61089bos49694 Ipc Nov2019 gp1

PAPER – 1 : ACCOUNTING
Question No. 1 is compulsory.

Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumptions may be made and indicated in answer by the
candidates.
Working Notes should form part of the answer.
Question 1
(a) From the following information of XYZ Limited, calculate cash and cash equivalent as on
31-03-2019 as per AS-3.
Particulars Amount (`)
Balance as per the Bank Statement 25,000
Cheque issued but not presented in the Bank 15,000
Short Term Investment in liquid equity shares of ABC Limited 50,000
Fixed Deposit created on 01-11-2018 and maturing on15-04-2019 75,000
Short Term Investment in highly liquid Sovereign Debt Mutual fund 1,00,000
on 01-03-2019
Bank Balance in a Foreign Currency Account in India $ 1,000
(Conversion Rate: On the day of deposit ` 69/USD As on 31-03-2019
` 70/USD)
(b) Given the following information of ABC Ltd.
(i) Goods of ` 80,000 were sold on 10-03-2019 but at the request of the buyer these
were delivered on 10-04-2019.
(ii) On 25-01-2019 goods of ` 2,00,000 were sent on consignment basis of which 20%
of the goods unsold are lying with the consignee as on 31-03-2019.
(iii) ` 2,40,000 worth of goods were sold on approval basis on 1-12-2018. The period of
approval was 3 months after which they were considered sold. Buyer sent approval
for 75% goods up to 31-1-2019 and no approval or disapproval received for the
remaining goods till 31-3-2019.
(iv) Apart from the above, the company has made cash sales of ` 9,60,000 (gross).
Trade discount of 5% was allowed on the cash sales.
You are required to advise the accountant of ABC Ltd., with valid reasons, the amount to
be recognized as revenue in above cases in the context of AS-9 for the year ending
31-1-2019.
© The Institute of Chartered Accountants of India

2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2019
(c) Shyan Limited commenced a construction contract on 01-04-2018. The company

expended ` 500 crores in 2018-19 for 40% work. The total estimated cost of the project
is ` 1,250 crores. Compute (i) Revenue, (ii) Expense, (iii) Provision for loss and (iv) Profit
or loss to be recognized in the statement of Profit and Loss A/c as per
AS-7 for the year ending 31-03-2019 if:
(1) It is fixed price contract of ` 1,200 crores.
(2) It is cost plus contract of 20%.
(d) With reference to AS-10, classify the items under the following heads:
HEADS
(i) Purchase Price of PPE
(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of PPE.
ITEMS
(1) Import duties and non-refundable purchase taxes.
(2) Initial delivery and handling costs.
(3) Costs of testing whether the asset is functioning properly, after deducting the net
proceeds.
(4) Initial operating losses, such as those incurred while demand for the output of an
item builds up.
(5) Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity.
(6) Trade discounts and rebates.
(7) Costs of relocating or reorganizing part or all of the operations of an enterprise .
(8) Installation and assembly costs.
(9) Cost of site preparation.
(10) Administration and other general overhead costs. (4 Parts x 5 Marks = 20 Marks)
Answer
(a) Computation of Cash and Cash Equivalents as on 31 st March, 2019
`
Cash balance with bank (` 25,000 less ` 15,000) 10,000
Short term investment in highly liquid sovereign debt mutual fund on 1,00,000
1.3.19*

PAPER – 1 : ACCOUNTING 3
Bank balance in foreign currency account ($1,000 x ` 70) 70,000

1,80,000
* Considered to be having maturity period of less than 3 months.
Note: Short term investment in liquid equity shares and fixed deposit will not be
considered as cash and cash equivalents.
(b) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions are
fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price
or all significant risks and rewards of ownership have been transferred to the buyer
and the seller retains no effective control of the goods transferred to a degree
usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of the goods.
Case (i)
The sale is complete (assuming risks and rewards transferred on 10.3.19) but delivery
has been postponed at buyer’s request. M/s ABC Ltd. should recognize the entire sale of
` 80,000 for the year ended 31 st March, 2019.
Case (ii)
20% goods lying unsold with consignee should be treated as closing inventory and sales
should be recognized for ` 1,60,000 (80% of ` 2,00,000). In case of consignment sales
revenue should not be recognized until the goods are sold to a third party.
Case (iii)
In case of goods sold on approval basis, revenue should not be recognized until the
goods have been formally accepted by the buyer or the buyer has done an act adopting
the transaction or the time period for rejection has elapsed or where no time has been
fixed, a reasonable time has elapsed. Therefore, revenue should be recognized for the
total sales amounting ` 2,40,000 as the time period for rejecting the goods had expired.
Case (iv)
Trade discounts given should be deducted in determining revenue. Thus ` 48,000 should
be deducted from the amount of turnover of ` 9,60,000 for the purpose of recognition of
revenue. Thus, revenue should be recognized for ` 9,12,000.
(c) 1. If it is a fixed price contract of ` 1,200 crores
Percentage of completion till date to total estimated cost of const ruction = 40%

(` in crores)
i Revenue (` 1,200 crores x 40%) 480
ii Expenses 500
iii Provision for loss (Refer Working note) 30
iv Loss 50
2. If it is a cost-plus contract of 20%
i Revenue (500 crores x120%) 600
ii Expenses 500
iii Provision for loss Nil
iv Profit 100
Working Note:
Calculation of provision for loss in case of fixed price contract
Amount of foreseeable loss (` in crores)
Total cost of construction 1,250
Less: Total contract price (1,200)
Amount of foreseeable loss 50
Loss for current year [500 – 480 (` 1,200 crores x 40%)] (20)
Expected loss to be recognized immediately 30
According to AS 7, when it is probable that total contract costs will exceed total contract
revenue, the expected loss should be recognized as an expense immediately.
(d) Heads
(i) Purchase price of PPE
(ii) Directly attributable cost of PPE
(iii) Cost not included in determining the carrying amount of an item of PPE
Items Classified
under Head
1 Import duties and non-refundable purchase taxes (i)
2 Initial delivery and handling costs (ii)
3 Costs of testing whether the asset is functioning properly, (ii)
after deducting the net proceeds*
4 Initial operating losses, such as those incurred while demand (iii)
for the output of an item builds up

5 Costs incurred while an item capable of operating in the (iii)

manner intended by management has yet to be brought into
use or is operated at less than full capacity.
6 Trade discounts and rebates (deducted for computing (i)
purchase price)
7 Costs of relocating or reorganizing part or all of the operations (iii)
of an enterprise.
8 Installation and assembly costs (ii)
9 Costs of site preparation (ii)
10 Administration and other general overhead costs (iii)
*Considered that this cost of testing is after deducting net proceeds from selling any items
produced while bringing the asset to that location and condition otherwise if the net
proceeds are after fixing the asset to its location and condition (asset ready for use), it
will be classified under category (iii) i.e. Cost not included in determining the carrying
amount of an item of PPE.
Question 2
A Limited and B Limited amalgamate to form a new company AB Limited. The financial
position of these companies as on the date of amalgamation was as under :
Particulars Amount Amount
A Ltd. B Ltd.
Equity and Liabilities
Shareholders' Fund:
(a) Equity share capital of ` 100 each 5,00,000 2,50,000
(b) 9% Preference Share Capital of ` 100 each 3,00,000 2,00,000
(c) General Reserve 1,50,000 1,40,000
(d) Profit & Loss Account 1,36,800 80,500
Non-Current Liabilities:
12% Debentures 2,00,000 -
Secured Loan. - 2,00,000
Current Liabilities:
Trade Payables 3,17,500 2,00,800
16,04,300 10,71,300
Assets
Non-Current Assets
Fixed Assets
Land and Building 2,50,000 1,90,000

Plant and Machinery 1,75,000 2,00,000

Furniture 75,000 50,000
Intangible Assets (Goodwill) 2,00,000
Non-Current Investments:
Current Assets:
Inventories 1,20,000 1,00,000
Trade Receivables 4,21,000 3,00,000
Bank Balance 3,40,000 1,80,000
Cash in hand 23,300 51,300
16,04,300 10,71,300
The terms of Amalgamation are as under :
(1) All assets and liabilities are to be taken at book value except inventory and trade
receivables for which provision of 5% and 7.5% respectively is required.
(2) Issue of 5 preference shares of ` 20 each in AB Limited @ ` 18 paid up at a premium of
` 4 per share for each preference share held in both the companies .
(3) Issue of 6 equity shares of ` 20 each in AB limited @ ` 18 paid up at a premium of ` 4
per share for each equity share held in both the companies.
(4) In addition cash should be paid to the equity shareholders of both the companies as is
required to adjust the rights of the shareholders in accordance with the intrinsic value of
shares of both the companies.
(5) Issue of such amount of fully paid 15% debentures in AB limited as is sufficient to
discharge the 12% debentures in A Limited.
(6) Trade receivable of A Limited include ` 25,000 due from B Ltd.
(i) Prepare necessary ledger accounts in the books of A limited to close their book.
(ii) Show necessary Journal entries in the books of AB Ltd. to give effect to the above
transactions. (16 Marks)
Answer
Books of A Ltd.
Realization Account
` `
To Goodwill 2,00,000 By 5% Debentures 2,00,000
To Land & Building 2,50,000 By Trade payables 3,17,500
To Plant & Machinery 1,75,000 By AB Ltd. 10,49,225
To Furniture 75,000 (Purchase consideration)
To Trade receivables 4,21,000 By Equity shareholders A/c 67,575

To Inventory 1,20,000 (loss)

To Bank balance 3,40,000
To Cash in hand 23,300
To Preference shareholders
(excess payment) 30,000
16,34,300 16,34,300
Equity Shareholders Account
` `
To Realisation A/c (loss) 67,575 By Share capital 5,00,000
To Equity Shares in AB Ltd. 6,60,000 By Profit & Loss A/c 1,36,800
To Cash 59,225 By Reserve 1,50,000
7,86,800 7,86,800
9% Preference Shareholders Account
` `
To Preference Shares in AB Ltd. 3,30,000 By Share capital 3,00,000
By Realisation A/c 30,000
3,30,000 3,30,000
AB Ltd. Account
` `
To Realisation A/c 10,49,225 By Equity Shares in AB Ltd.
For Equity 6,60,000
Pref. 3,30,000 9,90,000
By Cash 59,225
10,49,225 10,49,225
Working Notes:
(i) Purchase consideration
A Ltd. B Ltd.
` `
Payable to preference shareholders:
Preference shares at ` 22 (18*+4) per share 3,30,000 2,20,000
Equity Shares at ` 22(18*+4) per share 6,60,000 3,30,000
Cash [See W.N. (ii)] 59,225 93,000
10,49,225 6,43,000

(ii) Value of Net Assets

A Ltd. B Ltd.
` `
Goodwill 2,00,000
Land & Building 2,50,000 1,90,000
Plant & Machinery 1,75,000 2,00,000
Furniture 75,000 50,000
Trade receivables less 7.5% 3,89,425 2,77,500
Inventory less 5% 1,14,000 95,000
Bank balance 3,40,000 1,80,000
Cash in hand 23,300 51,300
15,66,725 10,43,800
Less: Debentures 2,00,000 –
Trade payables 3,17,500 2,00,800
Secured Loans – (5,17,500) 2,00,000 (4,00,800)
10,49,225 6,43,000
Payable in shares 9,90,000 5,50,000
Payable in cash 59,225 93,000
*considered that the paid-up value of ` 18 consists of only face value.
Journal Entries in the Books of AB Ltd.
1 Goodwill Dr. 2,00,000
Land & Building Dr. 2,50,000
Plant & Machinery Dr. 1,75,000
Furniture Dr. 75,000
Trade receivables less 7.5% Dr. 3,89,425
Inventory less 5% Dr. 1,14,000
Bank balance Dr. 3,40,000
Cash in hand Dr. 23,300
To Debentures 2,00,000
To Trade payables 3,17,500
To Business Purchase Account 10,49,225
(Incorporation of various assets and liabilities taken
over from A Ltd.’s at agreed value)
Land & Building Dr. 1,90,000
Plant & Machinery Dr. 2,00,000
Furniture Dr. 50,000

Trade receivables less 7.5% Dr. 2,77,500

Inventory less 5% Dr. 95,000
Bank balance Dr. 1,80,000
Cash in hand Dr. 51,300
To Secured Loans 2,00,000
To Trade payables 2,00,800
To Business Purchase Account 6,43,000
(Incorporation of various assets and liabilities taken
over from B Ltd.’s at agreed value)
2 Business Purchase A/c Dr. 10,49,225
To Liquidator of A Ltd 10,49,225
(Amount payable to A Ltd. as per agreement dated)
Business Purchase A/c Dr. 6,43,000
To Liquidator of B Ltd 6,43,000
(Amount payable to B Ltd. as per agreement dated)
3 Liquidator of A Ltd. Dr. 10,49,225
To Equity Share Capital 5,40,000
To 9% Preference Share Capital 2,70,000
To Securities premium 1,80,000
To Bank A/c 59,225
(Discharge of consideration for A Ltd.’s business)
Liquidator of B Ltd. Dr. 6,43,000
To Equity Share Capital 2,70,000
To 9% Preference Share Capital 1,80,000
To Securities premium 1,00,000
To Bank A/c 93,000
(Discharge of consideration for B Ltd.’s business)
4 12% Debentures A/c Dr. 2,00,000
To 15% Debentures A/c 2,00,000
(Allotment of 15% Debentures to debenture holders of
A Ltd.)
5 Trade payable of B Ltd. Dr. 25,000
To Trade receivables of A Ltd. 25,000
(Cancellation of mutual owing)
Note: Alternative set of entries (combined entries for both A Ltd. and B Ltd.) may also be
given for entries numbered 1,2,3.

Question 3
(a) Prepare cash flow for ABC Ltd., using Direct Method for the year ending 31-03-2019 from
the following information:
(1) Sales for the year amounted to ` 270 Lakh out of which 50% was cash sales.
(2) Purchases for the year amounted to ` 60 lakh out of which credit purchases were
80%.
(3) Administrative expenses amounted to ` 18 lakh. Salary of ` 16 lakh was charged
to profit and loss account for the year. Salary of ` 4 lakh was outstanding as on
31-03-2019. (Salary does not form part of Administrative expenses)
(4) The company has 15% debentures of ` 10 lakh, which it redeemed during the year
at a premium of 10% by issue of equity shares of ` 9 lakh towards redemption and
the balance was paid in cash. Debenture Interest was also paid during the year.
(5) Dividend paid during the year amounted to ` 12 lakh (including dividend distribution
tax).
(6) Investment costing ` 10 lakh were sold at a profit of ` 2.50 lakh.
(7) Income tax payable for the year was ` 80,000.
(8) Depreciation of 25% is charged by the company on opening balance of Plant and
Machinery. At the year end one old plant costing ` 5,00,000 (WDV ` 2,00,000) was
sold for ` 3,50,000. The purchases were also made at year end.
(9) The following balances are also provided :
` in Lakh ` in Lakh
31-03-2018 31-03-2019
Debtors 40 45
Creditors 20 23
Bank 5 -
Plant & Machinery 50 70
Provision for tax 1 0.7
(b) From the following details, find out the average due date of the bills issued by A to B :
Date of Bill Amount (`) Usance of the Bill
29th January, 2018 10,000 1 month
20th March 2018 8,000 2 months
12th July, 2018 14,000 1 month
10th August, 2018 12,000 2 months

Base date to be taken shall be the earliest due date. (10 + 6 = 16 Marks)
Answer
(a) ABC Ltd.
Cash Flow Statement for the year ended 31 st March, 2019
(Using direct method)
Particulars ` In lakhs ` In lakhs
Cash flows from operating activities
Cash sales (50% of 270) 135
Cash receipts from Debtors 130
[40 + 135 - 45]
Cash purchases (20% of 60) (12)
Cash payments to suppliers (45)
[20 + 60 x 80% – 23]
Cash paid to employees (12)
Cash payments for overheads (Adm. and selling) (18)
Cash generated from operations 178
Income tax paid (1.1)
Net cash generated from operating activities 176.9
Cash flows from investing activities
Sale of investments (10+ 2.5) 12.5
Payments for purchase of fixed assets (34.5)
Sale of Machinery 3.5
Net cash used in investing activities (18.5)
Cash flows from financing activities
Redemption of debentures (11-9) (2)
Interest paid (1.5)
Dividend paid (12)
Net cash used in financing activities (15.5)
Net increase in cash 142.90
Cash at beginning of the period 5.00
Cash at end of the period 147.90

Working Notes
1. Calculation of Income Tax paid during the year
Provision for taxation A/c
` `
To Cash (Amount paid 1,10,000 By Balance b/d 1,00,000
during the year
balancing figure)
To Balance c/d 70,000 By P & L A/c (Provision 80,000
for the year)
1,80,000 1,80,000
2. Calculation of Purchase of Fixed Assets
Plant & Machinery A/c
` `
To Balance b/d 50,00,000 By Depreciation (25% 12,50,000
of ` 50 Lacs)
To P & L A/c (Profit on 1,50,000 By Cash (Sale) 3,50,000
Sale)
To Cash
(Purchases)(bal. fig.) 34,50,000 By Balance c/d 70,00,000
86,00,000 86,00,000
(b) Calculation of Average Due Date
(Taking 3rd March, 2018 as base date)
Date of bill 2018 Term Due date Amount No. of days Product
2018 from the base
date i.e. 3rd
March,2018
(`) (`) (`)
29th January 1 month 3rd March 10,000 0 0
20th March 2 months 23rd May 8,000 81 6,48,000
12th July 1month 14th Aug. 14,000 164 22,96,000
10th August 2 months 13th Oct. 12,000 224 26,88,000
44,000 56,32,000
Sum of Products
Average due date = Base date + Days equal to
Sum of Amounts

56,32,000
= 3rd March, 2018 +
44,000
= 3rd March, 2018 + 128 days = 9 th July, 2018
Note:
Bill dated 12 th July, 2018 has the maturity period of one month, due date (after adding 3
days of grace) falls on 15 th August, 2018. 15 th August being public holiday, due date
would be preceding date i.e. 14th August, 2018.
Question 4
Prepare the Income & Expenditure Account of the Entertainment Club for the year ending
31st March, 2019 and Balance Sheet on that date from the following information:
Receipts and Payment Account of Entertainment Club
For the year ending on 31 st March, 2019
Receipts ` Payments `
To Balance b/d (cash) 25,000 By Rent and Rates 89,250
To Subscriptions: By Furniture purchased 80,000
(1-4-2018)
2017-18 13,350 By Creditors for Sports 71,000
Materials
2018-19 4,20,000 By Purchases for Sports 20,000
2019-20 12,000 4,45,350 Materials
By Cost of prizes awarded 23,450
To Sales of Sports Materials 34,000 By Match expenses 38,200
To Entrance Fees 50,000 By Miscellaneous expenses 1,28,300
To General Donation 25,750 By Balance c/d 1,49,300
To Donation for prize fund 15,500
To Interest on prize fund 2,000
Investments
To Miscellaneous receipts 1,900
5,99,500 5,99,500
Additional Information :
Particulars 31st March, 2018 31st March, 2019
Sports materials 25,000 28,000

Furniture 2,50,000 ?
5% Prize fund investments 80,000 ?
Creditors for sports materials 7,500 15,250
Subscription in arrears (17-18) 23,750 ?
Prize fund 80,000 ?
Rent paid in advance - 4,750
Outstanding rent 3,750 -
• Book value of sports materials sold was ` 30,000.
• Depreciation on furniture is to be provided @ 10%.
• Half of the entrance fee is to be capitalized.
• There are 1520 members, each paying an annual subscription@ ` 300.
• Subscription received in advance on 31-3-2018 were ` 9,000 (For 2018-19). (16 Marks)
Answer
Books of Entertainment Club
Income & Expenditure Account
For the year ending 31 st March, 2019
Particulars ` Particular `
To Rent & Rates (W.N.4) 80,750 By Subscription 4,56,000
(` 1,520 × ` 300)
To Match expenses 38,200 By Profit on sale of sports 4,000
material
To Misc. expense 1,28,300 (` 34,000 - ` 30,000)
To Depreciation 33,000 By Entrance fee 25,000
(10% of ` 3,30,000) on By Misc. Receipts 1,900
furniture
To Sports material consumed 65,750 By General donation 25,750
To Surplus 1,66,650
5,12,650 5,12,650

Balance Sheet of Entertainment Club as on 31 st March, 2019

Particular ` Particular `
Capital Fund Outstanding
subscription
Opening balance 3,03,500 (2018-19) 27,000
Add: Surplus 1,66,650 (2017-18) 10,400 37,400
Entrance fee 25,000 4,95,150 Furniture 2,97,000
Price fund (W.N.5) 76,050 Sports material 28,000
Subscription 12,000 5% Prize fund 80,000
received in advance investments
Creditors for sports 15,250 Accrued interest* 2,000
material on Prize Fund
investments
Cash balance 1,49,300
Rent paid in 4,750
advance
5,98,450 5,98,450
* Interest on prize fund investment amounts to ` 4,000 but only ` 2,000 was received, hence
` 2,000 is accrued.
Working Notes:
1. Balance Sheet as on 31.3.2018
Capital fund 3,03,500 Furniture 2,50,000
(bal figure)
Subscription received in advance 9,000 Investment (Prize Fund) 80,000
Prize Fund 80,000 Stock of sports material 25,000
Outstanding rent 3,750 Cash Balance 25,000
Creditors (Sports material) 7,500 Outstanding subscription 23,750
4,03,750 4,03,750
2. Furniture Account
To Opening balance 2,50,000 By Depreciation (10% of 3,30,000) 33,000
To Bank A/c 80,000 By bal. c/d 2,97,000
3,30,000 3,30,000

3. (i) Sports material purchased during the year (on credit)

Creditors
To Bank A/c 71,000 By Balance b/d 7,500
To Bal. c/d 15,250 By Purchases (Bal figure) 78,750
86,250 86,250
(ii) Sports material consumed during year
Particulars `
Opening balance 25,000
Add: Credit purchase 78,750
Cash purchase 20,000 98,750
Less Sale (30,000)
Total 93,750
Less: Closing Stock (28,000)
Sports material consumed 65,750
4. Rent & Rates to be shown in Income & Expenditure A/c
Particulars `
Payment 89,250
Less: Rent paid in advance on 31.3.19 (4,750)
Outstanding rent on 31.3.18 (3,750)
80,750
5. Prize fund
Particulars `
Opening balance 80,000
Add: Donation 15,500
Interest 4,000
99,500
Less: Prize distributed (23,450)
76,050
Note: The answer has been given on the assumption that the club is not registered under the
Companies Act, 2013. Therefore, Income & Expenditure A/c and Balance Sheet of the club
are not prepared as per Schedule III of the Companies Act, 2013.

Question 5
(a) ABC Ltd. has insured itself under a loss of profit policy for ` 3,30,000 with indemnity
period of 8 months under average clause. A fire occurred in the factory on 01-01-2019
and normal business was affected up to 30-04-2019.
From the following information, prepare a Statement of Claim under the policy:
Actual Turnover over the period of dislocation 50,000
(01-01-2019 to 30-4-2019)
Turnover for 12 months immediately preceding the date of fire 10,00,000
(01-01-2018 to 31-12-2018)
Turnover for corresponding period in 12 months immediately 4,50,000
preceding the date of fire (01-01-2018 to 30-04-2018)
Turnover for last financial year 12,00,000
Net Profit for last financial year 3,00,000
Uninsured Standing charges 18,000
Insured Standing charges for the last financial year 60,000
Following increases are approved in the policy:
(i) Increase in G.P. rate by 2%
(ii) Increase in turnover by 10%
There was an additional cost of working of ` 20,000 during dislocation period. Due to this
additional cost there was a saving of ` 5,000 in insured standing charges during the
indemnity period and but for this additional cost the turnover during the period of
dislocation would have been only ` 35,000.
(b) XYZ Limited held on 1st April, 2018, 1000 9% Government Securities at ` 90,000 (Face
Value of Security ` 100 each). Three month's interest had accrued on the above date.
On 1st May, the company purchased the same Government Securities of the face value
of ` 80,000 at ` 95 cum-interest. On 1 st June, ` 60,000 face value of the security was
sold at ` 94 cum-interest. Interest on the security was paid each year on 30 th June and
31st December and was credited by the bank on the same date. On 30th September,
` 40,000 face value of the Govt. securities were sold at ` 97 cum-interest. On
1st December, the company purchased the same security ` 10,000 at par ex-interest. On
1st March, the company sold ` 10,000 face value of the government securities at ` 95 ex-
interest.
You are required to draw up the 9% Government Security Account in the books of XYZ
Limited. FIFO method shall be followed.
Calculation shall be made to the nearest rupee or multiple thereof. (8 + 8 = 16 Marks)

Answer
(a) Computation of loss of profit Insurance claim
`
(1) Rate of gross profit:
Net profit for the last financial year 3,00,000
Add: Insured standing charges 60,000
3,60,000
Turnover for the last financial year 12,00,000
 ` 3,60,000 
Rate of gross profit =  100 = 30%
 ` 12,00,000 
Gross profit after adding 2% = 30%+2%= 32%
(2) Short sales:
Standard Turnover 4,50,000
Add: 10% increasing trend 45,000
4,95,000
Less: Turnover during the dislocation period (50,000)
4,45,000
(3) Annual (Adjusted) Turnover:
Annual Turnover (1-1-2018 to 31-12-2018) 10,00,000
Add: 10% increasing trend 1,00,000
11,00,000
Note: Assumed that trend adjustment is required on total amount of annual turnover.
However, part of the annual turnover represents trend adjusted figure. Alternatively, trend
may be ignored and annual turnover can be taken simply.
(4) Additional Expenses: `
(i) Actual Expenses 20,000
(ii) Gross profit on sales generated by additional expenses
32/100× (` 50,000 – ` 35,000) = 4,800
Gross Profit on Annual (Adjusted) Turnover
(iii) × Additional Expenses
Gross Profit shown in the numerator + Uninsured standing charges
(32% on ` 11,00,000)/ [(32% on ` 11,00,000)+18,000)] x ` 20,000
[` 3,52,000/(` 3,52,000+ ` 18,000)] x ` 20,000 = `19,027

Least of the above three figures, i.e. ` 4,800 allowable.

(5) Computation of Claim: `
Loss of profit on short sales (32% on ` 4,45,000) 1,42,400
Add: Allowable additional expenses 4,800
1,47,200
Less: Savings in insured standing charges (5,000)
1,42,200
Application of average clause
(3,30,000/3,52,000) x 1,42,200 = ` 1,33,312.50
(b) In the Books of XYZ Ltd.
9% Government Securities (Investment) Account
Particulars Face Interest Principal Particulars Face Interest Principal
Value Value
2018 ` ` ` 2018 ` ` `
April To Balance June 1 By Bank
1 b/d 1,00,000 2,250 90,000 A/c 60,000 2,250 54,150
May To Bank June 30 By Bank
1 A/c 80,000 2,400 73,600 A/c - 5,400 -
June To P&L A/c - - 150 Sept. By Bank
1 30 A/c 40,000 900 37,900
Sept. To P & L A/c - - 1,900 Dec. 31 By Bank - 4,050 -
30 A/c
Dec. To Bank Mar.1 By Bank
1 A/c 10,000 375 10,000 2019 A/c 10,000 150 9,500
Mar. To P&L A/c - - 300 Mar. 31 By Balance
1 c/d 80,000 1,800 74,400
Mar. To P&L A/c
31 (Transfer) - 9,525 -
1,90,000 14,550 1,75,950 1,90,000 14,550 1,75,950
Working Notes:
1. Interest accrued on 1 st April 2018 = `1,00,000 x 9% x 3/12 = ` 2,250
2. Accrued Interest on 800 units as on 01.05.2018 = ` 80,000 x 9/100 x 4/12 = ` 2,400

3. Cost of Investment for purchase on 01.05.2018 = ` 76,000 - ` 2,400 = ` 73,600

4. Accrued Interest on 600 units as on 01.06.2018 = ` 60,000 x 9/100 x 5/12 = ` 2,250
5. Profit on Securities sold on 1 st June = ` 54,150 (56,400 – 2,250)- ` 54,000 (60,000
x 90,000/1,00,000) = ` 150
6. Interest received on 30.06.2018 = `1,20,000 x 9/100 x 6/12 = ` 5,400
7. Accrued Interest on 400 units as on 30.09.2018 = ` 40,000 x 9/100 x 3/12 = ` 900
8. Cost of 400 Govt. Securities sold on 30.09.2018 = 40,000 x 90,000/1,00,000 =
` 36,000
9. Profit on securities sold on 30 th September = `37,900 (38,800-900) - ` 36,000 =
` 1,900
10. Accrued Interest on 1.12.2018 = ` 10,000 x 9/100 x 5/12 = ` 375
11. Interest received on 31.12.2018 = ` 90,000 x 9/100 x 6/12 = ` 4,050
12. Accrued Interest on 100 units as on 01.03.2019 = ` 10,000 x 9/100 x 2/12 = ` 150
13. Cost of 100 Govt. Securities sold on 01.03.2019 = ` 10,000 x 73,600/80,000 =
` 9,200
14. Profit on securities sold on 01.03.2019 = ` 9,500 - ` 9,200 = ` 300
15.
Calculation of closing balance: Units `
Securities in hand remained in hand at 31/3/2019
From original holding (1,00,000 – 60,000 – 40,000) -
Purchased on 1st May (80,000 – 10,000) 70,000 64,400
Purchased on 1 st December 10,000 10,000
80,000 74,400
Question 6
X, Y, and Z are partners of the firm XYZ & Co., sharing profits and losses in the ratio of 5:3:2.
Following is the Balance Sheet of the firm as at 31-3-2019:
Liabilities Amount Assets Amount
(` ) (` )
Partners’ Capital Accounts Goodwill 2,00,000
X 5,00,000 Building 9,50,000
Y 2,50,000 Machinery 7,00,000
Z 2,00,000 Furniture 2,50,000
Investment fluctuation 2,00,000 Investments (market value 1,00,000

reserve ` 1,25,000)
General Reserve 95,000 Stock 5,50,000
Long-term loan 10,45,000 Sundry debtors 5,00,000
Bank overdraft 3,60,000 Profit and Loss A/c 50,000
Sundry Creditors 6,50,000
33,00,000 33,00,000
It was decided that Y would retire from the partnership on 1-4-2019 and M would be admitted
as a partner on the same date. Following adjustments are agreed amongst the partners for the
retirement/admission:
(i) Goodwill is to be valued at ` 6,00,000, but the same will not appear as an asset in the
books of the firm.
(ii) Building and machinery are to be revalued at ` 10,00,000 and ` 6,40,000 respectively.
(iii) Investments are to be taken over by Y at the market value.
(iv) Provision for doubtful debts is to be maintained at 15% on Sundry debtors.
(v) The capital of the reconstituted firm will be ` 15,00,000 to be contributed by the partners
X, Y1 and M in their new profit sharing ratio of 2:2:1.
(vi) Surplus funds, if any will be used to pay the bank overdraft.
(vii) Amount due to retiring partner Y will be transferred to his loan account.
Prepare:
(1) Revaluation Account
(2) Capital Accounts of the partners; and
(3) Balance Sheet of the firm after reconstitution. (16 Marks)
Answer
Revaluation Account
` `
To Provision for doubtful debts 75,000 By Building 50,000
(15% on 5,00,000)
To Machinery 60,000 By Investments 25,000
By Parents’ Capital A/cs:
X 30,000
Y 18,000
1 PS: Partner Y to be read as partner Z.

______ Z 12,000 60,000

1,35,000 1,35,000
Partners’ Capital Accounts
Particulars X Y Z M Particulars X Y Z M
` ` ` ` ` ` ` `
To Revaluation 30,000 18,000 12,000
To Goodwill 1,00,000 60,000 40,000 By Balance b/d 5,00,000 2,50,000 2,00,000 -
To Investment 1,25,000 - - By Investment 1,00,000 60,000 40,000 -
Fluctuation
Reserve
To P & L A/c 25,000 15,000 10,000 By General -
Reserve 47,500 28,500 19,000
To X - 30,000 30,000 By Z 30,000 90,000 - -
To Y - - 90,000 90,000 By M 30,000 90,000 - -
To Y’s Loan - 3,00,500 - -
To Balance c/d 6,00,000 - 6,00,000 3,00,000 By Bank 47,500 - 5,23,000 4,20,000
7,55,000 5,18,500 7,82,000 4,20,000 7,55,000 5,18,500 7,82,000 4,20,000
Balance sheet of firm as on 31.03.2019 (after reconstitution)

` `
Capital Buildings 10,00,000
X 6,00,000 Machinery 6,40,000
Z 6,00,000 Furniture 2,50,000
M 3,00,000 15,00,000 Stock 5,50,000
Y’s loan A/c 3,00,500 Debtors less provision 4,25,000
Long-term loan 10,45,000 Bank 6,30,500
Sundry Creditors 6,50,000
34,95,500 34,95,500
Working Notes:
1. Profit sharing ratio – gain for the other partners including new partner
Gain/loss
Old Ratio New Ratio X Z M
X Y Z X Z M (5/10 less 2/5) (2/5 less 1/5
5 3 2 2 2 1 = loss 1/10 2/10) =1/5
5/10 3/10 2/10 2/5 2/5 1/5

Z and M gain in 1:1 but X loses by 1/10.

Adjustment of goodwill has been made accordingly in the partner’s capital accounts by
crediting X by 1/10 th and Y by 3/10 th value of goodwill and debiting Z and M in their equal
gaining ratio correspondingly.
Goodwill, already shown in the Balance Sheet of ` 2,00,000, is firstly written off and then
an adjusting entry is passed for revalued goodwill of `6,00,000 in sacrificing and gaining
ratio of partners.
2. Bank Account
` `
To X’ s capital 47,500 By Balance b/d (overdraft) 3,60,000
To Z’ s capital 5,23,000 By Balance c/d 6,30,500
To M’ s capital 4,20,000
9,90,500 9,90,500
3. Capitals of X, Z and M as per new ratio
X’s share 15,00,000 x2/5 6,00,000
Z’s share 15,00,000 x2/5 6,00,000
M’s share 15,00,000 x1/5 3,00,000
Total capital 15,00,000
Question 7
Answer any 4 out of below 5 questions.
(a) What is an Enterprise Resource Planning (ERP) Software? What are the factors which
you will take into consideration while choosing an ERP software?
(b) PQR Investments Ltd., wants to re-classify its investments in accordance with AS 13.
State the values, at which the investments have to be reclassified in the following cases:
(i) Long term investments in Company A, costing ` 10 lakhs are to be re-classified as
current. The company had reduced the value of these investments to ` 8 lakhs to
recognize a permanent decline in value. The fair value on date of transfer is ` 8.50
lakhs.
(ii) Long term investments in Company B, costing ` 5 lakhs are to be re-classified as
current. The fair value on date of transfer is ` 6 lakhs and book value is ` 5 lakhs.
(iii) Current investment in Company C costing ` 8 lakhs are to be re-classified as long
term as the company wants to retain them. The market value on date of transfer is
` 9 lakhs.

(iv) Current investment in Company D, costing ` 12 lakhs are to be re-classified as long

term. The market value on date of transfer is ` 11 Lakhs.
You are required to advise PQR Investments Ltd., the correct treatment in light of
relevant accounting standard.
(c) On 1st January 2016 M/s KMR acquired a machine on hire purchase from M/s PQR on
the following terms:
(1) Cash price of the machine was ` 2,40,000.
(2) The down payment at the time of signing the contract was ` 96,000.
(3) The balance amount is to be paid in 3 equal annual instalments plus interest.
(4) Interest is chargeable @ 8% p.a.
On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR in
the books of the purchaser.
(d) (1) Under what circumstances does the necessity for valuation of Goodwill in a
partnership firm arise.
(2) List four methods of valuation of Goodwill.
(e) XYZ Ltd. proposes to declare 10% dividend out of General Reserves due to inadequacy
of profits in the year ending 31-03-2019.
From the following particulars ascertain the amount that can be utilized from general
reserves, according to the Companies Rules, 2014:
8,00,000 Equity Shares of ` 10 each fully paid up 80,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%. (4 Parts x 4 Marks= 16 Marks)
Answer
(a) An Enterprise Resource Planning (ERP) is an integrated software package that manages
the business process across the entire enterprise by integrating information created by
different functional groups of the organisation.
Choice of ERP software depends upon the following factors:
1. Functional requirement of the organisation: The ERP that matches most of the
requirements of an organisation is preferred over the others.
2. Reports available in the ERP: The organisation visualises the reporting
requirements and chooses a vendor which fulfils its reporting requirements.

3. Background of the vendors: The service and deliverable record of a vendor is

extremely important in choosing the vendor.
4. Cost comparisons: The budget constraints and fund position of an enterprise often
becomes the deciding factor for choosing a particular package.
(b) As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified
as current investments, transfers are made at the lower of cost and carrying amount at
the date of transfer. And where investments are reclassified from current to long term,
transfers are made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the
cost; hence this re-classified current investment should be carried at ` 8 lakhs in
the books.
(ii) The carrying / book value of the long term investment is same as cost i.e. ` 5 lakhs.
Hence this long term investment will be reclassified as current investment at book
value of ` 5 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be
made at ` 8 lakhs as cost is less than its market value (considered as fair value) of
` 9 lakhs.
(iv) In this case, market value is ` 11 lakhs which is lower than the cost of ` 12 lakhs.
The reclassification of current investment as long-term investments will be made at
` 11 lakhs.
(c) In the books of M/s KMR (purchaser)
H.P. Interest Suspense Account
Date Particulars ` Date Particulars `
1.1.2016 To M/s PQR A/c 23,040 31.12.2016 By Interest A/c 11,520
(W.N.)
31.12.2016 By Balance c/d 11,520
23,040 23,040
1.1.2017 To Balance b/d 11,520 31.12.2017 By Interest A/c 7,680
31.12.2017 By Balance c/d 3,840
11,520 11,520
1.1.2018 To Balance b/d 3,840 31.12.2018 By Interest A/c 3,840
M/s PQR Account
Date Particulars ` Date Particulars `
1.1.2016 To Bank/Cash A/c 96,000 1.1.2016 By Machine/Van 2,40,000
A/c

31.12.2016 To Bank/Cash A/c 59,520 1.1.2016 By H.P. Interest 23,040

Suspense A/c
31.12.2016 To Balance c/d 1,07,520
2,63,040 2,63,040
31.12.2017 To Bank/Cash A/c 55,680 1.1.2017 By Balance b/d 1,07,520
31.12.2017 To Balance c/d 51,840
1,07,520 1,07,520
31.12.2018 To Bank/Cash A/c 51,840 1.1.2018 By Balance b/d 51,840
Working Note:
Cash Price 2,40,000
Down Payment 96,000
1,44,000
` 1,44,000 to be paid in 3 instalments ie. ` 48,000 plus interest
Total interest = ` 11,520 + ` 7,680 + ` 3,840 = ` 23,040
(d) Goodwill is the value of reputation of a firm in respect of profits expected in future over
and above the normal rate of profits. The necessity for valuation of goodwill in a firm
arises in the following cases:
(a) When the profit sharing ratio amongst the partners is changed;
(b) When a new partner is admitted;
(c) When a partner retires or dies, and
(d) When the business is dissolved or sold.
There are four methods for valuation of goodwill, viz:
• Average profit basis
• Super profit basis
• Annuity basis
• Capitalization basis
(e) Amount that can be drawn from reserves for (10% dividend on ` 80,00,000 i.e.
` 8,00,000)
Profits available
Current year profit ` 1,42,500

Amount which can be utilized from reserves (` 8,00,000 – 1,42,500) ` 6,57,500

Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:
Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be
declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should
not exceed 10% of paid up capital plus free reserves ie. ` 10,50,000 [10% of (80,00,000
+ 25,00,000)]
Condition III
The balance of reserves after drawl ` 18,42,500 (` 25,00,000 - ` 6,57,500) should not
fall below 15 % of its paid up capital ie. ` 12,00,000 (15% of ` 80,00,000]
Since all the three conditions are satisfied, the company can withdraw ` 6,57,500 from
accumulated reserve (as per Declaration and Payment of Dividend Rules, 2014).

PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION
Attempt any five questions from the remaining six questions.
Question 1
(a) Binoy, an employee of National Bank Private Limited which is actively engaged in Banking
business, drawing a salary of ` 50,000 p.m., borrowed Rupees One lakh and invested in
the shares of the bank. Explain whether there is any violation in the light of the pro visions
of the Companies Act, 2013. Would your answer be different if Binoy is a key managerial
personnel of the bank? (6 Marks)
(b) State the factors that has shaped the direction of the domain of Corporate Social
Responsibility. (4 Marks)
(c) Communication is a dynamic transactional (two way process) in which there is an
exchange of ideas linking the sender and the receiver towards a mutually accepted
direction or goal consisting of seven elements. Write any four such elements. (4 Marks)
Answer
(a) Restrictions on purchase by company or giving of loans by it for purchase of its
share: As per section 67 (3) of the Companies Act, 2013 a public company is allowed to
give a loan to its employees subject to the following limitations:
(a) The employee must not be a directors or Key Managerial Personnel;
(b) The amount of such loan shall not exceed an amount equal to six months' salary of
the employee.
(c) The shares to be subscribed must be fully paid shares.
In the given instance, Binoy is an employee of National Bank Private Ltd. drawing salary
of ` 50,000 per month, borrowed ` 1 lakh and invested in the shares of the bank.
On the basis of the above provisions, Mr. Binoy is entitled for the loan from the Bank upto
` 3 lakh. Being amount of loan less than his 6 months' salary, considering in compliance
with other requirements, there is no violation of the provisions of the Companies Act, 2013.
In case, if Mr. Binoy is a Key managerial personnel of the Bank, there wi ll be violation to
the provision of law contained in section 67(3) of the Companies Act, 2013.
[Note: The above answer is based on the assumption that “National Bank Private Limited”
is a public company. Answer may also be given considering “National Bank Private
Limited” is a private company.]
(b) Several factors that have converged over the last decade to shape the direction of the CSR
domain, are:
(i) Increased Stakeholder Activism

PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 29
(ii) Proliferation of Codes, Standards, Indicators and Guidelines.

(iii) Accountability throughout the Value Chain
(iv) Transparency and Reporting
(v) Convergence of CSR and Governance agenda
(vi) Growing Investor Pressure and Market-Based Incentives
(vii) Advances in Information Technology
(viii) Pressure to Quantify CSR “Return on Investment”
(c) Communication is a dynamic, transactional (two-way process) in which there is an
exchange of ideas linking the sender and receiver towards a mutually accepted direction
or goal consisting of seven elements:
1. Sender (Source): The process of communication begins with a sender, the person
who has an idea and wants to share it.
2. Encoding: The sender must choose certain words or non-verbal methods to translate
the idea into a message. This activity is called encoding. While encoding a message,
one needs to consider what contents to include, how the receiver will interpret it and
how it may affect one’s relationship.
3. Message: For communication to occur the receiver should first get the message. A
message is any signal that triggers the response of a receiver.
4. Channel: The choice of channel or medium (written or oral) is influenced by the inter
relationships between the sender and the receiver. It also depends upon the urgency
of the message being sent.
5. Receiver: A receiver is any person who notices and attaches some meaning to a
message.
6. Decoding: Even if the message reaches intact to its intended receiver, there is no
guarantee that it will be understood as the sender intended it to be. The receiver must
still decode it - Attaching meaning to the words or symbols.
7. Feedback: Whatever the response of a receiver to a sender is, known as feedback.
Feedback is an important component of the communication process, because
ultimately the success or failure of the communication is decided by the feedback we
get.
Question 2
(a) Mrs. Priya was engaged as a clerk in a partnership firm which comes under the purview of
the Payment of Gratuity Act, 1972, since January 2012. The firm was converted in a private
limited company, under the name Suryodaya Publishers Private Limited in October 2017.
Mrs. Priya resigned her job in December 2018. When she approached the company for
payment of gratuity, it stated that it is not liable to pay gratuity, as she had not worked in

the company for five years. Decide whether the contention of Suryodaya Publishers is valid
under the provisions of the Payment of Gratuity Act, 1972. (6 Marks)
(b) Explain the meaning of the "Iron Law of Responsibility". State the benefits acquired by
achieving the long-term objectives through the business activities. (4 Marks)
(c) Explain the socio-psychological barriers of communication in relation to an organization.
(4 Marks)
Answer
(a) As per the stated facts, Mrs. Priya was engaged as a clerk in a partnership firm (which
comes under the purview of the Payment of Gratuity Act, 1972) since January 2012. The
said firm was converted in a private limited company under the name Suryodaya Publishers
Private Ltd. in October 2017. Mrs. Priya resigned her job in December 2018.
As per the definition of "employee" under the Payment of Gratuity Act, 197 2, means any
person (other than an apprentice) who is employed for wages, whether the terms of such
employment are express or implied, in any kind of work, manual or otherwise, in or in
connection with the work of a factory, mine, oilfield, plantation, port, railway company, shop
or other establishment to which this Act applies. So, accordingly here Mrs. Priya (engaged
as clerk in the firm on which the said Act was made applicable) will be considered as an
employee.
Further, Section 4 (1) of the Payment of Gratuity Act states that Gratuity shall be payable
to an employee on the termination of his employment after he has rendered continuous
service for not less than five years,-
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease.
In the light of the stated provisions and the given facts, Mrs. Priya had been in continuous
service for more than 5 years i.e., from January 2012 to December 2018 in a firm which
was converted into a private Ltd. company. This will not effect on the right of Mrs. Priya on
the entitlement of payment of gratuity amount being her in continuous services under the
same employer. Therefore, the contention of the Suryodaya Publishers Private Ltd., stating
that it is not liable to pay gratuity to Mrs. Priya is not valid.
(b) The Iron Law of Responsibility: The institution of business exists only because it
performs invaluable services for society. Therefore, if a business intends to retain its
existing social role and power, it must respond to society’s needs constructively. This is
known as the “Iron Law of Responsibility”. In the long-term those who do not use power in
a manner that society considers responsible, will tend to lose it.
Businesses have been delegated economic power and have access to productive
resources of a community. They are obliged to use these resources for the common good

of society so that more wealth for its betterment may be generated. Technical and creative
resources are also helpful to it. A business organisation sensitive to community needs
would in its own self interest like to have a better community within which the business
may be conducted.
Benefits: This way, the resulting benefits would be:
(a) Decrease in crime
(b) Easier labour recruitment
(c) Reduced employee absenteeism.
(d) Easier access to international capital, better conditions for loans on international
money markets.
(e) Dependable and preferred as supplier, exporter, importer and retailer of responsibly
manufactured components and products.
(c) Socio-psychological barriers of communication: The attitudes and opinions, place in
society and status consciousness arising from one’s position in the hierarchical structure
of the organization, one’s relations with peers, seniors, juniors and family background – all
these deeply affect one’s ability to communicate both as a sender and receiver. Status
consciousness is widely known to be a serious communication barrier in organizations. It
leads to psychological distancing which further leads to breakdown of communication or
miscommunication. Often it is seen that a man high up in an organization builds up a wall
around himself. This restricts participation of the less powerful in decision making. In the
same way one’s family background formulates one’s attitude and communication skills.
Question 3
(a) Monu is an employee in a company. The amount of bonus payable to him during the year
2018-19 is ` 15,000. The company deducted a sum of ` 5,000 against the "Puja Bonus"
already paid to him during the said year and paid the remaining amount. Monu files a suit
against the company for recovery of the deducted amount. Decide under the Payment of
Bonus Act, 1965, whether Monu be given any relief by the Court. State also which type of
bonus that may be adjusted against the bonus payable under this Act. (3 Marks)
(b) Examine the validity of the following statement with reference to the provisions of the
Companies Act, 2013.
"The Articles of Association of X Limited contains a provision that the underwriting
commission may be paid upto 4% of the issue price of the shares. However the Board of
Directors have decided to pay the underwriting commission of 5% to Deal & Co., the
underwriters." (3 Marks)
(c) What is meant by Environmental ethics? How its non-adoption leads to 3 Ps. Viz. Polluter
Pay Principle? Explain. (4 Marks)
(d) Enumerate a few guidelines for active listening. (4 Marks)

Answer
(a) The problem as given in the question is based on the provisions of section 17 of the
Payment of Bonus Act, 1965. As per Section 17, if in any accounting year, an employer
has paid any puja bonus or other customary bonus or any advance against bonus, to any
employee, then the former shall be entitled to deduct the amount of bonus so paid from
the amount of bonus payable by him to the employee under this Act in respect of that
accounting year. The employee shall be entitled to receive only the balance. The employer
can do the same thing even in a case where he has paid off the bonus payable under this
Act to an employee before the date on which such bonus payable becomes payable.
In the instant case therefore, Monu will not get any relief from the court because employer
is empowered to deduct ` 5,000/- from the total bonus (` 15,000) payable to Monu.
As per section 17, the following bonus amounts may be adjusted against the bonus
payable:
(i) The puja bonus or other customary bonus to any employee, as mentioned above.
(ii) Part payment of bonus already paid to an employee before the date on which such
bonus becomes payable
(b) Section 40 (6) of the Companies Act 2013, provides that a company may pay commission
to any person in connection with the subscription to its securities, subject to the number of
conditions which are prescribed under the Companies (Prospectus and Allotment of
Securities) Rules, 2014. Under the Companies (Prospectus and Allotment of Securities)
Rules, 2014 the rate of commission paid or agreed to be paid shall not exceed, in case of
shares, five percent (5%) of the price at which the shares are issued or a rate authorised
by the articles, whichever is less.
In the given problem, the articles of X Ltd. have prescribed 4% underwriting commission
but the directors decided to pay 5% underwriting commission.
Therefore, the decision of the Board of Directors to pay 5% commission to the underwriters
(Deal & Co.) is invalid.
(c) Ecological ethics is based on the idea that the environment should be protected not only
for the sake of human beings but also for its own sake. The issue of environmental ethics
goes beyond the problems relating to protection of environment or nature in terms of
pollution, resource utilization or waste disposal.
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 major role in protection of 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. Sound management of wastes is among the major

environmental issues for maintaining the quality of Earth’s environment and ach ieving
sustainable development.
If the environmental costs are properly reflected in the prices paid for goods and services
then companies and ultimately the consumer would adjust market behaviour in a way that
would reduce damage to environment, pollution and waste production. Price signal will
also influence behaviour to avoid exploitation or excessive utilization of natural resources.
Such measures would facilitate the approach of “Polluter Pays Principle”. Removing
subsidies that encourage environmental damage is another measure.
(d) Guidelines for Active Listening
➢ Look at the person and suspend other things you are doing in order to understand the
other person’s concerns, intentions.
➢ Be interested in what the other person is saying. Try taking notes. Doing so will keep
ones body and mind active.
➢ Listen to the tone of voice and inflection; look at gestures and body language.
➢ Restate what the person said. Restating their meaning is a way to make sure you
understand the person clearly.
➢ Ask questions once in a while to clarify the meaning. Doing so will keep one alert and let
the other person know that they have been listening and are interested in getting all the
facts and ramifications.
➢ Be aware of your own feelings and opinions.
Question 4
(a) Neelesh guaranteed the honesty of Srinath in the employment of Gurudev. Srinath was
found guilty of dishonesty in the course of the service, but Gurudev continued to employ
him and did not inform Neelesh of what had occurred. Subsequently, Srinath committed
further acts of dishonesty. Gurudev requires Neelesh to make good the loss caused by
Srinath. Discuss the liability of Neelesh according to the Indian Contract Act, 1872.
(6 Marks)
(b) XYZ Limited has its registered office at Mumbai in the state of Maharastra. For
administrative conveniences, the company wants to shift its registered office from Mumbai
to Pune. Discuss the formalities to be complied with by the company as per the provisions
of the Companies Act, 2013. (4 Marks)
(c) M/s Confident Investments, a partnership firm, wants to appoint and authorize Mr. A, giving
him power to sell and sign documents and deeds including the transfer of shares and
securities, by executing a "Power of Attorney".
Draft a "Power of Attorney" to be given by the firm. (4 Marks)

Answer
(a) According to section 143 of the Indian Contract Act, 1872, any guarantee which the creditor
has obtained by means of keeping silence as to material circumstances is invalid.
In the given question, Neelesh guarantees the honesty of Srinath who was already in the
employment of Gurudev. While this guarantee was obtained, Gurudev kept silence about
the previous act of dishonesty by Srinath and Gurudev continues to employ Srinath. Thus,
in this case it seems that the guarantee of Srinath by Neelesh was obtained by
concealment of material circumstances/ keeping silence on material circumstances.
Now, when Srinath again commits an act of dishonesty, Gurudev requires Neelesh to make
good the loss caused by Srinath.
In the light of the facts of the case and the provisions of law, it appears that the guarantee
was obtained by concealment of material circumstances/ keeping silence on material
circumstances. Hence, the guarantee by Neelesh of Srinath will not be valid.
[Note: In the given question, it may also be presumed that firstly guarantee was given by
Neelesh and then Srinath committed the first act of dishonesty. In this case section 137
of the Indian Contract Act, 1872 will be attracted.]
(b) The Companies Act, 2013 under section 13 provides for the process of altering the
Memorandum of a company. Since the location or Registered Office clause in the
Memorandum only names the state in which its registered office is situated, a change in
address from Mumbai to Pune, does not result in the alteration of the Memora ndum and
hence the provisions of section 13 (and its sub sections) do not apply in this case.
According to section 12 of the Companies Act, 2013, the registered office of the company
shall be changed by a company, outside the local limits of any city, town or village where
such office is situated or where it may be situated later by virtue of a special resolution
passed by the company.
Further, notice of every change of the situation of the registered office, verified in the
manner prescribed, after the date of incorporation of the company, shall be given to the
Registrar within 30 days of the change, who shall record the same.
[Note: Practically there are two ROCs within the same state of Maharashtra. Hence, in
this case registered office is shifted from one ROC to another, therefore, the company will
have to seek approval of Regional director and comply with other formalities].
(c) Power of Attorney authorizing to sell and sign documents including execution of
deeds for transfer of shares & securities:-
BY THIS POWER OF ATTORNEY, M/s Confident Investments (full details), the firm hereby
appoints Mr. A (full details) as Attorney of the firm, to act in his name and on his behalf
and to do or execute all or any of the acts or things relating to selling and si gning
documents and deeds including transfer of shares and securities, that is to say:

1. To execute a deed authorizing to sell and sign documents including execution of

deeds for transfer of shares & securities.
2. To receive from………… (Full details), the transferee the sum of
`……….(Rupees….….. only) being the price agreed to be paid to the firm by the said
transferee for the purchase of (full description of shares and securities) under an
agreement dated…………and to give proper receipt and discharge for the same.
3. To present the said deed for registration before the proper registration authority, to
admit the execution thereof, to do all acts, deeds and things which may be necessary
for registering the said deed.
4. To execute or to do all acts, things or deeds or assurance for the completion giving
power to sell and sign documents and deeds including the transfer of the shares and
securities.
AND, the firm DO HEREBY AGREE to ratify all acts, things, deeds or proceedings lawfully
done by the said Attorney on behalf of the firm and in the name of the firm by virtue of this
power of attorney and the same shall be binding on firm in full force or effect.
IN WITNESS WHEREOF the firm have executed this power of attorney at ………………..
this……..day of……………..20……….
Witness:1 _______ Signature
2 _______ (Executant)
Question 5
(a) Excellent Tea Company Limited, the transferor company, sold its unit to New Garden Tea
Limited, the transferee Company. It has contributed 60% of the contribution to the pension
scheme of its employees. Now the transferee company refused to bear the balance of 40%
of the contribution to the pension scheme. Ascertain the liability of the transferee company
under the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act,
1952. (3 Marks)
(b) Mr. Sunil has transferred 1000 shares of Ganges Fabrics Limited to Mr. Janak. The
company has refused to register the transfer of shares and has not sent the notice of
refusal either to Mr. Sunil or to Mr. Janak within the prescribed time. Decide, under the
provisions of the Companies Act, 2013, whether the aggrieved party has any right against
the company for such a refusal. Discuss the nature of punishment to a person who
contravenes the order of the Tribunal. (3 Marks)
(c) State and explain any four sources of Ethical standards. (4 Marks)
(d) A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque,
forged C's endorsement and collected the proceeds of the cheque through his banker . B,
the drawer, wants to recover the amount from C's Banker. Discuss, in the light of the

provisions of Negotiable Instruments Act, 1881, the right/privileges available to a holder -

in-due course. (4 Marks)
Answer
(a) Liability in case of transfer of establishment: Section 17B of the Employees’ Provident
Funds and Miscellaneous Provisions Act, 1952,deals with the liability of transferor and
transferee in case of transfer of establishment in regard to the money due unde r: (a) the
Act; or (b) the Scheme; or (c) Pension Scheme. In the case of transfer of the establishment
brought in by sale, gift, lease, or any other manner whatsoever, the liability of the transferor
and the transferee is joint and several, but is limited with respect to the period up to the
date of the transfer. Also, the liability of the transferee is further limited to the assets
obtained by him from the transfer of the establishment.
Therefore, applying the above provisions in the given case, Excellent Tea Company
Limited, the transferor company, has contributed 60% of the contribution to the Pension
Scheme of its employees. With regards to remaining 40% contribution, both the transferor
and transferee companies are jointly and severally liable to contribute. In case Excellent
Tea Company Limited refuses to contribute, then New Garden Tea Limited will be liable to
pay.
However, the liability of the New Garden Tea Limited shall be limited to the value of assets
obtained by it from the Excellent Tea Company Limited.
(b) Refusal of registration and appeal against refusal [Section 58 of the Companies Act,
2013]: Under section 58 (4), if a public company without sufficient cause refuses to register
the transfer of securities within a period of thirty days from the date on which the instrument
of transfer or the intimation of transmission, as the case may be, is delivered to the
company, the transferee may, within a period of sixty days of such refusal or where no
intimation has been received from the company, within ninety days of the delivery of the
instrument of transfer or intimation of transmission, appeal to the Tribunal.
In the present case, Ganges Fabrics Limited has not complied with the requirement of
sending the notice of refusal of registering the transfer of shares.
Therefore, Mr. Janak, the transferee, can make an appeal before the Tribunal and claim
damages.
Under Section 58(6), if a person contravenes the order of the Tribunal given under section
58(5), he shall be punishable with imprisonment for a term not less than one year but may
extend to three years and with fine not less than one lakh rupees which may extend to five
lakh rupees.
(c) Sources of Ethical Standards:
The Utilitarian Approach: Some ethicists emphasize that the ethical action is the one that
provides the most good or does the least harm, or, to put it another way, produces the

greatest balance of good over harm. The utilitarian approach deals with consequences; it
tries both to increase the good done and to reduce the harm done.
The Rights Approach (The Deontological Approach): Other philosophers and ethicists
suggest that the ethical action is the one that best protects and respects the moral rights
of those affected. This approach starts from the belief that humans have a dignity based
on their human nature per se or on their ability to choose freely what they do with their
lives.
The Fairness or Justice Approach: Aristotle and other Greek philosophers have
contributed the idea that all equals should be treated equally. Today we use this idea to
say that ethical actions treat all human beings equally-or if unequally, then fairly based on
some standard that is defensible.
The Common Good Approach: The Greek philosophers have also contributed the notion
that life in community is good in itself and our actions should contribute to that life. This
approach suggests that the interlocking relationships of society are the basis of ethical
reasoning and that respect and compassion for all others, especially the vulnerable, are
requirements of such reasoning.
The Virtue Approach: A very ancient approach to ethics is that ethical actions ought to
be consistent with certain ideal virtues that provide for the full development of our
humanity.
(d) In the given problem A induced B by fraud to draw a cheque payable to C or order and
obtained it from B. He forged C’s endorsement and collected the proceeds of cheque
through his banker. Since, banker has made payment in good faith without negligence and
affording any circumstances which give rise to suspicion, the bank is discharged from it’s
liability as it has made payment in due course and therefore, B will not be entitled to recover
any amount from banker.
Privileges of Holder in due Course:
1. A person signing and delivering to another a stamped but otherwise inchoate
instrument is debarred from asserting, as against the holder in due course that the
instrument is not filled in accordance with the authority given by him, the stamp being
sufficient to cover the amount.
2. In case a bill of exchange is drawn payable to drawer’s order in a fictitious name and
is endorsed by the same hand is the drawer’s signature, it is not permissible for
acceptor to allege as against the holder in due course that such name is fictitious.
3. In case a bill or not is negotiated to a holder in due course, the other parties to bill or
note can’t avoid liability on the ground that the delivery of the instrument was
conditional or for a special purpose only.

4. The person liable in a negotiable instrument cannot set up against the holder in due
course the defenses that the instrument had been lost or obtained from the former by
means of an offence or fraud or for an unlawful consideration.
5. No maker of a promissory note, and no drawer of a bill or cheque and no acceptor of
a bill for the honor of the drawer shall, in a suit thereon by an holder in due course be
permitted to deny the validity of instrument originally made or not.
6. No maker of a promissory note, and no acceptor of a bill payable to order shall, in
suit thereon by the holder in due course, be permitted to deny the payee’s capacity
at the date of the note or bill, to endorse the same.
The problem is based upon the privileges of a 'holder in due course' given under Section
42 of the Negotiable Instruments Act, 1881. According to which an acceptor of a bill of
exchange drawn in a fictitious name and payable to the drawer's order is not, by reason
that such name is fictitious, relieved from liability to any holder in due course claiming
under an instrument by the same hand as the drawer's signature, and purporting to be
made by the drawer.
In this problem, C is not a fictitious payee and B, the drawer can recover the amount of the
cheque from C's bankers because C's title was derived through forged endorsement. The
acceptor, A is liable to make payment of bill to holder in due course in the said negotiation
of instrument.
Question 6
(a) X transferred his house to his daughter M by way of gift. The gift deed contained a direction
that M shall pay a sum of ` 5,000 per month to N. Consequently, M executed an instrument
in favour of N agreeing to pay the said sum. Afterwards, M refused to pay to N saying that
she is not liable to N because no consideration had moved from her. Decide with reasons
under the provisions of the Indian Contract Act, 1872, whether M is liable to pay the said
sum to N or not. (3 Marks)
OR
Mridul agreed to become an assistant for 6 years to Praveen who was a Doctor practising
in Bengaluru. It was also agreed that during the term of agreement Mridul will not practise
on his own at Bengaluru. After 2 years, Mridul left the job, opened a clinic and started to
practise on his own. Referring to the provisions of the Indian Contract Act, 1872, decide
whether Mridul could be restrained from practising. (3 Marks)
(b) Mrs. Parvathy drew a cheque in favour of Ashok who is sixteen years old. Ashok endorsed
the cheque in favour of Mr. Prakash who is the owner of the house where Ashok is staying.
The cheque was dishonoured by the bank for inadequacy of funds. Mr. Prakash seeks your
advice about the legal steps to be taken to collect the dues from Ashok. (3 Marks)
(c) Explain the threats existing in the environment faced by accounting and finance professionals
in adhering to ethical principles at the time of performing their duties. (4 Marks)

(d) What are the important factors that are to be considered to make Oral communication
effective? (4 Marks)
Answer
(a) Consideration can flow either from the promisee or any other person: As per section
2(d) of the Indian Contract Act, 1872, the consideration for a contract can move either from
the promisee or from any other person. This point is made clear even by the definition of
the word “consideration”, according to which at the desire of the promisor, the promisee or
any other person including a stranger, doing something is consideration.
The problem is based on a case "Chinnaya Vs. Ramayya” in which the Court clearly
observed that the consideration need not necessarily move from the party itself, it may
move from any person.
In the given problem, the same reason applies. Hence, M is liable to pay the said sum to
N and cannot deny her liability on the ground that consideration did not move from N.
OR
(a) Agreement in restraint of trade (Section 27): Any agreement through which a person is
restrained from exercising a lawful profession, trade or business of any kind is to that extent
void. The object of this law is to protect trade. The restraint, even if it is partial, will make
the agreement void.
The principle of law however has a number of exceptions. According to one exception, an
agreement of service by which a person binds himself during the term of the agreement
not to take service with anyone else directly or indirectly to promote any business in direct
competition with that of his employer is not in restraint of trade.
Thus, if Mridul left the assistantship (during the period of 6 years) and opened a clinic and
started to practice on his own, he could be restrained from practicing on his own account
in Bengaluru. However if Mridul wants to practice else where in India other than Bengaluru
he will be entitled to do so as it would not be considered a restraint of trade.
(b) Capacity to incur liability under instrument (Section 26 of the Negotiable Instruments
Act, 1881): A minor may draw, indorse, deliver and negotiate an instrument so as to bind
all the parties except himself. A minor may be the drawer where the instrument is drawn
or endorsed by him. In that case he does not incur any liability himself although other
parties to the instrument can be made liable and the holder can receive payment from any
other party thereto.
In the present case, Ashok (being a minor) is not liable. Mr. Prakash can thus proceed
against Mrs. Parvathy.
(c) The dynamic environment in which businesses operate today may usher a broad range of
circumstances because of which compliance with the fundamental principles may
potentially be threatened. Such threats may be classified as follows : -

(i) Self-interest threats, which may occur as a result of the financial or other interests of
a finance and accounting professional or of an immediate or close family member.
(ii) Self-review threats, which may occur when a previous judgement needs to be re-
evaluated by the finance and accounting professional responsible for that judgement.
(iii) Advocacy threats occur when a professional promotes a position or opinion to the
point that subsequent objectivity may be compromised.
(iv) Familiarity threats occur when finance and accounting professional has close
relationship in the work environment and such relationship impair his selfless attitude
towards work.
(v) Intimidation threats occur when a professional may be prohibited from acting
objectively by threats, actual or perceived.
(d) Factors to be considered for oral effective communication: Oral communication,
which is face-to-face communication with others, has its own benefits. The only
shortcoming of oral communication is that it is spontaneous and if one communicates
incorrectly, the message will not get understood. It is primarily due to this reason one
needs to develop effective oral communication skills as a message, if not understood at
appropriate time, can lead to disaster.
In order to provide a fair and candid exchange of ideas, the following factors to be
considered to make the oral communication effective:
➢ Consider the objective
➢ Think about the interest level of the receiver
➢ Be sincere
➢ Use simple language, familiar words
➢ Be brief and precise
➢ Avoid vagueness and generalities
➢ Give full facts
➢ Assume nothing
➢ Use polite words and tone
➢ Cut out insulting message
➢ Say something interesting and pleasing to the recipient
➢ Allow time to respond
➢ To make the oral communication effective, the speaker should converse slowly with
proper semantic pauses to enable the listener to receive and register in mind
whatever is said by the speaker and there should be a due correlation between the
pace of speaking and the rate of listening.

PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
Attempt any five questions out of the remaining six questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer.
Question 1
Answer the following:
(a) Following details are related to M/s XYZ Limited:
Total Cost ` 56,78,000
Margin of Safety ` 48,18,450
Margin of safety (in units) 6,500 units
Break even sales 3,500 units
You are required to calculate:
(i) Profit
(ii) Profit volume ratio
(iii) Break even sales (in `)
(iv) Fixed costs
(b) ABC Limited is facing the problem of increasing labour turnover in the factory. The
management is willing to analyse the causes and take remedial steps.
Last year sales of the company amounted to ` 12,18,49,320 and the P/V ratio was 25%.
The total number of actual hours worked by the direct labour force was ` 5.75 lakhs. The
company lost 1,25,000 potentially productive hours due to delay in filling vacancies
caused by labour turnover. The actual direct labour hours included 60,000 hours
attributable to training of new recruits, out of which 30% of the hours were unproductive.
The accounting records reveal the following costs incurred consequent to labour
turnover:
Recruitment costs - ` 5,36,300
Selection costs - ` 2,78,400
Training costs - ` 4,25,000
Settlement costs due to leaving - ` 7,18,800

Assuming that the potential production lost as a consequences of labour turnover could
have been sold at prevailing prices, find out the contribution and profit foregone by the
company in the last year due to labour turnover.
(c) Following information relates to a firm:
Current ratio 1.5 : 1
Inventory Turnover Ratio (Based on COGS) 8
Sales ` 40,00,000
Working capital ` 2,85,000
Gross Profit Ratio 20%
You are required to find out:
(i) The value of opening stock presuming that the closing stock is ` 40,000 more than
the opening stock.
(ii) The value of Bank overdraft, presuming that the Bank overdraft and other current
liabilities are in a ratio of 2 : 1.
(d) ABC Private Limited wishes to raise additional finance of ` 30 lakh for purchasing a
machine. It has ` 16 lakh in the form of retained earnings which is available for
investment purposes.
The following details are provided by the company:
(1) Debt-equity mix 1:2
(2) Earnings per share ` 10
(3) Current Market Price per share ` 50
(4) Tax rate 30%
(5) Dividend pay-out 50% of earning
(6) Expected growth rate in dividend 10%
(7) Cost of debt:
- upto ` 6 lakh, 12% (before tax)
- beyond ` 6 lakh 15% (before tax)
You are required:
(i) To determine the pattern for raising the additional finance, assuming that the firm
intends to maintain existing debt-equity mix.
(ii) To determine the post-tax average cost of additional debt.
(iii) To determine the cost of retained earnings and cost of equity.

PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 43
(iv) To Compute the overall weighted average after tax cost of additional finance.
(4 x 5 = 20 Marks)
Answer
(a) Working:
6,500 units
Margin of Safety (%) =
6,500 units+ 3,500units
= 0.65 or 65 %
` 48,18,450
Total Sales =
0.65
= ` 74,13,000
(i) Profit = Total Sales – Total Cost
= ` 74,13,000 – ` 56,78,000
= ` 17,35,000
Profit
(ii) Profit Volume (P/V) Ratio = × 100
Margin of Safety in Rupee value
` 17,35,000
=  100 = 36%
` 48,18,450
(iii) Break-even Sales (in `) = Total Sales × [100 – Margin of Safety %]
= ` 74,13,000 × 0.35
= ` 25,94,550
Or, = BEP units × Selling Price per unit
= 3,500 units × ` 741.30
= ` 25,94,550
(iv) Fixed Costs = Contribution – Profit
= Sales Value × P/V Ratio – Profit
= ` 74,13,000×36% - ` 17,35,000
= ` 26,68,680 - ` 17,35,000
= ` 9,33,680
Or, = Break even sales x P/V Ratio
= ` 25,94,550 X 36% = ` 9,34,038

(b) Workings:
Computation of productive hours
Actual hours worked (given) 5,75,000
Less: Unproductive training hours 18,000
Actual productive hours 5,57,000
(i) Computation of contribution foregone on account of labour turnover
The potentially productive hours lost are 1,25,000
` 12,18,49,320
Sales lost for 1,25,000 hours = × 1,25,000 hours = ` 2,73,45,000
5,57,000 hours
` 2,73,45, 000
Contribution lost for 1,25,000 hours =  25 = ` 68,36,250
100
(ii) Computation of profit forgone on account of labour turnover
Particulars (`)
Contribution foregone (as calculated above) 68,36,250
Recruitment cost 5,36,300
Selection cost 2,78,400
Training costs 4,25,000
Settlement cost due to leaving 7,18,800
Profit foregone 87,94,750
Alternatively, the Productive hours lost can be calculated as 1,25,000 hours (delay
in vacancy) + 18,000 hours (unproductive training hours) = 1,43,000 hours. So,
` 12,18,49,320
Sales lost for 1,43,000 hours will be × 1,43,000 hours
5,57,000 hours
= ` 3,12,82,680. Therefore, contribution lost for 1,43,000 hours is
` 3,12,82,680
 25 = ` 78,20,670 (instead of ` 68,36,250). Accordingly, total profit
100
forgone on account of labour turnover will be ` 97,79,170.
(c) (i) Computation of Opening Stock
Gross Profit = 20 % of sales
= 20% of ` 40,00,000 = ` 8,00,000
Cost of Goods Sold (COGS) = Sales - Gross Profit = ` 40,00,000 – ` 8,00,000

= ` 32,00,000
COGS
Inventory Turnover Ratio =
Average Inventory
` 32,00, 000
Or, 8 =
Average Inventory
Average inventory = ` 4,00,000
Now, Closing Stock = Opening Stock + ` 40,000
Opening Stock+Closing Stock
` 4,00,000
2
Or, Opening Stock + Opening Stock + ` 40,000 = ` 8,00,000
Or, 2 Opening Stock = ` 7,60,000
Opening Stock = ` 3,80,000
(ii) Computation of Bank Overdraft
Current Assets (CA)
Current Ratio = 1.5
Current Liabilities (CL)
CA = 1.5 CL
Or, CL = CA/1.5
Further, Working Capital = Current Assets – Current Liabilities
So, ` 2,85,000 = 1.5 CL – CL
Or, .5 CL = ` 2,85,000
CL = ` 5,70,000
Bank Overdraft + Other CL = ` 5,70,000
Other CL = ` 5,70,000 - Bank Overdraft
Bank Overdraft 2
Now, =
Other CL 1
Bank Overdraft 2
Or,
` 5,70,000 Bank Overdraft 1
Or, ` 11,40,000 – 2 Bank overdraft = Bank Overdraft
Bank Overdraft = ` 3,80,000

(d) (i) Pattern of raising additional finance

Equity 2/3 of `30,00,000 = ` 20,00,000
Debt 1/3 of `30,00,000 = ` 10,00,
The capital structure after raising additional finance:
Particulars (`)
Shareholders’ Funds
Equity Capital (20,00,000–16,00,000) 4,00,000
Retained earnings 16,00,000
Debt (Interest at 12% p.a.) 6,00,000
(Interest at 15% p.a.) (10,00,000–6,00,000) 4,00,000
Total Funds 30,00,000
(ii) Determination of post-tax average cost of additional debt

Kd = I (1 – t)
Where,
I = Interest Rate
t = Corporate tax-rate
On ` 6,00,000 = 12% (1 – 0.3) = 8.4% or 0.084
On ` 4,00,000 = 15% (1 – 0.3) = 10.5% or 0.105
Average Cost of Debt
(` 6,00,000×0.084)+(` 4,00,000×0.105)
= ×100
` 10,00,000
` 50,400 + ` 42,000
= ×100 = 9.24%
` 10,00,000
(iii) Determination of cost of retained earnings and cost of equity (Applying
Dividend growth model):
D1
Ke = +g
P0
Where,
Ke = Cost of equity
D1 = DO(1+ g)

D0 = Dividend paid (i.e., 50% of EPS = 50% × `10 = `5)

g = Growth rate
P0 = Current market price per share
` 5 (1.1) ` 5.5
Then, Ke = + 0.10 = + 0.10 = 0.11 + 0.10 = 0.21 = 21%
` 50 ` 50
(iv) Computation of overall weighted average after tax cost of additional finance
Particular (`) Weights Cost of Weighted Cost
funds (%)
Equity (including retained 20,00,000 2/3 21% 14
earnings)
Debt 10,00,000 1/3 9.24% 3.08
WACC 30,00,000 17.08
Note: If it is assumed that D1 = Dividend paid (i.e., 50% of EPS = 50% × ` 10 = ` 5),
Then, Ke and Kr will be equals to 20%. Accordingly, WACC will be 16.41% .
Question 2
(a) PQR Ltd. processes a range of product including a toy 'Alpha', which passes through
three processes before completion and transfer to the finished goods warehouse. The
information relating to the month of October 2019 are as follows:
Particulars Process-I Process-II Process-III Total
Raw materials (2,000 units) ` 12,000 - - ` 12,000
Direct raw material added in ` 17,000 ` 19,000 ` 11,000 ` 47,000
process
Direct wages ` 8,000 ` 12,000 ` 24,000 ` 44,000
Direct expenses ` 2,400 ` 1,860 ` 2,680 ` 6,940
Production overhead - - - ` 33,000
Outputs (Units) 1,840 1,740 1,580
Normal loss in process of input (%) 10 5 10
Scrap value per unit `2 `5 ` 10
The production overhead is absorbed as a percentage of direct wages. There was no
opening and closing stock.
Prepare the following accounts:
(i) Process-I

(ii) Process-II
(iii) Process-III
(iv) Abnormal Loss
(v) Abnormal Gain (8 Marks)
(b) A firm is willing to purchase a new machine and is having two options. Information
related to the options are as follows:
Option-I Option-II
Cost of Machine ` 30,00,000 ` 35,00,000
Expected Life 5 years 6 years
Salvage value of Machine ` 5,00,000 ` 5,00,000
Expected Earning (After tax) ` 7,75,000 ` 8,25,000
The firm charges depreciation on the machine as per straight line method. The cost of
capital is 14%.
The present value of ` 1 @ 14% is as under:
Year 1 2 3 4 5 6
P/V factor 0.877 0.769 0.675 0.592 0.519 0.455
You are required to evaluate both the options on the basis of:
(i) Discounted pay back period.
(ii) Net present value
(iii) Profitability index (8 Marks)
Answer
(a) (i) Process- I Account
Particulars Units Amount Particulars Units Amount
(`) (`)
To Raw Materials 2,000 12,000 By Normal loss 200 400
(200 units × ` 2)
To Direct raw - 17,000 By Process- II 1,840 46,000
material (1,840 units ×
` 25)
To Direct wages - 8,000
To Direct - 2,400
Expenses

To Production OH - 6,000
To Abnormal gain 40 1,000
A/c
(40 units ×
` 25)
2,040 46,400 2,040 46,400
Working:
` 45,400 - ` 400
Cost per unit = = ` 25 per unit
2,000units - 200units
Normal loss = 2,000 units × 10% = 200 units
Abnormal gain = (200 units + 1,840 units) – 2,000 = 40 units
(ii) Process- II Account
(`) (`)
To Process - I 1,840 46,000 By Normal loss 92 460
(92 units × ` 5)
To Direct raw - 19,000 By Process- III 1,740 87,000
material (1,740 units ×` 50)
To Direct wages - 12,000 By Abnormal loss A/c 8 400
(8 units ×` 50)
To Direct Expenses - 1,860
1,840 87,860 1,840 87,860
Working:
` 87,860 - ` 460
1,840units - 92units
Abnormal loss = 1,840 - (92 units + 1,740 units) = 8 units
(iii) Process- III Account
(`) (`)
To Process- II 1,740 87,000 By Normal loss 174 1,740
(174 units × ` 10)

To Direct raw - 11,000 By Finished goods 1,580 1,42,200

material stock
(1,580 units ×` 90)
To Direct wages - 24,000
To Direct Expenses - 2,680
To Abnormal gain A/c 14 1,260
(14 units ×`90)
1,754 1,43,940 1,754 1,43,940
Working:
` 1,42,680 - ` 1,740
1,740units -174units
Abnormal gain = (174 units + 1,580 units) – 1,740 = 14 units
(iv) Abnormal Loss Account
(`) (`)
To Process- II 8 400 By sale proceeds of scrap 8 40
@ ` 5 per unit
By Costing Profit & Loss A/c 360
(loss transferred)
Total 8 400 Total 8 400
(v) Abnormal Gain Account
(`) (`)
To normal loss By Process- I 40 1,000
Process I 40 80 By Process- III 14 1,260
Process II 14 140
To Costing Profit & Loss 2,040
A/c (profit transferred)
Total 54 2,260 Total 54 2,260

(b) Working Notes:

1. Annual Depreciation of Machines
` 30,00,000 - ` 5,00,000
Option I-Depreciation of Machine = = ` 5,00,000
5
` 35,00,000 - ` 5,00,000
Option-II-Depreciation of Machine = = ` 5,00,000
6
2. Calculation of Cash Inflows
Option – I Option – II
(`) (`)
Expected Earnings After Tax 7,75,000 8,25,000
Add: Depreciation 5,00,000 5,00,000
Annual Cash Inflows 12,75,000 13,25,000
3. Calculation of Present value of Cash Inflows
Option – I (`) Option – II (`)
Year P.V. of Cash flow P.V. Cumulative Cash flow P.V. Cumulative
`1 P.V. P.V.
@14%
1 0.877 12,75,000 11,18,175 11,18,175 13,25,000 11,62,025 11,62,025
2 0.769 12,75,000 9,80,475 20,98,650 13,25,000 10,18,925 21,80,950
3 0.675 12,75,000 8,60,625 29,59,275 13,25,000 8,94,375 30,75,325
4 0.592 12,75,000 7,54,800 37,14,075 13,25,000 7,84,400 38,59,725
5 0.519 12,75,000 6,61,725 43,75,800 13,25,000 6,87,675 45,47,400
5 0.519 5,00,000* 2,59,500 46,35,300
6 0.455 13,25,000 6,02,875 51,50,275
6 0.455 5,00,000* 2,27,500 53,77,775
*Salvage value of machine

(i) Computation of Discounted Payback Period
Option– I
( 30,00,000 - 29,59,275 )
Discounted Payback Period = 3+
7,54,800
40,725
= 3+
7,54,800

= 3.054 years = 3 years 20 days

Option– II
Discounted Payback Period = 3+

( 35,00,000 - 30,75,325 )
7,84,400
4,24,675
= 3+
7,84,400
= 3.54 years = 3 years 6 months 15 days (approx.)
(ii) Computation of Net Present Value (NPV)
Option– I
NPV = `46,35,300 – 30,00,000 = `16,35,300
Option– II
NPV = `53,77,775 – 35,00,000 = `18,77,775
(iii) Computation of Profitability Index (PI)
Option– I
Sum of Discounted Cash inflows
Profitability index =
Cost of the Project
` 46,35,300
= = 1.545
` 30,00,000
Option– II
Sum of Discounted Cash inflows
Profitability index =
Cost of the Project
` 53,77,775
= = 1.536
` 35,00,000
Ranking of Machines in terms of Three Method
Method Option – I Option – II
Discounted Pay-back period I II
Net Present Value (NPV) II I
Profitability Index (PI) I II

Question 3
(a) M/s XYZ Traders is a distributor of an electronic calculator. A periodic inventory of
electronic calculator on hand is taken when books are closed at the end of each quarter.
The following summary of information is available for the quarter ended on
30th September, 2019:
Sales ` 1,46,20,000
Opening Stock 25,000 calculator @ ` 200 per calculator
Administrative Expenses ` 3,75,000
Purchases (including freight inward):
- July 1, 2019 50,000 calculator @ ` 191 per calculator
- September 30, 2019 25,000 calculator @ ` 210 per calculator
Closing stock- September 30, 2019 32,000 calculator
You are required to compute the following by WAM (Weighted Average Method), FIFO
method and LIFO method.
(i) Value of Inventory on 30 th September, 2019.
(ii) Profit or loss for the quarter ended 30 th September, 2019. (8 Marks)
(b) XYZ Ltd. is making a turnover of ` 70 lakhs out of which 60% is made on credit. The
company allows credit for 30 days. The company is considering proposals to liberalize
the credit policy. Information regarding options available are as under:
Proposal-A Proposal-B
Credit period 45 days 60 days
Anticipated credit sales ` 65 lakh ` 80 lakh
The product yield an average contribution of 20% on sales. Fixed costs are ` 6 lakh per
annum. The company expects a pre-tax return of 18% on capital employed. At present
company makes a provision for bad debts@ 0.5% which is expected to go up to 1% for
Proposal-A and to 2% for Proposal-B. Assume 360 days in a year.
Evaluate the proposals and give your recommendations. (8 Marks)
Answer
(a) (i) Computation of Value of Inventory as on 30 th September 2019:
Date Particulars Units WAM (`) FIFO (`) LIFO (`)
01-07-19 Opening 25,000 50,00,000 50,00,000 50,00,000
Stock (`200×25,000) (`200×25,000) (`200×25,000)
01-07-19 Purchases 50,000 95,50,000 95,50,000 95,50,000

(`191×50,000) (`191×50,000) (`191×50,000)

30-09-19 Purchases 25,000 52,50,000 52,50,000 52,50,000
(`210×25,000) (`210×25,000) (`210×25,000)
01-07-19 Issues/ 68,000 1,34,64,000* 1,32,13,000** 1,34,63,000***
to Consumption
30-09-19 (Balancing
figure)
30-09-19 Closing 32,000 63,36,000 65,87,000 63,37,000
Stock
Weighted average rate = ` 50,00,000+` 95,50,000+` 52,50,000 = ` 198
(25,000 + 50,000 + 25,000) units
* ` 198 x 68,000
** ` 200×25,000 + ` 191×43,000 = ` 50,00,000 + ` 82,13,000
*** ` 210×25,000 + ` 191×43,000 = ` 52,50,000 + ` 82,13,000
(ii) Computation of Profit or Loss for the Quarter ended 30 th September 2019
Particulars WAM (`) FIFO (`) LIFO (`)
Sales 1,46,20,000 1,46,20,000 1,46,20,000
Less: Consumption 1,34,64,000 1,32,13,000 1,34,63,000
Less: Administrative Exp. 3,75,000 3,75,000 3,75,000
Profit or Loss 7,81,000 10,32,000 7,82,000
[Assumption: Issue/ consumption pattern was even throughout the quarter]
(b) Statement showing the Evaluation of Credit Policies
Particulars Present Proposal Proposal
Policy A B
(30 days) (45 days) (60 days)
` ` `
A Expected Profit:
(a) Credit Sales 42,00,000 65,00,000 80,00,000
(b) Variable Costs[(a)-(c)] or 80% of Credit 33,60,000 52,00,000 64,00,000
Sales
(c) Contribution (20% on credit sales) 8,40,000 13,00,000 16,00,000
(d) Fixed Cost 6,00,000 6,00,000 6,00,000

(e) Expected profit [(c)-(d)] before bad debt 2,40,000 7,00,000 10,00,000
(f) Bad Debts 21,000 65,000 1,60,000
(d) Expected Profit after bad debt[(e) – (f)] 2,19,000 6,35,000 8,40,000
B Opportunity Cost of Investments in 59,400 1,30,500 2,10,000
Receivables (Working note)
C Net Benefits (A – B) 1,59,600 5,04,500 6,30,000
Recommendation: The Proposal - B should be adopted since the net benefits under this
policy are higher as compared to other policies.
Working Note:
Calculation of Opportunity Cost of Average Investments
Collection period Rate of Return
Opportunity Cost = Total Cost x x
360 100
Particulars Present Proposal Proposal
Policy A B
S. No. ` ` `
1 Variable Costs 33,60,000 52,00,000 64,00,000
2 Fixed Cost 6,00,000 6,00,000 6,00,000
3 Total Cost 39,60,000 58,00,000 70,00,000
4 Collection period 30/360 45/360 60/360
5 Required Rate of Return 18% 18% 18%
6 Opportunity Cost (3 x4 x 5) 59,400 1,30,500 2,10,000
(Note: This question may be solved either in Total Approach or in Incremental Approach)
Question 4
(a) ABC Construction Limited commenced a contract on 1st April, 2018. The contract price
was ` 40,68,750. It was decided to estimate the total profit and to take to the credit of
costing P/L accounts that proportion of estimated profit on cash basis, which work
completed bear to the total contract.
Actual expenditure of the contract for the year ending 31-3-2019 and estimated
expenditure for the year 2019-20 (up-to completion of contract) are given below:
2018-2019 2019-2020
Actual (`) Estimated (`)
Material issued to site 6,84,000 12,21,000
Labour Charges: Paid 4,57,500 6,04,500

Outstanding at the end 34,500 52,500

Machinery Purchased 3,37,500 -
Expenses: Paid 1,50,000 2,62,500
Prepaid at the end 33,750 -
Machine returned to stores (Original Cost) 1,12,500 2,25,000
(31st March, 19) (31st Dec.,19)
Material at Site 45,000 1,12,500
Work in progress certified 19,12,500 Full
WIP Uncertified 60,000 -
Cash Received 15,00,000 Full
The Depreciation on machinery is charged @ 25% on Written down Value (WDV). It is
estimated that contract will be completed on 31-12-2019.
You are required to:
(i) Prepare Contract Account for the year 2018-19.
(ii) Estimate the Profit on the contract for the year·2018-19 on prudent basis which has
to be credited to costing Profit and Loss Account. (8 Marks)
(b) M/s X Limited has furnished the following information relating to the financial year ended
31st March, 2019:
Particulars (`)
Net Profit 2,50,000
Dividend 1,00,000
Provision for income tax 80,000
Income tax paid during the year 65,000
Loss on sale of Plant & Machinery 1,000
Book value of plant & machinery (sold) 4,500
Depreciation debited to profit & loss account 12,000
Purchases of furniture & fixtures 1,11,000
Investment in joint venture 40,000
Proceeds from issue of 12% debentures 20,000
Increase in working capital (Excluding cash and bank balance) 15,000
Closing cash and cash equivalent 50,000

Prepare the cash flow statement in accordance with AS-3 for the year ended 31 st March,
2019. (8 Marks)
Answer
(a) Contract A/c
(April 1, 2018 to March 31, 2019)
Particulars Amount Particulars Amount (`)
(`)
To Materials Issued 6,84,000 By Machine returned to 84,375
Stores (Working Note 1)
To Labour ` 4,57,500 By Materials at Site 45,000
Add: Outstanding ` 34,500 4,92,000 By W.I.P.:
To Machinery Purchased 3,37,500 Certified
` 19,12,500
To Expenses ` 1,50,000 Uncertified 19,72,500
` 60,000
Less: Prepaid ` 1,16,250 By Machine at Site
(33,750) (Working Note 2) 1,68,750
To Notional Profit c/d 6,40,875
22,70,625 22,70,625
To Costing Profit & Loss A/c 2,33,450 By Notional Profit b/d 6,40,875
(Refer to Working Note 4)
To Work-in-Progress A/c 4,07,425
(Profit-in-reserve)
6,40,875 6,40,875
Contract A/c
(April 1, 2018 to December 31, 2019)
(For Computing estimated profit)
Particulars Amount (`) Particulars Amount

(`)
To Materials Issued 19,05,000 By Material at Site 1,12,500
(` 6,84,000 + ` 12,21,000)
To Labour Cost 11,14,500 By Machinery returned to 84,375
(` 4,57,500 + ` 34,500 + Stores on 31.03.2019
` 5,70,000* + ` 52,500)

To Machinery purchased 3,37,500 By Machinery returned to 1,37,109

Stores on 31.12.2019
(Working Note 3)
To Expenses 4,12,500 By Contractee A/c 40,68,750
(` 1,50,000 + ` 2,62,500)
To Estimated profit 6,33,234
44,02,734 44,02,734
Labour paid in 2019-20: ` 6,04,500 – ` 34,500 = ` 5,70,000
Working Notes
(`)
1. Value of the Machinery returned to Stores on 31.03.2019
Historical Cost of the Machine returned 1,12,500
Less: Depreciation @ 25% of WDV for one year (28,125)
84,375
2. Value of Machinery at Site 31.03.2019
Historical Cost of Plant at Site (` 3,37,500 – ` 1,12,500) 2,25,000
Less: Depreciation @ 25% on WDV for one year (56,250)
1,68,750
3. Value of Machinery returned to Stores on 31.12.2019
Value of Plant (WDV) on 31.3.2019 1,68,750
Less: Depreciation @ 25% of WDV for a period of 9 months (31,641)
1,37,109
4. Profit to be credited to Costing Profit & Loss A/c on March
31, 2019 for the Contract likely to be completed on December
31, 2019.
Work Certified Cash received
Estimated Profit × ×
Total Contract Price Work Certified
19,12,500 15,00,000 2,33,450
= ` 6,33,235 × 
40,68,750 19,12,500
(b) M/s X Limited

Cash Flow Statement for the year ended 31st March, 2019
(a) Cash Flows from Operating Activities (`)
Net profit before taxation* (` 2,50,000 + ` 80,000) 3,30,000

Adjustment for:
Depreciation debited to Profit & Loss A/c 12,000
Loss on sale of Plant and Machinery 1,000
Operating Profit before working capital changes 3,43,000
Increase in working capital (excluding cash and bank (15,000)
balance)
Cash generated from operations 3,28,000
Income tax paid (65,000)
Net cash from operating activities (A) 2,63,000
(b) Cash Flow from Investing Activities
Sale of Plant & Machinery (` 4,500 – ` 1,000) 3,500
Purchases of Furniture and Fixtures (1,11,000)
Investments in Joint Venture (40,000)
Net Cash used in Investing Activities (B) (1,47,500)
(c) Cash Flow from Financing Activities
Proceeds from issue of 12% Debentures* 20,000
Dividend paid* (1,00,000)
Net cash used in Financing Activities (C) (80,000)
Net increase in cash and cash equivalents (A) + (B) + (C) 35,500
Cash and cash equivalents at the beginning of the year 14,500
(balancing figure)
Cash and cash equivalents at the end of the year 50,000
[*Note: Question may also be solved assuming Net Profit as Net Profit before/ after tax;
and/ or Dividend as Dividend paid/ received; and/ or Debentures as Debentures issued at
the end/ beginning of the year (interest adjustment needed).]
Question 5
(a) Explain the meaning of 'Waste' and 'Spoilage' and give the accounting treatment for each
one.
(b) State the objectives of Budgetary Control System.
(c) State various types of packing credit.
(d) Explain 'Net Income (NI) Approach' and 'Net Operating Income (NOI) Approach' of capital
structure. (4 x 4 = 16 Marks)

Answer
(a)
Waste
Meaning Accounting Treatment
The portion of basic raw materials lost In Case of Normal Wastage
in processing having no recoverable Normal waste is absorbed in the cost of
value. Waste may be visible - remnants net output.
of basic raw materials - or invisible, In Case of Abnormal Wastage
e.g., disappearance of basic raw
The abnormal waste is transferred to the
materials through evaporation, smoke
Costing Profit and Loss Account.
etc. Shrinkage of material due to
natural causes may also be a form of a
material wastage.
Spoilage
Meaning Accounting Treatment
It is the term used for materials which In case of normal spoilage
are badly damaged in manufacturing Normal spoilage (i.e., which is inherent in
operations, and they cannot be rectified the operation) costs are included in costs
economically and hence taken out of either charging the loss due to spoilage to
process to be disposed of in some the production order or by charging it to
manner without further processing. production overhead so that it is spread
over all products.
Any value realised from spoilage is
credited to production order or production
overhead account, as the case may be.
In case of abnormal spoilage
The cost of abnormal spoilage (i.e.,
arising out of causes not inherent in
manufacturing process) is charged to the
Costing Profit and Loss Account. When
spoiled work is the result of rigid
specification, the cost of spoiled work is
absorbed by good production while the
cost of disposal is charged to production
overhead.
(b) Objectives of Budgetary Control System:
(i) Portraying with precision the overall aims of the business and determining targets of
performance for each section or department of the business.

(ii) Laying down the responsibilities of each of the executives and other personnel so
that everyone knows what is expected of him and how he will be judged. Budgetary
control is one of the few ways in which an objective assessment of executives or
department is possible.
(iii) Providing a basis for the comparison of actual performance with the predetermined
targets and investigation of deviation, if any, of actual performance and expenses
from the budgeted figures. This naturally helps in adopting corrective measures.
(iv) Ensuring the best use of all available resources to maximise profit or production,
subject to the limiting factors. Since budgets cannot be properly drawn up without
considering all aspects usually there is good co-ordination when a system of
budgetary control operates.
(v) Co-ordinating the various activities of the business, and centralising control and yet
enabling management to decentralise responsibility and delegate authority in the
overall interest of the business.
(vi) Engendering a spirit of careful forethought, assessment of what is possible and an
attempt at it. It leads to dynamism without recklessness. Of course, much depends
on the objectives of the firm and the vigour of its management.
(vii) Providing a basis for revision of current and future policies.
(viii) Drawing up long range plans with a fair measure of accuracy.
(ix) Providing a yardstick against which actual results can be compared.
(c) Types of Packing Credit:
(i) Clean packing credit: This is an advance made available to an exporter only on
production of a firm export order or a letter of credit without exercising any charge
or control over raw material or finished goods. It is a clean type of export advance.
Each proposal is weighed according to particular requirements of the trade and
credit worthiness of the exporter. A suitable margin has to be maintained. Also,
Export Credit Guarantee Corporation (ECGC) cover should be obtained by the
bank.
(ii) Packing credit against hypothecation of goods: Export finance is made available
on certain terms and conditions where the exporter has pledge able interest and the
goods are hypothecated to the bank as security with stipulated margin. At the time
of utilising the advance, the exporter is required to submit, along with the firm export
order or letter of credit relative stock statements and thereafter continue submitting
them every fortnight and/or whenever there is any movement in stocks.
(iii) Packing credit against pledge of goods: Export finance is made available on
certain terms and conditions where the exportable finished goods are pledged to the

banks with approved clearing agents who will ship the same from time to time as
required by the exporter. The possession of the goods so pledged lies with the bank
and is kept under its lock and key.
(iv) E.C.G.C. guarantee: Any loan given to an exporter for the manufacture,
processing, purchasing, or packing of goods meant for export against a firm order
qualifies for the packing credit guarantee issued by Export Credit Guarantee
Corporation.
(v) Forward exchange contract: Another requirement of packing credit facility is that if
the export bill is to be drawn in a foreign currency, the exporter should enter into a
forward exchange contact with the bank, thereby avoiding risk involved in a possible
change in the rate of exchange.
(d) (i) Net Income (NI) Approach: According to this approach, capital structure decision
is relevant to the value of the firm. An increase in financial leverage will lead to
decline in the weighted average cost of capital (WACC), while the value of the firm
as well as market price of ordinary share will increase. Conversely, a decrease in
the leverage will cause an increase in the overall cost of capital and a consequent
decline in the value as well as market price of equity shares.
From the above diagram, K e and Kd are assumed not to change with leverage. As
debt increases, it causes weighted average cost of capital (WACC) to decrease.
The value of the firm on the basis of Net Income Approach can be ascertained as
follows:
V=S+D
Where,
V = Value of the firm
S = Market value of equity

D = Market value of debt

NI
Market value of equity (S) =
Ke
Where,
NI = Earnings available for equity shareholders
Ke= Equity Capitalisation rate
Under, NI approach, the value of the firm will be maximum at a point where
weighted average cost of capital (WACC) is minimum. Thus, the theory suggests
total or maximum possible debt financing for minimising the cost of capital. The
overall cost of capital under this approach is :
EBIT
Overall cos t of capital =
Value of the firm
Thus according to this approach, the firm can increase its total value by decreasing
its overall cost of capital through increasing the degree of leverage. The significant
conclusion of this approach is that it pleads for the firm to employ as much debt as
possible to maximise its value.
(ii) Net Operating Income (NOI) Approach: NOI means earnings before interest and
tax (EBIT). According to this approach, capital structure decisions of the firm are
irrelevant.
Any change in the leverage will not lead to any change in the total value of the firm
and the market price of shares, as the overall cost of capital is independent of the
degree of leverage. As a result, the division between debt and equi ty is irrelevant.
As per this approach, an increase in the use of debt which is apparently cheaper is
offset by an increase in the equity capitalisation rate. This happens because equity
investors seek higher compensation as they are opposed to greater risk due to the
existence of fixed return securities in the capital structure.
The above diagram shows that K o (Overall capitalisation rate) and (debt –
capitalisation rate) are constant and K e (Cost of equity) increases with leverage.

Question 6
(a) A manufacturing firm produces a specific product and adopts standard costing system.
The product is produced within a single cost centre.
Following information related to the product are available from the standard cost sheet of
the product:
Unit Cost (` )
Direct material 5 kg @ ` 15 per kg 75.00
Direct wages 4 hours @ ` 20 per hour 80.00
During the month of October 2019, the firm purchased 3,50,000 kg of material at the·
rate of ` 14 per kg. Production records for the month exhibits the following actual results:
Material used 3,20,000 kg
Direct wages - 2,20,000 hours ` 46,20,000
The production schedule requires completion of 60,000 units in a month. However, the
firm produced 62,000 units in the month of October, 2019. There are no opening and
closing work-in-progress.
You are required to:
(i) Calculate material cost, price and usage variance.
(ii) Calculate labour cost, Rate and efficiency variance and
(iii) Calculate the amount of bonus, as an incentive scheme is in operation in the
company whereby employees are paid a bonus of 50% of direct labour hour saved
at standard direct labour hour rate. (8 Marks)
(b) Following information has been provided by ABC Private Limited:
(`)
Sales 80,00,000
Variable Cost 46,00,000
Fixed Costs 6,50,000
11% Borrowed Capital 50,00,000
Equity Capital 45,00,000
Retained earnings 15,00,000
Required:
(i) What is the firm's Return on Investment (ROI)?
(ii) Does it have favourable financial leverage?

(iii) If the firm belongs to an industry whose asset turnover is 3, does it have a high or
low asset leverage?
(iv) If the sales drop to ` 60,00,000, what will be the new EBIT?
(v) At what level of sales, will the EBT of the firm be equal to zero? (8 Marks)
Answer
(a) (i) Material Cost, price and usage variance
Material Cost Variance (on the basis of consumed quantity)
= SQ × SP – AQConsumed × AP
= (5 kg. × 62,000 units × ` 15) – (3,20,000 kg. × ` 14)
= ` 46,50,000 – `44,80,000
= ` 1,70,000 (F)
Alternatively,
Material Cost Variance (on the basis of purchased quantity)
= SQ × SP – AQPurchase× AP
= 3,10,000 × ` 15 – 3,50,000 × ` 14
= ` 2,50,000 (A)
Material Price Variance (on the basis of consumed quantity)
= AQConsumed × SP - AQConsumed × AP
= (3,20,000 kg. × ` 15) - (3,20,000 kg. × ` 14)
= ` 3,20,000 (F)
Alternatively,
Material Price Variance (on the basis of purchased quantity)
= (SP – AP) × AQPurchase
= (` 15 -` 14) × 3,50,000 = ` 3,50,000 (F)
Material Usage Variance = SP × SQ – SP × AQ Consumed

= (` 15 × 5 kg. × 62,000 units) – (` 15 × 3,20,000 kg.)
= ` 46,50,000 – ` 48,00,000
= ` 1,50,000 (A)
(ii) Labour cost Variance = SH × SR – AH × AR
= 2,48,000 hours × ` 20 – 2,20,000 hours × ` 21

= ` 49,60,000 – ` 46,20,000
= ` 3,40,000 (F)
Rate Variance = (SR – AR) × AH
= (` 20 – ` 21) × 2,20,000 = 2,20,000 (A)
Efficiency Variance = (SH – AH) × SR
= (2,48,000 – 2,20,000) × ` 20
= 5,60,000 (F)
(iii) Hours Saved = 2,48,000 – 2,20,000 = 28000 hrs.
Bonus Rate = ` 20 × 50% = ` 10
Bonus = 28,000 × ` 10 = ` 2,80,000
(b) Income Statement
Sales 80,00,000
Less: Variable cost 46,00,000
Contribution 34,00,000
Less: Fixed costs 6,50,000
Earnings before interest and tax (EBIT) 27,50,000
Less: Interest on debt (@ 11% on ` 50 lakhs) 5,50,000
Earnings before tax (EBT) 22,00,000
EBIT
(i) ROI = ×100
Capital employed
EBIT
= ×100
Equity + Debt + Retained Earnings
` 27,50,000
= ×100 = 25%
` 45,00,000+ ` 50,00,000 + ` 15,00,000)
(ROI is calculated on Capital Employed)
(ii) ROI = 25% and Interest on borrowed capital is 11%, hence, it has a favourable
financial leverage.
Total Sales
(iii) Asset Turnover =
Assets *
(* Note: Assets taken as Capital employed)

Total Sales ` 80,00,000

Or = = = 0.727
Assets ` 1,10,00,000
which is very low as compared to industry average of 3.
(iv)
Particular `
EBIT at Sales level of ` 60 Lakhs
Sales Revenue 60,00,000
Less: Variable Cost (` 60 lakhs × 57.50%) 34,50,000
(Variable Cost % = 46 lakhs/` 80 lakhs = 57.50%
Less: Fixed Costs 6,50,000
EBIT 19,00,000
(v)
Zero EBIT implies break even sales (BESR) = Fixed Costs/PV
Ratio
Sales - variable costs
P/V Ratio = ×100
Sales
` 80 lakhs -` 46 lakhs
= ×100
` 80 lakhs
= 42.50%
Fixed Costs = ` 6,50,000 + ` 5,50,000 (Interest on Debt)
Or, = ` 12,00,000
Fixed Costs
=
Profit Volume Ratio
` 12 lakhs
= ×100 or ` 28,23,529
42.50
Question 7
Answer any four of the following:
(a) Explain the advantages of Integrated accounting system.
(b) (i) Explain limitations of cost accounting.
(ii) Explain 'Flexible Budget'.

(c) Explain:
(i) Compounding and discounting
(ii) Perpetuity
(iii) Inflation
(iv) Compound Interest
(d) Describe the principles which guide the selection of marketable securities.
(e) Describe operating/working capital cycle. (4 x 4 = 16 Marks)
Answer
(a) Advantages of Integrated Accounting System: Integrated Accounting is the name
given to a system of accounting whereby cost and financial accounts are kept in the
same set of books. Such a system will have to afford full information required for Costing
as well as for Financial Accounts. In other words, information and data should be
recorded in such a way so as to enable the firm to ascertain the cost (together with the
necessary analysis) of each product, job, process, operation or any other identifiable
activity. For instance, purchases are analysed by nature of material and its end-use.
Purchases account is eliminated and direct postings are made to Stores Control Account,
Work-in-Progress account, or Overhead Account. Payroll is straightway analysed into
direct labour and overheads. It also ensures the ascertainment of marginal cost,
variances, abnormal losses and gains. Infact all information that management requires
from a system of Costing for doing its work properly is made available. The integrated
accounts give full information in such a manner so that the profit and loss account and
the balance sheet can be prepared according to the requirements of law and the
management maintains full control over the liabilities and assets of its business.
The main advantages of Integrated Accounting are as follows:
(i) Since there is one set of accounts, thus there is one figure of profit. Hence the
question of reconciliation of costing profit and financial profit does not arise.
(ii) There is no duplication of recording of entries and efforts to maintain separate set of
books.
(iii) Costing data are available from books of original entry and hence no delay is
caused in obtaining information.
(iv) The operation of the system is facilitated with the use of mechanized accounting.
(v) Centralization of accounting function results in economy.
(b) (i) Limitations of Cost Accounting: Like other branches of accounting, cost
accounting is also having certain limitations. The limitations of cost accounting are
as follows-

(I) Expensive: It is expensive because analysis, allocation and absorption of

overheads require considerable amount of additional work, and hence
additional money.
(II) Requirement of Reconciliation: The results shown by cost accounts differ
from those shown by financial accounts. Thus, preparation of reconciliation
statements is necessary to verify their accuracy.
(III) Duplication Work: It involves duplication of work as organization has to
maintain two sets of accounts i.e. Financial Account and Cost Account.
(IV) Inefficiency: Costing system itself does not control costs but its usage does.
(ii) Flexible Budget: A flexible budget is defined as “a budget which, by recognizing
the difference between fixed, semi-variable and variable cost is designed to change
in relation to the level of activity attained”. In flexibility budgetary control system, a
series of budgets are prepared one for the each of a number of alternative
production levels or volumes. Flexible budgets represent the amount of expense
that is reasonably necessary to achieve each level of output specified. In other
words, the allowances given under flexibility budgetary control system serve as
standards of what costs should be at each level of output.
(c) (i) Compounding and discounting: Compounding is the process of calculating future
values of cash flows where discounting means finding present value of cash flows.
Compounding
Present Value Future Value
Discounting
(ii) Perpetuity: Perpetuity is an annuity in which the periodic payments or receipts

begin on a fixed date and continue indefinitely or perpetually. Fixed coupon
payments on permanently invested (irredeemable) sums of money are prime
examples of perpetuities.
The formula for evaluating perpetuity is relatively straight forward. Two points which
are important to understand in this regard are:

(a) The value of the perpetuity is finite because receipts that are anticipated far in
the future have extremely low present value (today's value of the future cash
flows).
(b) Additionally, because the principal is never repaid, there is no present value
for the principal.
Therefore, the price of perpetuity is simply the coupon amount over the appropriate
discount rate or yield.
(iii) Inflation: Inflation means when prices of things rise faster than they actually
should. When there is inflation, the value of currency decreases over time. I f the
inflation is more, then the gap between the value of money today to the value of
money in future is more. So, greater the inflation, greater is the gap and vice versa.
(iv) Compound Interest: If interest is calculated on original principal amount it is simple
interest. When interest is calculated on total of previously earned interest and the
original principal it compound interest. Naturally, the amount calculated on the basis
of compound interest rate is higher than when calculated with the simple r ate.
(d) Three Principles which guide the Selection of Marketable Securities
The three principles relating to selection of marketable securities are:
(i) Safety: Return and risk go hand-in-hand. As the objective in this investment is
ensuring liquidity, minimum risk is the criterion of selection.
(ii) Maturity: Matching of maturity and forecasted cash needs is essential. Prices of
long-term securities fluctuate more with changes in interest rates and are, therefore,
riskier.
(iii) Marketability: It refers to the convenience, speed and cost at which a security can
be converted into cash. If the security can be sold quickly without loss of time and
price, it is highly liquid or marketable.
(e) Operating/ Working Capital Cycle: Working Capital cycle indicates the length of time
between a company’s paying for materials, entering into stock and receiving the cash
from sales of finished goods. It can be determined by adding the number of days
required for each stage in the cycle. For example, a company holds raw materials on an
average for 60 days, it gets credit from the supplier for 15 days, production process
needs 15 days, finished goods are held for 30 days and 30 days credit is extended to
debtors. The total of all these, 120 days, i.e., 60 – 15 + 15 + 30 + 30 days is the total
working capital cycle.

PAPER – 4 : TAXATION
SECTION A : INCOME TAX
Question No.1 is compulsory.
Candidates are also required to attempt any three questions from the rest.
Working notes should form part of the respective answers.
All questions pertaining to income-tax relate to assessment year 2019-20, unless stated
otherwise in the questions.
Question 1
Ms. Kanchan, a resident individual aged 61 years, provides the following information for the
financial year 2018-19:
(i) She is partner in SAR & Associates and received the following amounts from the firm :
Share of profit from the firm ` 31,100
Interest on capital@ 15% p.a. ` 2,85,000
Rent for an office ` 1,44,000
Salary as working partner (fully allowed in the hands of the firm) ` 1,20,000
(ii) She worked as a sales manager in her friend's show-room for 2 months at a salary of
` 30,000 per month.
(iii) She started her own boutique on 01-08-2018. The net profit as per Profit & Loss account
for the period of initial 8 months is ` 3,50,000. The following items are debited to Profit and
Loss account:
Advance Income-tax paid ` 90,000
Personal drawings ` 80,000
The following items are credited to Profit and Loss Account :
Interest on savings bank account with PNB ` 27,000
Interest on savings account with post office ` 11,000
Interest on Fixed Deposits with Canara Bank ` 25,000
(iv) She owned a house property which was sold in June, 2018 for ` 80 Lakh. This property
was purchased for ` 31.5 Lakh in January 2003. She received ` 90,000 by way of arrear
rent in respect of the said property in March, 2019.
The Suggested Answers for Paper 4A: Income-tax are based on the provisions of Income-tax
Law as amended by the Finance Act, 2018, which is relevant for November, 2019 Examination.
The relevant assessment year is A.Y.2019-20.

(v) She made the following investments:

Life insurance premium on a policy in the name of her husband ` 87,000. (The policy was
taken on 01-07-2012 and the sum assured being ` 8,00,000).
Health insurance premium on a policy covering her mother aged 83. She is not dependant
on Ms. Kanchan. Premium paid by cheque ` 54,000.
Cost inflation indices for different years are as under :
Financial Year : 2002-03 2003-04 2018-19
Cost inflation index : 105 109 280
Compute the total income and the tax liability of Ms. Kanchan for the Assessment Year
2019-20. (14 Marks)
Answer
Computation of Total Income of Ms. Kanchan for the A.Y.2019-20
Particulars ` ` `
Salaries
Salary = ` 30,000 x 2 months 60,000
Less: Standard deduction u/s 16 [Actual salary or 40,000
` 40,000, whichever is less]
Net Salary 20,000
Income from house property

Annual value (rent of office has been taken as 1,44,000
annual value, due to absence of information relating
to expected rent in the question)
Less: Deduction under section 24(a)
30% of Annual Value 43,200
1,00,800
Arrears of rent received chargeable to tax under 90,000
section 25A (even if Ms. Kanchan is no longer the
owner of the property)
Less: Deduction@30% 27,000 63,000
1,63,800
Profits and gains of business or profession
Income received from the firm in which she is
partner:
Share of profit from firm `31,100 [Exempt under -
section 10(2A)]

PAPER – 4 : TAXATION 73
Interest on capital [` 2,85,000 x 12%/15%] 2,28,000

[Since interest calculated@12% on capital is the
maximum permissible deduction in the hands of the
firm computed u/s 40(b), only interest to such extent
is taxable in the hands of the partner 2]
Salary as working partner (taxable in her hands,
since the same is fully allowed in the hands of the 1,20,000 3,48,000
firm)
Income received from her proprietary boutique
business:
Net profit as per profit and loss account 3,50,000
Add: Expenses/Payments debited to profit and
loss account but not allowed
Advance income-tax paid disallowed under 90,000
section 40(a)(ii)
Personal drawings (since personal expenses
are not allowed under section 37) 80,000
5,20,000
Less: Income chargeable under the head
“Income from Other Sources” but
credited to profit and loss account
Interest on savings bank account with PNB 27,000
Interest on savings account with post office 11,000
Interest on FDs with Canara Bank 25,000 4,57,000 8,05,000
Capital Gains
Sale consideration 80,00,000
Less: Indexed cost of acquisition [` 31,50,000 x
280/105]3 84,00,000
Long-term capital loss to be carried forward to (4,00,000)
A.Y.2020-21 for set-off against long-term capital
gains, if any, arising in that year
Income from Other Sources
Interest on savings bank account with PNB 27,000
Interest on savings account with post office 11,000
Less: Exempt under section 10(15) 3,500 7,500
Interest on fixed deposits with Canara Bank 25,000 59,500
Gross Total Income 10,48,300
2 It is presumed that the same is authorised by the partnership deed

3 The house property is a long-term capital asset, as it is held for more than 24 months.

Less: Deduction under Chapter VI-A

Section 80C
Life Insurance premium in the name of her husband 80,000
[` 87,000, restricted to ` 80,000, being 10% of sum
assured of ` 8 lakh, since the same is in respect of
a policy taken after 31.3.2012]
Section 80D
Health insurance premium for her mother ` 54,000, 50,000
being a senior citizen restricted to ` 50,000 (the
same is allowable even though her mother is not
dependent on her)
Section 80TTB 50,000
Since Ms. Kanchan is a resident individual aged 61
years, interest on savings deposits as well as fixed
deposits would qualify for deduction. However, the
total of ` 59,500 would be subject to a maximum of 1,80,000
` 50,000
Total Income 8,68,300
Computation of tax liability of Ms. Kanchan for A.Y. 2019-20
Particulars `
Tax on total income of ` 8,68,300
Upto ` 3,00,000 (Since Ms. Kanchan is a resident individual of the age of 61 Nil
years)
` 3,00,001 – ` 5,00,000 [i.e., ` 2,00,000@5%] 10,000
` 5,00,001 – ` 8,68,300 [i.e., ` 3,68,300@20%] 73,660
83,660
Add: Health and Education cess@4% 3,346
Tax Liability 87,006
Tax Liability (rounded off) 87,010
Less: Advance income-tax paid 90,000
Tax refundable (2,990)
Question 2
Miss Bansuri, a Chinese National, got married to Mr. Keshav of India in Beijing on 3 rd February,
2018 and came to India for the first time on 14-02-2018. She left for China on 11-08-2018. She
returned to India again on 20-02-2019.

She received the following gifts from her relatives and friends during 01-04-2018 to 31-03-2019
in India:
- From parents of husband ` 71,000
- From married sister of husband ` 21,000
- From two very close friends of her husband, ` 1,41,000 and ` 1,21,000 ` 2,62,000
(a) Determine her residential status and compute the total income chargeable to tax along
with the amount of tax payable on such income for the Assessment Year 2019-20.
(b) Will your answer change if she had returned to India again on 20 -01-2019 instead of
20-02-2019? (7 Marks)
Answer
(a) Determination of residential status and computation of total income and tax liability
of Miss Bansuri (if she returned to India on 20.2.2019)
Particulars `
Under section 6(1), an individual is said to be resident in India in any
previous year, if he/she satisfies any one of the following conditions:
(i) He/she has been in India during the previous year for a total period
of 182 days or more, or
(ii) He/she has been in India during the 4 years immediately
preceding the previous year for a total period of 365 days or more
and has been in India for at least 60 days in the previous year.
If an individual satisfies any one of the conditions mentioned above,
he/she is a resident. If both the above conditions are not satisfied, the
individual is a non-resident.
Therefore, the residential status of Miss Bansuri, a Chinese National,
for A.Y.2019-20 has to be determined on the basis of her stay in India
during the previous year relevant to A.Y. 2019-20 i.e. P.Y.2018-19 and
in the preceding four years.
Her stay in India during the previous year 2018-19 and in the
preceding four years are as under:
P.Y. 2018-19
01.04.2018 to 11.08.2018 - 133 days
20.02.2019 to 31.03.2019 - 40 days
Total 173 days
Four preceding previous years
P.Y.2017-18 [14.2.2018 to 31.3.2018] - 46 days
P.Y.2016-17 [1.4.2016 to 31.3.2017] - Nil

P.Y.2015-16 [1.4.2015 to 31.3.2016] - Nil

P.Y.2014-15 [1.4.2014 to 31.3.2015] - Nil
Total 46 days
The total stay of Miss Bansuri during the previous year in India was
less than 182 days and during the four years preceding this year was
for 46 days.
Therefore, due to non-fulfillment of any of the two conditions for a
resident, she would be treated as non-resident for the Assessment
Year 2019-20.
Accordingly, her total income and tax liability would be computed in
the following manner:
Computation of total income and tax liability of Miss Bansuri for
the A.Y. 2019-20
Income from other sources
Gifts received from non-relatives is chargeable to tax as per section
56(2) (x) if the aggregate value of such gifts exceeds ` 50,000.
- ` 71,000 received from parents of husband would be exempt, Nil
since parents of husband fall within the definition of ‘relatives’
and gifts from a relative are not chargeable to tax.
- ` 21,000 received from married sister-in-law is exempt, since Nil
sister of husband falls within the definition of relative and gifts
from a relative are not chargeable to tax.
- Gift received from two friends of her husband ` 1,41,000 and
` 1,21,000 aggregating to ` 2,62,000 is taxable under section
56(2)(x) since the aggregate of ` 2,62,000 exceeds ` 50,000. 2,62,000
Tax on total income of ` 2,62,000 [5% of ` 12,000 in excess of 600
` 2,50,000, being the basic exemption limit]
Add: Health and Education cess@4% 24
Total tax payable 624
Total tax payable (rounded off) 620
(b) Determination of residential status and computation of total income and tax liability
of Miss Bansuri (if she returned to India on 20.1.2019)
Particulars `
Yes, the answer would change, if she had returned to India again on
20.1.2019 instead of 20.2.2019.
In such case, her stay in India during the previous year 2018-19 would be:

01.04.2018 to 11.08.2018 - 133 days

20.01.2019 to 31.03.2019 - 71 days
Total 204 days
Since she satisfies the condition of stay in India for more than 182 days
during the previous year 2018-19, she would become resident in India.
She would be a resident but not ordinarily resident in India for A.Y.
2019-20, since her stay in India in the preceding seven years is less than
730 days (it is only 46 days) 4.
Her total income would remain same i.e., ` 2,62,000 even in case she
become resident but not ordinarily resident, however, her tax liability
would be determined in the following manner:
Tax liability:
Tax on total income of ` 2,62,000 [5% of ` 12,000 in excess of 600
` 2,50,000, being the basic exemption limit]
Less: Rebate under section 87A (since she is a resident individual and
her total income does not exceed ` 3,50,000, she would be eligible for a
rebate of lower of ` 2,500 and tax payable i.e., ` 600). 600
Total tax payable Nil
Question 3
Mr. Swaraj has provided the following particulars for the year ended 31-03-2019:
(i) He retired on 31-12-2018 at the age of 58, after putting in 25 years and 9 months of service,
from a private company at Delhi.
(ii) He was paid a salary of ` 25,000 p.m. and house rent allowance of ` 6,000 p.m. He paid
rent of ` 6,500 p.m., during his tenure of service.
(iii) On retirement, he was paid a gratuity of ` 3,50,000. He was covered by the payment of
Gratuity Act, 1972. He had not received any other gratuity at any point of time earlier, other
than this gratuity.
(iv) He had accumulated leave of 15 days per annum during the period of his service; this was
encashed by him at the time of his retirement. A sum of ` 3,15,000 was received by him in
this regard. Employer allowed 30 days leave per annum.
(v) The company presented him with a gift voucher of ` 5,000 on his retirement. His colleagues
also gifted him a mobile phone worth ` 50,000 from their own contribution.
You are requested to compute his income from salary for the assessment year 2019-20. (7 Marks)
4 In the alternative, an individual can be treated as not ordinarily resident if she is non-resident in any 9 out of
10 preceding assessment years. In this case, Miss Bansuri is a non-resident in all 10 preceding assessment
years. She was in India for only 46 days in A.Y.2018-19 and never visited India earlier.

Answer
Computation of income under the head “Salaries” of Mr. Swaraj for the A.Y.2019-20
Particulars ` `
Basic Salary = ` 25,000 x 9 months 2,25,000
House Rent Allowance = ` 6,000 x 9 months 54,000
Less: Least of the following exempt under section 10(13A) 36,000 18,000
(i) House rent allowance actually received = ` 6,000 x 9 =
` 54,000
(ii) Rent paid (-) 10% of salary for the relevant period
[` 58,500 (i.e., ` 6,500 x 9) (-) ` 22,500 (10% of salary
i.e., 10% of ` 2,25,000 (Basic Salary)] = ` 36,000
(iii) 50% of salary for the relevant period [50% of
` 2,25,000 (Basic salary)] `1,12,500
Gratuity 3,50,000
Less: Least of the following exempt under section 10(10)(ii) 3,50,000 Nil
(i) Actual Gratuity received ` 3,50,000
(ii) 15 days salary for every year of completed service
[15/26 x ` 25,000 x 26] = ` 3,75,000
(iii) Notified limit = ` 20,00,00
Leave encashment 3,15,000
Less: Least of the following exempt under section 10(10AA) 2,50,000 65,000
(i) ` 3,00,000
(ii) Leave salary actually received ` 3,15,000
(iii) ` 2,50,000, being 10 months’ salary x ` 25,000
(iv) Cash equivalent of leave standing at the credit of the
employee based on the average salary of last 10
months’ (max. 30 days per year of service) for every
year of actual service rendered for the employer from
whose service he has retired
375/30 x ` 25,000 = ` 3,12,500
[Leave Due = Leave allowed – Leave taken]
= 750 (30 days per year × 25 years) – 375 days (15
days x 25)
= 375 days]
Gift Voucher [As per Rule 3(7)(iv), the value of any gift or voucher Exempt
or token in lieu of gift received by the employee or by member of

his household not exceeding ` 5,000 in aggregate during the

previous year is exempt].
Mobile Phone received as gift from colleagues (Neither taxable
under the head “Salaries” nor “Income from other sources”, since
taxability provisions under section 56(2)(x) are not attracted in
respect of mobile phone received from colleagues, as mobile
Nil
phone is not included in the definition of “property” thereunder)
Gross Salary 3,08,000
Less: Standard deduction u/s 16 [Actual salary or ` 40,000,
whichever is less] 40,000
Net Salary 2,68,000
Question 4
(a) M/s ABC and Co., a partnership firm, started its textile business on 01-04-2018. During
the previous year 2018-19, it appoints the following persons :
Date of No. of Designation Emoluments (in `
appointment Employees per person/ month)
01-04-2018 25 Accounting and office staff 22,000
01-05-2018 25 Technical staff 25,200
01-08-2018 100 Supervisors 28,000
01-09-2018 200 Helpers 22,000
Total 350
Determine the amount of deduction available, if any, for the assessment year 2019 -20, if
turnover of ABC and Co. for the previous year 2018-19 is ` 4 crore and tax audit under
section 44AB is applicable and all the employees participates in the recognised provident
fund.
What would be your answer if the business of M/s ABC and Co. was of manufacture of
leather products instead of textile ?
(Assume that all the requirements under the relevant section, relating to the aforesaid
deduction, have been fulfilled.) (4 Marks)
(b) Ms. Netra, a resident individual aged 32 years, furnishes you with the following information
for the year ended on 31-03-2019:
Income from business of handloom trading 2,65,000
Long term capital gain on sale of jewellery 1,55,000

Long term capital loss on sale of shares listed in recognised stock 1,25,000
exchange
(STT paid both at the time of sale and purchase of shares)
Ms. Netra also has a brought forward loss of ` 4,500 from handloom business related to
assessment year 2010-11 and a brought forward loss from house property amounting to
` 2,20,000 related to the assessment year 2018-19.
You are required to compute the total income of Ms. Netra for the assessment year
2019-20 and the amount of loss, if any, to be carried forward. (3 Marks)
Answer
(a) I. Where ABC and Co. has started textile business on 1.4.2018
M/s. ABC and Co., a partnership firm, would be eligible for deduction u/s 80JJAA in
respect of additional employees employed by it during the P.Y.2018 -19, since it is
subject to tax audit under section 44AB.
However, only employees employed on 1.4.2018 will qualify as “additional
employees” since employees employed on 1.5.2018 and 1.8.2018 draw monthly
emoluments exceeding ` 25,000. Also, employees employed on 1.9.2018 have been
employed for only 212 days (i.e., less than 240 days) in the P.Y.2018-19. Hence, they
would not be included in the meaning of “additional employees”.
Deduction u/s 80JJAA = 30% x ` 66,00,000, being additional employee cost in
respect of employees employed on 1.4.2018 (25 employees x ` 22,000 p.m. x 12
months) = ` 19,80,000
II. Where ABC and Co. has started manufacture of leather products on 1.4.2018
In this case the firm has started manufacture of leather products, new employees
employed for 150 days in the year would qualify as “additional employees” for the
purpose of section 80JJAA.
Therefore, employees employed on 1.9.2018 (for 212 days during the P.Y.
2018-19) would also qualify as additional employees.
Additional Employee Cost `
Employees employed on 1.4.2018 (25 employees x ` 22,000 p.m. 66,00,000
x 12 months)
Employees employed on 1.9.2018 (200 employees x ` 22,000 p.m. 3,08,00,000
x 7 months)
3,74,00,000
Deduction u/s 80JJAA: 30% of ` 3,74,00,000 = ` 1,12,20,000

Note: The benefit of employment for minimum period of 150 days instead of 240 days
during the year to qualify as “additional employee” for the purpose of section 80JJAA is
available in respect of assessees engaged in apparel business, leather products and
footwear products.
The question (first part) mentions that M/s. ABC and Co., partnership firm, started its textile
business. Accordingly, the above solution has been worked out by considering that the
firm is engaged only in the manufacture of raw fabric and not in the manufacture of finished
apparel. Hence, 200 employees employed on 1.9.2018 (i.e., for less than 240 days) would
not qualify as additional employees for the purpose of deduction under section 80JJAA.
Alternatively, if it is assumed that the firm manufactures the finished apparel, the employee
cost of 200 employees employed on 1.9.2018 (i.e., for less than 240 days) has also to be
included in the additional employees cost for the purpose of deduction under section
80JJAA. In such a case, in both scenarios I & II, i.e., whether ABC and Co. has started
manufacture of apparel or manufacture of leather products, the deduction under section
80JJAA would be ` 1,12,20,000.
(b) Computation of total income of Ms. Netra for A.Y.2019-20
Particulars `
Profits and gains of business or profession
Income from business of handloom trading 2,65,000
[By virtue of section 72(3), brought forward loss of ` 4,500 from handloom
business for A.Y.2010-11 cannot be set-off against this income, since the
eight year period immediately succeeding the assessment year relevant
to the previous year in which the loss was incurred for carry forward and
set-off of business loss has expired with A.Y.2018-19]
Capital Gains
Long-term capital gains on sale of jewellery 1,55,000
Less: Long-term capital loss on sale of listed shares on
which STT was paid both at the time of purchase and sale 1,25,000 30,000
{Since long-term capital gains on sale of such shares is taxable under
section 112A, the long-term capital loss arising therefrom can be set-off5
against long-term capital gains on sale of jewellery [Section 70(3)]}
Loss to be carried forward to A.Y.2020-21
Loss from house property ` 2,20,000 related to A.Y.2018-19
5 CBDT clarification dated 4.2.2018

As per section 71B, brought forward loss of ` 2,20,000 from house 2,20,000
property related to A.Y.2018-19 has to be carried forward to A.Y.2020-21,
since there is no income chargeable under this head in the A.Y.2019-20.
Such loss can be carried forward for a maximum of 8 assessment years
for set-off only against income from house property.
Question 5
(a) Answer any one of the following two sub-parts:
(i) Mr. Mani, a resident individual, sold a plot of land on 20 th March,2019. Long term
capital gain on such sale amounted to ` 5,00,000. Since he had no other income
during the previous year 2018-19, he did not pay any advance tax instalment.
You are required to calculate the amount of advance tax payable by Mr. Mani, if any.
Base your answer on the relevant provisions relating to the payment of advance tax
on income from capital gain and advise Mr. Mani suitably, so that the liability on late
payment does not arise. (4 Marks)
OR
(ii) Examine the applicability of tax deduction at source provisions, the rate and amount
of tax deduction in the following cases for the financial year 2018-19 :
(A) An insurance company paid ` 45,000 as insurance commission to its agent
Mr. Abjijeet.
(B) Gupta and·Co. (firm), engaged in wholesale business, assigned a contract for
construction of its godown building to Mr. Ravi. The firm paid an aggregate of
` 10,00,000 to Mr. Ravi during the year.
(C) Y and Co. engaged in real estate business, conducted a lucky dip and gave a
Maruti Car worth ` 5,00,000 to the prize winner.
(D) An advertisement company paid ` 5,00,000 to a cricketer, Mr. Peter from
England, for working in an advertisement film. (4 Marks)
(b) Explain with brief reasons, whether the return of income can be revised under section
139(5) of the Income-tax Act, 1961 in the following cases:
(i) Defective or incomplete return filed under section 139(9).
(ii) Return already revised once under section 139(5).
(iii) Return of loss filed under section 139(3). (3 Marks)

Answer
(a) (i) Computation of advance tax payable by Mr. Mani
Particulars `
The total income of ` 5 lakh comprises only of long-term capital
gains on sale of plot on 20.3.2019.
Therefore, the basic exemption limit of ` 2,50,000 can be fully
exhausted against long-term capital gains, since Mr. Mani is a
resident individual. The balance capital gains of ` 2,50,000 is
taxable@20%.
Tax @20% on long-term capital gain of ` 2,50,000 (i.e., ` 5,00,000 50,000
less unexhausted basic exemption limit of ` 2,50,000)
Add: Health and education cess@4% 2,000
Total tax liability 52,000
Since Mr. Mani sold the plot of land on 20.3.2019, the long-term
capital gain on transfer of such land arises only after due date of
fourth instalment, i.e., after 15.3.2019. Accordingly, he is required to
pay whole of the tax of ` 52,000 on such long-term capital gain on
or before 31.3.2019.
Accordingly, if he pays ` 52,000 on or before 31.3.2019, interest
under section 234C for deferment of advance tax would not be
attracted. Also, interest under section 234B for default in payment of
advance tax would not be attracted.
(ii) (A) Insurance Commission
The insurance company is required to deduct tax at source @5% under section
194D on ` 45,000, being the amount of insurance commission payable to
Mr. Abhijeet, since such amount exceeds the threshold limit of ` 15,000.
Therefore, the amount of tax to be deducted at source:
= ` 45,000 x 5% = ` 2,250
(B) Contract for construction of godown building
Gupta and Co. (firm) is required deduct tax at source @1% under section 194C,
on the amount of ` 10,00,000 payable for contract for construction of godown
building to an individual, Mr. Ravi, since the aggregate amount of payment
during the financial year 2018-19 exceeds `1,00,000.
Therefore, the amount of tax to be deducted at source:
= ` 10,00,000 x 1% = ` 10,000

(C) Winning of Maruti car in Lucky dip

Y and Co., before giving the Maruti Car to the prize winner, is required to ensure
that tax of ` 1,50,000 (i.e., ` 5,00,000 x 30%) has been paid in respect of the
winnings, since the winnings are wholly in kind.
(D) Payment to non-resident sportsman
The advertisement company is required to deduct tax at source @ 20% plus
health and education cess@4% under section 194E, on the payment made to
Mr. Peter from England, being a non-resident sportsman for advertisement
Therefore, the amount of tax to be deducted at source = ` 5,00,000 x 20.8%
= ` 1,04,000
(b) (i) Defective or incomplete return filed under section 139(9)
The defective return has to be rectified within the period of 15 days from the date of
intimation received from the Assessing Officer or such further extended period. Where
a defective return is rectified within 15 days or such further extended period, then,
such return would be a valid return.
Thereafter, if the assessee discovers any omission or wrong statement in such a
return, he can furnish a revised return under section 139(5), within the prescribed
time i.e. within the end of the relevant assessment year or before the completion of
assessment, whichever is earlier.
However, if the defect is not rectified within the said time, it would be an invalid return,
in which case, it cannot be revised.
(ii) Return already revised once under section 139(5)
A return revised earlier can be revised again as the first revised return replaces the
original return. Therefore, if the assessee discovers any omission or wrong statement
in such a revised return, he can furnish a second revised return within the prescribed
time i.e. within the end of the relevant assessment year or before the completion of
assessment, whichever is earlier.
(iii) Return of loss filed under section 139(3)
A return of loss filed under section 139(3) is deemed to be return filed under section
139(1), and therefore, can be revised under section 139(5).

SECTION B: INDIRECT TAXES
Attempt any three questions from the rest.
“Working notes should form part of the respective answers.”
“Wherever necessary, suitable assumptions may be made by the candidates, and disclosed by
way of note.”
“All questions should be answered on the basis of the position of GST law as amended upto
30th April, 2019.”
Question 6
Alfa Institute of Management (AIM), a private college, is registered under GST in the State of
Punjab.
AIM provides the following particulars for the month of April, 2019 :
SI. Particulars Amount
No. (`)
i. Tuition fee received from students pursuing management courses 18,00,000
recognised by Punjab University, established by an Act of State
Legislature
ii. Tuition fee received from students pursuing under- graduate courses 8,50,000
recognised by Stan University, London under Dual Degree
programmes
iii. Fee received from students of competitive exam training academy run 5,40,000
by a Department of AIM
iv. Mess fees received from students (Mess is run by AIM on its own) 3,20,000
v. Amount paid to Local Municipal Corporation for premises taken on rent 50,000
for conducting coaching classes for competitive exams
vi. Legal services availed from Top Care & Co., a Partnership firm of 20,000
advocates, for the competitive exam training academy (Intra-state
transaction)
Note:
Rate of CGST, SGST and IGST are 9%, 9% and 18% respectively for both outward and inward
supplies.
All the amounts given above are exclusive of taxes, wherever applicable.
All the conditions necessary for availing the ITC have been fulfilled, wherever applicable.

No opening balance of ITC under any head of tax.

From the information given above, you are required to calculate the Value of taxable supply and
net GST liability (CGST, SGST or IGST as the case may be) to be paid in cash, if any, by AIM
for the month of April, 2019. (8 Marks)
Answer
Computation of value of taxable supply and net GST liability to be paid in cash
by AIM for April, 2019
Particulars Amount
(`)
Tuition fee received from students pursuing recognized management courses Nil
[Note-1]
Tuition fee received from students pursuing under-graduate courses 8,50,000
recognized by Foreign University [Note-2]
Fee received from students of Competitive Exam Training Academy [Note-3] 5,40,000
Mess fees received from students [Note-4] Nil
Total value of taxable supply 13,90,000
Particulars CGST (`) SGST (`)
GST liability under forward charge @ 9% [Note-5] 1,25,100 1,25,100
Services on which tax is payable under reverse charge:
Rent paid to Local Municipal Corporation [Note-6] 4,500 4,500
Legal services received from Top Care & Co., a partnership firm 1,800 1,800
of advocates1 [Note-7]
GST liability under reverse charge payable in cash [A] [Note-8] 6,300 6,300
Output tax payable against which ITC can be set off 1,25,100 1,25,100
Less: ITC of renting immovable property and legal services 6,300 6,300
Output tax payable after set off of ITC [B] 1,18,800 1,18,800
Net GST liability payable in cash [A] + [B] 1,25,100 1,25,100
Notes:-
1. Services provided by an educational institution to its students are exempt. Further,
educational institution means inter alia an institution providing services by way of education
as a part of a curriculum for obtaining a qualification recognised by an Indian law.
1
It has been assumed that the aggregate turnover of AIM in the preceding financial year exceeds ` 20 lakh.

Therefore, tuition fee received by Punjab University, being an educational institution, is

exempt, since it provides qualification recognised by Indian law.
2. Tuition fee received by Stan University is taxable since Stan University is not an
educational institution as qualification provided by it is not recognised by Indian law.
3. Fee received from students of competitive exam training academy is taxable as
Department of AIM is not an educational institution since competitive exam training does
not lead to grant of a recognized qualification.
4. Catering services provided by educational institutions to its students are exempt. It has
been assumed that the mess fees has been charged from the students pursuing the
qualification recognised by law.
5. Since all the services provided are intra-State, CGST and SGST @ 9% is charged
6. GST is payable under reverse charge in case of renting of immovable property services
supplied by a local authority to a registered person.
7. GST is payable under reverse charge in case of legal services supplied by a firm of
advocates to a business entity
8. The amount available in the electronic credit ledger may be used for making payment
towards output tax. However, tax payable under reverse charge is not an output tax.
Therefore, tax payable under reverse charge cannot be set off against the input tax credit
and thus, will have to be paid in cash.
Question 7
(a) Dina Ltd., a registered supplier from Maharashtra, is engaged in the manufacturing of
Passenger auto. The company provides the following details of purchases made/services
availed by it during the month of March, 2019:
SI. No. Particulars GST Paid (`)
i. Purchase of iron which is used as a raw material 2,50,000
[Goods were received in two instalments, first one in March,
2019 and the second instalment was received in April, 2019]
ii. Purchase of accessories which were delivered directly to the 90,000
dealers of the company. Only invoice was received by Dina Ltd.
iii. Purchase of Bus (seating capacity 15) for the transportation of 1,97,000
employees from their residence to company and back
iv. Input tax on general insurance taken on a car used by 5,200
Executives of the company for official purposes
v. Payment made to M/s Tasty Caterers for providing daily 54,700
breakfast & lunch to the employees of the company, as a
voluntary staff welfare measure

You are required to determine the eligible Input tax credit available to M/s Dina Ltd. for the
month of March, 2019, by giving brief explanations for treatment of various items. Subject
to the information given above, all the other conditions necessary for availing input tax
credit have been fulfilled. (5 Marks)
(b) M/s Pranav Associates, a Partnership firm, provided recovery agent service to Newtron
Credits Ltd., a NBFC and a registered supplier, on 15th January, 2019. Invoice for the
same was issued on 7 th February, 2019 and the payment was made on 18th April, 2019 by
Newtron Credits Ltd. Bank account of company was debited on 20 th April, 2019. Determine
the following:
(i) Person liable to pay GST (ii) Time of supply of service. (4 Marks)
Answer
(a) Computation of input tax credit (ITC) available with Dina Ltd. for the month of March
2019
Particulars ITC (`)
Purchase of iron used as a raw material [Note-1] Nil
Purchase of accessories delivered directly to the dealers of the 90,000

company2 [Note-2]
Bus for the transportation of employees [Note-3] 1,97,000
General insurance taken on car used by executives of the company for Nil
official purpose [Note-4]
Payment made to caterer for providing breakfast and lunch to the Nil
employees of company [Note-5]
Notes:-
1. When inputs are received in instalments, ITC can be availed only on the receipt of
last instalment. Hence, since last instalment is received in April 2019, ITC cannot be
availed in March 2019.
2. Goods delivered to another person on the direction of the registered person by way
of transfer of documents of title or otherwise, either before or during the movement,
are deemed to have been received by such registered person. Thus, ITC is available
to the registered person, on whose order/direction the goods are delivered to a third
person.
2
It has been presumed in the above answer that the goods have been delivered to the dealers of the
company on the direction of Dina Ltd. (registered person).

3. ITC on motor vehicles for transportation of persons with seating capacity > 13 persons
(including the driver) used for any purpose is allowed.
4. ITC on motor vehicles for transportation of persons with seating capacity ≤ 13
persons (including the driver) is blocked except when the same are used for (i) making
further taxable supply of such motor vehicles (ii) making taxable supply of
transportation of passengers (iii) making taxable supply of imparting training on
driving such motor vehicles. Further, ITC is not allowed on services of general
insurance relating to such ineligible motor vehicles.
Since, the car is not used for any of the eligible purposes, ITC thereon is blocked and
thus, ITC on general insurance taken on such car is also blocked.
5. ITC on outdoor catering is blocked except (i) in the case of sub-contracting, i.e. when
such service is used by the taxpayer who is in the same line of business (ii) when
such service is provided by the employer to its employees under a statutory
obligation.
Since the company is not an outdoor caterer and it is providing such services to its
employees as a voluntary staff welfare measure, ITC on such outdoor catering
services is blocked.
(b) (i) Tax on services supplied by a recovery agent to, inter alia, a non- banking financial
company is payable under reverse charge by such non-banking financial company.
Therefore, in the given case, person liable to pay GST is the NBFC - Newton Credits
Ltd.
(ii) The time of supply of service on which GST is payable on reverse charge basis is
earlier of the following:-
a) Date of payment as entered in the books of account of the recipient (18 th
April, 2019) or the date on which the payment is debited in his bank account
(20th April, 2019), whichever is earlier;
b) Date immediately following 60 days since issue of invoice by the supplier,
i.e. 9th April, 2019.
Thus, time of supply of service is 9th April, 2019.
Question 8
(a) Kartik & Co., a registered supplier under GST, provides the following information regarding
various tax invoices issued by it during the month of March, 2019 :
(i) Value of supply charged in an invoice was ` 2,50,000 against the actual taxable value
of ` 2,30,000.
(ii) Tax charged in an invoice was ` 32,000 against the actual tax liability of ` 68,000
due to wrong HSN code being chosen while issuing invoice.

(iii) Value charged in an invoice was ` 3,20,000 as against the actual value of ` 4,20,000
due to wrong quantity considered while billing.
Kartik & Co. asks you to answer the following :
(1) Who shall issue a Debit/Credit Note under CGST Act, 2017 ?
(2) Whether Debit Note or Credit Note has to be issued in each of the above
circumstances and, if so, quantify the amount for which it is to be issued.
(3) What is the maximum time-limit available for declaring the credit note in the GST
Return ? (5 Marks)
(b) Examine, with reason, whether registration is required under CGST Act, 2017 in the
following independent cases:
(i) Aadhav Computers of Gujarat is providing Computer Maintenance Service.
Aggregate turnover of Aadhav Computers is ` 15 Lakh which comprises both inter-
state and intra-state supply.
(ii) Soft Wings of West Bengal, exclusively trading in garments, supplies its taxable
goods to various States in India. Aggregate turnover of Wild Wings is ` 35 Lakh.
(4 Marks)
Answer
(a) (1) The debit/credit note shall be issued by the registered person who has supplied the goods
and/or services, i.e. Kartik & Co.
(2) Yes debit/credit note need to be issued in each of the circumstances as under:
(i) A credit note is required to be issued as the taxable value in invoice exceeds
the actual taxable value. The credit note should be issued for the excess value
of supply charged in the invoice, i.e. ` 20,000.
(ii) A debit note is required to be issued as the tax charged in the invoice is less
than the actual tax payable. The debit note should be issued for the amount of
tax which is charged less, i.e. ` 36,000.
(iii) A debit note is required to be issued as the value of supply charged in the invoice
is less than the actual value. The debit note should be issued for the amount of
value which is charged less, i.e. ` 1,00,000.
(3) The details of the credit note cannot be declared later than the return for the month
of September following the end of the financial year in which such supply was mad e
or the date of furnishing of the relevant annual return, whichever is earlier.
(b) (i) Registration is compulsory for suppliers engaged in inter-State supply. However,
threshold exemption of ` 20 lakh [` 10 lakh in case of Specified Special Category States]
is available in case of inter-State supply of taxable services.

Therefore, Aadhav Computers (aggregate turnover ` 15 lakh) is not required to obtain

registration as it is engaged in inter-State supply of taxable services and thus, is
eligible for threshold exemption of ` 20 lakh applicable for Gujarat.
(ii) The threshold limit for registration in the State of West Bengal for the persons
engaged exclusively in supply of goods, is ` 40 lakh. However, registration is
compulsory if the supplier is engaged inter-State supply of goods. The threshold
exemption of ` 20 lakh/ ` 10 lakh is not available in case of inter-State supply of
taxable goods.
Thus, Soft Wings is required to obtain registration.
Note: In the above question, “Wild” Wings be read as “Soft” Wings.
Question 9
(a) M/s United Electronics, a registered dealer, is supplying all types of electronic appliances
in the State of Karnataka. Their aggregate turnover in the financial year 2018-19 by way
of supply of appliances was ` 120 Lakh.
The firm also expects to provide repair and maintenance service of such appliances from
the financial year 2019-20.
With reference to the latest amendments made in the CGST Act, 2017, examine:
(i) Whether the firm can opt for the composition scheme for the financial year 2019-20,
as the turnover may include supply of both goods and services?
(ii) If yes, up to what amount, the supply of service can be provided ? (5 Marks)
(b) Mr. Alok, a registered supplier of taxable goods, filed GSTR 3B for the month of January,
2019 on 15th April, 2019. The prescribed due date to file the said GSTR 3B was
20th February, 2019. The amount of net GST payable on supplies made by him for the said
month worked out to be ` 36,500 which was paid on the same date of filing the return.
Briefly explain the related provisions and compute the amount of interest payable under
the CGST Act, 2017 by Mr. Alok. (4 Marks)
Answer
(a) (i) The registered persons, whose aggregate turnover in the preceding financial year did not
exceed ` 1.5 crore, may opt to pay tax under composition levy.
The scheme can be availed by an intra-State supplier of goods and supplier of
restaurant service.
However, the composition scheme permits supply of marginal services (other than
restaurant services) for a specified value along with the supply of goods and
restaurant service, as the case may be.
Thus, M/s United Electronics can opt for composition scheme for the financial year
2019-20 as its aggregate turnover is less than `1.5 crore in the preceding financial
year and it is not engaged in inter-State outward supplies.

(ii) The registered person opting for composition scheme can also supply services (other
than restaurant services) for a value up to 10% of the turnover in the preceding year
or ` 5 lakh, whichever is higher, in the current financial year.
Thus, M/s United Electronics can supply repair and maintenance services up to a
value of `12 lakh [10% of `120 lakh or `5 lakh, whichever is higher] in the current
financial year 2019-20.
(b) Interest is payable in case of delayed payment of tax @ 18% per annum from the date
following the due date of payment to the actual date of payment of tax.
Thus, the amount of interest payable by Mr. Alok is as under:-
Period of delay = 21 st February, 2019 to 15 th April, 2019
= 54 days
Hence, amount of interest = ` 36,500 x 18% x 54/365
= ` 972
Question 10
(a) Discuss about the exemption available to the services provided by an Old Age Home under
the CGST Act, 2017.
OR
Documents based on which ITC is taken should contain at least certain details. What are
they ? (4 Marks)
(b) Discuss about the late fee levied for delay in filing :
(i) Final Return
(ii) Annual Return (5 Marks)
Answer
(a) The services provided by an old age home to its residents are exempt if the following
conditions are fulfilled:
(i) the old age home is run by Central Government, State Government or an entity
registered under section 12AA of the Income-tax Act, 1961.
(ii) The consideration charged is upto ` 25,000 per month per member.
(iii) The consideration charged is inclusive of charges for boarding, lodging and
maintenance.
(iv) The residents of the old age home are aged 60 years or more.
(a) Alternative
The documents based on which ITC is taken should contain at least the following details:

(i) Amount of tax charged

(ii) Description of goods or services
(iii) Total value of supply of goods and/or services
(iv) GSTIN of the supplier and recipient
(v) Place of supply in case of inter-State supply
Note: Any four points may be mentioned out of the above mentioned five points.
(b) (i) The late fee levied for delay in filing final return is:
(a) ` 100 for every day during which such failure continues or
(b) ` 5,000
whichever is lower.
(ii) The late fee levied for delay in filing annual return is:
(a) `100 for every day during which such failure continues, or
(b) 0.25% of the turnover of the registered person in the State/Union Territory
whichever is lower.

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PAPER – 1 : ACCOUNTING

Question No. 1 is compulsory.

© The Institute of Chartered Accountants of India

(c) Shyan Limited commenced a construction contract on 01-04-2018. The company

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Bank balance in foreign currency account ($1,000 x ` 70) 70,000

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© The Institute of Chartered Accountants of India

5 Costs incurred while an item capable of operating in the (iii)

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Plant and Machinery 1,75,000 2,00,000

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To Inventory 1,20,000 (loss)

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(ii) Value of Net Assets

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Trade receivables less 7.5% Dr. 2,77,500

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Balance Sheet of Entertainment Club as on 31 st March, 2019

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3. (i) Sports material purchased during the year (on credit)

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© The Institute of Chartered Accountants of India

Least of the above three figures, i.e. ` 4,800 allowable.

1,90,000 14,550 1,75,950 1,90,000 14,550 1,75,950

© The Institute of Chartered Accountants of India

3. Cost of Investment for purchase on 01.05.2018 = ` 76,000 - ` 2,400 = ` 73,600

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1 PS: Partner Y to be read as partner Z.

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______ Z 12,000 60,000

Balance sheet of firm as on 31.03.2019 (after reconstitution)

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Z and M gain in 1:1 but X loses by 1/10.

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(iv) Current investment in Company D, costing ` 12 lakhs are to be re-classified as long

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3. Background of the vendors: The service and deliverable record of a vendor is

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31.12.2016 To Bank/Cash A/c 59,520 1.1.2016 By H.P. Interest 23,040

© The Institute of Chartered Accountants of India

Amount which can be utilized from reserves (` 8,00,000 – 1,42,500) ` 6,57,500

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(ii) Proliferation of Codes, Standards, Indicators and Guidelines.

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1. To execute a deed authorizing to sell and sign documents including execution of

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