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INTERMEDIATE EXAMINATION

GROUP I

(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS

DECEMBER 2011

Paper-7 : APPLIED DIRECT TAXATION

Time Allowed : 3 Hours Full Marks : 100

The figures in the margin on the right side indicate full marks.

Wherever required, the candidate may make suitable assumptions and

state them clearly in the answers.

Working notes should form part of the relevant answers.

All questions relate to the assessment year 2011-12 and the provisions stated relate to

Income Tax Act, 1961, unless stated otherwise in the question.

Answer Question No. 1, which is compulsory and any five from the rest.

Q. 1. Choose the correct answer : [125=25]

(a) For RAJASTHALI Ltd., a company engaged in the manufacture of automotive parts, the rate of

depreciation on acquiring machinery from UK on 1 January, 2011 to be used in India for the first

time for AY 2011-12 will be :

A. 15% B. 25% C. 7.5% D. None of these

(b) ARUN JAIDEV Ltd. has taken office premises on lease from Mr. X. The monthly rental amounts to

` 15,000-on which service tax is levied @ 10.30% thereby resulting in a total monthly expense of

` 16,545. TDS u/s 194I on this transaction is applicable on :

A. ` 15,000 B. ` 16,500 C. ` 16,545 D. Nil

2 .. Suggested Answers to Question ADT

(c) PREM BANSAL Ltd. makes a payment of ` 35,000 in cash to a transporter for plying of goods

carriages in a single day. The disallowance under section 40A(3) will be :

A. ` 35,000 B. ` 20,000 C. ` 15,000 D. Nil

(d) S. S. CORPORATE SECURITIES Ltd., an existing company incurred an expenditure of ` 1,00,000 in

FY 2010-11 in connection with issue of shares to increase its share capital for a period of 10 years.

The amount allowed as deduction under section 37(1) for AY 2011-12 will be :

A. ` 10,000 B. ` 20,000 C. ` 1,00,000 D. Nil

(e) PELF FINSTOCK Ltd. filed its Return of Income Tax for AY 2010-11 on 30th March, 2011. The notice

for making scrutiny assessment under section 143(3) can be served on the assessee upto :

A. 30th September, B. 31st December, C. 30th March, D. 30th September,

2011 2011 2012 2012

(f) Interest under section 234B is payable by an assessee due to the following reason :

A. Defaults in B. Defaults in C. Defaults in D. Defaults due to

furnishing return payable of instalments of non-deduction of

of income advance tax advance tax tax at source

(g) The basic exemption limit for a Non-resident woman who is 70 years old for the Assessment Year

2011-12 is :

A. ` 1,60,000 B. ` 2,40,000 C. ` 1,90,000 D. ` 1,80,000

(h) The charging section of the Income Tax Act is:

A. Section 1 B. Section 2 C. Section 3 D. Section 4

(i) Deduction of profit and gains derived from export under section 10AA available to SEZ units is

for years.

A. 10 B. 5 C. 8 D. None of these

(j) In case of conflict between the provisions of Income Tax Act and the provisions of Double Taxation

Avoidance Agreement (DTAA), the following shall prevail :

A. The Income B. DTAA C. Whichever is D. Whichever is

Tax Act, 1961 beneficial to the beneficial to

assessee the Income Tax

authorities

(k) Walmart Ltd., is in the business of setting up and operation cold chain facilities. It commenced its

operations on 1.4.2010 and claimed deduction of all expenditure under section 35AD. The net

loss for the year ending 2010-11 is ` 50,00,000. The number of years for which this loss can be

Suggested Answers to Question ADT .. 3

carried forward is:

A. 8 years B. 4 years C. Infinitely D. Cannot be

carried forward

(l) MR. RAKESH BEHARI is a trader and deals in purchase and sales of cloth. He is required to get his

accounts audited under section 44AB if his total sales/turnover exceeds:

A. ` 40,00,000 B. ` 10,00,000 C. ` 15,00,000 D. ` 60,00,000

(m) MAT credit under section 115JAA is allowed to be carry forward and set-off for years.

A. 10 B. 8 C. 7 D. Infinitely

(n) Xing Ltd. is incorporated in USA, it declared of ` 1,00,000 to its Indian shareholders on 30th

September, 2010. The rate at which Xing Ltd. is liable to pay Dividend Distribution Tax (DDT)

under section 115-O is equal to :

A. 15% B. 16.995% C. 16.61% D. Not liable to

pay DDT

(o) The ceiling limit for exemption of Gratuity under section 10(10) received from the employer is:

A. ` 10,00,000 B. ` 3,50,000 C. ` 5,00,000 D. ` 3,00,000

(p) On 17th January, 2011, M/s. Naina sold a house property and earned a long term capital gain of

` 1,02,50,000. She invested a sum of ` 50,00,000 in bonds specified in section 54EC on 8th March,

2011. She further invested a sum of ` 50,00,000 in same bonds on 8th May, 2011. Taxable Income

of M/s. Naina for the Assessment Year 2011-12 will be:

A. ` 50,00,000 B. ` 50,50,000 C. ` 1,00,50,000 D. ` 2,50,000

(q) PRARTHANA Ltd. has to make a payment of ` 10,00,000 to Mr. PIYUSH for certain services.

PRARTHANA Ltd. is required to deduct tax at source at the rate of 10%. However, Mr. PIYUSH

does not provide Permanant Account Number (PAN) to PRARTHANA Ltd. for deduction of tax

from ` 10,00,000. The rate at which tax will be deducted by PRARTHANA Ltd. will be:

A. 10% B. 20% C. 30% D. No TDS should be

deducted due to

non-availability

of PAN

(r) Incomes which accrue or arise outside India but are received directly in India are taxable in case

of:

A. Resident only B. Non-Residents C. All Assessees D. Resident but not

Ordinarily Resident


(s) Where the Assessing Officer is aggrieved by an order of the Commissioner of Income-tax (Appeals),

further appeal in respect of same lies to:

A. Income-tax B. Dispute C. Central Board of D. Income-tax

Appellate Resolution Panel Direct Taxes Settlement

Tribunal Commission

(t) A company is required to pay 75% of its advance tax liability by which date:

A. 15 March of B. 15 December C. 15 September of D. 15 June of the

the previous year of the previous year the previous year previous year

(u) S. Ltd. is an Indian Company which is 100% subsidiary of H. Ltd., a Foreign Company. H. Ltd. sells

its products to S. Ltd. at ` 15 per unit. At the same time, it sells its products to an unrelated party

at ` 20 per unit. The arms length price as per section 92C in this transaction will be:

A. ` 15 B. ` 20 C. ` 15.75 D. $ 21

(v) R. Ltd. is registered in UK. Its control and management is wholly situated in India. R. Ltd. shall be:

A. Resident in B. Non-resident in C. Resident but not D. Resident in India if

India India ordinarily resident other certain

conditions are

satisfied

(w) Transfer Pricing provisions are applicable if:

A. There is an B. There is any C. There is an D. There is an

international transaction international international

transaction between transaction transaction

between any associated between between assotwo

parties enterprises associated ciated enterprises

enterprise and the transaction

is not at

arms length price

(x) Circulars issued by the Central Board of Direct Taxes is binding on:

A. Assessee only B. Income-tax C. Both assessees D. On everyone

authority only and income tax except the

authorities Judiciary

(y) Additional depreciation under section 32(1) (iia) of the Income-tax Act, 1961 is avaliable to :

A. Plant & B. Plant & C. Plant & D. All depreciable

Machinery Machinery and Machinery and assets under the

Buildings intangible assets Income-tax Act,

1961


Answer 1. (a)

(a) C.

(b) D.

(c) D.

(d) D.

(e) A.

(f) B.

(g) A.

(h) D.

(i) D.

(j) C.

(k) C.

(l) D.

(m) A.

(n) D.

(o) A.

(p) D.

(q) B.

(r) C.

(s) A.

(t) B.

(u) A.

(v) A.

(w) D.

(x) B.

(y) A.

Q. 2. (a) Answer the following with reference to the provisions of the Income-tax Act, 1961:

(i) Bad debt claim disallowed in an earlier assessment year, recovered subsequently. Is the sum

recovered chargeable to tax?

(ii) Return of income of a company was signed by the Company Secretary. Is the return a valid

return?

(iii) Tax deducted at source on salary paid to employees not remitted till the due date for filing

the return prescribed in section 139. Is the expenditure to be disallowed under section

40(a)(ia)?

(iv) X Co. Ltd. paid ` 120 lakhs as compensation as per approved Voluntary Retirement Scheme

(VRS) the financial year 2010-11.

How much is deductible under section 35DDA for the assessment year 2011-12? [6]


(b) BHART doing manufacture and wholesale trade furnishes you the following information: Total

turnover for the financial year :

`

2009-10 45,00,000

2010-11 55,00,000

State whether tax deduction at source provisions are attracted for the below said expenses incurred

during financial year 2010-11:

`

Interest paid to UCO Bank 41,000

Contract payment to Raj (2 contracts of ` 12,000 each) 24,000

Shop rent paid (one payee) 1,90,000

Commission paid 7,000 [3]

(c) RAJASTHALI Ltd. furnishes you the following information for the year ended 31.3.2011:

`

Total turnover of Unit A located in Special Economic Zone 100 lakhs

Profit of the business of Unit A 30 lakhs

Export turnover of Unit A 50 lakhs

Total turnover of Unit B located in Domestic Tariff Area (DTA) 200 lakhs

Profit of the business of Unit B 20 lakhs

Compute deduction under section 10AA for the A. Y. 2011-12. [3]

(d) TUSHAR had 4 heavy goods vehicles as on 1.4.2010. He acquired 7 heavy goods vehicles on 27.6.201

sold 2 heavy goods vehicles on 31.5.2010.

He has brought forward business loss of ` 50,000 relating to assessment year 2007-08 of a

discontinued business. Assuming that he opts for presumptive taxation of income as per section

44AE, compute his income chargeable to tax for the assessment year 2011-12. [3]

Answer 2. (a)

(i) Recovery of a bad debt claim disallowed in the earlier year cannot be brought to tax under section

41(4). Section 41(4) can be invoked only in a case where bad debts or part thereof has been allowed

as deduction earlier under section 36(1)(vii).

(ii) Where the return of income of a company was signed by a company secretary, although it is supposed

to be signed by a Managing Director or a Director (in the absence of a Managing Director), it is a

defective return, which can be rectified and not an invalid return.

Note :

(1) There is an alternate view that the return of income of a company, which is not signed and

verified by the Managing Director or Director, is not a defective return but an invalid return and

thus, void-ab-initio.


(2) In case of a company not resident in India, the return of income may be signed and verified by

any person who holds a valid power of attorney. Since the question does not specify the residential

status of a company, it is possible to answer that the return is valid if the company is nonresident

and the Company Secretary holds a valid power of attorney.

(iii) The salary expenditure is allowable while computing the income of the employer even though TDS

has not been deposited within the due date under section 139(1). The disallowance under section

40(a)(ia) will not apply for non-deduction of tax at source from income chargeable under the head

Salaries.

(iv) It is deductible in 5 equal annual instalments commencing from the previous year of payment.

` 24 lakhs, being 1/5th of ` 120 lakhs, is deductible under section 35DDA for the A. Y. 2011-12.

Answer 2. (b)

As the turnover of BHART for F. Y. 2000-10, i.e. ` 45 lakh. has exceeded the monetary limit of ` 40 lakh

prescribed under section 44AB, he has to comply with the tax deduction provisions during the financial

year 2010-11, subject to however the exemptions provided for under the relevant sections for applicability

of TDS provisions.

Interest paid to UCO Bank

TDS under section 194A is not attracted in respect of interest paid to a banking company.

Contract payment of ` 24,000 to Rai for 2 contracts of ` 12,000 each

TDS provisions under section 194C would not be attracted if the amount paid to a contractor does not

exceed ` 30,000 in a single payment or ` 75,000 in the aggregate during the financial year. Therefore, TDS

provisions under section 194C are not attracted in this case.

Shop Rent paid to one payee Tax has to be deducted under section 194-I as the rental payment exceeds

` 1,80,000.

Commission paid Tax has to be deducted under section 194-H as the commission exceeds ` 5,000.

Note :

(1) The monetary limit of turnover for tax audit under section 44AB has been increased from ` 40 lakh

to 60 lakh w.e.f. A. Y. 2011-12. However, for determining the applicability of TDS provisions under

section 194A for F. Y. 2010-11, the turnover and monetary limit under section 44AB for F. Y. 2009-10

are relevant.

(2) The Finance Act, 2010 has increased the threshold limits for applicability of TDS provisions w.e.f. 1st

July, 2010. It is presumed that the payments specified in the question were made on or after 15t July,

2010, and accordingly, the reasoning has been given on the basis of the provisions as amended by

the Finance Act, 2010 w.e.f. 1.7.2010.

Answer 2. (c)

100% of the profit derived from export of articles or things or services is eligible for deduction under

section 10AA, assuming that F. Y. 2010-11 falls within the first five year period commencing from the year

of manufacture or production of articles or things or provision of services by the Unit in SEZ. As per section

10AA(7), the profit derived from export of articles or things or services shall be the amount which bears to

the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover

in respect of articles or things or services bears to the total turnover of the business carried on by the

undertaking.


Deduction under section 10AA

= Profit of the business of Unit A Total Turnover of Unit A

Export Turnover of Unit A

= ` 30 lakhs 100

50

= ` 15 lakhs

Answer 2. (d)

Computation of total income of Mr. TUSHAR for A. Y. 2011-12

Particulars `

Presumptive business income under section 44AE

4 heavy goods vehicles for 2 months (4 ` 5,000 2) 40,000

Balance 2 heavy goods vehicles for 10 months (2 ` 5,000 10) 1,00,000

7 heavy goods vehicles for 10 months (7 ` 5,000 10) 3,50,000

Business Income 4,90,000

Less : Brought forward business loss of discontinued business 50,000

Total Income 4,40,000

Note : The assessee is eligible for computing the income from goods carriages applying the presumptive

provisions of section 44AE, since he did not own more than 10 goods carriages at any time during the

previous year.

Q. 3. (a) Mr. PADAM engaged in retail trade, reports a turnover of ` 58,50,000 for the financial year 2010-

11. His income from the said business as per books of account is computed at ` 2,90,000. Retail

trade is the.only source of his income:

(i) Is Mr. PADAM eligible to opt for presumtive determination of his income chargeable to tax

for the assessment year 2011-12?

(ii) If so, determine his income from retail trade as per the applicable presumtive provision.

(iii) In case he does not opt for presumtive taxation of income from retail trade, what are his

obligations under the Income-tax Act, 1961?

(iv) What is the due date for filing his return of income under both the options? [5]

(b) MITTAL (P) Ltd., converted into a Limited Liability Partnership (LLP) by name All Trade LLP, with

effect from 01.04.2010:

The following details are given to you:

`

Asst. year 2003-04 : Business loss brought forward 2,00,000

Asst. year 2010-11 : Business loss brought forward 5,00,000

(These are related to erstwhile MITTAL (P) Ltd.

Total income of All Trade LLP, for the financial year 2010-11

(Before set off of brought forward business losses of erstwhile

company i.e. MITTAL (P) Ltd.) 6,00,000


Assume that all the conditions prescribed in section 47(xiiib) were satisfied by (P) Ltd. at the time

of conversion into LLP:

(P)

(i) Explain whether All Trade LLP can set off and carry forward the business loss of its predecessor

i.e. MITTAL (P) Ltd.?

(ii) State whether any change in partners of All Trade LLP at later date would have any tax

consequence. [5]

(c) CHERRY Limited commenced the business of operating a three star hotel in Tirupati on 1.4.2010.

It furnishes you the following information:

`

(i) Cost of land (acquired in June 2008) 60 lakhs

(ii) Cost of construction of hotel building

Financial year 2008-09 30 lakhs

Financial year 2009-10 150 lakhs

(iii) Plant and Machineries (all new) acquired during financial year 2009-10 30 lakhs

[All the above expenditures were capitalized in the books of the company]

Net profit before depreciation for the financial year 2010-11 80 lakhs

Determine the amount eligible for deduction under section 35AD of the Income-tax Act, 1961,

for the assessment year 2011-12. [5]

Answer 3. (a)

(i) Yes. Since his total turnover for the F. Y. 2010-11 is below ` 60 lakhs, he is eligible to opt for

presumptive taxation scheme under section 44AD in respect of his retail trade business.

(ii) His income from retail trade, applying the presumptive tax provisions under section 44AD, would be

` 4,68,000, being 8% of ` 58,50,000.

(iii) In case he does not opt for the presumptive taxation scheme under section 44AD, and claims that

his income is ` 2,90,000 (which is lower than the presumptive business income of ` 4,68,000), he

has to maintain books of account as required under section 44AA(2) and also get them audited and

furnish a report of such audit under section 44AB, since his total income exceeds the basic exemption

limit of ` 1,60,000.

(iv) In case he opts for the presumptive taxation scheme under section 44AD, the due date would be

31st July, 2011.

In case he does not opt for the presumptive taxation scheme and claims that his income is ` 2,90,000 as

per books of account, then he has two options. If he chooses to file return without audit, the due date is

31st July 2011. If he chooses to get his books audited u/s 44AB then due date is 30th September, 2011.

Answer 3. (b)

(i) Sub-section (6A), inserted by the Finance Act, 2010 in section 72A, provides that where a private

company is succeeded by a LLP fulfilling the conditions laid down in the proviso to section 47(xiiib),

then, notwithstanding anything contained in any other provision of the Income-tax Act, 1961, the


accumulated loss and unabsorbed depreciation of the predecessor company shall be deemed to be

the loss or allowance for depreciation of the successor LLP for the purpose of the previous year in

which the business reorganisation was effected and other provisions of the Act relating to set-off

and carry forward of losses and depreciation allowance shall apply accordingly.

Therefore, All Trade LLP can carry forward and set-off the business loss of ` 7 lakh of erstwhile.

Mittal (P) Ltd. against its business income for the F. Y. 2010-11. The unabsorbed business loss will be

carried forward to the next year.

(ii) Section 47(xiiib) requires that the shareholders of the company become partners of the LLP in the

same proportion as their shareholding in the company. Further, the erstwhile shareholders of the

company should continue to be entitled to receive at least 50% of the profits of the LLP for a period

of 5 years from the date of conversion. If the entity fails to fulfil this condition, the benefit of set-off

of business loss availed by the LLP would be deemed to be the profits and gains of the LLP chargeable

to tax in the previous year in which the LLP fails to fulfil the condition.

Answer 3. (c)

Under section 35AD, 100% of the capital expenditure incurred during the previous year, wholly and

exclusively for the specified business, which includes the business of building and operating a hotel of twostar

or above category anywhere in India which commences its operations on or after 1.4.2010, would be

allowed as deduction from the business income. However, expenditure incurred on acquisition of any land,

goodwill or financial instrument would not be eligible for deduction.

Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to

commencement of operation would be allowed as deduction during the previous year in which the assessee

commences operation of his specified business. A condition has been inserted that such amount incurred

prior to commencement should be capitalized in the books of account of the assessee on the date of

commencement of its operations.

Accordingly, the deduction under section 35AD for the A. Y. 2011-12 in the case of Cherry Ltd. would be

calculated as follows, assuming that the expenditures were capitalised in the books of the company on

1.4.2010, being the date of commencement of operations

Particulars ` (in lakhs)

Cost of land (not eligible for deduction under section 35AD) Nil

Cost of construction of hotel building (` 30 Iakhs + ` 150 lakhs) 180

Cost of plant and machinery 30

Deduction under section 35AD 210

Note :

For A. Y. 2011-12, the loss from specified business of operating a three star hotel would bet ` 130 lakhs (i.e.

` 210 lakhs - 80 lakhs). As per section 73A, any loss computed in respect of the specified business referred to

in section 35AD shall be set off only against profits and gains, if any, of any other specified business. The

unabsorbed loss, if any, will be carried forward for set off against profits and gains of any specified business

in the following assessment year.


Q. 4. (a) BIRLA Ltd., a cement manufacturing company, entered into an agreement with a supplier for

purchase of additional cement plant. One of the conditions in the agreement was that if the

supplier failed to supply the machinery within the stipulated time, the company would be

compensated at 5% of the price of the respective portion of the machinery without proof of

actual loss. The company received ` 8.50 lakhs from the supplier by way of liquidated damages

on account of his failure to supply the machinery within the stipulated time. What is the nature

of liquidated damages received by BIRLA Ltd. from the supplier of plant for failure to supply

machinery to the company within the stipulated time-a capital receipt or a revenue receipt? [5]

(b) A public charitable trust, created under a trust deed for providing relief to poor, registered under

section 12A, furnishes the following particulars of its receipts during the year ended 31st March,

2011:

` in lakh

(i) Income from properties held by trust (net) 12

(ii) Income (net) from business (incidental to main objects) 25

(iii) Voluntary contributions from public 14

(including the corpus donation of ` 4 lakh)

The trust applied ` 15 lakhs towards activities undertaken for the benefit of street urchins and

Below Poverty Line (BPL) families during the year. The trust has also paid ` 18 lakh towards

repayment of a loan taken a year back for the purpose of construction of a vocational training

centre for the benefit of training of youth from BPL families.

Determine the Taxable Income, if any, of the trust for the assessment year 2011-12. [5]

(c) During the financial year 2010-11, the following payments/expenditures were made/incurred by

Mr. ATUL GUPTA, a resident individual (whose turmover during the year ended 31.3.2010 was

` 39 lakhs).

(i) Interest of ` 12,000 was paid to P C T & Co., a resident partnership firm, without deduction

of tax at source;

(ii) Interest of ` 4,000 was paid as interest to Mr. PULKIT a non-resident, without deduction of

tax at source;

(iii) ` 3,00,000 was paid as salary to a resident individual without deduction of tax at source;

(iv) He had sold goods worth ` 5 lakhs to Mr. SANCHIT. He gave Mr. SANCHIT a cash discount of

` 12,000 later. Commission of ` 15,000 was paid to Mr. Vidyasagar on 2.7.2010. In none of

these transactions, tax was deducted at source.

Briefly discuss whether any disallowance arises under the provisions of section 40(a)(i)/40(a)(ia)

of the Income. tax Act, 1961. [5]

Answer 4. (a)

This issue came up before the Apex Court in CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422.

The Apex Court affirmed the decision of the Gujarat High Court holding that the damages were directly and

intimately linked with the procurement of a capital asset i.e., the cement plant, which lead to delay in


coming into existence of the profit-making apparatus. It was not a receipt in the course of profit earning

process. Therefore, the amount received by the assessee towards compensation for sterilization of the

profit earning source, not in the ordinary course of business, is a capital receipt in the hands of the assessee.

Therefore. in this case, the liquidated damages of ` 8.50 lakhs received by Birla Ltd., from the supplier of

plant for failure to supply machinery to the company within the stipulated time is a capital receipt.

Answer 4. (b)

Computation of total income of the trust for the A. Y. 2011-12

Particulars `

Income from properties held by trust 12,00,000

Income from business incidental to the main objects of the trust 25,00,000

Voluntary contribution other than corpus donation (Note 1) 10,00,000 47,00,000

Less : 15% of income accumulated or set apart under section 11(1)(a) 7,05,000

39,95,000

Less : Amount applied for charitable purposes

Activities for the benefit of street urchins and BPL families 15,00,000

Repayment of loan taken for construction of vocational training

centre (Note 2) 18,00,000 33,00,000

Taxable Income 6,95,000

Notes :

(1) Section 11(1)(d) excludes from the total income of the person, any income in the form of voluntary

contributions made with a specific direction that they shall form part of the corpus of the trust or

institution.

(2) In CIT vs. Janmabhumi Press Trust (2000) 242 ITR 457, the Karnataka High Court held that where a

debt is incurred for the purpose of the trust, the repayment of the debt would amount to an

application of the income for the purpose of the trust Therefore, repayment of loan taken for

construction of the vocational training centre for the benefit of training of youth from BPL families

is to be considered as application for charitable purpose.

Answer 4. (c)

Disallowance under section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961 is attracted where the assessee

fails to deduct tax at source as is required under the Act, or having deducted tax at source, fails to remit the

same to the credit of the Central Government within the stipulated time limit.

The assessee is a resident individual, who was not subject to tax audit during the immediately preceding

previous year i.e., P. Y. 2009-10 (as his turnover is less than ` 40 lakh in that year) and the TDS obligations

have to be considered bearing this in mind.

(i) The obligation to deduct tax source from interest paid to a resident arises under section 194A in the

case of an individual, only where he was subject to tax audit under section 44AB in the immediately

preceding previous year, i.e.. P. Y. 2009-10. From the data given. it is clear that he was not subject to

tax audit under- section 44AB in the P. Y. 2009-10. Hence. disallowance under section 40(a)(ia) is not

attracted in this case.


(ii) In the case of interest paid to a non-resident, there is obligation to deduct tax at source under

section 195, hence non-deduction of tax at source will attract disallowance under section 40(a)(i).

(iii) Disallowance under section 40(a)(ia) is not attracted for failure to deduct tax at source under section

192 from salaries.

(iv) The obligation to deduct tax at source under section 194-H from commission paid in excess of ` 5,000

w.e.f. 1.7.2010 to a resident arises in the case of an individual, only where he was subject to tax

audit under section 44AB in the immediately preceding previous year. From the data given, it is

clear that he was not subject to tax audit under section 44AB in the P. Y. 2009-10. Hence, there is no

obligation to deduct tax at source under section 194H during the P. Y. 2010-11. Therefore, disallowance

under section 40(a)(ia) is not attracted in this case.

Q. 5. (a) The following are the details relating to Mr. SUNIL a resident Indian, aged 57, relating to the year

ended 31.3.2011:

`

Income from salaries 2,20,000

Loss from house property 1,90,000

Loss from cloth business 2,40,000

Income from speculation business 30,000

Loss from specified business covered by section 35AD 20,000

Long-term capital gains from sale of urban land 2,50,000

Long-term capital loss from sale of listed shares in recognized 1,10,000

stock exchange (STT paid)

Loss from card games 32,000

Income from betting 45,000

Life Insurance Premium paid 1,20,000

Compute the total income and show the items eligible for carry forward. [8]

(b) NIKITA Pvt. Ltd. is converted into NIKITA LLP on 1.1.2011. The following particulars are available

to you:

`

(i) WDV of land as on 1.4.2010 5,00,000

(ii) WDV of machinery as on 1.4.2010 3,30,000

(iii) Patents acquired on 1.6.2010 3,00,000

(iv) Building acquired on 12.3.2009 for which deduction was

allowed under section 35AD 7,00,000

(v) Above building was revalued as on the date of conversion into LLP as 12,00,000

(vi) Unabsorbed business loss as on 1.4.2010 (A. Y. 2007-08) 9,00,000

Though the conversion into LLP took place on 1.1.2011, there was disruption of business and the

assets were put in to use by the LLP only from 1st March, 2011 onwards.


The company earned profits of ` 8 lakhs prior to computation of depreciation.

Assuming that the necessary conditions laid down in section 47(xiiib) of the Income-tax Act,

1961 have been complied with, explain the tax treatment of the above in the hands of the LLP.

[7]

Note : WDV of land as on 1.4.2010 may be read as Cost of land.

Answer 5. (a)

Computation of total income of Mr. Sunil for the A. Y. 2011-12

Particulars ` `

Salaries

Income from salaries 2,20,000

Less : Loss from house property 1,90,000

30,000

Profits and gains of business or profession

Income from speculation business 30,000

Less : Loss from cloth business set off 30,000 Nil

Capital gains

Long-term capital gains from sale of urban land 2,50,000

Less : Loss from cloth business set off 2,10,000 40,000

Income from other sources

Income from betting 45 ,000

Gross total income 1,15,000

Less : Deduction under section 80C (life insurance premium paid) 30,000

Total income 85,000

Losses to be carried forward `

(1) Loss from cloth business (2,40,000-30,000-2,10,000) Nil

(2) Loss from specified business covered by section 35AD 20,000

Notes :

(i) Long-term capital gains from sale of listed shares in a recognized stock exchange is exempt under

section 10(38). Loss from an exempt source cannot be set off against profits from a taxable source.

Therefore, long-term capital loss on sale of listed shares cannot be set-off against long-term capital

gains from sale of urban land.

(ii) Loss from specified business covered by section 35AD can be set-off only against profits and gains of

any other specified business. Therefore, such loss cannot be set off against any other income. The

unabsorbed loss has to be carried forward for set-off against profits and gains of any specified business

in the following year.

(iii) Business loss cannot be set off against salary income. However, the balance business loss of ` 2,10,000

( ` 2,40,000 - 30,000 set-off against income from speculation business) can be set-off against longterm

capital gains of ` 2,50,000 from sale of urban land. Consequently, the taxable long-term capital

gains would be ` 40,000.


(iv) Loss from card games can neither be set off against any other income, nor can it be carried forward.

(v) For providing deduction under Chapter VIA, gross total income has to be reduced by the amount of

long-term capital gains and casual income. Therefore, the deduction under section 80C in respect of

life insurance premium paid has to be restricted to ` 30,000 [i.e., Gross Total Income of ` 1,15,000

- ` 40,000 (LTCG) - ` 45,000 (Casual income)].

(vi) Income from betting is chargeable at a flat rate of 30% under section 115BB and no expenditure or

allowance can be allowed as deduction from such income, nor can any loss be set-off against such

income.

Answer 5. (b)

Tax treatment of depreciation and unabsorbed business loss of a private company on its conversion into

a LLP.

The LLP would be allowed to carry forward and set-off the business loss and unabsorbed depreciation of

the predecessor company [Section 72A(6A)].

1. Depreciation

The aggregate depreciation allowable to the predecessor company and successor LLP shall not exceed,

in any previous year, the depreciation calculated at the prescribed rates as if the conversion had not

taken place. Such depreciation shall be apportioned between the predecessor company and the

successor LLP in the ratio of the number of days for which the assets were used by them [Section

32(1)].

Therefore, depreciation has to be first calculated as if the conversion had not taken place and then

apportioned between the company and the LLP in the ratio of the number of days for which the

assets were used by them.

Amount Dep. Rate Dep. Amount

` ` `

Block I Machinery 3,30,000 15% 49,500

Block II Patents 3,00,000 25% 75,000

1,24,500

Allocation of depreciation

Depreciation on machinery and patents have to be apportioned between the company and the LLP in

the ratio of the number of days for which the assets were used by them. Since patents were acquired

only on 1.6.2010, it could have been used by the company for 214 days only. Therefore, the depreciation

on assets has to be allocated between the company and LLP as follows -

Company LLP

Asset Total depreciation No. of days Depreciation No. of days Depreciation

for the year of usage of usage

Machinery 49,500 275 44,485 31 5,015

Patents 75,000 214 65,510 31 9,490

1,24,500 1,09,995 14,505

Therefore, depreciation to be allowed in the hands of the company is ` 1,09,995 and depreciation to

be allowed in the hands of the LLP is ` 14,505.


2. Unabsorbed business loss to be carried forward by the LLP.

Particulars `

Profits of the company before depreciation 8,00,000

Less : Current year depreciation 1,09,995

Business income of the company after depreciation 6,90,005

Brought forward business loss 9,00,000

Unabsorbed business loss as on 31 .12.2010 to be carded forward by the LLP 2,09,995

3. Actual cost of assets to th the LLP

(1) The actual cost of the block of assets in case of the LLP shall be the WDV of the block of assets

as in the case of the company on the date of conversion. The WDV as on 1.1.2011 for Machinery

and Patents are ` 2,85,515 and ` 2,34,490, respectively, which would be the actual cost in the

case of the LLP.

WDV of Machinery as on 1.1.2011 = ` 3,30,000 - 44,485 = ` 2,85,515

WDV of Patents as on 1.1.2011 = ` 3,00,000 65,510 = ` 2,34,490

(2) Land is not a depreciable asset. The cost of acquisition of land to the LLP would be the cost for

which the company acquired it, as increased by the cost of improvement.

In respect of the building, deduction had been allowed in the earlier year under Section 35AD,

there is no question of depreciation during the current fiancial year.

Q. 6. (a) VERTIKA Limited has two units - one engaged in manufacture of computer hardware and the

other involved in developling software. As a restructuring drive, the compamy has decided to sell

its software unit as a going concern by way of slump sale for ` 385 lakh to a new company called

SUMEDHA Limited, in which it holds 74% equity shares.

The balance sheet of VERTIKA Limited as on 31st March, 2011 being the date on which software

unit has been transferred, is given hereunder

Balance Sheet as on 31.3.2011

Liabilities ` in lakh Assets ` in lakh

Paid up Share Capital 300 Fixed Assets

General Reserve 150 Hardware unit 170

Share Premium 50 Software unit 200

Revaluation Reserve 120 Debtors

Current Liabilities Hareware unit 140

Hardware unit 40 Software unit 110

Software unit 90 Inventories

Hareware unit 95

Software unit 35

750 750


Following additional information are furnished by the management.

(i) The Software unit is in existence since May, 2007.

(ii) Fixed assets of software unit includes land which was purchased at ` 40 lakh in the year

2004 and revalued at ` 60 lakh as on March 31, 2011.

(iii) Fixed assets of software unit mirrored at ` 140 lakh (` 200 lakh minus land value ` 60 lakh)

is written down value of depreciable assets as per books of account. However, the written

down value of these assets under section 43(6) of the Income Tax Act is ` 90 lakh.

Ascertain the tax liability, which would arise from slump sale to SUMEDHA Limited. [8]

(b) Mr. AGGARWAL purchased a house property on 14th April, 1979 for ` 1,05,000. He entered into

an agreement with Mr. B for the sale of house on 15th September, 1982 and received an advance

of ` 25,000. However, since Mr. B did not remit the balance amount, Mr. AGGARWAL forfeited

the advance.

Later on, he gifted the house property to his friend Mr. A on 15th June, 1986.

Following renovations were carried out by Mr. AGGARWAL and Mr. A to the house property:

Amount (`)

By Mr. AGGARWAL during FY 1979-80 10,000

By Mr. AGGARWAL during FY 1983-84 50,000

By Mr. A during FY 1993-94 1,90,000

The fair market value of the property as on 1.4. 1981 is ` 1,50,000.

Mr. A entered into an agreement with Mr. C for sale of the house on 1st June, 1995 and received

an advance of ` 80,000. The said amount was forfeited by Mr. A since Mr. C could not fulfil the

terms of the agreement.

Finally, the house was sold by Mr. A to Mr. Sanjay on 2nd January, 2011 for a consideration of

` 12,00,000.

Compute the capital gains chargeable to tax in the hands of Mr. A for the assessment year 2011-

12. Cost inflation indices are as under :

Financial Year Cost Inflation Index

1981-82 100

1983-84 116

1986-87 140

1993-94 244

2010-11 711 [7]

Answer 6. (a)

As per section 50B, any profits and gains arising from the slump sale effected in the previous year shall be

chargeable to income-tax as capital gains arising from the transfer of capital assets and shall be deemed to

be the income of the previous year in which the transfer took place.


If the assessee owned and held the undertaking transferred under slump sale for more than 36 months

before slump sale, the capital gain shall be deemed to be long-term capital gain. Indexation benefit is not

available in case of slump sale as per section 50B(2).

Ascertainment of tax liability from slump sale of software unit

Particulars (` in lakh)

Sale consideration for slump sale of Software Unit 385

Less : Cost of acquisition being the net worth of Software Unit 185

Long term capital gains arising on slump sale 200

(The capital gains is long-term as the Software Unit is held

for more than 36 months)

Tax liability on LTCG

Under section 112 @ 20% on ` 200 lakhs 40.00

Add : Surcharge 7% 3.00

43.00

Add : Education cess @ 2% and SHEC @ 1% i.e., totalling 3% 1.29

44.29

Working Note :

Computation of net worth of Software Unit ( ` in lakh)

(1) Book value of non-depreciable assets

(i) Land (Revaluation not to be considered) 40

(ii) Debtors 110

(iii) Inventories 35

(2) Written down value of depreciable assets under section 43(6) (Note 1) 90

Aggregate value of total assets 275

Less : Current liabilities of software unit 90

Net worth of software unit 185

Note 1 : For computing net worth, the aggregate value of total assets in the case of depreciable assets shall

be the written down value of the block of assets as per section 43(6).

Answer 6. (b)

Computation of capital gains chargeable to tax in the hands of Mr. A

Particulars Amount (`)

Sale consideration 12,00,000

Less : Indexed cost of acquisition (Note 1) 3,55,500

8,44,500

Less : Indexed cost of improvement (Note 2) 8,60,114

Long term capital loss (15,614)


Note 1.

Indexed cost of acquisition is determined as under:

Cost to the previous owner i.e. Mr. Aggarwal is ` 1,05,000

Fair Market Value on 1st April, 1981 is ` 1,50,000

Cost to the previous owner or FMV on 1st April, 1981, whichever is more, is to be

taken as cost of acquisition of Mr. A 1,50,000

Less : Advance money forfeited by Mr. A (as per section 51)

(Note : Advance forfeited by Mr. Aggarwal the previous owner,

should, however, not be deducted) 80,000

Cost of acquisition 70,000

Indexed cost of acquisition (70,000 711/140) 3,55,500

140 is the Cost Inflation Index for F. Y. 1986-87, being the first year in which

property is held by Mr. A and 711 is the Cost Inflation Index for F. Y. 2010-11,

being the year in which the property is sold.

Note 2.

Indexed cost of Improvement is determined as under:

Expenditure incurred before 1st April, 1981 should not be considered NIL

Expenditure incurred on or after 1st April, 1981

During 1983-84 Indexed cost of Improvement [50,000 711/116] 3,06,466

During 1993-94 Indexed cost of Improvement [1,90,000 711/244] 5,53,648

Total indexed cost of improvement 8,60,114

Q. 7. (a) ANJU, an individual resident retired employee of the All India Radio aged 60 years is a wellknown

dramatist deriving income of ` 1,10,000 from theatrical works played abroad. Tax of

` 11,000 was deducted in the country where the plays were performed. India does not have any

Double Tax Avoidance Agreement under section 90 of the Income-tax Act. 1961, with that country.

Her income in India amounted to ` 5,10,000. In view of tax planning she has deposited ` 70,000

in Public Provident Fund and paid contribution to approved Pension Fund of LIC ` 32,000 along

with subscription to notified long-term infrastructure bonds ` 25,000. She also contributed

` 18,000 to Central Government Health Scheme during the previous year and gave payment of

medical insurance premium of ` 21,000 to insure the health of her father, a non-resident aged 76

years, who is not dependent on her. Compute the tax liability of ANJU for the Assessment year

2011-12. [8]


(b) CHERRY Ltd. is running two industrial undertakings, one in a SEZ (Unit S) and another in a normal

area (Unit N). The brief summarized details for the year ended 31.3.2011 are as under :

(` in lacs)

S N

Domestic turnover 10 100

Export turnover 120 Nil

Gross profit 20 10

Less : Expenses and depreciation 7 6

Profits derived from the unit 13 4

The brought forward business loss pertaining to Unit N is ` 2 lacs. Briefly compute the business

income of the assessee. [7]

Answer 7. (a)

Computation of tax liability of Anju for the A. Y. 2011-12

Particulars (Amount in `)

Indian Income 5,10,000

Foreign Income 1,10,000

Gross Total Income 6,20,000

Less : Deduction under section 80C

Deposit in PPF 70,000

Under section 80CCC

Contribution to approved Pension Fund of LIC 32,000

1,02,000

Under section 80CCE

The aggregate deduction under section 80C, 80CCC

and 80CCD has to be restricted to ` 1,00,000 1,00,000

Under section 80CCF

Subscription to notified long-term infrastructure bonds.

` 25.000, restricted to ` 20,000, being the maximum 20,000

deduction allowable under section 80CCF

Under section 80D

Contribution to Central Government Health Scheme ` 18,000.

As per the Finance Act, 2010, this contribution is also allowable 15,000

as deduction under section 80D, but restricted to ` 15,000

Medical insurance premium of ` 21,000 paid for father aged 76 years.

Since the father is a non-resident in India, he will not be entitled for the

higher deduction of ` 20,000 eligible for a senior citizen, who is resident

in India. Hence, the deduction will be restricted to maximum of ` 15,000. 15,000 1,50,000

Total Income 4,70,000


Tax on Total Income ` `

Income-tax {(` 4,70,000 ` 1,90,000) 10%} 28,000

Add : Education cess @ 2% 560

Add : SHEC @ 1% 280 28,840

Average rate of tax in India

(i.e. 28,840/4,70,000 100) 6.14%

Average rate of tax in foreign country 10%

(i.e. 11,000/1,10,000 100)

Rebate under section 91 on ` 1,10,000 @ 6.14%

(lower of average Indian-tax rate or average foreign 6,754

tax rate)

Tax payable in India ( ` 28,840 ` 6,754) 22,086

Answer 7. (b)

Computation of business income of CHERRY Ltd.

Particulars ` in lacs

Total profit dervied from Units S & N ( ` 13 lacs + ` 4 lacs) 17

Less : Exemption under section 10AA [See Working Note below) 12

5

Less : Brought forward business loss 2

3

Working Note :

Computation of exemption under section 10AA in respect of Unit S located in a SEZ ` in lacs

Domestic turnover of Unit S 10

Export turnover of Unit S 120

Total turnover of Unit S 130

Profit derived from Unit S 13

Exemption under section 10AA

Profit of Unit S = = 130

13 120 Total turnover of Unit S

Export turnover of Unit S 12

Note :

100% of the profit derived from export of articles or things or from services is eligible for deduction under

section 10AA, assuming that F.Y.2010-11 falls within the first five year period commencing from the year of

manufacture or production of articles or things or provision of services by the Unit in SEZ.


Q. 8. (a) Mrs. MITTAL furnishes the following particulars for the computation of her wealth-tax liability for

the assess year 2011-12.

(1) She owns two residential house properties, valuing ` 52 lakhs and ` 55 lakhs.

(2) She is one of the partners in the business with her husband. The value of her interest in

assets of the firm as at 31st March, 2011 is ` 15 lakhs. The said business is conducted in one

of the house properties owned by Mrs. MITTAL.

(3) She has two motor cars one Indian car valued at ` 8 lakhs and an imported car valued at

` 19 lakhs.

(4) She has invested ` 5,00,000 in a bank deposit for five years to meet the future expense of

children on their education.

(5) She has signed agreement to sell for purchase of new residential house property of ` 40

lakhs and has made advance payment of ` 20 lakhs on 15th March, 2011 and has taken

possession. However, the sale deed has not been executed till 31st March, 2011. She has

taken loan of ` 20,00,000 from bank for purchase of said property.

(6) She has cash balance of ` 80,000.

Compute the wealth tax payable by Mrs. MITTAL for the assessment year 2011-12. [8]

(b) On 21.3.2010, Mr. PIYUSH gifted to his wife Mrs. PRARTHANA 200 listed shares, which had been

bought by him on 19.4.2009 at ` 2,000 per shares. On 1.6.2010 bonus shares were allotted in the

ratio of 1:1. All these shares were sold by Mrs. PRARTHANA as under.

Date of Manner of sale No. of Net sales

sale shares value (`)

21.5.2010 Sold in recognized stock exchange, STT paid 100 2,20,000

21.7.2010 Private sale to an outsider All bonus 1,25,000

shares

28.2.2011 Private sale to her friend Mrs. NIKITA 100 1,70,000

(Market value on this date was ` 2,10,000

Briefly state the income-tax consequences in respect of the sale of the shares by Mrs. PRARTHANA

showing clearly the person in whose hands the same is chargeable, the quantum and the head of

income in respect of the above transactions. Detailed computation of total income is NOT required.

Net sales value represents the amount credited after all taxes, levies, brokerage, etc., and the

same may be adopted for computing the capital gains.

Cost inflation index for the F. Y. 2010-11 is 711 and for the F. Y. 2009-10 is 632. [7]


Answer 8. (a)

Computation of wealth-tax payable by Mrs. MITTAL for A. Y. 2011-12

Asset Amount in ` Reason

House Property 1 Nil A house used exclusively for residential purpose is treated as

an asset under section 2(ea). but the same is exempt under

section 5(vi).

House Property 2 Nil Building owned by a partner but used in firms business is

deemed to be used by the partner for her business purposes

and is, hence, not an asset chargeable to tax under section 2(ea).

Value of interest in 15,00,000 Included in the net wealth of Mrs. MITTAL by virtue of section

assets of the firm 4(1)(b).

It has been assumed that the assets are those covered under

section 2(ea).

Motor Cars 27,00,000 Motor cars, whether indigenous or imported, are assets

chargeable to wealth-tax under section 2(ea).

Bank Deposit Nil Not an asset under section 2(ea) and hence, not chargeable to

tax under the Wealth-tax Act.

House Property 3 40,00,000 Since the possession of the house property is taken, it is deemed

as an asset and is chargeable to wealth-tax. It may be noted

that only one house property is exempt under section 5(vi) and

this exemption has already been availed in respect of House

Property 1.

Cash balance 30,000 For an individual, cash in hand in excess of ` 50,000 shall be

chargeable to wealth tax (` 80,000 50,000)

Gross Wealth 82,30,000

Less : Loan 20,00,000 Money borrowed by the assessee for purchase of House

borrowed from Property 3 is deductible under section 2(m), since the value of

Bank House Property 3 is included in gross wealth.

New Wealth 62,30,000

Wealth-tax payable by Mrs. Mittal will be ` 32,300 i.e. 1% of ` 32,30,000 (i.e., ` 62,30,000 - ` 30,00,000).

Answer 8. (b)

Where an asset has been transferred by an individual to his spouse otherwise than for adequate

consideration, the income arising from the sale of the said asset by the spouse will be clubbed in the hands

of the individual.

Where there is any accretion to the asset transferred, income arising to the transferee from such accretion

will not be clubbed. Hence, the profit from sale of bonus shares allotted to Mrs. PRARTHANA will be

chargeable to tax in the hands of Mrs. PRARTHANA.


Therefore, the capital gains arising from the sale of the original shares has to be included in the hands of

Mr. Piyush, and the capital gains arising from the sale of bonus shares would be taxable in the hands of

Mrs. PRARTHANA.

Where an asset received by way of gift has been sold, the period of holding of the previous owner should

be considered for determining whether the capital gain is long term or short term. The cost to the previous

owner has to be taken as the cost of acquisition.

Income/loss to be clubbed in the hands of Mr. PIYUSH

Long-term capital gains/loss

Particulars `

(i) 100 shares sold on 21.5.2010 in a recognized stock exchange,

STT paid. Long-term capital gains on sale of such shares is exempt

under section10(38) Nil

(ii) Shares sold to a friend on 28.2.2011

Sale consideration 1 ,70.000

Less : Indexed cost of acquisition of 100 shares ( ` 2,000 100 711 /632) 2,25,000

Long term capital loss to be included in the hands of Mr. PIYUSH (55,000)

Income taxable in the hands of Mrs. PRARTHANA

Short-term capital gains (on sale of 100 bonus shares)

Particulars `

Sale consideration 1,25,000

Less : Cost of acquisition of bonus shares Nil

Short-term capital gains 1,25,000

Taxability in the hands of Mrs. NIKITA under the head Income from other sources

Mrs. NIKITA has received shares from her friend, Mrs. PRARTHANA for inadequate consideration. Even

though shares fall within the definition of property under section 56(2)(vii), the provisions of section

56(2)(vii) would not be attracted in the hands of Mrs. NIKITA, since the difference between the fair market

value of shares and actual sale consideration does not exceed ` 50,000.

INTERMEDIATE EXAMINATION

GROUP I

(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS

DECEMBER 2011

Paper-5 : FINANCIAL ACCOUNTING

Time Allowed : 3 Hours Full Marks : 100

The figures in the margin on the right side indicate full marks.

Answer Question No. 1, which is compulsory and any five questions from the rest.

Q. 1. (a) From the four alternative answers given against each indicate the correct answer : [110=10]

(i) From the four alternative answers given against each indicate the correct answer :

(A) Periodic inventory system

(B) Perpetual inventory system

(C) Both of (A) and (B)

(D) None of (A) and (B)

(ii) The cost of a Fixed Assets of a business has to be written off over its

(A) Natural Life

(B) Accounting Life

(C) Physical Life

(D) Estimated Economic Life

(iii) Shortworkings can be recouped out of

(A) Minimum rent

(B) Excess of actual Royalty over minimum rent

(C) Excess of minimum rent over actual Royalty

(D) Profit and Loss Account

2 Suggested Answers to Question FAC

(iv) In Hire Purchase system cash price plus interest is known as

(A) Capital value of asset

(B) Book value of asset

(C) Hire purchase price of asset

(D) Hire purchase charges

(v) In partnership when a new Partner brings his share of Goodwill in cash, then the amount of

such Goodwill will be credited to Partners capitals as per the following ratio :

(A) Old Profit sharing ratio

(B) Sacrifice ratio

(C) Gain ratio

(D) None of the above

(vi) The Receipts and Payments Account generally begins with

(A) Credit Balance

(B) Debit Balance

(C) Both Debit and Credit Balance


(vii) Which of the following is a category of Share Capital of a company?

(A) Authorised Capital

(B) Issued Capital

(C) Called up Capital

(D) All of the above

(viii) In case of a Banking Company, entries in the Personal Ledger are made from

(A) Day Book

(B) Vouchers

(C) Rough Register


(ix) When Sales = ` 1,80,000, Purchase = ` 1,60,000, Opening Stock = ` 34,000 and rate of the

Gross Profit is 20% on cost, the Closing Stock would be

(A) ` 50,000

(B) ` 44,000

(C) ` 46,000


Suggested Answers to Question FAC 3

(x) Goods are transferred from Department X to Department Y at a price so as to include a profit

of 33.33% on cost. If the value of closing stock of Department Y is ` 18,000, then the amount

of stock reserve on closing stock will be

(A) ` 6,000

(B) ` 4,500

(C) ` 9,000


(b) State whether the following statements are TRUE (T) or FALSE (F) : [15=5]

(i) Original cost minus scrap value is the depreciable value of asset.

(ii) Royalty is a Revenue Expenditure to Lessor.

(iii) According to AS-2 Inventories are held for sale in normal course of business.

(iv) Income and Expenditure Account is prepared by adopting accrual principle of accounting.

(v) Advance payment of Tax is shown in the Liabilities side of Balance Sheet.

(c) Fill in the blanks in the following sentences using the appropriate word from the alternatives

indicated : [15=5]

(i) Depreciation is an item of . (gross profit/expenditure)

(ii) Compensation paid to employees who are retrenched is expenditure (Capital/

Revenue)

(iii) Receipts and Payment Account is a Account is nature. (Real/Nominal)

(iv) Unclaimed Dividend appears under the head of in the Balance Sheet of a Company

(Deferred Expenditure/Liabilities)

(v) According to Insurance Act, the provision required to be made against unexpired risk in fire

insurance business is per cent. (30/50)

(d) Match the following : [15=5]

(i) AS6 (I) Borrowing costs

(ii) AS13 (II) Consolidated Financial Statements

(iii) AS16 (III) Depreciation Accounting

(iv) AS19 (IV) Accounting for Investment

(v) AS21 (V) Leases

(VI) No matching statements found

Answer 1. (a)

(i) (A) Periodic inventory system

(ii) (D) Estimated Economic Life

(iii) (B) Excess of actual Royalty over minimum rent

(iv) (C) Hire purchase price of asset


(v) (B) Sacrifice ratio

(vi) (B) Debit Balance

(vii) (D) All of the above

(viii) (B) Voucher

(ix) (B) ` 44,000

(x) (B) ` 4,500

Answer 1. (b)

(i) (T)

(ii) (F)

(iii) (T)

(iv) (T)

(v) (F)

Answer 1. (c)

(i) Expenditure

(ii) Revenue

(iii) Real

(iv) Liabilities

(v) 50

Answer 1. (d)

(i) AS-6 (III)

(ii) AS-13 (IV)

(iii) AS-16 (I)

(iv) AS-19 (V)

(v) AS-21 (II)

Q. 2. (a) For the year ending 31st December, 2011, the Sales, Purchases, Opening Stock and Closing Stock

of a Trader was ` 5,00,000, ` 3,80,000, ` 65,000 and ` 52,000 respectively. Some goods were

destroyed by fire (without realization of any value) during the year. If the Trader earned Gross

Profit @ 25% on Sales for the year, calculate the value of goods destroyed by fire. [3]

(b) On 1st April, 2009, Nath Ltd. purchased a second-hand Machine for ` 1,20,000 and spent ` 30,000

on its renewal. On 1st October, 2010, ` 3,000 was spent on repairs. On 30th September, 2011 the

Machine was sold for ` 75,000. Depreciation is to be provided @ 20 per cent per annum according

to written down value method.


Prepare Machinery Account reflecting all these transactions assuming Books are closed on 31st

March each year. [5]

(c) A and B are currently partners in a firm sharing Profit/Loss in the ratio of 4 : 3. A new partner C

is admitted and after his admission new profit sharing ratio between A, B and C becomes 5 : 3 :

2. What will be the sacrifice ratio of A and B after admission of C? [2]

(d) What do you understand by gradual realisation of assets and piecemeal distribution? State the

priority that should be followed in piece meal distribution. [5]

Answer 2. (a)

Calculation of value of goods destroyed by fire :

Dr. Memorundum Trading A/c Cr.

Particulars ` Particulars `

To Opening stock 65,000 By Sales 5,00,000

To Purchases 3,80,000 By Goods destroyed by fire (bal. fig.) 18,000

To Gross Profit (25% of Sales) 1,25,000 By Closing stock 52,000

5,70,000 5,70,000

Goods destroyed by Fire = ` 18,000

Answer 2. (b)

Ledger of Nath Limited

Dr. Machinery A/c Cr.


1.4.09 To Bank A/c 1,20,000 31.3.10 By Depreciation 30,000

Bank A/c (Exp.) 30,000 By Balance c/d 1,20,000

1,50,000 1,50,000

1.4.10 To Balance b/d 1,20,000 31.3.11 By Depreciation 24,000

By Balance c/d 96,000

1,20,000 1,20,000

1.4.11 To Balance b/d 96,000 30.9.11 By Depreciation 9,600

(@ 20% on ` 96,000

for year)

Bank A/c (Sale) 75,000

P & L A/c (Loss) 11,400

96,000 96,000

Answer 2. (c)

Sacrifice of A = 4/7 5/10 = 40 (35/70) = 5/70

Sacrifice of B = 3/7 3/10 = 30 (21/70) = 9/70

Hence the sacrifice ratio = 5/70 : 9/70 or 5 : 9


Answer 2. (d)

When a partnership is in process of being dissolved, assets are sold gradually one after another to fetch

maximum price. Assets are realized individually and it may need a time period to realize from all the assets.

The partners in such a case may not wish to wait till all the assets are realized. It is universally accepted

practice that an interim distribution is made to the partners for their claim (after paying off all creditors) as

and when cash is available.

Priority of distribution will be as under :

(i) to meet the realization expenses

(ii) to pay off preferential creditors

(iii) to pay off other creditors

(iv) to pay off partners loans

(v) to pay off partners capital

Q. 3. (a) From the following information relating to Evergreen Sports Club, prepare Balance Sheet of the

Club as on 1-1-2010 and on 31-12-2010 : [10]

(i) Assets as on 1-1-2010 `

Club Ground 80,000

Sports Equipment 50,000

Furniture 10,000

(ii) Accrued Subscription as on 1-1-2010 was ` 2,000.

(iii) Creditor for stationery as on 1-1-2010 was ` 1,800.

(iv) Receipts and Payments Account for the year ended 31-12-2010

Dr. Cr.

Receipts Payments

` `

To Balance brought down 8,000 By Salaries 14,000

Subscription received (2009) 1,800 Printing and Stationery 3,500

-do- (2010) 22,000 Fire Insurance 2,200

-do- (2011) 600 Advertisement 3,000

Sales of old Newspaper 500 Furniture 4,000

Rent Received 5,800 Investments 21,000

Entrance Fees 18,000 Balance c/d 9,000

56,700 56,700


Income and Expenditure Account for the year ended 31-12-2010.

Dr. Cr.

Expenditure Income

` `

To Salaries 16,000 By Subscription 24,000

Printing & Stationery 2,000 Entrance Fees 9,000

Advertisement 3,000 Rent 6,000

Audit Fees 800 Sale of old Newspapers 500

Fire Insurance 2,000

Depreciation:

Equipment 7,000

Furniture 1,000

Excess of Income over

Expenditure 7,700

39,500 39,500

(b) A and B are Partners sharing profits in the ratio of 5 : 3. Following is the Balance Sheet of the Firm

on 31-3-2011 : [5]

Balance Sheet as at 31-3-2011

` `

Capital : Drawings

A 80,000 A 5,000

B 20,000 B 3,000

Other Assets 92,000

1,00,000 1,00,000

Profit for the year 2010-11 was ` 16,000 and was divided between the Partners as per agreed

ratio, but interest on capital @ 5% p.a. and on drawings @ 6% was inadvertently omitted.

Interest on drawing may calculated on an average basis for 6 months.

You are required to pass Journal Entry(ies) to make the adjustments in the Capital accounts of A

and B.

Answer 3. (a)

Balance Sheet as at 1.1.2010

Liabilities ` Assets `

Capital Fund (bal. fig.) 1,48,200 Club Ground 80,000

Creditors (for stationery) 1,800 Sports Equipment 50,000

Furniture 10,000

Accrued Subscription 2,000

Cash 8,000

1,50,000 1,50,000



Liabilities ` ` Assets `

Capital Fund 1,48,200 Club Ground 80,000

Entrance Fees 9,000 Sports Equipment 43,000

Surplus 7,700 1,64,900 (` 50,000 ` 7,000)

Advance Subscription 600 Furniture

(` 10,000 + 4,000 Less: Depn. 1,000) 13,000

Liabilities for expenses Investments 21,000

Printing 300 Accrued Subscription

Salaries 2,000 - 2009 ` 200

Audit fees 800 3,100 - 2010 ` 2,000 2,200

Accrued Rent 200

Prepaid Insurance 200

Cash 9,000

1,68,600 1,68,600

Answer 3. (b)

Partner A Partner B

` `

Capital as at 31-3-11 80,000 20,000

Less : Profit credited 10,000 6,000

70,000 14,000

(Figures in `)

Adjustments for : Partner A Partner B

Dr. Cr. Dr. Cr.

Interest on capital @ 5% 3,500 700

Interest on drawings @ 6% 150 90

Profit written back 10,000 6,000

Divisible Profit 7,525 4,515

(16,000 + 240 4,200) = 12,040

Total 10,150 11,025 6,090 5,215

Net (+) 875 () 875

Journal Entry : Dr. Cr.

Partner B A/c Dr. 875

To Partner A A/c 875


Q. 4. (a) Mr. X, a cloth trader of Kolkata opened a Branch at Kanpur on 1-4-2010. The goods were sent by

Head Office to the Branch and invoiced at selling price to the Branch, which is 25% of the cost

price of Head Office. [10]

The following are the particulars relating to the transactions of the Kanpur Branch:

` `

Goods sent to Branch (at cost to H.O.) 4,50,000

Sales Cash 2,10,000

Credit 3,20,000

Cash collected from Debtors 2,85,000

Return from Debtors 10,000

Discount Allowed 8,500

Cash sent to Branchfor Freight 30,000

for Salaries 8,000

for other expenses 12,000 50,000

Spoiled clothes written off at invoice price 10,000

Normal loss estimated at 15,000

Prepare Branch Stock Account, Branch Debtors Account and Branch Adjustment Account showing

the net profit of the Branch.

(b) The following information for the year ended 31st March, 2011 is available for Seva Bank Ltd.:

[5]

` `

Standard Assets 5,50,00,000

Sub-standard Assets 31,50,000

Doubtful Assets but secured

Up to one year 29,00,000

One to three years 17,00,000

More than three years 7,00,000 53,00,000

Loss Assets 21,00,000

You are required to ascertain the amount of provision required to be made by the Bank.


Answer 4. (d)

Dr. Branch Stock Account Cr.


To Goods sent to Branch 5,62,500 By Cash sales 2,10,000

(` 4,50,000 + 25% of ` 4,50,000) Branch Debtors (Cr. Sales) 3,20,000

Branch debtors Account 10,000 Branch adjustment a/c

(Normal Loss) 15,000

Branch adjustment a/c

(Spoiled) 2,000

Profit & Loss A/c (Spoiled) 8,000

Stock shortage 17,500

5,72,500 5,72,500

Dr. Branch Debtors Account Cr.


To Goods sent to Branch 3,20,000 By Cash 2,85,000

Discount 8,500

Branch Stock (return) 10,000

Balance c/d 16,500

3,20,000 3,20,000

Dr. Branch Adjustment Account Cr.


To Branch Stock A/c (spoilage) 2,000 By 25% mark up on goods sent 1,12,500

Stock shortage ( 125

25 of ` 17,500) 3,500

Normal Loss 15,000

Gross Profit c/d 92,000

1,12,500 1,12,500

Dr. Branch Profit Account Cr.


To Freight 30,000 By Gross Profit b/d 92,000

Salaries 8,000

Other expenses 12,000

Spoilage 8,000

Stock Shortage 14,000

Net Profit 20,000

92,000 92,000


Answer 4. (b)

Seva Bank Ltd

Statement showing the amount of provision for the year ending 31st March 2011

Assets Amount Rate of Provision Amount of Provision

(`) (%) (`)

1. Standard Assets 5,50,00,000 0.40 2,20,000

2. Sub-standard 31,50,000 10 3,15,000

3. Doubtful Assets :

Upto on year 29,00,000 20 5,80,000

One to three years 17,00,000 30 5,10,000

More than three years 7,00,000 100 7,00,000

Loss Assets 21,00,000 100 21,00,000

Total amount of required for provision 44,25,000

(Rates of provision as per Master Circular issued by RBI DBOD No. BP. BC. 11/21.04, 048/2005-06 dated

November 4, 2005)

Q. 5. (a) The following balances are appearing in the Books of All Xerox Ltd. on 1-4-2011: [10]

`

Redeemable Preference Share Capital (Shares of ` 10 each) 2,00,000

Calls-in-Arrear 2,000

General Reserve 1,00,000

Share Premium 5,000

The preference shares are fully called up and due for redemption at a premium of 10%. Calls-in-

Arrear are in respect of final call at the rate of ` 4 per share and these shares are held by Mr.

Rahul whose whereabouts are not known.

The Board of Directors decided that 50% of the General Reserve is to be utilized for the purpose

of redemption of redeemable preference share capital and to meet the further requirement of

funds, further 14,500 numbers of equity shares of ` 10 each were issued at a premium of 20%.

The redemption of preference shares were duly carried out and subsequently the company utilized

the balance of Capital Redemption Reserve Account to issue equity shares at ` 10 each as bonus

to shareholders.

You are required to show necessary journal entries in the Books of All Xerox Ltd.

(b) Discuss some important provisions of the Banking Regulation Act, 1949 regarding disposal of

Non-Banking Assets u/s 9 of the Act. [5]


Answer 5. (a)

Book of All Xerox Ltd.

Journal Entries Dr. Cr.

Date Particulars Amount (`) Amount (`)

Redeemable Prefrence Share Capital A/c Dr. 1,95,000

Premium on Redemption A/c Dr. 19,500

To Redeemable Preference Sharholders A/c 2,14,500

(Being 19,500 fully paid Red. Pref. Shares along with premium

Payable on redemption as per Board resolution no. dt. )

General Reserve A/c Dr. 50,000

To Capital Redemption Reserve A/c 50,000

(Being General Reserve transferred)

Bank A/c Dr. 1,74,000

To Equity Shares capital A/c 1,45,000

To Equity Share Premium A/c 29,000

(Being issue of 14,500 Equity shares at a premium)

Share Premium A/c Dr. 19,500

To Premium on Redemption A/c 19,500

(Being premium payable adjusted)

Prefrence Shareholders A/c Dr. 2,14,500

To Bank A/c 2,14,500

(Being amount paid off to Pref. shareholders)

Capital Redemption Reserve A/c Dr. 50,000

To Bonus payable to Shareholders A/c 50,000

(Being Bonus declared and transferred to Capital

Redemption Reserve account)

Bonus payable to Shareholders A/c Dr. 50,000

To Equity Share capital A/c 50,000

(Being amount transferred to Equity Share capital)

Working Note :

`

Nominal Value of shares Redeemed 1,95,000

Less : General Reserve Utilised 50,000

1,45,000


Answer 5. (b)

Notwithstanding anything contained in Section 6 which specifies the various forms of business in which

a Banking company may engage in addition to the business of Banking, no Banking company shall hold

any immovable property howsoever acquired, except such as is required for its own use, for any period

exceeding seven years from the acquisition thereof or from commencement of the Act, whichever is later,

or any extension of such period as in Section provided; and such property shall be disposed of within

such period or extended period, as the the case may be.

Provided that the Banking company may, within the period of seven years as aforesaid; deal or trade in

any such property for the purpose of facilitating the disposal thereof. Provided further that Reserve Bank

may in any particular case extend the aforesaid period of seven years by such period not exceeding five

years, where it is satisfied that such extension would be in the interest of the depositors of the Banking

company.

Q. 6. (a) On April 1, 2008 Chandra Transport Company purchased a mini truck from S. K. Motors on hire

purchase system. The terms were that they would pay ` 1,00,000 down on same date and the

balance was payable in three annual instalments. First instalment amounted to ` 74,000 was

payable on 31-3-2009, second ` 93,000 on 31-3-2010 and third ` 84,000 on 31-3-2011. Interest

is charged @ 12% per annum. Rate of depreciation is 20% on written down value.

You are required to calculate the total cash price and prepare, (i) S. K. Motors Account; and (ii)

Mini-Truck Account in the Books of Chandra Transport Company. [6]

(b) Distinguish between Hire Purchase System and Instalment Payment System. [4]

(c) Give the journal entries to rectify or adjust the following in the books of the Head Office: [5]

(i) Goods purchased by branch ` 7,500 but payment made by Head Office. The Head Office has

wrongly debited this amount to its own purchases account.

(ii) Branch paid ` 6,500 as salary to a visiting Head Office official. The Branch has debited the

amount to salaries account.

(iii) Depreciation ` 11,250 in respect of Branch Shop whose account is kept in Head Office Books.

(iv) Expenses ` 5,600 to be charged to the Branch for work done on its behalf by the Head Office.

(v) Goods sent by the Head Office to Branch ` 25,000 not yet received by the Branch.


Answer 6. (a)

Calculation of Cash Price

Date Particulars Instalment Interest Cash Price

(`) (`) (`)

31-3-11 3rd Instalment 84,000 9,000 75,000

() Interest

112 84,000

12

9,000

Balance of Cash Price 75,000

31-3-10 + 2nd Instalment 93,000 18,000 75,000

1,68,000

() Interest

112 1,68,000

12

18,000

Balance of Cash Price 1,50,000

31-3-09 + 1st Instalment 74,000 24,000 50,000

2,24,000

() Interest

112 2,24,000

12

24,000

Balance of Cash Price 2,00,000

+ Down Payment 1,00,000 1,00,000

Total 3,00,000 3,00,000

Total Cash Price = ` 3,00,000

Ledger of Chandra Transport Co.

Dr. S. K. Motors Account Cr.


1.4.08 To Bank A/c 1,00,000 1.4.08 By Mini Truck A/c 3,00,000

31.3.09 To Bank A/c 74,000 31.3.09 By Interest A/c 24,000

To Balance c/d 1,50,000

3,24,000 3,24,000

31.3.10 To Bank A/c 93,000 1.4.09 By Balance b/d 1,50,000

To Balance c/d 75,000 31.3.09 By Interest A/c 18,000

1,68,000 1,68,000

31.3.11 To Bank A/c 84,000 1.4.10 By Balance b/d 75,000

31.3.11 By Interest A/c 9,000

84,000 84,000


Dr. Mini Truck Account Cr.


1.4.08 To S. K. Motors A/c 3,00,000 31.3.09 By Depreciation A/c 60,000

By Balance c/d 2,40,000

3,00,000 3,00,000

1.4.09 To Balance b/d 2,40,000 31.3.10 By Depreciation A/c 48,000


2,40,000 2,40,000

1.4.10 To Balance b/d 1,92,000 31.3.11 By Depreciation A/c 38,400


1,92,000 1,92,000

Answer 6. (b)

Difference between Hire Purchase System and Instamment Purchase System

Hire Purchase System Instalment Purchase System

(i) It is an agreement of hiring of goods It is an agreement of sale of goods.

(ii) The title of the goods is transferred to the

buyer after payment of last instalment

The title of goods is passed on to the buyer at the

signing of agreement.

(iii) If the buyer fails to pay any of the instalment

the goods can be repossessed by the seller

The seller can not repossess the goods.

(iv) The buyer can not hire out, sell, transfer,

destroy, pledge the goods.

The buyer can hire out, sell, transfer, destroy and

pledge the goods

(v) The buyer may return the goods without

further payment, except for the instalment

overdue.

Except sellers default, goods can not be returned

(vi) In cae of default, the total amount of

instalment paid is forfeited and treated as

hire charge.

In case of default, the total amount of instalmens

paid by the buyer can not be forfeited


Answer 6. (c)

Entries in Books of Head Office

Dr. Cr.

Amount (`) Amount (`)

(i) Branch A/c Dr. 7,500

To Purchase A/c 7,500

(H.O. purchase a/c was wrongly debited instead

of Branch a/c, now rectified)

(ii) Salaries A/c Dr. 6,500

To Branch a/c 6,500

(Being Salaries was paid by Branch to H.O. official)

(iii) Branch A/c Dr. 11,250

To Branch Shop A/c 11,250

(Being Depreciation on Branch Shop written off)

(iv) Branch A/c Dr. 5,600

To Expenses A/c 5,600

(Being expenses charged to Branch)

(v) Goods in Transit A/c Dr. 25,000

To Branch A/c 25,000

(Being goods sent to Branch still in transit)

Q. 7. (a) State the various limitations of Ratio Analysis (mention at least 5 points). [5]

(b) Using the following information, complete the Balance Sheet of Shekhar Ltd. as on 31st March,

2011: [7]

(i) Sales ` 36,00,000

(ii) Gross Profit Ratio 25%;

(iii) Total Assets Turnover: 3 times

(iv) Fixed Assets Turnover: 5 times

(v) Current Assets Turnover: 7.5 times

(vi) Inventory Turnover: 20 times

(vii) Debtors Turnover: 18 times

(viii) Current Ratio 1.8 : 1

(ix) Total Assets/Net worth-2.25: 1

(x) Debt (long term)-Equity 0.75:1


Turnover ratios are based on cost of goods sold except Debtors turnover

Balance Sheet as on 31st March, 2011

Liabilities Amount Assets Ammount

` `

Equity (net worth) Fixed Assets

Long term Debt Current Assets

Current liabilities Inventories

Debtors

Cash in hand & bank

(c) Classify the following expenditures into Capital Expenditure and Revenue Expenditure: [3]

(i) Expenses on a foreign tour to purchase a machinery

(ii) Annual maintenance fee of a machine

(iii) Money spent to reduce working cost

(iv) Compensation paid to workers under voluntary retirement scheme

(v) Legal expenses to recover dues from customers

(vi) Salaries paid to Engineering staff in erecting a machine

Answer 7. (a)

Some of the limitations of Ratio Analysis are discussed below :

(i) Completely based on comparison : It is not possible to analyse any particular matter with the help

of a single ratio. Such analysis is possible by making comparison of at least two or more ratios.

Whether a particular trend indicated by any ratio is good or bad, favourable or unfavorable that

can only be judged through comparative analysis. Comparison is only one of the techniques of

making analysis, but in case of ratio analysis it is the sole technique. For this reason it is said that

ratio analysis is only a partial analytical process, not a complete one.

(ii) Difficult to fix up definite standards : The real significance of a particular ratio can be understood

by comparing it with any ideal or standard norm of that ratio. But the standard already fixed on for

a ratio may change over time. Moreover, standard ratios of the industry to which the firm belongs

may be fixed up on different basis and may vary widely with the computed ratios of the firm.

Standards may also differ according to the nature of the situations. So fixing up acceptable

standards for all the ratios is no doubt an uphill task.

(iii) Dependence on financial statements : Ratios are always based on information disclosed in basic

financial statements like the Profit and Loss Account and the Balance Sheet. Financial statements

have their own limitations. So ratios computed on the basis of information disclosed in those

financial statements cannot also be free from such limitations. For getting rid of these limitations

before computing ratios some adjustments are required to be made in the information disclosed in

financial statements. In reality it is not done and so ratios always suffer from the limitations of the

financial statements.

(iv) Problem of inter-firm comparison : In case there is significant variations in accounting policies

adopted by different firms belonging to the same industry the inter-firm comparison through ratio


analysis does not become effective. For example it can be said that if the policies relating to

inventory valuation, depreciation, treatment of contingent liabilities, etc. of two firms under the

same industry are different the trend indicated by an inter-firm comparison through ratios does

not carry any effective meaning.

(v) Personal influence : The utility of ratio analysis depends a lot on the skill and judgment of the

interpreter. If the personal sense of judgment and analytical power of different interpreters vary a

particular ratio may indicate different trends. So presence of personal aptitude reduces the

effectiveness of ratio analysis. Moreover, the interpreters may exert undue influence on their

analysis with unfair motives.

(vi) Only quantitative analysis : Ratios are often called quantitative tools because their computations

are based on only quantitative or numerical figures. The qualitative aspects of the concerned

numerals are totally ignored in the process of ratio analysis. Ignoring qualitative aspect may

mislead the users of ratios. For example, a high current ratio indicates a satisfactory loan repayment

capacity of a firm. But if its current assets consist of a large quantity of obsolete stock or its

debtors are slow in paying the satisfactory trend of loan repayment capacity as indicated by the

current ratio may prove to be only a paper jugglery.

(vii) Ratios indicate trend, do not prove : A common criticism against the ratio analysis technique is

that it only indicates trend but does not prove anything. By comparing the computed ratios with the

ideal or standard ratios, last years ratios and similar ratios of other firms belonging to the same

industry, the inference that is arrived at by the interpreter is nothing but a trend on any particular

event. Whether the trend of the item of consideration is favourable or unfavourable, satisfactory

or unsatisfactory a general notion as to that can be inferred upon through ratio analysis. Whether

the item is really favourable or unfavourable, satisfactory or unsatisfactory that can never be

authenticated or proved through such analysis. The considerations that are needed for coming to

such a conclusive decision are not taken care of in ratio analysis.

Answer 7. (b)

Working Notes :

(i) Cost of goods sold = Sales ` 36,00,000 25% of ` 36,00,000 = ` 27,00,000

(ii) Total Assets = Cost of goods sold/Total Assets turnover = ` 27,00,000/3 = ` 9,00,000

(iii) Fixed Assets = Cost of goods sold/Fixed Assets Turnover = ` 27,00,000/5 = ` 5,40,000

(iv) Current Assets = Cost of goods sold/current assets turnover = ` 27,00,000/7.5 = ` 3,60,000

{or, Total Assets - Fixed Assets = ` 9,00,000 5,40,000 = ` 3,60,000}

(v) Inventories = Cost of goods sold/Inventory Turnover = ` 27,00,000/20 = ` 1,35,000

(vi) Debtors = Sales/Debtors Turnover = ` 36,00,000/18 = ` 2,00,000

(vii) Current Liabilities = Current Assets/Current Ratio = ` 3,60,000/1.8 = ` 2,00,000

(viii) Net worth = Total Assets/Total Assets to Net worth ratio = ` 9,00,000/2.25 = ` 4,00,000

(ix) Long Term Debt = Net worth or Equity 0.75 = ` 4,00,000 0.75 = ` 3,00,000

{or, Total Assets Net worth Current Liabilities = ` 9,00,000 ` 4,00,000 ` 2,00,000}

(x) Cash and bank = [Current Assets Inventory Debtors] = ` 3,60,000 1,35,000 2,00,000

= ` 25,000


Shekhar Ltd.


Liabilities ` Assets `

Equity/Net worth 4,00,000 Fixed Assets 5,40,000

Long Term Debt 3,00,000 Current Assets

Current Liabilities 2,00,000 Inventories 1,35,000

Debtors 2,00,000

Cash & Bank 25,000 3,60,000

9,00,000 9,00,000

Answer 7. (c)

(i) Capital Expenditure

(ii) Revenue Expenditure

(iii) Capital Expenditure

(iv) Revenue Expenditure

(v) Revenue Expenditure

(vi) Capital Expenditure

Q. 8. Write Short Notes on any three : [35=15]

(a) Earning per share (AS 20);

(b) Sources for payment of Dividend;

(c) Conditions for buy back of shares;

(d) Managerial Remuneration;

(e) Money measurement concept.

Answer 8. (a) Earning per share (AS 20) :

(i) The applicability of the AS 20 is mandatory with effect from accounting year commencing on or

after 01-04-2001 in respect of enterprises whose equity shares or potential equity shares are

listed on a recognized stock exchange in India.

(ii) However under Part IV of Schedule VI of the Companies Act 56 every company is required to

disclose EPS in accordance with AS-20, whether listed on a recognized stock exchange or not.

(iii) Presentation of EPS is required to be made both on the basis of consolidated financial statement,

as well as individual financial statements of the parent company.

(iv) Presentation should be made in terms of Basic and Diluted EPS on the face of the Profit & Loss

Account for each class of equity share that has a different right to share in the net profit for the

accounting period. For equity shares having different nominal value but carrying same voting

rights should be converted into equivalent number of shares of the same nominal value.

(v) Both Basic and D

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