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Volume 3 5 Volume 3

IPCE, Group I, November, 2010


INTEGRATED PROFESSIONAL
COMPETENCE EXAMINATION
GROUP I
&
ACCOUNTING TECHNICIAN EXAMINATION

Suggested
Answers
ISBN: 978-81-8441-433-2 November, 2010

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February/ 2011/ 11,000 (New)
SUGGESTED ANSWERS TO QUESTIONS SET AT THE

COMMON FOR
INTEGRATED PROFESSIONAL COMPETENCE
EXAMINATION
GROUP I

&

ACCOUNTING TECHNICIAN EXAMINATION

NOVEMBER, 2010

BOARD OF STUDIES
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February/ 2011/ 11,000 Copies
Contents
Page Nos.

Paper 1. Accounting ......................................................................................... 1 31


Paper 2. Business Laws, Ethics and Communication.........................................32 48
Paper 3. Cost Accounting and Financial Management.......................................49 71
Paper 4 Taxation .............................................................................................72 96

Examiners comments on the performance of the candidates


PAPER 1 : ACCOUNTING

Question No. 1 is compulsory


Attempt any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Working notes should form part of the answer.
Question 1
(a) Following two problems are regarding issues in Partnership Accounts, kindly solve both:
(i) Anil and Mukesh are partners sharing profit, and losses in the ratio 3 : 2. Govind is
admitted for th share of firm. Thereafter, Madan enters for 20 paisa in a rupee.
Compute new profit sharing ratios under both the admission of partners.
(ii) The following Goodwill Account was opened by the partners R and S, on the
admission of H as a new partner into firm Om and Sons. Calculate the share of
profit agreed to be given to H.
Goodwill A/c
` `
1-4-2010 To Rs Capital A/c 24,800 1-4-2010 By Rs Capital A/c 12,400
1-4-2010 To Ss Capital A/c 18,600 1-4-2010 By Ss Capital A/c 12,400
1-4-2010 By Hs Capital A/c 18,600
43,400 43,400
(b) HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when the
books are closed at the end of each month. At the end of month following information is
available:
Sales ` 47,25,000
General overheads cost ` 1,25,000
Inventory at beginning 1,00,000 litres @ 15 per litre
Purchases
June 1 two lakh litres @ 14.25
June 30 one lakh litres @ 15.15
Closing inventory 1.30 lakh litres
Compute the following by the FIFO as per AS 2:
(i) Value of Inventory on June, 30.
(ii) Amount of cost of goods sold for June.
(iii) Profit/Loss for the month of June.
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(c) A and B decide to amalgamate themselves into Sharp Limited. The following are their
Balance Sheets as on 31st December, 2009.
Liabilities A Ltd. B. Ltd. Assets A Ltd. B Ltd.
` ` ` `
Face value and Investments:
paid up capital:
Share capital 5,00,000 4,00,000 1,000 shares in B 1,30,000 -
(` 100 each) Ltd.
General Reserves 2,00,000 1,00,000 2,000 shares in A - 2,10,000
Ltd.
10% Debentures 2,00,000 1,50,000 Sundry Assets 7,70,000 4,40,000
9,00,000 6,50,000 9,00,000 6,50,000
Compute the amount of purchase consideration for each of these companies under
purchase method as per AS 14.
(d) H purchased 500 equity shares of ` 100 each in the ABC Company Limited for ` 62,500
inclusive of brokerage and stamp duty. Some years later the company decided to
capitalise its profit and to issue to the holders of equity shares one equity share as Bonus
for every equity share held by them. Prior to capitalization, the shares of ABC Company
Limited were quoted at ` 175 per share. After the capitalization, the shares were quoted
at ` 92.50 per share. H sold the Bonus shares and received ` 90 per share. Show
Investment A/c in Hs books on average cost basis as per AS 13. (4 5 = 20 Marks)
Answer
(a) (i) 1. At the time of admission of Govind
Let the total share of profit at the time of admission of Govind = 1
Share of New Partner - Govind =
Remaining share of profit = 1 =
Now,
3 3 9
New share of Anil = x =
4 5 20
3 2 6
New share of Mukesh = x =
4 5 20
New ratio of Anil, Mukesh and Govind
9 6 1
: : i.e. = 9:6:5
20 20 4

2
PAPER 1 : ACCOUNTING

2. At the time of admission of Madan


Let total share at the time of admission of Madan = 1
Share of new partner - Madan = 1/5
Remaining share = 1 1/5 = 4/5
Now,
4 9 9
New share of Anil = x =
5 20 25
New share of Mukesh = 4/5 x 6/20 = 6/25
New share of Govind = 4/5 x 5/20 =5/25
New ratio of Anil, Mukesh, Govind and Madan
9 6 5 1
: : : i.e. 9 : 6 :5 :5
25 25 25 5
(ii) Share of H in profit sharing ratio may be calculated as follows:
Share of H in Goodwill 18,600 3
Hs share = = =
Total Goodwill 43,400 7
(b)
`
(i) Cost of closing inventory for 1,30,000 litres as on 30th June
1,00,000 litres @ ` 15.15 15,15,000
30,000 litres @ ` 14.25 4,27,500
Total 19,42,500
(ii) Calculation of cost of goods sold
Opening inventories (1,00,000 litres @ ` 15) 15,00,000
Purchases June-1 (2,00,000 litres @ `14.25) 28,50,000
June-30 (1,00,000 litres @ `15.15) 15,15,000
58,65,000
Less: Closing inventories (19,42,500)
Cost of goods sold 39,22,500
(iii) Calculation of profit
Sales (Given) (A) 47,25,000
Cost of goods sold 39,22,500
Add: General overheads 1,25,000
Total cost (B) 40,47,500
Profit (A-B) 6,77,500

3
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(c) Let the net assets of A Ltd. be x and net assets of B Ltd. be y.
Then x = 7,70,000 2,00,000 + y
x = 5,70,000 + y
4x-y = 22,80,000 (i)
Similarly
y = 4,40,000 1,50,000 + 2/5 x
y = 2,90,000 + 2/5 x
- 2x +5y = 14,50,000 (ii)
By multiplying equation (ii) by 2, we get
-4x + 10y = 29,00,000 (iii)
By adding equation (i) with equation (iii), we get
4x-y = 22,80,000
-4x+10y = 29,00,000
51,80,000
9y = 51,80,000 i.e. y = = ` 5,75,556
9
Putting the value of y in equation (i) we get
4x 5,75,556 = 22,80,000
4x = 22,80,000 + 5,75,556
28,55,556
x= = 7,13,889
4
A Ltd. B Ltd
` `
Total value of net assets 7,13,889 5,75,556
Less: 1/4 for shares held by A Ltd. - 1,43,889
Less: 2/5 for shares held by B Ltd. 2,85,556 -
Purchase consideration 4,28,333 4,31,667
Presuming that the shares in Sharp Ltd. consist of ` 100 each, Sharp Ltd. may satisfy
the purchase consideration as follows:
A Ltd. B Ltd.
` `
Shares in Sharp Ltd. (` 100) 4,28,300 4,31,600
Cash 33 67
4,28,333 4,31,667

4
PAPER 1 : ACCOUNTING

(d) In the books of H


Investment Account (Equity Shares of ABC Co. Ltd.)
Particulars Face Cost Particulars Face Cost
Value Value
` ` ` `

To Balance b/d 50,000 62,500 By Bank A/c 50,000 45,000
To Bonus Shares A/c 50,000 - By Balance c/d 50,000 31,250
To Profit & Loss A/c 13,750 (Refer W.N.2)
(Refer W.N. 1)
(Profit on sale)
1,00,000 76,250 1,00,000 76,250
Working Note:
1. Calculation of profit on sale of bonus shares:
`
Sales price of bonus shares 45,000
62,500
Less: Average cost of shares sold x 50,000 = (31,250)
1,00,000
Profit 13,750
2. Value of closing investment:
50,000
Market value of shares 100 92.50 = 46,250

Cost price of shares (W.N. 1) = 31,250
Value of investment will be least of market value or average cost price, i.e. ` 31,250
Question 2
The Young Trust runs a Charitable Hospital and a Dispensary. The following information is
available for the year ended 31st March, 2009 from the books of accounts:
Dr. Cr.
` `
Capital fund 9,00,000
Donations received during the year 6,00,000
Recovery of the rent 2,75,000

Bonus issue was made some years later to the purchase of initial 500 equity shares.
5
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Fee received from patients 3,00,000


Recovery of food supplies 1,40,000
Surgical equipments 4,55,000
Building & operation theatres 3,20,000
Consumption in the hospital of:
Medicines 1,20,000
Food stuff 90,000
Chemicals 30,000
Closing stock of hospital
Medicines 20,000
Food stuff 4,000
Chemicals 1,000
Sales of medicines (dispensary) 3,10,000
Opening stock of medicines (dispensary) 55,000
Purchase of medicines (dispensary) 3,00,000
Salaries:
Administrative staff 30,000
Doctors/Nurses 1,50,000
Assistant at the dispensary 15,000
Electricity & power charges:
Hospital 1,05,000
Dispensary 2,000
Furniture & equipments 80,000
Ambulance 30,000
Postage & telephone expenses less recovery 26,000
Subscription to medical journals 21,000
Ambulance maintenance charges less recovery 800
Consumption of bed sheets 90,000
Fixed deposits made on 01-04-2008 for three years at interest @
11% p.a. 5,00,000
Cash & bank balances 41,300
Sundry debtors (dispensary) 60,500
Sundry creditors (dispensary) 41,000
Remuneration to trustees, trust office expenses etc. 21,000
Additional information :
(a) The dispensary supplied medicines to the hospital worth ` 60,000, for which no
adjustment was made in the books.
(b) The closing stock of the medicines was ` 40,000 at the dispensary.

6
PAPER 1 : ACCOUNTING

(c) The stock of medicines on 31st March, 2009 at the hospital included ` 4,000 worth of
medicines belonging to the patients, which has not been considered while arriving at the
figure of consumption of medicines.
(d) The donations were received towards Corpus of the Trust.
(e) On 15th August, 2008, surgical equipments were donated having market value of
` 40,000.
(f) The hospital is to receive the grant of 25% of the amount spent on treatment of the poor
patients from the Red Cross Society. Such expenditure was ` 50,000.
(g) Out of the fee recovered from the patients, 10% is to be given to the Specialist retained
by the Hospital.
(h) Depreciation on the assets on the closing balances:
Surgical Equipments @ 20%
Building @ 5%
Furniture & Equipments @ 10%
Ambulance @ 30%
You are required to prepare:
(i) Income and Expenditure Account of the Hospital, Dispensary and Trust.
(ii) Statement of Affairs of the Trust for the year ended 31st March, 2009. (16 Marks)
Answer
Income & Expenditure Account of Dispensary
for the year ended 31st March, 2009
Particulars Amount Particulars Amount
` `
To Opening stock of medicines 55,000 By Sales of medicine 3,10,000
To Purchase of medicines 3,00,000 By Supply of 60,000
medicines to hospital
To Salaries to assistants 15,000 By Closing stock of 40,000
medicines
To Electricity & power charges 2,000
To Surplus transferred to trust income &
expenditure account (Bal. Fig.) 38,000
4,10,000 4,10,000

7
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Income & Expenditure Account of Hospital


for the year ended 31st March, 2009
Particulars Amount Particulars Amount
` `
To Consumption of: By Fees received from 3,00,000
patients
Medicines (W.N.1) 1,84,000 By Recovery for rent 2,75,000
Food stuff 90,000 By Recovery of food 1,40,000
supplies
Chemicals 30,000 3,04,000 By Ambulance maintenance
To Salaries: charges less recovery
Admn. staff 30,000 By Grant receivable 800
Doctors & nurses 1,50,000 1,80,000 from Red Cross
To Electricity & power charges 1,05,000 Society
To Subscription to medical journals 21,000 (25% of ` 50,000) 12,500
To Consumption of bed sheets 90,000 By Deficit transferred
To Retainership of specialists to trust income & 1,33,700
outstanding (W.N.2) 30,000 expenditure account
To Depreciation on:
Surgical equipments 99,000
Building 16,000
Furniture & fixtures 8,000
Ambulance 9,000 1,32,000
8,62,000 8,62,000

Income & Expenditure Account of the Young Trust


for the year ended 31st March, 2009
Particulars Amount Particulars Amount
` `
To Deficit from hospital 1,33,700 By Surplus from dispensary 38,000
To Postage & telephone expenses By Interest accrued on
less recovery 26,000 fixed deposits 55,000
To Remuneration to trustees, trust 21,000 By Deficit
office expenses etc. (Excess of expenditure
over income) 87,700

1,80,700 1,80,700

8
PAPER 1 : ACCOUNTING

Statement of Affairs of Young Trust as on 31st March, 2009


Liabilities Amount Assets Amount
` `
Capital fund: Building 3,20,000
Opening balance 9,00,000 Less: Depreciation 16,000 3,04,000
Add: Donations: Surgical equipment 4,55,000
Add: Donation 40,000
4,95,000
Cash 6,00,000 Less: Depreciation (99,000) 3,96,000
Surgical Furniture 80,000
equipment 40,000
15,40,000 Less: Depreciation (8,000) 72,000
Less: Deficit 87,700 14,52,300 Ambulance 30,000
Sundry creditors 41,000 Less: Depreciation (9,000) 21,000
(dispensary) Stock:
Outstanding Medicines:
retainership to Dispensary 40,000
specialist (W.N.2) 30,000
Hospital 16,000
(20,000 4,000)
Food stuff
Hospital 4,000
Chemicals 1,000 61,000
Sundry debtors
(Dispensary) 60,500
Grant receivable
from Red Cross
Society 12,500
Fixed deposits 5,00,000
Interest accrued 55,000
Cash & bank
balance 41,300
15,23,300 15,23,300

9
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Working Notes:
1. Consumption of medicines in hospital:
`
Medicines 1,20,000
Supplies received from dispensary 60,000
Medicines in stock belonging to patients 4,000
Total 1,84,000
2. Calculation of fee given to specialist:
10% of ` 3,00,000 = ` 30,000
Note: It is presumed that surgical equipment donated on 15th August 2008 was not
included in the closing balance of surgical equipments as on 31st March, 2009.
Question 3
From the following information, prepare a Cash Flow Statement as per AS 3 for Banjara Ltd.,
using direct method:
Balance Sheet as on March 31, 2010 (` 000)
2010 2009
Assets:
Cash on hand and balances with bank 200 25
Marketable securities (having one month maturity) 670 135
Sundry debtors 1,700 1,200
Interest receivable 100 -
Inventories 900 1,950
Investments 2,500 2,500
Fixed assets at cost 2,180 1,910
Accumulated depreciation (1,450) (1,060)
Fixed assets (net) 730 850
Total assets 6,800 6,660
Liabilities:
Sundry creditors 150 1,890
Interest payable 230 100
Income tax payable 400 1,000
Long term debt 1,110 1,040
Total liabilities 1,890 4,030
10
PAPER 1 : ACCOUNTING

Shareholders fund:
Share capital 1,500 1,250
Reserves 3,410 1,380
4,910 2,630
Total liabilities and shareholders fund 6,800 6,660
Statement of Profit or Loss for the year ended 31-3-10
(` 000)
Sales 30,650
Cost of sales (26,000)
Gross profit 4,650
Depreciation (450)
Administrative and selling expenses (910)
Interest expenses (400)
Interest income 300
Dividend income 200
Net profit before taxation and extraordinary items 3,390
Extraordinary items:
Insurance proceeds from earthquake disaster settlement 140
Net profit after extraordinary items 3,530
Income tax (300)
3,230
Additional information: (` 000)
(i) An amount of ` 250 was raised from the issue of share capital and a further ` 250 was
raised from long-term borrowings.
(ii) Interest expense was ` 400 of which ` 170 was paid during the period. ` 100 relating to
interest expense of the prior period was also paid during the period.
(iii) Dividends paid were ` 1,200.
(iv) Tax deducted at source on dividends received (including in the tax expense of ` 300 for
the year) amounted to ` 40.
(v) During the period the enterprise acquired fixed assets for ` 350. The payment was made
in cash.
(vi) Plant with original cost of ` 80 and accumulated depreciation of ` 60 was sold for ` 20.
(vii) Sundry debtors and Sundry creditors include amounts relating to credit sales and credit
purchase only. (16 Marks)

11
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Answer
Cash Flow Statement (direct method)
` in 000
Cash flows from Operating Activities
Cash receipts from customers (W.N.2) 30,150
Cash paid to suppliers, employees and for expenses (W.N.3) (27,600)
Cash generated from operations 2,550
Income tax paid (W.N.4) (860)
1,690
Cash flow before extraordinary item:
Proceeds from earthquake disaster settlement 140
Net cash generated from operating activities 1,830
Cash flows from Investing Activities
Purchase of fixed assets (350)
Proceeds from sale of equipment 20
Interest received (300 100) 200
Dividends received (200 40) 160
Net cash from investing activities 30
Cash flows from Financing Activities
Proceeds from issuance of share capital 250
Proceeds from long term borrowings 250
Repayment of long term borrowings (W.N.5) (180)
Interest paid (W.N.6) (270)
Dividend paid (1,200)
Net cash used in financing activities (1,150)
Net increase in cash and cash equivalents 710
Cash and cash equivalents at beginning of the period (W.N.1) 160
Cash and cash equivalents at end of the period (W.N.1) 870

Working Notes:
(1) Cash and cash equivalents
Cash and cash equivalents consist of cash in hand and balances with banks and
investments in money market instruments for short period.

12
PAPER 1 : ACCOUNTING

`000
2010 2009
Cash in hand and balance with bank 200 25
Short-term investments 670 135
Cash and cash equivalents 870 160
(2) Cash receipts from customers
`000
Total sales 30,650
Add: Sundry debtors at the beginning of the year 1,200
31,850
Less: Sundry debtors at the end of the year (1,700)
Cash sales 30,150
(3) Cash paid to suppliers, employees and for expenses
`000
Cost of sales 26,000
Administrative and selling expenses 910
26,910
Add: Sundry creditors at the beginning of the year 1,890
Inventories at the end of the year 900 2,790
29,700
Less: Sundry creditors at the end of the year (150)
Inventories at the beginning of the year (1,950) (2,100)
27,600
(4) Income tax paid (including TDS from dividends received)
`000
Income tax expense for the year 300
(including tax deducted at source from dividends received)
Add: Income tax liability at the beginning of the year 1,000
1,300
Less: Income tax liability at the end of the year (400)
900
Out of ` 900 thousands, tax deducted at source on dividends received (amounting to
`40 thousands) is included in cash flows from investing activities and the balance of
`860 thousands is included in cash flows from operating activities.

13
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(5) Repayment of long term borrowings during the year


`000
Long term debts at the beginning of the year 1,040
Add: Long term borrowings made during the year 250
1,290
Less: Long term borrowings at the end of the year (1,110)
180
(6) Interest paid during the year
`000
Interest expense for the year 400
Add: Interest payable at the beginning of the year 100
500
Less: Interest payable at the end of the year (230)
270
Question 4
Ramu, Shamu and Raju were partners sharing profits and losses in the ratio of 3 : 2 : 2. Their
Balance Sheet as on 01-01-2009 was as follows:
Liabilities ` Assets `
Capital accounts Fixed assets 80,000
Ramu 30,000 Stock 15,000
Shamu 20,000 Debtors 12,000
Raju 20,000 70,000 Cash & bank 1,951
Reserves 14,000
Creditors 24,951
1,08,951 1,08,951
On 1st October, 2009, Ramu died. His heirs agreed that:
(i) Goodwill of the firm be valued at 2 years purchase of average profit of past three years.
Profits for the year 2006, 2007 and 2008 were ` 30,000, ` 40,000 and ` 47,600
respectively.
(ii) Fixed assets be revalued at ` 1,01,000.
(iii) Profit to be shared, earned in subsequent period after death of Ramu till settlement of his
executors claim.
Ramus heirs account was settled on 31-12-2009 by bringing in required cash by remaining
partners in equal proportion leaving cash balance of ` 1,234. Each partner had drawn
@ ` 1,000 per month for personal use.

14
PAPER 1 : ACCOUNTING

Profit for the current year after charging depreciation of ` 9,000 (` 6,000 for first three
quarters and ` 3,000 for last quarter ) was ` 46,600 earned evenly through-out the year.
You are requested to prepare Profit & Loss Appropriation A/c, Cash & Bank A/c, Ramus
Executors A/c and Partners Capital Accounts for the year ended on 31-12-2009 assuming
remaining partners decided not to retain goodwill in the books. (16 Marks)
Answer
(i) Profit & Loss Account
` (for ` (for ` (for ` (for
nine three nine three
months) months months) months)
To Depreciation 6,000 3,000 By Profit (W.N.1) 41,700 13,900
To Net profit 35,700 10,900
41,700 13,900 41,700 13,900
Profit & Loss Appropriation Account
` (for ` (for ` (for ` (for
nine three nine three
months) months months) months
To Partners capital A/cs By Net Profit 35,700 10,900
Ramu 15,300 -
Shamu 10,200 3,043
Raju 10,200 3,044
To Ramus Executor A/c
(W.N.2) - 4,813
35,700 10,900 35,700 10,900
(ii) Partners Capital Accounts as on 1st October, 2009
Ramu Shamu Raju Ramu Shamu Raju
(`) (`) (`) (`) (`) (`)
To Drawings 9,000 9,000 9,000 By Balance b/d 30,000 20,000 20,000
To Ramus 87,414 - - By Reserves 6,000 4,000 4,000
Executors A/c
To Balance c/d - 55,276 55,276 By Goodwill
(W.N.3) 36,114 24,076 24,076


As per para 36 of AS 10, Accounting for fixed Assets, goodwill should be recorded in the
books only when some consideration in money or moneys worth has been paid for it.
However, in the above solution, goodwill has been raised in the books at the time of death of
a partner and written off by the remaining partners, as per the information given in the
question.
15
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

By Fixed 9,000 6,000 6,000


Assets
By Profit &
Loss
Appropriation 15,300 10,200 10,200
A/c

96,414 64,276 64,276 96,414 64,276 64,276


(iii) Partners Capital Accounts as on 31.12.2009
Shamu Raju Shamu Raju
(`) (`) (`) (`)
By Balance b/d 55,276 55,276
To Drawings 3,000 3,000 By Cash 62,255 62,255
To Goodwill 42,133 42,133 By Profit & Loss
To Balance c/d 75,441 75,442 Appropriation A/c 3,043 3,044
1,20,574 1,20,575 1,20,574 1,20,575
(iv) Ramus Executors A/c as on 31.12.2009
(`) (`)
To Bank 92,227 By Balance b/d 87,414
By P&L Appropriation
A/c 4,813
92,227 92,227
(v) Cash & Bank A/c
(`) (`)
To Balance b/d 1,951 By Ramus executors A/c 92,227
To Shamus capital A/c 62,255 By Partners Capital A/cs
(Drawings):
To Rajus capital A/c 62,255 Ramu 9,000
Shamu 12,000
Raju 12,000
By Balance c/d 1,234
1,26,461 1,26,461


Appreciation of fixed assets may also be recorded through Revaluation Account.
16
PAPER 1 : ACCOUNTING

Working Notes:
1. Profit for the year before depreciation:
`
Profit after depreciation 46,600
Add: Depreciation 9,000
Profit before depreciation 55,600
2. As per section 37 of the Partnership Act, in case of settlement of deceased
partners account on the date other then the date of death, the executor of
deceased partner has a choice to take
Either-
Unsettled capital as on 1.10.09
(A) Profit earned on un-settled capital = Profit x
Total capital as on 1.10.09
87,414
= 10,900 x
(87,414 + 55,276 + 55,276)
87,414
= 10,900 x = ` 4,813
1,97,966
Or-
(B) Interest on capital @ 6% i.e.
` 87,414 6% 3/12 = ` 1,311
Option A is beneficial, therefore heirs of Ramu will opt for proportionate share of
profit i.e. ` 4,813.
3. Valuation of Goodwill:
` Weight Product
Profit for 2006 30,000 1 30,000
2007 40,000 2 80,000
2008 47,600 3 1,42,800
1,17,600 6 2,52,800
2,52,800
Weighted Average Profit = = ` 42,133
6
Goodwill = 2 years purchase of average profit = ` 42,133 2 = ` 84,266.

17
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Question 5
(a) The following is the Balance Sheet of Bumbum Limited as at 31 st March, 2009:
`
Sources of funds
Authorized capital
50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ` 100 each 10,00,000
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of ` 10 each 3,00,000
5,000, 8%Redeemable Preference shares of ` 100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 1,80,000
2,500, 9% Debentures of ` 100 each 2,50,000
Sundry Creditors 1,70,000
26,50,000
Application of funds
Fixed Assets (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Sundry Debtors 6,20,000
Cash & Bank balance 2,80,000
Preliminary expenses 1,40,000
26,50,000
In Annual General Meeting held on 20th June, 2009 the company passed the following
resolutions:
(i) To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1st July, 09.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To redeem 9% Debentures by making offer to debenture holders to convert their
holdings into equity shares at ` 10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares
held on record date.
18
PAPER 1 : ACCOUNTING

On 10th July, 2009 investments were sold for ` 5,55,000 and preference shares were
redeemed.
40% of Debentureholders exercised their option to accept cash and their claims were
settled on 1st August, 2009.
The company fixed 5th September, 2009 as record date and bonus issue was concluded
by 12th September, 2009.
You are requested to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30th September, 2009. All working notes should form part
of your answer. (12 Marks)
(b) Ujju Enterprise furnishes you the following information for the period October to
December, 2009. You are requested to draw up Debtors Ledger Adjustment account in
the General Ledger:
(i) Total sales amounted to ` 2,20,000 including sale of old motor car for ` 10,000
(book value ` 5,000). Total credit sales were 80% higher than the cash sales.
(ii) Cash collection from debtors amounted to 60% of the aggregate of the opening
debtors amounting to ` 40,000 and credit sales for the period. Debtors were
allowed discount of ` 10,000.
(iii) Bills receivables drawn during the period totalled ` 20,000 of which one bill of
` 5,000 was dishonoured for non-payment as the party became insolvent and his
estate realized 50 paise in a rupee.
(iv) A sum of ` 3,000 was written off as bad debts, ` 7,000 was realized against bad
debts written off in earlier years and provision of ` 6,000 was made for doubtful
debts. (4 Marks)
Answer
(a) Bumbum Limited
Journal Entries
2009 Dr. (`) Cr. (`)
July 1 Equity Share Capital A/c (` 10 each) Dr. 3,00,000
To Equity share capital A/c (` 2 each) 3,00,000
(Being equity share of ` 10 each splitted into 5 equity
shares of ` 2 each)
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited
to Profit & Loss A/c)

19
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

July 10 8% Redeemable preference share


capital A/c Dr. 5,00,000
Premium on redemption of preference share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share holders on
redemption)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 Securities premium A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve A/c
on its redemption as per the law)
Aug 1 9% Debentures A/c Dr. 2,50,000
Interest on debentures A/c Dr. 7,500
To Debentureholders A/c 2,57,500
(Being amount payable to debentureholders along
with interest payable)
Aug. 1 Debentureholders A/c Dr. 2,57,500
To Cash & bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c 30,000
To Securities premium A/c 1,20,000
(Being claims of debenture holders satisfied)
Sept. 5 Securities premium A/c Dr. 1,10,000
To Bonus to shareholders A/c 1,10,000
(Being securities premium capitalized to issue bonus
shares)
Sept. 12 Bonus to shareholders A/c Dr. 1,10,000
To Equity share capital A/c 1,10,000
(Being 55,000 fully paid equity shares of ` 2 each issued
as bonus in ratio of 1 share for every 3 shares held)

20
PAPER 1 : ACCOUNTING

Sept. 30 Securities Premium A/c Dr. 25,000


To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from
securities premium account)
Sept. 30 Profit & Loss A/c Dr. 7,500
To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and
Loss Account)
Note: For capitalisation of Bonus shares and transfer to capital redemption reserve
account any other free reserves given in the balance sheet may also be used.
Balance Sheet as at 30th September, 2009
(`)
Sources of funds
Authorized share capital
2,50,000 Equity shares of ` 2 each 5,00,000
10,000 Preference shares of `100 each 10,00,000
15,00,000
Issued, subscribed and paid up
2,20,000 Equity shares of ` 2 each 4,40,000
Reserves & Surplus
Securities Premium 85,000
Capital Redemption Reserve 5,00,000
General Reserve 6,50,000
Profit & Loss A/c (1,80,000 + 65,000 7,500) 2,37,500
Current Liabilities & Provisions
Sundry Creditors 1,70,000
Total 20,82,500
Application of funds
Fixed assets (Net) 7,80,000
Deferred tax assets 3,40,000
Sundry debtors 6,20,000
Cash & bank balance 2,02,500
Preliminary expenses 1,40,000
Total 20,82,500

21
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Working Notes:
`
1. Redemption of preference share:
5,000 Preference shares of ` 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Redemption of Debentures
2,500 Debentures of ` 100 each 2,50,000
Less:Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
1,50,000
Equity shares issued on conversion = = 15,000 shares
10
3. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares
4. Securities Premium A/c
Balance as per balance sheet 6,00,000
Add: Premium on equity shares issued on
conversion of debentures (15,000 x 8) 1,20,000
7,20,000
Less: Capitalization for bonus issue (55,000 x 2) (1,10,000)
Adjustment for premium on preference shares (25,000)
Transfer to capital redemption reserve (5,00,000)
Balance 85,000
5. Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Paid to Debentureholders (7,500 + 1,00,000) (1,07,500)
Balance 2,02,500

22
PAPER 1 : ACCOUNTING

6. Interest of ` 7,500 paid to debenture holders have been debited to Profit & Loss
Account.
(b) In the books of Ujju Enterprise
Debtors Ledger Adjustment Account in the General Ledger
2009 ` 2009 `
Oct. 1 To Balance b/d 40,000 Oct. 1 By General Ledger
to Dec. Adj. A/c:
31
Oct. 1 to To General Ledger Adj. A/c: Collection from 1,05,000
Dec.31 Sales (Refer W.N.) 1,35,000 debtors-bank
[60% of `
Bills Receivables 5,000 (40,000 +
dishonoured 1,35,000)]
Discount allowed 10,000
Bills receivables 20,000
Bad debts (`2,500 5,500
+ `3,000)
By Balance c/d 39,500
1,80,000 1,80,000
Note: No entries are to be made:
(a) For ` 7,000 realised against bad debts written off in earlier years, and
(b) For provision of ` 6,000 made for doubtful debts.
Working Note:
Calculation of credit sales :
`
Total trade sales (2,20,000 10,000) 2,10,000
100
Less: Cash sales 2,10,000 (75,000)

(180 + 100 )
Credit sales 1,35,000
Question 6
(a) The partners of Shri Enterprises decided to convert the partnership firm into a Private
Limited Company Shreya (P) Ltd. with effect from 1st January, 2008. However, company
could be incorporated only on 1st June, 2008. The business was continued on behalf of
the company and the consideration of ` 6,00,000 was settled on that day along with
interest @ 12% per annum. The company availed loan of ` 9,00,000 @ 10% per annum
23
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

on 1st June, 2008 to pay purchase consideration and for working capital. The company
closed its accounts for the first time on 31st March, 2009 and presents you the following
summarized profit and loss account:
` `
Sales 19,80,000
Cost of goods sold 11,88,000
Discount to dealers 46,200
Directors remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses (to be written off in first year itself) 15,000 18,07,200
Profit 1,72,800
Sales from June, 2008 to December, 2008 were 2 times of the average sales, which
further increased to 3 times in January to March quarter, 2009. The company recruited
additional work force to expand the business. The salaries from July, 2008 doubled. The
company also acquired additional showroom at monthly rent of ` 10,000 from July, 2008.
You are required to prepare a Profit and Loss Account showing apportionment of cost
and revenue between pre-incorporation and post-incorporation periods. Also suggest
how the pre-incorporation profits/losses are to be dealt with. (10 Marks)
(b) Sonam Corporation sells goods on hire purchase basis. The hire purchase price is cost plus 50%.
From the following particulars prepare Hire Purchase Trading Account for the year ended
31st March, 2010:
`
Instalments not yet due on 01-04-09 3,00,000
Instalments due on 01-04-09 1,50,000
Goods sold on hire purchase during the year 9,00,000
Instalments collected from HP debtors 6,80,000
Stock with customers at hire purchase price 4,50,000
Goods re-possessed during the year 60,000
On 31-03-2010 Goods repossessed were valued at Cost less 40%
(6 Marks)

24
PAPER 1 : ACCOUNTING

Answer
(a) Shreya (P) Limited
Profit and Loss Account
for 15 months ended 31st March, 2009
Pre. inc. Post inc. Pre. inc. Post inc.
(5 (10 (5 (10
months) months) months) months)
(`) (`) (`) (`)
To Cost of sales 1,80,000 10,08,000 By Sales 3,00,000 16,80,000
To Gross profit 1,20,000 6,72,000 (W.N.1)
3,00,000 16,80,000 3,00,000 16,80,000
To Discount to 7,000 39,200 By Gross 1,20,000 6,72,000
dealers profit
To Directors - 60,000 By Loss 750
remuneration
To Salaries (W.N.2) 18,750 71,250
To Rent (W.N.3) 15,000 1,20,000
To Interest (W.N.4) 30,000 75,000
To Depreciation 10,000 20,000
To Office expenses 35,000 70,000
To Preliminary - 15,000
expenses
To Sales promotion 5,000 28,000
expenses
To Net profit - 1,73,550
1,20,750 6,72,000 1,20,750 6,72,000

Treatment of pre-incorporation loss:


Pre-incorporation loss may, either be considered as a reduction from any capital reserve
accruing in relation to the transaction or be treated as goodwill.
Working Notes:
1. Calculation of sales ratio:
Let the average sales per month in pre-incorporation period be x
Average Sales (Pre-incorporation) = x X 5 = 5x
Sales (Post incorporation) from June to December, 2008 = 2x X 7 = 17.5x
From January to March, 2009 = 3x X 3 = 10.5x
Total Sales 28.0x
Sales ratio of pre-incorporation & post incorporation is 5x : 28x

25
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

2. Calculation of ratio for salaries


Let the average salary be x
Pre-incorporation salary = x X 5= 5x
Post incorporation salary
June, 2008 = x
July to March, 2009 = x X 9 X 2 = 18x
19x
Ratio is 5 : 19
3. Calculation of Rent `
Total rent 1,35,000
Less: Additional rent for 9 months @ ` 10,000 p.m. 90,000
Rent of old premises apportioned in time ratio 45,000
Apportionment Pre Inc. Post Inc.
Old premises rent 15,000 30,000
Additional Rent 90,000
15,000 1,20,000
4. Calculation of interest
Pre-incorporation period from January, 2008 to May, 2008
6,00,000 12 5
100 12 = ` 30,000

Post incorporation period from June, 2008 to March, 2009
9,00,000 10 10
100 12 = ` 75,000

` 1,05,000
(b) Hire Purchase Trading Account for the year ended 31.03.2010
` `
To Opening balance: By Hire purchase stock
Hire purchase stock 3,00,000 reserve (opening) 1,00,000
Hire purchase debtors 1,50,000 By Bank (Installments 6,80,000
Collected)
To Goods sold on hire 9,00,000 By Goods re- 24,000
purchase possessed (W.N.3)
To Hire purchase stock By Goods sold on hire
reserve (closing) 1,50,000 purchase (loading) 3,00,000

26
PAPER 1 : ACCOUNTING

To Profit & Loss A/c 2,14,000 By Closing balances:


Hire purchase stock 4,50,000
By Hire purchase
debtors (W.N.2) 1,60,000
17,14,000 17,14,000
Working Notes:
(1) Memorandum Hire Purchase Stock A/c
` `
To Balance b/d 3,00,000 By Hire purchase 7,50,000
debtors A/c
(Bal. fig.)
To Goods sold on hire By Balance c/d 4,50,000
purchase 9,00,000
12,00,000 12,00,000
(2) Memorandum Hire Purchase Debtors A/c
` `
To Balance b/d 1,50,000 By Bank/Cash 6,80,000
To Hire purchase stock 7,50,000 By Goods repossessed 60,000
A/c (W.N.1)
By Balance c/d
(Bal. fig.) 1,60,000
9,00,000 9,00,000
100 60
(3) Value of goods re-possessed: (` 60,000 x x ) = ` 24,000
150 100
Note : It is assumed that figures given in the question are at invoice price.
Question 7
Answer any four of the following:
(a) A company installed a plant at a cost of ` 20 lacs with estimated useful life of 10 years
and decided to depreciate on straight line method. In the fifth year, company decided to
switch over from straight line method to written down value method. Compute the
resultant surplus/deficiency if any, and state how will you treat the same in the accounts.
(b) A large size multi departments hospital decided to outsource the accounting functions.
Hospital invited proposals from vendors through open tender and received three
proposals. How will you select the vendor?
(c) An amount of ` 9,90,000 was incurred on a contract work upto 31-03-2010. Certificates
have been received to date to the value of ` 12,00,000 against which ` 10,80,000 has
been received in cash. The cost of work done but not certified amounted to ` 22,500. It
is estimated that by spending an additional amount of ` 60,000 (including provision for
27
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

contingencies) the work can be completed in all respects in another two months. The
agreed contract price of work is ` 12,50,000. Compute a conservative estimate of the
profit to be taken to the Profit and Loss Account as per AS 7.
(d) A trader intends to take a loss of profit policy with indemnity period of 6 months,
however, he could not decide the policy amount. From the following details, suggest the
policy amount:
`
Turnover in last financial year 4,50,000
Standing charges in last financial year 90,000
Net profit earned in last year was 10% of turnover and the same trend expected in
subsequent year.
Increase in turnover expected 25%.
To achieve additional sales, trader has to incur additional expenditure of ` 31,250.
(e) From the following details find out the average due date:
Date of Bill Amount (`) Usance of Bill
29th January, 2009 5,000 1 month
20 March, 2009
th 4,000 2 months
12th July, 2009 7,000 1 month
10th August, 2009 6,000 2 months
(4 4 = 16 Marks)
Answer
(a) Table showing depreciation under Straight Line Method (SLM) and depreciation under
Written Down Value Method (WDV)
` in lacs
Depreciation
Year SLM WDV
I 2.001 2.002
II 2.00 1.80
III 2.00 1.62
IV 2.00 1.46
Total 8.00 6.88

1 Depreciation as per SLM ` 20 lakhs/10years = ` 2 lakhs.


2
Depreciation rate under SLM is 10% [(2,00,000/20,00,000) 100]. It is assumed that
depreciation rate will remain same under WDV method also.

Rounded off up to two decimals.
28
PAPER 1 : ACCOUNTING

Resultant surplus on change in method of depreciation from SLM to WDV = (8.00 6.88)
` 1.12 lakhs.
As per para 21 of AS 6 Depreciation Accounting, when a change in the method of
depreciation is made, depreciation should be re-calculated in accordance with the new
method from the date of the asset put to use. The deficiency or surplus arising from
retrospective re-computation of depreciation in accordance with the new method should
be adjusted in the accounts in the year in which the method of depreciation is changed.
In the given case, surplus amounting ` 1.12 lakhs (8.00 6.88) should be credited to
profit and loss statement in the fifth year. Such a change should be treated as a change
in accounting policy and its effect should be quantified and disclosed as per AS 5 Net
Profit loss for the period, prior period items and changes in Accounting Policies).
(b) The proposals will be evaluated and vendor will be selected considering the following
criteria:
1. Quantum of services provided and whether the same matches with the requirements
of the hospital.
2. Reputation and background of the vendor.
3. Comparative costs of the various propositions.
4. Organizational set up of the vendor particularly technical staffing to obtain services
without inordinate delay.
5. Assurance of quality, confidentiality and secrecy.
6. Data storage and processing facilities.
(c) Computation of estimate of profit as per AS 7
`
Expenditure incurred upto 31.3.2010 9,90,000
Estimated additional expenses (including provision for contingency) 60,000
Estimated cost (A) 10,50,000
Contract price (B) 12,50,000
Total estimated profit [(B-A)] 2,00,000
Percentage of completion (9,90,000 / 10,50,000) x 100 94.29%

29
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Computation of estimate of the profit to be taken to Profit and Loss Account:


Expenses incurred till 31.3.2010
Total estimated profit
Total estimated cost
9,90,000
2,00,000 = ` 1,88,571
10,50,000

According to para 21 of AS 7 Construction Contracts, when the outcome of a


construction contract can be estimated reliably, contract revenue and contract costs
associated with the construction contract should be recognised as revenue and expenses
respectively by reference to stage of completion of the contract activity at the reporting
date. Thus estimated profit amounting `1,88,571 should be recognised as revenue in the
statement of profit and loss.
(d) (a) Calculation of Gross Profit
Net Profit + Standing Charges
Gross Profit = 100
Turnover
45,000 + 90,000
= 100 = 30%
4,50,000

(b) Calculation of policy amount to cover loss of profit


`
Turnover in the last financial year 4,50,000
Add: 25% increase in turnover 1,12,500
5,62,500
Gross profit on increased turnover (5,62,500 x 30%) 1,68,750
Add: Additional standing charges 31,250
Policy Amount 2,00,000

Therefore, the trader should go in for a loss of profit policy of ` 2,00,000.

30
PAPER 1 : ACCOUNTING

(e) Calculation of Average Due Date


(Taking 3rd March, 2009 as base date)
Date of bill Term Due date Amount No. of days Product
2009 2009 from the base
date i.e. 3rd
March,2009
(`) (`) (`)
29th January 1 month 3rd March1 5,000 0 0
20th March 2 months 23rd May 4,000 81 3,24,000
12th July 1month 14th Aug.2 7,000 164 11,48,000
10th August 2 months 13th Oct. 6,000 224 13,44,000
22,000 28,16,000

Sum of Products
Average due date = Base date + Days equal to
Sum of Amounts
28,16,000
= 3rd March, 2009 +
22,000
= 3rd March, 2009 + 128 days
= 9th July, 2009

1
Bill dated 29th January, 2009 has the maturity period of one month, but there is no
corresponding date in February, 2009. Therefore, the last day of the month i.e. 28th
February, 2009 shall be deemed maturity date and due date would be 3rd March, 2009 (after
adding 3 days of grace).
2
Bill dated 12th July, 2009 has the maturity period of one month, due date (after adding 3
days of grace) falls on 15th August, 2009. 15th August being public holiday, due date would
be preceding date i.e. 14th August, 2009.
31
PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION
Question No.1 is compulsory.
Attempt any five questions from the remaining six questions.
Question 1
(a) X sent a consignment of mobile phones worth Rs. 60,000 to Y and obtained a railway
receipt therefore. Later, he borrowed a loan of Rs. 40,000 from Star Bank and endorsed
the railway receipt in favour of the Bank as security. In transit the consignment of mobile
phones was lost. The Bank files a suit against the railway for a claim of Rs.60,000, the
value of the consignment. The railway contended that the Bank is entitled to recover the
amount of loan i.e. Rs. 40,000 only. Examining the provisions of the Indian Contract Act,
1872, decide, whether the contention of the railway is valid. (5 Marks)
(b) (I) State with reasons whether the following statements are correct or incorrect.
(i) A promissory note duly executed in favour of minor is void.
(ii) No consideration is necessary to create an Agency. (21 Marks)
(II) Choose the correct answer from the following and give reasons (31 Marks)
(i) Where both the parties to an agreement are under mistake as to a matter of
fact, which is essential to the agreement, the agreement is:
(a) Valid
(b) Voidable
(c) Void
(d) Illegal.
(ii) In a Contract of Guarantee there is/are :
(a) One contract
(b) Two contracts
(c) Three contracts
(d) Four contracts.
(iii) Cash is withdrawn by the customer of a bank from the automatic teller machine
is an example of:
(a) Express contract
(b) Void contract
(c) Tacit contract
(d) Illegal contract.
(c) RSP Limited, allotted 500 fully paid-up shares of Rs. 100 each to Z, a minor, in response
to his application without knowing that he was a minor and entered his name in the
PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

Register of Members. Later on, the company came to know of this fact. The company
cancelled the allotment and struck-off his name from the Register of Members and also
forfeited his entire share money. He filed a suit against the action of the company.
Decide whether Z would be given any relief by the court under the provisions of the
Companies Act, 1956. (5 Marks)
(d) (I) State with reasons whether the following statements are correct or incorrect.
(i) A company should file its annual return within six months of the closing of the
financial year.
(ii) If a company does not receive the minimum subscription, it should refund
money received from applicants within 120 days of issue of prospectus.
(2 1 Marks)

(II) Choose the correct answer from the following and give reasons:
(i) An index of members must be maintained by a company when its membership
exceeds:
(a) 20
(b) 50
(c) 70
(d) 80
(ii) Unless the Articles provide for a large number, the quorum for a General
Meeting for a public limited company is:
(a) 1/3rd of the member
(b) 5 members personally present
(c) 2 members
(d) 7 members
(iii) Sources of funds for buy back of shares are:
(a) Free reserves or securities premium account
(b) The proceeds of any shares or other specified securities
(c) (a) and (b) both
(d) None of the above. (3 1 Marks)
Answer
(a) The given problem is based on the case of Morvi Mercantile Ltd. Vs. Union of India. As
stated by the Court, the deposit of title deed with the Bank as security against an
advance constitutes a Pledge. As per Sections 178 and 178A of the Indian Contract

33
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Act,1872 the deposit of title deeds with the Bank as a security against advance
constitutes a pledge.
As a Pledgee, a bankers rights are not limited to his interest in the goods pledged. In
the case of injury to the goods or their deprivation by a third party, the Pledgee would
have all such remedies that the owner of the goods would have against them.
In this case the Supreme Court also held that the Bank (Pledgee) was entitled to recover not
only the amount of the advance due to it, but also the full value of the consignment.
However, the amount over and above his interest is to be held by him in trust for the Pledger.
Thus, the Star Bank will succeed in recovering the claim of Rs.60,000 against the
railway.
(b) (I) (i) Incorrect: As per the Indian Contract Act,1872 ,minor is not competent to contract,
but he can be a beneficiary. In this case, the minor is a beneficiary. Hence the
Promissory Note is not void and the minor at his option can enforce it.
(ii) Correct: Unlike other regular contract, a Contract of Agency does not need
consideration. In other words, the relationship between the Principal and
Agent need not be supported by consideration as per Section 185 of the
Contract Act, 1872.
(II) (i) Answer (c)
Reason: If both the parties to an agreement are under a mistake (i.e. the
mistake is bilateral) regarding a matter of fact, which is essential to the
agreement, the agreement is void (Couturiers Vs. Hasite).
(ii) Answer (c)
Reason: In a Contract of Guarantee there are three contracts arising between
the Creditor & Principal debtor, Creditor and Surety and Principal debtor and
Surety. However, the contract is primarily between Principal debtor & Creditor
whereas the other two contracts are ancillary.
Alternate Answer
[As per the definition given under Section 126 of the Indian Contract Act,1872,
it states that a Contract of Guarantee is a contract to perform the promise, or
discharge the liability, of a third person in case of his default.
Therefore, Contract of Guarantee is a single contract primarily between
Principal Debtor and the Creditor with Surety standing as collateral only. The
liability of Surety will occur when there is default of the Principal Debtor.
So , Contract of Guarantee is a single contract with the three parties.]
(iii) Answer (c)
Reason: Tacit Contracts are those that are inferred through the conduct of
parties. Hence, this is a tacit contract.

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

(c) A minor being incompetent to contract, cannot be member of a company. It is true that
the Companies Act, 1956 prescribes no qualification for membership but membership
entails an agreement and this agreement can be enforced in the Court. Therefore, the
contractual capacity as envisaged by the Indian Contract Act, 1872 should be taken into
consideration. It has been held in Mohri Bibi vs. Dharmadas Ghose (1930) that since a
minor has no contractual capacity, the agreement with a minor is void. Therefore, a minor
or a lunatic cannot enter into an agreement to become a member of a company.
In the case Palaniappa vs Official Liquidator AIR 1942, it was observed that if the
directors allot share to a minor in response to his application, without knowing that he
was a minor and enter his name in the Register of Members. As soon as the company
comes to known of this fact, it can eschew the allotment and strike the name of the minor
off the Register of Members. But the company must refund the entire money to the minor,
which it obtained in relation to the shares allotted.
On the basis of above decision the contention of Z is not valid. The company is
empowered to cancel the allotment and strike the name of Z off the Register of Member.
But the decision of the company to forfeit the entire share money of Z is wrong. The
company must refund the money to the Z.
(d) (I) (i) Incorrect: Section 159 of the Companies Act, 1956 states that a company
should file its annual return within sixty days from the date of holding the
Annual General Meeting.
(ii) Correct: As per Section 69 of the Companies Act, 1956 if the applications are not
received by the company for such quantum of shares for making the minimum
subscription, within 120 days of the issue of prospectus, all moneys received from
the applicants for shares shall be repaid without interest. If any such money is not
repaid within 130 days after the issue of prospectus, moneys will be repaid with
interest at the rate of 6% p.a. from the expiry of 130 days.
(II) (i) Answer (b)
Reason: As per Section 151 of the Companies Act, 1956 every company
having more than 50 members must maintain an index of members except
where the Register of Members in itself constitutes an index.
(ii) Answer (b)
Reason: As per Section 174 of the Companies Act, 1956 unless the Articles
provide for a large number, the quorum for a General Meeting of a public
company is 5 members personally present.
(iii) Answer (c)
Reason: As per Section 77A of the Companies (Amendment) Act, 1999 a
company can purchase its own shares or other specified securities. The
purchase should be out of:
(i) its free reserves; or
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(ii) the securities premium account; or


(iii) the proceeds of any shares or other specified securities.
Question 2
(a) X was an employee of Universal Limited. He retired from the company on 31st March,
2010 and died after few months. Y, the heir of X, applied within the prescribed time to the
company for payment of due bonus of X. The company refused to pay the bonus.
Examine the validity of the company's refusal and also state the procedure to recover the
bonus under the provisions of the Payment of Bonus Act, 1965. (8 Marks)
(b) Explain the Social Sins listed by Mahatma Gandhi. (4 Marks)
(c) MNP Limited was incorporated in September, 2010. Now the company wants to hold its
first meeting of the Board of Directors. Draft a notice of the said meeting along with
agenda. (4 Marks)
Answer
(a) As per Section 21 of the Payment of Bonus Act, 1965 it may so happen that an amount of
bonus is due to an employee from his employer under a settlement or an award or agreement
and it is not paid. In such a case, the employee is to make an application for the recovery of
the amount to the Appropriate Government. Even his assignee or heirs can make this
application when the employee is dead. The application is to be made within one year from
the date on which the bonus becomes due but it may be entertained even after the expiry of
the said period of one year, if the Appropriate Government is satisfied that the application had
sufficient cause for not making the application within the said period.
In the given problem, the Universal Limiteds action is not valid. Y is entitled for payment
of bonus as per above provision. Y should apply for the payment of bonus to the
Appropriate Government within one year from the date on which bonus becomes due. On
the receipt of the aforesaid application for the recovery of the bonus amount, the
Appropriate Government or such authority as it may specify in this connection is to be
satisfied that the money is so due. On being thus satisfied, it must issue a certificate for
that amount to the Collector. There upon, Collector shall proceed to recover the same in
the same manner as an arrear of land revenue.
(b) Mahatma Gandhi, Father of India, promoted non-violence, justice and harmony between
people of all faiths. He stressed that people follow ethical principles and listed following
seven Social Sins:
(i) Politics without Principles
(ii) Wealth without Work
(iii) Commerce without Morality
(iv) Knowledge without Character
(v) Pleasure without Conscience

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

(vi) Science without Humanity


(vii) Worship without Sacrifice.
The first deals with the political field. The Kings in Indian tradition were only the guardian
executors and servants of 'Dharma'. For Gandhi, Rama was the symbol of a king
dedicated to principles. The second dictum deals with the sphere of Economics. Tolstoy
and Ruskin inspired Gandhi on the idea of bread-labour. Gandhiji developed the third
maxim into the idea of trusteeship. A businessman has to act only as a trustee of the
society for whatever he has gained from the society. Everything, finally, belongs to the
society. The fourth dictum deals with knowledge. Education stands for the all round
development of the individual and his character. Gandhi's system of basic education was
the system for development of one's character. In this maxim, Gandhi emphasized on
conscience. He said that pleasure without conscience is a sin. In sixth maxim, Gandhi
held that science without the thought of the welfare of humanity is a sin. Science and
humanity together pave the way for welfare of all. In religion, we worship, but if we are
not ready to sacrifice for social service, worship has no value, it is a sin to worship
without sacrifice.

(c) Notice of the First Meeting of the Board of Directors


MNP Limited
To, Date
(Director)
Dear Sir/Madam,

This is to inform you that the first meeting of the Board of Directors will be held at the
Registered Office of the company on 15th September, 2010 at 3 p.m. to transact the
business as per the enclosed agenda.
You are requested to please attend the meeting.
Yours faithfully,
Secretary
For and on behalf of the
Board of Directors
Place : ..
Date

Agenda:
(i) Election of the Chairman of the Meeting.

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(ii) To produce the Certificate of Incorporation, the Memorandum and the Articles of
Association.
(iii) Election of the Chairman of the Company.
(iv) Appointment of Managing Director.
(v) Appointment of Secretary.
(vi) Appointment of Auditors.
(vii) Appointment of Bankers and approval of the opening of a Bank Account and its
operation.
(viii) Adoption of the company's seal.
(ix) Approval of the statement of preliminary expenses by the promoters and adoption of
the preliminary contracts and underwriting contracts.
(x) Any other business with the permission of the chairman.
Question 3
(a) K is an employee of RST Limited, a software company which works five days, in a week.
K was not in continuous service during the financial year 2009-10. However, she worked
only for 150 days because she was on maternity leave with full pay for 50 days. Referring
to the provisions of the Payment of Gratuity Act, 1972 decide, whether K is entitled to
gratuity payable under the Act? Would your answer remain the same in case RST
Limited works six days in a week? (8 Marks)
(b) Explain the fundamental principles relating to ethics. (4 Marks)
(c) A, B and C are partners of a firm. A retires from the firm by mutual consent due to
sickness. Remaining partners (B and C) decide to admit D as a new partner in their firm.
Draft a deed for reconstitution of partnership. (4 Marks)
Answer
(a) As per Section 2 A of the Payment of Gratuity Act, 1972 an employee shall be said to be
in continuous service for a period if he has, for that period, been in uninterrupted service,
including service which may be interrupted on account of sickness, accident, leave, lay-
off, strike or a lockout or cessation of work not due to any fault of an employee.
Where any employee (not being an employee employed in a seasonal establishment) is
not in continuous service, for any period of one year he shall be deemed to be in
continuous service under the employer for the said period of one year, if the employee
during the period of twelve calendar months preceding the date with reference to which
calculation is to be made, has actually worked under the employer for not less than (i)
one hundred and ninety days, in the case of any employee employed below the ground in
a mine or in an establishment which works for less than six days in a week, and (ii) two
hundred and forty days, in any other case.

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

For the purposes of calculating the number of days on which an employee has actually
worked under an employer shall include the days on which in the case of a female, she
has been on maternity leave, so, however, that the total period of such maternity leave
does not exceed twelve weeks.
Thus, as per the above provisions-
In the first case, K is entitled for gratuity because she was in continuous service (150+50
days) more then 190 days in 2009-10.
In second case, she (K) is not entitled for gratuity because RST Limited works for 6 days
in a week and she worked only for 200 days less then prescribed limits (240 days).
(b) The fundamental principles relating to ethics may be summarized as under:
1. The Principle of Integrity: It calls upon all accounting and finance professionals to
adhere to honesty and straightforwardness while discharging their respective
professional duties.
2. The Principle of Objectivity: This principle requires accounting and finance
professionals to stick to their professional and financial judgment.
3. The Principle of Confidentiality: This principle requires practitioners of
accounting and financial management to refrain from disclosing confidential
information related to their work.
4. The Principle of Professional Competence and due care: Finance and
accounting professionals need to update their professional skills from time to time in
order to provide competent professional services to their clients.
5. The Principle of Professional Behaviour: This principle requires accounting and
finance professionals to comply with relevant laws and regulations and avoid such
actions which may result in discrediting the profession.
(c) Deed for Reconstitution of Partnership
This Deed of Reconstitution of Partnership executed on this ----- day of -----, 2010
Between B, S/o-------,Aged------------- residing at ---------(hereinafter called the first party),
C, S/o----, Aged------------- residing at-----------, (hereinafter called the second party), and
D, S/o-----, Aged------------- residing at---------, (hereinafter called the third party).
Whereas the parties B and C were working in partnership along with another partner A,
a business under the name and style of A B C constituted under an instrument of
partnership the last of which is dated ------------ ; and whereas the said partner A retired
from the old partnership by mutual consent due to sickness allowing the other partners
to continue the partnership business in the same name with all its assets and liabilities,
and whereas the parties B and C invited D to join them in the partnership to carry on the
said business for which he has assented, the terms and conditions of the reconstituted
partnership are hereby agreed to as follows:

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

1 The business under the name and style of A B C carried on by the erstwhile
partnership will continue with all its assets and liabilities as the business of this
reconstituted partnership.
2. The name on which the partnership business shall continue to be A B C and such
other name as the parties may from time to time determine. Other clauses as in the
partnership deed.
Question 4
(a) Unique Builders Limited, decides to pay 2.5 percent of the value of debentures as
underwriting commission to the underwriters but the Articles of the company authorize
only 2.0 percent underwriting commission on debentures. The company further decides
to pay the underwriting commission in the form of flats. Examine the validity of the above
arrangements under the provisions of the Companies Act, 1956. (4 Marks)
(b) State some examples of ethical issues faced by an individual at the workplace. (4 Marks)
(c) Explain the various forms of formal communication. (4 Marks)
Answer
(a) As per Section 76 of the Companies Act, 1956 the amount of underwriting commission
should not exceed, in the cases of shares, 5 percent of the price at which the shares
have been issued and in the case of debentures it should not exceed 2 1/2 percent or the
amount or rate authorized by the Articles whichever is less.
(i) Hence the decision of Unique Builders Limited, to pay underwriting commission
exceeding the percentage prescribed under Articles is not valid.
(ii) The company may pay the underwriting commission in the form of flats as decided in
the Booth Vs New Afrikander Gold Mining Co. (1903) case. Underwriting commission
may be paid in cash or kind or as lump sum or by way of percentage but in no case can
it go beyond the statutory limits of 5% or 2 % as the case may be.
(b) Some examples of ethical issues faced by an individual at the workplace are:
(i) Relationship with suppliers and business partners:
Bribery and immoral entertainment
Discrimination between suppliers
Dishonesty in making and keeping contracts
(ii) Relationship with customers:
Unfair pricing
Cheating customers
Dishonest advertising
Research Confidentiality

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

(iii) Relationship with employees:


Discrimination in hiring and treatment of employees,
Lack of good behaviour with employees
(iv) Management of resources:
Misuse of organizational funds
Tax evasion
(c) A formal communication flows along prescribed channels which all organizational
members desirous of communicating with one another are obliged to follow. Every
organization has built-in hierarchical system, communication in an organization is
multidirectional. On the basis of various directions in which communications are sent, we
can classify formal communication in these forms:
(i) Downward Communication
(ii) Upward Communication
(iii) Horizontal or Lateral Communication
(iv) Diagonal or Crosswise Communication
Communication generally flows from top to bottom. Downward communication means
communication from superior to subordinate in the hierarchical system of the
organization. It includes orders and instructions. In upward communication, message
flows from the subordinate to superior in the form of request, reports, instructions
complaints and suggestions. Communication between co-workers with different areas of
responsibility is called horizontal (lateral) communication. Communication among the
functional managers of a company is the best example of horizontal communication.
Diagonal communication means communication among the various
Department/employees of the organization without any hierarchical system in case of
emergency.
Question 5
(a) P draws a bill on Q for Rs.10,000. Q accepts the bill. On maturity the bill was dishonored
by non-payment. P files a suit against Q for payment of Rs. 10,000. Q proved that the bill
was accepted for value of Rs. 7,000 and as an accommodation to the plaintiff for the
balance amount i.e. Rs.3,000. Referring to the provisions of the Negotiable Instruments
Act, 1881 decide whether P would succeed in recovering the whole amount of the bill?
(8 Marks)
(b) State with reasons whether the following statements are correct or incorrect.
(i) Business and industry are closely linked with environment and resource utilization.
(ii) Trusteeship provides a means of transforming the present capitalist order of society
into an egalitarian one. (22 Marks)

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(c) State the reasons for acceptance of change in an organisation. (4 Marks)

Answer
(a) As per Section 44 of the Negotiable Instruments Act, 1881, when the consideration for
which a person signed a promissory note, bill of exchange or cheque consisted of
money, and was originally absent in part or has subsequently failed in part, the sum
which a holder standing in immediate relation with such signer is entitled to receive from
him is proportionally reduced.
[Explanation- The drawer of a bill of exchange stands in immediate relation with the
acceptor. The maker of a promissory note, bill of exchange or cheque stands in
immediate relation with the payee, and the endorser with his endorsee. Other signers
may be agreement stand in immediate relation with a holder].
On the basis of above provision, P would succeed to recover Rs. 7,000 only from Q and
not the whole amount of the bill because it was accepted for value as to Rs.7,000 only
and an accommodation to P for Rs.3,000.
(b) (i) Correct: Business and industry are closely linked with environment and resource
utilization. Production process and strategy for eco-friendly technologies throughout
the product life cycle and minimization of waste play a major role in the protection of
the environment and conservation of resources. Business, industry and
multinational corporations have to recognize environmental management as the
priority area and a key determinant to sustainable development.
(ii) Correct: Commerce without morality was developed into the idea of Trusteeship by
Gandhiji. A businessman has to act only as a trustee of the society for whatever he
has gained from the society. Everything, finally, belongs to the society. Hence,
"Trusteeship provides a means of transforming the present capitalist order of
society into an egalitarian one."
(c) Generally, people resist change in an organization. Even after there are some people
who accept or welcome change due to the following reasons:
1. Personal Gain: People will be more likely to accept change when they see the
possibility that they will gain in some of the following areas:-
Increased security
Money
More authority
Status/Prestige
Better Working Conditions
Self-Satisfaction

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

Better Personal Contracts


Less time and efforts

2. Other factors:
Provide a new challenge
Respects/like the source
Likes the way change is being communicated
Reduces boredom
Provides opportunity for input
Improve future
Perception, that the change is necessary
Question 6
(a) In a General Meeting of PQR Limited, the Chairman directed to exclude certain matters
detrimental to the interest of the company from the minutes. M, a shareholder contended
that the minutes of the meeting must contain fair and correct summary of the proceedings
thereat. Decide, whether the contention of M/s is maintainable under the provisions of the
Companies Act, 1956? (8 Marks)
(b) State the objectives of the Central Consumer Protection Council in India. (4 Marks)
(c) Explain the basic principles of interpersonal communication. (4 Marks)
Answer
(a) Under Section 193 (5) of the Companies Act, 1956 any matter which in the opinion of the
Chairman of the meeting:
(i) is or could reasonably be regarded as defamatory of any person;
(ii) is irrelevant or immaterial to the proceeding; or
(iii) is detrimental to the interests of the company;
The chairman shall have the discretion in regard to the inclusion or non inclusion of any
matter in the minutes on the grounds specified above.
The Chairman enjoys an absolute discretion in the regard.
Hence, the contention of M, a shareholder of PQR Limited is not valid because the
Chairman has discretion on the inclusion or exclusion of any matter in the minutes for
aforesaid reasons.
(b) The objectives of the Central Consumer Protection Council in India are to promote and
protect the rights of the consumers such as:-

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(i) the right to be protected against the marketing of goods and services which are
hazardous to life and property;
(ii) the right to be informed about the quality, quantity, potency, purity, standard and
price of goods/services so as to protect the consumer against unfair trade practices;
(iii) the right to be assured, whichever possible, access to a variety of goods and
services at competitive prices;
(iv) the right to be heard and to be assured that consumers interest will receive due
consideration at appropriate terms;
(v) the right to seek redressal against unfair trade practices;
(vi) the right to consumer education.
(c) The basic principles of interpersonal communication are as follows:
(i) Interpersonal Communication is Inescapable: It is a continuous process. We
constantly communicate to others and also receive communication from others
through not only words but through tone of voice and through gesture, posture,
facial expressions etc.
(ii) Interpersonal Communication is Irreversible: It deals with proper speaking. Once a
word goes out your mouth, you can never swallow it again. The effect will
inevitably remain for ever.
(iii) Interpersonal Communication is Complicated: It is extremely complicated. A
message or communication may be simple but it involves a number of variables.
(iv) Interpersonal Communication Contextual: In other words, communication does not
happen in isolation. There are so many contexts in communication such as
psychological context, relational context, situational context, environmental context
and cultural context etc.
Question 7
(a) S retired from the services of PQR Limited, on 31st March, 2009. He had a sum of Rs. 5
lac in his Provident Fund Account. It has become due for payment to S on 30th April,
2009 but the company made the payment of the said amount after one year. S claimed
for the payment of interest on due amount at the rate of 15 percent per-annum for one
year. Decide, whether the claim of S is tenable under the provisions of the Employee's
Provident Funds and Miscellaneous Provisions Act, 1952. (4 Marks)
(b) RSP Limited, with a limited liability of its members by guarantee of Rs. 10 lac to each
member. The company increases the liability of the members from Rs.10 to 15 lac by an
alteration made in the liability clause of the Memorandum of Association. Referring to the
provisions of the Companies Act, 1956 decide, whether the members of the company are
liable for the increased liability. (4 Marks)
OR

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

The Board of Directors of XYZ Private Limited, a subsidiary of SRN Limited, decides to
grant a loan of Rs.2.00 lac to P, the Finance Manager of the company getting salary of
Rs.30,000 per month, to buy 400 partly paid-up equity share of Rs. 1,000 each of XYZ
Limited. Examine the validity of Board's decision with reference to the provisions of the
Companies Act, 1956. (4 Marks)
(c) Explain briefly the key strategies which can be used at the time of implementation of
Corporate Social Responsibility policies and practices in a company. (4 Marks)
OR

Write a note on harassment at workplace. (4 Marks)


(d) State reasons for selecting the oral mode of communication instead of the written mode
of communication. (4 Marks)
OR

X desires to gift his flat to Y. Draft a gift deed. (4 Marks)


Answer
(a) According Section 7Q of the Employees' Provident Funds and Miscellaneous Provisions
Act, 1952 the employer shall be liable to pay simple interest @ of 12% per annum or at
such higher rate as may be specified in the Scheme on any amount due from him under
this Act from the date on which the amount has become so due till the date of its actual
payment:
Provided that higher rate of interest specified in the Scheme shall not exceed the lending
rate of interest charged by any scheduled bank.
As per above provision, S can claim for the payment of interest on due amount @ 12
percent per annum or at the rate specified in the Scheme, whichever is higher, for one
year. Here in the absence of specified rate he(S) can claim only 12 percent per annum
interest on the due amount.
Hence claim of S for interest rate of 15% is not tenable.
(b) According Section 38 of the Companies Act, 1956, no member of a company shall be
bound by an alteration made in the Memorandum or Articles after the date on which he
become a member, if such an alteration requires him to take or subscribe for more
shares should then the number held by him as the date of alteration or in any way
increase his liability. But the section will not apply where the member agrees in writing
either before or after a particular alteration is made, so as to bind by the alteration.
Hence, the members of RSP Limited are not bound by any alteration made in the liability
clause without obtaining their written permission.
OR

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

According to Section 77 of the Companies Act, 1956 no public company and no private
company (being subsidiary of a public company) can give financial aid to any person
(either directly or indirectly) and whether by way of loan, guarantee or surety or
otherwise, for, or in connection with, purchase or subscription made or to be made of any
shares of its own or of its holding company. But there are few exceptions of the Section
77 of the above Act, out of them one exception is as under.
The company may advance a loan to a person bonafide in its employment (other than
directors, or managers) to enable them to purchase or subscribe for fully paid shares for
an amount not exceeding their salary or wages for a period of six months.
On the basis of above provisions, the proposals of the Board of Directors of XYZ Limited
is not valid because P is a Finance Manager and he wants to purchase partly paid up
shares of the company. The amount of loan is also higher than the six months salary of
P.
(c) Each company differs in how it implements Corporate Social Responsibility (CSR). The
distinction depends on such factors as the company's size, sector, culture and the
commitment of its leadership. Below are some key strategies that companies can use
when implementing CSR policies and practices in a company.
(i) Mission, Vision and Value Statements
(ii) Cultural Values
(iii) Management Structures
(iv) Strategic Planning
(v) General Accountability
(vi) Employee Recognition and Rewards
(vii) Communications, Education and Training
(viii) CSR Reporting
OR

Harassment is tormenting by subjecting to constant interference or intimidation. Law


prohibits harassing acts and conduct that creates an intimidating hostile or offensive
working environment, which could be a term or condition of an individuals employment,
either explicitly or implicitly or such conduct which has the purpose or effect of
unreasonably interfering with an individuals work performance or creating an
intimidating, hostile or offensive working environment. Another type of harassment is
sexual harassment situations in which an employee is coerced into giving in to another
employees sexual demands by the threat of losing some significant job benefit, such as
a promotion, raise or even the job. Sexual harassment is prohibited and an employer is
held responsible for all sexual harassment engaged in by employees, regardless of

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

whether the employer knew or should have known the harassment was occurring and
regardless of whether it was forbidden by the employer.
(d) Oral Communication is a face to face communication with others. Oral communication is
characterized by seven Cs Candidness, Clarity, Completeness, Conciseness,
Concreteness, Correctness, and Courtesy. These act as principles for selecting the
mode of oral communication. In addition to above seven principles it has its own
benefits as under:
(i) More personal and informal.
(ii) Make immediate and impact.
(iii) Provides opportunity for interaction and feedback.
(iv) Helps us to correct ourselves (our message according to the feedback and non-
verbal cues received from the listener).
(v) Better for conveying feelings and emotions.
(vi) More effective because one can understand the message better by observing facial
expressions, eye contact, tone of voice, gestures, postures etc of the sender.
It is said that it does not matter what you say, what matters is how you say it. Your way
of saying includes your choice of words, your confidence and sincerity.
OR

Gift Deed
This Deed of Gift is made at----- (city) on this ------ day of ----- 2010 between X and Y an
Indian inhabitant residing at flat No. ------, Floor --------, Coop. Housing Society Ltd. ----
(city) hereinafter called "THE DONOR" of the ONE PART and ------ also an Indian
inhabitant of------ (city), residing at flat no. -------, floor ---------, Coop. Housing Society
Ltd. -------(city), hereinafter called" THE DONEE" of the OTHER PART.
WHEREAS the Donee Y is the ------- ( Relative) of Donor X .
AND WHEREAS the Donor is the member of ------- society which is duly registered under
the Maharashtra Coop. Societies Act 1960, (hereinafter referred to as the said society).
The donor has five fully paid up shares of the said society. The donor has acquired a flat
No. ------ on the ----- floor and measuring ------ sq. meters. In the building known as "----
(hereinafter referred to as the "said building") situate at ------ (City), (hereinafter referred
to as "the said flat") more particularly described in the Schedule hereunder written "said
society").
WHEREAS the Donor has full right title and interest in the said shares/flat more
particularly described in the Schedule hereunder written.

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

AND WHEREAS the Donor desires to gift his right, title and interest in the said shares/flat
in the said building of the said society more particularly described in the Schedule
hereunder written to the Donee hereto.
NOW THIS DEED OF GIFT WITNESSETH AS FOLLOWS:
The donor out of natural love and affection for the Donee, hereby transfers by way of gift
his right, title and interest in the said shares and the said flat more particularly described
in the Schedule hereunder written to the Donee absolutely for ever.
The Donee accepts the gift and agrees to hold the right, title and interest of the donor in
the said shares/flat in the said building of the said society more particularly described in
the Schedule hereunder written of the said flat from the Donor.
Schedule of property above referred to:
IN WITNESS WHEREOF the parties hereto have hereunder set and subscribed their
respective hands on the day and the year first herein above written.
SIGNED AND DELIVERED
By the within named "Donor"
In the presence of ---------
1) ------------
2) --------------
SIGNED AND DELIVERED
By the within named "Donee"
In the presence of
1) -----------
2) -----------
A Suggestive Simple Format of the Gift Deed
KNOW ALL MEN BY THESE PRESENTS that I, -----S/o ----- R/o ----------, transfers
voluntarily, the flat no. -------situated at ---------, the estimated value of which is Rs ------- (
Rupees -------only) to ------- S/o of ------------R/o-----------. To hold the same to the donee
absolutely for ever, I further declare that the said gift has been made by me out of my
natural love and affection for the donee and the same has been accepted by the donee.
IN WITNESS WHEREOF, I have executed this -------- day of ---------.
Witness:
1. --------- DONOR: ----------
2. ---------- DONOR: -----------

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
Question No. 1 is compulsory
Attempt any five questions from the remaining six questions.
Working notes should form part of the answer

Question 1
Answer the following:
(a) Compute the sales variances (total, price and volume) from the following figures:
Product Budgeted Budgeted Price per Actual quantity Actual Price
quantity Unit (`) per unit (`)
P 4000 25 4800 30
Q 3000 50 2800 45
R 2000 75 2400 70
S 1000 100 800 105
(b) ABC Limited has received an offer of quantity discounts on its order of materials as
under:
Price per tonnee Tonnes
(`) Nos.

4,800 Less than 50

4,680 50 and less than 100

4,560 100 and less than 200

4,440 200 and less than 300

4,320 300 and above

The annual requirement for the material is 500 tonnes. The ordering cost per order is `
6,250 and the stock holding cost is estimated at 25% of the material cost per annum.
Required :
(i) Compute the most economical purchase level.
(ii) Compute E.O.Q. if there are no quantity discounts and the price per tone is ` 5,250.
(c) MNP Limited has made plans for the next year 2010 -11. It is estimated that the company
will employ total assets of ` 25,00,000; 30% of assets being financed by debt at an
interest cost of 9% p.a. The direct costs for the year are estimated at ` 15,00,000 and all
other operating expenses are estimated at ` 2,40,000. The sales revenue are estimated
at ` 22,50,000. Tax rate is assumed to be 40%. Required to calculate:
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(i) Net profit margin (ii) Return on Assets


(iii) Asset turnover (iv) Return on equity
(d) PQR Ltd. has the following capital structure on October 31, 2010:
`
Equity Share Capital 20,00,000
(2,00,000 Shares of ` 10 each)
Reserves & Surplus 20,00,000
12% Preference Shares 10,00,000
9% Debentures 30,00,000
80,00,000

The market price of equity share is ` 30. It is expected that the company will pay next
year a dividend of ` 3 per share, which will grow at 7% forever. Assume 40% income tax
rate.
You are required to compute weighted average cost of capital using market value
weights. (4 5 = 20 Marks)
Answer
(a) Working:
Product Budgeted Actual Budgeted Actual Budgeted Standard Actual
Price Price Qty. Qty. Sales Sales sales
(Rs.) (Rs.) (Rs.) (Actual (Rs.)
Sales at
Budgeted
price)
(Rs.)
a b c d e =a x c f=axd g =b x d
P 25 30 4,000 4,800 1,00,000 1,20,000 1,44,000
Q 50 45 3,000 2,800 1,50,000 1,40,000 1,26,000
R 75 70 2,000 2,400 1,50,000 1,80,000 1,68,000
S 100 105 1,000 800 1,00,000 80,000 84,000
5,00,000 5,20,000 5,22,000
Calculation of variances:
Sale Price Variance = Actual Quantity (Actual Price Budgeted Price)
= Actual Sales Standard. Sales
= 5,22,000 5,20,000 = Rs. 2,000 (Favourable)

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Sales Volume Variance = Budgeted Price (Actual Quantity Budgeted Quantity)


= Standard Sales (Actual Sale at Standard Price) Budgeted Sales
= 5,20,000 5,00,000 = Rs. 20,000 (Favourable)
Total Sales Variance = Actual Sales Budgeted Sales
= 5,22,000 5,00,000 = Rs. 22,000 (Favourable)
Verification: Total Sales Variance (Rs.20,000/- Favourable) = Sales Price Variance
(Rs.2,000/- Favourable) + Sales Volume Variance (Rs.20,000 Favourable)
(b) (i) Calculation of most economical purchase level:
A= Annual requirement = 500 tonnes
Order No. of Orders Cost of Ordering Cost Carrying Cost Total Cost
size Purchase
(Q) (A/Q) (A x Cost/total) (A/Q x Rs. (Q/2 x Price/ tonne
Units 6,250) 25%) Rs.
40 500/40= 12.5 5004,800 12.5X6,250 40 25,02,125
= 24,00,000 = 78,125 4,800 .25 = 24,000
2
50 500/50= 10 500 X 4,680 10X6,250 50 24,31,750
= 23,40,000 = 62,500 4,680 .25 = 29,250
2
100 500/100= 5 500 X 4,560 5X62,250 100 23,68,250
= 22,80,000 = 31,250 4,560.25 = 57,000
2
200 500/200= 2.5 500 4,440= 2.5 200 23,46,625
22,20,000 6,250=15,625 4,440.25=1,11,000
2
300 500/300=1.67 500 X 4,320 1.67 X 6,250
300 23,32,437.50
= 21,60,000 4,320.25 =1,62,000
= 10,437.50
2
The total cost of purchase, ordering cost and carrying cost of 500 tonnes is
minimum Rs. 23,32,437.50 when the order size is 300 tonnes. Hence most
economical purchase level is 300 tonnes.
2AO 2 500 tonnes Rs.6250per order
(ii) EOQ = =
C i Rs.5250 .25

= 69 tonnes
A is the annual requirement for the material.
O is the ordering Cost per order
Ci is the carrying Cost per unit per annum.

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(c) The net profit is calculated as follows:


`
Sales Revenue 22,50,000
Less: Direct Costs 15,00,000
Gross Profits 7,50,000
Less: Operating Expense 2,40,000
EBIT 5,10,000
Less: Interest (9% 7,50,000) 67,500
EBT 4,42,500
Less: Taxes (@ 40%) 1,77,000
PAT 2,65,500

(i) Net Profit Margin


EBIT (1 - t) 5,10,000 (1 0.4)
Net Profit Margin = 100 = = 13.6%
Sales 22,50,000
(ii) Return on Assets (ROA)
ROA = EBIT (1 t) Total Assets
= 5,10,000 (1 0.4) 25,00,000 = 3,06,000 25,00,000
= 0.1224 = 12.24%
(iii) Asset Turnover
Sales 22,50,000
Asset Turnover = = = 0.9
Assets 25,00,000
Asset Turnover = 0.9
(iv) Return on Equity (ROE)
PAT 2,65,500
ROE = = = 15.17%
Equity 17,50,000
ROE = 15.17%
(d) Computation of Weighted Average Cost of Capital (WACC): Existing Capital
Structure
Calculation of Cost of Equity
D1
Cost of Equity = +g
Po

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Rs. 3
= + 0.07 = 0.1 + 0.07
Rs. 30
= 0.17 = 17%
After Tax Cost Weights Weighted Cost
9% Debentures (Kd) 0.054* 0.375 0.0203
12% Preference Shares 0.12 0.125 0.015
Equity Capital 0.17 0.500 0.085
0.1203
*Kd = rd* (1Tc) = 9% (1 0.4) = 5.4% or 0.054
Weighted Average Cost of Capital = 0.1203 or 12.03%
Question 2
(a) PQR Construction Ltd. commenced a contract on April 1, 2009. The total contract was for `
27,12,500. It was decided to estimate the total profit and to take to the credit of P/L A/c the
proportion of estimated profit on cash basis which work completed bear to the total contract.
Actual expenditure in 2009-10 and estimated expenditure in 2010-11 are given below:
2009-10 2010-11

Actual( `) Estimated (`)


Material issued 4,56,000 8,14,000
Labour : Paid 3,05,000 3,80,000
: Outstanding at end 24,000 37,500
Plant purchased 2,25,000 -
Expenses : Paid 1,00,000 1,75,000
: Outstanding at the end - 25,000
: Prepaid at the end 22,500 -
Plant returned to stores (a historical stores) 75,000 1,50,000 (on Dec 31
2010)
Material at site 30,000 75,000
Work-in progress certified 12,75,000 Full
Work-in-progress uncertified 40,000 ----
Cash received 10,00,000 Full
The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to
be completed on December 31, 2010.
required:
(i) Prepare the Contract A/c for the year 2009-10.

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(ii) Estimate the profit on the contract for the year 2009-10 on prudent basis which has
to be credited to P/L A/c. (8 Marks)
(b) RST Limited is considering relaxing its present credit policy and is in the process of
evaluating two proposed polices. Currently, the firm has annual credit sales of ` 225
lakhs and accounts receivable turnover ratio of 5 times a year. The current level of loss
due to bad debts is ` 7,50,000. The firm is required to give a return of 20% on the
investment in new accounts receivables. The companys variable costs are 60% of the
selling price. Given the following information, which is a better option?
Present Policy Policy
Policy Option I Option II
Annual credit sales(`) 225 275 350
Accounts receivable turnover ratio 5 4 3
Bad debt losses (`) 7.5 22.5 47.5
(8 Marks)
Answer
(a) PQR Construction Ltd.
Contract A/c
(April 1, 2009 to March 31,2010)
Dr. Cr.
To Materials Issued 4,56,000 By Plant returned to Stores 60,000
To Labour (Working Note 1)
Paid 3,05,000 By Materials at Site 30,000
Outstanding 24,000 3,29,000 By W.I.P.
To Plant Purchased 2,25,000 Certified 12,75,000
To expenses Uncertified 40,000 13,15,000
Paid 1,00,000
(-) Prepaid 22,500 77,500 By Plant at Site 1,20,000
To Notional Profit c/d 4,37,500 (Working Note No. 2) -
15,25,000 15,25,000
To Profit & Loss A/c 1,59,263 By Notional Profit b/d 4,37,500
(Refer to Working Note 5)
To Work-in-Progress A/c 2,78,237 -
(Profit-in-reserve) 4,37,500 4,37,500

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

PQR Construction Ltd.


Contract A/c
(April 1, 2009 to December 31,2010)
(For Computing estimated profit)
Dr. Cr.
To Materials Issued 12,70,000 By Material at Site 75,000
(4,56,000+8,14,000)
To Labour Cost 7,22,500 By Plant returned to 60,000
(Paid & Outstanding) Stores on 31.3.2010
3,05,000 + 24,000 + 3,56,000 By Plant returned to
+ 37,500) Stores on 31.12.2010 1,02,000
To Plant purchased 2,25,000 (Working Note 3)
To expenses By Contractee A/c 27,12,500
(77,500 + 1,97,500 + 25,000) 3,00,000
To Estimated profit 4,32,000 -
29,49,500 29,49,500

Working Notes
Rs.
1. Value of the Plant returned to Stores on 31.03.2010
Historical Cost of the Plant returned 75,000
Less: Depreciation @ 20% of WDV for one year 15,000
60,000
2. Value of Plant at Site 31.3.2010
Historical Cost of Plant at Site 1,50,000
Less: Depreciation @ 20% on WDV for one year 30,000
1,20,000
3. Value of Plant returned to Stores on 31.12.2010
Value of Plant (WDV) on 31.3.2010 1,20,000
Less: Depreciation @ 20% of WDV for a period of 9 months 18,000
1,02,000


Labour paid in 2010- 11:3,80,000 24,000 = 3,56,000

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

4. Expenses Paid for the year 2009-10


Total expenses paid 1,00,000
Less: Pre-paid at the end 22,500
77,500
5. Profit to be credited to Profit & Loss A/c on March 31,2010
for the Contract likely to be completed on December 31,2100
Work Cerfified Cash received
= Estimated Profit x
Total Contract Price Work Certified
12,75,000 10,00,000
= 4,32,000
27,12,500 12,75,000
= Rs. 15,92,263
(b) Evaluation of Credit Policies for RST Ltd.
Amount in Rs. Lakhs
Present Policy Policy
Policy Option I Option II
Annual Credit Sales 225 275 350
Accounts Receivable Turnover 5 times 4 times 3 times
Average Collection period (12/Accounts 2.4 months 3 months 4 months
Receivable Turnover)
Average Level of Accounts Receivables 45 68.75 116.67
(Annual Credit Sales/Accounts
Receivable Turnover)
Marginal Increase in Investment in - 14.25 28.75
Receivables less Profit Margin
Marginal Increase in Sales - 50 75
Profit on Marginal Increase in Sales - 20 30
(40%)
Marginal Increase in Bad Debt Losses - 15 25
Net Gain - 5 5
Required Return on Marginal - 2.85 5.75
Investment @ 20%
Surplus (Deficit) after Required Rate of - 2.15 (0.75)
Return
Advise: It is clear from the foregoing analysis that the Policy Option I has a surplus of
Rs. 2.15 lakhs whereas Option II shows a deficit of Rs. 0.75 lakhs on the basis of 20%
return. Hence, Policy Option I is better.

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Question 3
(a) Following information is available regarding Process A for the month of October 2010:
Production Record:
(i) Opening work-in progress 40,000 Units
(Material: 100% complete, 25% complete for
labour & overheads)
(ii) Units Introduced 1,80,000 Units
(iii) Units Completed 1,50,000 Units
(iv) Units in-process on 31.10.2010 70,000 Units
(Material: 100% complete, 50% complete for
labour & overheads)
Cost Record:
Opening Work-in-progress:
Material ` 1,00,000
Labour ` 25,000
Overheads ` 45,000
Cost incurred during the month:
Material ` 6,60,000
Labour ` 5,55,000
Overheads ` 9,25,000
Assure that FIFO method is used for W.I.P. inventory valuation.
Required:
(i) Statement of Equivalent Production
(ii) Statement showing Cost for each element
(iii) Statement of apportionment of Cost
(iv) Process A Account (8 Marks)
(b) (i) Calculate the degree of operating leverage, degree of financial leverage and the
degree of combined leverage for the following firms and interpret the results:
P Q R
Output (units) 2,50,000 1,25,000 7,50,000
Fixed Cost (`) 5,00,000 2,50,000 10,00,000

57
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Unit Variable Cost (`) 5 2 7.50


Unit Selling Price (`) 7.50 7 10.0
Interest Expense (`) 75,000 25,000 -
(ii) Discuss the liquidity vs. profitability issue in management of working capital.
(4+4 =8 Marks)
Answer
(a) Statement of Equivalent Production
(FIFO Method)
Particulars Equivalent Production
Material Labour & Overheads
Input Output Units % Qty. % Qty.
(Units) Completion Completion
Opening 40,000 Transfer to Process
WIP II
Introduced 1,80,000 Opening WIP 40,000 - - 75% 30,000
completed
Introduced & 1,10,000 100% 1,10,000 100% 1,10,000
completed
Closing WIP 7,000 100% 70,000 50% 35,000

2,20,000 2,20,000 1,80,000 1,75,000

Statement showing Cost for each element


Item of Cost Equivalent Production Cost Incurred Cost per Unit
Material 1,80,000 6,60,000 3.66667
Labour & Overheads 1,75,000 14,80,000 8.45714
12.12381
Statement of Evaluation
Transfer to Process II
Opening WIP Completed
Cost Incurred already 1,70,000
Cost Incurred during the Month
Labour & Overheads 2,53,714 4,23,714
30,000 8.45714
Introduced & Completed 1,10,000 12.12381 13,33,619
17,57,333

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Closing WIP
Material 70,000 3.6667 = 2,56,667 2,56,667
Labour and Overheads 35,000 8.45714 2,96,000 5,52,667
Process A A/c
Units Amount Units Amount
To Opening WIP 40,000 1,70,000 By Process II A/c 1,50,000 17,57,333
To Materials 1,80,000 6,60,000
To Labour 5,55,000 By Closing WIP 7,000 5,52,667
To Overheads 9,25,000
2,20,000 23,10,000 2,20,000 23,10,000
(b) (i) Estimation of Degree of Operating Leverage (DOL), Degree of Financial
Leverage (DFL) and Degree of Combined Leverage (DCL)
P Q R
Output (in units) 2,50,000 1,25,000 7,50,000
Selling Price (per unit) 7.50 7 10
Sales Revenues 18,75,000 8,75,000 75,00,000
Less: Variable Cost 12,50,000 2,50,000 56,25,000
Contribution Margin 6,25,000 6,25,000 18,75,000
Less: Fixed Cost 5,00,000 2,50,000 10,00,000
EBIT 1,25,000 3,75,000 8,75,000
Less: Interest Expense 75,000 25,000 -
EBT 50,000 3,50,000 8,75,000
Contribution 5x 1.67 x 2.14 x
DOL =
EBIT
EBIT 2.5 x 1.07 x -
DFL =
EBT
DCL = DOL DFL 12.5 x 1.79 x 2.14 x
Comment Aggressive Moderate
Moderate Policy
Policy Policy
with no financial
leverage
(ii) Liquidity versus Profitability Issue in Management of Working Capital
Working capital management entails the control and monitoring of all components of
working capital i.e. cash, marketable securities, debtors, creditors etc. Finance
manager has to pay particular attention to the levels of current assets and their
financing. To decide the level of financing of current assets, the risk return trade off
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

must be taken into account. The level of current assets can be measured by
creating a relationship between current assets and fixed assets. A firm may follow a
conservative, aggressive or moderate policy.

A conservative policy means lower return and risk while an aggressive policy
produces higher return and risk. The two important aims of the working capital
management are profitability and solvency. A liquid firm has less risk of insolvency
i.e. it will hardly experience a cash shortage or a stock out situation. However, there
is a cost associated with maintaining a sound liquidity position. So, to have a higher
profitability the firm may have to sacrifice solvency and maintain a relatively low
level of current assets.
Question 4
(a) Balance Sheets of ABC Ltd as on March 31, 2009 and March 31, 2010 are as under:
Liabilities 31.3.2009 31.3.2010 Assets 31.3.2009 31.3.2010
` ` ` `
Share Capital 40,00,000 40,00,000 Land and Building 30,00,000 28,00,000
General Reserve 8,00,000 9,00,000 Plant and 36,00,000 35,00,000
Machinery
Profit and Loss A/c 5,00,000 7,20,000 Investments 8,00,000 7,44,000
(long-term)
10% Debentures 20,00,000 16,00,000 Stock 9,60,000 17,00,000
Bank Loan (long- 10,00,000 12,00,000 Debtors 12,00,000 15,96,000
term)
Creditors 8,00,000 11,60,000 Prepaid Expenses 1,00,000 80,000
Outstanding 40,000 50,000 Cash and Bank 2,80,000 1,70,000
Expenses
Proposed Dividend 6,00,000 7,20,000
Provision for 2,00,000 2,40,000
Taxation
99,40,000 1,05,90,000 99,40,000 1,05,90,000

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Additional Information:
(i) New machinery for ` 6,00,000 was purchased but an old machinery costing `
2,90,000 was sold for ` 1,00,000 and accumulated depreciation thereon was `
1,50,000.
(ii) 10% debentures were redeemed at 20% premium.
(iii) Investments (long term) were sold for ` 90,000 and its profit was transferred to
general reserve.
(iv) Income-tax paid during the year 2009-10 was ` 1,60,000.
(v) An interim dividend of ` 2,40,000 has been paid during the year 2009-10.
(vi) Assume the provision for taxation as current liability and proposed dividend as non-
current liability.
(vii) Investments (long-term) are non-trade investments.
Required:
(i) Schedule of changes in working capital
(ii) Funds flow from operations for the year ended March 31, 2010. (8 Marks)
(b) MNP Ltd sold 2,75,000 units of its product at ` 37.50 per unit. Variable costs are ` 17.50
per unit (manufacturing costs of ` 14 and selling cost ` 3.50 per unit). Fixed costs are
incurred uniformly throughout the year and amount to ` 35,00,000 (including depreciation
of `15,00,000). there are no beginning or ending inventories.
Required:
(i) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Estimate the P/V ratio.
(iii) Estimate the number of units that must be sold to earn an income (EBIT) of `
2,50,000.
(iv) Estimate the sales level achieve an after-tax income (PAT) of ` 2,50,000. Assume
40% corporate Income Tax rate. (8 Marks)
Answer
(a) (i) Schedule of Changes in Working Capital:
Particulars 31st March Working Capital
2009 2010 Increase Decrease
` ` ` `
(A) Current Assets
Stock 9,60,000 17,00,000 7,40,000
Debtors 12,00,000 15,96,000 3,96,000

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Prepaid Expenses 1,00,000 80,000 20,000


Cash and Bank 2,80,000 1,70,000 1,10,000
Total (A) 25,40,000 35,46,000
(B) Current Liabilities
Creditors 8,00,000 11,60,000 3,60,000
Outstanding 40,000 50,000 10,000
Expenses
Provision for Taxation 2,00,000 2,40,000 40,000
Total (B) 10,40,000 14,50,000
Working Capital 15,00,000 20,96,000 11,36,000 5,40,000
(A) (B)
Increase in Working 5,96,000 5,96,000
Capital
Total 20,96,000 20,96,000 11,36,000 11,36,000

(ii) Funds flow from Operations for the year ended March 31, 2010
Adjusted Profit and Loss A/C
Particulars Rs. Particulars Rs.
To General Reserve 66,000 By Balance b/d 5,00,000
To Depreciation: By Funds from 21,26,000
Operations
(Balancing figure)
On Land & Building 2,00,000
On Plant & 5,60,000 7,60,000
Machinery
To Loss on Sale of 40,000
Machine
To Premium on 80,000
Redemption of
Debentures
To Proposed 7,20,000
Dividend
To Interim Dividend 2,40,000
To Balance c/d 7,40,000
26,26,000 26,26,000

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Working Notes:
(i) Depreciation on Land and Building = Rs. 30,00,000 28,00,000 = Rs.
2,00,000
(ii) Loss on Sale of Old Machine = Rs. 2,90,000 (Cost) 1,50,000 (Cum. Dep.)
1,00,000 (Sale Value) = 40,000
(iii) Depreciation on Plant and Machinery
Dr. Rs. Cr. Rs.
To Balance b/d 36,00,000 By Bank a/c (sold) 1,00,000
To Bank a/c 6,00,000 By Profit & Loss a/c 40,000
(Purchases) (Loss on Sales)
By Depreciation 5,60,000
(Balancing figure)
By Balance c/d 35,00,000
42,00,000 42,00,000
(iv) Premium on Redemption of Debentures
Amount of Debentures Redeemed = Rs. 20,00,000 16,00,000 = Rs. 4,00,000
Premium = 20% of 4,00,000 = Rs. 80,000
Fixed cost Rs.35,00,000
(b) (i) Break even Sales Quantity = = =1,75,000 units
Contribution margin per unit Rs.20

Cash Fixed Cost Rs.20,00,000


Cash Break even Sales Qty= = =1, 00,000 units.
Contribution margin per unit Rs.20

Contribution / unit 20
(ii) P/V ratio = 100 = 100 = 53.33 %
Selling Pr ice / unit 37.50
(iii) No. of units that must be sold to earn an Income (EBIT) of Rs. 2, 50,000
Fixed cost + Desired EBIT level 35,00,000 + 2,50,000
= = 187500 units
Contribution margin per unit 20
(iv) After Tax Income (PAT) = Rs.2, 50,000
Tax rate = 40%
Desired level of Profit before tax
Rs.2,50,000
= 100
60
= Rs.4,16,667/-

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

FixedCost + DesiredPr ofit


Estimate Sales Level =
P / V ratio
Rs.35,00,000 + Rs.4,16,667
= = Rs.73,43,750/-
53.33%
Question 5
(a) A manufacturing company has disclosed a net loss of ` 8, 75,000 as per their cost
accounting records for the year ended March 31, 2010. However, their financial
accounting records disclosed a net loss of ` 7, 19,250 for the same period. A scrutiny of
the data of both the sets of books of accounts revealed the following information:
`
(i) Factory overheads over-absorbed 47,500
(ii) Administration overheads under-absorbed 32,750
(iii) Depreciation charged in Financial Accounts 2,25,000
(iv) Depreciation charged in Cost Accounts 2,42,250
(v) Interest on investments not included in Cost Accounts 62,750
(vi) Income Tax provided in Financial Accounts 7,250
(vii) Transfer fees (credit in Financial Accounts) 12,500
(viii) Preliminary expenses written off 27,500
(ix) Under-valuation of opening stock in Cost Accounts 6,250
(x) Under valuations of closing stock in Cost Accounts 17,500
Required :
Prepare a Memorandum Reconciliation A/c (8 Marks)
(b) Distinguish between the following:
(i) Profit maximization vs. Wealth maximization objective of the firm.
(ii) Global Depository Receipts and American Depository Receipts (2 4 = 8 Marks)
Answer
Memorandum Reconciliation Account

Dr. Cr.

Particulars Particulars
To net loss as per Cost 8,75,000 By factory overheads over- 47,500
Accounting records absorbed

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

To Administrative overheads 32,750 By excess charge of 17,250


under -absorbed depreciation in Cost Accounts
(2,42,250 2,25,000)
To Income tax provided in 7,250 By Transfer fee 12,500
Financial Accounts
To Preliminary expenses 27,500 By Interest on investment not 62,750
written off included in Cost Accounts
Under valuation of opening 6,250 Under valuation of Closing 17,500
stock in Cost Accounts stock in Cost Accounts
By Net loss as per Financial 7,91,250
records
9,48,750 9,48,750
(b) (i) Profit Maximization versus Wealth Maximization Principle of the Firm
The primary objective of a company is to earn profit; hence the objective of financial
management is also profit maximisation. This implies that the finance manager has
to make his decisions in a manner so that the profits of the concern are maximised.
Each alternative, therefore, is to be seen as to whether or not it gives maximum
profit. The company may pursue profit maximization goal but that may not result into
creation of shareholder value. Profit maximization is at best a limited objective. It
does not take into account the time pattern of returns and it is a narrow objective.
Whereas, Wealth maximisation, on the other hand, means that the company is
using its resources in a good manner. If the share value is to stay high the company
has to reduce its costs and use the resources properly. Goal of wealth maximization
means that the company will promote only those policies that will lead to efficient
allocation of resources.
(ii) Global Depository Receipts (GDRs) and American Depository Receipts (ADRs)
Global Depository Receipts are negotiable certificates held in the bank of one
country representing a specific number of shares of a stock traded on the exchange
of another country. These financial instruments are used by companies to raise
capital in either dollars or Euros. These are mainly traded in European countries
and particularly in London.
Whereas, American Depository Receipts, on the other hand, are basically
negotiable certificates denominated in US dollars that represent a non-US
companys publicly traded local currency equity shares. These are created when the
local currency shares of Indian Company are delivered to the depositorys local
custodian bank, against which the depository bank issues Depository Receipts in
US dollars. These are deposited in a custodial account in the US. Such receipts have to
be issued in accordance with the provisions stipulated by the SEC.

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Question 6
(a) A company has to make a choice between two machines X and Y. The two machines
are designed differently, but have identical capacity and do exactly the same job.
Machine X costs ` 5,50,000 and will last for three years. It costs ` 1,25,000 per year to
run. Machine Y is an economy model costing ` 4,00,000, but will last for two years and
costs ` 1,50,000 per year to run. These are real cash flows. The costs are forecasted in
Rupees of constant purchasing power. Opportunity cost of capital is 12%. Ignore taxes.
Which machine company should buy?
t=1 t=2 t=3
PVIF0.12, t 0.8929 0.7972 0.7118
PVIFA0.12,2 = 1.6901
PVIFA0,12,3 = 2.4019
(8 Marks)
(b) Write short notes on the following :
(i) Essential factors for installing a Cost Accounting system.
(ii) treatment of under-absorbed and over-absorbed overheads in Cost Accounting.
(2 4 = 8 Marks)
Answer
(a) Statement showing the Evaluation of Two Machines
Machines X Y
Purchase cost (Rs.): (i) 5,50,000 4,00,000
Life of Machines (years) 3 2
Running Cost of Machine per year (Rs.): (ii) 1,25,000 1,50,000
Cumulative Present value factor for 1-3 years @ 10%: (iii) 2.4019 -
Cumulative Present value factor for 1-2 years @ 10%: (iv) - 1.6901
Present Value of Running Cost of Machines (Rs.): (v) 3,00,237.5 2,53,515
[(ii) (iii)] [(ii) (iv)]
Cash Outflow of Machines (Rs.): (vi)=(i) +(v) 8,50,237.5 6,53,515.0
Equivalent Present Value of Annual Cash Outflow
PV of Machine Cost 3,53,985.39 3,86,672.39
Equated Annualized Cost =
PVI FA 0.12,t
[(vi)(iii)] [(vi) (iv)]
Advise: The Company should buy Machine X since its equivalent cash outflow (Rs.
3,53,985.39) is less than that of Machine Y (Rs. 3,86,672.39).

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

(b) (i) Essential Factors for installing a Cost Accounting System


Before setting up a system of cost accounting following factors should be studied:
(a) Objective
The objective of costing system, for example whether it is being introduced for
fixing prices or for insisting a system of cost control.
(b) Type of Business
The areas of operation of business wherein the managements action will be
most beneficial. For instance, in a concern, which is anxious to expand its
operations, increase in production would require maximum attention. On the
other hand for a concern, which is not able, to sell the whole of its production
the selling effort would require greater attention. The system of costing in each
case should be designed to highlight, in significant areas, factors considered
important for improving the efficiency of operations in that area.
(c) General organisation
The business, with a view of finding out the manner in which the system of
cost control could be introduced without altering or extending the organisation
appreciably.
(d) The Technical Details
Technical aspects of the concern and the attitude and behaviour that will be
successful in winning sympathetic assistance or support of the supervisory
staff and workmen.
(e) Change in operations
The manner in which different variable expenses would be affected with
expansion or cessation of different operations
(f) Method of maintenance of cost records
The manner in which Cost and Financial accounts could be inter-locked into a
single integral accounting system and in which results of separate sets of
accounts, cost and financial, could be reconciled by means of control
accounts.
(g) Information
The maximum amount of information that would be sufficient and how the
same should be secured without too much clerical labour, especially the
possibility of collection of data on a separate printed form designed for each
process; also the possibility of instruction as regards filling up of the forms in
writing to ensure that these would be faithfully carried out.

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(h) Accuracy
How the accuracy of the data collected can be verified? Who should be made
responsible for making such verification in regard to each operation and the
form of certificate that he should give to indicate the verification that he has
carried out?
(i) Informative and Simple
The manner in which the benefits of introducing Cost Accounting could be
explained to various persons in the concern, especially those in charge of
production department and awareness created for the necessity of
promptitude, frequency and regularity in collection of costing data.
(j) Support
Support of top management and employees are essential for installing a Cost
Accounting System in any organisation.
(ii) Treatment of Under-absorbed & Over-absorbed Overheads in Cost Accounting
Overheads are usually applied to production on the basis of a pre-determined rate.
The actual overhead rate will rarely coincide with the pre-determined overhead rate
due to different spending pattern and activity level.
Such over or under absorption as arrived at under different situations may also be
termed as overhead variance. The amount of over-absorption being represented by
a credit balance in the account and conversely, the amount of under absorption,
being a debit balance.
If such balances are small, they should be transferred to costing Profit & Loss A/c.
Where, however the difference is large and due to wrong estimation, it would be
desirable to adjust the cost of products manufactured, as otherwise the cost figures
would convey a misleading impression. Such adjustments usually take the form of
supplementary rates.
Question 7
Answer any Four of the following:
(a) What are the methods of re-apportionment of service department expenses over the
production departments? Discuss.
(b) How apportionment of joint costs upto the point of separation amongst the joint products
using market value at the point of separation and net realizable value method is done?
Discuss
(c) Discuss the estimation of working capital need based on operating cycle process.
(d) Discuss financial break-even and EBIT-EPS indifference analysis.
(e) Discuss the three different methods of calculating labour turnover. (4 4 = 16 Marks)

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Answer
(a) Methods of re-apportionment of service department expenses over the production
departments
(i) Direct re-distribution method.
(ii) Step method or non-reciprocal method.
(iii) Reciprocal Service method
Direct re-distribution Method: Service department costs under this method are
apportioned over the production departments only, ignoring services rendered by one
service department to another. The basis of apportionment could be no. of workers. H.P
of machines.
Step Method or Non-Reciprocal Method
This method gives cognizance to the service rendered by service department to another
service department. Therefore, as compared to previous method, this method is more
complicated because a sequence of apportionments has to be selected here. The
sequence here begins with the department that renders service to the maximum number
of other service departments.
Production Department Service Department
P1 P P3 S1 S2 S3

Reciprocal Service Method


This method recognises the fact that where there are two or more service departments
they may render service to each other and, there these inter-departmental services are to
be given due weight while re-distributing the expenses of service department.
The methods available for dealing with reciprocal services are:
Simultaneous equation method
Repeated distribution method
Trial & Error method.
(b) Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation
This method is used for apportionment of joint costs to joint products upto the split off
point. It is difficult to apply if the market value of the product at the point of separation
are not available. It is useful method where further processing costs are incurred
disproportionately.

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Net realizable value Method


From the sales value of joint products (at finished stage) are deducted:
Estimated profit margins
Selling distribution expenses, if any
Post split off costs.
The resultant figure so obtained is known as net realizable value of joint products. Joint
costs are apportioned in the ratio of net realizable value.
(c) Estimation of Working Capital Need based on Operating Cycle
One of the methods for forecasting working capital requirement is based on the concept
of operating cycle. The determination of operating capital cycle helps in the forecast,
control and management of working capital. The length of operating cycle is the indicator
of performance of management. The net operating cycle represents the time interval for
which the firm has to negotiate for Working Capital from its Bankers. It enables to
determine accurately the amount of working capital needed for the continuous operation
of business activities. The duration of working capital cycle may vary depending on the
nature of the business.
In the form of an equation, the operating cycle process can be expressed as follows:
Operating Cycle = R + W + F +D C
Where,
R = Raw material storage period.
W = Work-in-progress holding period.
F = Finished goods storage period.
D = Debtors collection period.
C = Credit period availed.
(d) Financial Break-even and EBIT-EPS Indifference Analysis
Financial break-even point is the minimum level of EBIT needed to satisfy all the fixed
financial charges i.e. interest and preference dividend. It denotes the level of EBIT for
which firms EPS equals zero. If the EBIT is less than the financial breakeven point, then
the EPS will be negative but if the expected level of EBIT is more than the breakeven
point, then more fixed costs financing instruments can be taken in the capital structure,
otherwise, equity would be preferred.
EBIT-EPS analysis is a vital tool for designing the optimal capital structure of a firm. The
objective of this analysis is to find the EBIT level that will equate EPS regardless of the
financing plan chosen.

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

(EBIT I1 )(1 T) (EBIT I2 )(1 T )


=
E1 E2

Where,
EBIT = Indifference point
E1 = Number of equity shares in Alternative 1
E2 = Number of equity shares in Alternative 2
I1 = Interest charges in Alternative 1
12 = Interest charges in Alternative 2
T = Tax-rate
Alternative 1= All equity finance
Alternative 2= Debt-equity finance.
(e) Three different methods of calculating labour turnover
No.of Employeereplaced
Replacement Method = 100
Average number of employeesonrollduringtheperiod

No.of Employee separatedduringthe year


Separation Method = 100
Average number of employeesonrollduringtheperiod

No.of Employee separated + No.of employeereplaced


Flux Method = 100
Average number of employeesonrollduringtheperiod

or
Flux Method (with new recruitment)
No.of separation + No.of replacement + No.of new recruitments
= 100
Average number of wor ker s

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PAPER 4 : TAXATION
Question No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
Working notes should form part of the answer.
Wherever necessary, suitable assumptions may be made by the candidates.
Question 1
(a) Mr. Soohan submits the following details of his income for the assessment year 2010-11.
Particulars Rs.
Income from salary 3,00,000.00
Loss from let out house property 40,000.00
Income from sugar business 50,000.00
Loss from iron ore business b/f (discontinued in 2003-04) 1,20,000.00
Short term capital loss 60,000.00
Long term capital gain 40,000.00
Dividend 5,000.00
Income received from lottery winning (Gross) 50,000.00
Winnings in card games 6,000.00
Agricultural income 20,000.00
Long term capital gain from shares (STT paid) 10,000.00
Short term capital loss under section 111A 10,000.00
Bank interest 5,000.00
Calculate gross total income and losses to be carried forward. (5 Marks)
(b) Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 1.4.2009 his
unit 1 by way of slump sale for a total consideration of Rs.25 lacs. The expenses
incurred for this transfer were Rs.28,000. His Balance Sheet as on 31.3.2009 is as
under:

The Suggested Answers for Income-tax are based on the provisions applicable for A.Y.2010-11,
which is the assessment year relevant for November 2010 examination. The suggested answers
for Service-tax and VAT are based on the provisions as amended by the Finance (No.2) Act,
2009 and notifications/circulars issued up to 30.04.2010 which are relevant for November 2010
examination.
PAPER 4 : TAXATION

Liabilities Total Assets Unit 1 Unit 2 Total


Rs. Rs. Rs. Rs.
Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
Reserve (for
building of unit 1)
Bank loan (70% 2,00,000 Debtors 1,00,000 40,000 1,40,000
for unit 1)
Trade creditors 1,50,000 Other assets 1,50,000 60,000 2,10,000
(25% for unit 1)
Total 21,50,000 Total 17,50,000 4,00,000 21,50,000
Other information:
(i) Revaluation reserve is created by revising upward the value of the building of unit 1.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Other assets of unit 1 include patents acquired on 1.7.2007 for Rs.50,000 on which
no depreciation has been charged.
Compute the capital gain for the assessment year 2010-11. (5 Marks)
(c) Smart & Express Co. is providing taxable information technology software services. The
firm furnishes the following information relating to the services rendered, bills raised,
amount received pertaining to this service, for the financial year ended on 31st March,
2010 as under :
Rs.
(i) Amount received being 10% of the assignment fees on 31stMarch, 6,00,000
2010 for the upgradation and enhancement of software services to
be rendered during the financial year 2010-11.
(ii) Services provided to UNICEF, an International Organisation in 5,00,000
Gandhinagar, for analysis, design and programming of latest
information technology software.
(iii) Services billed to clients - In one of the bill amounting to 3,00,00,000
Rs.3,00,000 service tax was not charged due to conflicting nature
and in another bill the firm failed to recover service tax from the
client, which was charged separately, due to insolvency of the
client, the bill details are as under:
Rs.
Being the charges for right to use IT software 8,00,000
Service tax @ 10% 80,000
Education cess @ 2% 1,600
Secondary & Higher education cess @ 1% 800
8,82,400
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(iv) Amount received for services rendered during current financial 1,04,78,500
year (excluding payment for 2 bills in item (iii) above for which also
payment was received during current financial year)
Service tax and education cess have been charged separately in all the bills except
wherever mentioned when it is not so charged separately.
Compute the value of total taxable services and service tax payable thereon for the year
ended 31.03.2010, assigning reasons in brief to the treatment of all items. (5 Marks)
(d) Mr. Rajesh is a registered dealer and gives the following information. You are required to
compute the net tax liability and total sales value under value added tax:
Rajesh sells his products to dealers in his State and in other States.
The profit margin is 15% of cost of production and VAT rate is 12.5% of sales.
(i) Intra State purchases of raw material Rs.2,50,000/- (excluding VAT @ 4%)
(ii) Purchases of raw materials from an unregistered dealer Rs.80,000/- (including VAT
@ 12.5%)
(iii) High seas purchases of raw materials are Rs.1,85,000/- (excluding custom duty
@ 10% Rs.18,500)
(iv) Purchases of raw materials from other States (excluding CST @ 2%) Rs.50,000/-
(v) Transportation charges, wages and other manufacturing expenses excluding tax
Rs.1,45,000/-
(vi) Interest paid on bank loan Rs.70,000/- (5 Marks)
Answer
(a) Computation of gross total income of Mr. Soohan for the A.Y.2010-11
Particulars Rs. Rs.
Salaries
Income from salary 3,00,000
Less: Loss from house property set-off against salary income
as per section 71 __(40,000)
2,60,000
Profits and gains of business or profession
Income from sugar business 50,000
Less: Brought forward loss from iron-ore business set-off as per (50,000) Nil
section 72(1)
Balance business loss of Rs.70,000 of P.Y.2003-04 carried
forward to A.Y.2011-12
Capital gains
Long term capital gain 40,000
Less: Short term capital loss set-off (40,000) Nil
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PAPER 4 : TAXATION

Balance short-term capital loss of Rs.20,000 to be carried


forward
Short-term capital loss of Rs.10,000 under section 111A to be
carried forward
Income from other sources
Winnings from lottery 50,000
Winnings from card games 6,000
Bank interest 5,000
61,000
Gross Total Income 3,21,000
Losses to be carried forward to A.Y.2011-12
Loss of iron-ore business 70,000
Short term capital loss 30,000
Notes:
1. The following income are exempt under section 10
(i) Dividend income [Exempt under section 10(34)], assuming that dividend is
received from a domestic company.
(ii) Agricultural income [Exempt under section 10(1)]
(iii) Long-term capital gains on which STT is paid [Exempt under section 10(38)]
2. It is presumed that loss from iron-ore business relates to P.Y.2003-04, the year in
which the business was discontinued.
(b) Computation of capital gains on slump sale of Unit 1
Particulars Rs.
Sale value 25,00,000
Less: Expenses on sale ___28,000
Net sale consideration 24,72,000
Less: Net worth (See Note 1 below) 12,50,625
Long term capital gain 12,21,375

Note 1 : Computation of net worth of Unit 1 of Akash Enterprises


Particulars Rs. Rs.
Building (excluding Rs.3 lakhs on account of revaluation) 9,00,000
Machinery 3,00,000
Debtors 1,00,000
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Patents (See Note 2 below) 28,125


Other assets (Rs.1,50,000 Rs.50,000) 1,00,000
Total assets 14,28,125
Less: Creditors 37,500
Bank Loan 1,40,000 1,77,500
Net worth 12,50,625
Note 2 : Written down value of patents as on 1.4.2009
Value of patents: Rs.
Cost as on 1.7.2007 50,000
Less: Depreciation @ 25% for Financial Year 2007-08 12,500
WDV as on 1.4.2008 37,500
Less: Depreciation for Financial Year 2008-09 _9,375
WDV as on 1.4.2009 28,125
For the purposes of computation of net worth, the written down value determined as per
section 43(6) has to be considered in the case of depreciable assets. The problem has
been solved assuming that the Balance Sheet values of Rs.3 lakh and Rs.9 lakh (Rs.12
lakh Rs.3 lakh) represent the written down value of machinery and building,
respectively, of Unit 1.
(c) Computation of value of taxable services and service tax payable by Smart & Express Co.
Rs.
(i) Amount received in advance for upgradation and enhancement of
software services is also liable though the services were rendered 6,00,000
during the financial year 2010-11 [Refer Note 1]
(ii) Services rendered to UNICEF not liable to service tax [Refer Note 2] Nil
(iii) The actual amount realized is liable for service tax [Refer Note 3] 3,00,000
(iv) The actual amount realized is liable for service tax [Refer Note 3] 8,00,000
(v) Amount realized for services rendered (excluding items (ii) and (iii) 1,04,78,500
above).
Total 1,21,78,500
Less: Service tax (Rs.1,21,78,500 x 10.3) / 110.3 11,37,249
Total value of taxable services 1,10,41,251
Service tax payable thereon @10% 11,04,125
Education cess @ 2% 22,083
Secondary and higher education cess @ 1% 11,041
Total service tax payable including education cesses 11,37,249

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PAPER 4 : TAXATION

Working Notes:
(1) The scope of taxable service includes service provided towards upgradation,
enhancement, implementation and other similar services related to information
technology software.
(2) As per Notification No.16/2002 ST dated 02.08.2002, the Central Government has
exempted all the taxable services specified in section 65 of the Finance Act, 1994
provided by any person to the International organizations like UNICEF, from whole
of the service tax leviable thereon under section 66 of the Act.
(3) The statutory liability of paying service tax does not get extinguished if the service
provider fails to realize or charge the service tax from the service receiver. In such
cases, the amount realized is liable for service tax by deeming the same as
inclusive of service tax.
(4) Figures in point (i) and (v) are taken to be inclusive of service tax as they represent
total amount received.
(d) Computation of net VAT liability and total sales value
Rs.
Intra-State purchases of raw material (excluding VAT Rs. 10,000) 2,50,000
Purchases of raw materials from unregistered dealer [Refer Note 1] 80,000
High seas purchases of raw materials [Refer Note 2] 2,03,500
Purchase of raw materials from other States [Refer Note 3] 51,000
Transportation charges, wages and manufacturing expenses 1,45,000
Cost of production 7,29,500
Add : Profit margin 15% 1,09,425
8,38,925
Add: VAT @ 12.5% 1,04,866
Total sales value 9,43,791

Computation of VAT liability:- Rs.


VAT on above sales price @ 12.5% 1,04,8,66
Less:Set off of VAT on purchases:
From high seas Nil
From intra-State [Refer Note 4] 10,000
From inter-State Nil
From unregistered dealer Nil 10,000
Net VAT payable 94,866

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Notes:
1. Input tax credit is not available on the purchases of raw materials from unregistered
dealer. Hence, VAT paid thereon is a part of cost of production.
2. Duty paid on high seas purchases i.e., imports is not a State VAT, so the input tax
credit is not available in respect of the same and it is a part of cost of production.
3. Set-off of tax paid on inter-state purchases is not allowed.
4. Tax on intra-State purchases is Rs.10,000. As credit of the same will be available,
it is not included in the cost of production.
5. Interest on loan has been excluded for calculating the cost of production on the
presumption that the loan is availed for purposes other than working capital.
6. It has been assumed that the entire production is sold.
Question 2
(a) (i) Which income of Sikkimese individual is exempted from tax under section
10(26AAA)? (4 Marks)
(ii) How will you calculate the period of holding in case of the following assets?
(1) Shares held in a company in liquidation
(2) Bonus shares
(3) Flat in a co-operative society
(4) Transfer of a security by a depository (i.e., demat account) (4 Marks)
(b) How can an assessee adjust the excess payment of service tax against his liability of
service tax for subsequent periods? What is the basic condition for it? (4 Marks)
(c) What records should be maintained under VAT system by a registered dealer? (4 Marks)
Answer
(a) (i) Exemption of income of Sikkimese individual under section 10(26AAA)
The following income which accrues or arises to a Sikkimese individual would be
exempt from income-tax :
(a) income from any source in the State of Sikkim or
(b) income by way of dividend or interest on securities
This exemption will not be available to a Sikkimese woman who, on or after 1st April,
2008, marries a non-Sikkimese individual.
(ii) (1) Shares held in a company in liquidation - The period after the date on which
the company goes into liquidation shall be excluded while calculating the
period of holding. Therefore, the period of holding shall commence from the
date of acquisition of shares and shall end with the date on which the company
goes into liquidation.
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PAPER 4 : TAXATION

(2) Bonus shares - The period of holding shall be reckoned from the date of
allotment of bonus shares and will end with the date of transfer.
(3) Flat in a co-operative society - The period of holding shall be reckoned from the
date of allotment of shares in the society and will end with the date of transfer.
Note Any transaction whether by way of becoming a member of, or acquiring
shares in, a co-operative society or by way of any agreement or any
arrangement or in any other manner whatsoever which has the effect of
transferring, or enabling enjoyment of, any immovable property is a transfer as
per section 2(47)(vi). Hence, it is possible to take a view that any date from
which such right is obtained may be taken as the date of acquisition.
(4) Transfer of a security by a depository (i.e., demat account) - The period of
holding shall be computed from the date of purchase to the date of sale. The
first-in-first-out (FIFO) method will be adopted for determining the period of
holding.
(b) If the assessee has paid to the credit of Central Government any amount in excess of the
payment required to be paid towards service tax liability for a month or quarter, as the
case may be, he can adjust such excess amount paid by him against his service tax
liability for the succeeding month or quarter, as the case may be, subject to following
conditions:-
(i) Self-adjustment of excess credit would not be allowed in case of reasons involving
interpretation of law, taxability, classification, valuation or applicability of any
exemption notification.
(ii) Excess amount paid and proposed to be adjusted should not exceed Rs.1 lakh for the
relevant month or quarter. If the assessee has opted for centralized registration,
excess amount can be adjusted without monetary limit, provided the excess payment
is on account of delayed receipt of details of payments from branch offices.
(iii) Adjustment can be made only in the succeeding month or quarter.
(v) The details of self-adjustment should be intimated to the Superintendent of Central
Excise within a period of 15 days from the date of such adjustment.
(c) The following records should be maintained under VAT system:
(i) Purchase records;
(ii) Sales records;
(iii) VAT account;
(iv) Separate record of any exempt sale.
Further, the following records should also be kept and produced to an Officer:
(i) Copies of invoices issued, in serial number;
(ii) Copies of all credit & debit notes issued, in chronological order;
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(iii) All purchase invoices, copies of customs entries, receipt for payment of customs
duty or tax and credit and debit notes received to be filed chronologically either by
date of receipt or under each suppliers name;
(iv) Details of amount of tax charged on each sale or purchase;
(v) Total of the output tax and the input tax in each period and a net total of the tax
payable or the excess carried forward, as the case may be, at the end of each
month;
(vi) Details of goods manufactured and delivered from the factory of the taxable person;
(vii) Details of each supply of goods from the business premises, unless such details are
available at the time of supply in invoices issued at, or before, that time.
Question 3
(a) Dr. Shuba is a medical practitioner. Her age is 64 as on 1st January, 2010. The receipts
and payments account of 2009-10 of her is as under:
To Rs. By Rs.
Balance B/f 10,000 Purchase of commercial vehicle 4,00,000
before 30 Sep. 2009
Receipts from sale of 2,50,000 Drawings 2,50,000
medicine
Consultation fee 50,000 Deposit in bank for 5 years 1,50,000
Visiting fee 2,00,000 Surgical instrument purchased
Lecture fees 5,000 before 30 Sep. 2009 50,000
Family pension 2,80,000 Instalment of loan paid 1,21,000
(including interest Rs. 22,333)
Savings bank interest 1,000 Medical insurance premium 32,000
Loan from bank 3,00,000 Instalment of housing loan 1,08,000
(Principal component Rs.
48,000)
Share from HUF 50,000 Advance tax paid 20,000
Agricultural income 1,00,000 Purchase of medicine 47,000
Income from lottery 35,000 Payment for medical journal 5,000
(net after deduction of TDS Vehicle expenses 50,000
@ 30%)
Balance C/f 48,000
Total 12,81,000 12,81,000

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PAPER 4 : TAXATION

Other relevant information is as under:


(i) She resides in her own house which was constructed in 1998 with a loan from LIC
Housing of Rs. 10,00,000 out of which Rs.6,00,000 was still due. She got it
refinanced from SBI on 01-04-09 at the rate of 10%. One-fourth portion of the
house is used for clinic purposes.
(ii) She invested in term deposit Rs. 1,50,000 in Bank of Baroda on 01-07-2009 for a
period of 5 years in the name of her minor daughter at 9% interest p.a.
(iii) She purchased a commercial vehicle on 1st July 2009 at Rs. 4,00,000. A loan of
Rs. 3,00,000 was taken to buy the van at 8% interest. One fourth use of vehicle is
estimated to be personal.
(iv) She paid medical insurance premium for herself of Rs. 16,000 and for mother
Rs. 16,000. Her mother is dependent on her.
(v) She got her share from HUFs income of Rs. 50,000. (8 Marks)
(b) Write a note in brief on provisional payment of service tax. (4 Marks)
(c) State the variants of VAT. Present them in schematic diagram and explain each one
briefly. (4 Marks)
Answer
(a) Computation of total income of Dr. Shuba for A.Y. 2010-11
Particulars Rs. Rs. Rs. Rs.
Income from house property:
Annual value of self-occupied house Nil
Less: Interest on loan
[Rs.45,000, being 3/4th of Rs.60,000]
(Restricted to Rs.30,000) (30,000) (30,000)
Income from profession:
Sale of medicine 2,50,000
Consultation fees 50,000
Visiting fee 2,00,000
Total income 5,00,000
Less: Expenses
Medicine purchases 47,000
Medical journal 5,000
Depreciation
Surgical instrument(15% of Rs.50,000) 7,500
Vehicle (3/4th of 50% of Rs.4,00,000) 1,50,000
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Vehicle expenses (3/4th) 37,500


Interest on loan (3/4th) 16,750
Interest on housing loan (1/4th) _15,000
Total expenses 2,78,750
2,21,250
Income from other sources
Family Pension 2,80,000
Less : 33% or Rs.15,000, whichever 15,000 2,65,000
is lower
Lecture fees 5,000
Savings bank interest 1,000
Interest on bank FD in the name of 10,125
minor daughter [1,50,000 9% 9/12]
Less : Exempt u/s 10(32) 1,500 8,625
Winnings from lottery __50,000
3,29,625
Gross Total Income 5,20,875
Less: Deductions under Chapter VI-A
Under section 80C
Repayment of housing loan (48,000 ) 36,000
Under section 80D
Medical Insurance Premium
Own (Rs.16,000 restricted to Rs.15,000) 15,000
Mother (Senior Citizen, hence fully allowed since
premium is less than Rs.20,000) 16,000 31,000
Total deduction __67,000
Total income 4,53,875
Notes:
1. Since the residential house was constructed before 01.04.1999, the deduction for
interest is restricted to Rs.30,000.
2. Since th portion of house is used for business purposes, therefore, th share of
interest paid is deductible while computing business income.
3. Agricultural income is exempt under section 10(1) and share of income from HUF is
exempt under section 10(2).
4. Term deposit of Rs.1,50,000 in the name of minor daughter does not qualify for
deduction under section 80C. However, principal repayment of housing loan (3/4th)
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would qualify for deduction under section 80C. Therefore, the deduction under
section 80C would be Rs.36,000 (i.e. 3/4th of Rs.48,000).
5. Depreciation@15% has been provided on surgical instruments. It is also possible to
assume that the surgical instruments mentioned in the question are life-saving
medical equipment (for example, surgical laser) and therefore, eligible for
depreciation@40%.
PS Since the requirement of the question has not been specified, having regard to the
information given in the question and the marks it carries, the computation has been
restricted to the total income of Dr. Shuba and the tax liability has not been calculated.
(b) In case the assessee is unable to correctly estimate, at the time of the deposit, the actual
amount of service tax for any month or quarter, he may make a written request to
Assistant/ Deputy Commissioner of Central Excise for making payment of service tax on
provisional basis. The concerned officer may allow payment of service tax on provisional
basis on such value of taxable service as may be specified by him.
For the purpose of provisional assessment at the time of filing the return, the assessee is
required to file a statement in form ST - 3A giving detail of difference between service tax
deposited and the service tax liable to be paid for each month. The quarterly or half
yearly statements should also accompany.
The Assistant/Deputy Commissioner of Central Excise, on the basis of memorandum in
form ST - 3A may complete the assessment after calling for necessary documents or
records, if need be.
(c) VAT has following three variants:
(a) Gross product variant
(b) Income variant
(c) Consumption variant
These variants are presented in a schematic diagram given below:
Different variants of VAT

Gross product variant Income variant Consumption variant

Tax is levied on all Tax is levied on all Tax is levied on all sales
sales and deduction sales with set-off for with deduction for tax
for tax paid on inputs tax paid on inputs and paid on all business
excluding capital only depreciation on inputs (including capital
inputs is allowed. capital goods. goods).

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(a) Gross product variant


The gross product variant allows deductions for taxes on all purchases of raw
materials and components, but no deduction is allowed for taxes on capital inputs.
That is, taxes on capital goods such as plant and machinery are not deductible from
the tax base in the year of purchase and tax on the depreciated part of the plant and
machinery is not deductible in the subsequent years.
(b) Income variant
The income variant of VAT on the other hand allows for deductions on purchases of
raw materials and components as well as depreciation on capital goods. This
method provides incentives to classify purchases as current expenditure to claim
set-off. In practice, however, there are many difficulties connected with the
specification of any method of measuring depreciation, which basically depends on
the life of an asset as well as on the rate of inflation.
(c) Consumption variant
Consumption variant of VAT allows for deduction on all business purchases
including capital assets. Thus, gross investment is deductible in calculating value
added. It neither distinguishes between capital and current expenditures nor
specifies the life of assets or depreciation allowances for different assets.
Question 4
(a) (i) Explain the consequences of not deducting tax and paying to Government account
under section 201 of the Income-tax Act, 1961. (4 Marks)
(ii) Can a political party claim exemption of its income under section 13A of the Income-
tax Act, 1961? (4 Marks)
(b) How will a taxable service be valued when the consideration thereof is not wholly or
partly in terms of money? (4 Marks)
(c) State with reasons in brief whether the following statements are correct or incorrect with
reference to the provision of value added tax.
(i) It is permitted to issue tax invoice inclusive of VAT i.e. aggregate of sales price &
VAT.
(ii) A registered dealer is compulsorily required to get its books of accounts audited
under VAT laws of different States irrespective of limit of turnover. (2 2 = 4 Marks)
Answer
(a) (i) (1) The following persons shall be deemed to be an assessee in default if they do not
deduct the whole or any part of the tax or after deducting fails to pay the tax
(a) Any person who is required to deduct any sum according to the Act.
(b) An employer paying tax on non-monetary perquisites under section
192(1A).
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(2) No penalty shall be charged unless the Assessing Officer is satisfied that such
person has failed to deduct and pay the tax without good and sufficient reasons.
(3) Such persons shall also be liable to pay simple interest @ 1% for every month
or part of a month. Such interest is chargeable on the amount of such tax from
the date on which such tax was deductible to the date on which such tax is
actually paid.
(4) Such interest should be paid before furnishing the statements under section
200(3).
(5) Where the tax has not been paid after it is deducted, the amount of the tax
together with the amount of simple interest shall be a charge upon all the
assets of the person or the company.
(6) Disallowance under section 40(a) would be attracted in respect of expenditure
which is subject to TDS, if tax is not deducted therefrom during the relevant
previous year or after being deducted, is not paid within the prescribed time.
(ii) Under section 13A, a political party registered under section 29A of the
Representation of the People Act, 1951, can claim exemption under the following
heads - Income from house property, capital gains and income from other sources.
The income by way of voluntary contributions received by such political party is also
exempt under section 13A.
These exemptions are subject to the following conditions:-
(i) The political party must keep and maintain such books of account and other
documents as would enable the Assessing Officer to properly deduce its
income therefrom.
(ii) The political party should keep and maintain a record of each such voluntary
contribution in excess of Rs.20,000 and the names and addresses of such
contributors.
(iii) The accounts of the political party must be audited by a chartered accountant.
(b) As per section 67(2) of the Finance Act, 1994, if the consideration for a taxable service is
not wholly or partly in terms of money, then the value of such service shall be such amount
in money, with the addition of service tax charged, is equivalent to the consideration.
In other words, where the service rendered is for a consideration not wholly or partly
consisting of money the value of the taxable service is equivalent to the total value of the
consideration. However, the total of such money and non-money values of the
consideration has to be treated as inclusive of the service tax payable thereon.
(c) (i) Incorrect
Reason: One of the requirements under the contents of the tax invoice is that rate
and amount of tax charged in respect of taxable goods should be distinctly shown in
the tax invoice', in order to claim input credit.

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(ii) Incorrect
Reason: Different States have determined different turnover limits above which a
registered dealer will have to get its books of accounts audited under VAT laws.
Question 5
(a) From the following details, find out the salary chargeable to tax for the assessment year
2010-11 -
Mr. X is a regular employee of Rama & Co. in Gurgaon. He was appointed on 1.1.09 in
the scale of 20,000-1,000-30,000. He is paid 10% D.A. & Bonus equivalent to one month
pay. He contributes 15% of his pay and D.A. towards his recognized provident fund and
the company contributes the same amount.
He is provided free housing facility which has been taken on rent by the company at
Rs. 10,000 per month. He is also provided with following facilities:
(i) Facility of laptop costing Rs. 50,000.
(ii) Company reimbursed the medical treatment bill of his brother of Rs. 25,000, who is
dependent on him.
(iii) The monthly salary of Rs. 1,000 of a house keeper is reimbursed by the company.
(iv) A gift voucher of Rs. 10,000 on the occasion of his marriage anniversary.
(v) Conveyance allowance of Rs. 1,000 per month is given by the company towards
actual reimbursement.
(vi) He is provided personal accident policy for which premium of Rs. 5,000 is paid by
the company.
(vii) He is getting telephone allowance @Rs. 500 per month.
(viii) Company pays medical insurance premium of his family of Rs. 10,000. (8 Marks)
(b) What do you mean by e-filing of returns? Is there any facility of e-filing of service tax
returns? If yes, then which of the services are eligible for this facility? (4 Marks)
(c) What are the conditions to be fulfilled by the dealer accepting the composition scheme
under the value added tax? (4 Marks)
Answer
(a) Computation of taxable salary of Mr.X for A.Y. 2010-11
Particulars Rs.
Basic pay [(20,0009) + (21,0003)] = 1,80,000 +63,000 2,43,000
Dearness allowance [10% of basic pay] 24,300
Bonus [See Note 1 below] 21,000

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Employers contribution to RPF in excess of 12% (15%-12% =3% of 8,019


Rs.2,67,300) [See Note 2 below]
Taxable allowances
Telephone allowance 6,000
Taxable perquisites
Rent-free accommodation [See Note 2 & 3 below] 44,145
Medical reimbursement (25,000 - 15,000) [See Note 5 below] 10,000
Reimbursement of salary of housekeeper 12,000
Gift voucher __10,000
Salary income chargeable to tax 3,78,464
Notes:
1. Bonus has been taken as one months basic pay as at the end of the year i.e.
Rs.21,000. In the alternative, the problem can also be worked out by taking bonus
as Rs.20,000, being one months basic pay upto 31.12.2009.
2. It has been assumed that dearness allowance forms part of salary for retirement
benefits and accordingly, the perquisite value of rent-free accommodation and
employers contribution to RPF have been worked out.
3. Where the accommodation is taken on lease or rent by the employer, the value of
rent-free accommodation provided to employee would be actual amount of lease
rental paid or payable by the employer or 15% of salary, whichever is lower.
For the purposes of valuation of rent free house, salary includes:
(i) Basic salary i.e., Rs.2,43,000
(ii) Dearness allowance (assuming that it is included for calculating retirement
benefits) i.e. Rs.24,300
(iii) Bonus i.e., Rs.21,000
(iv) Telephone allowance i.e., Rs.6,000
Therefore, salary works out to
2,43,000 + 24,300 + 21,000 +6,000 = 2,94,300.
15% of salary = 2,94,300 15/100 = 44,145
Value of rent-free house = Lower of rent paid by the employer (i.e. Rs.1,20,000)
or 15% of salary (i.e., Rs.44,145).
Therefore, the perquisite value is Rs.44,145.
4. Facility of laptop is not a taxable perquisite.
5. Clause (v) of the proviso to section 17(2) exempts any sum paid by the employer in
respect of any expenditure actually incurred by the employee on his medical
treatment or treatment of any member of his family to the extent of Rs.15,000.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Therefore, in this case, the balance of Rs.10,000 (i.e., Rs.25,000 Rs.15,000) is a


taxable perquisite. Medical insurance premium paid by employer is exempt.
6. Conveyance allowance is exempt since it is based on actual reimbursement for
official purposes.
7. Premium of Rs.5,000 paid by the company for personal accident policy is not liable
to tax.
(b) E-filing is a facility for the electronic filing of service tax returns by the assessee from his
office, residence or any other place of choice, through the internet, by using a computer.
With effect from 01.04.2010, e-filing of service tax returns has been made mandatory for
the assessees who have paid total service tax of Rs.10 lakh or more including the
amount of service tax paid by utilization of CENVAT credit in the preceding financial year.
The facility of e-filing of returns on the website (http://exciseandservicetax.nic.in) has
been withdrawn and the assessees are now required to file their returns online or by
uploading the downloadable off-line return utilities to the new ACES website
(http://www.aces.gov.in).
This facility is available to all service providers.
(c) The dealer accepting the composition scheme should fulfill the following conditions:
(i) He should intimate to the Commissioner of VAT in writing that he is opting to such
scheme for a year or a part of the year in which he gets himself registered.
(ii) If he avails this scheme, he is not required to maintain any statutory records as
prescribed under the Act. Only the records for purchases, sales and inventory
should be maintained.
(iii) The dealer should not have any stock of goods which were brought from outside the
State on the date he opts to pay tax under composition scheme and should not use
such goods after such date.
(iv) The dealer should not claim input tax credit on the inventory available on the date
on which he opts for composition scheme.
Question 6
(a) Sai Ltd. has a block of assets carrying 15% rate of depreciation, whose written down
value on 01.04.2009 was Rs. 40 lacs. It purchased another asset of the same block on
01.11.2009 for Rs. 14.40 lacs and put to use on the same day. Sai Ltd. was
amalgamated with Shirdi Ltd. with effect from 01.01.2010.
You are required to compute the depreciation allowable to Sai Ltd. & Shirdi Ltd. for the
previous year ended on 31.03.2010 assuming the assets transferred to Shirdi Ltd. at Rs.
60 lacs. (8 Marks)
(b) State with reasons in brief whether the following statements are correct or incorrect with
reference to the provisions of service tax:

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(i) The scope of taxable service shall include any service provided or to be provided to
business entity, by any other business entity, in relation to advice, consultancy or
assistance in any branch of law including service provided by way of appearance
before any court, tribunal or authority.
(ii) Service tax provisions are not applicable in Jammu and Kashmir because State
Government concurrence was not obtained in respect of Finance Act, 1944.
(22 = 4 Marks)
(c) Mention the purchases which are not eligible for input tax credit (any eight items) under
value added tax. (4 Marks)
Answer
(a) Statement showing computation of depreciation allowable to Sai Ltd. & Shirdi Ltd.
for P.Y. 2009-10
Particulars Amount
Rs.
Written down value (WDV) as on 1.4.2009 40,00,000
Addition during the year (used for less than 180 days) 14,40,000
Total 54,40,000
Depreciation on Rs.40,00,000 @ 15% 6,00,000
Depreciation on Rs.14,40,000 @ 7.5% 1,08,000
Total depreciation for the year 7,08,000
Apportionment between two companies:
(a) Amalgamating company, Sai Ltd.
Rs.6,00,000 275/365 4,52,055
Rs.1,08,000 61/151 43,629
4,95,684
(b) Amalgamated company, Shirdi Ltd.
Rs.6,00,000 90/365 1,47,945
Rs.1,08,000 90/151 64,371
2,12,316
Notes:
(1) The aggregate deduction, in respect of depreciation allowable to the amalgamating
company and amalgamated company in the case of amalgamation shall not exceed
in any case, the deduction calculated at the prescribed rates as if the amalgamation
had not taken place. Such deduction shall be apportioned between the
amalgamating company and the amalgamated company in the ratio of the number
of days for which the assets were used by them.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

(2) The price at which the assets were transferred, i.e., Rs.60 lacs, has no implication
in computing eligible depreciation.
(b) (i) Incorrect
Reason: Section 65(105) of Finance Act, 1994 specifically excludes services
provided by way of appearance before any court, tribunal or authority from the
scope of taxable legal consultancy services.
(ii) Correct
Reason: As per Article 370 of the Constitution, any Act of Parliament applies to
Jammu and Kashmir only with the concurrence of the State Government. Since, no
such concurrence has been obtained in respect of Finance Act, 1994, service tax
provisions are not applicable in Jammu and Kashmir.
PS The words Finance Act, 1944 mentioned in the question should be read as
Finance Act, 1994.
(c) The following purchases are not eligible for input tax credit:
(i) purchases from unregistered dealer;
(ii) purchases from a registered dealer who opts for composition scheme;
(iii) purchases of goods as may be notified by the State Government;
(iv) purchases of goods where the purchase invoice is not available with the claimant;
(v) purchases of goods where invoice does not show the amount of tax separately;
(vi) purchases of goods which are being utilized in the manufacture of exempted goods;
(vii) purchases of goods used for personal use or provided free of charge as gifts;
(viii) imports from outside the territory of India;
(ix) imports from other States;
(x) goods in stock, which have suffered tax under an earlier Act, but under the VAT Act
they are covered under exempted items.
Note: Any eight points may be given.
Question 7
(a) Answer any two sub-parts out of three sub-parts of the question.
(i) Mr. Shah, an Accounts Manager, has retired from JK Ltd. on 15.1.2010 after
rendering services for 30 years 7 months. His salary is Rs. 25,000/- p.m. upto
30.09.2009 and Rs. 27,000/- thereafter. He also gets Rs. 2,000/- p.m. as dearness
allowance (55% of it is a part of salary for computing retirement benefits). He is not
covered by the Payment of Gratuity Act, 1972. He has received Rs. 8 Lacs as
gratuity from the employer company.
(ii) State under which heads the following incomes are taxable:
(i) Rental income in case of dealer in property
(ii) Dividend on shares in case of a dealer in shares
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(iii) Salary by a partner from his partnership firm


(iv) Rental income of machinery
(v) Winnings from lotteries by a person having the same as business activity
(vi) Salaries payable to a Member of Parliament
(vii) Receipts without consideration
(viii) In case of retirement, interest on employees contribution if provident fund is
unrecognized.
(iii) Explain briefly the applicability of section 22 for chargeability of income-tax for:
(i) House property situated in foreign country and
(ii) House property with disputed ownership. (2 4 = 8 Marks)
(b) Shashwat Hotels Pvt. Ltd has given the following information for F.Y. 2009-10. You are
required to compute the taxable services under Service Tax Act and the tax thereon for
F.Y. 2009-10 without assigning any reason for the treatment.
(i) Reception room and vehicle parking space were let out for a film shooting for 3
months. The charges received for this Rs.5 Lacs.
(ii) The conference hall was let out to a Gujarati Samaj Trust for a week for a music
competition for Rs.50,000.
(iii) The hotel was booked by a customer for 3 days for a marriage function. The room
booking charges were received in advance (excluding service tax) in the same year
of Rs.50,000. The electricity charges separately billed Rs.20,000, hire charges
including catering charges for 3 days billed of Rs.3,25,000 after deducting the
advance.
(iv) During the year, the conference hall was let out to MNO Ltd. The charges received
were as under:
Hall rent Rs.4,00,000, computer & projector systems charges Rs.25,000, electricity
charges Rs.30,000. Hall rent includes charges for snacks and cold drinks
Rs.50,000.
(v) The hotel garden was let out to a political party for 2 days for a meeting. The
charges received Rs.25,000.
The hotel charges 10% service charges which are later distributed as tips to employees.
The above charges are excluding service tax. All the charges have been received in F.Y.
2009-10.
The hotel has already been registered under Service Tax Act in F.Y. 2008-09. (4 Marks)
(c) Compute the VAT payable by Mr. Shyam, who purchased goods from a manufacturer on
payment of Rs.4,16,000 (including VAT) and earned 20% profit on purchase price. VAT
rate on both purchases and sales is 4%. (4 Marks)
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Answer
(a) (i) Computation of gratuity taxable in the hands of Mr. Shah for the P.Y. 2009-10
As per section 10(10)(iii), gratuity received by an employee would be exempt upto the
least of the following limits -
Rs.
(i) Gratuity received 8,00,000
(ii) Half-months salary for every year of completed service (See 4,00,500
Note below)
(iii) Monetary limit 3,50,000
Therefore, Rs.3,50,000 would be exempt under section 10(10)(iii). The balance
Rs.4,50,000 (i.e.Rs.8,00,000 Rs.3,50,000) would be taxable.
Note
One of the limits for calculation of gratuity exempt under section 10(10)(iii) is one-
half-months salary for each year of completed service (fraction of a year to be
ignored), calculated on the basis of average salary for the ten months immediately
preceding the month of retirement. In this case, the month of retirement is January,
2010. Therefore, average salary for the months of March 2009 to December 2009
have to be considered. The salary is Rs.25,000 p.m. upto 30.9.2009 and Rs.27,000
p.m. from 1.10.2009. Hence, average salary would be Rs.26,700[(Rs.25,000 7) +
(Rs.27,000 3) + (2000 55%10)]/10.
Further, half-months salary should be multiplied by the number of years of
completed service and any fraction of a year has to be ignored. Therefore, in this
case, half-months salary should be multiplied by 30 and the fraction of 7 months
should be ignored.
Computation of average salary Rs.
Basic salary March 2009 to December 2009 (25,0007+27,0003) 2,56,000
Dearness allowance (2,000 10 55%) 11,000
2,67,000
Average salary = 2,67,000/10 = Rs.26,700
Half-months salary for every year of completed service 4,00,500
(fraction is to be ignored)
[30 26,700/2]
PS The requirement of the question has not been specified. Having regard to the
information given in the question, the taxable gratuity has been computed.
(ii) Particulars Head of Income
(i) Rental income in case of dealer in property Income from house
property
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(ii) Dividend on shares in case of a dealer in Income from other sources


shares
(iii) Salary by partner from his partnership firm Profit and gains of
business or profession
(iv) Rental income of machinery (See Note below) Income from other
sources/ Profits and gains
of business or profession
(v) Winnings from lotteries by a person having the Income from other sources
same as business activity
(vi) Salaries payable to a Member of Parliament Income from other sources
(vii) Receipts without consideration Income from other
sources`
(viii) In case of retirement, interest on employees Income from other sources
contribution if provident fund is unrecognized
Note - As per section 56(2)(ii), rental income of machinery would be chargeable to tax
under the head Income from Other Sources, if the same is not chargeable to income-
tax under the head Profits and gains of business or profession.
(iii) Applicability of section 22 for chargeability of income-tax for
(i) House property situated in foreign country
A resident assessee is taxable under section 22 in respect of annual value of a
house property situated in foreign country. A resident but not ordinarily resident or
a non resident is taxable in respect of income from such property if the income is
received in India during the previous year. Once incidence of tax is attracted under
section 22, the annual value will be computed as if the property is situated in India.
(ii) House property with disputed ownership
If the title of ownership of the house property is under dispute in a court of law, the
decision about who is the owner lies with the Income tax Department. The
assessment cannot be held up for such dispute. Generally, a person who
receives the income or who enjoys the possession of the house property as owner,
though his claim is under dispute, is assessable to tax under section 22.
(b) Computation of Gross Taxable Services for the Financial Year 2009-10
Rs.
I. Taxable Mandap Keeper Services
1. Charges received for reception room and vehicle parking Nil
space let out for film shooting [Refer Note 1]
2. Charges received for music competition [Refer Note 2] 50,000
3. Charges received for marriage function (excluding room
booking charges) [Refer Note 3]
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Add: Catering & hire charges 3,25,000


Electricity charges 20,000
3,45,000
Less: Abatement @ 40% vide Notification No. 1/2006 ST 1,38,000 2,07,000
dated 01.03.2006
4. Charges received for letting out the hotel garden for a Nil
meeting of the political party [Refer Note 4]
Total Taxable Mandap Keeper Services 2,57,000
II. Taxable Convention Services
Charges received from MNO Ltd. [Refer Note 5]
Add: Hall rent (excluding charges for snacks and cold 3,50,000
drinks)
Computer and projector Systems 25,000
Electricity Charges 30,000
Total Taxable Convention Services 4,05,000
Gross Taxable Services 6,62,000
Service tax @ 10% 66,200
Add: Education Cess @ 2% 1324
Secondary and Higher
Education Cess @ 1% 662 1986 68,186
It may be noted that the question does not require the students to provide any
reason for the treatment of each item. However, the same are given hereunder
for the better understanding of the students:
Note 1
Activity of shooting of films/T.V. serials cannot be considered as official, social or
business function [Departmental clarification in the book entitled Service Tax
through Questions and Answers Similar view expressed in Secretary, Town Hall
Committee v. CCE, Mysore 2007 (8) STR 170 (Tri.-Bang.)].
Note 2
Music competition is a social function and allowing temporary occupation of a hall
for a consideration for organizing such function is liable to service tax under
mandap keeper service [Circular No. 96/7/2007 ST dated 23.08.2007].
Note 3
(i) Halls, rooms etc. let out by a hotel for a consideration for organizing social
function like marriage is liable to service tax under mandap keeper service
[Circular No. 96/7/2007 ST dated 23.08.2007].

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(ii) Room booking charges are not liable to service tax under mandap keeper
services [Merwara Estates v. CCE 2007 6 STT 310/21 STT 327 (New Delhi -
CESTAT)]
Alternative view: It is possible to take a view that room booking charges are
covered under mandap keeper services by virtue of New Delhi CESTATs ruling in
the case of Rajmahal Hotels v. CCE 2006 3 STT 75, wherein it was held that where
for holding function like marriages, a hotel provided its hall and also allotted rooms
to persons booking the hall, such room rent would also be includible in the value of
taxable service.
(ii) The gross amount charged for the taxable mandap keeper service includes
charges towards supply of electricity, hire charges and catering charges
[CBEC FAQs].
(iii) Since, catering service is also provided along with mandap keeper services,
benefit of abatement of 40% of the gross amount charged is available under
Notification No. 1/2006 ST dated 01.03.2006 on the following assumptions:
bill issued for this purpose indicates that it is inclusive of charges for catering
services;
no CENVAT credit on inputs/capital goods/input services has been taken;
the service provider has not availed the benefit under the Notification No.
12/2003 ST, dated 20.06.2003.
Note 4
Meeting of a political party is not a social function and thus not liable to service tax
under mandap keeper service [Secretary, Town Hall Committee, Mysore City
Corporation v. CCE (2007) (8) STR 170 (Tri- Bang.)].
Alternative view: It is possible to take a view that the meeting of a political party is
an official function and thus allowing temporary occupation of the hotel garden for a
consideration for organizing such meeting would be liable to service tax under
mandap keeper services.
Note 5
(i) It has been assumed that the conference hall let out to MNO Ltd. is for the
purpose of organizing a seminar/conference and thus, the said activity falls
under convention services.
(ii) Since, snacks and cold drinks cannot be termed as satisfying meal, benefit of
abatement of 40% of the gross amount charged available under Notification
No. 1/2006 ST dated 01.03.2006 cannot be taken.
However, charges for snacks and cold drinks can be excluded by virtue of
Notification No. 12/2003 ST dated 20.06.2003 as these are goods sold during the
95
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

provision of service on the following assumptions:


there is documentary proof specifically indicating the value of the said goods and
materials;
no credit of duty paid on such goods and materials sold, has been taken under the
provisions of the CENVAT Credit Rules, 2004; or
where such credit has been taken by the service provider on such goods and
materials, such service provider has paid the amount equal to such credit availed
before the sale of such goods and materials.
Note 6
Service tax is leviable on 10% service charges [Hotel Mela Plaza v. CCE 2005 1
STT 204]. However, separate addition of 10% has not been made on the
assumption that all the transactions/receipts are inclusive of such 10% service
charges.
Note 7
It is presumed that assessee is not eligible for threshold exemption of Rs 10 lakh,
as he was registered in FY 2008-09 itself.
PS The words Service Tax Act mentioned in the question may be read as
Finance Act, 1994.
(c) Computation of VAT payable by Mr. Shyam
Rs.
Payment made to manufacturer 4,16,000
Less: VAT paid [(4,16,000/104) x 4] 16,000
Purchase price 4,00,000
Add: Profit margin @ 20% on purchase price 80,000
Sale price before VAT 4,80,000
Add: VAT @ 4% on Rs.4,80,000 19,200
Less: Input credit 16,000
VAT payable by Mr. Shyam 3,200

96
EXAMINERS COMMENTS ON THE PERFORMANCE OF THE CANDIDATES

PAPER 1 : ACCOUNTING
Question 1. This question was fairly well answered by most of the candidates.
Question 2. The overall performance of the candidates was below average. Most of the
candidates prepared combined Income and Expenditure account instead of giving separate
accounts for Hospital, Dispensary and Trust.
Question 3. Majority of the candidates have correctly calculated cash flows from investing
and financing activities. However, some of the candidates computed cash flows from operating
activities by Indirect Method instead of the direct method, as asked in the question.
Question 4. Most of the candidates were not able to prepare partners capital accounts and
could not calculate the settlement amount for the executor of the deceased partner as per
Section 37 of the Partnership Act.,1932.
Question 5.(a) Large number of candidates failed to give the correct journal entries and
answered it as internal reconstruction.
(b) Candidates performed satisfactorily in this part of the question.
Question 6.(a) Average performance was observed in this part of the question. Candidates
failed to calculate pre and post sales, salary, rent and interest ratio and hence arrived at
wrong pre and post incorporation profit or loss.
(b) Few candidates were not able to calculate installment due but not received and
therefore erred in the calculation of hire purchase profit.
Question 7. The performance of the candidates was average except part (b) and (c) in which
they have performed fairly well.

PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

Question 1. Overall performance has been satisfactory. In respect of part (a) of the question,
many candidates answered incorrectly by stating that the Star Bank can collect only Rs.
40,000 from the Railways instead of the full amount of Rs. 60,000/-. Further, large number of
candidates did not give reasons or the provisions of the Indian Contract Act, 1872 in support
of their answers as required by the question.
Question 2. Performance was satisfactory in respect of part (a) of the question. Part (b) of
the question was either not attempted by the candidates or wrongly answered stating the
general philosophy of Mahatma Gandhi without stating the social sins as enunciated by him. In
part (c) quite a few candidates gave notice of the statutory / General Meeting instead of the
first Board Meeting as required by the question.
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

Question 3. In respect of part (a) of the question, performance was satisfactory. In part (b) of
the question, in place of fundamental principles of ethics, many candidates discussed vaguely
ethics and its utility in business based on guesswork. With reference to part(c) of the question,
the answer on drafting of the deed for reconstitution of partnership was not given in legal
format by many candidates.
Question 4. Performance was satisfactory except that in part (c) of the question, many
candidates have answered the benefits of communication instead of the forms of formal
communication as required by the question.
Question 5. Overall performance of the candidates on the question were satisfactory, except
in respect of part (b) (ii) of the question. Most of the candidates not attempted the part of the
question and those who attempted, were unable to give reasons and as such, their answer
was found to be unsatisfactory.
Question 6. The overall performance was satisfactory except that with respect to part (c) of
the question, instead of explaining the basic principles of interpersonal communication,
number of candidates discussed 7 cs of communication.
Question 7. Overall performance was satisfactory except that in part (d) of the question, the
answer of many candidates on drafting of the gift deed was not in the legal format as required
in the question and expected from the student.

PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT


Question 1. It is a compulsory question divided into four sub-parts:
(a) It is a practical question based on calculation of sales variances. Performance of
candidates was average in this part. Some of the examinees were confused in identifying the
favourable and adverse variances.
(b) It is a practical problem related to economic order quantity and divided into two sub
parts. Part (i) was not attempted by most of the candidates on correct lines while part (ii) was
answered well by majority of them.
(c) This practical problem is related to calculation of different ratios. Overall performance of
the candidates in this part was observed to be satisfactory.
(d) This practical problem is on computation of weighted average cost of capital on the basis
of market price. Some of the candidates were not able to compute the weight of the equity
capital on correct lines as they did not consider the reserves and surplus to arrive at the
figure. Average performance was observed.
Question 2.(a) This numerical part pertained to the concept of contract costing. Performance
of candidates was average as many candidates could not understand the requirement of the
question. They failed to calculate amount of estimated profit and amount to be transferred to
reserve.

98
EXAMINERS COMMENTS

(b) It is a practical problem related to receivables management for recommendation of


appropriate credit policy. Most of the candidates did not answer in the desired manner.
Question 3.(a) It is a practical problem of process accounting relating to equivalent
production. Most of the candidates solved it correctly.
(b) Part (i) of this question is related to calculation of operating, financial and combined
leverages. A good number of candidates attempted this part very well. Part (ii) is a theoretical
question on liquidity and profitability issues in management of working capital. It was
responded well.
Question 4.(a) This numerical problem is related to calculation of funds flow from operations.
Most of the candidates prepared fund flow statement unnecessarily, which was not required in
the question. Average performance of the candidates was observed.
(b) This practical problem is related to marginal costing. It required candidates to calculate
P/V ratio, BEP, and desired sales levels to achieve a particular level of EBIT and PAT.
Average performance was observed, as most of the candidates could not answer cash break-
even point on correct lines.
Question 5.(a) It is a practical problem related to reconciliation of profit as per cost
accounting and financial accounting by preparation of memorandum reconciliation account. It
was well attempted though in statement form.
(b) This theoretical question related to distinction between profit maximization and wealth
maximization, and Global depository receipts (GDRs) and American depository receipts
(ADRs). Average performance was observed.
Question 6.(a) It is a practical problem on capital budgeting to select the most favourable
option of machine by using net present value method. Overall performance of the candidates
was satisfactory.
(b) This is a theoretical question divided into two parts Part (i) on essential factor for
installing cost accounting system and Part (ii) on treatment of under and over absorption of
overheads. It was not answered in appropriate manner by most of the candidates.
Question 7. This question comprises of five theoretical parts, and the candidates were
required to answer any four. Average performance was observed.
Concluding Observations
The overall performance of the candidates was satisfactory.

PAPER 4 : TAXATION

Question 1.(a) This question requires computation of gross total income and losses eligible
for carry forward. The number of adjustments and issues were much more considering the
marks this question carries. Many candidates exhibited their lack of knowledge in set off and
99
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER, 2010

carry forward provisions. As a result, they could not secure full marks and got only some
marks for steps.
(b) This question requires computation of capital gain on slump sale of an undertaking. It is
a different type of question which the candidates found it difficult to answer. Many candidates
did not answer well and secured only some marks for steps.
(c) This question is on computation of value of taxable service and service tax payable
thereon. It requires not only calculation of value of taxable service but also reasons in brief for
the treatment given to the items. Candidates have computed value of taxable service and /or
service tax liability for some of the items and secured some step marks only.
(d) This question is on computation of net VAT liability taking into account input tax credit.
Many candidates solved this question correctly and secured full marks.
Question 2.(a)(i) This question requiring knowledge of the specific income exempt in the
hands of a Sikkimese individual was not understood properly by the candidates and was,
therefore, not answered well.
(a)(ii) This question requires calculation of the period of holding of some capital assets.
Candidates have mainly answered only regarding the date of transfer and not the date of
commencement of holding of capital asset. Hence, they could only secure some marks for
steps.
(b) This question requires the candidates to explain as to how the excess payment of service
tax is to be adjusted and what are the conditions to be satisfied in this regard. Many
candidates gave very general answers.
(c) This question was in relation to the records to be maintained by a registered dealer under
VAT and was answered reasonably well by the candidates.
Question 3.(a) The candidates have attempted to compute income from profession, income
from other sources and eligible deduction under section 80D. Most of the candidates secured
only some marks for steps in this question.
(b) This question was not understood by many candidates. They have explained the
provisions relating to payment of service tax instead of provisional payment of service tax
which was asked for in the question.
(c) In this question, candidates were required to state variants of VAT, their schematic
diagrams and also a brief explanation of each of them. It was written reasonably well by the
candidates.
Question 4.(a)(i) This question requires the consequences of not deducting tax at source and
it was answered vaguely by the candidates.
(a)(ii) The exemption available to political parties was not explained properly by the
candidates and thus, they could not secure good marks.
100
EXAMINERS COMMENTS

Question 5.(a) This question requires computation of salary income chargeable to tax. It was
answered reasonably well by the candidates.
(b) This question requires the candidates to explain e-filling of service tax returns. However,
they have explained about e-filling of income-tax returns. Also, the later parts of the question
were not answered by many candidates.
(c) This question seeks to test the candidates knowledge about the conditions to be fulfilled
by a dealer accepting composition scheme under VAT. It was not answered well by many
candidates.
Question 6.(a) This question requires allocation of depreciation between two companies on
the basis of number of days the assets were held by them. However, the candidates were not
able to score full marks.
(b) This question requires the candidates to state the correctness of two statements in the
context of service tax. This was answered reasonably well by the candidates and many
candidates secured full marks in it.
(c) Candidates were expected to list items of purchases not eligible for input credit under
VAT in this question. It was answered reasonably well by the candidates.
Question 7.(a)(i) Many candidates have computed taxable gratuity and exempt gratuity and
secured full marks.
(a)(ii) This question testing the candidates on conceptual issues was answered reasonably
well by many candidates to secure good marks.
(a)(iii) This question was answered by less number of candidates (on account of internal
choice). The answers were very general and not up to the expectation level.
(b) This question had some complicated issues involving dual interpretations and hence, the
candidates could not secure full marks.
(c) This question was easy and candidates secured good marks.

101
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106