8 from the rest

1(a) Explain the validity of contracts entered into over fax or e-mail. 5 Marks

(b) A sends an offer to B to sell his second-car for Rs. 65000 with a condition that if B does not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his proposition? What shall be the position if B communicates his acceptance after one week?

5 Marks

2. (i) State the following statements are correct or incorrect

(a) An agreement the meaning of which is neither certain nor capable of being made certain is voidable.

(b) “A” agrees to pay “B” 1,000 if two straight lines should enclose a space, this agreement is valid because there is valid consideration.

(c) When both parties to an agreement are under a mistake as to a matter fact essential, the agreement is void.

(d) “A” contract to indemnity “B” against consequences of any proceeding, which “C” may take against “B” in respect of certain sum of 300 rupees, is contract of guarantee.

(e) A person employed and acting under the control of the original agent in the business of agency is co-agent. 5 x 1= 5 Marks

(ii) How a contract is assigned? 5 Marks

3. Pick up the correct answer from the following;

( i) A bearer instrument can be negotiated by :-

(a) Indorsement only (b) Delivery only (c) Both indorsement and delivery (d) None of the above

(ii) In which of the following case, the employee will be disqualified for bonus under section

9 of the payment of Bonus Act, 1965:-

(a) Fraud: or (b) Riotous or violent behavior while on the premises of establishment: or (c) Theft,misappropriation or sabotage of any property of the establishment: (d) All of the above.


(iii) Which of the following is not included for the purpose of salary as per the Employees Provident fund & Misc Provisions act, 1952-

(a) The cash value of food concession (b) Any dearness allowance (c) Any presents made by the employer (d) All of the above

(iv) Completed year of service under the Payment of Gratuity Act means: -

(a) Service for one year (b) Continuous service (c) Continuous service for one year (d) Number of years of service

(v) A negotiable instrument payable to order can be can be transferred by:-

(a) Simple delivery (b) Endorsement (c) Both (a) and (b) (d) Registered post 5 x 1 = 5 Marks

4. A contracted with B to supply him (B) 500 tons of iron-steel @ Rs.5,000 per ton, to be

delivered at a specified time. Thereafter, A contracts with C for the purchase of 500 tons of iron-steel @ Rs.4,800 per ton, and at the same time told ‘C’ that he did so for the purpose of performing his contract entered into with B. C failed to perform his contract in due course. Consequently, A could not procure claim from C in the circumstances? Explain with reference to the provisions of the Indian Contract, 1872.

5 Marks

5. Explain protection against attachment of amount standing to the credit of member under Employees Provident Fund and Miscellaneous Provisions Act 1952

5 Marks

6. When presentment for payment is excused? 5 Marks

7. Ram Gupta is working as salesman in a company on salary basis the following payments were made to him by the company during the previous financial year.

(i) Overtime allowance (ii) Dearness allowance (iii)Commission on sales (iv) Employer’s contribution towards pension fund (v) Value of food

Examine as to which of the above payments from part of salary of Ram Gupta under payment of Bonus Act, 1965. 5 Marks


8. When does a Public Ltd Company become a Private Company? 5 Marks

9. Majority of the Forms under the Companies Act are required to be filed only through e filing.

Do you agree with this statement? In case a company omitted to file the balance sheet relating to the year 2004 –05 due to non – operations of the company, whether the same can be filed now physically? 5 Marks

10. Explain the meaning of Doctrine of Ultravires. 5 Marks

11. What is the Golden Rule of prospectus? 5 Marks

12. What is the meaning of “Sweat Equity shares? 5 Marks

PART II

Question no 13 is compulsory. Answer any two of the rest.

13 (a) what do you mean by Business Ethics? 5 Marks

(b) Who is stakeholder? Whether competitor is a stakeholder? 5 Marks

14. State the main reasons for ethical dilemmas at work place. 5 Marks

15. Define“Corporate social responsibility “State the nature of corporate social responsibility. 5 Marks 16. State the aspects of code of conduct at work place 5 Marks

PART III

Question no. 17 is compulsory. Answer any two from the rest.

17 (a) what are the advantages of grapevine? 5 Marks

(b) Explain the role of body language (kinesics) in communication. 5 Marks

18. What are the benefits of effective communication? 5 Marks

19. Write a letter to the Registrar of Companies enclosing relevant documents at the time of incorporation of a company. 5 Marks

20. What are the characteristics of emotional intelligence? 5 Marks

PRIME ACADEMY 29TH SESSION MODEL EXAM

IPCC- LAW ETHICS AND COMMUNICATION SUGGESTED ANSWERS

PART - I

1 (a) Communication of an offer and acceptance is important to culminate the agreement into a

contract. The Offeror and Offeree should communicate with each other properly. Any mode of communication is permissible, provided that both the parties are able to convey their intentions to the other clearly and in an unambiguous manner. Contracts can also be entered through fax or email. When such electronic modes are used, it is used it is the duty of the acceptor to ensure / confirm that his fax or email message is duly received by the Offeror. Only when such acceptance reaches the offeror, there can be a valid contract, which binds both parties.

(b) A sends an offer to B to sell his second-car for Rs. 65000 with a condition that if B does not

reply within a week, he (A) shall treat the offer as accepted. Is A correct in his proposition? What shall be the position if B communicates his acceptance after one week? Acceptance cannot be implied merely from silence of offeree, even if it is expressly stated in the offer itself. When there is mere silence on the part of the offeree, there is no acceptance. Silence is acceptance only when the Offeree has, by his previous conduct, indicated that his silence amounts to his acceptance. Hence when B remains silent, it does not amount to Acceptance. Acceptance may be made within the time limit prescribed in the offer. Acceptance of an offer after the time prescribed by the Offeror has elapsed, will not operate to turn the offer into a contract.

2. (i) 1 (a) An agreement the meaning of which is neither certain nor capable of being made certain

is voidable. (b) “A” agrees to pay “B” 1,000 if two straight lines should enclose a space, this agreement

is valid because there is valid consideration. (c) When both parties to an agreement are under a mistake as to a matter fact essential, the

agreement is not valid. (d) “A” contract to indemnity “B” against consequences of any proceeding, which “C” may

take against “B” in respect of certain sum of 300 rupees, is contract of guarantee. (e) A person employed and acting under the control of the original agent in the business of

agency is co-agent. 2

(a) Incorrect. An agreement the meaning of which is neither certain nor capable of being made certain is void.

(b) Incorrect. “A” agrees to pay “B” 1,000 if two straight lines should enclose a space; this agreement is void because there is impossibility of performance.

(c) Correct. When both parties to an agreement are under a mistake as to a matter fact essential, the agreement is void.

PRIME/29ME/IPCC 1

(d) Incorrect. The situation mentioned herein is contract of indemnity and not contract of guarantee.

(e) Incorrect. A person employed and acting under the control of the original agent in the business of agency is Sub-agent.

2. (ii)

Assignment of a contract means transfer of right and liabilities arising out of a contract to a third party. Assignment is not possible where the contract is of personal nature. For example, if A has engaged B to sing songs in his theatre, B cannot assign the contract to C or anyone else. However, where the contract is not dependent upon the personal skill, it may be assigned subject to certain conditions. Contracts can be assigned in 2 ways:

1) Assignment by Act of Parties:

(i) Novation: A contract which is not of personal nature may be assigned, if both the parties to the agreement agree. For example: A owes B Rs.2 Lac. A and B, by an agreement with C, can agree that now C will pay Rs.2 Lac to B. By this agreement, liability of B to pay the debt is transferred from A to C.

Exceptions:

(a) A person cannot become creditor of another without his consent. Example: A Owes B Rs.1,000. B assigns his debt to C. C cannot recover the amount from A as C cannot become A’s creditor without A’s consent.

(b) A person is under no obligation to accept a stranger as is debtor. Example: A owes Rs.1,000 to B. A cannot ask B to recover the amount from C without the consent of B and C. (ii) Performance of contract through Agent: Where the contract is not of a personal

nature, A party can perform the contract through the competent Agent, provided the contract does not expressly or impliedly require performance only by the promisor.

(iii) Assignment of Actionable Claim: Actionable claims can be assigned by instrument in writing Examples of actionable claims are as under- 1) Right of action arising out of a Contract; 2) Money debts, i.e. a certain sum of money: 3) Book debts; 4) A share in a partnership firm.

2) Assignment by operation of Law:

(i) Death: Where the contract is not of personal nature 0 – Assignment to legal

representative with limited liability. Where the contract is of personal nature – Contract comes to an end. (ii) Insolvency: Under the insolvency law, rights and liabilities of an insolvent pass

on to the official receiver or assignee.

PRIME/29ME/IPCC 2

3. a 3(i) - (b) Delivery only

3(ii) - (d) All of the above.

3(iii) - All of the above

3 (iv) - Continuous service for one year 3 (v) - Both (a) and (b)

4. i). In the instant case ‘A’ had intimated to ‘C’ that he was procuring iron steel from him

for the purpose of performing his contract whit ‘B’ Thus, C had the knowledge of the special circumstance. Therefore, A is entitled to claim from ‘C’ Rs.1,00,000 (difference between the procuring price of iron steel and contracted selling price to ‘B’) being the amount of profit ‘A’ would have made by the performance of his contract with ‘B’.

ii). If A had told C of ‘B’s contract, then the amount of damages would have been the

difference between the contract price and the market price on the day of default.

5. (i) The amount standing to the credit of any member in the Fund or any exempted

employee in a provident fund shall not be ASSIGNED/CHARGED/LIABLE TO ATACHMENT under any decree or order of any Court in respect of any debt or liability incurred by the member or the exempted employee. The official assignee or Official receiver shall not have any claim on any such amount.

(ii) On the death of member, any amount standing to his credit shall vest in the nominee

and shall be free from any debt or other liability incurred by the deceased or the nominee before the death of the member and shall also not be liable to attachment under any decree or order of any Court.

6. Notes, bills, cheques must be presented for payment to the maker, acceptor or drawee thereof respectively by or on the behalf of the holder [Sec.64(1)]. In default of such presentment, the person with primary liability will not discharge. The other parties to the instrument will be discharged. When the presentment for payment is excused (Sec. 76):

1. The maker, drawee, or acceptor intentionally prevents presentment of the Instrument. 2. The instrument is payable at the business place of the maker, acceptor or drawee of

the note, bill or cheque, and such place on the due date during the usual business hours is closed.

3. The instrument is payable at a specified place, and neither the marker, acceptor or drawee, nor their authorised person is present, during the usual business hours.

4. The instrument is not payable at a specified place, and the payer cannot be found after reasonable search.

PRIME/29ME/IPCC 3

5. There is a promise to pay notwithstanding non-presentment. 6. Presentment for payment is waived either expressly or impliedly. 7. The drawer could not suffer damage for want of presentment. 8. The bill is dishonoured by non-acceptance. 9. The drawer is a fictitious person or the drawer and the drawee are the same person. 10. Presentment becomes impossible. In these cases, the instrument is deemed to be dishonoured on the due date of presentment for payment.

7.

(i) Overtime allowance (ii) Dearness allowance (iii) Commission on sales (iv) Employer’s contribution towards pension fund (v) Value of food

Salary is defined in Section 2 (21 ) of the Payment of Bonus Act, 1965. Accordingly the following are applicable.

(i)Overtime allowance - Not a part of salary

(ii)Dearness allowance - Part of salary (iii)Commission on sales - Not a part of salary (iv)Employer’s contribution – Not a part of salary towards pension fund (v)Value of food - Part of salary, if it is given in lieu of the whole or part of the salary or wages payable to him

8. A Public company may become a Private Company by adopting the following steps:-

1. Alteration of Articles: Passing of Special Resolution, authorising the conversion and altering articles so as to contain the matters specified in Sec. 3(1)(iii),

2. Change the Name: Changing the name of the company by Special resolution as required by Sec. 21.

3. Bring the number of members within the limits specified by 3(1)(iii), i.e. upto 50. 4. Approval of CG: Obtaining the Approval of the Central Government as required by

Sec.31; Proviso to Sec. 31 5. Filing the Documents With ROC:

- A Printed Copy of the Altered Articles within 1 month of the receipt of the approval of the Central Government.

- Special Resolutions

9. No, all the forms under the Companies Act, 1956 are required to be filed only through e filing. In case a company omitted to o file the balance sheet relating to the year 2004 –05, Form 23AC and Form 23 ACA can be filed now only through e- filing.

Physical filing of balance sheet is now not possible eventhough it relates to earlier years.

PRIME/29ME/IPCC 4

10. The word ultra means beyond and the word vires means powers. Thus ultra vires means doing an act beyond the powers. Any activity done contrary to or in excess of the scope of activity of director’s, Articles, memorandum or companies Act will be ultra vires. The ultra vires acts can be divided into the following categories;

(i) An act ultra vires the directors; (ii) An act ultra vires the Articles of Association; (iii) An act ultra vires the memorandum of Association; and (iv) An act ultra vires the Companies Act.

Ultra-vires the Directors- if the act is ultra vires the directors, it is not altogether void, because this act can be ratified by the general body of shareholders and on such ratification the act becomes binding on the company. Ultra vires the Memorandum of Association The Memorandum of a company defines and confines the area within which the company is required to work. The company is formed to carry out or achieve the objects as laid down in the Memorandum. A company cannot do anything which is beyond the purview of the objects clause. If the company does any act which is contrary to the objects clause of Memorandum, it shall be termed as ultra vires the Memorandum and it shall be wholly void or inoperative. Such an act cannot be subsequently ratified or validated even by a unanimous resolution of all the shareholders.

11.

(i) By prospectus, the public is invited to subscribe the shares of a company. Generally, it is represented that the public will get great advantage by subscribing the shares of the company. The public is induced to subscribe the shares.

(ii) So, every thing must be stated in the prospectus with strict accuracy. The prospective

shareholders are entitled to true and faithful disclosures in the prospectus. (iii) It is the duty of the person, authorizing the prospectus, to ensure that-

(a) The prospectus does not contain any information, which is misleading, or (b) No Material information, which may change the reader’s decision, is omitted

from the prospectus. Leading Cases: Henderson vs. Lacon

Karberg’s Case, Re Metropolitan Coal Consumers’ Association,

Ross v Estate Investment Co.

12. Sweat equity shares means equity shares issued by the company to employees or directors at a

discount or for consideration other than cash. Sweat equity shares may be issued for providing know-how or making available intellectual property rights (say, patents) or value additions, by whatever name called. Section 79A, allows companies to issue sweat shares subject to the following conditions:

(a) Sweat equity shares must be of a class of shares already issued by the company: (b) The issue of sweat equity shares must be authorized by a special resolution passed by the

company in the general meeting.

PRIME/29ME/IPCC 5

(c) The resolution must specify the number of shares, current market price, consideration if

any and the class or classes of directors or employees to whom such equity shares are to be issued.

(d) Not less than one year must have, at the date of the issue, elapsed since the date of on

which the company was entitled to commence business. (e) The sweat equity shares of a company whose equity shares are listed on a recognized

stock exchange shall be issued in accordance with the regulations made by the SEBI. However, in the case of a company whose equity shares are not listed, the same must be issued in accordance with the guidelines as may be prescribed.

(f) All the limitations, restrictions and provisions relating to equity shares shall be applicable

to such sweat equity shares issued under sub-section (1) of Section 79A(2).

PART II

13(a) Meaning:

Business ethics refers to the application of ethical principles to business. Business ethics is a study of moral right or wrong. It concentrates on moral standards as they apply to business policies, institutions and behaviors.

Features of business ethics (1) Business ethics is applied ethics. It involves the application of what is good and right to business affairs. (2) Ethics is study of morality. However, ethics is not same as morality.

(b) The word ‘Stakeholders’ refers to such groups, which are affected by, or can affect the

organization in pursuit of its goals. It may be the individuals, groups or other organizations. They are also known as Interested Groups. Stakeholders of a Company would include-

(a) Employees, (b) Trade Unions, (c) Customers, (d) Suppliers, (e) Shareholders and Investors, (f) Competitors, (g) Government (h) Industry as a whole, and (i) Society at large.

Management is not accountable solely to Investors (Shareholders), but to all the above interest groups.

PRIME/29ME/IPCC 6

14. (a) Different Roles: In his relationship and responsibilities at the workplace, an individual has to

make choices between alternatives. When there are no clear guidelines, he has to force an ethical dilemma. In such a case, the individual is always confused and does not know, which alternative should be selected. For example, One set of relationships and responsibilities is directly related to Employees, e.g. discipline, performance appraisal, safely, and the administration of reward systems. Another set is concerned with Customers and Suppliers, e.g. aspects like timing, quality, and price.

(b) Conflicts between values: Ethical dilemmas may also arise, because there is conflict between the values of the individual and those of his superiors or peers. For example, an employee may believe it is unethical to invade the privacy of others to steal the secrets of a competitor. But he may indulge in such activities to keep his job under pressure from the boss.

15. Corporate Social Responsibilities – Every organization has some social issues. These social issues may be divided into 3 categories: (a) Social problems external to the enterprise: These are not caused by any direct business

action, e.g. poverty, drug abuse, etc. (b) External impact of regular economic activities: for example, pollution caused by

production, quality, staff reliability of goods and services, deception in marketing practices, social impact of plant closures, etc.

(c) Issues within the Firm that are tied up with regular economic activities: For example,

equal employment, opportunity, occupational health and safety, the quality of work life and industrial democracy etc.

The concept of Corporate Social Responsibility (CSR)’ focuses on all the above social issues. It is based upon the idea that that a business has some social obligations, which are over and above profit. A corporation is responsible not only to the shareholders, but also to all the stakeholders. A company can best benefit to the shareholders, if it fulfill their (a) legal, (b) ethical, (c) economic and (d) discretionary responsibilities. Social Responsibilities Legal responsibilities Ethical responsibilities Economic responsibilities Discretionary responsibilities

PRIME/29ME/IPCC 7

Definitions: CSR is the continuing commitment by business to behave ethically and contribute to economic development, while improving the quality of life of the workforce and their families as well as of local community and society at large.

CSR is achieving commercial success in ways that honour ethical values and respect people, communities, and the natural environment.

Nature of Corporate Social Responsibilities: 1) Business is a part of Society: The concept of social responsibility is based on the premise that

a business firm is more than an economic institution. It is a part of society and its activities exercise significant influence on the public. Therefore, business should work beyond the narrow goal of profit-making.

2) No charity: CSR does not mean mere charity. A business can be socially responsible without

charity. 3) In the long run, social responsibility is consistent with profit motive. A business cannot

survive and grow without serving the society. By fulfilling its social obligations, business creates an environment, which is conducive to its success.

4) Social responsibility is a personal obligation. A business firm can discharge its social

responsibility only through the persons, who manage and control it. 5) Social responsibility is a reciprocal relationship. Just as business owes responsibility to

society, society also is responsible to business. 6) Social responsibility is a continuing obligation. A business firm remains responsible to the

society throughout its life.

16. Codes of Conduct specify actions in the workplace and Codes of Ethics are general guides to decisions about those actions. Some aspects of Code of Conduct are-

(a) Preferred style of dress, (b) Avoiding illegal drugs, (c) Adherence to instructions of superiors, (d) being reliable and prompt, (e) maintaining confidentiality, (f) not accepting personal gifts, etc.

PRIME/29ME/IPCC 8

PART III

17 (a)

A tactful manager has to take some positive measures to get the best out of this informal channel of communication. Gives below are a few important points in this regard: (1) In the first place, a tactful manager will keep the employees well informed about

organizational policy matters, plans and prospects. (2) Fruitful group activities that enhance self-worth and update knowledge should be held as

frequently as possible. This will not only boost the morale and self-confidence of the workers, but also check their inclination to indulge in small task.

(3) The Managers should, as far as possible, have an open-door policy without giving the impression of cheap popularity of favourtism.

(4) The Managers should create a healthy environment where there is room for personal talk. But it must be made clear that work is of paramount importance. Nothing should be allowed to interface with progress of the organization. For this purpose regular timings should be fixed for meetings with the employees.

(5) The manager must tactfully identify the leaders and win their confidence so as to feel the pulse of their followers.

(6) As far as possible the employees, though their leaders, should be associated with decision-making. This will frustrate any negative aspect of the grapevine.

(7) The manager must keep trying to get clues about his style of functioning through regular interaction with the employees in as tactful, diplomatic manner as possible.

(8) Rumor mongering aimed at character assassination or maligning somebody in the organization should not be encouraged. Showing distaste for such talk will earn praise for the manager’s leadership qualities.

(9) A manager must learn to be good listener. In this connection, it is worthwhile to enumerate the four types of listening that are as follows:

(a) Discriminative listening (b) Appreciative listening (c) Evaluation listening (d) Empathic listening

(b) This is known as Kinesics and is an important medium of communication. According to

experts, the message is conveyed as under: 7% by verbal communication, 38% by voice tone 55% by body movement Thus, absence of body language is any message renders it incomplete. Some examples of Body Language are:

PRIME/29ME/IPCC 9

Body Position Message Protruding eyes: Rubbing the Nose: Crossing the hands: Moving the shoulders up and down: Putting the hand on forehead: Closing eyelids:

for disbelief when tense for feeling secure for showing that you are different for distress, for proximity

Another good example of body language is the signal used by a traffic policeman to stop the traffic. Body language completes communication, wherever a verbal message is given along with the use of body language then the message becomes clear. Body language helps in delivering the message unchanged.

18. Only through effective communication both inside and outside, an organization becomes an open system interacting with its environment. Effective internal communication works towards establishing and disseminating of the goals of an enterprise, evolving plans for their achievement, organizing human and other resources in an efficient way, selecting developing and appraising members of the organization, leading, motivating and encouraging people to put in their best and controlling performance. External communication relates an organization to the environment outside. No enterprise can thrive in a vacuum. It has to be aware of the needs of the customers, the availability of the suppliers, the regulations of the government and the concerns of a community.

19. The Registrar of Companies, 26, Haddows Road, Chennai - 600006 Dear Sir, Sub; Incorporation of M/s ABC Limited We enclose the following documents for the incorporation of M/s ABC Limited

1. Memorandum and Articles of the Company duly stamped and signed by the subscribers, 2. Declaration of Compliance in Form No.1 3. Notice of the situation of the Registered Office of Company in Form No. 18 4. Particulars of Directors in Form No.32 in duplicate 5. Registrar’s letter confirming availability of name. 6. Power of Attorney in favour of Mr. R Raman Practicing Chartered Accountant.

We request that the Certificate of Incorporation be issued at the earliest. Yours faithfully, SIGNATURE OF THE PROMOTER

PRIME/29ME/IPCC 10

PRIME/29ME/IPCC 11

20. Meaning:

Emotional intelligence means the capacity to recognize one’s feelings. Such recognition is very helpful to for motivating others as well as to maintain good relationship with others. Characteristics of emotional intelligence:

(1) Emotional intelligence is the ability to read innermost feelings of self and others and

to handle relationships effectively.

(2) Everybody acquires a set of emotions that determines his behaviour. Self-awareness,

self-discipline and empathy are examples of these emotions.

(3) Emotional intelligence as measured by ‘emotional quotient (EQ)’. EQ is

complementary to academic intelligence, which is measured by ‘intelligence quotient

(IQ)’. IQ measures group cognitive capabilities, whereas EQ measure non-cognitive

capacities.

(4) Emotion intelligence helps in building and prescribing positive relationship.

(5) Emotional intelligence has become very important for on-the-job success in today’s

global business.

(6) Our emotions and feelings shape our decisions and actions. ‘How we manage our

emotions?’ – This determines our success at home and at the workplace.

(7) Emotional balance protects our physical and mental health from toxic emotions,

which are as harmful as chain smoking.

(8) The future belongs to those who have excellent relationship skills.

CTFM Number of Pages : 5 Total Marks: 100 Number of Questions: 8 Time Allowed: 3 Hrs

Answer All Questions Working notes should form part of the answer

Wherever necessary, suitable assumptions may be made by the candidates.

1. Answer any five of the following

a. A company’s selling price and variable cost are Rs.20 and Rs.16 respectively with a

margin of safety of Rs.2,50,000. Find out the profit earned. b. Explain imputed cost and give an example c. What is meant by Normal capacity? d. List some of the advantages of “Integrated Accounts e. Explain Responsibility centre. f. What is meant by value analysis? ( 5 x 2 =10 Marks)

2. A company undertakes a contract for construction of a large building complex. The

construction work commenced on 1 st April,2007 and the following data are available for the year ended 31 st March 2008. Rs.’000 Contract price 35,000 Work Certified 20,000 Progress Payments Received 15,000 Materials issued to site 7,500 Planning & Estimating Costs 1,000 Direct wages paid 4,000 Materials returned from site 250 Plant Hire Charges 1,750 Wage related costs 500 Site office costs 678 Head office expenses apportioned 375 Direct expenses incurred 902 Work not certified 149 The contractors own a plant which originally cost Rs.20 lacs has been continuously in use in this contract throughout the year. The residual value of the plant after 5 years of life is expected to be Rs.5 lacs. Straight line method of depreciation is in use. As on 31 st March,2008 the direct wages due and payable amounted to Rs.2,70,000 and the materials at site were estimated at Rs.2,00,000


Required : (i) Prepare the contract account for the year ended 31 st March,2008. (ii) Show the calculation of profit to be taken to the profit and loss account of the year. (iii) Show the relevant balance sheet entries. (16 Marks)

3. From the following information for the month of October 2008, prepare Process III Cost Accounts. Opening WIP in Process III 1,800 units at Rs. 27,000 Transfer from process II 47,700 units at Rs. 5,36,625 Transferred to Warehouse 43,200 units Closing WIP of Process III 4,500 units Units Scrapped 1,800 units Direct material added in Process III Rs. 1,77,840 Direct wages Rs. 87,840 Production overheads Rs. 43,920 Degree of completion Opening Stock Closing stock Scrap Material 80 % 70 % 100 % Labour 60 % 50 % 70 % Overheads 60 % 50 % 70 % The normal loss in the process was at 5 % of the production and scrap was sold @ Rs.6.75 per unit.

(15 Marks) 4. Answer any three of the following a. For a manufacturing company the following information is given.

Budgeted production = 2,000 units with the standard consumption of 2 kg raw material per unit and a standard price of Rs.7 per kg.. Actual production is 2,500 units with raw material consumption of 1.8 kg per unit. The material cost variance for this period is Rs.5,500 (A). Find out the actual price per unit of the raw material procured.

b. A company sells its product at Rs.15 per unit. At a production level of 8,000 units it incurs a loss of Rs.40,000 where as at a production level of 20,000 units it earns a profit of Rs.80,000. Calculate break even point in units and value.

c. A supplier quotes for a material X as follows:-

Lot price 200 kg @ Rs.5 per kg 500 kg @ Rs,3.50 per kg 800 kg @ Rs.2.50 per kg.


The supplier allows a trade discount of 25% and cash discount of 3% if payment is made within 15 days. One contained is required for every 100 kgs of the material, and the containers are charged at Rs.15 each, but credited at Rs.10 on return. The buyer decides to buy 800 kg. Transport charges Rs.200 are charged by the supplier. Calculate the purchase price of 800 kg.

d. For a manufacturing unit the following average usage, lead time and their respective probabilities are given

Daily usage in units Probability Lead time in days Probability 1,500 0.20 20 0.40 3,600 0.50 35 0.60 4,500 0.30 Compute the possible usage levels at which stock outs can occur

( 3 x3 = 9 Marks) 5. Answer any five of the following a. Explain the basics of debt securitization process b. Write short note on profitability index. c. What are the merits and demerits of Commercial paper ? d. What are the uses of return on investment? e. Firms X and Y are identical in every respect, except that X is undervalued while Y is

levered. Company Y has Rs.20 lakhs of 8% debentures outstanding Assuming that all the MM assumptions are met , tax rate is 50% , EBIT is Rs.6,00,000 and equity capitalization rate for company Y is 10% what would be the value of each firm according to MM approach

f. What are the functions of treasury management ( 5 x 2 = 10 Marks)

6 a. There are two investment proposal A and B

A B Capital investment Rs. 10,000 8,000 Life 5 5 Rate of return 20% 20% Income 3000 per year 1st year 4,000 2nd year 3,500 3rd year 3,000 4th year 2,500 5th year 1,000 1 2 3 4 5 Present value of Rs1 @20% 0.833 0.694 0.579 0.482 0.402 Give your recommendation among the two proposals

(6 Marks)


b. HBL Ltd is manufacturing a product which is sold at Rs.1,000 per piece and the contribution per unit is Rs.200. The company sells on an average 400 pieces per month with one month credit to its customers. The company is thinking of extending the credit period to 2 months which will increase the sales by 25% but this will increase the stock by Rs.3,00,000 and a increase of creditors Rs.1,00,000. The company expects 40% minimum return on investment.. Advice the company whether or not to increase the credit terms if a) all the customers avail the extended credit period of 2 months. b) existing customers do not avail the extended credit periods but only the new

customers avail the same assuming the entire increase in sales is attributable to new customers

(10 Marks)

7. The Balance sheet of BL Engineering Ltd is given below. Prepare Cash Flow Statement.

Liabilities 2004 2005 Assets 2004 2005 Rs. Rs. Rs. Rs. Share capital 17,00,000 18,35,000 Buildings 8,00,000 10,00,000 Reserves 40,000 83,700 Plant & Machinery 2,50,000 3,70,000 P/L appropriation A/c 1,00,000 1,30,000 Fixtures & Fittings 5,000 6,000 Provision for dividends 70,000 50,000 Cash 2,000 2,200 Creditors 1,00,000 95,000 Debtors 1,00,000 45,000 Bank overdraft 8,000 18,000 Bills Receivable 8,000 9,000 Bills payable 14,000 13,000 Stock 4,00,000 3,43,700 Loan on Mortgage 10,000 70,000 Prepaid expenses 3,000 3,100 Investments 1,64,000 1,70,000 Goodwill 3,00,000 3,43,700 Preliminary expenses 10,000 2,000 20,42,000 22,94,700 20,42,000 22,94,700 a) Depreciation is charged on buildings at 3% of cost of Rs.9,00,000, on plant and

machinery at 8% of cost Rs.4,00,000, on fixtures and fittings at 5% of cost Rs.80,000

b) Investments were purchased and interest received that is Rs.3,000 was used in writing down the book value of investments

c) The declared dividend for 2004 was paid and the interim dividend of Rs.20,000 paid out of the Profit and Loss Appropriation Account.

(15 Marks)



8. Answer any three of the following a. The following data is available in respect of material A for the year ended 31st March

2009. The average inventory is Rs.1,00,000. The closing stock is more than opening stock by Rs.20,000 and the purchases during the period is Rs.2,70,000. Calculate the inventory turnover ratio and the number of days for which the average inventory is held.

b. The following information is given in respect of a company

EBIT - Rs.920 lakhs PBT - Rs.230 lakhs Degree of operating leverage 1.50 Calculate

a) Fixed cost b) Degree of financial leverage c) Degree of combined leverage

c. The shares of a company are selling st Rs.20 per share. The company has paid Rs.2 per share dividend last year. The estimated growth rate of the company is approximately 5 percent per year.

Calculate the cost of equity capital. Also calculate the estimated market price of equity shares if the anticipated growth rate of the company rises to 8%

d. The market price of share of a company is Rs.50 with P/E ratio of 12.5. The other details are.

Equity share capital (Rs.20 each) Rs.50,00,000 Reserves & surplus 5,00,000 Secured loans 25,00,000 Unsecured loans at 12.5% 10,00,000 Operating profit 25,00,000 Income tax rate 50%. What is the rate of interest of secured loans?

(3 x 3 = 9 Marks)

PRIME ACADEMY

29TH SESSION MODEL EXAM IPCC- COST ACCOUNTING AND FINANCIAL MANAGEMENT

SUGGESTED ANSWERS

1.a.

P/V ratio = (Contribution/Sales )x100 = (20-16) x 100 = 20% 20 Margin of safety = Profit/P/V ratio = P 20% 2,50,000 = P/20% Profit = 20% x 2,50,000 = Rs.50,000

b. These are notional costs which do not involve any cash outgo. Example – Rent of building used in business which is owned by the proprietor.

c. It is the capacity which is expected to be utilized over a long period based on the expected sales and this is also known as average capacity. This capacity is used in calculation of overhead recovery rate.

d. - In integrated system of accounts both financial and cost accounts are maintained in the same set of books and there will be no separate costing books.

- The integrated books of accounts give full information so that Profit & Loss account and Balance sheet can be required according to the requirements of law. Integrated Accounts provide lot of advantages:

- No duplication of recording of data in separate books - It facilitates the use of mechanized accounting - There is no need for reconciliation as there is one figure of profit - Costing data are available from original set of books which ensures accuracy and timeliness. - It facilitates centralized accounting leading to economy

e. It is one of the activity centre of business organization entrusted with a special task. Responsibility centres are identified under budgetary control for the purpose of control and accountability. Responsibility centre can be broadly classified in three catogories : Cost centres, profit centres and investment centres.

f. - It is defined as a systematic analysis and evaluation of the techniques and functions in

the various spheres of an organization with a view to exploring channels of performance improvement so that the value in a particular product can be bettered.

- It is a specialized services offered as a tool of management - Value analysis aims at cost reduction from the point of view of value. - Value analysis probes into economic attributes of value


2.

Contract Account for the year ended 31 st March,2008 Dr. Cr. Rs.’000 Rs.’000 To Materials Issued 7,500 By Materials at site 200 To Planning & estimating cost 1,000 By materials returned from site 250 To Direct wages paid 4,000 By work in progress c/d To Plant hire charges 1,750 Work certified 20,000 To wage related costs 500 Work uncertified 149 To site office costs 678 To Head office expenses apportioned 375 To Direct expenses incurred 902 To Plant Depreciation 300 To Direct wages accrued 270 To Notional profit 3,324 _________________________________________________________________ 20,599 20,599 To Profit & Loss account 1,662 By Notional profit b/d 3,324 To work in progress c/d 1,662_______________________________ 3,324 3,324 1 st April 2008 To Work in progress b/d Work certified 20,000 By Work in progress b/d Work uncertified 149 (profit in reserve) 1,662 To materials at site 200 The depreciation of plant and profit to be credited to Profit and loss account is calculated as below. Value of the plant 20,00,000 Less :Scrap value 5,00,000 15,00,000 Life 5 years Depreciation / year 15,00,000/5 = Rs.3,00,000 The work certified is 20,000,000 against the contract price of Rs.35,000,000 which is more than 50 %, 2/3 rd of notional profit reduced by cash received to work certified is to be transferred to profit & loss account = 3,324 2/315,000/20,000 = Rs.1,662 ( Rs. in ‘000) Work in progress to be carried to Balance sheet Work in progress 20,149 Less : Profit in reserve 1,662 18,487


Less: Cash received 15,000 Net WIP to Balance sheet 3,487 Balance sheet extract as on 31 st March’ 2008 Liabilities (Rs.’000) Assets (Rs.’000) Profit & Loss account 1,662 Plant at site 2,000 Wages accrued 270 Less :Depreciation 300 1,700 Materials at site 250 Work in progress 3,487 _______________________________________________________________

3. Production Units = Opening stock + units introduced – Closing stock = 1,800 + 47,700 – 4,500 = 45,000 units Normal loss = 5 % of production = 5 % of 45,000 = 2,250 units Actual loss = Opening stock+units introduced – Units transferred – Closing stock = 1,800 + 47,700 – 43,200 – 4,500 = 1,800 units Abnormal Gain = Actual loss – Normal loss = 2,250 – 1,800 = 450 units Statement of Equivalent units Material A Material B Labour & Input Output overheads Units units_______________________________ Op.WIP 1,800 Work on Units % Units % Units % Process II 47,700 opening WIP 1,800 360 20 720 40 Completed 41,400 41,400 100 41,400 100 41,400 100 Closing WIP 4,500 4,500 100 3,150 70 2,250 50 Scrap 2,250 - - - Abnormal gain (450) (450) 100 (450) 100 (450) 100 49,500 49,500 45,450 44,460 43,920 Statement of Cost per unit: Particulars Equivalent units Cost Cost per unit Rs. Rs. Material A 45,450 5,36,625 Scrap (15,188) 5,21,437 11.4728 Scrap 2,250 @ Rs.6.75/unit Material B 44,460 1,77,840 4.0000 Labour 43,920 87,840 2.0000 Overheads 43,920 43,920 1.0000 18.4728


Statement of apportionment of cost Rs. Opening WIP 1,800 Material A 27,000 Opening WIP-Material B 360 units @ Rs.4/unit 1,440 Labour 720 units @ Rs.2/unit 1,440 Overheads 720 units @ Rs.1/unit 720 30,600 Completed units 41,400 Cost @ Rs.18.4728/unit 7,64,773 Cost of units warehoused 7,95,373 Abnormal Gain 450 Cost @ Rs.18.4728/unit 8,313 Closing WIP – Material-A 4,500 units @ Rs.11.4728/unit 51,628 Material B 3,150 units @ Rs.4/unit = 12,600 Labour 2,250 units @ Rs.2/unit = 4,500 Overheads 2,250 units @ Rs.1/unit = 2,250 Cost of closing WIP 70,978 Process Account III Units Rs. Units Rs. To Balance b/d 1,800 27,000 By Normal Loss 2,250 15,187 To Process II A/c 47,700 5,36,625 By finished goods 43,200 7,95,373 To Direct materials 1,77,840 To Direct wages 87,840 To Production By Closing WIP 4,500 70,978 overheads 43,920 To Abnormal Gain 450 8,313_______________________________ 49,950 8,81,538 49,950 8,81,538

4. a. Actual consumption for actual production = 2500 x 1.8 = 4,500 kgs Standard consumption for actual production = 2500 x 2 = 5,000 kgs Standard material cost of actual production = Std. material x std price = 5,000 x 7 = Rs.35,000 Actual material cost – standard cost of material = Material cost variance 4500 x p – 35,000 = Rs.5,500 4500 x p = 35,000 + 5,500 = Rs.40,500 Actual price/unit = 40,500/4500 = Rs.9

b. P/V ratio = Difference in profit = 80,000 – (-40,000) Difference in sales 20,000 x 15 – 8000 x 15 = 1,20,000 = 2/3 15 x 12,000 Fixed cost = sales x p/v ratio – profit = 3,00,000 x (2/3) – 80,000 = Rs.1,20,000 Break point is Rs = Fixed cost = 1,20,000/(2/3) = Rs.1,80,000


P/V ratio Break point in numbers = Break even sales / selling price/unit = 1,80,000 / 15 = 12,000 Nos

c. Rs. Cost of 800 kg material @ Rs.2.50 per kg = 2,000 Less trade discount at 25% = 500 1,500 Charges for 8 container @ Rs.15 per container - 120 Less Credit @ Rs.10 per container - 80 40 1,540 Transport charges 200 Purchase price for 800 kg 1,740

d. The stock out will occur when the usage is likely to be above the normal consumption which can be found out by multiplying the weighted average daily usage and expected lead time. Hence normal usage during lead time = Average daily usage rate x Avg lead time Average daily usage rate = 1500x0.2+3600x0.5+4500x0.3 = 3,450 units Average lead time = 20x0.4 + 35x0.6 = 29 days Normal usage during lead time = 29 x 3,450 = 1,00,050 units Hence stock out will occur if the usage is above 1,00,050 units

5.a. It is a method of recycling of funds which is especially beneficial to financial intermediaries to support the lending volumes. Assets generating steady cash flows are packaged together and against these asset pool, market securities can be issued. Eg auto loans, housing finance etc. The process of securitization is generally without recourse.i.e the investors bears the risk and issuer is under an obligation to pay to investors only if the cash flows are received by him from the collateral. The benefits to the originator are that assets are shifted off the balance sheet, thus giving the originator recourse to off-balance sheet funding.

b. Profitability Index – The profitability index or cost benefit ratio of a project is the present value of future cash flows over the present value of cash outlay. It is used in the net present value approach to compare the profitability of various capital investment projects. The higher is the profitability index, the greater will be the return. Any project with profitability index above 1 is acceptable since the cash flow exceeds cash outlay. Projects with profitability index less than 1 are not acceptable. Profitability Index = Present value of cash flows Present value of cash outlay Profitability index may be used to compare projects with different cash flows and rank the projects according to profitability index.

c. Merits : (1) It is an alternative source of raising short term finance during period of tight bank

credit.


(2) It is relatively cheaper source of finance in comparison to bank credit. Usually, interest yield on commercial paper is less than the prime interest rate. Demerits : (1) It is an impersonal method of financing. If for any reason, a firm is unable to redeem its paper due to financial difficulties, it may not be possible for it to get the maturity of paper extended (2) It is normally used by financially sound and highest rated companies. A firm having temporary financial difficulties may not be able to raise funds through commercial paper. (3) It cannot be redeemed till maturity. Secondary market is doubtful for C.P (4) Absence of renewal facilities means that the C.P are to be issued afresh and the borrower incurs the issue cost every time. (5) In India the companies are reluctant to disclose the financial information and therefore only a few companies would like to get with the C.P market, as their account will be scrutinized by credit rating agencies.

d. The most common uses of Return on Investment concept are (1) Measures operating performance (2) Evaluates and controls capital expenditure projects (3) Helps in profit planning (4) Analyses profit by operating divisions (5) Analyses profit by product line (6) Pricing of new products (7) Analysis major cost areas in a cost reduction programme (8) Helps in determining the relative profitability of different projects (9) Helps in process development

e. Value of unlevered firm = EBIT (1-t) = Rs.6,00,000 ( 1 – 0.5) = Rs.30,00,000 Ke 0.1 Value of levered firm = Value of unlevered + Debt = Rs.30,00,000 +(Rs.20,00,000 x0.5) = Rs.40,00,000

f. Treasury management is responsible for (a) Maintaining good relationship with banks and other financial institutions (b) Managing cash while earning the optimum return from any surplus funds (c) Providing for long term and short term funds at minimum cost (d) Management of exchange risks (e) Advising on all aspects of corporate finance including capital structure, mergers

and acquisitions The treasurer is usually the person most directly responsible for obtaining finances, managing firm’s cash account and its relationships with banks and other financial institutions. Further, Treasurer makes sure that the firm meets its obligations to the investors holding its securities.


6a. A B Annual Income Present value Annual income Present value Rs Rs Rs Rs 1st year 3,000 2,499 4,000 3,332 2nd year 3,000 2,082 3,500 2,429 3rd year 3,000 1,737 3,000 1,737 4th year 3,000 1,446 2,500 1,205 5th year 3,000 1,206 1,000 402 8,970 9,105 Investment 10,000 8,000 In the case of A the present value is les than investment but B the cash flow exceeds the investment. Therefore Project B is recommended.

b. All customers avail the Only the new customers New credit terms avail new credit terms Present annual Turnover Rs. Rs. 400 x 12 x 1000 48,00,000 48,00,000 Increase in Turnover 25% 12,00,000 12,00,000 P/V ratio (200/1000)x100 20% 20% Profitability of additional sales -A 2,40,000 2,40,000 Proposed / Additional debtors 10,00,000 2,00,000 (60,00,000 x 2/12) (12,00,000 x 2/12) Less : Existing debtor 4,00,000 - (48,00,000 x 1/12) Additional/ Increase in debtors 6,00,000 2,00,000 Investment in additional Debtors 80% of sales value 4,80,000 1,60,000 Increase in stock 3,00,000 3,00,000 7,80,000 4,60,000 Less : Increase in creditors 1,00,000 1,00,000 Net additional inc.in working Capital 6,80,000 3,60,000 Minimum return @ 40% - B 2,72,000 1,44,000 Excess of profit over cost of carrying Additional working capital (A – B ) (32,000) 96,000 It is advisable to extend the credit period only to new customers and not to the existing customers


7.

Cash Flow from Operating Activities Rs. Balance of P/L appropriation A/c 1,30,000 Adjustments for: Dividend 50,000 Interim dividend 20,000 Transfer to general reserve 43,700 Opening balance of P/L appropriation A/c (1,00,000) Net profit before taxation and extraordinary items 1,43,700 Adjustments for depreciation Building 27,000 Plant & Machinery 32,000 Fixtures 4,000 Preliminary expenses 8,000 Operating profit before working capital changes 2,14,700 Decrease in debtors 55,000 Increase in receivables (1,000) Decrease in stock 56,300 Increase in prepaid expenses (100) Decrease in current liabilities (5,000) Decrease in Bills payable (1,000) Net cash from Operating activities 3,18,900 Cash Flow from Investing activities Purchase of investment (9,000) Purchase of plant & machinery (1,52,000) Purchase of building (2,27,000) Purchase of furniture (5,000) Goodwill purchased (43,700) Net cash from investing activities (4,36,700) Cash Flow from financing activities Proceeds from issue of share capital 1,35,000 Interest received 3,000 Loan from mortgage 60,000 Dividend paid (70,000) Interim dividend paid (20,000) Net cash from financing activities 1,08,000 Net increase in cash and cash equivalents (9,800) Cash and cash equivalent at the beginning of the period (6,000) (8,000 – 2,000) Net cash and cash equivalent at the end of the period(18,000-2,200) (15,800)


Working Notes Investment Account Rs Rs To Balance c/d 1,64,000 By interest A/c 3,000 To Cash A/c 9,000 By Balance b/d 1,70,000 1,73,000 1,73,000 Plant & Machinery A/c Rs Rs To Balance c/d 2,50,000 By Depreciation 32,000 To Cash A/c (Balancing fig) 1,52,000 By Balance b/d 3,70,000 4,02,000 4,02,000 Building A/c Rs Rs To Balance c/d 8,00,000 By Depreciation 27,000 To Cash A/c (Balancing fig) 2,27,000 By Balance b/d 10,00,000 10,27,000 10,27,000 Furniture A/c Rs Rs To Balance c/d 5,000 By Depreciation 4,000 To Cash A/c (Balancing fig) 5,000 By Balance b/d 6,000 10,000 10,000

8. a. Let opening stock be Rs.x and the closing stock is Rs.x+20,000

Average inventory = Opening stock + closing stock 2

1,00,000 = x+x+20,000 2

2,00,000 = 2x +20,000 2x = 1,80,000 x = 90,000

Opening stock is = 90,000 and closing stock is Rs.1,10,000 Cost of material consumed = Op.stock + purchases – Closing stock =90,000+2,70,000 – 1,10,000 = Rs.2,50,000 Inventory turnover ratio = Cost of raw material consumed Average inventory = 2,50,000/1,00,000 = 2.5 Average number of days inventory is held = 365/2.5 = 146 days

b. Degree of operating leverage = Contribution = Fixed cost+ EBIT

EBIT EBIT 1.50 = FC + 920 920 1,380 = FC + 920



Fixed cost = Rs.460 lakhs Degree of financial leverage = EBIT/PBT = 920/230 = 4 Degree of combined leverage = DOL x DFL = 1.5 x 4 = 6

c. Cost of equity capital Ke = d/p +g =2/20+0.05 = 0.15 = 15% When growth rate rises to 8% P = D/(Ke – g) = 2.16/(.15 -0.08) = 2.16/0.07 = Rs.30.86

d. Let the interest rate on secured loans be X % Operating profit - Rs.25,00,000 Less: Int on unsecured loan 1,25,000 On secured loans X x 25,00,000/100 = 25,000 X Profit before tax Rs.23,75,000 – 25000X Income tax Rs.11,87,500 – 12500 X Profit after tax Rs.11,87,500 – 12500 X No.of equity shares - 50,00,000/20 = Rs.2,50,000 Earning per share = 11,87500 – 12500 X 2,50,000 PE ratio = Market price per share / EPS 12.5 = 50________ (11,87,500 – 12500 X) 2,50,000 12.5 = 50x 2,50,000 (11,87,500 – 12500 X) 1,48,43,750 – 1,56,250X = 1,25,00,000 1,56,250X = 23,43,750 X = 15 The rate of interest on secured loans is 15%

TXTN Number of Pages : 5 Total Marks: 100 Number of Questions: 9 Time Allowed: 3 Hrs

Answer All Questions

PART I

1 Select the correct answer from the alternatives given to each of the following . a) The income of a minor child who is suffering from any disability of the nature specified in

Sec.80 U is

(i) clubbed with that of father

(ii) assessed in the individual capacity of that minor child

(iii) clubbed with that of mother

(iv) none of the above

b) Dr.Gopal is a Consultant Cardiologist. Which of the following is true with regard to maintenance

of books u/s 44AA read with Rule 6F of the Income Tax Rules,1962. The books and documents

are required to be maintained

(i) if the gross receipts have exceeded Rs.150000 in all the three immediately

preceeding previous years or is likely to exceed Rs 150000 during the current

previous year in the case of newly set up profession.

(ii) if the gross receipts have exceeded Rs.150000 in any of the three preceeding

previous year or likely to exceed Rs.150000 during the current previous year in the

case of newly set up profession.

(iii) if the income from such profession has exceeded Rs.150000 in any of the three

preceeding previous year or is likely to exceed Rs.150000 during the current


(iv) if the income from such profession has exceeded Rs.120000 in any of the three

preceeding previous year or likely to exceeded Rs.120000 during the current


c) Mr X wins Alottery of Rs.1000000 . He does not have any other income chargeable to tax. The

Life Insurance premium paid is Rs.125000. What is the maximum deduction under Chapter VI A

in computing his total income .

(i) Rs.125000 u/s 80C

(ii) Rs.100000 u/s 80C

(iii) NIL

(iv) None of the above.


d) A belated return

(i) can be revised

(ii) can not be revised

(iii) is a defective return

(iv) none of the above.

e) Interest u/s 234A,234B and 234C are

(i) mandatory

(ii) at the discretion of the assessing officer

(iii) at the discretion of the assessee

(iv) None of the above

(5 X 1 = 5 Marks)

2 Rakesh is a Chartered Accountant in practice. The following profit and Loss account is prepared

for the year ended 31st March, 2009.

Rs Rs

Salaries 4,50,000 Fees earned

Rent 24,000 Audit - 10,40,000

Printing & Stationary 4,500 Other Consultancy - 4,72,400

Meeting expenses 75,000 Divided - 10,500

Interest on loan 60,000 Income from units

Subscription & periodicals 12,000 of mutual fund - 5,723

Telephone , Postage etc. 1,68,500

Car expenses 55,000

Depreciation 29,500

Travelling expenses 40,000

Municipal Taxes 1,000

Net Profit 6,09,123

------------ --------------

15,28,623 15,28,623

======= ========


Other information

1. Rakesh’s ordinarily resident in India

2. Rakesh has sold some of the shares held in his d mat account. The profit on transfer is

Rs. 20,500. The sale is effected through stock exchange. The security transaction tax

also paid on its transfer. He held these shares for a period of 11 months

3. Rs. 507 of car is attributed to personal purpose.

4. Depreciation allowable u/s 32 (1) is Rs. 28,288 including depreciation on motor

car Rs. 12,288

5. The Municipal Taxes paid on a house property which was actually let out during the

previous year 2008 – 09. The annual value is computed as Rs. 84,000/-

6. He is a faculty for taxation in ICAI. The recommendation received for his service is Rs.

80,000, during the previous year 2008- 09, which is not taken in the other consultancy.

7. The average value of movement held during the previous year is Rs. 2,00,000/-

8. The life insurance premium is Rs. 25000 for 2008-09.

9. Interest is paid on capital borrowed for requiring the house property in 1998.

10. Dividend credited in the profit and loss A/c is the dividend received from Indian

companies

Compute the total Income. ( 20 Marks)

3 a) A B & C D, a partnership firm assessed as such furnishes the following profit and Loss account

for the previous year ending 31st March 2009.

Particulars Rs. Particulars Rs.

To Administrative and Selling Exp 95,000 By G.P. b/d 15,000

To Interest to Partner 30,000

To recommendation to partners 82,000 By Net Loss 192,000

207,000 207,000


Additional Points

1) The inadmissible expenses included in administration and selling expense

is Rs. 25,000

2) Interest 15% is paid to the Partners compute for the A.Y 2009- 10

(i) Book profit of the firm

(ii) Remuneration of partners deductible u/s 40 (b) (ii)

(iii) The income of the firm (9 Marks)

(b) Write a short note on zero coupon bond (ZCB) explain

(i) Deductibiling of discount on ZCB in the case of issuing company

(ii) Chargeability of ZCB in the case of the investor (2+2+2 = 6 Marks)

4 a)Write short notes on

(i) Expenditure involving cash payment exceeding Rs.20000

(ii) Capital gains in the case of compulsory acquisition of a capital asset.

b) When is an individual and HUF is said to be “Resident and Ordinarily Resident” under the

Income Tax Act,1961? (3+3+4=10 Marks)

PART II

5 Select the correct answer from the alternatives given to each of the following question.

(i) Let ‘t’ is the taxable turnover (including VAT) ,’r’ is the rate of tax, the tax included in the

turnover is

a) r/(100+r)*t

b) t/(100+t)*r

c) t*r/100

d) None of the above

ii) VAT is implemented

a) to eliminate the cascading effect of taxation

b) to introduce the cascading effect

c) to increase income tax liability




iii) Bill traders

a) issue invoices on sales

b) issue fake invoices

c) do not issue invoices

d) none of the above.

iv) Service tax is administered by

a) Central Board of Direct Taxes

b) Central Board of Excise and Customs

c) State Governments


v) Services rendered in SEZ is

a) fully exempt from service tax

b) fully taxable

c) taxable after providing for abatement

d) none of the above ( 5 x 1 = 5 Marks)

6 a) Explain Assessable Value(AV) under service tax act.

b) Write a short note on Works Contract Service Valuation under valuation rules

(5+3=8 Marks)

7 Write short notes on the following under the provisions of Service Tax Act

a) Pure Agent

b) Procedure and facilities for large tax payer

c) Functions and power of Director General(Service Tax) (3 x 5=15 Marks)

8 Compute the invoice value to be charged and amount of tax payable under VAT by a dealer who

had purchased goods for Rs 120000 and after adding for expenses for Rs10000 and profit Rs

15000 had sold out the same. The rate of VAT on purchases and sales is 12.5% .

(10 Marks)

9 Explain three commonly used methods for computation of tax.

(3 x 4 = 12 Marks)

PRIME ACADAMY 29TH SESSION MODEL EXAM

IPCC –TAXATION -- SUGGESTED ANSWERS

PART I Income Tax

1. (a) Assessed in the individual capacity of the minor child.

(b) If the gross receipts have exceeded Rs. 1,50,000 in all the three immediately

proceeding previous years or is likely exceed Rs. 1,50,000 during the current

previous year.

(c) NIL

(d) Can not be revised

(e) Mandatory

2.

Computation of Total Income

Name of the Assessee: Rakesh A.Y. 2009-10

Particulars Rs,

Income from House Property

Refer to working note :no.1 ( 1,900)

Profit and gains of business

Or Profession (working note no.2) 6, 89,756

Short term Capital gain

(working note no.3) 20,500

Income from other sources

(working note no.4) 80,000

Gross Total Income 7, 88,356

Less chapter VIA Deductions

Deduction u/s 80 C

Life Insurance premium paid 25,000

Total Income 7, 63,356


Working Note –1 Computation of Income from House Property

Particulars Rs. Rs.

Gross annual Value 84,000

Less Municipal tax paid 1,000

Net annual value 83,000

Less: Deduction u/s 24

(1) 30% on net annual value 24900

(2) Interest on loan 60,000 84,900

______

Loss from House property 1,900

Working Note –2 Profit and gains of Business or profession

Rs. Rs

Net profit as per profit and loss A/c 6, 09,123

Add (i) Depreciation Claimed in P&L A/c 29,500

(ii) Interest on loan borrowed 60,000

(iii) 50% of the car expenses attributable

To personal purpose 27,500

(iv) Municipal taxes paid 1,000

(v) Discount allowance u/s 1,000 1, 19,000

7, 28,123

Less

i) Depreciation Allowable u/s 32(1) 22,144

ii) Items credited in P&L A/c but

Considered under income from

other sources

Dividend 10,500

Income from mutual fund 5,723 38,367

Income under the hand profit

And gains of business or profession 6, 89,756


Working Note No.2(a) Depreciation

Depreciation under IT Rules

(Given the computed value) 28,288

Less 50% on motor car attributable to personal expenses 6,144

(Rs.12, 288x50%)

Depreciation allowable under IT Act 22,144

Working Note No. 2(b) Disallowance u/s 14A

Rs. 2, 00,000 x 0.5 Rs. 1,000

Working Note –3 Income from other sources

1. Dividend income 10,500

Less exempt u/s 10(34) 10,500 Nil

2. Income from units of

Mutual funds 5,723

Less exempt u/s 10(35) 5723 Nil

. Remuneration received from

ICAI 80,000

80,000

3 (a) Book – Profit Rs. Rs.

i) Net loss as per P&L A/c 1, 92,000

Less: In admissible expenses

a) Administration and selling expenses 25,000

b) Interest to partners 6,000

c) Remuneration to partners Book Profit 82,000 1, 13,000

79,000


ii) The maximum amount deducted as partners salary

is Rs.50,000 in case of loss.

iii) Income of the firm Book loss 79,000

(Refer answer (i) above)

Add Remuneration to the partners 50,000

Loss of the firm 1, 29,000

4(a) (i) In admissibility of cash payments in respect of expenditure exceeding Rs. 20,000

1) Sec 40A(3) provides that where the assessee incurs any expenditure in respect of which a

payment or aggregate of payments made to a person in a day, otherwise than by an account

payee cheque or account payee bank draft exceeds Rs. 20,000/- no deduction shall be allowed

in respect of such expenditure.

2) Any payment made during the previous year, for which deduction is allowed on accrual basis

in any preceding previous year, otherwise than by way of account payee cheque or account

payee draft then the payment so made shall be deemed to be the business income in the

previous year in which such payment is made.

4(a)(ii) Sec 45(5) provides that the capital gain arising out of transfer of capital asset by way

of compulsory acquisition under any law is taxable. Consideration for transfer is the

compensation received by the assessee. Where the assessee receives enhanced

compensation, such enhanced compensation would also be treated as consideration for

transfer. The capital gain is taxable in the year in which the compensation or enhanced

compensation is received by the assessee.

Any income on transfer of agricultural land by an individual or HUF by way of compulsory

acquisition is not subject to levy of capital gain tax u/s 10(38)

4(b) Determination of Residential status Individual

An individual is said to be resident in India is any previous year if he satisfies any one of the

following conditions.

1) He is in India in that year for a period or periods amounting in all to 182 days or more;


2) He is in India for a period or periods amounting in all to 60 days or more during the previous

year and 365 days or more during the 4 years preceding that previous year.

HUF : If the control and management of the affairs of HUF is wholly or partly situated in India,

the HUF is resident in India.

Control and management means the place where the decisions are taken.

Resident and Ordinarily Resident

Where a resident individual or the manager of HUF does not satisfy both the conditions given

below, they are said to be Resident and ordinarily resident.

1) The individual or the manger has been a non- resident in 9 out of the 10 preceding previous

years.

2) The individual or the manager has been in India for a period not exceeding 729 days during the

7 preceding previous years.

PART –II VAT and SERVICE TAX

5 1) (a) r * t

100 + r

2) (a) To eliminate the cascading effect of taxation.

3) (b) Issues fake invoices

4) (b) Control Board of Excise and Customs

5) (a) Fully exempt

6 (a)

Valuation –Sec.67 and valuation Rules

Service tax is to be calculated on the value of service. The following are the valuation rule to

calculate Assessable Value (AV)

1) Consideration for service in money

AV = Gross amount charged.

2) Consideration for service not in money

AV = Money value of consideration + Service tax thereon


3) Consideration for service not ascertainable

AV = As per valuation rules.

4) Billed amount = cumulative tax price

AV = Billed amount – service tax

5) Others

Av = Amount received before, during and after service.

6(b) Service tax (Determination of value) Rules,2006 (valuation Rules)

1. Rule 2A:Sec.65(105) (zzzza) works contract service valuation:

a) Assessable value means the gross amount charged less the excluded value of transfer of

property in good involved in the execution of works contract.

b) Assessable value includes labour charges, payment to sub-contractors planning/designing

charges, architect’s etc.

c) By virtue of Notification 7/2008 dated 01.03.08 the rate charged towards works contract

tax is increased from “two percent” as against “ four percent”

7(a) Pure agent is a Person who has an agreement with the service receiver to act as his pure agent to

incur expenditure for providing service. The salient features of a pure agent are:-

a. He has no title over the goods/ services of the principal.

b. He cannot use them for his purpose

c. He gets from the service receiver only the actual cost of such purchase.

7(b) Procedure and Facilities for large taxpayer-

The Following rule shall apply to large tax payer:

1. Large taxpayer shall submit the returns, as prescribed under these rules, for each of the

registered premises.

2. A large taxpayer, on demand, may be required to make available the financial, stores

and CENVAT credit records in electronic media, such as, compact disc or tape for the

purposes of carrying out any scrutiny and verification, as may be necessary.

3. A large taxpayer may, with intimation of at least thirty days in advance, opt out to be a

large taxpayer from the first day of the following financial year.

4. Any notice issued but not adjudged by any of the Central Excise officer administering

the Act or rules made there under immediately before the date of grant of acceptance by


the Chief Commissioner of Central Excise. Large Taxpayer Unit shall be deemed to

have been issued by central Excise officers of the said unit.

5. Provisions of these rules, in so far as they are not inconsistent with the provisions of this

rule shall mutatis mutandis apply incase of a large taxpayer.

7(c ) Function and powers of Directors General (Service Tax)

The following are the functions and powers of Director General (Service Tax):

1. To ensure proper establishments and infrastructure facilities under different Central Excise

Commission rates and to monitor the collection and assessment of Service Tax.

2. To make a study on the staff requirements at field level for effective implementation of

Service Tax.

3. To study whether Service Tax is being properly implemented in the field.

4. To suggest proper measures to increase the revenue collections and streamline the

procedures adopted for collection.

5. To simplify Service Tax collection and assessment and make suggestions thereon based on

the laws and procedure related to service Tax.

6. To form a database regarding the collection of Service Tax and to monitor the revenue

collection from Service Tax.

7. To ensure by inspection that the Service Tax cells in the Commissionerate are functioning

effectively.

8. To undertake any other function as may be assigned by the Board from time to time.

8 Computation of invoice Value

Particulars Amount Rs

Purchase Value 1,20,000

Tax suffered by purchase (1,20,000 x 12.5%) 15,000

Sale value (1,20,000 + 10,000+15,000) 1,45,000

Tax on sale value (1,45,000x 12.5%) 18,125

VAT Payable ( 18,125 – 15,000) 3,125

Sale Invoice Rs.

Sale Price 1,45,000

Add: VAT 18,125

Total Bill Amount 1,63,125



9. The three commonly used method for computation of VAT are

1. Addition method

2. Invoice method

3. Subtraction method.

1. Addition Method

a. In this method tax is levied on value addition at every stage of sale including profit.

b. In the chain of sale, the goods may enjoy exemption at certain stages of sales. Addition

method is incapable of accommodating such exemptions. i.e, tax is worked out on

exempted goods also.

2. Invoice Method

This is also known as “Tax credit method” or “Voucher method”

The following are the features of this method:-

a. Tax is lived at every stage of sales.

b. Tax is collected on the total sale value at every stage of sale.

c. A tax credit is allowed to the seller for the tax paid on input items.

3. Subtraction Method

The following are the salient features of subtraction methods.

1. Tax is levied at every stage of sale.

2. Tax is calculated on value addition made at each stage of sale.

3. Since tax is collected on value addition, there is no need to take credit on tax paid

for input items.