4 Solved Papers - Compressed

Suggested Answer_Syllabus 2016_Jun2017_Paper 13
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
SUGGESTED ANSWERS TO QUESTIONS

JUNE - 2017
Paper-13 : CORPORATE LAWS & COMPLIANCE
Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
Answer Question No. 1 which is compulsory, carrying 20 marks and
answer any 5(five) Questions from Question No. 2 to Question No. 8.
1. Answer all questions mentioned below. Mark the correct answer (Only indicate A or B or
C or D and give justification. 2×10=20
(i) Every Company shall hold the first Board meeting within
(A) 3 months of its incorporation.
(B) 30 days of its incorporation.
(C) 15 days of its incorporation.
(D) 4 months of its incorporation.
(ii) Every Nidhi shall maintain members not less than
(A) 500
(B) 200
(C) 100
(D) 50
(iii) Unless the Articles require a larger number of members, Quorum of a General
Meeting of a Producer Company shall be
(A) 5 members
(B) one-third of total membership
(C) one-fourth of total membership
(D) half of total membership
(iv) Original Books and paper which were seized during Search & Seizure u/s 209 of the
Companies Act, 2013 shall be returned by the Registrar or Inspector to the Company
from whom such documents are seized as soon as possible but not later than
(A) 180 days after such seizure.
(B) 90 days after such seizure.
(C) 360 days after such seizure.
(D) 30 days after such seizure.
(v) Sec 233 of the Companies Act, 2013 prescribed simplified procedures for merger or
amalgamation of two or more small company & small company means a company
whose paid up capital does not exceed
(A) ` 10,00,000
(B) ` 25,00,000
(C) ` 50,00,000
(D) ` 100,00,000
(vi) On the determination of sickness of a company by the Tribunal, the applicant shall
make an application accompanied with Audited Financial Statements etc. for revival
or rehabilitation within
(A) 30 days of determination of sickness.
(B) 60 days of determination of sickness.
(C) 120 days of determination of sickness.
(D) 180 days of determination of sickness.
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(vii)Companies Act, 2013 contemplated Penalties which are of
(A) 10 types
(B) 5 types
(C) 7 types
(D) 3 types
(viii)Any person aggrieved by any order of Appellate Tribunal, may file an appeal to the
Hon'ble Supreme Court within days, from the date of receipt of the order of Appellate
Tribunal.
(A) 30 days
(B) 60 days
(C) 90 days
(D) 120 days
(ix) Any allotment of securities made on the basis of Prospectus should be void if
permission of listing is not granted by the Stock Exchange before expiry of
(A) 12 weeks from the closure of the issue.
(B) 10 weeks from the closure of the issue.
(C) 8 weeks from the closure of the issue.
(D) 30 days from the closure of the issue.
(x) Unfair competition under the Competition Act, 2002 means adoption of practices viz.
(A) collusive price fixing.
(B) allocation of markets.
(C) discriminatory pricing etc.
(D) All of the above
Answer:
1. (i) (B) As per Sec . 173(1) the 1st Board Meeting shall be held within 30 days of the date
of its incorporation
(ii) (B) Number of members shall not be less than 200 (Nidhi Rules 2014 Rules 5)
(iii) (C) 1/4th membership. (SEC 581 Y)
(iv) (A) 180 days; Ref .Sec. 209 (2) of companies Act 2013 as soon as possible but not later
than 180 only.
(v) (C) 50,00,000; Ref. Sec. 2 (85) of Companies Act. 2013.
(vi) (B) 60 days; Sec. 254 of Company act. 2013
(vii) (B) 5 Types i.e. (1) Fine (2) Imprisonment or fine (3 Imprisonment or fine or with both (4)
imprisonment and fine and (5) imprisonment only
(viii)(B) 60 Days (Ref. Sec. 423. However Supreme Court if it is satisfied then SC may allow.
Further time not more than 60 days.
(ix) (B) 10 Weeks, Sec. 40 of Companies Act. 2013
(x) (D) All the above (SEC.40 collusive price fixing: creation of barriers to entry: allocation
of market: tie in scales: predatory price; discriminating price etc.
2. (a) Explain briefly the purpose of establishing SEBI. 6
(b) (i) What are the duties of the inspector as enumerated in Sec 223 of the Companies
Act, 2013 in relation to his report.
(ii) Corporate governance is about Stakeholder's satisfaction. Comment. 6+4=10
Answer:
2. (a) The purpose of the SEBI Act is to provide for the establishment of a Board called Securities
and Exchange Board of India (SEBI). The Preamble to the Act provides for the
establishment of a Board to:
(i) Protect the interests of investors in securities,
(ii) Promote the development of the securities market,
(iii) To regulate the securities market, and
(iv) For matters connected therewith or incidental thereto.
The Securities and Exchange Board of India was set up to achieve the following
objectives:
(i) To promote fair dealings by the issuers of securities and ensure a market place
where they can raise funds at a relatively low cost.
(ii) To provide, a degree of protection to the investors and safeguard their rights and
interests so that there is a steady flow of savings into the market.
(iii) To regulate and develop a code of conduct and fair practices by intermediaries
like brokers, merchant bankers, etc., with a view to making them competitive and
professional.
(b) (i) Section 223 of the Companies Act, 2013 deals with Inspector's report. The
following provisions are applicable in respect of the Inspector's report on
investigation:
(i) Submission of interim report and final report [Sub section (1)]: An inspector
appointed under this Chapter (Chapter XIV- inspection, Inquiry and
Investigation) may, and if so directed by the Central Government shall, submit
interim reports to that Government, and on the conclusion of the
investigation, shall submit a final report to the Central Government.
(ii) Report to be writing or printed [Sub section (2)]: Every report made under sub
section (1) above shall be in writing or printed as the Central Government
may direct.
(iii) Obtaining copy or report [Sub section (3)]: A copy of the above report may be
obtained by making an application in this regard to the Central Government,
(iv) Authentication of report [Sub section (4)]: The report of any inspector
appointed under this Chapter shall be authenticated either—
(a) by the seal, if any, of the company whose affairs have been investigated;
or
(b) by a certificate of a public officer having the custody of the report, as
provided under section 76 of the Indian Evidence Act, 1872, and such
report shall be admissible in any legal proceeding as evidence in relation
to any matter contained in the report. .
(v) Exceptions: Nothing in this section shall apply to the report referred to in
section 212 of the Companies Act, 2013.
(ii) Corporate governance is about stakeholders' satisfaction: The term "Corporate

Governance" is not easy to define. The term governance relates to a process of
decision making and implementing the decision in the interest of all stakeholders, it
basically relates to enhancement of corporate performance and ensure proper
accountability for management in the interest of all stakeholders. It is a system
through which an organization is guided and directed. On the basis of this definition,
the core of objectives of Corporate Governance are focus, predictability,
transparency, participation, accountability, efficiency and effectiveness and
satisfaction of stakeholders.
3. (a) A meeting of members of Joka Agricultural Equipments Limited was convened under
the orders of the Court for the purpose of considering a scheme of compromise and
arrangement. The meeting was attended by 200 members holding 500000 shares. 70
members holding 400000 shares in the aggregate voted for the scheme.120 members
holding 90000 shares in aggregate voted against the scheme. 10 members holding
10000 shares abstained from voting. Examine with reference to the relevant provisions
of the Companies Act, 1956 whether the scheme was approved by the requisite
majority? 6
(b) (i) The auditors of a company refuses to make their report on the annual accounts of
a company before it is signed on behalf of the Board of Directors. Advise the
company.
(ii) What are the restrictions on the Banking Companies for granting of loan &
advances against the security of its own shares. 4+6=10
Answer:
3. (a) Compromise or Arrangement: According to sub-section (2) of the section 391 of the
Companies Act, 1956, the scheme of compromise and arrangement must be
approved by a resolution passed with a majority in number representing three-fourths
in value of the creditors, or members, or class of members, as the case may be,
present and voting either in person or, by proxy.
The majority is dual, in number and in value. A simple majority of those voting is
sufficient. Whereas the 'three-fourths' requirement relates to value. The three-fourths
value is to be computed with reference to paid-up capital held by members present
and voting at the meeting.
In this case 200 members attended the meeting, but only 190 members voted at the
meeting. As 70 members voted in favour of the scheme the requirement relating to
majority in number (i.e. 95) is not satisfied.
190 members who participated in the meeting held 4,90,000 shares, three-fourth of
which works out to 3,67,500 while 70 members who voted for the scheme held
4,00,000 shares. The majority representing three-fourths in value is satisfied. .
Thus, in the instant case, the scheme of compromise and arrangement of Joka
Agricultural Equipments Limited is not approved as though the value of shares voting
in favour is significantly more, the number of members voting in favour do not exceed
the number of members voting against.
(b) (i) The auditor is right. Theoretically, accounts are presented to auditors only after they
are approved by the Board and signed by authorized persons. The auditor is only
expected to submit his report on the accounts presented to him for audit after
conducting an examination of the necessary documents, analyzing relevant
information and test checking accounting records in order to be able to form an
opinion of the financial statements presented to him. In practice, the checking of
accounts is already completed before accounts are approved by the Board. Auditor
informally approves the draft account with notes etc., before the accounts are
approved by the Board. However, auditor signs the accounts only after these are
approved by Board and signed by persons authorized by Board of the company.
(ii) Restrictions on loans and advances (Sections 20 & 21)

Section 20 lays down the restrictions on banking companies from entering into
any commitment from granting any loan to any of its director or to any firm in
which a director is interested or to any individual or whom director stands as a,
guarantor. Further the bonking companies are prohibited from granting loans or
advance, on the security of its own shares.
Under Section 21, the RBI has been empowered, to determine the policy to be
followed by the banks in relation to advances, Thus, RBI gives directions to
banking companies on the following matters.
(a) The purposes for which an advance may or may not be granted.
(b) The margins to be, maintained In Case of secured advances.
(c) The rate of Interest charged on advances, other financial accommodation
and commission on guarantees.
(d) The maximum amount of advance or other financial accommodation that a
bank may make to or guarantee that it may issue for, a single party having
regard to the paid up capital, reserves and deposits of the concerned bank.
4. (a) Can a Company pay compensation to its Directors for loss of office? Explain briefly
the relevant provisions of the Companies Act, 2013 in this regard. 8
(b) (i) Define "contributory" in a winding up. Explain the liabilities of contributories as
present and past member. Give your answer according to the Companies Act,
1956.
(ii) State the kind of approval required for the following transactions under the Foreign
Exchange Management Act, 1999:
(I) L, a famous playback singer of India wants to perform a musical night in Paris
for Indians residing there. Foreign exchange to the extent of USD 20,000 is
required for this purpose.
(II) M requires USD 5,000 to make payment related to 'call back services' of
telephone. 5+3=8
Answer:
4. (a) A company can pay compensation to its directors for loss of office as provided in
sections 202 of the Companies Act, 2013. Under section 202, such compensation can
be paid only to managing director, director holding the office of the manager and to
a whole time director but not to others. The compensation payable shall be on the
basis of average remuneration actually-earned by such director for three years, or
such shorter period as the case may be, immediately preceding the ceasing of
holding of such office and shall be for the unexpired portion of his term or for three
years whichever is shorter. No such payment can be made, if winding up of the
company is commenced before or commences within 12.months after he ceases to
hold office if the assets of the company on the winding up, after deducting expenses
thereof, are not sufficient to repay to the shareholders the share capital (including the
premium, if any) contributed by them, However, no payment of compensation can
be made in the following cases:
(a) where a director resigns on the ground of amalgamation or reconstruction and is
appointed the office of managing director or manager or other officer of such
reconstructed or amalgamated company,
(b) where the director resigns his office otherwise than on the reconstruction of the
company or its amalgamation as aforesaid,
(c) where the director vacates office under section 167 of the Companies Act, 2013,
(d) where the winding up of the company is due to the negligence of the director
concerned,
(e) where the director has been guilty of any fraud or breach of trust,
(f) where the director has instigated or has taken part directly or indirectly in bringing
about, the termination of his office.
(b) (i) Contributory: According to Section 428 of the Companies Act, 1956 in a winding
up, the term "contributory" means a past or present member liable to contribute
to the assets of the company in the event of its being wound up and includes
holders of shares which are fully paid up. If a member is once placed in the list of
contributories, he is liable to the extent of original shares that remain unpaid,
unless he proves that he should not have been placed in the list.
When a company goes into liquidation, every member, whether past or present,
has to contribute to the assets of the company. However, a past member will not
be required to contribute in the following circumstances:
(a) if he had ceased to be a member for a period of one year or upwards before
the commencement of winding up.
(b) if the debt or liability of the company was contracted or incurred after he
ceased to be a member.
(c) if the present members are able to satisfy the contributions required to be
made by them under the Act.
(ii) (i) Foreign exchange drawals for cultural tours require prior permission/approval
of the Government of India irrespective of amount of foreign exchange
required, Therefore, in the given case L, the singer is required to seek
permission of the Government of India.
(ii) Drawal of foreign exchange for payment related to 'call back services' of
telephones is prohibited. Therefore 'M' cannot draw foreign exchange.
5. (a) What is the minimum contribution the companies are required to make towards CSR
as per Companies Act, 2013. 8
(b) (i) What do you mean by anti-competitive agreements, viz tie-in arrangement and
resale price maintenance?
(ii) Mr. X is a director of ABC Ltd. He has approached Housing Finance Co. Ltd. for the
purpose of obtaining a loan of ` 50 lacs to be used for construction of building of
his residential house. The loan was sanctioned subject to the condition that ABC
Ltd. should provide the guarantee for repayment of loan installments by Mr. X.
Advise Mr. X. 5+3=8
Answer:
5. (a) Required minimum contribution of the Companies towards CSR:

(A) The Board of every company shall ensure that the company spends, in every
financial year, at least two per cent of the average net profits of the company
made during the three immediately preceding financial years, in pursuance of its
CSR Policy.
(B) The company shall give preference to the local area and areas around it where it
operates, for spending the amount earmarked for CSR activities.
(C) If the company fails to spend such amount, the Board shall, in its report, specify
the reasons for not spending the amount.
(D) Companies may build CSR capacities of their own personnel as well as those of
their implementing agencies through Institutions with established track records of
at least three financial years. However, such expenditure shall not exceed five
percent of total CSR expenditure of the company in one financial year.
(b) (i) Anti competitive agreements - According to section 3 of the Competition Act,
2002, it shall not be lawful for any enterprise or association of enterprises or person
or association of persons to 'enter' into an agreement in respect of production.
supply, storage, distribution, acquisition or control of goods or provision of services,
which causes or is likely to cause an appreciable adverse effect on competition
within India. These agreements are called as anti-competitive agreements. All
such agreements entered into in contravention of the aforesaid prohibition shall
be void.
Tie-in arrangement - It includes any agreement requiring a purchaser of goods, as
a condition of such purchase, to purchase some other goods;
Resale price maintenance - It includes any agreement to sell goods on condition

that the prices to be charged on the resale by the purchaser shall be the prices
stipulated by the seller unless it is clearly stated that prices lower than those prices
may be charged.
(ii) According to section 185 of the Companies Act, 2013, no company shall, directly or
indirectly, advance any loan, including any loan represented by a book debt, to any
of its directors or to any other person in whom the director is interested or give any
guarantee or provide any security in connection with any loan taken by him or such
other person.
Thus, Mr. X is not allowed for loan of ` 50 Lacs against guarantee by the company
ABC Ltd.
6. (a) Examine with reference to the provisions of the Companies Act, 2013 whether notice
of a Board Meeting is required to be sent to the following persons:
(i) An interested Director;
(ii) A Director who has expressed his inability to attend a particular Board Meeting;
(iii) A Director who has gone abroad (for less than 3 months). 6
(b) (i) The Board of Directors of Nimbahera Chemicals Limited proposes to transfer more
than 10% of the profits of the company to the reserves for the current year. Advise
the Board of Directors of the said company mentioning the relevant provisions of
the Companies Act, 2013.
(ii) State the "Insurable Interest"— based on the Insurance Act, 1938. 4+6=10
Answer:
6. (a) Notice of Board meeting

(i) Interested director: Section 173(3) of the Companies Act, 2013 makes it
mandatory for every director to be given proper notice of every board meeting. It
is immaterial whether a director is interested or not. In case of an Interested
Director, notice must be given to him even though he is precluded from voting at
the meeting on the business to be transacted.
(ii) A Director who has expressed his inability to attend a particular Board Meeting: In
terms of section 173(3) even if a director states that he will not be able to attend
the next Board meeting; notice must be given to that director.
(iii) A director who has gone abroad: A director who has gone abroad is still a
director. Therefore, he is entitled to receive notice of board meetings during his
stay abroad, The Companies Act, 2013, allows delivery of notice of meeting by
electronic means also. This is important because the Companies Act, 2013 permits
a director to participate in a meeting by video conferencing or any other audio
visual means.
(b) (i) The first proviso to 123 (1) of the Companies Act, 2013 provides that a company
may, before the declaration of any dividend in any financial year, transfer such
percentage of its profits for that financial year as it may consider appropriate to
the reserves of the company. Therefore, under the Companies Act, 2013 the
amount transferred to reserves out of profits for a financial year has been left at
the discretion of the company acting vide its Board of Directors. Therefore the
company is free to transfer any part of its profits to reserves as if deems fit.
(ii) Insurable Interest

To constitute insurable interest, it must be an interest such "that the risk would by its
proximate effect cause damage to the assured, that is to say, cause him to lose a
benefit or incur a liability. The validity of an insurance contract in India is
dependent on the existence of an insurable interest in the subject matter. The
person seeking an insurance policy must establish some kind of interest in the life
or property to be insured, in the absence of which, the insurance policy would
amount to a wager and consequently void in nature.
The test for determining if there is an insurable interest is whether the insured will in
case of damage to the life or property being insured, suffer pecuniary loss [New
India Insurance Company ltd. v. G.N. Sainani (1997) 6 SCC 383). A person having
a limited interest can also insure such interest.
Insurable interest varies depending on the nature of the insurance. The

controversy as to the existence of an insurable interest between spouses was
settled by the court, which held that such an interest could exist as neither was
likely to indulge in any1 mischievous game'. The same analogy may be .extended
to parents and children. Further, the courts have also held that such an insurable
interest would exist for a creditor (in a debtor) and for an employee (in an
employer) to the extent of the debt incurred and the remuneration due,
respectively.
The existence of insurable interest at the time of happening of the event is

another important consideration. In case, of life and personal accident insurance
it is sufficient if the insurable interest is present at the time of taking the policy.
However, in the case of fire and motor accident insurance the insurable interest
has to be present both at the time of taking the policy and at the time of the
accident. The case is completely different with marine insurance wherein there
need not be any insurable interest at the time of taking the policy.
7. (a) (i) Whether XBRL is mandatory in all the Companies. If not, state the Companies
where XBRL is mandatory.
(ii) What are the advantages of XBRL? 2+6=8
(b) What are the documents etc. to be delivered to the Registrar of Companies (MCA) by
foreign companies for registration? 8
Answer:
7. (a) (i) XBRL applies to the following companies:

1) All Public listed companies in India and their Indian subsidiaries.
2) All companies having a paid up Capital of ` 5 Crores and above.
3) All companies having Turnover of INR 100 Crores and above.
(ii) Advantages of XBRL

XBRL offers major benefits at all stages of business reporting and analysis. The
benefits are seen in automation, cost saving, faster, more reliable and more
accurate handling of data, improved analysis and in better quality of information
and decision making. XBRL enables producers end-consumers of financial data to
switch resources away from costly manual processes; typically involving time
consuming comparison, assembly and re-entry of data. They are able to
concentrate effort on analysis aided by software which can validate" and
'process XBRL information. XBRL is a flexible language, which is intended to
support, all current aspects of reporting in different countries and industries. Its
extensible nature means that it can be adjusted to meet particular business
requirements, even 'at the individual organization level.
All types of organizations can use XBRL to save costs and improve efficiency in
handling business and financial information. Because XBRL is extensible and
flexible, it can be adopted to a wide variety of different requirements. All
participants in the financial information supply chain can benefit, whether they
are preparers, transmitters or users of business data.
XBRL is set to become the standard way of recording, storing arid transmitting
business financial information. It is capable of use throughout the world, whatever
the language of the country concerned, for a wide variety of business purposes. It
will deliver major cost savings and gains in efficiency, improving' processes in
companies; governments and other organizations.
(b) Documents to be delivered to registrar "by foreign companies [Section 380(1)]. Every
foreign company shall, within 30 days of establishment of its place of business fn India.
Deliver to the Registrar for registration.
1) a certified copy of the Charter. Statutes or Memorandum and Articles, of the
Company or other instruments constituting or defining the constitution of the
company. If the instrument is not in the English language, a certified translation
thereof in the English language.
2) the full address of the Registered or Principal Office of the Company.
3) a list of the director's and secretary of the Company containing such particulars
as may be prescribed.
In relation to the nature of particulars to be provided as above, the Companies
(Registration of Foreign Companies) Rules. 2014 provide that the list of directors
and secretary or equivalent (by whatever name called) of the Foreign Company
shall contain the following Particulars for each of the persons included in such list,
namely:
(a) personal name and surname in full.
(b) any former name or names and surname or surnames in full.
(c) father's name or mother's name and spouse's name.
(d) date of birth.
(e) residential address.
(f) nationality.
(g) if the present nationality is not the nationality of Origin, his nationality of origin.
(h) Passport Number, date of issue and country of issue, (if a person holds more
than one passport then details of all passports to be given)
(i) income-tax permanent account number (PAN), if applicable.
(j) occupation, if any.
(k) Whether directorship in any other Indian company. (Director Identification
Number (DIN), Name Corporate Identity Number (CIN) of the company in
case of holding directorship).
(l) other directorship or directorships held by him.
(m) membership number (for Secretary only), and
(n) e-mail ID.
4) The name and address or the names and addresses of. one or more persons
resident in India authorized to accept, on behalf of the company, service of
process and any notices or other documents required to be served on the
company.
5) The full address of the office of the company in India which is deemed to be its
principal place of business in India.
6) Particulars of opening and closing of a place of business in India on earlier
occasion or occasions.
7) Declaration that none of the directors of the company or the authorized
representative in India has ever been convicted or debarred from formation of
companies and management in India or abroad, and
8) any other information, as may be prescribed.
8. Write short notes on any four of the following: 4×4=16

(a) Producer Companies
(b) Actuarial Valuation/ Report (Section 13)
(c) Lock-in of Specified Securities held by promoters.
(d) STR (Suspicious Transaction Reports)
(e) Grant of recognition to Stock Exchanges—Conditions, Section 4(2) SCRA,1956.
Answer:
8. (a) Producer Companies

The Companies (Amendment) Act, 2002 has introduced provisions relating to
Producer Companies vide Sections 581A to 581ZT under Part-IXA of the Companies
Act, 1956. Section 465-of the Companies Act, 2013, deals with the provisions relating
to repeal of certain enactments and savings. However, Section 465 (1) of the
Companies Act, 2013 has retained the provisions relating to Producer Companies
and clarifies that these provisions shall continue to be in force in a manner as if the
Companies Act, 1956 has not been repealed until a special Act is enacted for
Producer Companies.
In view of the explicit provisions contained in the Companies Act, 2013, the Producer
Companies are continued to be governed by the Companies Act, 1956 (Section
581A to 581ZT) for the time bring. Thus, under this topic 'Producer Companies',
wherever the word 'Act' is used, it refers to the Companies Act, 1956.
It must be understood that the concept of Producer companies has not-taken off
despite there being enough potential in view of some of the irritants like restricted
tenure of directors of maximum five years. People who have for long been
associated with co-operative and other such movements in' India nave found that
the tenure of five years is too short and would force people out of the producer
companies. The tenure should be suitably enhanced. The Government has done well
to retain the old provisions of Companies Act, 1956, but should give a try to remove
the irritants so that the movement tokes off.
(b) Actuarial Valuation/Report (section 13)

At least once a year, every insurer carrying on life insurance business shall cause an
investigation of the life insurance business carried on by him including a valuation of
his liabilities in respect thereto and shall cause an abstract of the report of such
actuary to made in accordance with the regulations. The Authority may, having
regard to the circumstances of any particular insurer, allow him to have the
investigation made as at a date not later than two' years from the date as at which
the previous investigation was made. If the investigation is made annually by any
insurer, the statement need not be appended every year but shall be appended at
least once in every three years.
(c) Lock-in of specified securities held by promoters.

In a public issue, the equity shares and convertible debentures held by promoters are
locked-in for the/period stipulated below:
1) Minimum promoters contribution is locked-in for a period of 3 years from the date
of commencement of commercial production or date of allotment in the public
issue, whichever is later.
2) Promoters' holding in excess of minimum promoters' contribution is locked-in for a
period of 1 year. However, excess promoters' contribution in a further public offer
is not subject to lock-in.
However, excess promoters' contribution in a further public offer is not subject to lock-
in.
(d) STR (Suspicious Transaction Reports)

The Prevention of Money laundering Act, 2002 and the Rules made there under
require ever banking company to furnish details of suspicious transactions whether or
not made in cash. Suspicious transaction means a transaction whether or not made
in cash which, to a person acting in good faith:
1) Gives rise to a reasonable ground of suspicion that it may involve the proceeds or
crime, or
2) Appears to be made in circumstances of unusual or unjustified complexity, or
3) Appears to have no economic rationale or bonafide purpose.
(e) Grant of recognition to stock exchanges - Conditions: Section 4(2), SCRA, 1956
The conditions may include, condition relating to:
1) qualification for Membership of the Stock Exchange.
2) manner in which contracts shall be entered into and enforced as between
members.
3) representation of the Central Government on the Stock Exchange (not
exceeding 3 nominated by the Central Government,)
4) maintenance of Accounts of members and their audit by Chartered
Accountants whenever audit is required by the Central Government.
Suggested Answers_Syl 2016_June2018_Paper 13
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

JUNE - 2018
Paper-13: Corporate Laws & Compliance
Answer Question No. 1 which is compulsory, carrying 20 marks and answer
any 5 (five) Questions from Question No. 2 to Question No. 8.
C or D) and give justification.
Multiple choice questions: 2x10=20
(i) A company shall have its Registered Office from the date __________ of its incorporation.
(A) 7th day
(B) 15th day
(C) 30th day
(D) one month
(ii) During any financial year Corporate Social Responsibility Committees of the Board shall
be constituted by every Company having
(A) Turnover of ` 5,000 crores or more.
(B) A Net Profit of ` 2 crores or more.
(C) Net Worth of ` 5 crores or more.
(D) Authorized capital of ` 500 crores or more.
(iii) Board of every Company shall ensure that the company spends in every financial year
on account of CSR Policy at least
(A) 5% of average Net Profit.
(B) 3% of average Net Profit.
(C) 2.5% of average Net Profit.
(D) 2% of average Net Profit.
(iv) Under Insolvency Bankruptcy code 2016 where extension of time is requested, the
Corporate Resolution process shall be completed within a period of _____________ from
the date of admission of the application to initiate such process.
DoS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(A) 60 days
(B) 90 days
(C) 180 days
(D) 240 days
(v) According to Banking Regulation Act 1949, no Banking Company shall pay dividend on
its shares until all its
(A) Depreciation is fully written off.
(B) "Capitalized expenses" have been completely written off
(C) Bad debts are provided in full.
(D) Contingent liability is settled.
(vi) The Director prepared the annual accounts in Director Responsibility Statement on a/an
(A) Money measurement basis
(B) Going concern basis
(C) Accrual basis
(D) Business Entity basis
(vii)Accounts and Balance Sheet along with auditor's reports should be filed with Reserve
Bank of India within ______ from the end of the period to which these relate.
(A) 3 months
(B) 6 months
(C) 9 months
(D) 12 months
(viii)A minor can be nominated as a nominee in Life Insurance Policy by its

(A) Drawer
(B) Agent
(C) Holder
(D) Corporation
(ix) Which of the following is not the type of unfair competition?

(A) Collusive price fixing
(B) Creation of barriers to entry
(C) Tie in purchase
(D) Predatory pricing
(x) Business should _______ the interests of and be responsive towards all stakeholders,
especially those who are disadvantaged, vulnerable and marginalized.
(A) Accept
(B) Respect
(C) Reject
(D) Object
Answer:
1.
(i) B 15th day Sec. 12 - A company shall on and from the fifteenth day of
its incorporation have a Regd. Office to receive &
acknowledge of communication & notices addressed to it.
(ii) A Turnover of ` 5000 According to Section 135(1) of the Companies Act 2013,
crores or more every Company having net worth of rupees five hundred
crores or more, or turnover of ` One thousand crores or
more or a net profit of rupees five crores or more during
any financial year shall constitute a corporate social
Responsibility Committee of the Board.
In view of the above, Option (A) Turnover of ` 5000 crores

or more which is more than of rupees one thousand crores
or more as per required provision stated above should be
considered.
(iii) D 2% of average Towards CSR expense (Sec. 135)
Net Profit.
(iv) C 180 days Where extension of time is requested, the corporate
insolvency resolution process shall be completed within a
period of 180 days [Sec 12 (2)].
(v) B "Capitalized Sec. 15 prohibits every Banking Co. from paying any
expenses" have dividend on its share until all its capitalized expense
been completely completely written off.
written off
(vi) B Going concern The director prepared the annual accounts in Director
basis Responsibility Statement on a going concern basis.
(vii) A 3 months Section 31, the accounts and balance sheet together with
the auditor's report’s shall be furnished as returns to the
Reserve Bank within three months from the end of the
period to which these relate.
(viii) C Holder A minor can be nominated as a nominee in life insurance
policy by its holder.
(ix) C Tie in purchase Tie in purchase is not the type of unfair competition.
(x) B Respect Business should respect the interests of and be responsive
towards all stakeholders, especially those who are
disadvantaged, vulnerable and marginalized.
2. (a) ABC Ltd. having a networth of ` 80 crores and turnover of ` 30 crores wants to accept
deposits from public other than its members. Referring to the provisions of the
Companies Act, 2013, state the conditions and the procedures to be followed by ABC
Ltd. for accepting deposits from public other than its members. 4
(b) The Secretary of a company issued a share certificate to 'Prem' under the company's
seal with his own signature and the signature of a Director forged by him. 'Prem'
borrowed money from 'Amar' on the strength of this certificate. 'Amar' wanted to
realise the security and requested the company to register him as a holder of the
shares. Explain whether 'Amar' will succeed in getting the share registered in his name.
Explain with the help of the doctrine of 'Indoor management' in brief. 4
(c) (i) X Ltd. appointed CA Innocent as a statutory auditor for the company for the
current financial year. Further the company offered him the services of actuarial,
investment advisory and investment banking which was also approved by the Board
of Directors. Comment.
(ii) Universal, a foreign company, incorporated in Australia was carrying on its business
in Delhi related to manufacturing of automobile parts. Due to failure of its
compliance with the respective law of the country under which it was incorporated,
it was ceased to exist. Decide in the light of the Companies Act, 2013 the status of
the company and the effect on the Conduct of Business in India. 5+3=8
Answer:
2. (a) Acceptance of deposit from public: According to section 76 of the Companies Act,
2013, a public company, having net worth of not less than 100 crore rupees or
turnover of not less than 500 crore rupees, can accept deposits from persons other
than its members subject to compliance with the requirements provided in sub-
section (2) of section 73 and subject to such rules as the Central Government may, in
consultation with the Reserve Bank of India, prescribe.
Provided that such a company shall be required to obtain the rating (including its
networth, liquidity and ability to pay its deposits on due date) from a recognised
credit rating agency for informing the public the rating given to the company at the
time of invitation of deposits from the public which ensures adequate safety and the
rating shall be obtained for every year during the tenure of deposits.
Provided further that every company accepting secured deposits from the public
shall within thirty days of such acceptance, create a charge on its assets of an
amount not less than the amount of deposits accepted in favour of the deposit
holders in accordance with such rules as may be prescribed.
Since, ABC Ltd. has a net worth of ` 80 crores and turnover of ` 30 crores, which is less
than the prescribed limits, hence, it cannot accept deposit from public other than its
members. If the company wants to accept deposits from public other than its
members, it has to fulfill the eligibility criteria of net worth or Turnover or both and then
the other conditions as stated above.
(b) The doctrine of Indoor Management is laid down in the Royal British Bank vs.
Turquand (1956) 6E&B 327 case in which the directors of RBB (Royal British Bank) gave
a bond to one T (Turquand) without the required resolution being passed. The Articles
empowered the directors to issue such bonds under the authority of a proper
resolution. In fact no such resolution was passed. It was decided in the case that
notwithstanding the non passing of the required resolution, T could sue on the bonds
on the ground that he was entitled to assume that the resolution had been duly
passed. Thus, the persons dealing with the company are entitled to assume that the
acts of the directors or the officers of the company are validly performed, if they are
within the scope of their apparent authority.
However, this doctrine is not applicable where the person dealing with the company
has notice of irregularity or when an instrument purporting to be enacted on behalf
of the company is a forgery.
In the instant problem, the doctrine of indoor management will not apply as the
certificate is a forgery which does not give a good title to Prem and thereby to Amar.
Hence, Amar will not succeed in getting the share registered in his name.
(c) (i) Services not to be Rendered by the Auditor: Section 144 of the Companies Act,
2013 prescribes certain services not to be rendered by the auditor. An auditor
appointed under this Act shall provide to the company only such other services
as are approved by the Board of Directors or the audit committee, as the case
may be, but which shall not include any of the following services (whether such
services are rendered directly or indirectly to the company or its holding
company or subsidiary company), namely:
(i) accounting and book keeping services;
(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.
Further section 141(3)(i) of the Companies Act, 2013 also disqualify a person for
appointment as an auditor of a company who is engaged as on the date of
appointment in consulting and specialized services as provided in section 144.
In the given case, CA Innocent was appointed as an auditor of X Ltd. He was

offered additional services of actuarial, investment advisory and investment
banking which was also approved by the Board of Directors. The auditor is
advised not to accept the services as these services are specifically notified in the
services not to be rendered by him as an auditor as per section 144 of the Act.
(ii) Section 376 of the Companies Act, 2013 provides the law related to the power of
winding up Foreign Companies, although dissolved. Provision states that where a
body corporate incorporated outside India which has been carrying on business
in India, ceases to carry on business In India, it may be wound up as an
unregistered company under this Part (i.e., Part I of the Chapter 21 which deals
with the companies authorized to register under this Act), notwithstanding that
the body corporate has been dissolved or otherwise ceased to exist as such
under or by virtue of the laws of the country under which it was incorporated.
As per the facts given in the question, Universal, a foreign company, incorporated
in Australia ceased to exist as per the law of the country, also ceased to carry on
business in Delhi. Accordingly, Universal Company may be wound up as an
unregistered company although it ceased to exist in Australia.
3. (a) There are four directors in Shine Paper Limited. Mr. Madhav, being the director in
station, has been authorized to draw and endorse cheque or other negotiable
instruments on account of the company and also to direct registration of transfer of
shares and signing the share certificates etc. Evaluate whether he will be treated as
Managing Director of the company. Also recommend the procedure of appointment
of a Managing Director in a company in the light of the Companies Act, 2013. 6
(b) Examine the following aspect related to convening of board meeting with reference to
the provisions of the Companies Act, 2013:
(i) The Chairman of Greenhouse Limited convened a board meeting and two weeks'
notice was served on all directors of the company. Two of the independent
directors on the board objected on the grounds that no proper agenda for the
meeting was circulated.
(ii) Purple Florence Limited proposes to hold its board meeting at a shorter notice
through video conferencing. 7
(c) State briefly the composition of SERIOUS FRAUD INVESTIGATION OFFICE (SFIO) under
the Companies Act, 2013. 3
Answer:
3. (a) Managing Director [Section 2(54)]: Section 2(54) of the Companies Act, 2013 defines
a "Managing Director" as a director who is entrusted with substantial powers of
management of the affairs of the company by:
(a) virtue of articles of a company, or
(b) an agreement with the company, or
(c) a resolution passed in its general meeting, or by its Board of Directors, and
includes a director occupying the position of the managing director, by
whatever name called.
Explanation to Section 2 (54) clarifies that substantial powers of the management

shall not be deemed to include the power to do such administrative acts of a routine
nature when so authorised by the Board such as:
(i) the power to affix the common seal of the company to any document or
(ii) to draw and endorse any cheque on the account of the company in any bank
or
(iii) to draw and endorse any negotiable instrument or
(iv) to sign any certificate of share or
(v) to direct registration of transfer of any share.
In the instant case, Mr. Madhav, a director in Shine Paper Limited has been,
authorized to draw and endorse cheque or other negotiable instruments on account
of the company and also to direct registration of transfer of shares and signing the
share certificates etc.
Hence, according to explanation to section 2(54), Mr. Madhav will not be treated as
managing director of the company as he is authorized to do administrative acts of a
routine nature.
Procedure of appointment of a managing director [Section 196(4)]

1. Subject to the provisions of section 197 and Schedule V, a managing director
shall be appointed, and the terms and conditions of such appointment and
remuneration payable be approved by the Board of Directors at a meeting.
2. The terms and conditions and remuneration approved by Board of Directors as
above shall be subject to the approval of shareholders by a resolution at the next
general meeting of the company.
3. In case such appointment is at variance to the conditions specified in the
Schedule V of the Companies Act, 2013, the appointment shall be approved by
the Central Government.
4. The notice convening Board or general meeting for considering such
appointment shall include the terms and conditions of such appointment,
remuneration payable and such other matters including interest, of a director or
directors in such appointments, if any.
5. A return in the prescribed form (Form No. MR.1) along with the prescribed fee
shall be filed with the Registrar within sixty days of such appointment.
(b) (i) According to section 173 (3) of the Companies Act, 2013, a meeting of the Board
shall be called by giving not less than 7 days' notice in writing to every director at
his address registered with the company and such notice shall be sent by hand
delivery or by post or by electronic means.
According to the question, two of the independent directors on the Board has
objected on the grounds that no proper agenda for the meeting was circulated.
The Companies Act, 2013 does not specifically provide for sending agenda along
with the notice of the meeting. However, generally as a good secretarial
practice, the notice is accompanied with the agenda of the meeting. Thus, the
contention of the independent directors objecting on the grounds that no
agenda for the meeting was circulated, does not hold good.
Further, the Chairman of Greenhouse Limited has convened the Board meeting
by serving a two weeks' notice (i.e. more than 7 days). Hence, the meeting shall
be valid.
(ii) According to section 173 of the Companies Act, 2013,
(a) The directors can participate in a meeting of the Board either in person or
through video conferencing or other audio visual means, as may be
prescribed, which are capable of recording and recognising the participation
of the directors and of recording and storing the proceedings of such
meetings along with date and time. Further, Central Government may
provide for matters which cannot be dealt in a meeting through video
conferencing or other audio visual means.
(b) A meeting of the Board shall be called by giving not less than 7 days' notice in
writing to every director at his address registered with the company.
Provided that a meeting of the Board may be called at shorter notice to

transact urgent business subject to the condition that at least one
independent director, if any, shall be present at the meeting. Further, in case
the independent directors are not present at such a meeting of the Board,
decisions taken at such a meeting shall be circulated to all the directors and
shall be final only on ratification thereof by at least one independent director,
if any.
Hence, Purple Florence Limited can hold a board meeting at a shorter notice
through video conferencing, for transacting urgent business subject to the
condition that at least one independent director, if any, shall be present at
the meeting. Further, if the independent directors are absent from the
meeting of the Board, decision taken at such a meeting shall be circulated to
all the directors and shall be final, only on ratification thereof by at least one
independent director, if any.
(c) Composition of SFIO [Section 211(2)]
The SFIO shall be:

(1) Headed by a Director, and
(2) Consist of such number of experts from the following fields to be appointed by
the Central Government from amongst persons of ability, integrity and
experience in:
(a) Banking;
(b) Corporate affairs;
(c) Taxation;
(d) Forensic audit;
(e) Capital market;
(f) Information technology;
(g) Law; or
(h) Such other fields as may be prescribed.
4. (a) Winding up proceedings has been commenced by the Tribunal against Paramount
Limited, a government company (Central Government is a member). Even after
completion of one year from the date of commencement of winding up proceedings, it
has not possible to conclude the same. The liquidator is of the opinion that the statement
shall be filed with tribunal and registrar only.
(i) Decide validity to the opinion made by the liquidator and penalty that can be
imposed on the liquidator for contravention of the provision as per the Companies
Act, 2013.
(ii) Discuss, if the Paramount Limited is a non-government company. 7
(b) State the law with respect to the Establishment of Special Court. Mr. A is Judicial
Magistrate in a Lower Court. He was appointed to hold the office of the Special Court for
the speedy disposal of the pending cases under the Act. Decide as per the applicable
provisions of the Companies Act, 2013, whether the appointment of Mr. A is tenable. 4
(c) (i) State the different types of Penalties prescribed under the Companies Act, 2013.
(ii) State the provisions of the companies Act, 2013 relating to preservation of books
and papers of amalgamated Companies. 3+2=5
Answer:
4. (a) Section 348 of the Companies Act, 2013 states that, if the winding up of a company is
not concluded within one year after its commencement then the Company
Liquidator shall file a statement in such form containing such particulars as may be
prescribed. Such statement shall be filled within two months of the expiry of such year
and it shall be filled continuously thereafter until the winding up is concluded, at
intervals of not more than one year or at such shorter intervals as may be prescribed.
The statement shall be duly audited, by a person qualified to act as auditor of the
company and position of with respect to the proceedings in the liquidation.
The statement shall be filled with the tribunal in the case of a winding up by the
Tribunal. A copy shall simultaneously be filed with the Registrar and shall be kept by
him along with the other records of the company.
Where a statement relates to a Government company in liquidation, the Company

Liquidator shall forward a copy thereof,
 to the Central Government, if that Government is a member of the Government
company;
 to any State Government, if that Government is a member of the Government
company; or
 to the Central Government and any State Government, if both the Governments
are members of the Government company.
If Paramount Limited is a Government Company
In the current scenario, we can understand that the Paramount Limited is a

government company in which Central Government is a member and hence
statement is also required to file to the Central Government along with the Tribunal
and Registrar. So, the opinion by the Company Liquidator is not tenable in the eyes of
the law and he is liable for penal action under the Act.
The company liquidator shall be punishable with fine which may extend to five
thousand rupees for every day during which the failure continues.
If Paramount Limited is a Non-Government Company
In the current scenario, the Paramount Limited is a non-government company hence

statement is only required to file with the Tribunal and Registrar only. So, the opinion
by the Company Liquidator is tenable in the eyes of the law and he is not liable for
any penal action under the Act.
(b) Establishment of special court: As per section 435 of the Companies Act, 2013, the
Central Government may, for the purpose of providing speedy trial of offences
punishable under this Act with imprisonment of two years or more, by notification,
establish or designate as many Special Courts as may be necessary.
Provided that all other offences shall be tried, as the case may be, by a Metropolitan
Magistrate or a Judicial Magistrate of the First Class having jurisdiction to try any
offence under this Act or under any previous company law.
Appointment of judge: A Special Court shall consist of a single judge who shall be
appointed by the Central Government with the concurrence of the Chief Justice of
the High Court within whose jurisdiction the judge to be appointed is working. A
person shall not be qualified for appointment as a judge of a Special Court unless he
is, immediately before such appointment, holding office of a Sessions Judge or an
Additional Sessions Judge.
Since in the given case, Mr. A who is a judicial magistrate in a lower court, was
appointed to hold the office of the special court for the speedy disposal of the
pending cases under the Act. As per the above provision, person shall be qualified for
appointment as a judge of a Special Court if he, immediately before such
appointment, holding office of a Sessions Judge or an Additional Sessions Judge.
Here Mr. A. was not complying with the eligibility criteria, so his appointment as a
judge of special court is not tenable.
(c) (i) Types of Penalties

There are five types of penalties that have been contemplated under the
Companies Act, 2013. They are:
(1) fine only
(2) Imprisonment or fine
(3) Imprisonment or fine or with both

(4) Imprisonment and fine and
(5) Imprisonment only
Of the above, the offences referred to in (1) to (3) are compoundable and
others are not compoundable.
(ii) Preservation of Books and Papers of Amalgamated Companies (Section 239)
As per Section 239, the books and papers of a company which has been
amalgamated with, or whose share have been acquired by, another company
under this Chapter shall not be disposed of without the prior permission of the
Central Government and before granting such permission, that Government may
appoint a person examine the books and papers or any of them for the purpose
of ascertaining whether they contain any evidence of the commission of art
offence in connection with the promotion or formation, or the management of
the affairs of the transferor company or its amalgamation or the acquisition of its
shares.
5. (a) List out the main features of a qualified and independent audit committee to be set
up under SEBI (listing obligations and disclosure Requirements) Regulations, 2015. 5
(b) Upon an enquiry made by the Competition Commission of India it was found that
Huge Limited is enjoying dominant position in the market and there is every possibility
that the company may abuse its dominant position. In order to overcome such a
possible situation, the Competition Commission of India wants to order for division of
Huge Limited. Referring to the provisions of the Competition Act, 2002, describe the
matters which may be provided in the said order. 5
(c) (i) A group of shareholders consisting of 25 members decide to file a petition before
the Tribunal for relief against oppression and mismanagement by the Board of
Directors of M/s Fly By Night Operators Ltd. The company has a total of 300 members
and the group of 25 members holds one-tenth of the total paid-up share capital
accounting for one-fifteenth of the issued share capital. The main grievance of the
group is that due to mismanagement by the board of directors, the company is
incurring losses and the company has not declared any dividend even when
profits were available in the past years for declaration of dividend. In the light of
the provisions of the Companies Act, 2013, advise the group of shareholders
regarding the success of (I) getting the petition admitted and (II) obtaining relief
from the Tribunal.
(ii) Mr. Arnab, one of the Directors of Aim Insurance Company Limited had taken some
life insurance policies from the company. He, now, wants to avail a temporary loan
from the company. The company refused to grant such loan on the ground that
there is a prohibition in this regard. Mr. Arnab, approached you, now, about the
matter. Advise him with reference to the Insurance Laws Amendment Act, 2015 as
well as Section 185 of the Companies Act, 2013, whether such loan can be obtained
by him. 3+3=6
Answer:
5. (a) The main features of a qualified and independent audit committee to be set up
under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 are as
follows:
1. The audit committee shall have minimum three directors as members. Two-thirds
of the members of audit committee shall be independent directors;
2. All members of audit committee shall be financially literate and at least one
member shall have accounting or related financial management expertise;
Explanation (I): The term "financially literate" means the ability to read and
understand basic financial statements i.e. balance sheet, profit and loss account,
and statement of cash flows.
Explanation (ii): A member will be considered to have accounting or related

financial management expertise if he or she possesses experience in finance or
accounting, or requisite professional certification in accounting, or any other
comparable experience or background which results in the individual's financial
sophistication, including being or having been a chief executive officer, chief
financial officer or other senior officer with financial oversight responsibilities.
3. The Chairperson of the Audit Committee shall be an independent director;
4. The Chairperson of the Audit Committee shall be present at Annual General

Meeting to answer shareholder queries;
5. The Audit Committee at its discretion shall invite the finance director or the head
of the finance function, head of internal audit and a representative of the
statutory auditor and any other such executives to be present at the meetings of
the committee; provided that occasionally, the Audit Committee may meet
without the presence of any executives of the listed entity.;
6. The Company Secretary shall act as the secretary to the committee.
(b) According to section 28 of the Competition Act, 2002, the Commission, may,
notwithstanding anything contained in any other law for the time being in force, by
order in writing, direct division of an enterprise enjoying dominant position to ensure
that such enterprise does not abuse its dominant position. The order may provide for
ail or any of the following matters, namely:—
(i) the transfer or vesting of property, rights, liabilities or obligations;

(ii) the adjustment of contracts either by discharge or reduction of any liability or
obligation or otherwise;
(iii) the creation, allotment, surrender or cancellation of any shares, stocks or
securities;
(iv) the formation or winding up of an enterprise or the amendment of the
memorandum of association or articles of association or any other instruments
regulating the business of any enterprise;
(v) the extent to which, and the circumstances in which, provisions of the order
affecting an enterprise may be altered by the enterprise and the registration
thereof;
(vi) any other matter which may be necessary to give effect to the division of the
enterprise.
(vii) The payment of compensation to any person who suffered any loss due to
dominant position of such enterprise.
(c) (i) Section 244 of the Companies Act, 2013 provides the right to apply to the Tribunal
for relief against oppression and mis-management. This right is available only
when the petitioners hold the prescribed limit of shares as indicated below:
(i) In the case of company having a share capital, not less than 100 members of
the Company or not less than one tenth of the total number of its members
whichever is less or any member or members holding not less than one tenth
of the issued share capital of the company, provided that the applicant(s)
have paid all calls and other dues on the shares.
(ii) In the case of company not having share capital, not less than one-fifth of the
total number of its members.
Since the group of shareholders do not number 100 or hold 1/10th of the issued
share capital or constitute 1/10th of the total number of members, they have no
right to approach the Tribunal for relief.
However, the Tribunal may, on an application made to it waive all or any of the
requirements specified in (i) or (ii) so as to enable the members to apply under
section 241.
As regards obtaining relief from Tribunal, continuous losses cannot, by itself, be

regarded as oppression (Ashok Betelnut Co. P. Ltd. vs. M.K. Chandrakanth).
Similarly, failure to declare dividends or payment of low dividends also does not
amount to oppression. (Thomas Veddon V.J. (v) Kuttanad Robber Co. Ltd).
Thus the shareholders may not succeed in getting any relief from Tribunal.
(ii) Section 29 of the Insurance Act, 1938 as amended by the Insurance Laws
(Amendment) Act, 2015 provides for the Prohibition of loans. According to this
section, no Insurer shall grant loans or temporary advances either on
hypothecation of property or on personal security or otherwise, except loans on

life insurance policies Issued by him within their surrender value, to any director,
manager, actuary, auditor or officer of the insurer, If a company or to any other
company or firm in which any such director, manager, actuary or officer holds
the position of a director, manager, actuary, officer or partner.
The provisions of section 185 of the Companies Act, 2013 shall not apply to a loan
granted to a director of an insurer being a company, if the loan is one granted
on the security of a policy on which the insurer bears the risk and the policy was
Issued to the director on his own life, and the loan is within the surrender value of
the policy.
Accordingly such loan can be obtained by the Mr. Arnab, director of Aim
Insurance Company Limited.
6. (a) Popular Limited defaulted in the repayment of term loan taken from a Bank against
security created as a first charge on some of its assets. The Bank issued notice pursuant
to Section 13 of the SARFAESI Act, 2002 to the Company to discharge its liabilities within a
period of 60 days from the date of the notice. The company failed to discharge its
liabilities within the time limit specified. Identify and explain the measures to be taken
by the Bank to enforce its security interest under the said Act. 4
(b) Ms. Ashima, daughter of Mr. Mittal (an exporter), is residing in Australia since long. She
wants to buy a flat in Australia. Since she is unmarried, she wants to make her father Mr.
Mittal a joint holder in that flat, for which entire proceeds are to be paid by her.
(i) State the provisions of FEMA governing such type of transaction.
(ii) On Applying the relevant provisions, can Mr. Mittal join his daughter in acquiring
such a flat in Australia? 4
(c) (i) State the manner of initiation of corporate insolvency resolution process by
financial creditor under the Insolvency and Bankruptcy Code, 2016.
(ii) State the qualification for appointment as Presiding Officer or member of
securities Appellant Tribunal (Section 15M). 5+3=8
Answer:
6. (a) Sub-section (4) of section 13 of SARFAESI Act, 2002, provides that if the borrower fails
to discharge his liability in full within the 60 days, the secured creditor may take
recourse to one or more of the following measures to recover his secured debt:
(i) take possession of the secured assets of the borrower including the right to
transfer by way of lease, assignment or sale for realising the secured asset;
(ii) take over the management of the business of the borrower including the right to
transfer by way of lease, assignment or sale for realising the secured asset:
Provided that the right to transfer by way of lease, assignment or sale shall be
exercised only where the substantial part of the business of the borrower is held as
security for the debt:
Provided further that where the management of whole of the business or part of
the business is severable, the secured creditor shall take over the management of
such business of the borrower which is relatable to the security for the debt;
(iii) appoint any person (hereafter referred to as the manager), to manage the
secured assets the possession of which has been taken over by the secured
creditor;
(iv) require at any time by notice in writing, any person who has acquired any of the
secured assets from the borrower and from whom any money is due or may
become due to the borrower, to pay the secured creditor, so much of the money
as is sufficient to pay the secured debt.
In the instant case, the Bank may take the above mentioned procedure to enforce
its security interest in case Popular Limited has failed to discharge its liabilities within
the time limit specified.
(b) (i) The provisions governing the acquisition and transfer of immovable property
outside India.
(1) A person resident in India may acquire immovable property outside India:
(a) By way of gift or inheritance from a person referred to in sub-section (4) of
Section 6 of the FEMA or referred to in clause (b) of regulation 4 acquired
by a person resident in India on or before 8 th July, 1947 and continued to
be held by him with the permission of Reserve Bank.
(b) by way of purchase out of foreign exchange held in Resident Foreign
Currency (RFC) account maintained in accordance with the foreign
exchange management (Foreign Currency accounts by a person resident
in India) Regulations 2015,
(c) Jointly with a relative who is a person resident outside India, provided
there is no outflow of funds from India.
(2) A person resident in India may acquire immovable property outside India, by
way of Inheritance or gift from a person resident in India who has acquired
such property in accordance with the foreign exchange provision in force at
the time of such acquisition.
(3) A Company incorporated in India having overseas offices, may acquire

Immovable property outside India for its business and for residential purposes
of its staff, in accordance with the direction issued by the Reserve Bank of
India from time to time.
(ii) In the light of above discussions in 1(c), it is quite clear that Mr. Mittal, a resident in
India, can join his daughter who is a resident outside India, in acquiring a flat in
Australia.
(c) (i) Initiation of corporate insolvency resolution process by financial creditor
Section 7 of Insolvency and Bankruptcy Code deals with initiation of corporate

insolvency resolution process by a financial creditor. The process can be
explained as under:
(1) Filing of application before the Adjudicating Authority for initiating corporate
insolvency resolution process
A financial creditor either by itself or jointly with other financial creditors may
file an application for initiating corporate insolvency resolution process
against a corporate debtor before the Adjudicating Authority when a default
has occurred.
For this purpose, a default includes a default in respect of a financial debt
owed not only to the applicant financial creditor but to any other financial
creditor of the corporate debtor.
(2) Form and manner of making application
The application shall be in such form and manner and accompanied with
such fee as may be prescribed.
(3) Enclosures to application
Following documents and information shall be furnished along with the

application:
(a) Record of the default recorded with the information utility or such other
record or evidence of default as may be specified.
(b) The name of the resolution professional proposed to act as an interim
resolution professional.
(c) Any other information as may be specified by the Board.
(4) Duty of Adjudicating Authority to ascertain the existence of a default
The Adjudicating Authority shall, within 14 days of the receipt of the

application, ascertain the existence of a default from the records of an
information utility or on the basis of other evidence furnished by the financial
creditor.
(5) Admission of application by the Adjudicating Authority
The Adjudicating Authority may, by order, admit such application, if it is

satisfied that -
(a) a default has occurred;
(b) the application for initiating corporate insolvency resolution process is
complete; and
(c) no disciplinary proceedings are pending against the proposed resolution

professional.
(6) Rejection of application by the Adjudicating Authority
The Adjudicating Authority may, by order, reject such application, if it is

satisfied that -
(a) default has not occurred; or
(b) the application for initiating corporate insolvency resolution process is
incomplete; or
(c) any disciplinary proceeding is pending against the proposed resolution
professional.
Before rejecting the application, the Adjudicating Authority shall give a notice
to the applicant to rectify, within 7 days, the defect in his application.
(7) Commencement of corporate insolvency resolution process
The corporate insolvency resolution process shall commence from the date
of admission of the application by the Adjudicating Authority.
(ii) Qualification for appointment as presiding officer or member of Securities

Appellant Tribunal (Section 15M) - A person, shall not be qualified for appointment
as the Presiding Officer or a Judicial Member or a Technical Member of the
Securities Appellate Tribunal, unless he — (a) is, or has been, a Judge of the
Supreme Court or a Chief Justice of a High Court or a Judge of High Court for at
least seven years, in the case of the Presiding Officer; and (b) is, or has been, a
Judge of High Court for at least five years, in the case of a Judicial Member; or (c)
in the case of a Technical Member— (i) is, or has been, a Secretary or an
Additional Secretary in the Ministry or Department of the Central Government or
any equivalent post in the Central Government or a State Government; or (ii) is a
person of proven ability, integrity and standing having special knowledge and
professional experience, of not less than fifteen years, in financial sector including
securities market or pension funds or commodity derivatives or insurance.
7. (a) Vijay, a director, resigns after giving due notice to the company and he forwards a
copy of resignation in e-form DIR-11 to the Registrar of Companies (RoC) within the
prescribed time. What would be the status of Vijay if the company fails to intimate
about the resignation of Vijay to RoC? 4
(b) Sohan Lal, a farmer, was found involved in embezzlement of opium cultivated by him.
State the punishment that can be awarded to him under the Prevention of Money
Laundering Act, 2002. 3
(c) (i) Explain the concept of Corporate Social Responsibility and its meaning to different
people.
(ii) State the causes and methods adopted for generation of Black Money. 6+3=9
Answer:
7. (a) Resignation of Director (Section 168 of the Companies Act, 2013)
A director may resign from his office by giving a notice in writing to the company. The
Board shall on receipt of such notice take note of the same. The company shall
within 30 days from the date of receipt of notice of resignation from a director,
intimate the Registrar in Form DIR -12 and post the information on its website, if any.
Such director shall also forward a copy of his resignation along with detailed reasons
for the resignation to the Registrar within 30 days from the date of resignation in FORM
DIR-11 along with the prescribed fee. The resignation of a director shall take effect
from the date on which the notice is received by the company or the date, if any,
specified by the director in the notice, whichever is later.
In the present case, Vijay, a director resigns after giving due notice to the company
and he forwards a copy of resignation in e-form DIR-11 to the RoC within the
prescribed time.
If the company fails to intimate about the resignation of Vijay to RoC, even then the
resignation of Vijay shall take effect from the date on which the notice is received by
the company or the date, if any, specified by Vijay in the notice, whichever is later.
(b) Section 4 of the Prevention of Money Laundering Act, 2002 provides for the
punishment for Money-Laundering. Whoever commits the offence of money-
laundering shall be punishable with rigorous imprisonment for a term which shall not
be less than 3 years but which may extend to 7 years and shall also be liable to fine.
But where the proceeds of crime involved in money-laundering relate to any offence
specified under paragraph 2 of, Part A of the Schedule, the maximum punishment
may extend to 10 years instead of 7 years.
Paragraph 2 of Part A of Schedule to the Prevention of Money Laundering Act, 2002,

covers Offences under the Narcotic Drugs And Psychotropic Substances Act, 1985
Whereby, embezzlement of opium by cultivator (section 19) is covered under
paragraph 2 of Part A.
In the present case, Sohan Lai, a farmer, who was involved in embezzlement of opium
cultivated by him shall be liable for the rigorous imprisonment for a term which may
extend to 10 years and shall also be liable to fine.
(c) (i) Corporate Social Responsibility (CSR): It is a concept that organizations, have an
obligation to consider the interests of customers, employees, shareholders,
communities, and ecological considerations in all aspects of their operations. This
obligation is seen to extend beyond their statutory obligation to comply with
legislation. CSR is closely linked with the principles of Sustainable Development,
which argues that enterprises should make decisions based not only on financial
factors such as profits or dividends, but also based on the immediate and long-
term social and environmental consequences of their activities, especially taking
into consideration the needs of future generations. It is an integrated
combination of policies, programs, education, and practices which extend
throughout a corporation's operations and into the communities in which they
operate, about how companies voluntarily manage the business processes to
produce an overall positive impact on society.
CSR can mean different things to different people:

 for an employee it can mean fair wages, no discrimination, acceptable
working conditions etc.
 for a shareholder it can mean making responsible and transparent decisions
regarding the use of capital.
 for suppliers it can mean receiving payment on time.
 for customers it can mean delivery on time, etc.
 for local communities and authorities it can mean taking measures to protect
the environment from pollution.
 for non-governmental organisations and pressure groups it can mean
disclosing business practices and performance on issues ranging from energy
conservation and global warming to human rights and animal rights, from
protection of the rainforests and endangered species to child and forced
labour, etc.
For a company, however, it can simply be seen as responding to the needs and
concerns of people who can influence the success of the company and/or
whom the company can Impact through its business activities, processes and
products.
(ii) Causes and Methods Adopted for Generation of Black Money

(a) Suppression of receipts, inflation of expenditure, etc.
(b) Land and real estate transactions
(c) Corruption
(d) Financial market transactions
(e) Bullion and jewellery transactions
(f) Cash economy and use of counterfeit currency
(g) NPO Sector
(h) Participatory Notes
(i) Trade Based Money Laundering
8. Write short notes on any four of the following: 4x4=16

(a) Types of listing
(b) Guidance on implementation of principles and Core Elements. (National Voluntary
Guidelines 2011)
(c) Disadvantages of the family Businesses over non-family Businesses
(d) Applicability of Insolvency and Bankruptcy Code 2016

(e) Activities not to be considered as CSR Activities
Answer:
8. (a) Types of Listing
Listing of securities falls under 5 groups:

(1) Initial listing: If the shares or securities are to be fisted for the first time by a
company on a stock exchange is called initial listing.
(2) Listing for Public Issue: When a company whose shares are listed on a stock
exchange comes out with a public issue of securities, it has to fist such issue with
the stock exchange.
(3) Listing for Rights Issue: When companies whose securities are listed on the stock
exchange issue further securities to existing share holders on rights basis, it has to
list such rights issues on the concerned stock exchange.
(4) Listing of Bonus Shares: Companies issuing shares as a result of capitalization of
profits through bonus issue shall fist such issues also on the concerned stock
exchange.
(5) Listing for merger or amalgamation: When new shares are issued by an
amalgamated company to the share holders of the amalgamating company,
such shares are also required to be listed on the concerned stock exchange.
(b) Guidance on Implementation of Principles and Core Elements
Successful implementation of the Principles and Core elements require that all of
them need to be integrated and embedded in the core business processes of an
enterprise. This requires, specifically that the following actions are taken:
(a) Leadership: The Chairman/CEO/Owner/Manager should play a proactive role in

convincing the board/Top Management and staff within the business that
adopting these principles is crucial-for success. The board and senior
management need to ensure that the principles are fully understood across the
organization and comprehensively executed.
(b) Integration: These principles and core elements must be embedded in the
Business policies and strategies emanating from the core business purpose of. the
organization. For this to happen, these must align with each businesses internal
values and/or must provide clear business benefits.
(c) Engagement: Building strong relationships and engaging with stakeholders on a
consistent, continuous basis is crucial.
(d) Reporting: Implementation process includes disclosure by companies of their
impact on society an environment to their stakeholders.
(c) Disadvantages of the Family Businesses over Non-Family Businesses
(a) Staff recruitment: External talent can be reluctant to join the family businesses as
they would not enjoy the same freedom that the other businesses offer.
(b) Raising funds for growth: Access to capital is required to grow and evolve.
However, it is difficult to raise the required funds for the family businesses than
non-family businesses.
(c) Family conflicts: Conflict among the family members is the major setback for the
family businesses.
(d) Ownership vs. Management: Separating the ownership from the management
and reaching a consensus on the roles of family members in the business are two
important issues for the family businesses to address.
(d) Applicability of Insolvency and Bankruptcy Code, 2016
The provisions of Insolvency and Bankruptcy Code, 2016 applies to the following, in
relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the
case may be (Section 2 of Insolvency and Bankruptcy Code, 2016).
(a) Companies incorporated under Companies Act

(b) Companies governed under special Act (so far as of Insolvency and Bankruptcy
Code, 2016 is consistent with those special Acts i.e. provisions of Special Act will
prevail over of Insolvency and Bankruptcy Code, 2016)
(c) Limited Liability Partnership (LLP)
(d) Other body corporates as may be notified by Central Government
(e) Partnership firms and individuals.
(e) Activities not to be considered as CSR Activities: The Companies (CSR Policy) Rules,
2014 provides for some activities which are not considered as CSR activities:
(1) The CSR projects or programs or activities undertaken outside India.

(2) the CSR projects or programs or activities that benefit only the employees of the
company and their families.
(3) Contribution of any amount directly or indirectly to any political party under
section 182 of the Act.
(4) Expenses incurred by companies for the fulfillment of any Act/Statute of
regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as
CSR expenditure under the Companies Act.
Suggested Answer_Syl16_Dec2018_Paper_13
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)

DECEMBER 2018
Paper- 13: CORPORATE LAWS & COMPLIANCE
Time Allowed: 3 Hours Full Marks :100
Answer Question No. 1 which is compulsory carrying 20 marks and answer
any five questions from Question No. 2 to Question No. 8
1. Answer all questions mentioned below. Mark the correct answer (only indicate A or B or C
or D) and give justification.
2 ×10=20
(a) Multiple Choice Questions:
(i) At a general meeting of a company a matter was to be passed by a special
resolution. Out of forty members of the company, twenty voted in favour of the
resolution, five voted against it and five votes were cancelled. The remaining ten
members abstained from voting. The chairman declared resolution as
(A) Passed
(B) Invalid
(C) Cancelled
(D) Accepted
(ii) Payment of Commission on exports made towards equity investment in wholly owned
subsidiary abroad of an Indian Company is
(A) Permissible
(B) Prohibited
(C) Forwarded
(D) Restricted
(iii) All Board members and senior management personnel should affirm compliance
with the Code on annual basis. The annual report of the Company shall contain a
declaration to this effect signed by the
(A) Auditor.
(B) Director.
(C) Managing Director.
(D) CEO.
(iv) The quality of something which enables one to understand the truth easily. In this
context of Corporate Governance, it implies an accurate, adequate and timely
disclosure of relevant information about the operating result etc., of the Corporate
enterprise to the stakeholders. This principle is known as
(A) Transparency
(B) Accountability
(C) Independence
(D) Clarity
(v) SEBI has to be responsive to the needs of the three groups which constitute the
Market. Which of the following does not constitute the Market?
(A) The issuers of securities
(B) The investors
(C) The brokers
(D) The market intermediaries
(vi) Which of the following listing provides arbitrage opportunities to the investors, whereby they
can make profit based on the difference in the prices prevailing in the said
exchanges?
(A) Multiple listing
(B) Initial listing
(C) Listing for right issue
(D) Listing for public issue
(vii) Which of the following is not the objective of Competition Act, 2002?
(A) To prevent practices having adverse effect on competition.
(B) To prevent competition in market
(C) To protect the interest of the consumers
(D) To ensure freedom of trade carried on by the other participant in marketing
India and for matter connected there with or incidental thereto.
(viii)An association of producers, sellers or distributors, traders or service providers who, by
agreement amongst themselves, limit, control or attempt to control the production,
distribution, sale or price of or trade in goods or provision of services is known as
(A) Acquisition
(B) Agreement
(C) Cartel
(D) Pool
(ix) An authorised dealer, money changer, offshore banking or any other persons for the time
being authorized to deal in foreign exchange or foreign securities is known as
(A) Authorised banker
(B) Authorised dealer
(C) Authorised person
(D) Authorised money changer
(x) The process of money laundering generally involves three stages. Which is the second
stage?
(A) Placement
(B) Layering
(C) Integration
(D) Contribution
Answer: 1(a)
(i) (a) Section 114(2). For a valid special resolution, votes cast in favour should be at
least three times the votes cast against the resolution, if any. Abstentions are not to
be taken into account.
Thus, 20 votes being in favour and only 5 votes against the resolution, the resolution
is validity passed.
(ii) (b) According to the rules, drawal of foreign exchange for certain transactions are
prohibited. In respect of certain transactions drawal of foreign exchange is
permissible with the prior approval of Central Government. Payment of
Commission on exports made towards equity investment in wholly owned subsidiary
abroad of an Indian Company is prohibited.
(iii) (d) All Board members and senior management personnel shall affirm Compliance
with the Code on annual basis. The annual Report of the Company shall contain a
declaration to this effect signed by the CEO.
(iv) (a) The quality of something which enables one to understand the truth easily. In
this context of Corporate Governance, it implies an accurate adequate and timely
disclosure of relevant information about the operating result etc. of the Corporate
enterprise to the stakeholders.
(v) (c) In 1995, the SEBI was given additional statutory power by the Government of
India through an amendment to the SEBI Act, 1992 SEBI has to be responsive to the
needs of the three groups which constitute issuers of securities, investors and the
market intermediaries.
(vi) (a) Multiple listing provides arbitrage opportunities to the investors, whereby they
can make profit based on the difference in the prices prevailing in the said
exchanges.
(vii) (b) Keeping in view the economic development of the country, the Competition
Act, 2002 was laid down to provide for an establishment of a commission not to
seek the objective of preventing competition in market.
(viii) (c) Cartel is an association of producers, sellers or distributors, traders or service

providers who, by agreement amongst themselves, limit control or attempt to
control the production, distribution, sale or price of or trade in goods or provision of
services.
(ix) (c) Authorised person is an authorized dealer, money changer, off shore banking
or any other persons for the time being authorized to deal in foreign exchange or
foreign securities.
(x) (b) Layering is the second stage of money laundering
(2)(a) (i) The common seal is a seal used by the Corporation as the symbol of its
incorporation and also a statutory requirement for a company. Comment
(ii) M/s. Kaberi Mutual Benefits Nidhi Ltd. is incorporated as a Nidhi Company
under the Companies Act, 2013. The Board of Directors of the Company have
decided to appoint Mr. Raja (a minor) as a member of the company. Referring
to the applicable provisions of the Companies Act, 2013 read with rules
thereunder, advise them.
(iii) Is it obligatory for a Producer Company to have internal audit of its accounts for
financial year 2016-17?
(iv) A company incorporated outside India having shareholders who are all Indian
citizens. Examine and state whether the above company can be considered
as „Foreign Company‟ under the Companies Act, 2013. 2+2+2+2=8
(b) BET Ltd. incurred loss in business up to current quarter of financial year 2017-18. The
company has declared dividend at the rate of 11%, 16% and 18% respectively in
the immediate preceding three years. In spite of the loss, the Board of Directors of
the company have decided to declare interim dividend @ 15% for the current
financial year. Examine the decision of BET Ltd. stating the provisions of declaration
of interim dividend under the Companies Act, 2013. 4
(c) The Board of Directors of Best Consultants Limited, registered in Kolkata, proposes to
hold the next board meeting in the month of May, 2017. They seek your advice in
respect of the following matters :
(i) Can the board meeting be held in Chennai, when all the Directors of the
Company reside at Kolkata?
(ii) Is it necessary that the notice of the board meeting should specify the nature
of business to be transacted?
Advice with reference to the relevant provisions of the Companies Act, 2013
2+2=4
Answer :2(a)
(i) The common seal acts as the official signature of the company. Prior to the
companies (amendment) Act, 2015, the common seal is a seal used by
corporation as the symbol of its incorporation and also a statutory requirement for
a company. As a departure from this concept, the companies (amendment) Act,
2015 has deleted the requirement of having common seal compulsorily.
After this Amendment, in case a company does not have a common seal, the
Authorisation shall be made by two directors or by a director and a company
secretary, wherever the company has appointed a company secretary.
(ii) According to rules 8(3) of Nidhi rules, 2014, a minor shall not be admitted as a
member of Nidhi. However, deposit may be accepted in the name of a minor, if
they are made by the natural or legal guardian who is a member of Nidhi.
Hence the Board of Directors of the company cannot appoint Mr. Raja (a minor)
as a member of the company.
(iii) Yes as per section 581ZF of the companies Act, 1956, every producer company is
required to have internal audit of its accounts carried out by a chartered
accountant at such intervals and in such manner as may be specified in the
articles.
(iv) A company incorporated outside India, will not be deemed to be a foreign

company even though all the shareholders are Indian citizens, unless it has a
place of business in India.
Answer : 2(b)
Interim Dividend: According to section 123(3) of the Companies Act, 2013, the Board of
Directors of a company may declare interim dividend during any financial year out of the
surplus in the profit and loss account and out of profits of the financial year in which such
interim dividend is sought to be declared.
However, in case the company has incurred loss during the current financial year up to
the end of the quarter immediately preceding the date of declaration of interim
dividend, such interim dividend shall not be declared at a rate higher than the average
dividends declared by the company during the immediately preceding three financial
years.
In the instant case, interim dividend by BET Ltd. shall not be declared at a rate higher than
the average dividends declared by the company during the immediately preceding
three financial years [i.e. (11+16+18)/3=45/3=15%]. Therefore, decision of Board of
Directors to declare 15% of the interim dividend for the current financial year is tenable.
Answer : 2(c)
(i) There is no provision in the Companies Act, 2013 under which the board meetings
must be held at any particular place. The Companies Act lays down the
provisions for holding meetings by video conferencing, sending notices,
procedures at the meeting etc. Therefore, there is no difficulty in holding the
board meeting at Chennai even if all the directors of the company reside at
Kolkata and the registered office is situated at Kolkata provided that the
requirements regarding the holding of a valid board meeting and the other
provisions relating to the signing of register of contracts, taking roll calls, etc. are
complied with.
(ii) Section 173(3) of the Companies act, 2013 provides for the giving of notice of
every board meeting of not less than seven days to every director of the
company. There is no provision in the Act laying down the contents of the notice.
Hence, it may be construed that notice may be interpreted as intimation of the
meeting and does not necessarily include the sending of the Agenda of the
meeting. However, considering the importance of Board Meetings and the
responsibilities placed on the Directors for decisions taken at the meetings, it is
inevitable for them to be properly prepared and informed about the items to be
discussed at the Board Meetings. As a matter of good secretarial practice, the
notice should include full details and particulars of the business to be transacted
at the Board Meetings.
The articles of association of the company may make it mandatory to do so in

almost all cases.
3.(a)(i) Mr. Balu is a CEO in a public company. State whether the limits on managerial
remuneration under section 197 of the Companies Act, 2013 and schedule V apply
to Mr. Balu.
(ii) Mr. X is a Whole Time Director (WTD) in a Super Ltd. He is also Whole Time Director
(WTD) in its subsidiary company. Discuss the validity of Mr. X as WTD in its
subsidiary company. 2+2=4
(b) Mr. Faithful is an auditor of Daga Ltd. While auditing the accounts of the Daga Ltd.
for 2016- 2017, he finds manipulation of fund around Rs. 2 crore committed by the
officers of the company against the Daga Ltd. Examine in the light of the
Companies Act, 2013 the way frauds are required to be reported by Mr. Faithful
and the duty of the Daga Ltd. in relation to reporting of such frauds. 7
(c) Comment with reference to the provisions of the Companies Act, 2013 in respect of
the following:-
(i) Mr. P who is not qualified to be appointed as an independent director is
appointed by the Board of Directors of XYZ Company Limited, for an
independent director, as an alternate director.
(ii) On the request of bank providing financial assistance, the Board of Directors of
PQR Limited decides to appoint on its Board Mr. Peter, as nominee director.
Articles of Association of the Company do not confer upon the Board of Director
any such power. Further, there is no agreement between the company and the
bank for any such nomination. 2+3=5
Answer : 3(a)
(i) Section 197 applies with regard to remuneration of directors including MD/WTD
and Manager. Schedule V provides conditions with regard to appointment and
remuneration of MD/WTD and Manager. Therefore, the provisions related to the
managerial remuneration are not applicable on all KMP‟s i.e. to CEO, CFO or CS
but they are applicable only to MD/WTD and Manager.
So, Section 197 & Schedule V, shall not apply to Mr. Financer.
(ii) As per section 203(2) of the Companies Act, 2013, every whole-time key
managerial personnel of a company shall be appointed by means of a resolution
of the Board containing the terms and conditions of the appointment including
the remuneration.
A whole-time key managerial personnel shall not hold office in more than one
company at the same time except in its subsidiary company [Section 203(3)]. So
accordingly. Mr. X can validly hold the position of Whole time Director in the
subsidiary of Super Ltd.
Answer :3(b)
Reporting of frauds by auditor and other matters : As per section 139 read with rule 13 of
the Companies (Audit and Auditors) Rules, 2014, if an auditor of a company, in the course
of the performance of his duties as auditor, has reason to believe that an offence of
fraud, which involves or is expected to involve individually an amount of rupees one crore
or above, is being or has been committed against the company by its officer or
employees, the auditor shall report the matter to the Central Government.
The auditor shall report the matter to the Central Government as under:-
(i) The auditor shall report the matter to the Board or the Audit Committee, as the case
may be, immediately but not later than two days of his knowledge of the fraud,
seeking their reply or observations within forty-five days;
(ii) On receipt of such reply or observations, the auditor shall forward his report and the
reply or observations of the Board or the Audit Committee along with his comments
(on such reply or observations of the Board or the Audit Committee) to the Central
Government within fifteen days from the date of receipt of such reply or
observations;
(iii) In case the auditor fails to get any reply or observations from the board or the Audit
Committee within the stipulated period of forty-five days, he shall forward his report
to the Central Government along with a note containing the details of his report that
was earlier forwarded to the Board or the Audit Committee for which he has not
received any reply or observations ;
(iv) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed
cover by Registered Post with Acknowledgement Due or by Speed Post followed by
an email in confirmation of the same;
(v) The report shall be on the letter-head of the auditor containing postal address, email
address and contact telephone number or mobile number and be signed by the
auditor with his seal and shall indicate his Membership Number; and
(vi) The report shall be in the form of a statement as specified in Form ADT-4.
Details of each of the fraud reported to the Audit Committee or the Board during the year
shall be disclosed in the Board‟s Report by the company :-
(a) Nature of Fraud with description;
(b) Approximate Amount involved ;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
Answer : (c)
(i) According to first proviso to section 161(2) of the Companies Act, 2013, no person
shall be appointed as an alternate director for an independent director unless he is
qualified to be appointed as an independent director under the provisions of this
Act.
In the present case, Mr. P who is not qualified to be appointed as an independent
director is appointed by the Board of Directors of XYZ Company Limited; for an
independent director, as an alternate director. Thus, the said appointment is not
valid.
(ii) According to section 161(3) of the Companies Act, 2013, the Board may appoint any
person as a director nominated by any institution in pursuance of the provisions of
any law for the time being in force or of any agreement or by the Central
Government or the State Government by virtue of its shareholding in a Government
company, subject to the articles of a company.
In the present case, on the request of bank providing financial assistance the Board
of Directors of PQR Limited decides to appoint on its Board Mr. Peter, as nominee
director. Articles of Association of the company do not confer upon the Board of
Directors any such power and further there is no agreement between the company
and the bank. Thus, the appointment of Mr. Peter as nominee director is not valid as
Articles do not confer upon the Board of Directors any such power.
4.(a) ABC Ltd. and DEF Ltd. are wholly owned by Government of West Bengal. As a
policy matter, the Government issued administrative orders for merging DEF Ltd.
with ABC Ltd. in the public interest. State the authority with whom the application
for merger is required to be filed under the provisions of the Companies Act, 2013.
4
(b) Excel Limited is a listed company with a turnover of Rs. 60crores in Financial Year
2016-2017. The Company appoints Ms. R as the Women Director on 1st March,
2017. Ms. R is already a Director in twelve companies including ten Public
Companies. State briefly whether the appointment of Ms. R in Excel Limited is valid
as per provision of the Companies Act, 2013. 4
(c) An Audit Committee of a Public Limited Company constituted under section 177 of
the Companies Act, 2013 submitted its report of its recommendation to the Board.
The Board, however, did not accept the recommendations. In the light of the
situation, analyze whether ;
(i) The Board is empowered not to accept the recommendations of the Audit
Committee.
(ii) If so, what alternative course of action, would be Board resort to ? 3+1=4
(d) State briefly the power of Tribunal in case Auditor acted in a Fraudulent Manner. 4
Answer : 4 (a)
Authority to whom the application for merger is to be madeAccording to Section 237 of
the Companies Act, 2013, where the Central Government is satisfied that it is essential in
the public interest that two or more companies should amalgamate, the Central
Government may, by order notified in the Official Gazette provide for the amalgamation
of those companies into a single company.
Thus, in the given situation of merger between two wholly owned Government companies
in public interest, there is no specific authority with whom the application for merger is
required as the Central Government shall by notification in the Official Gazette, will
provide for the amalgamation of the two said companies into a single company.
Answer: 4(b)
Number of directorships : As per section 165(1) of the Companies Act, 2013, no person
shall hold office as director, including any alternate directorship, in more than 20
companies at the same time.
Out of the limit of 20, the maximum number of public companies in which a person can
be appointed as a director shall not exceed 10. [Proviso to section 165(1)]
Private companies that is either holding or subsidiary company of a public company shall
be included in reckoning the limit of public companies in which a person can be
appointed as a director.
In the instant case, Ms. R was appointed as a women director on 1 st March, 2017 in Excel
Limited. She was already holding directorship in twelve companies including ten public
companies.
As Ms. R was already a director in ten public companies, her appointment in Excel
Limited is not valid as it will lead to her directorship in 11 public companies.
In this case, either she can choose between the companies in which she wishes to
continue to hold the office of director or resign her office as director in the other
remaining companies to maintain the limit of holding of directorship.
Answer : 4(c)
(i) As per Section 177(2) and (3) of the Companies Act, 2013 an audit committee must be
formed within a year of the commencement of the Act or within a year of the
incorporation of a company as the case may be, and will consist of at least 3 directors out
of which the independent directors shall constitute the majority.
Under section 177(8) the Board‟s Report which is laid before a general meeting of the
company under section 134(3) where the financial statements of the company are placed
before the members, must disclose the composition of the audit committee and also
where the Board has not accepted any recommendations of the audit Committee the
same shall be disclosed alongwith the reasons therefor. Therefore, the Board is
empowered not to accept the recommendations of the Audit Committee but only under
genuine circumstances and with legitimate reasons.
(ii) If the Board does not accept the recommendations of the Audit Committee, it shall
disclose the same in its report under section 134(3) placed before a general meeting of the
company.
Answer : 4(d)
Power of Tribunal in case Auditor acted in a Fraudulent Manner. As per sub-section (5) of
the section 140 of the Companies Act, 2013, the Tribunal either suomoto or on an
application made to it by the Central Government or by any person concerned, if it is
satisfied that the auditor of a company has, whether directly or indirectly, acted in a
fraudulent manner or abetted or colluded in any fraud by or in relation to, the company
or its directors or officers, it may, by order, direct the company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is
satisfied that any change of the auditor is required, it shall within fifteen days of receipt of
such application, make an order that he shall not function as an auditor and the Central
Government may appoint another auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final order has
been passed by the Tribunal under this section shall not be eligible to be appointed as
an auditor of any company for a period of five years from the date of passing of the
order and the auditor shall also be liable for action under section 447 of the said Act.
It is hereby clarified that the case of a firm, the liability shall be of the firm and that of
every partner or partners who acted in a fraudulent manner or abetted or colluded in
any fraud by, or in relation to the company or its director or officers.
5. (a) A group of members of XYZ Limited has filed a petition before the Tribunal alleging
various acts of oppression and mismanagement by the majority shareholders of the
company. The Petitioner group holds 12% of the issued share capital of the company.
During the pendency of the petition, some of the petitioner group holding about 5% of
the issued share capital of the company wish to disassociate themselves from the
petition and they along with the other majority shareholders have submitted before
the Tribunal that the petition may be dismissed on the ground of non-maintainability.
Examine their contention having regard to the provisions of the Companies Act,
2013. 4
(b) An officer of a company was allotted one room for two years in a guest house
owned by the Company at some other city where he used to stay while on tour. It
came to notice of the company that he had not vacated the said room after the
expiry of two years and is holding the unauthorized possession of that room and
has been permitting to stay outsiders in the said room, at a rent of Rs. 500 per day.
The record shows that he had permitted the outsider for 45 days and collected Rs.
22,500 and retained the said amount with him. As per the letter of allotment, there
was no such clause which can be invoked against him for making any recovery
on account of such wrongful occupation.
Analyse in the given situation, whether manager of the company can seek
recovery from the officer of the company under any of the provisions of his
employment or the Companies Act. 5
(c)(i) State briefly the factors to be considered by the Court while deciding the amount
of fine or imprisonment under section 446A of the Companies Act, 2013.
(ii) Asha Ltd., has made default in filing financial statements and annual returns for a
continuous period of 4 financial years ending on 31st March, 2017. The Registrar of
Companies having jurisdiction approached the Central Government to accord
sanction to present a petition to Tribunal (NCLT) for the winding up of the company
on the above ground under section 272 of the Companies Act, 2013.
Examine the validity of the RoC move, explaining the relevant provisions of the
Companies Act, 2013
4+3=7
Answer: 5(a)
The argument of the majority shareholders that the petition may be dismissed on
the ground of non-maintability is not correct. The proceedings shall continue
irrespective of withdrawal of consent by some petitioners. It has been held by the
Supreme Court in Rajmundhry Electric Corporation vs. V.NageswarRao, AIR (1956)
SC 213 that if some of the consenting members have subsequent to the
presentation of the petition withdraw their consent, it would not affect the right of
the applicant to proceed with the petition. Thus, the validity of the petition must
be judged on the facts as they were at the time of presentation. Neither the right
of the applicants to proceed with the petition nor the jurisdiction of Tribunal to
dispose it of on its merits can be affected by events happening subsequent to the
presentation of the petition.
Answer: 5(b)
Penalty for wrongful withholding of property : Section 452 of the Companies Act,
2013 provides for Penalty for wrongful withholding of property. According to the
section :
(1) If any officer or employee of a company –

(a) Wrongfully obtains possession of any property, including cash of the
company; or
(b) having any such property including cash in his possession, wrongfully
withholds it or knowingly applies it for the purposes other than those
expressed or directed in the articles and authorized by this Act, he shall,
on the complaint of the company or of any member or creditor or
contributory thereof, be punishable with fine which shall not be less than
1 lakh rupees but which may extend to 5 lakh rupees.
(2) The Court trying an offence may also order such officer or employee to
deliver up or refund, within a time to be fixed by it, any such property or cash
wrongfully obtained or wrongfully withheld or knowingly misapplied, the
benefits that have been derived from such property or cash or in default, to
undergo imprisonment for a term which may extend to 2 years.
Hence, as per the provisions of the Companies Act, 2013 and not giving any
emphasis on the terms of employment, the manager of the company can
recover possession of the room and the cash wrongfully obtained and the
benefits that have been derived from such property or cash.
Answer: 5(c)
(i) 446A. The court or the Special court, while deciding the amount of fine or
imprisonment under this Act, shall have due regard to the following factors, namely –
a) size of the Company;
b) nature of business carried on by the company;
c) injury to public interest;
d) nature of the default, and
e) repetition of the default
(ii) Validity of RoC‟s action

According to Section 271(d) of the Companies Act, 2013, a Company may, on a
petition under Section 272, be wound up by the Tribunal, if the Company has
made a default in filing with the Registrar its financial statements or annual returns
for immediately preceding five consecutive financial years.
In the instant case, the move by RoC to present a petition to Tribunal for the
winding up of Asha Ltd. is not valid as the Company has made default in filing
financial statements and annual returns for a continuous period of 4 financial
years ending on 31st March, 2017.
6.(a) State briefly the power of SEBI to levy monetary fines and penalties under SEBI Act, 1992.
4
(b) The Board of Directors of M/s. S.K. Limited, a banking company incorporated in India,
for the accounting year ended 31st March, 2018 has transferred 10% of its net profit
during the year to the Reserve Fund Account. A few shareholders of the company
have objected the above act of the Board on the ground that it is violative of the
provisions of the Banking Regulation Act, 1949. The Board of Directors of the
Company in their defense have stated that the company has received an order
dated 30th April, 2018 from the Central Government exempting the company from
the provisions of sub section (1) of section 17 of the Act. It is further informed that on
the date of the Central Government order i.e. 30.04.2018 the paid up capital of the
company was Rs. 200 crores and the amount standing in the Reserve Fund Account
and Share Premium Account was Rs. 100 crores and Rs. 75 crores respectively.
Decide whether the order of the Central Government exempting the company is
justified as per the provisions of the Banking Regulation Act, 1949.
4
(c) (i) All offences under the Companies Act, 2013 are non-cognizable. Comment.
(ii) What are the powers of the Central Government under the Companies Act, 2013
regarding to Appeal against acquittal ?
(iii) The Securities and Exchange Board of India issued an order against a stock
broker to redress the grievances of the investors within the stipulated time. The
stock broker failed to do so, which is an offence under the provisions of the
Securities Contracts (Regulation) Act, 1956.
Decide whether this offence can be compounded after institution of proceedings
against the stock broker.
(iv) Whether a person purchasing goods not for personal use, but for resale can be
considered as a „consumer‟ under the Competition Act, 2002.
2+2+2+2=8
Answer : 6(a)
Power of SEBI to levy monetary fines and penalties under SEBI Act, 1992 : SEBI Act, 1992
empowers SEBI to levy monetary fines and penalties on any person incurring a default
under the Act in the following cases :
(i) Failure to furnish any document, information, books, other documents, return or
report called for by the Board ;
(ii) Failure to maintain books of account and records ;
(iii) Failure by an intermediary to enter into an agreement with his client, redress
the grievances of investors;
(iv) Failure by a person sponsoring or carrying on any collective investment
scheme, including mutual funds, without obtaining certificate of registration ;
(v) Failure by a stock broker to issue contract notes in the form and manner
specified by the stock exchange, failure to deliver any security or failure to
make payment of the amount due to the investor, charging of excess
brokerage ;
(vi) Any person dealing, communicating, counseling on the basis of some price
sensitive information ;
(vii) Failure by a person to disclose the aggregate of his shareholding in a body
corporate before he acquires any shares of that body corporate and failure to
make a public announcement to acquire shares at a minimum price in case of
takeovers.
SEBI also has the power to suspend or cancel the certificate of registration of a stock-
broker, sub-broker, share transfer agent, banker to an issue, trustee of a trust deed,
registrar to an issue, merchant banker, underwriter, portfolio manager, investment
adviser and such other intermediary who may be associated with securities market,
This includes depository, depository participant, custodian of securities, foreign
institutional investor and credit rating agency also.
Answer :6(b)
Reserve Fund: According to Section 17 of the Banking Regulation Act, 1949, every
Banking Company incorporated in India must create a Reserve Fund and transfer a sum
equal to not less than 20% of its net profits. However, the Central Government is
empowered to exempt from this requirement on the recommendation of the RBI. Such
exemption will be allowed only :-
- When the amounts in the reserve fund and the share premium account are not less
than the paid-up capital of the banking company.
- When the Central Govt. feel that its paid-up capital and reserves are adequate to
safe guard the interest of the depositors.
If a banking company appropriates any sum from the Reserve fund or the share premium
account, it must be reported to RBI within 21 days explaining the circumstances leading
to such appropriation.
In the instant case, the total amount in the reserve fund and the share premium account
is Rs. 175 crores which is less than the paid-up capital of the banking company i.e. Rs. 200
crore.
In view of the above the transfer of 10% of its net profits to reserve fund is violative of the
provisions of the Banking Regulation Act, 1949. Moreover, the Order of the Central
Government exempting the company is not justified as per the provisions of the Banking
Regulation Act, 1949.
Answer : 6(c)
(i) As per section 439(1) of The Companies Act, 2013, every offence under the Companies
Act, 2013 except the offences referred to in section 212(6) shall be deemed to be
non-cognizable under the code of criminal procedure.
As per section 212(6), offence covered under section 447 of the Act shall be
cognizable. Hence the given statement in the question is not valid.
(ii) According to section 444 of The Companies Act, 2013, The Central Government may in
any case arising under this Act direct :-
a) Any Company Prosecutor or
b) Authorise any other person either by name or by virtue of his office, to present
an appeal from an order of acquittal passed by any court other than High
Court.
Appeal presented by such prosecutor or other person shall be deemed to
have been validly presented to the appellate court.
(iii) The offence can be compounded after institution of proceedings against the
stock broker as it is clearly stated under section 23N.
(iv) It is not necessary that a person must purchase the goods for personal use in order
to be considered as a “consumer” under Competition Act 2002. Even a person
purchasing goods for re-sale or for any commercial purpose will also be
considered as a “consumer” within the meaning of the section 2(f) of
Competition Act, 2002.
7.(a) Explain the main provisions of clause 49 of the listing agreement with the Stock
Exchanges regarding Corporate Governance. 4
(b) Discuss the National Voluntary Guidelines on “Business should respect the interests
of and be responsive towards all stakeholders, especially those who are
disadvantaged, vulnerable and marginalized.” 4
(c) (i) M/s. Toy Metal Limited had availed credit facilities from Bapi Bank Ltd. The
company made repayment of loan to some extent and not entirely and
accordingly, the bank took recourse under the provisions of section 13(2) of
the SARFAESI Act, 2002. Consequently, possession of the mortgaged property
was taken up and was duly advertised by the Bank. The company also filed
an application under section 17(1) of SARFAESI Act, 2002 before the debts
recovery tribunal which was dismissed by the impugned order. Being
aggrieved the company approached the Court.
Examine in the light of the SARFAESI Act, 2002 whether the company will
succeed in the petition filed before the Court.
(ii) “Money Laundering does not mean just siphoning of fund.” Comment.
(iii) The Insolvency and Bankruptcy Code, 2016 is not applicable to corporates in
finance sector. Explain. 4+2+2=8
Answer: 7(a)
(a) Clause 49, as currently in effect, includes the following key requirements :
a) Board : Independence Boards of directors of listed companies must have a
minimum number of independent directors. Where the chairman is an executive
or a promoter or related to a promoter or a senior official, then at least one half
the board should comprise independent directors ; in other cases, independent
directors should constitute at least one third of the board size.
b) Audit Committees : Listed Companies must have audit committees of the board
with a minimum of three directors, two thirds of whom must be independent; in
addition, the roles and responsibilities of the audit committee are specified in
detail.
c) Disclosure: Listed companies must periodically make various disclosures regarding

financial and other matters to ensure transparency.
d) CEO/CFO Certification of Internal Controls : The CEO and CFO of listed

companies must :
(i) Certify that the financial statements are fair, and

(ii) Accept responsibility for internal controls
e) Annual Reports : Annual reports of listed companies must carry status reports
about compliance with corporate governance norms.
Answer: 7(b)
The principle recognizes that businesses have a responsibility to think and act beyond the
interests of its shareholders to include all their stakeholders.
The principle, while appreciating that all stakeholders are not equally influential or aware,
encourages businesses to proactively engage with and respond to those that are
disadvantaged, vulnerable and marginalized.
Core Elements
(a) Businesses should systematically identify their stakeholders, understand their concerns,
define purpose and scope of engagement and commit to engaging with them.
(b) Businesses should acknowledge, assume responsibility and be transparent about the
impact of their policies, decisions, product & services and associated operations on
the stakeholders.
(c) Businesses should give special attention to stakeholders in areas that are
underdeveloped.
(d) Businesses should resolve differences with stakeholders in a just, fair and equitable
manner.
Answer: 7(c)
(i) According to section 18(1) of the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, any person aggrieved, by any
order made by the Debts Recovery Tribunal under sec. 17, may prefer an appeal
along with prescribed fees to the Appellate Tribunal within 30 days from the date of
receipt of the order of Debts Recovery Tribunal.
Further, no appeal shall be entertained unless the Borrower has deposited with the
Appellate Tribunal 50% of the amount of debt due from him, as claimed by the
Secured Creditors, or determined by the Debts Recovery Tribunal, whichever is less.
However, the Appellate Tribunal may, for the reasons to be recorded in writing,
reduce the amount of not less than 25% of debt.
Thus, in the given situation, Toy Metal Limited can appeal to the Appellate Tribunal
(Now to NCLT) by following the above provisions.
(ii) Money laundering is a moving of illegally acquired cash through financial systems
so that it appears to be legally acquired. Thus, Money laundering is not just the
siphoning of fund but it is the conversion of money which is illegally obtained.
(iii) Code not applicable to financial service providers – The Insolvency and
Bankruptcy Code is not applicable to corporates in finance sector. Section 3(7)
of Insolvency and Bankruptcy Code, 2016 states that “Corporate person” shall
not include any financial service provider. Thus, the Code does not cover Bank,
Financial Institutions, Insurance Company, Asset Reconstruction Company,
Mutual Funds, Collective Investment Schemes or Pension Funds.

(i) Persons who are not entitled to initiate insolvency resolution process
(ii) Differential Pricing
(iii) Record of Policies and Claims (Section 14)
(iv) Current account transaction (Section 2j)
(v) Inquiry by the Registrar [(Section 206(4)]
Answer: 8
(i) Persons who are not entitled to initiate Insolvency resolution process
The Code states that a corporate debtor (which includes a corporate applicant in
respect of such corporate debtor) shall not be entitled to make an application to
initiate corporate insolvency resolution process [Section 11 of Insolvency and
Bankruptcy Code, 2016] in the following cases :
(a) when undergoing a corporate insolvency resolution process ; or
(b) having completed corporate insolvency resolution process twelve months
preceding the date of making of the application ; or
(c) or a financial creditor who has violated any of the terms of resolution plan which
was approved twelve months before the date of making of an application under
this Chapter ; or
(d) in respect of him a liquidation order has been made.
Thus, application to initiate insolvency resolution process cannot be filed within 12
months or if there were violation of conditions or where order of liquidation has been
made.
(ii) Differential Pricing
An issuer may offer equity shares and convertible securities at different prices, subject
to the following condition :
(a) the retail individual investors/shareholders or employees entitled for reservation
making an application for equity shares and convertible securities of value not
more than 2 lakh, may be offered equity shares and convertible securities at a
price lower than the price at which net offer is made to other categories of
applicants provided that such difference is not more than 10% of the price at
which equity shares and convertible securities are offered to other categories of
applicants.
(b) in case of a book built issue, the price of the equity shares and convertible
securities offered to an anchor investor cannot be lower than the price offered to
other applicants.
(c) In case of a composite issue, the price of the equity shares and convertible
securities offered in the public issue may be different from the price offered in
rights issue and justification for such price difference should be given in the offer
document.
(d) In case the issuer opts for the alternate method of book building, the issuer may
offer specifies securities to its employees at a price lower than the floor price,
However, the difference between the floor price and the price at which equity
shares and convertible securities are offered to employees should not be more
than 10% of the floor price.
(iii) Record of Policies and claims (Section 14)
Every insurer, in respect of all business transacted by him, shall maintain :
(a) a record of policies, in which shall be entered, in respect of every policy issued by
the insurer, the name and address of the policyholder, the date when the policy
was effected and a record of any transfer, assignment or nomination of which
the insurer has notice.
(b) a record of claims , every claim made together with the date of the claim, the
name and address of the claimant and the date on which the claim was
discharged, or, in the case of a claim which is rejected, the date of rejection and
the grounds thereof.
(c) a record of policies and claims may be maintained in any such form, including
electronic made, as may be specified by the regulations made under this Act.
(d) Every insurer shall, in respect of all business transacted by him, endeavour to issue
policies above a specified threshold in terms of sum assured and premium in
electronic form, in the manner and form to be specified by the regulations made
under this Act.
(iv) Current account transaction- Section 2(j)
„Current account transaction‟ means a transaction other than a capital account
transaction and without prejudice to the generality of the foregoing such transaction
includes :
(1) Payments due in connection with foreign trade, other current business, services,
and short-term banking and credit facilities in the ordinary course of business.
(2) Payments due as interest on loans and as net income from investments.
(3) Remittances for living expenses of parents, spouse and children residing abroad
and
(4) Expenses in connection with foreign travel, education and medical care of
parents, spouse and children.
(v) Inquiry by the Registrar [Section 206(4)]

(1) The Registrar may call on the company to furnish in writing any information or
explanation on matters specified in the order within such time as he may specify
therein and carry out such inquiry as he deems fit after providing the company a
reasonable opportunity of being heard, if the Registrar is satisfied :
(a) on the basis of information available with or furnished to him, or
(b) on a representation made to him by any person that the business of a
company is being carried on for a fraudulent or unlawful purpose or not in
compliance with the provisions of this Act, or
(c) the grievances of investors are not being addressed.
(2) Before calling the company to furnish in writing any information or explanations
and carrying out inquiry, the Registrar has to inform the company of the
allegations made against it by a written order.
(3) The Central Government may, if it is satisfied that the circumstances so warrant,
direct the Registrar or an Inspector appointed by it for the purpose to carry out
the inquiry under this sub-section.
(4) It is further provided that where business of a company has been or is being
carried on for a fraudulent or unlawful purpose, every officer of the company
who is in default shall be punishable for fraud in the manner as provided in
section 447.
SUGGESTED_ANSWERS TO QUESTIONS_SYL2016_JUNE2019_PAPER-13
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
JUNE - 2019
answer any five questions from Question No. 2 to Question No. 8.
C or D and give justification.
Multiple choice questions: 2x10=20
(i) The asset in respect of which no default in repayment of principal or payment of

interest has occurred is known as
(A) Non-performing Asset
(B) Standard Asset
(C) Sub-standard Asset
(D) Doubtful Asset
(ii) A person who fails to get appointed as a director in a general meeting cannot be
appointed as
(A) Additional director
(B) Alternate director
(C) Independent director
(D) Nominee director
(iii) Which of the following is not the correct manner in the event of any change in his
particulars as stated in Form DIR-3, an applicant intimate such change to the Central
Government within a period of 30 days of such change in Form DIR-3?
(A) The applicant shall download Form DIR-6 from the portal.
(B) The form shall be digitally signed by CA or CS or CMA.
(C) The applicant shall submit the fees.
(D) The applicant shall submit the form DIR-6.
(iv) In which of the following principle, every members holds equal rights with other
members of the company in the same class? The scale of rights of members of the
same class must be held evenly for smooth functioning of the company.
(A) Interference
(B) Non-interference
(C) Indifference
(D) Difference
(v) SEBI has three functions rolled into one body. Which of the following is not the function
of SEBI?
(A) Quasi-legislative
(B) Quasi-judicial
(C) Quasi-executive
(D) Quasi-official
(vi) Which of the following is not the condition for issue of IDR?
(A) Issue size should not be more than ` 50 crores.
(B) Minimum application amount should be ` 20,000.
(C) At least 50% of the IDR issued should be allotted to qualified institutional buyers on
proportionate basis.
(D) There will be only denomination of IDR of the issuing company.
(vii)Which of the following FDI in resident entities is not eligible as investee entities?
(A) FDI in an India company
(B) FDI in Partnership
(C) FDI in HUF
(D) FDI in LLP
(viii) For the appointment, reappointment, remuneration and removal of the director of a
banking company, prior approval of ____________ should be obtained.
(A) Chairman
(B) RBI
(C) Managing Director
(D) Finance Secretary
(ix) A Nidhi shall not accept deposit exceeding …….....times of its net owned funds
(A) Ten times
(B) Fifteen times
(C) Twenty times
(D) Twenty five times
(x) Which of the following Committee was formed by SEBI for improving standards of
Corporate Governance of Listed Companies in India?
(A) Naresh Chandra Committee
(B) N.R. Narayan Murthy Committee
(C) Kotak Committee
(D) Kumar Mangalam Birla Committee
Answer:
1.
(i) B Standard Asset Standard Assets means asset In respect of which no
default in repayment of principal or payment of Interest
has occurred or is perceived and which has neither shown
signs of any problem relating to re-payment of principal
sum or interest nor does it carry more than normal risk
attached to the business.
(ii) A Additional A person who falls to get appointed as a director in a

director general meeting cannot be appointed as Additional
director.
(iii) C The applicant While submitting form DIR-6, the applicant does not require
shall submit the to submit fees.
fees
(iv) B Non Interference In the principle of non interference every members holds
equal rights with other members of the company in the
same class. The scale of rights of members of the same
class must be held evenly for smooth functioning of the
company.
(v) D Quasi-official SEBI has three functions rolled into one body. Quasi-
Legislative, Quasi-judicial and Quasi- executive.
(vi) A Issue size should Issue size should not be less than ` 50 crores.
not be more than
` 50 crores
(vii) C FDI in HUF FDI in Indian Company, partnership and LLP are eligible as
investee entities.
(viii) B RBI According to Section 35 (B) prior approval of RBI should,
be obtained for the appointment, reappointment,
remuneration and removal of the director of a banking
company.
(ix) C Twenty times A Nidhi shall not accept deposit exceeding Twenty times
of its Net owned funds as per its last audited financial
statements.
(x) C Kotak Committee SEBI had formed a committee for improving standards
of Corporate Governance of listed Companies in India
under the chairmanship of Uday Kotak.
2. (a) (i) Although Company is an artificial person, it can still own property and enter into
contracts — Comment. 2
(ii) State with reasons whether the following statements are 'True' or 'False'
(I) The liability in respect of offences committed under the Companies Act, 2013
by the officers in default of the transferor Company prior to its merger or
amalgamation shall not continue after such merger or amalgamation.

(II) Only a natural person who is an Indian Citizen shall be eligible to
incorporate a one-person Company. 1+1=2
(iii) State briefly the requirements relating to filing of accounts with the Registrar of
Companies by the Foreign Company in respect of Global Business as well as
Indian Business. 2
(iv) Define the terms 'Mediation' and 'Conciliation'. 1+1=2
(b) Simplex Ltd. has a credit balance of ` 10,00,000 in Securities Premium Reserve. It did
not earn profit during the year and thus was unable to declare dividend. Bapi, the
accountant of the Company, suggested that Securities Premium Reserve of `
10,00,000 may be used for payment of dividend. Comment. 4
(c) Explain the particulars required to be contained in Directors Responsibility Statement

as per provision of the Companies Act, 2013. 4
Answer:
2. (a) (i) It is true that Company is an artificial person as it is created by law. However, like
a natural person a Company may also own property and enter into contracts.
Being an artificial person, Company, enters into contracts through its Board of
Directors (BOD). BOD enters into an agreement with others and indicates
Company's approval through a common seal.
(ii) (a) False - As per Section 240 of the Companies Act, 2013, notwithstanding
anything in any other law for the time being in force, the liability in respect of
offences committed under this Act by the officers in default of the transferor
Company prior to its merger or amalgamation shall continue after such
merger or amalgamation.
(b) False - Only a natural person who is an Indian Citizen and resident in India shall
be eligible to incorporate a one-person Company.
(iii) According to Sec. 381 of the Companies Act, 2013

(1) Every Foreign Company shall in every calendar year,
(a) make out a Balance Sheet and Profit & Loss account in such form,
containing such particulars and including or having attached or annexed
thereto such documents as may be prescribed under Rule 4 & 5 of the
Companies (Regulation of foreign Companies) Rule 2014, and
(b) deliver a copy of those documents to the Registrar.
(iv) 'Mediation' means intervention of some third party in a dispute with the intention
to resolve the dispute.
'Conciliation' means the process of adjusting or settling disputes in a friendly

manner through extra judicial means.
(b) According to section 52 of the Companies Act, 2013, where a company issues shares at a
premium, whether for cash or otherwise, a sum equal to the aggregate 'amount of the
premium received on those shares shall be transferred to a "securities premium
account" and the provisions of this Act relating to reduction of share capital of a
company shall, except as provided in this section, apply as if the securities premium
account were the paid-up share capital of the company.
The securities premium account may be applied by the company—

(a) towards the issue of unissued shares of the company to the members of the company
as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities, under section 68.
As such dividend cannot be declared.
(c) Contents of Directors Responsibility Statement [Section 134(5) of the Companies Act,
2013]: The Directors' Responsibility Statement referred to in 134(3) (c) shall state that—
1. in the preparation of the annual accounts, the applicable accounting standards had
been followed along with proper explanation relating to material departures;
2. the directors had selected such accounting policies and applied them consistently and
made judgments and estimates that are reasonable and prudent so as to give a true
and fair view of the state of affairs of the company at the end of the financial year and
of the profit and loss of the company for that period;
3. the directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for safeguarding the
assets of the company and for preventing and detecting fraud and other
irregularities;
4. the directors had prepared the annual accounts on a going concern basis;
5. the directors, in the case of a listed company, had laid down internal financial
controls to be followed by the company and that such internal financial controls are
adequate and were operating effectively.
Here, the term "internal financial controls" means the policies and procedures
adopted by the company for ensuring the orderly and efficient conduct of its
business, including adherence to company's policies, the safeguarding of its assets, the
prevention and detection of frauds and errors, the accuracy and completeness of the
accounting records, and the timely preparation of reliable financial information;
and
(6) the directors had devised proper systems to ensure compliance with the provisions
of all applicable laws and that such systems were adequate and operating
effectively.
3. (a) The Promoters of M/s Soma Limited, a listed public company propose to have the
strength of the Board of Directors as eleven. They also propose to make the Managing
Director and Whole Time Directors as directors not liable to retire by rotation. Advise
on the following matters as per the provisions of the Companies Act, 2013:
(i) How many of the remaining directors will have to retire by rotation every year at
the Annual General Meeting (AGM)?
(ii) For the purpose of increasing the strength, certain nominations were received to
nominate candidates for contesting elections. One of the nominations was
rejected by the directors as it was received after sending the notice of AGM and
that too after the working hours of the last day on which nomination should
have been received. 5
(b) M/s Daga Limited (an unlisted company) without any public deposits as per the
audited financial statements of the company as at March 31st, 2018 gives you the
following informations:
Paid-up Share Capital `20 crores

Gross Turnover `500 crores
Bank Borrowings `50 crores (from a National Bank)
Other Borrowings `30 crores (from a Public Financial Institution)
Mr. Lodha, a Chartered Accountant employed in the finance and audit department of
the company wants to form a Vigil Mechanism for directors and employees of the
company. Advise whether it is mandatory for M/s Daga Limited to formulate a Vigil
Mechanism for directors and employees of the company. 4
(c) (i) DEF Limited is a listed company. The Board of Directors of the company at
their meeting held on 1st November, 2018 approved the proposal to issue bonus
shares in the ratio of 1:1. Such bonus issue is authorized by its Articles of
Association for issue of bonus shares and capitalization of reserves. The
company implemented the bonus issue on 15th November, 2018. Whether the
company has contravened the provisions of Securities Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulation 2009? 4
(ii) The e-forms rolled out by the Ministry of Corporate Affairs (MCA) under the
provisions of the Companies Act, 2013 and rules framed thereunder are
mandatorily numbered alpha-numeric. Explain this concept. 3
Answer:
3. (a) (i) According to section 152(6)(c) of the Companies Act, 2013, l/3rd of such of the
Directors for the time being as are liable to retire by rotation, or their number is
neither three nor a multiple of three, then, the number nearest to the l/3rd shall retire
from office. Therefor the Directors liable to retire by rotation are 11*2/3 i.e. 7.3 or 8.
(No. of directors to retire at AGM: 8 * 1/3 i.e. 2.67. Hence nearest to 1/3rd is 3).
(ii) According to section 160 of the Companies Act, 2013, a person who is not a
retiring director in terms of section 152 shall, subject to the provisions of this Act, be
eligible for appointment to the office of a director at any general meeting, if he
has, not less than 14 days before the meeting, left at the registered office of the
Company, a notice in writing under his hand signifying his candidature as a director.
In the instant case, one nomination was rejected by the directors as it was
received after sending the notice of AGM and that too after the working hours of
the last day on which nomination should have been received i.e. 14th day. Hence,
the contention of the directors are valid.
(b) Formation of vigil mechanism: According to Section 177(9) of the Companies Act, 2013,
a Vigil mechanism shall be formed in:
(a) Every listed Company, and
(b) Such other prescribed classes of companies.
Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 has
prescribed the following class or classes of companies that shall constitute Vigil
mechanism:
1. The Companies which accept deposits from the public;
2. The Companies which have borrowed money from banks and public
financial institutions in excess of 50 crore rupees.
In the instant case, Daga Ltd. does not have any public deposits. They have
borrowings from banks and public financial institutions of ` 80 Crores which is in
excess of ` 50 crores. Since, the Company had borrowed from banks and Public
Financial Institutions in excess of `50 crores as prescribed in Rule 7(2), the
Company is mandatorily required to form a Vigil Mechanism for directors and
employees of the Company.
(c) (i) Bonus Issue: According to the provisions of Chapter IX of the SEBI (Issue of Capital
and Disclosure Requirements) Regulations, 2009, a listed issuer may issue bonus
shares to its members if it is authorised by its articles of association for issue of
bonus share, Capitalisation of reserves, etc.
An issuer, announcing a bonus issue after the approval of its board of directors
and not requiring shareholders' approval for Capitalisation of profits or reserves for
making the bonus issue, shall implement the bonus issue within fifteen days from the
date of approval of the issue by its board of directors. According to the stated
facts, Board of Directors of DEF Ltd. approved the proposal to issue of bonus
shares in the meeting held on 1st November 2018. This issue of bonus shares, is
without requiring shareholders' approval.
Accordingly, DEF Ltd. implemented the bonus issue within fifteen days from the date
of approval of the issue by its board of directors (i.e. on 15th November 2018). So,
DEF Ltd. is in compliance with the SEBI (ICDR) Regulation, 2009 and thus has not
contravened.
(ii) In order to facilitate easy understanding of the e-forms being rolled out under the
provisions of Companies Act, 2013 and Rules made thereunder, forms under the
Companies Act are mandatorily numbered alpha-numeric. Initial of forms is to be
started with alphabet of two or three letters based on the subject of the Chapter,
followed by serial number of the form. This will define the nature of the forms and
would be easy to recognize.
4. (a) M/s RST and Co., a firm of Chartered Accountants, comprising of three partners
R, S and T are Statutory Auditors of 50 companies as per details given below:
(i) Small Companies — 10
(ii) Private Companies having paid-up share capital of less than `100 Crores — 20
(iii) Private Companies having paid-up share capital of more than ` 100 Crores — 15
(iv) Public Companies — 5
Mr. R signs the Balance Sheet of 10 Small Companies and 10 Private Companies
having paid-up share capital of less than ` 100 Crores. Mr. S signs the Balance Sheet
of 10 Private Companies having paid-up share capital of less than ` 100 Crores and 5
Private Companies having paid-up share capital of more than ` 100 Crores. Mr. T
signs the Balance Sheet of 10 Private Companies having paid-up share capital of
more than ` 100 Crores and 5 Public Companies.
What is the maximum number of audits that the firm as a whole can accept and what
is the maximum number of audits each individual partner can accept? 6
(b) State briefly with reference to the applicable provisions of the Companies Act, 2013
read with rules thereunder whether an unlisted Public Company which is a wholly
owned Subsidiary Company will be required to appoint Independent Directors. 2
(c) (i) PBX Pvt. Ltd. is a company in which there are 6 shareholders. Mr. Bala, who is a
director and also the legal representative of a deceased shareholder holding less
than one tenth of the share capital of the company made a petition to the tribunal
for relief against oppression and mismanagement. Examine under the provisions
of the Companies Act, 2013 whether the petition made by Mr. Bala is valid and
maintainable. 4
(ii) Decide the liability of the person for commission of the act during the course of
inspection, inquiry or investigation under the Companies Act, 2013:
(I) A person who is required to make statement during the course of investigation
pending against its company, is a party to the manipulation of documents
related to the transfer of securities and naming of holders in the register of
members by the company.
(II) An employee of the company publicized among his social networking of
sound financial position of his organization in order to incite the public to
purchase the shares of its company. In actuality, the company was running
in loss. 4
Answer:
4. (a) Ceiling on Number of Audit: As per section 141(3)(g) of the Companies Act, 2013, a
person shall not be eligible for appointment as an auditor if he is in full time
employment elsewhere or a person or a partner of a firm holding appointment as its
auditor, if such person or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty Companies
other than one person companies, dormant Companies, small Companies and
private Companies having paid-up share capital less than `100 crores.
As per section 141(3)(g), this limit of 20 Company audits is per person. In the case of
an audit firm having 3 partners, the overall ceiling will be 3 * 20 = 60 Company audits.
Sometimes, a chartered accountant is a partner in a number of auditing firms. In such
a case, all the firms in which he is partner or proprietor will be together entitled to 20
Company audits on his account. Therefore, maximum number of audits that the firm
M/S. RST & CO. as a whole can accept is 60 and maximum number of audits each
individual partner can accept is 20 i.e. other than one person Companies, dormant
Companies, small Companies and private Companies having paid-up share capital
less than ` 100 crores.
In the given case, CAR is holding appointment in 20 Companies, i.e. 10 small

companies and 10 private Companies having paid up share capital of less than ` 100
crores, whereas CA S is having appointment in 15 Companies i.e. 10 private
Companies having paid up share capital of less than ` 100 crore and 5 private
Companies having paid up share capital of more than `100 crore and CA T is having
appointment in 5 public Companies and 10 private Companies having paid up share
capital of more than ` 100 crores. In aggregate all three partners are having 50
audits.
As per section 141(3)(g) applying the above provisions, an auditor can accept more
appointment as auditor = ceiling limit as per section 141(3)(g) - already holding
appointments as an auditor.
Hence (1) CA R can accept 20 more audits. (2) CA S can accept 20 - 5 = 15 more
audits and (3) CA T can accept 20 — 1 5 = 5 more audits.
As per the facts of the case, M/S. RST & CO. is already having 20 Company audits
and they can also accept 40 more Company audits. In addition, they can also
conduct the audit of one person Companies, small Companies, dormant Companies
and private Companies having paid up share capital less than ` 100 crores.
As per section 141(3)(g) of the Companies act, 2013, M/S. RST &CO. can accept
appointment as an auditor of 40 more Companies as under:

Total number of Audits available to the Firm = 20 * 3 = 60
Number of Audits already taken by all the partners in their = 0 + 5+ 15 = 20
individual capacity
Remaining number of Audits available to the firm = 40
(b) As per section 149(6) read with Rule 4 of the Companies (Appointment and
Qualification of Directors) Rules, 2014, the public Companies of prescribed class shall
require to appoint minimum 2 independent directors. However, vide Notification
number G.S.R. 839(E) dated 5th July 2017 an amendment was issued through the
Companies (Appointment and Qualification of Directors) Amendment Rules, 2017. It
provided that an unlisted public Company which is a joint venture, a wholly owned
subsidiary or a dormant Company will not be required to appoint independent
Directors.
(c) (i) According to section 244 of the Companies Act, 2013, in the case of a Company
having share capital, the following member(s) have the right to apply to the
Tribunal under section 241:
(a) Not less than 100 members of the Company or not less than one-tenth of the
total number of members, whichever is less; or
(b) Any member or members holding not less than one-tenth of the issued share
capital of the Company provided the applicant(s) have paid all the calls and
other sums due on the shares.
Legal heir of the deceased shareholder with minority status is entitled to file the
petition.
In the given case, there are six shareholders. As per the condition (a) above, 10%
of 6 i.e. 1 (round off 0.6) satisfies the condition. Therefore, in the light of the
provisions of the Act, a single member (even the legal representative of a
deceased shareholder) can present a petition to the Tribunal, regardless of the
fact that he holds less than one-tenth of the Company's share capital.
Thus, the petition made by Mr. Bala is valid and maintainable.
(ii) Section 229 of the Companies Act, 2013 states that where a person who is
required to provide an explanation or make a statement during the course of
inspection, inquiry or investigation, or an officer or other employee of a company
or other body corporate which is also under investigation,—
(a) destroys, mutilates or falsifies, or conceals or tampers or unauthorisedly
removes, or is a party to the destruction, mutilation or falsification or
concealment or tampering or unauthorised removal of, documents relating
to the property, assets or affaire of the company or the body corporate;
(b) makes, or is a party to the making of, a false entry in any document
concerning the company or body corporate; or
(c) provides an explanation which is false or which he knows to be false,
-he shall be punishable for fraud in the manner as provided in section 447.
As per the above provision:

(i) With respect to this part of the question, the person shall be liable for
fraud. Since, in the given case, he is a party in the manipulation of
documents relating to the transfer of securities and in the register of members
of the company which is under investigation.
(ii) Employee shall not be liable here, as the said company in which he is an
employee, is not undergoing investigation. Secondly, the person purchasing
the shares can act with due diligence before purchasing shares rather -fully
relying on the publicity made on social networking.
5. (a) Discuss the National Voluntary Guidelines on "Business, when engaged in influencing
public and regulatory policy, should do so in a responsible manner". 4
(b) Referring to the provisions of the Securitisation & Reconstruction of Financial Assets
& Enforcement of Security Interest Act, 2002 state the circumstances under which the
Reserve Bank of India may cancel the certificate of registration granted to a
Securitisation Company. 5
(c) (i) Mr. Z, a director of Southern Highway Tolls Private Limited, is duly authorized by the
Board of Directors to prepare and file returns, report or other documents to the
Registrar of Companies on behalf of the company. Though he filed all the required
documents to Registrar in time, however, subsequently it was found that the filed
documents were false and inaccurate in respect to material particulars (knowing
it to be false) submitted to the Registrar. Discuss the penal provision under the
Companies Act, 2013 in the light of the given situation. 4
(ii) Mr. Ganesh, an operational creditor filed an application for corporate insolvency
resolution process. He does not propose for appointment of an interim resolution
professional in the application. State the provisions given by the code in the
given situation. State the term of such appointed IRP. 3
Answer:
5. (a) Principle 7: Businesses, when engaged in influencing public and regulatory policy, should do
so in a responsible manner.
The principle recognizes that businesses operate within the specified legislative and policy
frameworks prescribed by the Government, which guide their growth and also provide for
certain desirable restrictions and boundaries.
The principle acknowledges that in a democratic set-up, such legal frameworks are
developed in a collaborative manner with participation of all the stakeholders, including
businesses.
The principle, in that context, recognizes the right of businesses to engage with the
Government for redressal of a grievance or for influencing public policy and public
opinion.
The principle emphasizes that policy advocacy must expand public good rather than
diminish it or make it available to a select few.
Core Elements
(a) Businesses, while pursuing policy advocacy; must ensure that their advocacy
positions are consistent with the Principles and Core Elements contained in these
Guidelines.
(b) To the extent possible, businesses should utilize the trade and industry chambers
and asso ciations and other such collective platforms to undertake such policy
advocacy.
(b) Cancellation of Certificate of Registration (Section 4 of the securitisation &

reconstruction of financial assets & enforcement of Security interest Act, 2002).
As per the section 4 of the Securitisation & Reconstruction of Financial Assets &
Enforcement of security Interest Act, 2002, the Reserve Bank may cancel a certificate
of registration granted to a securitization company or a reconstruction company, if
such company-
(i) ceases to carry on the business of securitisation or asset reconstruction; or
(ii) ceases to receive or hold any investment from a qualified institutional buyer; or
(iii) has failed to comply with any conditions subject to which the certificate of
registration has been granted to it; or
(iv) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of
sub-section (3) of section 3; or
(v) falls to –
(a) comply with any direction Issued by the Reserve Bank under the provisions of
this Act; or
(b) maintain accounts in accordance with the requirements of any law or any
direction or order issued by the Reserve Bank under the provisions of this Act;
or
(c) submit or offer for inspection its books of account or other relevant
documents when so demanded by the Reserve Bank; or
(d) obtain prior approval of the Reserve Bank required under sub-section (6) of
section 3.
(c) Penalty for false statements (Section 448 of the Companies Act, 2013)
(i) According to section 448 of the Companies Act, 2013, save as otherwise provided in
this Act, if in any return, report, certificate, financial/statement, prospectus,
statement or other document required by, or for, the purposes of any of the
provisions of this Act or the rules made there under, any person makes a
statement, -
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material,
he shall be liable under section 447.
In the present case, Mr. Z, a director of Southern Highway Tools Private Limited
filed returns, report or other documents to Registrar in time, however,
subsequently it was found that the filed documents were false and inaccurate in
respect to material particulars (knowing it to be false) submitted to the Registrar.
Hence, Mr. Z shall be liable under section 447 for false statements.
(ii) Appointment of IRP: As per Section 16 of the Code where the application for
corporate insolvency resolution process is made by an operational creditor and
no proposal for an interim resolution professional is made in the said application.
The Adjudicating Authority shall make a reference to the Board for the
recommendation of an insolvency professional who may act as an Interim
resolution professional.
The Board shall recommend the name of an insolvency professional to the

Adjudicating Authority against whom no disciplinary proceedings are pending,
within ten days of the receipt of a reference from the Adjudicating Authority.
Period of appointment of IRP: The term of Interim Resolution Professional shall

continue till the date of appointment of the resolution professional under section
22 of the Code.
6. (a) (i) ABC Ltd., is a company which has a net worth of INR ` 200 crores, it manufactures
rubber parts for automobiles. The sales of the company are affected due to low
demand of its products.
The previous year's financial state:

(` in Crore)
March 31, 2019 March 31, March 31, March 31,
(Current year) 2018 2017 2016
Net Profit 3.00 8.50 4.00 3.00
Sales (turnover) 850 950 900 800
Does the company have an obligation to form a CSR Committee since the
applicability criteria is not satisfied in the current financial year? 3
(ii) Explain the concept of KMP (Key Managerial Personnel) as introduced by the
Companies Act, 2013. 2
(b) (i) Mr. Zupi was appointed as a Member of the Competition Commission of India by
Central Government. He has a professional experience in international
business for a period of 12 years, which is not a proper qualification for
appointment of a person as member. Pointing out this defect in the Constitution

of Commission, Mr. P. K. against whom the commission gave a decision, wants
to invalidate the proceedings of the commission. Examine with reference to the
provisions of the Competition Act, 2002 whether Mr. P. K. will succeed. 3
(ii) M/s Samrat is a company engaged in providing services of supplying goods all
over the world through aircrafts. The aircrafts of the said company is registered
and insured in India with the reputed insurance company. Company found that
the insurance policy of one of aircraft which is in Europe had expired. Company
said to his officer to get new insurance policy of that aircraft in Europe. State the
validity of such an act of registration of aircraft in Europe. 3
(c) Explain the responsibilities of banking companies under the Prevention of Money
Laundering Act, 2002. 5
Answer:
6. (a) (i) It has been clarified that 'any financial year' referred to under sub section (1) of
section 135 of the act read with rule 3(2) of companies CSR Rule,2014 implies 'any
of the three preceding financial years'.
A company which meets the net worth, turnover of net profits criteria in any of
the preceding three financial years, but which does not meet the criteria in the
relevant financial year ,will still need to constitute a CSR committee and comply
with provisions of sections 135(2) to(5) read with the CSR rules.
As per the criteria to constitute CSR committee -

1) Net worth greater than or equal to INR 500 Crores: This criterion is not satisfied.
2) Sales greater than or equal to INR 1000 crores: This criterion is not satisfied.
3) Net profit greater than or equal to INR 5 crores: This criterion is satisfied in
financial year ended March 31, 2018.
Hence, the company will be required to form a CSR committee.
(ii) As per the provisions of section 203(1) of the companies Act 2013, every
company belonging to such class or classes of companies as may be prescribed,
shall have the following whole time key managerial personnel.
(a) Managing Director or chief executive officer or manager and in their
absence ,a whole-time Director;
(b) Company secretary; and
(c) Chief financial officer
(b) (i) As per section 15 of Competition Act 2002 any act or proceeding of the
Commission shall not be invalidated merely on the ground of:
(a) any vacancy in, or any defect in the constitution of the Commission; or
(b) any defect in the appointment of a person acting as a Chairperson or as a
member; or
(c) any irregularity in the procedure of the Commission not affecting the merits of
the case.
Here in this case Mr. Zupi should have professional qualification of not less than 15
years as per section 8 of the Act but this disqualification will not invalidate the
proceeding of the Commission.
(ii) Given problem is based on the section 2CB of the Insurance Act, 1938. Said
section deals with the Indian properties not to be insured with foreign insurers.
According to the section, no person shall take out or renew any policy of
insurance in respect of any property in India or any ship or other vessel or aircraft
registered in India with an insurer whose principal place of business is outside
India, without the permission of the IRDAl.
In the given case, act of registration of aircraft of M/s Samrat which is an Indian
property, with an insurer in Europe, is an invalid act.
(c) Section 12 provides for the obligation of Banking Companies, Financial Institutions
and Intermediaries or a person carrying on a designated business or profession.
According to subsection (1), every banking company, financial institution and
intermediary or a person carrying on a designated business or profession shall –
(a) maintain a record of all transactions, including information relating to transactions

covered under clause (b), in such manner as to enable it to reconstruct individual
transactions;
(b) furnish to the Director within such time as may be prescribed, information relating
to such transactions, whether attempted or executed, the nature and value of
which may be prescribed;
(c) verify the identity of its clients in such manner and subject to such conditions, as
may be prescribed;
(d) identify the beneficial owner, if any, of such of its clients, as may be prescribed;
(e) maintain record of documents evidencing identity of its clients and beneficial
owners as well as account files and business correspondence relating to its
clients.
Every information maintained, furnished or verified, save as otherwise provided under

any law for the time being in force shall be kept confidential.
The records referred to in clause (a) of sub-section (I) shall be maintained for a period
of five years from the date of transaction between a client and the reporting entity.
The records referred to in clause (e) of sub-section (I) shall be maintained for a period
of five years after the business relationship between a client and the reporting entity
has ended or the account has been closed, whichever is later.
The Central Government may, by notification, exempt any reporting entity or class of
reporting entities from any obligation under this chapter.
7. (a) (i) Which principle of insurance is related to the following statements?

(I) The cause for loss must be related to the purpose of insurance.
(II) The insured should not be allowed to make any profit by selling damaged
or in the case of lost property being recovered. 1+1=2
(ii) XYZ Ltd. issued prospectus for the subscription of its shares for `500 Crores. The
issue was oversubscribed by 10 times. The company issued shares to all the
applicants on pro-rata basis. Later SEBI inspected the prospectus and found some
misleading statement about the management of the Company in it. SEBI imposed
a penalty of ` 1 Crore and banned its two executive directors for dealing in
securities market for three years.
Identify the function and its type performed by SEBI in above case. 2
(iii) (I) Who shall be the competent authority for all decisions pertaining to arrest as
per the provision of the Companies (Arrests in connection with investigation by
serious Fraud Investigation office) Rules, 2017?
(II) Who is empowered to designate court of session as special courts for trial
of offence of money laundering? 1+1 =2
(iv) Who can initiate insolvency resolution process? 2
(b) Explain how the provisions of the Companies Act, 2013 relating to Audit Committee
will help in achieving some of the objectives of Corporate Governance. 5
(c) State briefly the effect of floating charge on the undertaking or property of the
company when a company is being wound-up. 3
Answer:
7. (a) (i) (a) Principle of Causa Proxima

(b) Principle of Subrogation
(ii) Protective Function

Prohibition of fraudulent and unfair trade practices
(iii) (a) The Director of SFIO shall be the competent authority for all decisions
pertaining to arrest.
(b) Central Government in consultation with the Chief Justice of High Court is
empowered to designate court of session as special courts for trial of offence
of money laundering.
(iv) Where any Corporate debtor commits a default, a financial creditor, an

operation creditor or the corporate debtor itself may initiate corporate insolvency
resolution process in respect of such corporate debtor in the manner as provided
(See 6 of the insolvency and Bankruptcy code, 2016.
(b) Companies, particularly public listed companies raise huge amounts of monies from
the members of the public and public financial institutions. They owe it to all the vast
number of persons and institutions who have reposed their faith in them and have
invested in them, that their faith is rewarded both in terms of annual return and in
terms of wealth appreciation in real terms. In order to achieve this it is vital to have
the highest quality of corporate governance in the conduct of affairs of such
companies. Thus, the role of audit committees have been enhanced, their
responsibilities made more objective and the accountability, has increased
substantially.
In this context the provisions of the Companies Act, 2013 have been framed to
improve corporate governance standards and protect the interests of the public and
the financial institutions who have invested in companies. These provisions may be
highlighted as under:
1. The constitution of Audit Committees under section 177(2) requires the majority
representation from independent directors. In other words, persons from within
the management cannot form a majority in the Committee, thereby making the
functioning of these committees more transparent;
2. The proviso to section 177(2) further requires the majority of members and the
chairperson of the Audit Committees to be persons who can understand financial
statements. This enables a meaningful exercise of the committee's functions by
knowledgeable persons thereby increasing the effectiveness of such
committees.
3. Now the terms of reference or the minimum, scope of work of an Audit
Committee has been laid down in the act itself under section 177(4). By doing this
the vagueness and doubt in the role and functions of such committees has been
removed.
4. The Audit Committee shall have authority to investigate, into any matter in
relation to the areas of its scope of functioning or referred to it by the Board and
for this shall have power to obtain professional advice from external sources and
have full, access to information contained in the records of the company. This
provides the Audit Committee to function with a high degree of effectiveness by
accessing external professional advice and the records of the company.
5. The recommendations of the Audit Committee are binding' on the Board to take
appropriate corrective actions. In case the Board of Director refuses to accept
the recommendations of the Audit Committee, it bound to disclose the same
with the reasons for non acceptance, in Its report to the members of the
company under section. 134 (3) which relates to the Directors Report on Financial
Statements to the members of the company.
It will be seen from the above provisions of the Companies Act, 2013 that efforts have
been made to make such committees more impartial, effective and accountable
which will enable the company to improve the quality of its corporate governance
thereby improving accountability and avoiding financial impropriety.
(c) Effect of floating charge (Section 332)
As per Section 332, when a company is being wound up a floating charge on the
undertaking or property of the company created within the twelve months
immediately preceding the commencement of the winding up, shall, unless it is
proved that the company immediately after, the creation of the charge was solvent,
be invalid, except for the amount of any cash paid to the company at the time of, or
subsequent to the creation of, and in consideration for, the charge, together with
interest on that amount at the rate of five percent, per annum or such other rate as
may be notified by the Central Government in this behalf.
(i) List the quarterly compliances for a listed entity under the SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015
(ii) Constitution of the National Financial Reporting Authority
(iii) Acquisition and Transfer of Property in India by a Non-resident Indian or an Overseas
Citizen of India
(iv) Benefits of CSR Programme
(v) Rights and duties of authorised representative of financial creditors
Answer:
8. (i) Quarterly compliances- Listed Entity
A Listed company has to comply with the following quarterly compliances under the
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:
1. Regulation 13(3):- Grievance Redressal Mechanism

The listed entity shall file with the recognized stock exchange(s) on a quarterly
basis, within 21 days from the end of each quarter, a statement giving the
number of investor complaints pending at the beginning of the quarter, those
received during the quarter, disposed of during the quarter and those remaining
unresolved at the end of the quarter.
2. Regulation 27(2):- Other Corporate Governance Requirements

A listed entity shall submit quarterly compliance report on corporate governance
in the format as specified by the Board from time to time to the recognized stock
exchange(s), within 15 days from close of quarter.
3. Regulation 31(1): Holding of Specified Securities and Shareholding Pattern.

A listed entity shall submit a statement showing holding of securities and
shareholding pattern separately for each class of securities:-
(a) One day prior to listing of its securities on the stock exchange(s);
(b) On a quarterly basis, within 21 days from the end of each quarter; and,
(c) Within 10 days of any capital restructuring of the listed entity resulting in a
change exceeding 2 per cent of the total paid-up share capital.
4. Regulation 33(3): Financial Results

The listed entity shall submit quarterly and year-to-date standalone financial
results to the stock exchange within 45 days of end of each quarter, other than
the last quarter.
5. Regulation 32(1): Statement of Deviation(S) Or Variation(S)

A listed entity shall submit to the stock exchange the following statement(s) on a
quarterly basis for public issue, rights issue, preferential issue etc. -
(a) indicating deviations, if any, in the use of proceeds from the objects stated in
the offer document or explanatory statement to the notice for the general
meeting, as applicable;
(b) indicating category wise variation (capital expenditure, sales and marketing, working
capital etc.) between projected utilization of funds made by it in its offer document or
explanatory statement to the notice for the general meeting, as applicable and the
actual utilization of funds.
(ii) The National Financial Reporting Authority shall consist of a chairperson, who shall be
a person of eminence and having expertise in accountancy, auditing, finance or law
to be appointed by the Central Government and such other members not exceeding
fifteen consisting of part-time and full-time members as may be prescribed.
Provided that the terms and conditions and the manner of appointment of the
chairperson and members shall be such as may be prescribed.
Provided further that the chairperson and members shall make a declaration to the
Central Government in the prescribed form regarding no conflict of interest or lack of
independence in respect of his or their appointment.
Provided also that the chairperson and members, who are in full-time employments
with National Financial Reporting Authority shall not be associated with any audit firm
(including related consultancy firms) during the course of their appointment and two
years after ceasing to hold such appointment.
(iii) Acquisition and Transfer of Property in India by a Non-Resident Indian or an Overseas

Citizen of India:-
An NRI or an OCI may –

i. acquire immovable property in India other than agricultural land/farm
house/plantation property.
Provided that the consideration, if any, for transfer, shall be made out of (i) funds
received in India through banking channels by way of inward remittance from
any place outside India or (ii) funds held in any non resident account maintained
in accordance with the provisions of the Act, rules or regulations framed
thereunder.
Provided further that no payment for any transfer of immovable property shall be
made either by traveler's cheque or by foreign currency notes or by any other
mode other than those specifically permitted under this clause.
(b) acquire any immovable property in India other than agricultural land/ farm
house/ plantation property by way of gift from a person resident in India or from
an NRI or from an OCI, who in any case is a relative as defined in section 2(77) of
tie Companies Act, 2013;
(c) acquire any immovable property in India by way of inheritance from a person
resident outside India who had acquired such property (a) in accordance with
the provisions of the foreign exchange law in force at the time of acquisition by
him or the provisions of these Regulations or (b) from a person resident in India;
(d) transfer any immovable property in India to a person resident in India;
(e) transfer any immovable property other than agricultural land/farm house/
plantation property to an NRI or an OCI.
(iv) Benefits of CSR programme
As the business environment gets increasingly complex and stakeholders become

vocal about their expectations, good CSR practices can only bring in greater
benefits, some of which are as follows:
(a) Communities provide the licence to operate: Apart from internal drivers such as
values and ethos, some of the key stakeholders that influence corporate
behaviour include governments (through laws and regulations), investors and
customers. In India, a fourth and increasingly important stakeholder -is the
community and many companies have started realising that the 'licence to
operate' is no longer given by governments alone, but communities that are
impacted by a-company's business operations. Thus, a robust CSR programme
that meets the-aspirations of these, communities not only provides them with the
licence to operate, but also to maintain the licence, thereby precluding the 'trust
deficit'.
(b) Attracting and retaining employees: Several human resource studies have linked
a company's ability to attract, retain and motivate employees with their CSR
commitments. Interventions that encourage and enable employees to
participate are shown to increase employee' morale and a sense of belonging to
the company.
(c) Communities as suppliers: There are certain innovative CSR initiatives emerging
wherein companies have invested in enhancing community livelihood by
incorporating them into their supply chain. This has benefitted communities and
increased their income levels, while providing these companies with an
additional and secure supply chain.
(d) Enhancing corporate reputation: The traditional benefit of generating goodwill,

creating a positive image and branding benefits continue to exist for companies
that operate effective CSR programmes. This allows companies to position
themselves as responsible corporate citizens.
(v) Rights and Duties authorized representative of financial creditors.
(1) Right to participate and Vote on behalf of FC: The authorised representative (AR) under
section 21(6) & 21(6A) or section 24(5) shall have the right to participate and vote in
meetings of the committee of creditors on behalf of the financial creditor (FC) he
represents in accordance with the prior voting instructions of such creditors obtained
through physical or electronic means.
(2) Duty of AR to circulate agenda & minutes to FC: It shall be the duty of the
authorised representative to circulate the agenda and minutes of the meeting of the
committee of creditors to the financial creditor he represents.
(3) AR to act on instruction of FC: The authorised representative shall not act against the
interest of the financial creditor he represents and shall always act in accordance with
their prior instructions:
Provided that if the authorised representative represents several financial creditors, then
he shall cast his vote in respect of each financial creditor in accordance with instructions
received from each financial creditor, to the extent of his voting share:
Provided further that if any financial creditor does not give prior instructions through
physical or electronic means, the authorised representative shall abstain from voting on
behalf of such creditor.
(4) To ensure recording of instruction by IRP/RP: The authorised representative shall file with
the committee of creditors any instructions received by way of physical or electronic
means, from the financial creditor he represents, for voting in accordance therewith, to
ensure that the appropriate voting instructions of the financial creditor he represents is
correctly recorded by the interim resolution professional or resolution professional, as the
case may be.
SUGGESTED_ANSWERS TO QUESTIONS_SYL2016_Dec2019_PAPER-13
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
DECEMBER - 2019
answer any five questions from Question No. 2 to Question No. 8.
1. Answer all questions.
(a) Multiple choice questions: 2x10=20
(i) The company shall furnish to the Registrar verification of its registered office
within a period of ___________ from the date of its incorporation.
(A) 30 days
(B) 45 days
(C) 60 days
(D) 90 days
(ii) Out of following which item cannot be exercised by the Board of Directors of
ABC Ltd.?
(A) To diversify the business of the company
(B) To take over a company
(C) To approve amalgamation, merger or the reconstruction
(D) To sell of the whole or substantially the whole of the undertaking of the
company.
(iii) The board may fill any casual vacancy in the office of an auditor within
30 days but where such vacancy is caused by the resignation of an auditor,
such appointment shall also be approved by the company at a general
meeting concerned within ____________ of the recommendation of the Board.
(A) one month
(B) two months
(C) three months
(D) six months
(iv) In case the Comptroller and Auditor General of India does not appoint first
auditor within the stipulated date who will appoint such auditor within next 30
days?
(A) Shareholders
(B) Board of Directors
(C) Managing Directors
(D) Company Secretary
(v) Under which principle of Corporate Governance, it implies the responsibility of

the Chairman, the Board of Directors and the Chief Executive for the use of
company's resources in the best interest of the company and its shareholders?
(A) Independence
(B) Accountability
(C) Transparency
(D) Ethics
(vi) Any person aggrieved by an order of NCLT may prefer an appeal to the
Appellate Tribunal within a period of ___________ from the date on which a copy
of the order of the Tribunal is made available to the person aggrieved.
(A) 120 days
(B) 60 days
(C) 45 days
(D) 30 days
(vii) Which of the following is not the objective of The Prevention of Money
Laundering Act, 2002?
(A) To prevent and control money laundering
(B) To confiscate and seize the property obtained from the laundered money
(C) To generate profit for an individual or a group
(D) To deal with any other issue connected with money laundering in India
(viii) A promise whereby the assured undertakes that some particular thing shall or
shall not be done or that some conditions shall be fulfilled or affirms or negatives
the existence of a particular state of facts. This principle of Insurance is known
as
(A) Warranty
(B) Good faith
(C) Conditions
(D) Indemnity
(ix) Which of the following is not the benefits of CSR Programme?

(A) Mutual trust
(B) Attracting and retaining employees
(C) Communities as suppliers
(D) Enhancing corporate reputation
(x) An agreement or arrangement in writing for transfer of assets, or funds, goods or

services, from or to the corporate debtor is known as
(A) Transfer
(B) Transfer of property
(C) Transaction
(D) Transmission
Answer:
1.
(i) A 30 days (Section 12 of the Companies Act, 2013)
(ii) D As per section 180(i) of the Companies Act, 2013 the Board of Directors has
no power to sell / lease or otherwise dispose of the whole or substantially, the
whole of undertaking of the Company.
(iii) C Three Months. Such appointment shall also be approved by the company at
a general meeting concerned within three months of the recommendations
of the Board.
(iv) B Board of Directors - In case the Comptroller and Auditor General of India
does not appoint first auditor, Board of Directors appoint such auditor within
next 30 days.
(v) B Accountability - Under Accountability principle of corporate governance it
implies the responsibility of the chairman, the Board of Directors and the chief
executive for the use of companies resources in the best interest of Company
and its shareholders.
(vi) C 45 days (Sec. 421 of the Companies Act, 2013)
(vii) C To generate profit for an individual or a group. To generate profit for an
individual or a group is not the objective of the prevention of Money
laundering Act 2002.
(viii) A Warranty - Under the principle of warranty, promise whereby the assured
undertakes that some particular thing shall or shall not be done or that some
condition shall be fulfilled or affirms or negatives the existence of a particular
state of facts.
(ix) A Mutual trust - Mutual trust is not the benefits of CSR Programme.
(x) C Transaction - An agreement or arrangement in writing for transfer of assets, or
funds, goods or services, from or to the corporate debtor is known as
transaction.
2. (a) The Board of Directors of XYZ Company Limited at its meeting declared a dividend
on its paid-up equity share capital which was later on approved by the company's
Annual General Meeting. In the meantime, the directors at another meeting of the
Board decided by passing a resolution to divert the total dividend to be paid to
shareholders for purchase of investments for the company. As a result, dividend was
paid to shareholders after 45 days. Examining the provisions of the Companies Act,
2013, state:
(i) Whether the act of directors is in violation of the provisions of the Act and also the
consequences that shall follow for the above act of directors?
(ii) What would be your answer in case the amount of dividend to a shareholder is
adjusted by the company against certain dues to the company from the
shareholder? 6
(b) (i) An understanding has been reached among the manufacturers of cement to
control the price of cement, but the understanding is not in writing and it is also
not intended to be enforced by legal proceedings.
Examine whether the above understanding can be considered as an 'Agreement'
with the meaning of Section 2(b) of the Competition Act, 2002.
(ii) Soma Nidhi Limited proposes to reappoint Mr. X, a director who has completed a
term of 10 consecutive years as a Director of the Nidhi.
State your views the validity of the above proposals with reference to Nidhi
Rules, 2014 formulated under Companies Act, 2013. 3+3=6
(c) Answer the following in a few words: 1x4=4
(i) Which type of Public Enterprise is established under a Special Act of the
Parliament?
(ii) How can a foreign company access Indian Securities market for raising funds?
(iii) Which type of listing provides arbitrage opportunities to the investor?
(iv) How many times extension of the period of Corporate Insolvency Resolution
process can be granted?
Answer:
2. (a) According to section 124 of the Companies Act, 2013, where a dividend has been
declared by a company but has not been paid or claimed within 30 days from the
date of the declaration to any shareholder entitled to the payment of the dividend,
the company shall, within 7 days from the date of expiry of the said period of 30 days,
transfer the total amount of dividend which remains unpaid or unclaimed to a
special account to be opened by the company in that behalf in any scheduled
bank to be called the Unpaid Dividend Account.
Further, according to section 127 of the Companies Act, 2013, where a dividend has
been declared by a company but has not been paid or the warrant in respect
thereof has not been posted within 30 days from the date of declaration to any
shareholder entitled to the payment of the dividend, every director of the company
shall, if he is knowingly a party to the default is liable for the punishment under the
said section.
In the present case, the Board of Directors of XYZ Company Limited at its meeting
declared a dividend on its paid-up equity share capital which was later on approved
by the company's Annual Genera! Meeting. In the meantime, the directors at
another meeting of the Board decided by passing a resolution to divert the total
dividend to be paid to shareholders for purchase of investment for the company. As
a result, dividend was paid to shareholders after 45 days.
(i) 1. Since, declared dividend has not been paid or claimed within 30 days from
the date of the declaration to any shareholder entitled to the payment of the
dividend, the company shall, within 7 days from the date of expiry of the said
period of 30 days, transfer the total amount of dividend which remains unpaid
or unclaimed to a special account to be opened by the company in that
behalf in any scheduled bank to be called the Unpaid Dividend Account.
2. The Board of Directors of XYZ Company Limited is in violation of section 127 of

the Companies Act 2013 as it failed to pay dividend to shareholders within 30
days due to their decision to divert the total dividend to be paid to
shareholders for purchase of investment for the company.
Consequences: The following are the consequences for the violation of

above provisions:
(a) Every director of the company shall, if he is knowingly a party to the
default, be punishable with imprisonment which may extend to two years
and shall also be liable for a fine which shall not be less than one
thousand rupees for every day during which such default continues.
(b) The company shall also be liable to pay simple interest at the rate of 18%
p.a. during the period for which such default continues.
(ii) If the amount of dividend to a shareholder is adjusted by the company against

certain dues to the company from the' shareholder, then failure to pay dividend
within 30 days shall not be deemed to be an offence under Proviso to section 127
of the Companies Act 2013.
(b) (i) Agreement

'Agreement' includes any arrangement or understanding or action in concert:
(i) Whether or not, such arrangement, understanding or action is formal or in
writing or
(ii) Whether or not such arrangement, understanding or action is intended to be
enforceable by legal proceedings. [Section 2(b)].
In view of the above definition of 'agreement', and understanding reached by

the cement manufacturers to control the price of cement will be an 'agreement'
within the meaning of section 2(b) of the Competition Act, 2002 even though the
understanding is not in writing and it is not intended to be enforceable by legal
proceedings.
(ii) According to Rule - 17 of the Nidhi Rules, 2014, the Director of a Nidhi shall hold
office for a term up to ten consecutive years on the Board of Nidhi and he shall be
eligible for re-appointment only after the expiration of two years of ceasing to be
a Director.
Hence, in the instant case Soma Nidhi Limited cannot reappoint Mr. X as a
director for a period of two years after completion of ten consecutive years.
(C) (i) Statutory Corporation

(ii) Through issue of Indian Depository Receipt (ICDRs)
(iii) Multiple listing.
(iv) Shall not be granted more than once.
3. (a) On the ground of conviction for an offence dealing with related party transaction.
Mr. Bat was disqualified to hold the directorship in XYZ Limited. The Board filled up the
vacancy by appointing Mr. Samarth as a director on 3rd April, 2018 which was
subsequently approved by the members in the immediate next general meeting.
Unfortunately, Mr. Samarth expired on 15th May, 2018 after working about 40 days as
a director. The Board now wishes to fill up the said vacancy by appointing Mr. Ball in
the forthcoming meeting of the Board. Advise the Board on the validity of the
following appointments as per the provisions under the Companies Act, 2013:
(i) Appointment of Mr. Samarth in place of Mr. Bat.
(ii) Appointment of Mr. Ball in place of Mr. Samarth. 6
(b) (i) Domen India Limited owes a sum of ` 2,80,000 to S, who assigns this debt to his
two creditors, Mr. R—to the extent of ` 1,40,000 and Mr. M—to the extent of
`1,40,000. Mr. M makes a demand for his money from the company by giving a
legal notice. The company could not meet Mr. M's demand or otherwise satisfy
him till the expiry of four weeks from the date of notice. Mr. M, therefore, moves to
NCLT with an application for initiation of Insolvency and Bankruptcy Code, 2016,
decide whether an application filed by Mr. M can be accepted by NCLT.
(ii) State the matters to be dealt with in the Management Discussion and Analysis
Report as per SEBI guidelines on Corporate Governance. 3+3=6
(c) State whether the following statements are 'True' or 'False' and give reasons therefor:
1x4=4
(i) 'Overseas Citizen of India (OCI)' means a person resident outside India who is a
citizen of India.
(ii) As per the SS-I (Secretarial standards on the meeting of Board), Quorum is not
required to be present throughout the meeting.
(iii) Locked-in securities of Promoter shall not be eligible for pledge with commercial
banks, financial institutions as collateral security.
(iv) 'Asset Reconstruction Company' means a company registered with Reserve Bank
under section 3 for the purposes of carrying on the business of either asset
reconstruction or securitisation.
Answer:
3. (a) Section 161(4) of the Companies Act, 2013 provides that if the office of any director
appointed by the company in general meeting is vacated before his term of office
expires in the normal course, the resulting casual vacancy may, in default of and subject
to any regulations in the articles of the company, be filled by the Board of Directors at a
meeting of the Board which shall be subsequently approved by members in the
immediate next general meeting.
Provided that any person so appointed shall hold office only up to the date up to which
the director in whose place he is appointed would haw held office if it had not been
vacated.
(i) In view of the above provisions, in the given case, the appointment of Mr. Samarth
in place of the disqualified director Mr. Bat was in order. In normal course, Mr.
Samarth could have held his office as director up to the date to which Mr. Bat
would have held the same.
(ii) As per facts, Mr. Samarth expired on 15th May, 2018 and again a vacancy has
arisen in the office of director owing to death of Mr. Samarth who was appointed by
the board and approved by members to fill up the casual vacancy resulting from
disqualification of Mr. Bat Vacancy arising on the Board due to vacation of office by
the director appointed to fill a casual vacancy in the first place, does not create
another casual vacancy as section 161 (4) clearly mentions that such vacancy is
created by the vacation of office by any director appointed by the company in
general meeting. Hence, the Board cannot fill in the vacancy arising from the
death of Mr. Samarth. So cannot appoint Mr. Ball in the office of Mr. Samarth.
The Board may however appoint Mr. Ball as an additional director under section 161
(1) of the Companies Act, 2013 provided the articles of association authorises the
board to do so, in which case Mr. Ball will hold the office up to the date of the next
annual general meeting or the last date on which the AGM should have been held,
whichever is earlier.
(b) (i) Financial creditor can initiate corporate insolvency resolution process himself or
jointly with other financial creditors against corporate debtor on default of
payment of debt of ` 1,00,000/- or more. Assignee of financial debt is also financial
creditor as per section 5 (7) of the IBC, 2016. Mr. M's application can be
accepted by NCLT if Company fails to pay debt within stipulated time. Application
should be supported with a copy of the assignment or transfer agreement and
other relevant documents as may be required to demonstrate the assignment or
transfer.
(ii) Management
A Management Discussion and Analysis Report should form part of the annual
report to the shareholders; containing discussion on the following matters.
1. Opportunities and threats.
2. Segment-wise or product-wise performance.
3. Risks and concerns.
4. Discussion on financial performance with respect to operational performance.
5. Material development in human resource / industrial relations front.
(c) (i) False

‘Overseas Citizen of India (OCI)’
Means a person resident outside India who is registered as an Overseas Citizen of
India Card holder under Section 7(A) of the citizenship Act, 1955. (Foreign
Exchange Management (Acquisition and Transfer of Immovable Property in India)
Regulations, 2018.
(ii) False
As per SS-I (Secretarial Standards on the meeting of the Board) Quorum shall be
present throughout the meeting.
(iii) False
Locked in Securities of Promoter shall be eligible for pledge with Commercial
Banks, financial institutions as Collateral Security [SEBI (ICDR) Regulations 2018]
(iv) False
"Asset reconstruction Company" means a Company registered with Reserve Bank
under Section 3 for the purposes of Carrying on the business of asset
reconstruction or Securitization, or both [Section 2 (ba)]
4. (a) The Articles of Association of a listed company provides for fixed payment of sitting
fee for each meeting of Directors subject to maximum of ` 30,000. In view of the
increased responsibilities of Independent Directors of listed Companies, the Company
proposes to increase the sitting fee to ` 45,000 per meeting. Advise the company
about the requirement under the Companies Act, 2013 to give effect to the proposal.
4
(b) XYZ Limited was incorporated by furnishing false informations. As per the Companies
Act, 2013, state the power of the Tribunal in this regard. 4
(c) Briefly state the compliance requirements under Companies Act, 2013 regarding risk
management policy. 4
(d) Fill in the Blanks: 1x4=4
(i) Under IBC 2016, the resolution plan shall be approved by the Committee of
Creditors by a vote of not less than ______________ per cent of voting share of the
financial creditors.
(ii) Reserve Bank of India may check the condition that the asset reconstruction
company has not incurred any loss in the _____________ preceding financial years.
(iii) Sec. 25 of the Banking Regulation Act, 1949, requires for the maintenance of
assets equivalent to at least ___________% of its demand and time liabilities in
India at the close of business of the last Friday of every quarter.
(iv) According to section 14 of the Banking Regulation Act, 1949, no banking
company shall create any charge upon its _______________ capital, and any such
charge, if created, shall be invalid.
Answer:
4. (a) Section 197(5) of the Companies Act, 2013 provides that a director may receive
remuneration by way of fee for attending the Board/Committee meetings or for any
other purpose as may be decided by the Board, provided that the amount of such
fees shall not exceed the amount as may be prescribed. The Central Government
through rules prescribed that the amount of sitting fees payable to a director for
attending meetings of the Board or committees thereof may be such as may be
decided by the Board of directors or the Remuneration Committee thereof which
shall not exceed the sum of ` 1 lakh per meeting of the Board or committee thereof.
Further, the Board may decide different sitting fee payable to independent and non-
independent directors other than whole-time directors.
From the above, it is clear that fee to independent directors can be increased from
`30,000 to ` 45,000 per meeting by passing a resolution in the Board Meeting and
alternating the Articles of Association by passing Special Resolution.
(b) According to section 7(7) of the Companies Act, 2013:

Incorporation by furnishing of incorrect information: Without prejudice to the
provisions of sub-section (6), where a company has got incorporated by furnishing
any false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for
incorporating such company or by any fraudulent action, the Tribunal may, on an
application made to it, on being satisfied that the situation so warrants,—
(a) pass such orders, as it may think fit, for regulation of the management of the
company including changes, if any, in its memorandum and articles, in public
interest or in the interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order under this sub-section,—

(i) the company shall be given a reasonable opportunity of being heard in the
matter; and
(ii) the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.
(c) Companies Act, 2013 has introduced various provisions relating to ease of doing
business while ensuring the governance and transparency are maintained in the way
the business is conducted. One of the key compliance requirement introduced
towards the governance and transparency is the introduction of Risk Management as
a policy and process in the Companies Act, by which the board and audit
committee have been vested with specific responsibilities in assessing the robustness
of risk management policy, process and systems.
 Sec 134 (3) There shall be attached to (Financial) statements laid before a
company in general meeting, a report by its Board of Directors, which shall

include -
 a statement indicating development and implementation of a risk management
policy for the company including identification therein of elements of risk, if any,
which in the opinion of the Board may threaten the existence of the company:
 Sec 177 (4) Every Audit Committee shall act in accordance with the terms
of reference specified in writing by the Board which shall, inter alia, include,-
 evaluation of internal financial controls and risk management systems;
Hence as per Companies Act, 2013 it is mandatory for the Companies to

development and implementation of a risk management policy and Audit
Committee shall evaluate the risk management systems.
(d) (i) 66%

(ii) 3 (three)
(iii) 75%
(iv) unpaid
5. (a) One of the Objects Clauses of the Memorandum of Association of Info Company
Limited conferred upon the company, power to sell its undertaking to another
company with identical objects. Company's Articles also conferred upon the
directors powers to sell or otherwise deal with the property of the company. At an
Extraordinary General Meeting of the company, members passed an ordinary
resolution for the sale of its assets on certain terms and authorized the directors to
carry out the sale. Directors refused to comply with the wishes of the members where
upon it was contended on behalf of the members that they were the principals and
directors being their agents, were bound to give effect to their (members') decisions.
Examining the provisions of the Companies Act, 2013, answer the following:
Whether the contention of members against the non-compliance of members'
decision by the directors is tenable.
Whether it is possible for the members to usurp the powers, which by the Articles are
vested in the directors by passing a resolution in the general meeting. 6
(b) Runway Infrastructure Limited entered into a contract with Royal forgings (a
partnership firm), in which wife of Mr. Patrick, a director of the Runway Infrastructure
Limited is a partner. The contract is for supply of certain components by the firm for a
period of three years with effect from 1st September, 2018 on credit basis. Explain the
requirements under the Companies Act, 2013, which should have been complied with
by Runway Infrastructure Limited before entering into contract with Royal forgings.
What would be your answer in case Royal forgings is a private limited company in
which wife of Mr. Patrick is holding shares? 5
(c) (i) Is it mandatory to obtain Regulatory approvals for scheme of compromise/

arrangements as per section 230(5) of the Companies Act, 2013? Explain.
(ii) You, an individual shareholder found that the Directors representing the majority
of shareholders perform an illegal or ultra vires act for the company. What is the
action you may take to restrain such an act? 3+2
Answer:
5. (a) Powers of Board: In accordance with the provisions of the Companies Act, 2013, as
contained under Section 179(1), the Board of Directors of a Company shall be
entitled to exercise all such powers and to do all such acts and things, as the
Company is authorized to exercise and do:
Provided that in exercising such power of doing such act or thing, the Board shall be
subject to the provisions contained in that behalf in this Act, or in the memorandum
or articles, or in any regulations not inconsistent therewith and duly made there under
including regulations made by the Company in general meeting.
Provided further that the Board shall not exercise any power or do any act or thing
which is directed or required, whether under this Act or by the members or articles of
the Company or otherwise to be exercised or done by the Company in general
meeting.
Section 180 (1) of the Companies Act, 2013, provides that the powers of the Board of
Directors of a Company which can be exercised only with the consent of the
Company by a special resolution. Clause (a) of Section 180 ( 1 ) defines one such
power as the power to sell, lease or otherwise dispose of the whole or substantially the
whole of the undertaking of the company or where the Company owns more than
one undertaking of the whole or substantially the whole or any of such undertakings.
Therefore, the sale of the undertaking of a Company can be made by the Board of
Directors only with the consent of members of the Company accorded vide a special
resolution.
Even if the power is given to the Board by the memorandum and articles of the
Company, the sale of undertaking must be approved by the shareholders in general
meeting by passing a special resolution.
Therefore, the correct procedure to be followed is for the Board to approve the sale
of the undertaking clearly specifying the terms of such sale and then convene a
general meeting of members to have the proposal approved by a special resolution.
In the given case, the procedure followed is completely incorrect and violative of the
provisions of the Act. The shareholders cannot on their own make out a proposal of
sale and pass an ordinary resolution to implement it though the directors.
The contention of the shareholders is incorrect in the first place as it is not within their
authority to approve a proposal independently of the Board of Directors. It is for the

Board to approve a proposal of sale of the undertaking and then get the members to
approve it by a special resolution. Accordingly, the contention of the members that
they were, the principals and directors being t h e i r agents were bound to give effect
to the decisions of the members is not correct.
Further, in exercising their powers the directors do not act as agent for the majority of
members or even all the members. The members therefore, cannot by/resolution
passed by a majority or even unanimously supersede the powers of the directors or
instruct them how they shall exercise their powers. The shareholders have, however,
the power to alter the Articles of Association of the Company in the manner they like
subject to the provisions of the Companies Act, 2013.
(b) The contract for supply of components entered into between Runway Infrastructure -
Limited and Royal forgings, a partnership firm (in which wife of Mr. Patrick, a director
of the company is a partner) attracts Section 184,188 and 189 of the Companies Act
2013.
As per Section 188, company cannot enter into contract with firm for supply or
purchase of goods or material where director of company or his relative is partner of
firm without approval of Board of directors at board meeting. As per Section 184,
interested directors must disclose his interest at board meeting at which said business
is to be discussed. Interested directors should not take part in the discussion or voting
at board meeting. If he does vote, his vote shall not be counted. In case of Private
limited Company interested director can participate in the board meeting after
disclosure of interest.
As per Section 189, prescribed particulars of the contract must be entered into the
Register of Contract in which directors are interested in Form MBP-4. Every entry made
in Register should be authenticated by Company Secretary of company or any other
person authoriasd by Board. After each entry in the register, it shall be placed before
the next board meeting and shall be signed by all the directors present thereat
Based upon discussion of the above provisions:

If the value of the contract or transaction is exceeded than limit specified, prior
approval of shareholders is required to be obtained. Question does not suggest value
of transaction. Assuming that it is within limits specified under the Act consent of
shareholders is not required.
If Royal forgings is a private limited company: The provision of Section 188 are
applicable to it As the directors wife (i.e. Patrick's wife) is member of Royal forgings
private limited.
Section 184 is not applicable as Mr. Patrick, director of runway Infrastructure Limited is
neither director nor holding any shares in Royal Forgings Private Limited. Shares held
by Mr. Patrick's wife are not to be considered. Hence the provisions of Section 184 are
not attracted.
(c) (i) Notice to be sent to the regulators seeking their representations Section 230(5)
states that a notice under Sub-Section (3) along with all the documents in such
form as may be prescribed shall also be sent to the Central Government, the
income-tax authorities, the Reserve Bank of India, the Securities and Exchange
Board, the Registrar, the respective stock exchanges, the Official Liquidator, the
Competition Commission of India established under Sub-Section (1) of Section 7
of the Competition Act, 2002, if necessary, and such other sectoral regulators or
authorities which are likely to be affected by the compromise or arrangement
and shall require that representations, if any, to be made by them shall be made
within a period of thirty days from the date of receipt of such notice, failing
which, it shall be presumed that they have no representations to make on the
proposals.
(ii) The majority of shareholders have no right to confirm an illegal or ultravires

transactions of the company. In such case an individual shareholder has right to
restrain the company by an order or injunction of the court from carrying out an
ultravires acts.
6. (a) Referring to the provisions of the Securities Contracts (Regulation) Act, 1956, state
how a recognized stock exchange may delist the securities and how an appeal may
be filed by an aggrieved investor against the decision of stock exchange for delisting
of securities. 4
(b) What is the suggested framework for Business Responsibility Report? Explain. 4
(c) The Management of Gangotri Ltd. was taken by LBV Bank Ltd. (secured creditor)
complying the provisions of SARFAESI Act, 2002 who appointed two Directors. The
Board of Directors of Gangotri Ltd., duly authorized by its Articles, appointed two
Alternate Directors and the majority of the Directors made a declaration required for
voluntary liquidation proceedings. A special resolution requiring the Company to be
liquidated voluntarily by appointing an insolvency professional to act as the
Liquidator was passed at the general meeting of the Company. The Board of Directors
and the Shareholders passed the resolutions without the approval/consent of
Directors appointed by LBV Bank Ltd. Discuss the validity of the above resolutions
under SARFAESI Act, 2002. Does an unsecured Creditor have recourse to this Act? 4
(d) During investigations conducted on the affairs of a company in the public interest, the
inspector observed that the Directors of the company had been acting on the
instructions of the holding company and he proceeded to investigate the holding
company. Is Inspector permitted to do so under the provisions of the Companies Act,
2013? 4
Answer:
6. (a) According to section 21A of the Securities Contracts (Regulation) Act, 1956 the
delisting of securities may take place in the following manner-
(1) A recognized stock exchange may delist the securities, after recording the reasons
thereto, from any recognized stock exchange on any of the ground/s as may be
prescribed under this Act.
Provided that the securities of a company shall not be delisted unless the company
concerned has been given a reasonable opportunity of being heard.
(2) A listed company or an aggrieved investor may file an appeal before the Securities
Appellate Tribunal against the decision of the recognized stock exchange delisting
the securities within fifteen days from the date of the decision of the recognized stock
exchange delisting the securities and the Provisions of section 22B to 22E of this Act,
shall apply as far as may be, to such appeals.
Provided that the Securities Appellate Tribunal may, if it is satisfied that the company
was prevented by sufficient cause from filing the appeal within the said period,
allow it to be filed within a further period not exceeding one month.
(B) Business Responsibility Report - Suggested Framework
This report may be presented in three parts as detailed below:

Part - A of the report includes basic information and data about the operations of the
business entity so that the reading of the report becomes more contextual and
comparable with other similarly placed businesses.
Part - B of the report incorporates the basic parameters on which the business may
report their performance. Efforts have been made to keep the reporting simple
keeping in view the fact that this framework is equally applicable to the small
businesses as well. The report may be prepared in a free format with the basic
performance indicators being included in the same. In case the business entity has
chosen not to adopt or report on any of the Principles, the same may be stated
along with, if possible, the reasons for not doing so.
Part-C of the report incorporates two important aspects on Business" Responsibility

reporting. Part C - 1 is a disclosure on by the business entity on any negative
consequences of its operations on the social, environmental and economic fronts.
The objective is to encourage the business to report on this aspect in a transparent
manner so that it can channelize its efforts to mitigate the same. Part C - 2 is aimed at
encouraging the business to continuously improve its performance in the area of
Business Responsibility.
(c) Management of borrower taken by the secured creditor (Section 15 of the SARFAESI
Act, 2002): Where the management of the business of a borrower, being a company is
taken over by (he secured creditor then, notwithstanding anything contained in the
said Act or in the memorandum or articles of association of such borrower -
(a) it shall not be lawful for the shareholders of such company or any other person to
nominate or appoint any person to be a director of the company;
(b) no resolution passed at any meeting of the shareholders of such company shall be
given effect to unless approved by the secured creditor;
Accordingly, in the given situation in the question, appointment of alternate directors

by the BoD of Gangotri Ltd. though authorised by its Articles, is not valid, and the
special resolution so passed by majority for voluntary liquidation passed at general
meeting shall not be given effect due to lack of consent of LBV Bank Ltd.
An unsecured creditor doesn't have recourse to this Act.
(d) Investigation into affairs of related companies: Section 219 of the Companies Act,
2013, provides for power of Inspector to conduct investigation into the affairs of
related companies etc., if an inspector appointed under section 210 or section 212 or
section 213 to investigate into the affairs of a company considers it necessary for the
purposes of the investigation, to investigate also the affairs of
(a) any other body corporate which is, or has at any relevant time been the
company's subsidiary company or holding company, or a subsidiary company of its
holding company;
(b) any other body corporate which is, or has at any relevant time been managed by
any person as managing director or as manager, who is, or was, at the relevant
time, the managing director or the manager of the company;
(c) any other body corporate whose Board of Directors comprises nominees of the
company or is accustomed to act in accordance with the directions or
instructions of the company or any of its directors; or
(d) any person who is or has at any relevant time been the company's managing
director or manager or employee, he shall, subject to the prior approval of the
Central Government, investigate into and report on the affairs of the other body
corporate or of the managing director or manager, in so far as he considers that the
results of his investigation are relevant to the investigation of the affairs of the
company for which he is appointed.
Therefore, the inspector shall subject to the prior approval of the Central
Government, investigate into and report on the affairs of the other body corporate or
of to Managing Director or Manager, in so far as he considers that the results of his
investigation are relevant to the investigation of the affairs of the Company for which
he is appointed. In view of above, the Inspector is permitted to investigate the holding
company.
7. (a) What is meant by Corporate Governance? State the major 'characteristics' of good
corporate governance. 4
(b) Match the following items in Column 'A' with items shown in Column 'B': 1x4=4
Column 'A' Column 'B'
(i) Penalty under Sec. 15D of SEBI Act, (a) Not less than ` 1 lakh and may
1992 for certain defaults in case of extend ` 1 crore.
Mutual Funds.
(ii) Penalty under Sec. 15F of SEBI Act, (b) Not less than `5 lakh but which may
1992 for failure to issue Act, 1992 for extend to `25 crore or three times
failure to issue the amount of profits made out of
insider trading, whichever is higher.
(iii) Penalty under Sec. 15HA of SEBI Act, (c) Not less than `1 lakh and may
1992 for fraudulent and unfair trade extend to `1 lakh per day for
practices. continuous failure subject to a
maximum of `1 crore.
(iv) Penalty under Sec. 15HB for (d) Not less than `1 lakh.
contravention where no separate
penalty has been provided.
(c) State some of the devices by which trade based money laundering is done. 4
(d) Mr. Daksh, an Indian National desires to obtain foreign exchange for the following
purposes: 4
(i) Payment to be made for securing health insurance from a company abroad.
(ii) Payment of commission on exports under Rupee State Credit Route.
Advise whether he can get foreign exchange and if so, under what condition?
Answer:
7. (a) Corporate Governance: Simply stated, 'Governance' means the process of decision
making and the process by which decisions are implemented. The term corporate
governance is understood and defined in various ways. Corporate governance can be
defined as the formal system of accountability and control for ethical and socially
responsible organisational decisions and use of resources and accountability relates to
how well the content of workplace decisions is aligned with the organisations strategic
direction. Control involves the process of auditing and improving organisation decisions
and actions. Good corporate governance has the following major characteristics:
(i) Participatory
(ii) Consensus oriented
(iii) Accountable
(iv) Transparent
(v) Responsive
(vi) Effective and efficient
(vii) Equitable and inclusive and
(viii) Follows the rule of law.
(b)
Column 'A' Column 'B'
(i) Penalty under Sec. 15D of SEBI Act, (c) Not less than `1 lakh and may
1992 for certain defaults in case of extend to `1 lakh per day for
Mutual Funds. continuous failure subject to a
maximum of `1 crore.
(ii) Penalty under Sec. 15F of SEBI Act, (d) Not less than `1 lakh.
1992 for failure to issue Act, 1992 for
failure to issue
(iii) Penalty under Sec. 15HA of SEBI Act, (b) Not less than `5 lakh but which may
1992 for fraudulent and unfair trade extend to `25 crore or three times
practices.
the amount of profits made out of

insider trading, whichever is higher.
(iv) Penalty under Sec. 15HB for (a) Not less than ` 1 lakh and may
contravention where no separate extend ` 1 crore.
penalty has been provided.
(c) (1) 'Over-Invoicing' and 'Under-Invoicing' of Goods and Services: Money laundering
through the over-invoicing and under-invoicing of goods and services, which is
one of the oldest methods of fraudulently transferring value across borders,
remains a common practice today. The key element of this technique is the
misrepresentation of the price of the good or service in order to transfer additional
value between the importer and exporter. Over-invoicing of exports is one of the
most common trade-based money laundering techniques used to move money.
This reflects the fact that the primary focus of most customs agencies is to stop the
importation of contraband and ensure that appropriate import duties are
collected.
(2) Multiple-Invoicing of Goods and Services: Another technique used to 'launder'
funds involves issuing more than one invoice for the same trade transaction. By
invoicing the same good or service more than once, a money launderer or
terrorist financier is able to justify multiple payments for the same shipment of
goods or delivery of services. Unlike over-invoicing and under-invoicing, it should
be noted that there is no need for the exporter or importer to misrepresent the
price of the good or service on the commercial invoice.
(3) Over-Shipment and Under-Shipment of Goods and Services: In addition to
manipulating export and import prices, a money launderer can overstate or
understate the quantity of goods being shipped or services being provided. In
the extreme, an exporter may not ship any goods at all, but simply collude with
an importer to ensure that all shipping and customs documents associated with
this so called "phantom shipment" are routinely processed. Banks and other
financial institutions may unknowingly be involved in the provision of trade
financing for these phantom shipments.
(4) Falsely Described Goods and Services: In addition to manipulating export and
import prices, a money launderer can misrepresent the quality or type of a good
or service. For example, an exporter may ship a relatively inexpensive good and
falsely invoice it as a more expensive item or an entirely different item. This
creates a discrepancy between what appears on the shipping and customs
documents and what is actually shipped. The use of false descriptions can also
be used in the trade in services, such as financial advice, consulting services and
market research.
(d) Any person may sell or draw foreign exchange to or from an authorized person if such
sale 'or drawal is a current account transaction. However, the Central Government
may in public interest and in consultation with the RBI, impose such reasonable
restrictions for current account transactions as may be prescribed (Section 5). The
Central Government has framed Foreign Exchange Management (Current Account
Transactions) Rules, 2000.
The Rules stipulate some prohibitions and restrictions on drawal of foreign exchange
for certain purposes. In the light of provisions of these rules, the answer to the given
problem is as follows:
(i) Drawl of foreign exchange for securing health insurance from a company abroad
does not fall under any of the Schedules I. II or III. Therefore, such a transaction is
permitted without any restriction or condition.
(ii) Rule 3 read with Schedule I of Foreign Exchange Management (Current Account
Transactions) Rules, 2000 prohibits payment of commission on exports under
Rupees State Credit Route (except commission upto 10% of invoice value of
exports of tea and tobacco). Therefore, payment of commission on exports under
Rupee State Credit Route is prohibited unless such commission is paid for export
of tea and tobacco, and the commission does not exceed 10% of invoice value
of exports.
(i) Functions of Winding up committee
(ii) Duties of Interim resolution Professionals
(iii) Sufficiency of assets with reference to Sec. 64V of the Insurance Act, 1938
(iv) "Unpublished Price sensitive information" under Regulation (2n) of Part F of SEBI
(Prohibition of Insider Trading) Regulation, 2015
(v) The OECD Guidelines on corporate governance of state owned enterprises
Answer:
8. (i) Functions of winding up committee

Section 277(5) states that the Company Liquidator shall be the convener of the
meetings of the winding up committee which shall assist and monitor the liquidation
proceedings in following areas of liquidation functions, namely:
(a) taking over assets.
(b) examination of the statement of affairs.
(c) recovery of property, cash or any other assets of the company including
(d) benefits derived therefrom.
(e) review of audit reports and accounts of the company.
(f) sale of assets.
(g) finalization of list of creditors and contributories.
(h) compromise, abandonment and settlement of claims.
(i) payment of dividends, if any. and
(j) any other function, as the Tribunal may direct from time to time.
(ii) Duties of interim resolution professional

The interim resolution professional shall perform the following duties - Section 18(1) of
Insolvency and Bankruptcy Code, 2016.
(a) collect all information relating to the assets, finances and operations of the
corporate debtor for determining the financial position of the corporate debtor,
including information relating to— (i) business operations for the previous two
years (ii) financial and operational payments for the previous two years (iii) list of
assets and liabilities as on the initiation date; and (iv) such other matters as may
be specified.
(b) receive and collate all the claims submitted by creditors to him, pursuant to the
public announcement made under Sections 13 and 15.
(c) constitute a committee of creditors.
(d) monitor the assets of the corporate debtor and manage its operations until a
resolution professional is appointed by the committee of creditors.
(e) file information collected with the information utility, if necessary; and
(f) take control and custody of any asset over which the corporate debtor has
ownership rights as recorded in the balance sheet of the corporate debtor, or
with information utility or the depository of securities or any other registry that
records the ownership of assets.
(g) perform such other duties as may be specified by the Board.
(iii) Sufficiency of assets (Section 64V)

Every insurer and re-insurer shall at all times maintain an excess of value of assets over
the amount of liabilities of, not less than fifty per cent of the amount of minimum
capital as stated under section 6 and arrived at in the manner specified by the
regulations. An insurer or re-insurer, as the case may be, who does not comply with
shall be deemed to be insolvent and may be wound-up by the court on an
application made by the Authority. The Authority shall by way of regulation made for
the purpose, specify a level of solvency margin known as control level of solvency on
the breach of which the Authority shall act in accordance with without prejudice to
taking of any other remedial measures as deemed fit.
Thus, the amendment Act incorporates enhancements in the Insurance Laws in

keeping with the evolving insurance sector scenario and regulatory practices across
the globe. The amendments will enable the Regulator to create an operational
framework for greater innovation, competition and transparency, to meet the
insurance needs of citizens in a more complete and subscriber friendly manner. The
amendments are expected to enable the sector to achieve its full growth potential
and contribute towards the overall growth of the economy and job creation.
(iv) Regulation 2(n): "Unpublished price sensitive information"

"unpublished price sensitive information" means any information, relating to a
company or its securities, directly or indirectly, that is not generally available which
upon becoming generally available, is likely to materially affect the price of the
securities and shall, ordinarily including but not restricted to, information relating to
the following:
(i) financial results;
(ii) dividends;
(iii) change in capital structure;
(iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business

and such other transactions;
(v) changes in key managerial personnel; and
(vi) material events in accordance with the listing agreement.
(v) The OECD guidelines focused on the following areas:

(1) Rationales for State Ownership
The state exercises the ownership of SOEs in the interest of the general public. It
should carefully evaluate and disclose the objectives that justify state ownership
and subject these to a recurrent review.
(2) The State's Role as an Owner
The state should act as an informed and active owner, ensuring that the
governance of SOEs is carried out in a transparent and accountable manner,
with a high degree of professionalism and effectiveness.
(3) State-Owned Enterprises in the Marketplace
Consistent with the rationale for state ownership, the legal and regulatory
framework for SOEs should ensure a level playing field and fair competition in the
marketplace when SOEs undertake economic activities.
(4) Equitable Treatment of Shareholders and other Investors
Where SOEs are listed or otherwise include non-state investors among their
owners, the state and the enterprises should recognise the rights of a!!
shareholders and ensure shareholders'- equitable treatment and equal access to
corporate information.
(5) Stakeholder Relations and Responsible Business
The state ownership policy should fully recognise SOEs’ responsibilities towards
stakeholders and request that SOEs report on their relations with stakeholders. It
should make clear any expectations the state has in respect of responsible
business conduct by SOEs.
(6) Disclosure and Transparency
State-owned enterprises should observe high standards of transparency and be
subject to the same high quality accounting, disclosure, compliance and auditing
standards as listed companies.
(7) The Responsibilities of the Boards of State-Owned Enterprises
The boards of SOEs should have the necessary authority, competencies and
objectivity to carry out their functions of strategic guidance and monitoring of
management. They should act with integrity and be held accountable for their
actions.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
DECEMBER - 2021
Paper -13 Corporate Laws & Compliance
Section: A - MCQ 20X1=20

Q.1 Which of the following export documents is known as the Document of Title?
Ans 1. Mate‟s receipt
2. Bill of exchange
3. Bill of lading
4. Proforma invoice
Q.2 It is not compulsory for private Ltd companies to

Ans 1. All of these.
2. Conduct statutory meetings.
3. Issue prospectus.
4. Maintain an index of its members.

Q.3 Public deposits cannot exceed
Ans 1. 50% of share capital and free reserve.
2. None of these.
3. 25% of share capital and free reserve.
4. 10% of share capital and free reserve.
Q.4 As per section 36(4) of Insolvency and Bankruptcy code ,2016,which of the following
assets
will not form a part of liquidation assets:
Ans 1. Assets of any Indian or foreign subsidiary of the corporate debtor.
2. Assets subject to the determination of ownership by the court.
3. Tangible assets,whether moveable or immoveable.
4. All proceeds of liquidation as and when they are realised.
Q.5 Providing fair compensation and safe working conditions,is related to social
responsibilities
towards:
Ans 1. Shareholders.
2. Employees.
3. Customers.
4. Community.
Q.6 "METRO” is which form of enterprise
Ans 1. Private limited company
2. PPP
3. Government company
4. Public limited company
Q.7 Which of the following instruments is also known as ‘Hybrid security’?

Ans 1. Preference share.
2. Debentures
3. Public deposit
4. Equity shares
Q.8 Which of the following is not the feature of LLP?

Ans 1. The registration of LLP is not compulsory.
2. Compulsory to maintain accounts and get them audited.
3. All partners have limited liability.
4. No mutual agency.
Q.9 Which of the following FDI in resident entities is not eligible as investee entities?
Ans 1. FDI in H.U.F
2. FDI in an Indian company.
3. FDI in partnership.
4. FDI in LLP
Q.10 Rule means the enforcement of rules in the society legally.

Ans 1. Application.
2. Implementation
3. Making
4. Following
Q.11 Which of the following is a motive for merger?

Ans 1. Economics of scale.
2. Surplus fund
3. Tax shelter
4. None of these.
Q.12 More instability in currency is called as
Ans 1. Country risk.
2. Liquidity risk
3. Currency risk.
4. Financial risk.
Q.13 Which of the following can never be dishonoured

Ans 1. None of these
2. Bank draft
3. Cheque
4. Both (a) and (b)
Q.14 A Nidhi shall not accept deposits exceeding times of its net owned funds
Ans 1. Fifteen times
2. Ten times
3. Twenty times
4. Twenty five times

Q.15 The ethical issues relating to customers include.
Ans 1. Price of the product.
2. Quality of the product.
3. All of these.
4. Safety in handling product.
Q.16 Principle of indemnity is not applicable to

Ans 1. Life insurance
2. Marine insurance
3. Fire insurance.
4. None of these
Q.17 The process of money laundering generally involves three stages.Which is the second
stage?
Ans 1. Placement.
2. Integration.
3. Layering.
4. Contribution.
Q.18 Which of the following is not a motive for setting up a joint venture?
Ans 1. None of these.
2. Diversification of risk.
3. Tax shelter
4. Economics of scale.
Q.19 The holders of GDRs do not carry which of the following right?
Ans 1. Voting right.
2. Dividends
3. All of these.
4. Capital appreciation
Q.20 In the case of a meeting of the Board of directors or of a committee of the board,the
Minutes
shall also contain.
Ans 1. The names of the directors present at the meeting.
2. Both.
3. In the case of each resolution passed at the meeting, the names of the directors, if
any,dissenting from or concerning with the resolution.
4. None of these
Section : B - SAQ 20X1=20
Q.1 Which document helps to avoid and solve any ambiguity,or conflict between
exporter and
importer?
Answer:
Indent
Q.2 The Companies Act, 2013 is administered by which authority?
Answer:
The Companies Act 2013 is administered by the Central Government through the Ministry Of Corporate Affairs, (MCA)
and offices of Registrar of Companies.
Q.3 In between the winding up and dissolution, can the company be sued in the Court
of Law?
Answer:
Yes, because the legal status of the company continues.
Q.4 A company got registered with an illegal object.Can the registration be questioned?
Answer:
No, The registration can not be questioned if the Registrar has already issued the certificate of registration.
Q.5 Is the power to invest the funds of the company the prerogative of the board of
directors?
Answer:
Yes
Q.6 What is the full form of RTGS?
Answer:
Real time gross settlement.
Q.7 Can the company keep any of the books of account at any other place in India other
than the
registered office of the company?
Answer:
Yes, Subject to intimation to the Registrar, within seven days of the Board decisions.
Q.8 What are three main target groups that can be distinguished in governance
concepts?
Answer:
Government, citizens and business/interest groups.

Q.9 State whether shareholders of the company may declare interim dividend.
Answer:
No
Q.10 State which of the following terms are not defined in the companies Act,2013:
i) The word amalgamation
ii) The words oppression and mismanagement
Answer:
Both
Q.11 Financial statement with respect to small company may not include cash flow
statement. Do
you agree?
Answer:
Yes
Q.12 State whether public deposit may be accepted in joint name exceeding three?
Answer:
No
Q.13 Name the organisation formed by passing a special act.
Answer:
Statutory Company
Q.14 State whether the LLP Act, 2008 provides any facility for conversion of a LLP into
private
limited company.
Answer:
The LLP Act, 2008 does not provide any facility for conversion of LLP into a private limited company.
Q.15 Who defines trade based money laundering?
Answer:
Financial Action task force
Q.16 Fill in the blanks:

Public deposits can be invited by companies for a period of months to
years.
Answer:
Six‐three
Q.17 When two or more firms come together to create a new business entity that is
legally separate
and distinct from its parents, it is known as .
Answer:
Joint Venture
Q.18 A person who is indebted to a company in excess of Rs.5 lakh can be appointed as
an
auditor of that company.
Answer:
No
Q.19 State the effect if the resolution plan is rejected by NCLT
Answer:
If the resolution plan is rejected by the adjudicating authority. Liquidation process will commence.
Q.20 Can a person resident in India, possess foreign coins without no restriction?
Answer:
Yes
Section : C
(12X4= 48 Marks)
One LAQ
Q.1 Insincere, limited on 22nd May, 2020. Mortgaged one of the freehold land of the (6 Marks)
company in the
favour of the bank, from which Mr Daman,a director of the company had taken a
housing loan for his
residential purpose since Insincere Ltd. had been running in losses and was unable
to honour the
liabilities due towards the other creditors.The Board of directors of the company
was aware of the
financial crisis faced by the insincere Ltd. and of creation of a mortgage in order to
give preference to
Mr.Daman over other creditors.
On 23rd September, 2020, some creditors of the company filed a petition for the
winding up before
tribunal. It passed an order for the winding up of the company on 5th
November,2020. Discuss on the
nature of the transaction of mortgage created with bank in the given circumstances
in the light of the
companies Act,2013.
Answer:
Section 328 (1) states that when a company has given preference to a person who is one of the creditors of the company or a
surety or guarantor for any of the debts or other liabilities of the company,and the company does anything or suffers anything
done which has the effect of putting that person into a position which in the event of the company going into liquidation,will be
better than the position, he would have been in if that thing had not been done prior to six months of making winding up
application,the Tribunal, if satisfied that such transaction is a fraudulent preference may order as it may think fit forrestoring
the position to what it would have been if the company had not given that preference.
Sub‐Section(2) states that if the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any
delivery of goods, payment, execution made, taken or done by or against a company within six months before making winding up
application, the Tribunalmay order as it may thinkfit and may declare such transactioninvalid and restore the position.
In the question, the company had created a legal mortgage on 22nd May 2020 and the creditors made a petition for winding up of
the company on 23rd September 2020, so the above transaction of creation of legal mortgage on the freehold land of the
company falls within the ambit of section 328 of the Act.
Therefore, creation of mortgage of the freehold land of the company is the transaction covered under the fraudulent preference
since the mortgage is created 6 months preceding the date of making of winding up petition and therefore the Tribunal may order
as it may think fit and may declare such transaction on creation of mortgage as invalid and restore the position.
Q.2 Perpetual Limited is an asset reconstruction company (ARC) under the SARFAESI
Act,2002.
(4 Marks)
During the financial year 2020-2021. Mr Param, one of the directors of the company
in urgent need of
money transferred 10% of his shareholding to Mr Shariff (Another director of the
company), which
increased Mr Shariff’s shareholding to 20%. Perpetual Ltd also appointed Mr Vikram
as CEO for
managing the overall operations and resources of the company. However, for the
said purposes,
Perpetual limited did not take approval of the Reserve Bank of India. RBI cancelled
the certificate of
Registration granted to Perpetual Limited. Perpetual Ltd. contended that the
decision of the RBI is
inappropriate as transfer of shareholding and appointment of CEO is not a
substantial change in
management. Discuss the validity of decisions of the RBI in the light of the
applicable law
Answer:
As per Section 3(6) of the SARFAESI ACT 2002. Every asset reconstruction company, shall obtain prior approval of the Reserve
Bank for any substantial change in its management including appointment of any director on the board of directors of the asset
reconstruction company or managing director or chief executive officer thereof or change of location of its registered office or
change in its name.
Provided that the decision of the Reserve Bank whether the change in management of a securitisation company or a
reconstruction company is a substantial change in its management or not shall be final.
Explanation—For the purposes of this section, the expression”substantial change in management” means the change in the
management by way of transfer of shares or change affecting the sponsorship in the company by way of transfer or shares or
amalgamation or transfer of the business of the company.
In the above question, there has been change in shareholding of directors which falls under the “substantial change in
management”including appointment of CEO and the decision of the Reserve Bank as to whether the change in management of
the asset reconstruction company is a substantial change in management or not, shall be final.
Therefore, the decision of the Reserve Bank shall be final and will be held valid
Q.3 Identify the form of public sector enterprise in the following cases. (2 Marks)
1) It is under the control of the Concerned Minister of the department.
2) Private individuals can also become shareholders.
Answer:
1) Departmental Undertaking
2) Government company
Two LAQ
Q.1 Bharti Limited, a company listed on Bharat Stock Exchange Limited(A recognised (5 Marks)
Stock Exchange
to India)had been incurring losses continuously during the preceding 3 years, but
its net worth has not
become negative till date.The Stock Exchange decided to delist the securities of the
company after
giving an opportunity of being heard to the company. Mr. Binay, (the investor) who
holds equity shares
up to 10% of the total equity share capital of the company, has suffered heavy
losses due to delisting
of securities by the Stock Exchange.You have been hired by Mr. Binay to consult
him regarding the
security laws.Examine the given situation and mention the various grounds of
delisting under SCRA
and the remedies available to Mr. Binay in the light of the securities contract
(Regulation)Act,1956[SCRA].
Answer:
As per Section 21A of the Securities Contracts (Regulation) Act, 1956 read with Rule 21 of the Securities Contract (Regulation)
1957, a recognised stock exchange may delist the securities, after recording the reasons therefor from any recognised stock
exchange on any of the ground or grounds as may be prescribed under this Act.
Provided that the securities of a company shall not be delisted unless the company concerned has been given a reasonable
opportunity of being heard. Alisted company or an aggrieved investor may file an appeal before the Securities Appellate
Tribunal against the decision of the recognised stock exchange delisting the securities within fifteen days from the date of the
decision of the recognised stock exchange delisting the securities,
Following are the grounds namely

(a) the company hasincurred lossesduring the preceding three consecutive years and it has negative net worth.
(b) trading in the securities of the company has remained suspended for a period of more than six months.
(c) the securities of the company have remained infrequently traded during the preceding three years,
(d) the company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions
of the Act or the Securities and Exchange Board of India Act,1992 or the Depositories Act.1996 or
rules,regulations,agreements made thereunder.as the case may be and awarded a penalty of not less than rupees one crore or
imprisonment of not less than three years.
(e) the addresses of the company or any of its promoter or any of its directors,are not known or false addresses have been
furnished or the company has changed its registered office in contravention of the provisions of the Companies Act, or
(f) shareholding of the company held by the public has come below the minimum level applicable to the company as per the
listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified
by the recognised stock exchange. In the above question, the net worth of the company has not become negative.
Therefore,either the company or Mr, Binay may file an appeal before the Securities Appellate Tribunal against the decision of
the recognised stock exchange within 15 days from the date of the decision.
Q.2 Earth Developers Private Limited, a Bengaluru based company is regular in filing its
annual return
(4 Marks)
as well as financial statements and has four directors but so far no managing
director has been
appointed.Due to the manifold increase in the construction work undertaken by the
company in the
last two years, it is urgently felt that a managing director needs to be
appointed.Accordingly, Mr
Pranav was appointed as MD by the Board of Directors at its meeting, specifying
the terms and
conditions including monthly remuneration, payable to him. Enumerate on the
requirement and validity
of an appointment of Mr. Pranav in the given scenario, in the context of relevant law.
Answer:
Section 196(4) requires that the terms and conditions of appointments of aManaging Director and the remuneration
payable to him shall be approved by the Board of Directors at a meeting which shall be subject to approval by a
resolution at the next general meeting of the company and by the Central Government in case such appointment is at
variance to the conditions specified in Part I of the Schedule V.
Therefore, there is no requirement regarding the approval of appointment of Mr.Pranav as MDin the Earth Developers
Private Limited, at the immediate next general meeting of the shareholders. Therefore his appointment as MD inthe
Earth DevelopersPrivate Limited is valid.
Q.3 A claim for loss by fire must satisfy the certain conditions.what are those (3 Marks)
conditions?
Answer:
Aclaim for loss by fire must satisfy the following two conditions,
(i) there must be actual loss, and
(ii) fire must be accidental and non‐intentional. The property must be damaged or burnt by fire.If the property is
damaged by heat or smoke without ignition,it will not be covered under the word &#39,fire&#39, and the loss will not be
recoverable from the insurer.
Three LAQ
Q.1 What is an overseas direct investment?Differentiate between automatic route and (5 Marks)
approval route to
direct investment.
Answer:
Direct investment outside India /overseas direct investment means investments, either under the Automatic Route or the
Approval Route by way of
I. contribution to the capital or subscription to the Memorandum of a foreign entity or
II. purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange,
signifying a long‐term interest in the foreign entity.(JV or WOS).
Difference between Automatic Route and Approval Route for direct investment Automatic route for direct investment
or financial commitment outside India:
An Indian Party has been permitted to make investment/undertake financial commitment in overseas Joint Ventures (JV)/
Wholly Owned Subsidiaries (WOS), as per the ceiling prescribed by the Reserve Bank.
With effect from july 03, 2014, it has been decided that any financial commitment (FC) exceeding USD 1 (one) billion (for its
equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian
Party is within the eligible limit under the automatic route [i.e. , within 400% of the net worth (Paid up capital + Free Reserves)
as per the last audited balance sheet].
Approval route for direct investment or financial commitment outside India:

(i) Prior approval of the Reserve Bank would be required in all other cases of direct investment (or financial commitment)
abroad.
(ii) Reserve Bank would, inter alia, take into account the following factors while considering such applications:
(a) Prima facie viability of the JV/WOS outside India,
(b) Contribution to external trade and other benefits which will accrue to India through such investment (or financial
commitment),
(c) Financial position and business track record of the Indian Party and the foreign entity, and
(d) Expertise and experience of the Indian Party in the same or related line of activity as of the JV/WOS outside India.
Therefore, under the approval route (proposals not covered by the conditions under the automatic route) prior approval of the
Reserve Bank would be required. For which a specific application in Form ODI with the documents prescribed therein is
required to be made through the Authorised Dealer Category‐ 1 Banks
Q.2 State on the nature of liability caused on an offence committed under the
prevention of Money (5 Marks)
Laundering Act, 2002.
Answer:
Money Laundering basically is knowingly dealing with proceeds of crime directly or indirectly. The Act provides both for civil
and criminal liability. Criminal liability under the Prevention of Money Laundering Act Crime which results in tainted money is a
separate offence under various laws as specified in Schedule to Prevention of Money Laundering Act. These offences are
punishable under those Acts. The punishment is to the person/s who is/are involved in actually committing that offence.
The offence as specified in Section 4 of the Prevention of Money Laundering Act is a separate offence. The punishment under
section 4 of Prevention of Money Laundering Act is not only to those who are actually involved in dealing with
tainted money but also on those who are knowingly involved, directly or indirectly, in dealing with proceeds of crime.
This is a criminal offence, which will be tried by special courts designated for this purpose under Section 2 (Z) of the
Prevention of Money Laundering Act. The trail will be both for charges under the specific Act which is a crime and also
offence of money laundering under Prevention of Money Laundering Act. However it is not „joint trial‟
Civil Liability i.e. confiscation of tainted property
In addition to criminal liability, the property involved in money laundering can be
attached and frozen by Central Government and later confiscated.
Q.3 State when an act or omission is an offence . (2 Marks)
Answer:
An Act or omission is an offence only if it is made punishable by any law for the
time being in force and not otherwise.
Four LAQ
Q.1 Delegare Limited incorporated in Singapore desires to establish a place of business (6 Marks)
at Mumbai.You
being a practicing Chartered Accountant have been appointed by the company as
liaison officer for
compliance of legal formalities on behalf of the company.Examining the provisions
of the Companies
Act, 2013,state the documents which are required to be furnished on behalf of the
company, on the
establishment of a place of business at Mumbai.
Answer:
Under Section 380 (1) of the Companies Act, 2013 every foreign company shall, within 30 days of the establishment of place of
business in India, deliver to the Registrar for registration the following documents:
(i) a certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or
defining the constitution of the company. If the instruments are not in the English Language, a certified translation thereof in the
English Language.
(ii) the full address of the registered or principal office of the company,
(iii) A list of the directors and the secretary of the company containing such particulars as prescribed under the Companies
(Registration of Foreign Companies) Rules, 2014,
(iv) The name and address or the names and addresses of one or more persons resident in India authorised to accept on
behalf of the company service of process and any notices or other documents required to be served on the company
(v) The full address of the office of the company in India which is deemed to be its principal place of business in India
(vi) Particulars of opening and closing of a place of business in India on earlier occasion or occasions,
(vii) Declaration that none of the directors of the company or the authorised representative in India has ever been convicted or
debarred from formation of companies and management in India or abroad and
(viii) Any other information as may be prescribed.
According to the Companies (Registration of Foreign Companies) Rules, 2014, any document which any foreign company is
required to deliver to the Registrar shall be delivered to the Registrar having jurisdiction over New Delhi.
Q.2 Everlasting Ltd. went into liquidation.XYZ Bank Ltd. the secured creditor, decided to (3 Marks)
realise its
security interest by informing liquidator of such security interest and identify
assets subject to which
such security interest has to be realised. Liquidator denied the XYZ bank Ltd.to
enforce its
security interest as said secured creditor is not a part of committee of
creditors.Throw a light on the
stated situation and examining on the validity of the stand taken by the liquidator.
Answer:
As per Provisions laid down in Section 52 of the Insolvency and Bankruptcy Code, 2016,an option is given to secured creditor
to realise its security interest by informing liquidator in respect of such security interest and identify assets subject
to which such security interest has to be realised. Therefore, it is not mandatory under Code proceedings for financial creditor
to be a part of CoC (Committee of Creditors) to enforce its security interest. Hence, application filed by Financialcreditor was to
be accepted.
Therefore the stand taken by the liquidator on his denial to the XYZ Bank Ltd., to enforce its security interest on the account
that secured creditor is not a part of the Committee of creditors, is not valid.
Q.3 Who can initiate the insolvency resolution process? (3 Marks)
Answer:
Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself
may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided‐
Section 6 of Insolvency and Bankruptcy Code, 2016.
Five LAQ
Q.1 Explain the principles of corporate governance. (5 Marks)
Answer:
Principles of Corporate Governance

Transparency
Transparency means the quality of something which enables one to understand the truth easily. In the context of corporate
governance, it implies an accurate, adequate and timely disclosure of relevant information about the operating results etc.of the
corporate enterprise to the stakeholders.
Accountability
Accountability is a liability to explain the results of one‟s decisions taken in the interest of others. In the context of corporate
governance, accountability implies the responsibility of the Chairman, the Board of Directors and the chief executive
for the use of company‟s resources (over which they have authority) in the best interest of company and its stakeholders.
Independence
Good corporate governance requires independence on the part of the top management of the corporation i.e, the Board of
Directors must be strong non partisan body; so that it can take all corporate decisions based on business prudence. Without
the top management of the company being independent; good corporate governance is only a mere dream.
Q.2 State briefly the Evaluation of MOU (4 Marks)

Answer:
Evaluation of MOU
Performance of MOU signing PSEs is evaluated with reference to their MOU targets twice in a year. First the performance is
evaluated on the basis of provisional results and secondly on the basis of audited data. The performance evaluation exercise is
also carried out in an extensive manner. As mentioned earlier this performance evaluation exercise is not carried out purely
through a mechanical procedure. In fact, at the end of the year the review meetings are held which provides an opportunity to
consider the proposals to adjust the criteria values for factors which were not predicated and could not have been predicted by
either party. Thus, the MOU evaluation is finalized on the basis of the actual performance and the PSEs are graded as
ÈXCELLENT`, `VERY GOOD`, `GOOD`, `FAIR` & `POOR`. Some portion of the Performance Related Pay (PRP) is linked to
MOU Rating.
Q.3 State briefly various factors which have persuaded businessmen to consider their (3 Marks)
social
responsibilities.
Answer:
The various factors which have persuaded businessmen to consider their social responsibilities are :
(i) Threat of public regulation
(ii) Pressure of labour movement
(iii) Impact of consumer consciousness
(iv) Development of social standards of business
(v) Development of business education
(vi) Relationship between social interest and business interest
(vii) Development of professional, managerial class
Six LAQ
(4X3=12 Marks)
Q.1 Write short note on Allotment of corporate identity number(CIN) (3 Marks)
Answer:
Allotment of Corporate Identity Number (CIN) on and from the date mentioned in the certificate of incorporation, the registrar
shall allot to the company a Corporate Identity Number which shall be distinct Identity for the company and which shall also be
included in the certificate.
Q.2 Write short note on Boards report in case of OPC.[Section 134(4)] (3 Marks)
Answer:
Board’s report in case of OPC [Section 134(4)]

In case of a one person company, the report of the Board of Directors to be attached to the financial statement under this section
shall mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or
disclaimer made by the auditor in his report.
Q.3 Write short note on SEBI Code of corporate governance relating to board of (3 Marks)
directors.
Answer:
SEBI code of corporate governance relating to the Board of Directors

The Board of Directors of the company shall have an optimum combination of executive and non executive directors. The number
of independent directors would depend on whether the chairman is executive ornon executive. In case of non executive chairman
atleast 1/3rd of the Board should comprise Independent directors, and in case of executive chairman atleast half of the board
should comprise independent directors.
Q.4 Write short note on Policy on preservation of documents as per part-D SEBI (Listing (3 Marks)
obligations and disclosure
requirement) rules 2015
Answer:
Policy on preservation of documents

As per part D‐SEBI (Listing obligationand disclosure requirements) RULE 2015
‐To be approved by BOD
‐Classified under two categories
‐Documents to be preserved permanently and to be preserved for minimum 8 years.
Q.5 Write short note on Replacement of resolution professional by Committee of (3 Marks)

creditors.
Answer:
Replacement of resolution professional by committee of creditors

Committee of creditors can change the resolution professional. They have to forward new name to Adjudicating Authority who will
appoint another resolution professional after getting approval from Board‐ Section 27 of Insolvency and Bankruptcy Code 2016
Section : D - Case Study Question
Q.1 Mr. Vikram, a Director of M/S Tubelight Limited has made default in filing of annual . (3+3+2+4=12 Marks)
.accountsaccounts and
annual returns with the Registrar of Companies for a continuous period of 3
financial years ending on
31st March 2016. Examine the validity of the following under the Companies Act,
2013.
i) Whether Mr.Vikram can continue to be a Director of M/S Tubelight Limited

(defaulting company) and also M/S Green light Limited where he is also a Director.
ii) State Whether he can be reappointed as Director in these two companies.
iii) What would be your answer be in case Mr. Vikram is a nominee Director of a
Public Financial Institution ?
iv) what would be your answer in case the defaulting company (i,e. M/S Tubelight
Limited) is a private
limited company ?
Answer:
Disqualifications for Appointment of Director

According to Section 164 (2) of the Companies Act 2013 a person who is or has
been a director of a company which
(A) has not filed the financial statements or annual returns for any continuous three financial years or
(B) has failed to repay the deposits accepted by it or pay interest thereon due date or redeem its debentures on
due date or pay interest due thereon or pay any dividend declared and such failure continues for one year or
more. Shall not be eligible to be reappointed as a director of that company or appointed in other company for a
period of five years from the date on which
the said company fails to do so. Further, pursuant to Section 167(1) (a) of the companies act 2013, the office of
a director shall become vacant in case he incurs any of the disqualification specified in Section 164. The
company joint reading of both the Sections i.e. 164(2) and 167 (1)(a),we may decide the case as under
i) In the first case Mr.Vikram cannot continue to be director of the defaulting company namely M/s Tubelight Ltd. whereas in Green
light Ltd., he can continue as a director because that company is not defaulting company.
ii) Further, Mr Vikram is a Director of Tubelight Ltd. and Green Light Ltd. Tube Light Ltd did not file financial statements for a
continuous period of three financial years ending 31 march 2016. This failure constitute a disqualification under Section 164(2)
and consequently Mr Vikram will not be eligible for reappointment in Tubelight Ltd. and Green light Ltd for a period of five
years from the date on which the said company incurs the default.
iii) In case Mr.Vikram is a nominee director of a Public Financial Institution then in such case section 164 is not applicable.
iv) In case Tubelight Ltd is a Private Ltd Company. According to Section 164(3) a private company may by its articles provide
for any disqualifications for appointment as a director in addition to those specified in sub section (1) and (2) of Section 164
Thus in this case the answer would be same as above i.e. Mr Vikram has to vacate his office of directorship from TubelightLtd
and Green light Ltd and cannot be reappointed in both the companies for a period of 5 years from the date on which the said
company incurs the default.
SUGGESTED_ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-13
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

DECEMBER - 2017
answer any 5(five) Questions from Question No. 2 to Question No. 8.
C or D and give justification.
(a) Multiple choice questions: 2x10=20
(i) The power of appointing additional director can be exercised by the

(A) Annual General Meeting
(B) Board Meeting
(C) Statutory Meeting
(D) None of the above
(ii) A company has 9 Directors, on 01-01-2016. The office of 2 Directors have fallen
vacant on 02-01-2016. The quorum required for conducting a Board meeting is
(A) 4
(B) 3
(C) 2
(D) 5
(iii) Power to recognize Stock Exchange vests with
(A) Central Government
(B) State Government
(C) SEBI
(D) Supreme Court
(iv) A Government department supplying water for irrigation to the agriculturists after
levying charges for water supplied can be considered as
(A) Firms
(B) Enterprise
(C) Joint venture
(D) Joint sector
(v) The Apples producers of Shimla have formed an association to control the
production of apples. This association is called as
(A) Pool
(B) Cartel
(C) Merger
(D) Combination
(vi) Every Banking Company incorporated in India shall prepare a balance sheet and
profit and loss account as on the last working day of the
(A) Calendar Year
(B) Accounting Year
(C) Month
(vii)A memorandum containing such salient features of a prospectus as may be
specified by the Securities and Exchange Board by making regulation in this
behalf is known as
(A) Red Herring Prospectus
(B) Abridged Prospectus
(C) Shelf Prospectus
(D) Deemed Prospectus
(viii)The Chairman of the Insurance Regulatory and Development Authority shall hold
office for a term of ____________ from the date on which he enters upon his office
and should be eligible for reappointment.
(A) 3 years
(B) 4 years
(C) 5 years
(D) 6 years
(ix) Corporate Governance is a blend of the Internal and External Corporate
Governance
(A) Techniques
(B) Mechanisms
(C) Systems
(D) Methods
(x) Which of the following is the advantage of the family business over non-family
business?
(A) Staff recruitment
(B) Raising funds for growth
(C) Ownership vs. Management
(D) Deep industry insight
Answer:
1. (i) (B) The power to appoint additional directors vests with the Board of Directors and it
will be decided in the AGM of the company.
(ii) (B) The total strength shall be 9-2=7 directors. Quorum shall be higher of 2 or 1/3rd of
7. 1/3rd of 7 comes to 2.33. As per Clause (i) of Explanation to section 174(4), any
fraction of a number shall be rounded off as 1. Accordingly, the quorum shall be 3
directors (being higher of 2 or 3).
(iii) (C) Power to recognize Stock Exchange vests with Central Government. However,
Central Government has delegated the powers to SEBI vide its notification
No.F.No. 1/57/SE/93 dated 13.9.94. (Section 3 of Securities Contracts (Regulation)
Act, 1956).
(iv) (B) The given problem relates to Section 2(h) of the Competition Act, 2002. As per this
section 2(h), enterprise means a person or a department of the Government, who
or which is, or has been, engaged in any activity, relating to the production,
storage, supply, distribution, acquisition or control of articles or goods.
(v) (B) The term "cartel" has an inclusive meaning. Thus an association formed to control
the production of apples is within the aforesaid definition of a cartel. Hence the
association of apple producers of Shimla will be considered as a cartel under the
provisions of the Act.
(vi) (B) According to Section 29 of the Banking Regulation Act 1949 every Banking
Company incorporated in India, in respect of all business transacted by it and
through its branches in India, shall prepare a balance sheet and profit & loss
account as on the last working day of the Accounting year which is (1st April to
31st March.)
(vii) (B) Abridged Prospectus is a shorter version of the prospectus that includes all the
most key elements of the typical prospectus.
(viii)(C) The Chairman of the Insurance Regulatory and Development Authority shall hold
office for a term of five years from the date on which he enters upon his office
and should be eligible for reappointment. Maximum age of Chairman to be 65
year: [First Proviso to section 5(1)]. No person shall hold office as such Chairman
after he has attained the age of 65 years.
(ix) (B) Corporate Governance is a blend of the internal and external corporate
governance mechanisms. The external mechanisms include the managerial
labour market, the capital market, takeover and legal systems. The internal
governance mechanisms include the board of directors and most important is
ownership
(x) (D) Deep Industry Insight. Family businesses gain significant experience and expertise
as they typically work in one industry for longer durations. This gives them the
added advantage of understanding and appreciating the challenges faced in
that industry much better than any non-family businesses.
2. (a) Minu Limited was incorporated by furnishing false informations. As per the Companies
Act, 2013, state the power of the Tribunal in this regard. 7
(b) Referring to the provisions of the Companies Act, 2013, examine the validity of the
following:
The Board of Directors of ABC Limited proposes to declare dividend at the rate of 20%
to the equity shareholders, despite the fact that the company has defaulted in
repayment of public deposits accepted before the commencement of this Act. 4
(c) The Board of Directors of a company have filed a complaint with the Institute of
Chartered Accountants of India against their Statutory Auditors for their failing to
attend the Annual General Meeting of the Shareholders in which audited accounts
were considered. Comment. 5
Answer:
2. (a) According to section 7(7) of the Companies Act, 2013:

Incorporation by furnishing of incorrect information: Without prejudice to the
provisions of sub-section (6), where a company has got incorporated by furnishing
any false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for
incorporating such company or by any fraudulent action, the Tribunal may, on an
application made to it, on being satisfied that the situation so warrants,—
(a) pass such orders, as it may think fit, for regulation of the management of the
company including changes, if any, in its memorandum and articles, in public
interest or in the interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order under this sub-section.—

(i) the company shall be given a reasonable opportunity of being heard in the
matter; and
(ii) the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.
(b) Prohibition on declaration of dividend: Section 123(6) of the Companies Act, 2013,
specifically provides that a company which fails to comply with the provisions of
section 73 (Prohibition of acceptance of deposits from public) and section 74
(Repayment of deposits, etc., accepted before the commencement of this Act) shall
not, so long as such failure continues, declare any dividend on its equity shares.
In the given instance, the Board of Directors of ABC Limited proposes to declare
dividend at the rate of 20% to the equity share holders, in spite of the fact that the
company has defaulted in repayment of public deposits accepted before the
commencement of the Companies Act 2013. So according to the above provision,
declaration of dividend by the ABC Limited is not valid.
(c) Auditors Attendance at Annual General Meeting: As per Section 146 of the
Companies Act, 2013, it is right of the auditor to receive notices, and other
communications relating to any general meeting and to be heard at such meeting,
relating to the matter of his concern, however, it is duty of the auditor to attend the
same or through his authorised representative unless otherwise exempted.
In the instant case, the Board of Directors of a company have filed a complaint with
the Institute of Chartered Accountants of India against their statutory auditors for their
failing to attend the Annual General Meeting of the Shareholders in which audited
accounts were considered.
In view of above discussed provisions of section 146, the statutory auditor of the
company should attend the general meetings either through himself or through his
authorised representative.
3. (a) Robertson Ltd. is a company registered in Thailand. Although, it has no place of

business established in India, yet it is doing online business through telemarketing in
India. Whether it will be treated as a Foreign Company under the Companies Act,
2013? Explain. 7
(b) Various complaints have been made against the activities of a Co-operative Banking
company to the effect that, if unchecked, the shareholders, depositors and others will
suffer heavily and the complainants requested for the appointment of directors by
Reserve Bank of India. Discuss whether the Reserve Bank has any powers to inspect
the records of the Co-operative Bank to ascertain the truth or otherwise in the
complaints and to appoint directors in the Co-operative Bank under the Banking
Regulation Act, 1949. 5
(c) The Board of Directors of Stepping Stones Publications Ltd. at a meeting held on
15.01.2014 resolved to borrow a sum of `15 crores from a nationalized bank.
Subsequently the said amount was received by the company. One of the Directors,
who opposed the said borrowing as not in the interest of the company has raised an
issue that the said borrowing is outside the powers of the Board of Directors. The
Company seeks your advice and the following data is given for your information:
(i) Share Capital ` 5 crores
(ii) Reserves and Surplus ` 5 crores
(iii) Secured Loans ` 15 crores
(iv) Unsecured Loans ` 5 crores
Advise the management of the company. 4
Answer:
3. (a) According to section 2(42) of the Companies Act, 2013, "foreign company" means a
company or body corporate incorporated outside India which -
(a) has a place of business in India whether by itself or through an agent, physically
through electronic mode; and
(b) conducts any business activity in India in any other manner.
According to the Companies (Registration of Foreign Companies) Rules, 2014:

"electronic mode" means carrying out electronically based, whether main server
installed in India or not, including, but not limited to –
(a) business to business and business to consumer transactions, data interchange and
other digital supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits
subscriptions in securities in India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services
data base services and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education
and information research; and
(e) all related data communication services whether conducted by e-mail, mobile
devices, social media, cloud computing, document management, voice or data
transmission or otherwise.
Looking to the above description, it can be said that being involved in business
activity through telemarketing, Robertson Ltd., will be treated as foreign company.
(b) Power of Reserve Bank of India to inspect banks (Section 35 of the Banking Regulation
Act, 1949): RBI is empowered to conduct inspection of any bank and to give them
direction as it deems fit. All banks are bound to comply with such directions. Every
directors or other officer of the bank shall produce all such books, documents as
required by the inspector. The inspector may examine on oath any director or other
officers.
RBI shall supply the bank a copy of such report of the inspection. RBI submits report to
Central Government and the latter, on scrutiny, if is of the opinion that the affairs of
the bank are being conducted detrimental to the interest of its depositors, it may,
after giving an opportunity of being heard, to the bank, may order in writing
prohibiting the bank from receiving fresh deposits, direct the RBI to apply section 38
for winding up of the bank.
Power of RBI to appoint Directors (Section 36AB of the Banking Regulation Act, 1949):
RSI is empowered to appoint additional Directors for the banking company with
effect from the date to be specified in the order, in the interest of the bank or that of
depositors. Such additional directors shall hold office for a period not exceeding
three years or such further period not exceeding three years at a time.
(c) According to the provisions of Section 180(1)(c) of the Companies Act, 2013, there
are restrictions on the borrowing powers to be exercised by the Board of directors.
According to the said section, the borrowings should not exceed the aggregate of
the paid up capital and free reserves. While calculating the limit, the temporary loans
obtained by the company from its bankers in the ordinary course of business will be
excluded. However, from the figures available in the present case the proposed
borrowing of `15 crores wilt exceed the limit mentioned. Thus, the borrowing will be
beyond the powers of the Board of directors.
Thus, the management of Stepping Stone Publications Ltd., should take steps to
convene the general meeting and pass a special resolution by the members in the
meeting as stated in Section 180(1)(c) of the Companies Act, 2013. Then the
borrowing will be valid and binding on the company and its members.
4. (a) (i) ABC Private Limited is a company in which there are eight shareholders. Can a
member holding less than one-tenth of the share capital of the company apply to
the Tribunal for relief against oppression and mismanagement? Give your answer
according to the provisions of the Companies Act, 2013.
(ii) Does the scheme of compromise or arrangement require approval of preference

shareholder? 4+3=7
(b) (i) Shareholders of Hide and Seek Ltd. are not satisfied about performance of the
company. It is suspected that some activities being run in the name of the
company are not in the interest of the company or its members. 101 out of total
500 shareholders of the company have made an application to the Central
Government to appoint an inspector to carry out investigation and find out the
true picture.
With reference to the provisions of the Companies Act, 2013, mention whether the
shareholders' application will be accepted. Elaborate.
(ii) B B Ltd. is a listed company and it has been served with notice for appointment of
small shareholders' director. Referring to the provisions of the Companies Act,
2013, advise on the following:
What is the tenure of small shareholders' director and whether he can be re-
appointed as such, after expiry of his tenure? Also state whether he can be
appointed as an officer of the company on expiry of his tenure as small
shareholders' director. 6+3=9
Answer:
4. (a) (i) Under section 244 of the Companies Act, 2013, in the case of a company having
share capital, the following member(s) have the right to apply to the Tribunal
under section 241:
(a) Not less than 100 members of the company or not less than one-tenth of the
total number of members, whichever is less; or
(b) Any member or members holding not less than one-tenth of the issued share
capital or the company provided the applicant(s) have paid all the calls and
other sums due on the shares.
In the given case, since there are eight shareholders. As per the condition (a)
above, 10% of 8 i.e. 1 satisfies the condition. Therefore, a single member can
present a petition to the Tribunal, regardless of the fact that he holds less than
one-tenth of the company's share capital.
(ii) Preference shareholders: The term member' includes preference shareholders

also. Further, preference shareholders are a class of members and their rights may
be affected differently in the proposed scheme of arrangement. Hence their
approval is also required.
If the Court/Tribunal directs separate meeting of preference shareholders and

equity shareholders, then the scheme should be approved by requisite majority in
both such meetings held as per directions of the Court/Tribunal.
(b) (i) According to the Companies Act, 2013, the Central Government under section
210 (1) may order an investigation into the affairs of the company, if it is of the
opinion that it is necessary to do so:
(a) on the receipt of a report of the Registrar or Inspector under section 208;
(b) on intimation of a special resolution passed by a company that the affairs of
the company ought to be investigated;
(c) in public interest.
According to section 210 (3) of the Companies Act, 2013, the Central
Government may appoint one or more persons as inspectors to investigate into
the affairs of the company and to report thereon in such manner as the Central
Government may direct.
The shareholders' application will not be accepted as under 210 of the

Companies Act, 2013, Central Government may order an investigation into affairs
of the company on the intimation of a special resolution passed by a company
that the affairs of the company ought to be investigated and then may appoint
the inspectors. Here, 101 out of total 500 shareholders of the company have
made an application to the Central Government to appoint an inspector to carry
out investigation but it is not sufficient as the company has not passed the special
resolution.
(ii) The tenure of small shareholder’s director shall not exceed a period of 6
consecutive years and on the expiry of the tenure, such director shall not be
eligible for re-appointment.
A small shareholders' director shall not, for a period of 3 years from the date on
which he ceases to hold office on a small shareholders' director in a company, be
appointed in or be associated with such company in any other capacity, either
directly or indirectly.
5. (a) (i) In the annual general meeting of XYZ Ltd., while discussing on the matter of
retirement and reappointment of director Mr. X, allegations of fraud and financial
irregularities were levelled against him by some members. This resulted into chaos
in the meeting. The situation was normal only after the Chairman declared about
initiating an inquiry against the director, Mr. X, however, could not be re-
appointed in the meeting. The matter was published in the newspapers next day.
On the basis of such news, whether the court can take cognizance of the matter
and take action against the director on its own? Justify your answer with reference
to the provisions of the Companies Act, 2013.
(ii) What is the role of the Audit Committee vis-a-vis the statutory auditor when the
company wishes to engage them to perform certain engagements not restricted
under Section 144? 4+4=8
(b) (i) X was appointed as Managing Director for life by the Articles of Association of a
private company incorporated on 1st June, 2014. Examine in this connection.
(A) Can 'X' be appointed for life as Managing Director?
(B) Is it possible for the company in general meeting to remove 'X' from his office
of directorship during his life time?
(ii) Explain briefly over-riding preferential payments in accordance with the provision
of the Companies Act, 2013. 4+4=8
Answer:
5. (a) (i) Section 439 of the Companies Act, 2013 provides that offences under the Act
shall be non-cognizable. As per this section:
1. Notwithstanding anything in the Code of Criminal Procedure, 1973, every
offence under this Act except the offences referred to in sub section (6) of
section 212 shall be deemed to be non-cognizable within the meaning of the
said Code.
2. No court shall take cognizance of any offence under this Act which is alleged
to have been committed by any company or any officer thereof, except on
the complaint in writing of the Registrar, a shareholder of the company, or of
a person authorized by the Central Government in that behalf.
Thus, in the given situation, the court shall not initiate any suo moto action against
the director Mr. X without receiving any complaint in writing of the Registrar of
Companies, a shareholder of the company or of a person authorized by the
Central Government in this behalf.
(ii) According to section 177(5), the Audit Committee is empowered to;

(1) call for the comments of the auditors about:
(A) internal control systems,
(B) the scope of audit, including the observations of the auditors,
(C) review of financial statement before their submission to the Board,
(2) discuss any related issues with the internal and statutory auditors and the
management of the company.
Audit committee should review the annual financial statements and submit the
same to the Board with its recommendations, if any.
(b) (i) (a) Under section 196(2) of the Companies Act, 2013 lays down that no company
shall appoint or re-appoint any person as its managing director, whole-time
director or manager for a term exceeding five years at a time. No concession
or exception is allowed by the Act to private companies.
Hence, 'X' cannot be appointed as Managing Director for life in a private

company.
(b) Section 169(1) of the Companies Act, 2013 empowers the company to
remove a director, by ordinary resolution before the expiry of his period of
office after giving him an opportunity of being heard. This section applies to
both public and private companies. It applies to all directors except a
director appointed by the Tribunal under section 242 of the Act. The above
provision applies to the Managing Director also as he is a director of the
company and the member of its Board of Directors. Hence, it is possible for
the company in general meeting to remove 'X' before the expiry of his term of
office by an ordinary resolution.
(ii) Overriding preferential payments (Section 326)

Section 326(1) notwithstanding anything contained in this Act or any other law for
the time being in force in the winding up of a company:
(a) workmen's dues, and
(b) debts due to secured creditors to the extent such debts rank under clause (iii)
of the proviso to Section (1) of Section 325 pari passu with such dues, shall be
paid in priority to all other debts.
In case of the winding up of a company, the sums towards wages or salary

referred to in sub-clause (i) of clause (b) of Sub-Section (3) of Section 325, which
are payable for a period of two years preceding the winding up order or such
other period as may be prescribed, shall, be paid in priority to all other debts
(including debts due to secured creditors), within a period of thirty days of sale of
assets and shall be subject to such charge over the security of secured creditors
as may be prescribed.
Sub-Section (2) states that the debts payable under the proviso to Sub-Section (1)
shall be paid in full before any payment is made to secured creditors and
thereafter debts payable under that Sub-Section shall be paid in full, unless the
assets are-insufficient to meet them, in which case they shall abate in equal
proportions Preferential payments.
6. (a) Business should support inclusive growth and equitable development. Explain briefly
as per National Voluntary Guidelines 2011 in this regard. 7
(b) Interior Pvt. Ltd. is a manufacturing company having turnover of ` 210 crore but
having maximum outstanding loan from public financial institution of ` 90 crore only
during the preceding financial year. You are required to state whether the company
is liable for internal audit as per the provisions of the Companies Act, 2013. 5
(c) XYZ. Ltd. is a listed company having turnover of ` 1200 crores during the financial year
2015-16. The CSR committee of the Board formulated and recommended a CSR
project which was approved by the Board. Company finalised the project under its
CSR initiatives which require funds @ 5% of average net profit of the company for last
three financial years. Will such excess expense be counted in subsequent financial
years as a part of CSR expenditure? Advise. 4
Answer:
6. (a) Principle 8: Businesses should support Inclusive growth and equitable development:
The principle recognizes the challenges of social and economic development faced
by India and builds upon the development agenda that has been articulated in the
government policies and priorities.
The principle recognizes the value of the energy and enterprise of businesses and
encourages' them to innovate and contribute to the overall development of the
country, especially to that of the disadvantaged, vulnerable and marginalised
sections of society.
The principle also emphasizes the need for collaboration amongst businesses,
government agencies and civil society in furthering this development agenda. The
principle reiterates that business prosperity and inclusive growth and equitable
development are interdependent.
Core Elements
(a) Businesses should understand their impact on social and economic development,
and respond through appropriate action to minimise the negative impacts.
(b) Businesses should innovate and invest in products, technologies and processes
that promote the wellbeing of society.
(c) Businesses should make efforts to complement and support the development
priorities at local and national levels, and assure appropriate resettlement and
rehabilitation of communities who have been displaced owing to their business
operations.
(d) Businesses operating in regions that are underdeveloped should be especially
sensitive to local concerns.
(b) Applicability of Provisions of Internal Audit : As per section 138 of the Companies Act,
2013, read with rule 13 of Companies (Audit and Auditors) Rules, 2014 every private
company shall be required to appoint an internal auditor or a firm of internal auditors,
having-
(i) turnover of two hundred crore rupees or more during the preceding financial
year; or
(ii) outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year;
Thus, either of the condition is required to be satisfied for the applicability of the
provision. The internal auditor to be appointed shall either be a chartered
accountant whether engaged in practice or not or a cost accountant, or such other
professional as may be decided by the Board to conduct internal audit of the
functions and activities of the companies auditor may or may not be an employee of
the company.
Interior Pvt. Ltd. is having turnover of ` 210 crore and maximum outstanding loan from
public financial institution of ` 90 crore during the previous financial year, here in the
case, the turnover is over and above two hundred crore rupees i.e. either of the
condition in respect of turnover or outstanding loans is satisfied. Therefore the
company is liable for internal audit as per section 138 of the Companies Act, 2013.
(c) In terms of Section 135(5) of the Companies Act, 2013, the Board of every company
to which section 135 is applicable, shall ensure that the company spends, in every
Financial year at least 2 per cent of average net profits of the company made during
the three immediately preceding financial years, in pursuance of its CSR policy. There
is no provision for carry forward of excess expenditure to the next year(s). The words
used in the section are 'at least'. Therefore, any expenditure over 2% would be
considered as voluntary higher spending.
7. (a) Referring to the provisions of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 state the circumstances under which
the Reserve Bank of India may cancel the certificate of registration granted to a
Securitisation Company. 8
(b) With reference to the provisions of Insurance Act, 1938 as amended by Insurance
Regulatory and Development Authority Act, 1999, state the norms in respect of paid
up equity capital for carrying out the business of an insurer. Also state the items that
are excluded in determining the amount of paid up equity capital of an insurer under
the said Acts. 4
(c) (i) Central Government and Government of Maharashtra together hold 40% of the
paid-up share capital of MN Limited. A government company also holds 20% of
the paid-up share capital in MN Limited.
(ii) PQ Limited is a subsidiary but not a wholly owned subsidiary of a government
company.
Examine with reference to the provisions of the Companies Act, 2013 whether MN
Limited and PQ Limited can be considered as Government Company. 4
Answer:
7. (a) Cancellation of Certificate of Registration (Section 4 of the securitization and

reconstruction of financial assets and enforcement of Security Interest Act, 2002).
As per the section 4 of the Securitisation & Reconstruction of Financial Assets and
Enforcement of security Interest Act, 2002, the Reserve Bank may cancel a certificate
of registration granted to a securitization company or a reconstruction company, if
such company-
(i) ceases to carry on the business of securitisation or asset reconstruction; or
(ii) ceases to receive or hold any investment from a qualified institutional buyer; or
(iii) has failed to comply with any conditions subject to which the certificate of
registration has been granted to it; or
(iv) at any time fails to fulfill any of the conditions referred to in clauses (a) to (g) of
sub-section (3) of section 3; or
(v) fails to-
(a) comply with any direction issued by the Reserve Bank under the provisions of
this Act; or
(b) maintain accounts in accordance with the requirements of any law or any
direction or order issued by the Reserve Bank under the provisions of this Act;
or
(c) submit or offer for inspection its books of account or other relevant documents
when so demanded by the Reserve Bank; or
(d) obtain prior approval of the Reserve Bank required under sub-section (6) of
section 3.
(b) Requirement of Paid Up equity capital for insurance business: No insurer carrying on
the business of life insurance, general insurance, health insurance or re-insurance in
India on or after the commencement of the Insurance Regulatory and Development
Authority of India Act, 1999, shall be registered unless he has, —
(i) a paid-up equity capital of rupees one hundred crores, in case of a person
carrying on the business of life insurance or general insurance; or
(ii) a paid-up equity capital of rupees one hundred crore, in case of a person
carrying on exclusively the business of health insurance; or
(iii) a paid-up equity capital of rupees two hundred crore, in case of a person
carrying on exclusively the business as a re-insurer.
Items to be excluded in determining the amount of paid up equity share capital: In

determining the paid-up equity capital specified above, any preliminary expenses
incurred in the formation and registration of any insurer as may be specified by the
regulations made under this Act, shall be excluded.
(c) According to section 2(45) of the Companies Act, 2013, "Government company"
means any company in which not less than fifty-one per cent of the paid-up share
capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a
Government company.
(i) The Central Government and Government of Maharashtra together hold 40% of
the paid-up share capital of MN Limited. A government company also holds 20%
of the paid-up share capital in MN Limited.
In this case, MN Limited is not a Government company because the holding of

the Central Government and Government of Maharashtra is 40% which is less
than the 51% prescribed under the definition of Government Company. The
holding of the government company in MN Limited of 20% cannot be taken into
account while counting the prescribed limit of 51%.
(ii) PQ Limited is a subsidiary but not a wholly owned subsidiary of a government

company
In this case, PQ Limited is a government company as the definition of Government

Company clearly specifies that a Government Company includes a company which
is a subsidiary company of a Government company. Whether the subsidiary should
be a: wholly owned subsidiary or not is not clearly mentioned under the definition of
the Government company under section 2(45).
(a) Objectives of the Competition Act, 2002
(b) Difference between Mediation and Conciliation
(c) Benefits of Listing
(d) Objectives of MOU System
(e) Strategy to tackle black money
Answer:
8. (a) Objectives of the Competition Act, 2002

Keeping in view of the economic development of the country, the Competition Act,
2002 was laid down to provide for an establishment of a Commission seeks to achieve
the following objectives:-
(a) to prevent practices having adverse effect on competition.
(b) to promote and sustain competition in markets.

(c) to protect the interests of consumers.
(d) To ensure freedom of trade carried on by other participants in' markets in India
and for matters' connected therewith or incidental thereto.
The objectives of the Act are sought to be achieved through the instrumentality of
the Competition' Commission of India (CCI) which has been established by the
Central Government with effect from 14th October, 2003.
(b) Difference between Mediation and Conciliation

The meaning of these words as understood in India appears to be similar. 'Mediation'
is a way of settling disputes by a third party who helps both sides to come to an
agreement, which each considers acceptable. Mediation can be 'evaluative' or
'facilitative'. 'Conciliation', is a procedure like mediation but the third party, the
conciliator, takes a more interventionist role in bringing the two parties together and
in suggesting possible solutions to help achieve a settlement. The difference lies in the
fact that the 'conciliator' can make proposals for .settlement, 'formulate' or
'reformulate' the terms of a possible settlement while a 'mediator' would not do so but
would merely facilitate a settlement between the parties.
From the very wording it appears that the 'Mediation and Conciliation Panel' as
contemplated under Section 442 (as the name suggests) will adopt dual approach of
'Mediation' as well as 'Conciliation' in settling the disputes.
(c) Benefits of Listing

The following benefits are available when securities are listed by a company in the
stock exchange:
(a) public image of the company is enhanced.
(b) the liquidity of the security is ensured making it easy to buy and sell the securities in
the stock exchange.
(c) tax concessions are made available both to the investors and the companies.
(d) listing procedure compels company management to disclose important
information to investors enabling them to make crucial decisions with regard to
holding or disposing of such securities.
(e) Shares for listed companies command better credibility as they could be offered
as security for loans from Banks and Fls.
(d) Objectives of MoU System

The specific objectives of the MoU system are to:
(a) Improve the performance of CPSEs though increased management autonomy.
(b) Remove the haziness in goals and objectives.
(c) Evaluate management performance through objective criteria; and
(d) Provide incentives for better future performance.
(e) Strategy to tackle black money:

The committee has identified following strategy to tackle black money:
(a) Preventing generation of black money.
(b) Discouraging use to black money.
(c) Effective detection of black money.
(d) Effective investigation and adjudication.
(e) Other steps.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

JUNE - 2017
Paper-14 : STRATEGIC FINANCIAL MANAGEMENT
Working Notes should form part of your answers.
Wherever necessary candidates may make appropriate assumptions and clearly state them.
No present value factor table or other statistical table will be given in addition to this question paper.
This paper contains two sections, A and B. Section A is compulsory and contains question 1
for 20 marks. Section B contains question 2 to 8, each carrying 16 marks.
Answer any five questions from Section B.
Section – A
Answer all the questions. Each question carries two marks.
1. Choose the Correct Option from amongst the four alternatives given (1 mark is for the
correct choice and 1 mark for justification/workings) 2×10=20
(i) Annual Cost Saving ` 4,00,000

Useful life 4 years
Cost of the Project ` 11,42,000
The Pay back period would be
(A) 2 years 8 months
(B) 2 years 11 months
(C) 3 years
(D) 1 year 10 months
(ii) There are 4 investments
X Y Z U
The standard deviation is 37,947 44,497 42,163 41,997
Expected net present value (`) 90,000 1,06,000 1,00,000 90,000
Which investment has the highest risk?
(A) X
(B) Y
(C) X
(D) U
(iii) The spot rate of the US dollar is ` 65.00/USD and the four month forward rate is
65.90/USD. The annualized premium is
(A) 4.2%
(B) 5.1%
(C) 6.0%
(D) 6.4%
(iv) A stock is currently sells at ` 350. The put option to sell the stock sells at ` 380 with a
premium of ` 20. The time value of option will be
(A) ` 10
(B) ` -10
(C) ` 20
(D) ` 0
(v) An investor owns a stock portfolio equally invested in a risk free asset and two stocks.
If one of the stocks has a beta of 0.75 and the portfolio is as risky as the market, the
beta of the stock in portfolio is
(A) 2.12
(B) 2.25
(C) 2.56
(D) 2.89
(vi) You are given the following information: required rate of return on risk free security
7%; required rate of return on market portfolio of investment 12%; beta of the firm 1.7.
The cost of equity capital as per CAPM approach is
(A) 16.3%
(B) 18.0%
(C) 18.60%
(D) 19%
(vii)The following statement is true in the context of rupee-dollar exchange rate with ri
denoting interest rate in India and ru denoting interest rate in the US.
(A) Rupee will be at forward discount if ri > ru
(B) Rupee will be at forward premium if ru > ri
(C) Rupee will be forward premium if ri > ru
(D) Rupee will be at par with dollar if ri = ru.
(viii)The following is not a systematic risk.
(A) Market Risk
(B) Interest Rate Risk
(C) Business Risk
(D) Purchasing Power Risk
(ix) The following statement is true:
(If ‘r’ denotes the correlation coefficient)
(A) r = +1 implies full diversification of securities in a portfolio
(B) r = -1 implies full diversification of securities in a portfolio
(C) r = 0 implies an ideal situation of zero risk
(D) ‘r’ is independent of diversification. Nothing can be inferred based on r.
(x) The following is not a feature of Capital Market Line:
(A) There is no unsystematic risk.
(B) The individual portfolio exactly replicates market portfolio in terms of risk and reward.
(C) Estimates portfolio return based on market return.
(D) Diversification can minimize the individual portfolio risk.
Answer:
1. (i) (B)
Justification: Pay-back Period = Cost of Project/Annual Cost Saving
= ` 11,42,000/4,00,000 = 2.855
= 2 years 11 months.
(ii) (D)
Justification: Coefficient of variation = Standard deviation/Expected NPV
Coefficient of variation of X=37947/90000=0.422
Coefficient of variation of Y=44497/106000=0.420
Coefficient of variation of Z= 42163/100000=0.422
Coefficient of variation of U= 41997/90000=0.467
U has highest risk as it has highest coefficient of variation.
(iii) (A)
Justification: The annualized premium = [(Forward rate-Spot Rate)/Spot Rate]*[12/
Forward Contract length in months]
= 65.90-65/65*12/4 = 4.2%.
(iv) (D)
Justification: Time value of option is =(Option premium- Intrinsic Value of option)
= `[20-(380-350)]= `(20-30) = ` -10
= 0 (Cannot be negative)
(v) (B)
Justification: Beta of the stock of the portfolio is [(1/3*0.75)+(1/3*x)+(1/3*0)] = 1
So, x = 2.25
(vi) (A)
Justification: Cost of equity capital as per CAPM approach= 0.07+1.7(0.12-0.07)=16.3
(vii) (B)
F 1+ r
Justification: Interest Parity = =( i)
S 1+ ru
Rupee premium is when spot is more than forward rupee/dollar
Forward value is less if ri < ru i.e ru > ri.
(viii)(C)
Justification: Business Risk arise from known and controllable factors unique to
particular security or industry. Business Risks can be eliminated by
diversification of portfolio.
(ix) (B)
Justification: Investments offset each other as they move in opposite direction.
(x) (D)
Justification: Individual securities does not lie on Capital Market Line. A well diversified
portfolio does not become risk free and would be subject to considerable
variability. The real risk of a security is the market risk which cannot be eliminated.
Section – B
Answer any five questions from question No. 2 to 8. Each question carries 16 marks.
2. (a) A Ltd. is considering replacement of an existing machine or to spend money on

overhauling it. A Ltd currently pays no taxes. The replacement machine costs ` 50,000
now and requires maintenance of ` 5,000 at the end of every year for 5 years. At the
end of 5 years, it would have a salvage value of ` 10,000 and would be sold. The
existing machine requires increasing amounts of maintenance each year and its
salvage value falls each year as follows:
Year Maintenance (`) Salvage (`)
Present 0 20,000
1 5,000 12,500
2 10,000 7,500
3 15,000 0
The cost of capital of A Ltd is 15%.
End of year 1 2 3 4 5 6
Present value factor @ 15% 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323
When should the company replace the machine? 8
(b) The following information pertaining to two securities is given:

Securities
A Ltd. B Ltd.
Spot Price (`) 4,550 360
Dividend expected (`) 50 20
Divided receivable in (months) 2 3
Recommended Action: Sell Spot, Buy Futures Buy Spot Sell Futures
Risk free interest rate may be taken as 9% p.a.
(i) Determine the 6 months' theoretical forward prices of securities of A Ltd. and B Ltd.
For what values of futures contract rates will the above recommended action be
appropriate?
(ii) What would your answer to (i) above be if there is no dividend expected for A and
B? 8
Answer:
2. (a) Equivalent cost of (EAC) of new machine:

`
Cost of new machine now 50,000
Add: P.V. of annual repairs @ 5,000 p.a. for 5 years = 5,000 × 3.3522 (+)16,761
Less: P.V. of salvage value at end of 5 years = 10,000 × 0.4972 (-) 4,972
61,789
Equivalent annual cost = 61,789/3.3522 18,432
EAC of keeping the old machine:

Present Value Year 1(`) Year 2(`) Year 3 (`)
Value present 20,000 12 ,50 0 7,500
Add PV of Annual Maintenance
=Annual Maintenance/1.15 4347.826 8695.652 13043.48
Total 24347.826 21195.652 20543.48
Less: PV of salvage value at end of year 10869.565 6521.739 0
(PV/1.15)
13478.261 14673.913 20543.48
1.15 1.15 1.15
Equivalent Annual Cost 15500 16875 23625
Advice: The company should replace the old machine after year 2 as EAC of new
machine at ` 18,432 is lower than the cost of using existing machine in year 3.
(b) (i)
Securities of A Ltd. B Ltd.
Spot Price [Sx](`) 4,550 360
Dividend Expected [DF](`) 50 20
Dividend Receivable in [t] 2 months or 1/6 year or 3 months or ¼ year or 0.25
0.1667
Risk Free Interest Rate [r] 9% or 0.09 9% or 0.09
Present Value of Dividend DF ÷ ert DF ÷ ert
[Dp] = ` 50 ÷ e0.09 × 0.1667 = ` 20 ÷ e0.09 × 0.25
= ` 50 ÷ e0.015 = ` 20 ÷ e0.0225
= ` 50 ÷ 1.01511 = ` 20 ÷ 1.022755
= ` 49.256 = ` 19.555
Adjusted Spot Price [Sadj] Sx 4,550 - 49.256 = 360 – 19.555 = 340.445
- DP (`) 4,500.744
Theoretical Forward Price = = 4500.744 × e0.09 x 0.50 = 340.445 × e0.09 x 0.50
[TFPx](`) = 4,500.744 × e0,045 = 340.445 × e0,045
= 4,500.744 × 1.04603 = 340.445 × 1.04603
= 4,707.91 = 356.126
6 months Futures Contract Less than 4707 More than 356
Rate [AFPX] (`)
Valuation in Futures Market Undervalued Overvalued
Recommended Action Sell Spot. Buy Future. Buy Spot. Sell Future.
(ii)
Adjusted spot price 4550 360
Theoretical Forward Price = 4550 × e0.045 = 360 × e0.045
= 4550 × 1.04603 = 360 × 1.04603
= 4759.4 = 376.57
6 months future rate for Less than 4759 More than 376
appropriateness of action
3. (a) A Mutual Fund made an issue of 10,00,000 units of ` 10 each on 01.01.2016. No entry
load was charged. It made the following investments after incurring initial expenses of
` 2 lacs.
Particulars `
50,000 Equity Shares of ` 100 each @ ` 160 80,00,000
7% Government Securities 8,00,000
9% Debentures (unlisted) of ` 100 each 5,00,000
10% Debentures (Listed) of ` 100 each 5,00,000
Total 98,00,000
During the year, dividends of ` 12,00,000 were received on equity shares, interest on
all types of debt securities was received as and when due. At the end of the year,
equity shares and 10% debentures are quoted at 175% and 90% of their respective
face values. Other investments are quoted at par.
(i) Find out the Net Asset Value (NAV) per unit given that the operating expenses
during the year amounted to ` 5,00,000.
(ii) Also find out the NAV, if the Mutual Fund had distributed a dividend of ` 0.90 per
unit during the year to the unit holders. 8
(b) H L Manufacturing Ltd. desires to acquire a diesel generating machine set costing ` 40
lakh which has an economic life of 10 years at the end of which the asset is not
expected to have any residual value. The company is considering two alternatives:
(a) taking the machine on lease
(b) purchasing the asset outright by raising a loan.
Lease payments are equal annual amounts and have to be made in advance and
the lessor requires the asset to be completely amortized over its useful period. The
loan carries an interest 16% p.a. The loan has to be paid in 10 equal annual
installment becoming due at the beginning of the first year. Average rate of income
tax is 50%. It is expected that the operating costs would remain the same under either
method. The company allows straight line method of depreciation and the same is
accepted for tax purposes.
Assume tax benefits at the end of the respective years and for end of year zero, tax
benefit may be considered at the end of the first year. Use 8% discount rate for p.v.
factors. Present a statement showing discounted values of annual cash flows to the
nearest rupee under alternative (b), only for end of years 0 to 2 and year 10. What
should be the maximum annual lease rental for which the lease option may be
preferred if you are given that the present value under the loan option is ` 26,57,029?
The present value of an annuity of one Rupee
Year 8%
1 to 9 6.247
1 to 10 6.71
Present value of Rupee one at 8%

Year 0 1 2 3 4 5 6 7 8 9 10
PV 1.00 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463
8
Answer:
3. (a) Given the total initial investments is ` 98,00,000, out of the issue proceeds of
` 1,00,00,000. Therefore the balance of ` 2,00,000 is considered as Issue Expenses.
Computation of Closing Net Asset Value

Opening Capital Closing Income (`)
Particulars value of Appreciation value of
Investments (`) Investments
Equity Shares 80,00,000 7,50,000 87,50,000 12,00,000
7% Govt. Securities 8,00,000 NIL 8,00,000 56,000
9% Debentures (Unlisted) 5,00,000 NIL 5,00,000 45,000
10% Debentures(Listed) 5,00,000 (-)50,000 4,50,000 50,000
Total 98,00,000 7,00,000 1,05,00,000 13,51,000
Less: operating expenses during (5,00,000)
the period
Net Income 8,51,000
Net Fund Balance 1,13,51,000
= ` (1,05,00,000+8,51,000)
Less: Dividend (9,00,000)
= (10,00,000 × 0.90)
Net Fund Balance (after Dividend) 1,04,51,000
NAV(Before considering Dividends) 11.35
`1,13,51,000 ÷ 10,00,000
NAV(After Dividends) 10.45
` 1,04,51,000 ÷ 10,00,000
(b) Schedule of Debt Payment
Year Loan Loan at the Interest on Principal Principal

end Instalment beginning of loan (Col. 3 Repayment Outstanding
the year  0.16) (Col.2  at the end of
Col.4) the year
(Col.3 
Col.5)
1 2 3 4 5 6
0 713,394 40,00,000 0 713,394 32,86,606
1 713,394 32,86,606 525,857 187,537 30,99,069
2 713,394 30,99,069 495,851 217,543 28,81,526
Annual instalment of Loan = `40,00,000 / 5.607 (PV factor making payment in 0

year=Factor for cash flow at time 0+Annuity factor for 9 years at 16%=1+4.607)
= `713,394
PV of Cash Outflows under Buying Alternative
Depreciation = 40,00,000 / 10 = 4,00,000
Year Loan Tax Advantage Net Cash PV factor Total PV

End Instalm On Interest On Outflows at after
ent (0.5) Depreciation tax cost
(0.5)
1 2 3 4 5 6 7
0 713,394 0 - 713,394 1.000 713,394
1 713,394 262,928 200,000 250,465 0.926 231,931
2 713,394 247,926 200,000 265,468 0.857 227,506
10 0 0 2,00,000 (2,00,000) 0.463 (92,600)
Let x be the equal annual lease rental (L.R).
P.V. of L.R. = PV for year 0 + PV for yrs 1-9 +PV for year 10
= (x)x1+ (x-0.5x)x 6.247-(0.5x)x0.463 = 1x + 3.1235x-0.2315x = 3.892x
Lease will be preferred if 3.892x < 26,57,029, i.e., x < 6,82,690
4. (a) A firm has an investment proposal, requiring an outlay of ` 40,000. The investment
proposal is expected to have 2 years' economic life with no salvage value. In year 1,
there is a 0.4 probability that cash inflow after tax will be ` 25,000 and 0.6 probability
that cash inflow after tax will be ` 30,000. The probabilities assigned to cash inflows
after tax for the year 2 are as follows:
The Cash inflow year 1 ` 25,000 ` 30,000
The Cash inflow year 2 Probability Probability
` 12,000 0.2 ` 20,000 0.4
` 16,000 0.3 ` 25,000 0.5
` 25,000 0.5 ` 30,000 0.1
The Firm uses a 12% discount rate for this type of investment.
(i) Tabulate the NPVs for each path of the decision free (diagram not essential)
(ii) What net present value will the project yield if the worst outcome is realized? What
is the probability of occurrence of this NPV.
(iii) What will be the best outcome and the probability of that occurrence?
(12% Discount factor 1 year 0.8929
2 year 0.7972) 8
(b) The following details are given about stocks X and Y. An analyst prepared ex-ante
probability distribution for the possible economic scenarios and the conditional
returns for the two stocks and the market index as shown below:
Economic Scenario Probability X Y Market
Growth 0.4 25 20 18
Stagnation 0.3 10 15 13
Recession 0.3 -5 -8 -3
The risk free rate during the next year is expected to be around 9%. The following
additional information is known:
X Y Market
Standard Deviation % 12.46 12.03 8.89
Covariance with the market 106.20 106.69
(i) Find the expected returns of X, Y and the market using the probability distribution.
(ii) Find the Beta of X and Y.
(iii) Find the expected returns of X and Y under CAPM and recommend whether to
buy or hold stocks X and Y. 8
Answer:
4. (a) (i) The decision tree given below shows that there are six possible outcomes each
represented by a path.
PATH Jt. Probability
NO. year 1 × year 2
12,000 1 0.08
0.2
25,000 0.3 16,000 2 0.12
0.4 0.5
25,000 3 0.20
CASH OUTLAY
40,000 4 0.24
20,000
0.6 0.4
5 0.30
30,000 0.5 25,000
0.1 30,000 6 0.06
1.00
The net present value of each path at 12% discount rate is given below:
Cash inflow year cash inflow year Total cash
Path 1*discount factor year 1 2*discount factor year 2 inflow outflow NPV
1 ` 25000*.8929=22323 12000*.7972=9566 31889 40000 -8111
2 ` 25000*.8929=22323 16000*.7972=12755 35078 40000 -4922
3 ` 25000*.8929=22323 25000*.7972=19930 42253 40000 2253
4 `30000*.8929=26787 20000*.7972=15944 42731 40000 2731
5 `30000*.8929=26787 25000*.7972=19930 46717 40000 6717
6 `30000*.8929=26787 30000*.7972=23916 50703 40000 10703
Statement showing Expected Net present Value
Path NPV @12% Joint probability Expected NPV

1 -8111 0.08 -648.88
2 -4922 0.12 -590.64
3 2253 0.2 450.60
4 2731 0.24 655.44
5 6717 0.3 2015.1
6 10703 0.06 642.18
2523.8
(ii) If the worst outcome is realized, the Net Present Value which the project will yield
is Rs 8111(negative). The probability of occurrence of this NPV is 8%
(iii) The best outcome will be path 6 when NPV is higher i.e. `10703(positive). The
probability of occurrence of this NPV is 6%
(b) (i) Computation of Expected Returns:

Scenario Prob. P Return x Mean Return Y Mean Market Mean
Rx P x Rx Ry P x Ry Return RM Px RM
Growth 0.4 25 10.00 20 8.0 18 7.2
Stagnation 0.3 10 3.00 15 4.5 13 3.9
Recession 0.3 -5 -1.50 -8 -2.4 -3 -0.9
Estimated 11.5 10.1 10.2
Returns
(ii) Computation of Standard Deviation of RM

RM DM=RM-10.2 DM2 P P × DM2
18 7.8 60.84 0.4 24.34
13 2.8 7.84 0.3 2.35
-3 -13.2 174.24 0.3 52.27
78.96
Standard Deviation of the Market = √78.96 = 8.89%

Beta =Covariance/Variance of the market
1. Beta of Security X = 106.20/78.96= 1.34
2. Beta of Security Y = 106.69/78.96 = 1.35
(iii) Under CAPM, the equilibrium Return = Rf + β(Rm – Rf)

Expected Return of Security X = 9% + 1.34 (10.2 – 9) = 10.61%
Expected Return of Security Y = 9% + 1.35 (10.2 – 9) = 10.62%
Conclusion and Recommendations

Particulars Security X Security Y
Estimated Returns 11.50 10.10
Expected Return under CAPM 10.61 10.62
Estimated Return Vs. Expected Return is lower. Expected Return is higher
Expected Return Stock X is under priced. Stock Y is overpriced
Recommendation Buy/Hold Sell
5. (a) An investor has invested ` 10,00,000 in four securities A, B, C and D the details of which
are as follows:
Security Amount Invested (`) Beta
A 2,50,000 0.500
B 3,00,000 1.400
C 1,60,000 0.900
D 2,90,000 1.300
Total 10,00,000
Reserve Bank of India (RBI) bonds carry an interest rate of 9% and NIFTY yields 15%.
You are required to find out the expected return on portfolio. If investment in security
C is replaced by RBI Bonds, what is the corresponding change in portfolio beta and
expected return? 10
(b) ABC Ltd. has a capital budget of ` 2 crore for the year. From the following information
relating to six independent proposals, select the projects if (i) the projects are
divisible and (ii) projects are indivisible in order to maximise the NPV.
Proposal Investment (`) NPV (`)

I 8,500,000.00 5,000,000.00
II 3,500,000.00 2,600,000.00
III 6,000,000.00 2,000,000.00
IV 4,000,000.00 2,500,000.00
V 6,000,000.00 5,000,000.00
VI 8,000,000.00 (2,500,000.00)
6
Answer:
5. (a) Computation of Weighted Beta (Beta of the Portfolio)

Security Amount Proportion to Total Beta of Weighted
Invested Investment Investment Beta
A 250000 0.250 0.500 0.125
B 300000 0.300 1.400 0.420
C 160000 0.160 0.900 0.144
D 290000 0.290 1.300 0.377
Total 1000000 1.000 1.066
Computation of Expected Return on Portfolio
Expected Return [E(Rp)] = Rf + p × (Rm  Rf)
Risk Free Rate 9%

Nifty Yields 15%
Beta 1.066
Expected Return 9% + 1.066 × (15  9) = 0.1539
Computation of Weighted Beta (Beta of the Portfolio)

Security Amount Proportion to Total Beta of Weighted
Invested Investment Investment Beta
A 250000 0.250 0.500 0.125
B 300000 0.300 1.400 0.420
RBI 160000 0.160 0.000 0.000
D 290000j 0.290 1,300 0.377
Total 1000000 1.000 0.922
Computation of Expected Return on Portfolio
Expected Return [E(Rp)] = Rf + p × (Rm  Rf)

Risk Free Rate 9%
Nifty Yields 15%
Beta 0.922
Expected Return 9% + 0.922 (15  9) = 0.1453
(b) (i) If the projects are divisible

Projects are ranked according to PI and arranged in descending order.
Proposal Investment NPV PV of Inflows PI Rank

I 85,00,000 50,00,000 135,00,000 1.59 4
II 35,00,000 26,00,000 61,00,000 1.74 2
III 60,00,000 20,00,000 80,00,000 1.33 5
IV 40,00,000 25,00,000 65,00,000 1.63 3
V 60,00,000 50,00,000 110,00,000 1.83 1
Proposal Investment Cum Investment

V 60,00,000 60,00,000
II 35,00,000 95,00,000
IV 40,00,000 135,00,000
I 85,00,000 220,00,000
III 60,00,000 280,00,000
Only 65,00,000 can be invested in project I.NPV of the project=65/85x50,00,000=38,23,529
So the selected projects are V, II, IV and part of I.
(ii) If the projects are indivisible (by trial and error method)
Feasible Sets Investments NPV

V, II, I 180,00,000 126,00,000
V, IV, I 185,00,000 125,00,000
V, II, IV, III 195,00,000 121,00,000

I, II, IV 160,00,000 101,00,000
V, IV, III 160,00,000 95,00,000
Project V, II and I provides the maximum NPV may be undertaken.
6. (a) Company A has outstanding debt on which, it currently pays fixed rate of interest at
9.5%. The company intends to refinance the debt with a floating rate interest. The best
floating rate it can obtain is LIBOR + 2%. However, it does not want to pay more than
LIBOR.
Another company B is looking for a loan at a fixed rate of interest to finance its
exports. The best rate it can obtain is 13.5% but it cannot afford to pay more than 12%.
However, one bank has agreed to offer finance at a floating rate of LIBOR + 2% and is
in the process of arranging rate swap between these two companies.
(i) Enumerate the steps in the swap deal.
(ii) What are the interest savings by each company?
(iii) How much would the bank's benefit be? 10
(b) JB ltd. an American Company will need £ 3,00,000 in 180 days. In this connection, the
following information is available:
Spot rate £1= $2.00
180 days forward rate of £ as of today = $ 1.96
Interest rates are as follows:
U.K US
180 days deposit rate % 4.50 5.00
180 days borrowing rate % 5.00 5.50
The Company has forecast the spot rates 180 days hence as follows:
Rate Probability
$ 1.91 25%
$ 1.95 60%
$ 2.05 15%
Compare the benefits of money market hedge Vs. Nod hedge and advise JB Ltd. on
the choice of the better strategy. 6
Answer:
6. (a) (i)First let us tabulate the details to find the quality spread differential:
Cost of funds to company A and B
Objective Fixed Rate Floating Rate
Company A Floating 9.50% p.a. Libor + 200 bps
Company B Fixed 13.5% p.a. Libor + 200 bps
Differential 400 bps 0 bps
BANK
Libor 9.5% 10% Libor
A B
9.5% to Lenders Libor + 200 bps to Lenders
The differential between the two markets = 400 bps - 0 = 400 bps.
A total of 400 bps needs to be shared between A, B and bank.
Since A cannot afford to pay more than LIBOR, it needs 200bps benefits out of the
total 400 bps (Libor +2% -Libor).
Similarly, B cannot pay more than 12% as against the existing available fixed rate
funding of 13.5%. It requires 150 bps benefits, out of 400 bps.
The balance 50 bps would be shared/charged by the bank.
The swap can therefore be structured as follows:

Firm Paid to Received Paid to Net Savings
Bank from Bank market Cost
A LIBOR 9.5% 9.5% LIBOR (LIBOR+2%)-(LIBOR)=200bps
B 10% LIBOR LIBOR+200bps 12% (13.5-12.0)=150bps
(ii)Company A gets floating rate funds at LIBOR as against (LIBOR+2%), thereby

getting an advantage of 200 bps.
Company B gets fixed rate funds at 12% as against 13.5%, thereby getting an
advantage of 150 bps.
(iii) Bank gets 50 bps as commission.
(b) Money market hedge: Borrow $, convert to £, invest £, repay $ loan in 180 days
Amount in £ to be invested = 3,00,000/(1+i) = 3,00,000/1.045 = £ 2,87,081
Amount of $ needed to convert into £ = 2,87,081 × 2 = $ 5,74,162
Interest and principal on $ loan after 180 days = $ 5,74,162 × (1 + 5.5 %) = $ 5,74,162 ×
1.055 = $ 6,05,741
No hedge option:
Expected future spot rate Dollar needed Probability
(1) £ 3,00,000 × (1) =(2) (3)
(2) × (3) =(4)
1.91 5,73,000 0.25
1,43,250
1.95 5,85,000 0.60
3,51,000
2.05 6,15,000 0.15
92,250
5,86,500
Probability distribution of outcomes for no hedge strategy appears to be more
preferable because less no. of dollars are needed under this option to arrange
£3,00,000.
7. (a) The equity share of VCC Ltd., is quoted at ` 210. A 3-month call option is available at
a premium of ` 6 per share and a 3-month put option is available at a premium of 5
per share.
Ascertain the net pay-offs to the option holder of a call option and a put option if
(i) The strike price in both cases is ` 220 and
(ii) The share price on the exercise days is ` 200, 210 220, 230 and 240. 8
[on the expiry day for what threshold values of share price will each option holder be
in the money?]
(b) Stock P has a beta of 1.50 and a market expectation of 15% return. For stock Q, it is
0.80 and 12.50% respectively. If the risk free rate is 6% and the market risk premium is
7%, evaluate whether these two stocks are priced correctly. Hence recommend the
appropriate action to be taken for each stock. For what value of β of stock P would
you reverse your decision above for stock P? 8
Answer:
7. (a) Net pay off [call option]

Spot price on Exercise Value of call [Maximum Action Option Net Pay off
Expiry Date (SPE) Price (EP) of (SPE-EP),0] premium [call holder]
1 2 3 4 5 6=3-5
200 220 200-220=-20-----------0 Lapse 6 0-6=-6
210 220 210-220= -10-----------0 Lapse 6 0-6=-6
220 220 220-220=0--------------0 Lapse 6 0-6=-6
230 220 230-220=10-------------10 Exercise 6 10-6=4
240 220 240-220=20-------------20 Exercise 6 20-6=14
Net pay off [put option]

Spot price on Exercise Value of call [Maximum Action Option Net Pay off
Expiry Date(SPE) price (EP) of (EP-SPE),0] premium [call holder]
1 2 3 4 5 6=3-5
200 220 220-200=20 Exercise 5 15
210 220 220-210=10 Exercise 5 5
220 220 220-220=0 Lapse 5 -5
230 220 220-230= -10----------0 Lapse 5 -5
240 220 220-240= -20-----------0 Lapse 5 -5
Option is gainfully exercised by(or in the money)
(i) For call option holder share price is more than ` 226
(ii) For put option holder share price is less than ` 215
(b) Expected return under CAPM:

Stock P = RF + β x [RM - RF] = 6% + 1.50 × 7% = 16.50%
Stock Q = 6% + 0 .8 0 × 7 % = 11.60%
Market price evaluation
Particulars Stock P Stock Q
Expected return (market) [A] 15% 12.50 %
Expected return under CAPM [B] 16.50% 11.60 %
[A] vs. [B] B is higher B is lower
Inference Stock P gives lesser return Stock Q gives higher return
than what it should give than what it should give.
Conclusion: Overvalued Undervalued
Recommendation Sell Buy
For holding or buying P,
CAPM return ≤ Market Return
6% + β × 7% ≤ 15%
9%
 β≤ = 1.29
7%
β should be less than or equal to 1.29 to reverse the decision.
8. Answer any four out of the following five questions:
(a) What are the tools and techniques used by RBI to maintain financial stability? 4
(b) Distinguish between commodity futures and financial futures with respect to the
following aspects:
(i) Valuation
(ii) Delivery and settlement
(iii) Contract features and life
(iv) Supply and consumption pattern 4
(c) List the steps involved in raising equity through American Depositary Receipts (ADR). 4
(d) Write a short note on price based auction in securities market. 4
(e) What are the constituents of an interest rate cap? 4
Answer:
8. (a) Tools and Techniques

The Reserve Bank makes use of a variety of tools and techniques to assess the build-
up of systemic risks in the economy and to provide critical inputs in this respect to its
policy making departments. The tools include:
 A Financial Stress Indicator - a contemporaneous indicator of conditions in
financial markets and in the banking sector;
 Systemic Liquidity Indicator for assessing stresses in availability of systemic liquidity;
 A Fiscal Stress Indicator for assessing build up of risks from the fiscal;
 A Network Model of the bilateral exposures in the financial system - for assessing
the inter-connectedness in the system;
 A Banking Stability Indicator for assessing risk factors having a bearing on the
stability of the banking sector; and
 A series of Banking Stability Measures for assessing the systemic importance of
individual banks.
(b) Difference between Financial futures and commodity futures on the following basis:
(i) Valuation
Financial futures are easier to understand as the cost of carry model for its
valuation applies. The argument of arbitrage also holds because of the absence
of convenience yield in financial futures. Financial futures involve financial
instruments which do not have consumption value. The consumption value makes
valuation of futures contracts on commodities difficult.
(ii) Delivery and Settlement
The provisions of delivery are applicable equally to commodities and financial
futures. In case of financial futures delivery of underlying assets is prompt and
hassle free, and so is its settlement.
Further, there are no costs of transportation, storage, or insurance, etc. involved in
financial futures. For futures on financial assets the price adjustment on account
of discrepancy in quality of what was contracted and what is being delivered, is
not required. Quality of underlying asset is immaterial in case of financial
products, whereas there is ample scope of controversy over quality in case of
commodity futures. In case of futures on indices or intangibles the underlying is
non-deliverable and futures contracts on them are necessarily cash settled.
(iii) Contract Features and Life
Commodity futures are governed by seasons and perishable nature of the
underlying asset. The delivery is linked to the availability, and therefore contracts
specifications have to consider physical characteristics of the underlying assets.
Futures contracts on commodities normally do not exceed 90 days, while there is
no such limitation on the financial futures. Financial futures can have much longer
life, though generally maturity of many financial futures is kept at 90 days.
(iv) Supply and Consumption Patterns

In case of financial products, such as stocks, indices, and foreign exchange, the
supply can be considered as unlimited and independent of weather and
seasons. The supply in case of financial products does not suffer from vagaries of
nature. The supply of commodities depends upon factors on which we do not
have any control. The total supply is dependent upon whether, storage capacity,
shelf life, etc. further, the supply of most commodities (agricultural products) is
confined to the harvesting period, while the consumption is uniform throughout
the year. Deterioration in value of commodities with time is another phenomenon
that does not affect futures on financial products.
(c) Process for Raising Equity through ADR:

(i) Issue Intermediaries: ADRs are issued by Overseas Depository Bank (ODB), who
have a Domestic Custodian Bank (DCB) in India.
(ii) Deposit of Securities: Company willing to raise equity through ADRs should deposit
the securities with the DCB in India.
(iii) Authorization for Issue of ADRs: The Indian Company authorizes the ODB to issue
ADR against the security of Company’s Equity Shares.
(iv) Issue of ADR: ODB issues ADRs to investors at a predetermined ratio to the
Company’s securities.
(v) Redemption of ADR: When an investor redeems his ADRs, the appropriate number
of underlying equity shares or bonds is released.
(vi) Dividend/Interest: The Indian Company pays interest to the ODB, which in turn
distributes dividends to the ADR holders based on the prevailing exchange rate.
(d) Price Based Auction in securities market:

In this type of auction, RBI announces the issue size or notified amount and the tenor
of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in
terms of the price. This method of auction is normally used in case of reissue of existing
Government Securities. Bids at price lower than the cut off price are rejected and
bids higher than the cut off price are accepted. Price Based auction leads to a
better price discovery then the Yield based auction.
(e) Constituents of an interest rate cap :
(i) Notional Principal amount

(ii) Interest Rate Index : specified maturity of LIBOR
(iii) A cap rate, which is equivalent to strike or exercise price on an option
(iv) Period of agreement, including payment dates and interest rate reset dates.
Candidates may use relevant values from the following:

e0.015 = 1.01511
e0.225 = 1.022755
e0.045 = 1.04603
e0.03 = 1.030455
1 n
PV factor ( )
1 x
End of Year n 1 2 3 4 5
x% 0.8929 0.7972 0.7118 0.6355 0.5674
12
Suggested Answers_Syl2016_June2018_Paper 14
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

JUNE - 2018
Working Notes should form part of the respective answers.
Wherever necessary, candidates may make appropriate assumptions and clearly state them.
Candidates may use the values tabulated at the relevant portions of this question paper.
Section – A
1. Choose the Correct Option from the four alternatives given: (One mark is for the correct
choice and one mark is for the justification/workings. You may present only the Roman
numeral, your choice and the reason/working, without copying the question). 2×10=20
(i) A company has ` 7 crore available for investment. It has evaluated its options and
has found that only four investment projects given below have positive NPV. All these
investments are divisible and get proportional NPVs.
Project Initial Investment (` crore) NPV (` crore) PI

W 6.00 1.80 1.30
X 3.00 0.60 1.20
Y 2.00 0.50 1.25
Z 2.50 1.50 1.60
Which investment projects should be selected?

(A) Project W in full and X in part
(B) Project Z in full and W in part
(C) Project W in full and Z in part
(D) Project Z and Y in full and X in part
(ii) An investor is bullish about X Ltd. which trades in the spot market at ` 1,150. He buys
two call option contracts with three months (one contract is 100 shares) with a strike
price of ` 1,195 at a premium of ` 35 per share. Three months later, the share is selling
at ` 1,240.
Net profit/loss of the investor on the position will be
(A) ` 1,000
(B) ` 16,000
(C) ` 11,000
(D) ` 2,000
(iii) Duhita Ltd. intends to buy an equipment. Quotes are obtained for two different makes
A and B as given below:
Cost (` Million) Estimate life (years)
A 4.5 10
B 6.00 15
Ignoring the operations and maintenance costs which will be almost the same for A
and B, which one would be chapter? The company's cost of capital is 10%
[Given: PVIFA (10%, 10 yrs.) = 6.1446 and PVIFA (10%, 15 years) = 7.6061]
(A) A will be cheaper
(B) B will be cheaper
(C) Cost will be the same
(D) They are not comparable and therefore nothing can be said about which is
cheaper.
(iv) BLC Ltd. a valued customer engaged in import business, is in need to remit EURO 1
million to his European exporter. The spot rate of `/US$ is ` 65.47/65.57 and that of
US$/EURO is $ 0.8053/0.8057. What rate will a banker quote to BLC Ltd. if the bank's
margin is 0.50%?
(A) ` 53.09
(B) ` 53.067
(C) ` 53.01
(D) ` 52.99
(v) Given for a project:

Annual Cash inflow = ` 80,000, Useful life = 4 years
Undiscounted Pay-Back period = 2.855 years
What is the cost of the project?
(A) ` 1,12,084
(B) ` 2,28,400
(C) ` 9,13,600
(vi) A project had an equity beta of 1.4 and is to be financed by a combination of 25%
Debt and 75% Equity. Assume Debt Beta as zero, Rf = 12% and Rm = 18%.
Hence, the required rate of return of the project is

(A) 16.72%
(B) 18.30%
(C) 17.45%
(D) 12.00%
(vii)An Indian Company is planning to invest in the US. The annual rates of inflation are 8%
in India and 3% in USA. If the spot rate is currently ` 60.50/$, what spot rate can you
expect after 5 years, assuming the inflation rates will remain the same over 5 years?
(A) ` 88.89
(B) ` 54.95
(C) ` 76.68
(D) ` 76.10
(viii) Which of the following securities is most liquid?

(A) Money Market instruments
(B) Capital Market instruments
(C) Gilt-edged securities
(D) Index futures
(ix) While plotting a graph with risk on X-axis and expected return on Y-axis, a line drawn
with co-ordinates (0, rf) and (β, rm) is called
(A) Security Market Line
(B) Characteristic Line
(C) Capital Market Line
(D) CAPM Line
(x) If the RBI intends to reduce the supply of money as part of anti-inflation policy, it might
(A) Lower the bank rate
(B) Increase the Cash Reserve Ration
(C) Decrease the SLR
(D) Buy Government securities in the open market.
Answer:
1. (i) (B)
Justification:
Project Z in full and W in part
All 4 projects have positive NPV. So PI is the selection criteria. Higher the PI, greater is
the return for every rupee of investment. Z has highest and W has 2nd highest PI. So,
option B is selected.
(ii) (D)
Justification:
Investor’s Profit = (Spot Price – Strike Price – Premium) × No of Contracts × Lot Size = (`
1,240 – ` 1,195 – ` 35) × 2 × 100 = ` 2,000
(iii) (A) Make – A will be cheaper

Justification:
Equivalent annual cost of Make – A = 45,00,000 ÷ 6.1446 = ` 7,32,350
Equivalent annual cost of Make – B = 60,00,000 ÷ 7.6061 = ` 7,88,841
(iv) (A) ` 53.09

Justification:
BLC Ltd. needs EURO to pay for import.
BLC Ltd. will purchase EUROS.
Hence bank would quote for selling
= (` 65.57 x 0.8057) + (0.5% commission)
= (` 52.83 x 1.005) = ` 53.09/ EURO
(v) (B) ` 2,28,400

Justification:
Pay-back period = Cost of project / Annual cash inflow
So, Cost of project = Annual cash inflow x Pay-back period
= 80,000 x 2.855 = ` 2,28,400
(vi) (B)
Justification:
We know, BP = [ β EQUITY x {E / (D + E)}] + [ β DEBT x {D / (D + E)}]
= (1.4 x 0.75) + (0 x 0.25) = 1.05
Rate of return of the project = Rp = Rf + Bp (Rm - Rf)

= 12% + 1.05 (18% - 12%)
= 12%+ 6.30%
= 18.30%
(vii) (C) ` 76.68

Justification:
F = S x [(1 + rA)n/ (1+ rB)n]; or, F(`/$) = 60.50 x [1 + 0.08)5 / (1+ 0.03)5]
= 60.50 x 1.267455 = `76.68
(viii) (C)
Justification:
Gilt-edged securities. Of all securities given, gilt edged securities are considered as
most liquid because they are Government bonds and have active secondary
market.
(ix) (A) Security Market Line

Justification:
Security Market Line simply represents the average or normal trade-off between risk
and return for a group of securities where risk is measured typically in terms of the
securities betas.
(x) (B) Increase Cash Reserve Ratio

Justification:
If the RBI intends to reduce the supply of money as part of anti-inflation policy, it might
increase bank rate, increase Cash Reserve Ratio, increase SLR, sell Government
securities in the open market.
Section – B
Answer any five questions out of the following seven questions.
Each question carries 16 marks.
2. (a) Electronics Pvt. Ltd. is considering a proposal to replace one of its machines. In this
connection, the following information is available:
The existing machine was purchased 3 years ago for ` 20 Lakh. It was depreciated 20
per cent per annum on reducing balance basis. It has remaining useful life of 5 years,
but its maintenance cost is expected to increase by ` 1 Lakh per year from the end of
sixth year of its installation. Its present realizable value is ` 12 Lakh. The company has
several machines having 20% depreciation.
The new machine costs `30 Lakh and is subject to the same rate and basis of
depreciation. On sale after 5 years, it is expected to realize `18 Lakh. With the new
machine, the annual pre-tax operating costs (excluding depreciation) are expected
to decrease by `2 Lakh. In addition, the machine would increase productivity on
account of which net pre-tax revenues would increase by `3 Lakh annually
(reckoned at year end). The tax rate applicable to the company is 40% and the cost
of capital is 10 per cent.
Advise the company on the choice of the machine from a financial perspective on
the basis of NPV.
PV Factors (10%)
Year 1 2 3 4 5
PV Factor 0.909 0.826 0.751 0.683 0.621
Present an incremental analysis of using the existing machine versus replacing the
machine with a new one. Present annual discounted cash flows in your answers with
separate calculation showing annual discounted cash flows on account of
incremental depreciation without netting off capital asset outflows or inflows.
Calculations are to be presented to the nearest rupee. P.V. factors with above
decimal places should be used. 10
(b) The following two-way quotes appear in the foreign exchange market:
Spot Rate 2-Months Forward
`/US$ ` 66.00/` 66.25 ` 67.00/ ` 67.50
(i) How many US Dollars should a firm sell to get ` 50 Lakh after two months?
(ii) How many Rupees is the firm required to pay to obtain US $ 3,00,000 in the spot
market?
(iii) Assume that the firm has US $ 1,19,000 earning no interest. ROI on Rupee
Investment is 8% p.a. Should the firm encash the US $ now or 2 months later? 6
Answer:
2. (a) (i)
Existing Machine (`) (Amount in `)
Cost 20,00,000
Depreciation 20%, year 1 4,00,000
16,00,000
WDV 12,80,000
WDV at Y0 = 10,24,000
(ii) Base for incremental depreciation

Cost of New Machine 30,00,000
Less: WDV of existing machine 10,24,000
Difference 19,76,000
Depreciation at end of the Year PV Disc. Values

Year 1 3,95,200 0.909 3,59,237
Year 2 3,16,160 0.826 2,61,148
Year 3 2,52,928 0.751 1,89,949
Year 4 2,02,342 0.683 1,38,200
Year 5 1,61,874 0.621 1,00,524
10,49,058
Tax Shield 40% 4,19,623
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Expenses (1,00,000) (1,00,000) (1,00,000)
Revenue 3,00,000 3,00,000 3,00,000 3,00,000 3,00,000
Net Revenue 3,00,000 3,00,000 2,00,000 2,00,000 2,00,000
Net Revenue after 1,80,000 1,80,000 1,20,000 1,20,000 1,20,000
Tax
Cost of New Machine (30,00,000)
Resale – old Machine 12,00,000
Resale – New Machine 18,00,000
Cash Flows other than (18,00,000) 1,80,000 1,80,000 1,20,000 1,20,000 19,20,000
Depreciation
PV Factor 1 0.909 0.826 0.751 0.683 0.621
Discount Annual C/F (18,00,000) 1,63,620 1,48,680 90,120 81,960 11,92,320
(1,23,300)
 PV of Cash Flows (Other than Depreciation) (1,23,300)
Depreciation Impact + 4,19,623
Net Impact + 2,96,323
Hence it is beneficial to go in for the new machine.

(b) (i) US dollars for ` 50 Lakh in the forward Market
Action Sell Foreign Currency in Forward Market

Relevant Rate Forward Bid Rate = ` 67.00
US $ Required to get ` 50 Lakh ` 50,00,000 ÷ ` 67.00= US $ 74,626.87
(ii) Required to obtain US dollars 3,00,000 in the spot market

Action Buy Foreign Currency in Spot Market
Relevant Rate Spot Ask Rate = ` 66.25
Rupees Required to get $3,00,000 US $ 3,00,000 × ` 66.25 = ` 19,875,000
(iii) Evaluation of investment in Rupee

Forward Rate ` 67 - Spot Rate ` 66 12 Months
Forward Premium (for Bid Rates)= × ×100
Spot Rate ` 66 2 Months
= 9.09%
Comment: Annualized Forward Premium for Bid Rates (9.09%) is greater than the
Annual Return on Investment in Rupees (8%). Therefore, the firm should not encash
its US $ balance now. It should sell the US $ in the forward market and encash them
two months later.
Alternative:
Alternatively, if it encashes now, ` = 66 x 1,19,000 = 78,54,000
Interest at 8% p.a. 2 months = 8% x 2/12 x 78,54,000 = 1,04,720
Amount at the end of two months = 79,58,720
Hold for 2 months, then ` = 67 x 119000 = 79,73,000

Hence the amount should be encashed into Rupees two months later.
3. (a) The following quotes are available for 3-months options in respect of a share of P Ltd.
which is currently traded at ` 310.
Strike Price ` 300

Call option ` 30
Put option ` 20
An investor devises a strategy of buying a call and selling the share and a put option.
Risk free interest rate is 10% per annum.
Using Put-call parity theory

(i) Find out profit/loss of the investor.
(ii) What would be the position if the strategy adopted is selling a call and buying the
put and the share? (e0.025 = 1. 0253; e0.25 = 1. 2840) 8
(b) The Stock Research Division of Bharati Investment Services Ltd. has developed ex-
ante probability distribution for the likely economic scenarios over the next one year
and estimates the corresponding one period rates of return on Stock A, B and Market
Index as follows:
Economic scenarios Probability One period rate of return %
Stock A Stock B Market
Recession 0.15 -15 -3 -10
Low growth 0.25 10 7 13
Medium growth 0.45 25 15 18
High growth 0.15 40 25 32
The expected risk free real rate of return and the premium for inflation are 3.0% and
6.5% p.a. respectively.
As a financial analyst in the Research Division you are required to calculate the
following for stock A and stock B:

(i) Expected return
(ii) Covariance of returns with the market returns
(iii) Beta 2+4+2=8
Answer:
3. (a) (i) According to Put-Call Parity

p = c+X e-rt - S
S+ p = c+X e_rt
Here,
P = Put option price
c = Call option price
S = Spot Price
X = Ex. Price
Left Hand Side (LHS)= ` 310 + ` 20= ` 330

Right Hand Side (RHS)= ` 30 + ` 300/[(0.10 × 3/12)]= ` 322.60
Since LHS is not equal to RHS and the difference is ` 330 – ` 322.68 = ` 7.40
There is an arbitrage opportunity and the investor is devising a strategy of buying a

call and selling the share and a put option.
From the put-call parity equation we can see that it is equivalent to;
c-S-p = - X e-rt or (c-S-p)+ X e-rt = 0
Arbitrage Profits per Share

Position Immediate Cash Flow Payoff in 3 Months
St ≤ 300 St > 300
Sell Stock 310 - St - St
Deposit PV (300) -292.60 300 300
Buy Call -30 0 St -300
Sell Put +20 -(300 - St) 0
Total ` 7.40 0 0
St = Stock Price at expiration

This strategy would be adopted, since the initial payoff is positive.
(ii) If the investor would adopt by selling a call and buying the share and put option,
then the Put-Call Parity Equation would be equivalent to -c+S+p = X e_rt. The result
of net cash outflow (initial payoff):
Arbitrage Profits per Share
Position Immediate Cash Flow Payoff in 3 Months
St ≤ 300 St > 300
Buy Stock - 310 St St
Borrow PV (300) +292.60 - 300 - 300
Sell Call +30 0 - (St -300)
Buy Put - 20 (300 - St) 0
Total - ` 7.40 0 0
This strategy would not adopted, since the initial payoff is negative.
(b) (i) Expected return on stock
n
E(RA) =  Rs Ps
S=1
= 0.15(-15)+0.25x10+0.45x25+0.15x40 = 17.5%
E(RB) = 0.15x(-3)+0.25x7+0.45x15+0.15X25 = 11.8%
E(RM)= 0.15x(-10)+0.25x13+0.45x18+0.15x32 = 14.65%
(ii) Covariances
n  
COVAM =  R A - E(R A ) RM - E(R ) P
S=1 S   S M  S
= 0.15[(-15)-17.5][(-10)-14.65]+0.25[10-17.5](13-14.65]+0.45[25-17.5][18-14.65]+0.15[40-
17.5][32-14.65]
= 120.16875+3.09375+11.30625+58.55625
= 193.13
COVBM = 0.15[(-3)-11.8][(-10)-14.65]+0.25[7-11.8][13-14.65]+0.45[15-11.8][18-14.65]+
0.15 [25 -11.8][32-14.65]
= 54.723+1.98+4.824+34.353
= 95.88
VARM(a2m) = 0.15[(-10)-14.65]2+0.25[13-14.65]2+0.45[18-14.65]2
= 0.15[32-14.65]2
=142.03
COVAM 193.13
(iii) βA = = = 1.36
2 142.03
am
COVBM 95.88
βB = = = 0.675 = 0.68
2 142.03
am
(iii) Alternatively, Rf = 9.5
RA - Rf (17.5 - 9.5)
Beta for A = βA from CAPM = = = 1.553 = 1.6
Rm - Rf
14.65 - 9.5
RB - Rf
(11.80 - 9.5)
Beta for B = βB from CAPM = = = 0.45
Rm - Rf 14.65 - 9.5
4. (a) X Ltd. has imported goods from USA worth US $ 10 million and it requires 90 days to
make the payment. The USA supplier has offered a 60 days interest free credit period
and for additional credit for 30 days interest is to be charged at 8% per annum.
(Consider 360 days p.a.)
The banker of X Ltd. Offers a 30 days loan at 10% per annum and its quotes for foreign
exchange are as follows:
Spot 1 US $ ` 64.50
60 days forward rate for 1 US $ ` 65.10
90 days forward rate for 1 US $ ` 65.50
You are required to evaluate the following options:

(i) Pay the USA supplier in 60 days or
(ii) Avail the supplier's offer of 90 days' credit. Advise X Ltd. accordingly.
(b) Your client holds the following securities:
Particulars of Securities Cost (`) Dividends (`) Market Price (`) BETA
Equity Shares:
Co. T 8,000 800 8,200 0.8
Co. Q 10,000 800 10,500 0.7
Co. M 16,000 800 22,000 0.5
Co. P 34,000 3,400 32,300 0.2
Assuming a Risk-free rate of 6%, calculate the expected rate of return in each, using
the Capital Asset Pricing Model (CAPM). Assume equal proportion of securities for
market portfolio as also for the client. Calculations should be presented up to two
decimal places. 6
Answer:
4. (a) (i) Payment to supplier in 60 days

If the payment is made to supplier in 60 Days, the applicable ` 65.10
forward rate for 1 US$
Payment due US$ 1,00,00,000
Outflow in rupees (US$ 1,00,00,000 × ` 65.10) ` 65,10,00,000
Add: Interest on Loan for 30 days @10% p.a. ` 54,25,000
Total Outflow ` 65,64,25,000
(ii) Payment to supplier in 90 days

Amount Payable US$ 1,00,00,000
Add: Interest on Credit Period for 30 days @ 8% p.a. US$ 66,667
Total Outflow in US$ US$ 1,00,66,667
Applicable forward for 1 US$ ` 65.50
Total Outflow (US$ 1,00,66,667 × ` 65.50) ` 65,93,66,689
Comment: It is better to select alternative (i) as entails lower cash flows.
(b) Calculation of expected return on market portfolio (Rm)

Investment Cost(`) Dividends(`) Capital Gains (`)
Shares T 8,000 800 200
Shares Q 10,000 800 500
Shares M 16,000 800 6,000
Shares P 34,000 3,400 -1,700
68,000 5,800 5,000
Rm = (5,800 + 5,000) / 68,000 X 100 = 15.88%
(i) Calculation of expected rate of return on individual security:

Security
Share T 6 + 0.8(15.88-6.0) = 13.90%
Share Q 6 + 0.7(15.88-6.0) = 12.92%
Share M 6 + 0.5(15.88-6.0) = 10.94%
Share P 6 + 0.2(15.88-6.0) = 7.98%
5. (a) XYZ Ltd. is considering acquisition of an additional computer to supplement its

computer services to its clients. It has two options:
(i) To purchase the computer for ` 22,00,000.
(ii) To lease the computer for 3 years from a leasing company for ` 5,00,000 as
annual year end lease rent. The agreement also requires as additional one time
lump sum lease rent payment of ` 6,00,000 at the end of the third year. Lease rents
are payable at the year ends and the computer is returned to the lessor after the
lease period.
The company estimates that the computer considered for purchase now will be worth
` 10 lakhs at the end of the third year and proceeds are taxable at the end of the third
year at the usual 50% tax rates. Forecast pre-tax year end revenues are:
Year `
1 22,50,000
2 25,00,000
3 27,50,000
Annual year end pre-tax operating costs (excluding depreciation/lease rent of

computer) are estimated at ` 9,00,000 with an additional ` 1,00,000 for start-up and
training costs at the beginning of the first year, the tax benefit of which can be
claimed at the end of the first year. These costs are to be borne by XYZ Ltd. XYZ Ltd.
will borrow at 16% interest to finance the acquisition of the computer and the
repayments are to be made according to the following schedule:
Year-end Principal (`) Interest (`) Total (`)
1 5,00,000 3,52,000 8,52,000
2 8,50,000 2,72,000 11,22,000
3 8.50,000 1,36,000 9,86,000
The company depreciates the computer at 60% of cost in the first year and the
remaining at the end of the second year. Consider these at year ends. The
Management of XYZ Ltd. approaches you, as a Management Accountant, for advice.
Will the computer's use be justified? Which alternative would you recommend and
why? Support your advice with relevant calculations. Present annual discounted cash
flows to the nearest rupee, for each option using PV factors up to the decimals
provided. Indicate inflows by '+' and outflows by '-' or '()'
Note: Present value factor at 8% and 16% rate of discount:
Year 1 2 3
8% 0.926 0.857 0.794
16% 0.862 0.743 0.641
10
(b) A Portfolio Manager has the following four stocks in his portfolio:
Security No. of shares Market price (`) per share β = Beta
ADU 12,000 40 0.9
DVU 6,000 20 1.0
NDU 10,000 25 1.5
SVU 2,000 225 1.2
Compute the following:
(i) Portfolio Beta (β)
(ii) If the Portfolio Manager seeks to reduce the portfolio Beta to 0.8, how much risk-
free investment should he bring in? Consider that he disposes the riskier securities
first and replaces them with risk free investment. Present the revised portfolio. 6
Answer:
5. (a) Purchase of the Computer

Particulars Year 1 (`) Year 2 (`) Year 3 (`)
Principal 5,00,000 8,50,000 8,50,000
Interest 3,52,000 2,72,000 1,36,000
Total A 8,52,000 11,22,000 9,86,000
Tax Shield @ 50%

Interest 1,76,000 1,36,000 68,000
Depreciation 6,60,000 4,40,000 ---
Total B 8,36,000 5,76,000 68,000
Net Cash outflow (A – B) 16,000 5,46,000 9,18,000

PV Factor at 8% 0.926 0.857 0.794
PV of cash outflows 14,816 4,67,922 7,28,892
Total PV of cash out flows 12,11,630
Less: PV of salvage value (` 10 lacs – Tax) * 0.794 3,97,000
Net PV of cash outflows 8,14,630
Lease of the computer

Particulars Year 1 (`) Year 2 (`) Year 3 (`)
Lease rent 5,00,000 5,00,000 5,00,000
Lump sum payment 6,00,000
Total Payment 5,00,000 5,00,000 11,00,000
Less: Tax shield 50% 2,50,000 2,50,000 5,50,000
Net cash outflows 2,50,000 2,50,000 5,50,000
PV factor at 8% 0.926 0.857 0.794
PV of cash outflows at 8% 2,31,500 2,14,250 4,36,700
Total PV of cash outflows 8,82,450
Since PV of Net cash outflow of Purchase is lower, the company should purchase
computer.
Working:
Depreciation = 60% on 1st year, rest 2nd year
Effective rate of interest after tax shield = 0.16 *(1 – 0.50) = 8%
Operating and training costs and revenue are common is both alternatives hence
not considered while calculating NPV of cash flow.
Alternative:
Purchase
Particulars Year 0 (`) Year 1 (`) Year 2 (`) Year 3 (`)
Revenue 22,50,000 25,00,000 27,50,000
Expenses Training Cost (1,00,000)
Operating Cost (9,00,000)(9,00,000) (9,00,000)
Interest (3,52,000)(2,72,000) (1,36,000)
Sale Proceeds 10,00,000
Cash flow before Tax (1,00,000) 9,98,000 13,28,000 27,14,000
Tax 50% (4,99,000) (6,64,000)(13,57,000)
Depreciation Tax Shield 6,60,000 4,40,000
Training Cost Tax Shield 50,000
Principal Payment (5,00,000) (8,50,000) (8,50,000)
Net Cash Inflows (1,00,000) 7,09,000 2,54,000 5,07,000

P.V. Factor at 8% 1 0.926 0.857 0.794
Total P.V. of Cash Inflows (1,00,000) 6,56,534 2,17,678 4,02,558
Total 11,76,770
Particulars Year 0 (`) Year 1 (`) Year 2 (`) Year 3 (`)

Lease Rent (5,00,000) (5,00,000)(11,00,000)
Revenue 22,50,000 25,00,000 27,50,000
Training Cost (1,00,000)
Operating Cost (9,00,000) (9,00,000) (9,00,000)
Cash flow before Tax (1,00,000) 8,50,000 11,00,000 7,50,000
Tax 50% (4,25,000) (5,50,000) (3,75,000)

Training Cost Tax Shield 50,000
Net Cash Inflow (1,00,000) 4,75,000 5,50,000 3,75,000
P.V. Factor at 8% 1 0.926 0.857 0.794

Total P.V. of Cash Inflows (1,00,000) 4,39,850 4,71,350 2,97,750
Total 11,08,950
The computer’s use is justified. It should be purchased.
(b) (i)
Security No. of Shares MPS MV Beta Product
ADU 12,000 40 4,80,000 0.9 4,32,000
DVU 6,000 20 1,20,000 1.0 1,20,000
NDU 10,000 25 2,50,000 1.5 3,75,000
SVU 2,000 225 4,50,000 1.2 5,40,000
13,00,000 14,67,000
14,67,000
β= = 1.1285 = 1.13
13,00,000
(ii) Reduce β to 0.8

Beta can be reduced replacing High beta stocks in the portfolio with risk free
investment which carry a Beta of Zero.
 Required Value = 0.8 × 13,00,000 = 10,40,000

Difference in value = ` 14,67,000 – 10,40,000 = 4,27,000
` 4,27,000 should be eliminated from product column (Value).
NDU has highest β and to be replaced ` 3,75,000.
Remaining value ` 52,000
Next highest beta is of SVU
Market value of ` 52,000 (Product) 52,000/1.2 = ` 43,334
No. of Share of SVU to be replaced = 43,334/225 = 192.5 or 193.
Total value of risk free investment to be brought in = ` [2,50,000 + (193 shares ×
225)] = ` 2,50,000 + 43,425) = ` 2,93,425
` 2,93,425 securities should be replaced.
Security No. of Shares MPS MV Beta Product

ADU 12,000 40 4,80,000 0.9 4,32,000
DVU 6,000 20 1,20,000 1.0 1,20,000
NDU 0 0 0 1.5 0
SVU 1,807 225 4,06,575 1.2 4,87,890
Risk free securities 2,93,425 0 0
13,00,000 10,39,890
Beta = 10,39,890 / 13,00,000 = 0.8
6. (a) Y, a British firm with a US subsidiary, seeks to refinance some of its existing British
pound debt to include floating rate obligations. The best floating rate it can obtain in
London is LIBOR + 2.0%. Its current debts are as follows:
US$ 10 million owed to CT Bank at 9.5% (fixed annually); and

£ 5 million owed to MD Bank at 9.5% (fixed) annually.
HRS Company wishes to finance exports to Britain with £3 million of pound

denominated fixed rate debt for six months. HRS is unable to obtain a fixed interest
rate in London for less than 13.5% interest because of its lack of credit history in the
UK. However, Lloyds Bank is willing to extend a floating rate British pound loan at
LIBOR + 2%. HRS, however, cannot afford to pay more than 12%.
Assume that Y is in a strong bargaining position and can negotiate the best deal
possible, but HRS will not pay over 12%. Assume further that transaction costs are 0.5%
and exchange rates are stable.
Can Y and HRS help each another by an interest rate swap? If so, how? Compute the
amount of gains for Y, HRS and the Swap Dealer.
Illustrate the effective post-swap interest rates of each party with a diagram. What are
the effective interest rates for each party over the six months period of the swap?
8
(b) A manager is trying to decide which of the three mutually exclusive project X, Y or Z
to undertake. Each of the projects could lead to varying net profits which are
classified as outcomes I, II and III. The manager has constructed the following pay-off
table or matrix (a conditional profit table).
Project
Outcomes Probability X Y z
Net Profit (`)
I (Worst) 0.2 5,00,000 7,00,000 9,00,000
II (Most likely) 0.5 8,50,000 7,50,000 10,00,000
III (Best) 0.3 13,00,000 14,00,000 11,00,000
(i) Which project should be undertaken using Expected Value Criterion?

(ii) Which project should be chosen, if minimax regret rule is applicable? 8
Answer:
6. (a)
Particulars Cost of Funds Y and HRS
Objective Fixed Rate Floating Rate
Y Floating 9.5% p.a. LIBOR +2%
HRS Fixed 13.5% p.a. LIBOR +2%
Differential in absolute terms 4% 0
The differential between two markets = 4% - 0% = 4%. A total of 4% needs to be shared

between Y, HRS and Swap Dealer.
Since HRS cannot pay more than 12% as against the fixed rate funding of 13.5%, it requires
1.5% benefit out of 4%. Commission to swap dealer is 0.5%. so, benefit to Y = 4% - 1.5% - 0.5%
= 2%.
The swap can therefore be structured as follows:

Firm Paid to Swap Received from Paid to Market Net Cost Savings
Dealer Swap Dealer
Y LIBOR 9.50% 9.50% LIBOR LIBOR+2% - LIBOR = 2%
HRS 10% LIBOR 12% 12% 13.5% - 12% = 1.5%
Y gets floating rate funds at LIBOR as against LIBOR +2%, thereby getting advantage of 2%
HRS gets fixed rate funds at 13.5%, there by getting advantage of 1.5%
Finally Swap Dealer get commission of 0.5%.

Schematic Diagram
9.5% 12%
Swap Dealer
LIBOR
LIBOR + 2%
Y HRS LIBOR + 2%
9.5%
Effective interest rates:

If HRS is able to negotiate such that its total outflow is 12%, Commission will be borne by Y.
Hence, effective interest rate for
Y = LIBOR
HRS = 12%
Alternatively
Y = LIBOR + 2% - 2.25%
= LIBOR – 0.25%
HRS = 12% (Fixed) + 0.25% (Commission)
= 12.25% (Fixed)
(b) (i)
Outcome Probability EVx (`) EVY (`) EVz (`)
I (Worst) 0.2 1,00,000 1,40,000 1,80,000
II (Most Likely) 0.5 4,25,000 3,75,000 5,00,000
III (Best) 0.3 3,90,000 4,20,000 3,30,000
Total 1.0 9,15,000 9,35,000 10,10,000
If the project with the highest EV of profit is chosen, this would be product Z.
(ii) A table of regrets can be compiled, as follows, showing the amount of profit that
might be foregone for each project, depending on whether the outcome is I, II or
III.
Outcome X (`) Y (`) Z (Rs)
I (Worst) [9,00,000 - 5,00,000] [9,00,000-7,00,000] [9,00,000- 9,00,000]
= 4,00,000 = 2,00,000 =0
II (Most [10,00,000-8,50,000] [10,00,000-7,50,000] [10,00,000 10,00,000]
likely) = 1,50,000 = 2,50,000 =0
III (Best) [14,00,000 -13,00,000] [14,00,000-14,00,000] [14,00,000-11,00,000]
= 1,00,000 =0 = 3,00,000
Analysis: The maximum regret is ` 4,00,000 with project X , ` 2,50,000 with Y and `
3,00,000 with Z. The lowest of these three maximum regrets is ` 2,50,000 with Y and so
project Y would be selected, if the minimax regret rule is used.
7. (a) Bharat Oil Corporation (BOC) imports crude oil for its requirements on a regular basis.
Its requirements are estimated at 100 tonnes per month. Of late, there has been a
surge in the prices of oil. The current price (month of June) of crude oil is ` 5,500 per
barrel. The firm expects the price to rise in the coming months to ` 5,800 by August. It
wants to hedge against the rising prices for some of its requirements of the month of
August.
Multi Commodity Exchange (MCX) in India offers futures contracts in crude oil. The
contract size is 100 barrels and August contract is currently traded at ` 5,668 per
barrel.
BOC would like to hedge half its exposure in futures and leave the other half to
market conditions. While hedging, the number of futures contracts dealt with should
be rounded off to the next higher integer. Then, how many contracts should it book?
Compare the hedged and exposed parts regarding the effective price per barrel and
also compute the effective price per barrel for the whole requirement of August, if in
August,
(i) The spot price is ` 5,570 and futures price is ` 5,788,
(ii) The spot price is ` 5,417 and futures price is ` 5,455?
Ignore marking-to-market and initial margin on futures contracts.

Given that 1 tonne = 7.33 barrels. 10
(b) A share is currently priced at ` 600. It is known that at the end of one month, it will be
either ` 570 or ` 630. The risk-free interest rate is 8% per annum with continuous
compounding. Find the value of a one month European call option with a strike price
of ` 592 with the help of a Binomial Model. (Given that e0.007 = 1.00702) 6
Answer:
7. (a)
Particulars
Quantity of crude oil required per month 100 tonnes
1 tonne 7.33 barrels
Quantity involved in barrels = 100*7.33 barrels 733 barrels
Exposure to be covered in future 50% 366.5 or 367 barrels
Contract size in futures 100 barrels
No of contracts to book =366.5/100=3.67= 4 contracts
Future price ` 5668 per barrel
Exposure in Future = 5668*4*100 ` 2267200
In August BOC would unwind its futures position and buy requirement from spot market
For covered part:

` `
Futures sold at price 5,788 5,455
Amount of futures sold = 4*100 23,15,200 21,82,000
Gain / Loss on futures (4 contracts) 48,000 -85,200
Spot price 5,570 5,417

Actual cost of buying 400 barrel 22,28,000 21,66,800
Effective cost of buying 400 barrel 21,80,000 22,52,000
Effective Price per barrel 5,450 5,630
Exposed Part:
Effective Price per barrel 5,570 5,417
Total cost of 333 barrel 18,54,810 18,03,861
Total cost 40,34,810 40,55,861
Effective Price per barrel 5504.515689 5533.234652
(b)
Computation of Option Delta [Binomial Model]:
FP1 FP2
Future spot price 630 570
Position on expiry date [compared to Exercise price] In the money Out of money
Action on Expiry date Exercise Lapse
Value of Option on expiry:
[Future spot price - Exercise price] [630 - 592] = 38 0
Option Delta = Change in value of option / Change in Future spot price

= [` 38 -0] / [`630 - `570]
= 0.633
Computation of amount to be invested in Risk Free Rate:
= Present value of Lower band of Future spot price i.e., FP2

= Present value of `570 discounted at 8% continuous compounding for a 1-month
period
= ` 570 x e (-)rt = ` 570 x e -0.08 × 1/12 = `570 / e 0.007 = `570 / 1.00702 = `566.
Value of call = Option Delta x [Current stock price - Amount to be invested at risk free
rate]
= 0.633 x [` 600 - ` 566]
= ` 21.522.
(a) State the type of risk in the following situation: (You may present only the question
Roman numeral and the type of risk in your answer) 4
(i) The risk of loss arising from sovereign State freezing foreign currency payments.
(ii) The risk that stock prices or stock indices values and/or their implied volatility may
change.
(iii) The risk arising from the people, system and processes through which a company
operates.
(iv) Changes in currency exchange rates.
(b) You are required to present Columns I, IV and V after filling up the contents of
columns IV And V. 4
SI. No. Situation Option Type ________ the money Action: (Exercise/Lapse/
(Fill up In/At/Out of) Indifferent)
Column II III IV V
(i) CMP<EP Call
(ii) CMP<EP Put
(iii) CMP>EP Call
(iv) CMP>EP Put
EP=Exercise Price; CMP=Current Market Price
(c) Identify the following financial instruments: (You may present only the Roman numeral
and the name of the instrument in your answers) 4
(i) X is a negotiable instrument issued in US $ and issued by a US Depository Bank for
the benefit of a non US company that wishes to raise money in the US. X is listed
on NYSE and NASDAQ. Issue of X offers access to both institutional and retail
markets in the US.
(ii) Y is an instrument issued abroad by authorized overseas corporate bodies against
shares or bonds of Indian companies held with nominated domestic custodial
banks. An Indian company intending to issue Y will issue the corresponding
number of shares to an overseas depository bank. Y is freely transferable outside

India and dividend in respect of the shares represented by Y are paid in Indian
rupees. Y is traded on OTC basis (Over the Counter). Y is listed on the London
Stock Exchange.
(iii) Z is a zero - interest bond sold at a discount and redeemed at face value on
maturity. Investors in Z are not looking for immediate return. Z is issued by the
issuer to meet the long term requirements spanning 20 - 30 years. Z can also be
traded in the market.
(iv) W is a negotiable certificate issued by a company or the Government, entitles the

holder to repayment of principal and interest. Interest is paid periodically at
predetermined intervals and the principal is repaid at a specified maturity date.
(d) A certain project is expected to generate year and annual net cash inflows of `
5,00,000 for four years. The cost of capital (real discount rate is 10%). Inflation rate is
5% p.a.
(i) What are the nominal cash flows and real cash flows of the second year's inflows
which occur at the end of year 2?
(ii) What is the present value of the inflow of the second year that you would use in
determining the NPV of the project? 4
(You are not required to calculate the values. You are only required to substitute the
values in appropriate formulae for the answers).
(e) Explain the concept of 'option' in relation to a capital budgeting decision. What would
be the value of the option? 4
Answer:
8. (a) (i) The risk of loss arising from sovereign state freezing foreign currency payments-
Country risk under Credit risk.
(ii) The risk that stock prices or stock indices values and/or their implied volatility
change-Equity risk under Market risk.
(iii) The risks arising from the people, systems and process through which a company
operates-Operational risk.
(iv) Changes in currency exchange rates- Foreign Investments Risk.
b)
SI. No. Situation Option Type the money Action: (Exercise/
(Fill up In/At/Out of) Lapse/ Indifferent)
Column I II III IV V
(i) CMP<EP Call Out of Lapse
(ii) CMP<EP Put In Exercise
(iii) CMP>EP Call In Exercise
(iv) CMP>EP Put Out of Lapse
(c)
(i) ADR or American Depository Receipt
(ii) GDR or Global Depository Receipt
(iii) Deep Discount Bond
(iv) Bond
(d) (i) The nominal cash flow is ` 5,00,000.

The real cash flow at year end 2 is (5,00,000)/(1.05)
(ii) PV of nominal cash flow should be discounted by the nominal discount rate i.e.
Nominal discount rate =1 -(1.05 x 1.10) = 0.155 = 15.5%.
PV at year end 2 will be 5,00,000/1.155

or
PV will be real cash flow discounted by real discount rate = 5,00,000/1.05 ÷ 1.1
(e) An option is a special contract under which the option owner enjoys the right to buy
or sell something without any obligation to do the same. The option to buy is a ‘call
option’ and the option to sell is a ‘put option’. In the context of capital budgeting
decision, the opportunities that managers have are called managerial option or real
option, involving the real assets, not financial assets. The options provide the
managers opportunity or flexibility to increase gains or reduce losses. The holder of a
real option is often unclear as to what the precise right is and low long the same will
last.
Value of the option = NPV with option - NPV without option.
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)

DECEMBER 2018
Paper- 14: STRATEGIC FINANCIAL MANAGEMENT

Time Allowed: 3 Hours Full Marks : 100
No present value factor table or other statistical table will be provided in addition to this question paper
Candidates may use relevant values from tables given at the end of the question paper.
This paper contains two sections. A and B. Section A is compulsory and contains questions
No.1 for 20 marks. Section B contains question Nos. 2 to 8, each carrying 16 marks.
SECTION – A
Answer all the question. Each question carries two marks.
1. Choose the correct option from the four alternatives given : (1 mark is for the correct
choice and 1 mark is for the justifications/workings. You may present only the Roman
numeral, your choice and the reasons/workings, without copying the question).
2×10=20
(i) M buys a call option contract for a premium of Rs. 200. The exercise price is RS. 25
and the current market price of the share is Rs. 22. If the share price after three
months reaches Rs. 30, what is the profit made by M on exercising the option? A
contract is for 100 shares. Ignore transaction charges.
(A) Rs. 200
(B) Rs. 300
(C) Rs. 100
(D) Rs. 600
(ii) You are a forex dealer in India. Rates of rupee and pound in the international market
are US $0.01386952 and US $1.3181401 respectively. What will be your direct quote
of £ (pound) to your customer.
(A) Rs.54.6987
(B) Rs.71.1408
(C) Rs.95.0386
(D) Rs.0.0105
(iii) ‘Bank rate’ published by the Reserve Bank refers to
(A) the repo rate transacted by RBI.
(B) the rate at which housing or other long term loans shall be sanctioned by
scheduled banks to their customers.
(C) The rate at which RBI is willing to buy or rediscount bills of exchange or other
commercial paper.
(D) the rate which RBI uses as cut-off for auction of Government securities.
(iv) An investor has invested in a mutual fund when the NAG was Rs. 15.50 per unit. After
90 days the NAV was Rs. 14.45 per unit. During the period the investor got a cash
dividend of Rs. 1.35 per unit and capital gain distribution of Re. 0.20. The annualized
return based on 360 days year count will be
(A) 3.23%
(B) 12.92%
(C) 0.8075%
(D) 16.45%
(v) Initial investment of a project is Rs. 25 lakh. Expected annual cash flows are Rs. 6.5
lakh for 10 years Cost of capital is 15%. The annuity factor for 15% for 10 years is
5.019. The Profitability Index of the project will be
(A) 1.305
(B) 3.846
(C) 0.26
(D) 0.7663
(vi) Rate of inflation = 5.1%, β = 0.85, Risk premium = 2.295%, Market return = 12%. The
real rate of return will be
(A) 4.2%
(B) 11.70%
(C) 6%
(D) 5.95%
(vii) In a constant dividend model, the following estimates the difference between the
required rate of return and the growth rate :
(A) Earnings Retention ratio
(B) Leverage ratio
(C) Dividend Pay-out ratio
(D) Dividend yield ratio
(viii) Presently, a company’s share price is Rs. 120. After 6 months, the price will be either
Rs. 150 with a probability of 0.8 or Rs. 110 with a probability of 0.2. A call option
exists with an exercise price of Rs. 130. What will be the expected value of call
option at maturity date?
(A) Rs. 20
(B) Rs. 16
(C) Rs. 12
(D) Rs. 10
(ix) A stock is currently selling at Rs. 270. The call option to buy the stock at Rs. 265 costs
Rs. 12. What is the Time Value of the option ?
(A) Rs. 5
(B) Rs. 17
(C) Rs. 7
(D) None of (A), (B) or (C)
(x) A Ltd., an export customer requested his banker B to purchase a bill for USD 80,000.
Calculate the rate to be quoted to A Ltd. if B wants a margin of 0.08%, given that the
inter bank rate is Rs./$ 71.50/10.
(A) Rs. 71.1569
(B) Rs. 71.0431
(C) Rs.71.5572
(D) Rs.71.4428
Answer: 1
(i) (B) Strike price – price after 3 m = 25-30 = Rs. 5 increase. Hence gain by exercising
call option is 5 x 100 shares = Rs. 500. Less premium = Rs. 200. Net gain = 500 – 200
= 300
(ii) (C) Rs./$ = 1/0.01386952 = Rs. 72.1005 ; $/£ = 1.3181401
Rs./£ = 72.1005 x 1.3181401 = 95.0386
(iii) (C) This is the base rate upon which many other rates are determined. It is a
medium term policy rate.
(iv) (B) -15.50 + 14.45 +1.35 + 0.20 = +0.50
Annualized return = 0.50 / 15.5 x (360/90) = 12.92%
(v) (A) PI = 6.50 X 5.019 / 25 = 1.305
(vi) (A) Rf = Real rate + Inflation rate
Risk premium = β(Rm-Rf)
2.295 = 0.85 (12-Rf)
12- Rf= 2.295/0.85 = 2.7
Rf= 12-2.7 = 9.3
Real Rate of return – 9.3 – 5.1 = 4.2%
(vii) (D) P = D/(ke-g) Hence, Ke-g = D/P = Dividend Yield ratio
(viii) (B) Expected value of call option :

Expected share Exercise Call value Probability Call option
price (Rs.) price (Rs.) (Rs.) value (Rs.)
150 130 20 0.8 16
110 130 0 0.2 0
16
(ix) (C) Time Value of option = Call premium – Intrinsic Value = Rs.(265+12)-
(Rs.270)=Rs. 7
(x) (B) A’s banker will purchase $ from A and sell in the interbank market. In the
interbank market, B is a customer and hence he can sell at only 71.10 while B can
purchase in the interbank market at 71.50. Hence , if B sells at 71.10, it has for itself
only the margin of 0.08%. Hence it will quote to A 71.10 -.08% x 71.10 for purchasing
the $ from A.
i.e. 71.10-0.0569 = 71.0431
SECTION – B
Answer any five question
2. (a) The distribution of return of security ‘S’ and the market portfolio ‘M’ is given below :
Probability Return %
S M
0.30 30 - 10
0.40 20 20
0.30 0 30
You are required to calculate :
(i) the expected return of security ‘S’ and the market portfolio ‘M’.
(ii) the covariance between the market portfolio and security, and
(iii) beta for the security. 8
(b) Shares of N Limited are being quoted at Rs. 600. Three months’ futures rate is Rs. 636
per share with a lot size of 500 shares. The company does not expect to distribute
any dividend in the interim period and the risk free return is 9% p.a. continuously
compounded.
(i) Compute the Theoretical Forward Price.
(ii) What is the recommended action for a trader in shares in the spot and futures
market ? Substantiate your conclusion with logical steps and compute the gains
per contract if any, due to futures.
(iii) What would be the recommended action and gains, if the three months’ future
rate is Rs. 600 per share? 8
Answer : 2(a)
(i) Security S
Probability (P) Rs P x Rs Deviations of (Deviation)2 (Deviation)2
S(Rs_ERs) of S Px
0.3 30 9 13 169 50.7
0.4 20 8 3 9 3.6
0.3 0 0 -17 289 86.7
ERs = 17 Vars = 141
Std. Dev σs = √141 = 11.87
(ii) Market Portfolio M

RM PM Exp. Return Dev. of M (Dev of M)2 (Dev)2 PM (Dev of S) (Dev of S)x
PM X RM (RM – ERM) x Dev of Dev of M) x
M) PM
-10 0.3 -3 -24 576 172.8 -312 -93.6
20 0.4 8 6 36 14.4 18 7.2
30 0.3 9 16 256 76.8 -272 -81.6
ERM = 14 VarM = 264 Covariance
σM = 16.25 PM = -168
(iii) Beta = Covariance PM / σ2M = -168 / 264 = -0.636
Answer :2 (b)
(b) Theoretical Forward Price = Rs. 600 x e0.09 x 0.25 = 600 x e0.0225
= 600 × 1.0228 = Rs. 613.68
Evaluation & suggested course of action :
Particulars Case A Case B
3- months future contract rate Rs.636 Rs. 600
Actual Price Higher Lower
Valuation Overvaluation Undervalulation
Action Buy Spot, Sell Future Sell Spot, Buy Future
Gains due to Futures Rs.(636-613.68) = Rs. 22.32 Rs.(613.68-600) = Rs. 13.68
Rounded Off 22 or 23 13 or 14
3. (a) An Indian exporter has sold handicaraft items to an American business house. The
exporter will be receiving US dollar 1 lakh in 90 days. Premium for a dollar put option with
a strike price of Rs. 71.00 and a 90 days settlement is Rs. 1. The exporter anticipates the
spot rate after 90 days to be Rs. 69.50.
(i) Should the exporter hedge its account receivable in the options market ?
(ii) If the exporter is anticipating a spot rate to be Rs. 70.50 or Rs. 71.50 after 90 days,
how would it affect the exporter’s decision ?
8
(b) A company operating in USA has on 1st September 2018 invoiced sales in $ to an
Indian company, the payment being due on 1st December 2018. The invoice amount
is $ 13,750. At spot rate on 1/9/2018 it is equivalent to Rs. 10,18,875. The 3 months
forward rate is presently quoted at $ 0.01340 per rupee. The importer wants to hedge
half his exposure by a forward contract. Explain the hedging transaction by forward
contract that he will enter into and calculate the pay outs and the net gain or loss
due to hedging if the spot rates are as follows on 1st December 2018.
(i) $ 0.01338
(ii) $ 0.01352
Present your calculation using Rs./$ upto two decimal places. Ignore transaction cost.
8
Answer : 3(a)
Option Put
Strike price Rs.71 per US $
Premium Rs. 1 per US $
Settlement (expiration) rate Rs. 69.50
(i) Benefit from Put option = Max [(Strike rate – Expiration rate),0] – Premium
= Max [(Rs. 71 per US $ - Rs. 69.50 per US $), 0] – Rs. 1 per US $
= Rs. (1.50 – Rs. 1) per US $ = Rs. 0.50 per US $
Here, if the exporter remains un-hedged, it will receive
=[Rs. 69.50 per US $ x US $ 1,00,000) = Rs. 69,50,000
But with hedging using Put Option, the exporter receives at the end of 90 days
=[(Rs. 71 x US $ 1,00,000) – (Rs. 1 x US $ 1,00,000)] = Rs. 70,00,000
Gain = Rs. 50,000
OR
Gain = (71 – 69.50) – 1 = 1.5 – 1 = 0.5 Rs./$
1,00,000$ x 0.5 = 50,000 Rs.
As there is benefit in owing the Put, so the Exporter should hedge using the Put Option.
(ii) For Settlement price of Rs. 70.50 per US $, BENEFIT FROM Put Option
= Max [(Rs. 71 per US $ - Rs. 70.50 per US $),0] – Rs. 1 per US $ = (-) Rs. 0.50 per US $,
negative
For settlement price of Rs. 71.50 per US $, BENEFIT FROM Put Option
= Max [(Rs. 71 per US $ - Rs. 71.50 per US $), 0] – Rs. 1 per US $
= 0 – Rs. 1 per US $
= (-) Rs. 1 per US $
So, for anticipated price of Rs. 70.50 per US $ or Rs. 71.50 per US $, the exporter will not
be hedging through a Put Option, as he does not have positive benefit.
Answer : 3(b)
The importer will loss if the $ appreciates, as is indicated by the forward rate/
Spot rate on 1/9/2018= 74.10 Rs/$ (Rs.10,18,875/$13,750)
3m forward rate = 1/0.01340 = 74.63
Hence by a forward contract, he will ask his banker to sell him at Rs. 74.63, 3 months later,
irrespective of what happens to the spot rate on 1st Dec.
(i) On Dec 1st, if the sport rate increases to 74.74 (i.e. 1/0.01338),
Half of his exposure is hedged. His pay out will be on 1 st Dec, 13750/2 ×
74.74+13750/2 × 74.63 i.e. 6875 × 74.40 + 6875 × 74.63 = 513838 + 513081 = 10,26,919.
If he had not gone for the Forward contract, he would have paid 13750 x 74.74= 10,27,675
By forward contract, the net gain is 1027675– 1026919 = 757
Or
He can still buy from his bank at 74.63. He saves Rs.0.11 per $ by hedging i.e. 0.11x6875=
757
(ii) If the exchange rate falls to 73.96 (i.e. 1/0.01352) on 1st December,
His pay out on 1/12 will be 6875 x 73.96 + 6875 x 74.63
i.e. he will pay 508475 + 513081 = 1021556
If not gone for forward contract, he would have paid 13750 x 73.96 = 10,16,950
By forward contract the net loss = 1021556 – 1016950 = Rs. 4606
Or
He will lose due to the forward contract to the extent of 6875 x (74.63 – 73.96) = Rs. 4606
Since the forward rate was indicting a premium , the importer would only go for forward
purchase agreement from the bank. If the actual spot rate goes in a different direction,
then the forward contract will not result in hedging and will instead create loss.
4. (a) A company wishes to acquire an asset costing Rs. 1,00,000. The company has an
offer from a bank to lend @ 18%. The principal amount is repayable in equal 5 year
end instalments. A leasing company has also submitted a proposal to the company
to acquire the asset on lease at year end rentals of Rs. 280 per Rs. 1,000 of the asset
value for 5 years. The asset’s life is estimated at 5 years with residual value of Rs.
10,000 and the cost net of residual value is depreciated equally each year over its
life. Assume that this is the only asset of its class so that at the end of the 5 th year
there will be a capital gain or lss with 20% tax effect when the asset is sold. The tax
rate of the company is 50%.
For what minimum sale value of the asset at the end of the 5th year will the decision to
borrow and own the asset be preferred to leasing ? Present annual cash flows and
arrive at the discounted cash flows for each year showing salvage value separately.
Use PV factors as provided. Round off calculations to the nearest rupee. Assume
cash flows on interest and taxes also at year ends.
8
(b) A Ltd. has an investment proposal, requiring an outlay of Rs. 5 lakh. The investment
proposal is expected t have two years economic life with no salvage value.
In year 1, there is a 0.4 probability that cash inflow after tax will be Rs. 3 lakh and 0.6
probability that cash inflow after tax will be Rs. 4 lakh. The probability assigned to
cash inflow after tax for year 2 are as follows :
Cash inflow for year 1 3 Lakh 4 Lakh

(Rs.)
Cash inflow for year 2 Rs. Probability Rs. Probability
(Rs.) 1.50 lakh 0.2 2.40 lakh 0.4
1.92 lakh 0.3 3.00 lakh 0.5
2.64 lakh 0.5 3.60 lakh 0.1
The company uses 10% discount rate for this type of investment.
(i) Construct a decision tree for the proposed investment project.
(ii) Calculate the expected Net Present Value (NPV), giving the break up of each
path of the decision tree.
(iii) What Net Present Value will the project yield, if the worst outcome is realized?
What is its probability?
(iv) What is the probability of having a negative NPV?
(v) Will the project be accepted?
Use pv factors as given in the table. Present calculations to the nearest rupee. 8
Answer : 4(a)
Lease Rental = 28000 before tax = 14000 after tax
14000 x annuity factor 3.889 = 54,446 = PV of lease rentals
In a lease vs borrow evaluation, after tax cost of debt should be the pv factor.
End Principal Principal Interest Depn Interest Tax Cash PV PV of
of yr O/S Repayment +Depn Shield Outflow Factor cash
50% 9% outflow
1 80000 20000 18000 18000 36000 18000 20000 0.917 18340
2 60000 20000 14400 18000 32400 16200 18200 0.842 15324
3 40000 20000 10800 18000 28800 14400 16400 0.772 12661
4 20000 20000 7200 18000 25200 12600 14600 0.708 10337
5 0 20000 3600 18000 21600 10800 12800 0.650 8320
Total 64982
Assuming x is the sale value on sale of the asset at the end of the 5 th year
64982-[x-.2 {x-10000}] < 54446 to justify purchase by loan
-[x – 0.2x + 2000] x pv factor 0.65 <10,536
or 0.8x + 2000 > 16,209 (I.e. 10,536/0.65)
or 0.8x = 16,209 – 2000 = 14209
or x > 17,761
For any sale value above Rs.17,761, purchasing the asset out of bank borrowing is
preferable
Answer :4(b)
(i) Path No. Joint probability

0.2
150000 1 0.08
30000 0.3 2 0.12

0 192000
0.4 0.5
264000 3 0.20
Cash outlay
500000
0.6 0.4 4 0.24

240000
0.5
400000
300000 5 0.30
0.1
360000 6 0.06
Decision Tree
(ii) The decision tree given above shows that there are six possible outcomes each
represented by a path. The net present value (NPV) of each path at 10% discount
rate is given below :-
Path Cash inflow Cash inflow Total Cash Cash outflow Net present
No. year 1 (Rs.) year 2 (Rs.) inflow (Rs.) (Rs.) value (Rs.)
(a) (b) (c)=(a)+(b) (d) e=(c)-(d)
1. 300000 x 0.9091 150000 x 0.8264 396690 500000 (103310)
= 272730 = 123960
2. 300000 x 0.9091 192000 x 0.8264 431399 500000 (68601)
=272730 = 158669
3. 300000 x 0.9091 264000 x 0.8264 490900 500000 (9100)
= 272730 = 218170
4. 400000 x 0.9091 240000 x 0.8264 561976 500000 61976
= 363640 = 198336
5. 400000 x 0.9091 300000 x 0.8264 611560 500000 111560
= 363640 = 247920
6. 400000 x 0.9091 360000 x 0.8264 661144 500000 161144
= 363640 = 297504
Statement showing the expected NPV

Path NPV @ 10% (a) Joint Probability (b) Expected NPV = (a) x (b)
1. (103310) 0.08 (8265)
2. (68601) 0.12 (8232)
3. (9100) 0.20 (1820)
4. 61976 0.24 14874
5. 111560 0.30 33468
6. 161144 0.06 9669
Total 1.00 39694
(iii) If the worst outcome is realized, the Net present value (NPV) which the project will
yield is Rs. 103310 (Negative).
(iv) .08 + .12 + .20 = .40 or 40%
(v) Yes, the project will be accepted since the total expected net present value
(ENPV) is positive of Rs. 39694 based on joint probability.
5. (a) The returns on strock @ and market portfolio M for a period of six periods in excess of
the risk free rate of 6% are given as follows :
Period Return on stock S Return on market

% portfolio %
1 12.0 8.0
2 15.0 12.0
3 11.0 11.0
4 2.0 -4.0
5 10.00 9.5
6 -12.0 -2.0
Additional details that may be used optionally :

Variance (%)2 82.93 40.15
Mean (%) 6.33 5.75
Covariance (%) 48.27
(i) Determine the equation for the characteristic line of the stock – S.
(ii) What would be the return on stock S if the market return is 17.5%?
(iii) Is your finding in (ii) above compatible with the data given ? Why ? Comment on
the correlation coefficient. 8
(b) Sagar owns a portfolio in three stocks as detailed below :
Stock No. of shares Price (Rs./share) Beta
X 400000 400 1.3
Y 800000 300 1.2
Z 1200000 100 1.1
The index futures is traded at Rs. 10,250. Assume that the index factor is 100.
(i) Compute the existing portfolio beta upto two decimals.
(ii) Find out the number of contracts (rounded off to the nearest integer) of stock
index futures to be bought or sold in order to :
(A) Decrease the portfolio β to 0.8
(B) Increase the portfolio β to 1.5. What will be the proportion of market value of
investments in X to the value of total investments plus 10% margin on futures?
8
Answer 5(a)
(i) The characteristic line is given by the formula :
αi + βi Rm
βi =
= -
Return Return on
on 1(%) market (%) XY X2 (X – ) (X – )2 (Y – )2
(Y) (X)
12.0 8.0 96.0 64.00 2.25 5.06 32.15
15.0 12.0 180.0 144.00 6.25 39.06 75.17
11.0 11.0 121.0 121.00 5.25 27.56 21.81
2.0 -4.0 -8.0 16.00 -9.75 95.06 18.75
10.0 9.5 95.0 90.25 3.75 14.06 13.47
-12.0 -2.0 24.0 4.00 -7.75 60.06 325.99
38.0 34.5 508.0 439.25 240.86 487.34
= = 6.33
= = 5.75
= = = 1.202
= –
= 6.33 – 1.202 (5.75)
= 6.33 – 6.91 = -0.58
Hence, the characteristic line is -0.58 + 1.202 [X = ]
Characteristic Line : y = 1.202x – 0.58
(ii) When market return is 17.5%, x = 17.5 – 6 = 11.5%

Substituting 11.5% in the above equation,
Y = 1.202 x 11.5 – 0.58
= 13.823 – 0.58
= 13.243% is the excess over the risk free rate.
Hence stock’s return = 13.243 + 6% = 19.243%, say 19%
This is not compatible with the given data where for 11% market excess, 11% is the stock
return excess. And 12% corresponds to 15% (the first two lines in the data). Hence for
market 11.5%, awe should expect from the data that the computed value lies mid way
between 11 and 15. But it is not so.
Correlation Coefficient r = Cov (X,Y) / σx αy = 48.27 / (9.11 x 6.34) = 0.83
Even in spite of a high correlation, the data is not compatible since the correlation
coefficient is reported high only be periods 3 and 5, where data on both market and
stock is identical, whereas period 4 shows opposite correlation. Since the data is widely
fluctuating, the expected values of covariance tend to average and hence the value as
per characteristic line and the actual data are very different.
Answer : 5(b)
Stock No. of Shares Price Beta Market Value Weighted
Rs/Share Value of beta
X 400000 400 1.3 16,00,00,000 20,80,00,000
Y 800000 300 1.2 24,00,00,000 28,80,00,000
Z 1200000 100 1.1 12,00,00,000 13,20,00,000
Total 52,00,00,000 62,80,00,000
Weighted Beta = 62,80/52,00 = 1.21
Futures Contract value = 10,250 x 100 = 10,25,000
No. of contracts = (1.21-0.8) x 52,00,00,000 / 10,25,000 = 0.41 x 507.32 = 208 contracts have
to be sold in the futures market.
Margin money = 10% x 208 x 10,25,000 = 2,13,20,000
Total investments = 52,00,00,000 +2,13,20,000 = 54,13,20,000
Proportion of X= 16,00,00,000 / 54,13,20,000 = 29.55%, say 30%
To increase the beta on 1.5, no of futures to be purchased = (1.5 – 1.21) x 52,00,00,000
/10,25,000 = 0.29 x 507.32 = 147.1229 = 147 contracts.
Value of the futures contracts = 147 x 10,25,000
= 15,06,75,000
Initial Margin 10% = 1,50,67,500
Total value of investments
in shares = 52,00,00,000
Margin = +1,50,67,500
53,50,67,500
Proportion of X = 16,00,00,000 = 29.90 or 30%
53,50,67,500
6. The following are the data on five mutual funds :

Mutual Fund Return Standard Deviation Beta
A 15 7 1.25
B 18 10 0.75
C 14 5 1.40
D 12 6 0.98
E 16 9 1.50
(i) Compute the Sharpe Ratio and Treynor’s Ratio and rank these funds assuming the
risk free rate as 6% .
(ii) Compute the unsystematic risk of these funds.
(iii) Which of the two measures in (i) is more appropriate ? Why ?
(iv) Assuming that the risk free rate is not known, would you still be able to rank the funds
using the Sharpe’s and Treynor’s ratios ? Why?
16
Answer :6 (i) & (ii)
Return Rf R- Std Sharpe Shar Beta Treynor Rank Unsystemati
Rf dev pe Trey c risk
rank
ratio ratio
A 15 6 9 7 1.285714 2 1.25 7.2 2 5.75
B 18 6 12 10 1.2 3 0.75 16 1 9.25
C 14 6 8 5 1.6 1 1.4 5.714286 5 3.6
D 12 6 6 6 1 5 0.98 6.122449 4 5.02
E 16 6 10 9 1.111111 4 1.5 6.666667 3 7.5
(iii) Treynor’s method assumes that there is no unsystematic risk and that there is full
diversification, whereas Sharpe’s method does not assume this. Moreover, as is
seen, standard deviation represents the total risk consisting of systematic and
unsystematic risk. Unsystematic risk is high and hence, Treynor’s assumption is not
satisfied. Hence Sharpe’s method results in a more appropriate ranking.
(iv) In practical application, the mean return and the standard deviation are estimated
from historical data over the period of interest (for which the comparison to be
made) and the risk free return is chosen accordingly Rate of return is required for the
computation.
7. (a) Saptarshi Ltd. has just installed Machine- M at a cost of Rs. 2,10,000. The machine has
a five year life with no residual value. The annual volume of production is estimated at
150000 units, which can be sole at Rs. 6 per unit in the first two years and at Rs. 7,8 and 9
in the third, fourth and fifth years. The first year’s operating costs are estimated at Rs.
2,00,000 (excluding depreciation) at this output level. Fixed costs are estimated at Rs. 3
per unit for the same level of production. The second year’s cost will be the same as in
the first year. Thereafter, costs (operating and fixed) will increase over the first year’s cost
by 10%, 20% and 25% respectively in the third, fourth and fifth years.
Saptarshi Ltd. has just come across another model called Machine-N capable of fiving the
same output at the same fixed and operating costs as in the first year of Machine- M.
There will be no change over the first year’s costs in the next four years also. Capital cost
of this machine is Rs. 2,50,000 and the estimated life is five years with nil residual value.
The company has an offer for sale of Machine- M at Rs.1,10,000. But the cost of
dismantling and removal will amount to Rs.40,000. As the company has not yet
commenced operations, it wants to sell Machine- M and purchase Machine- N.
Saptarshi Ltd. will be a zero-tax company for seven years in view of several incentives and
allowances available.
The cost of capital is 15%.
(i) Advise whether the company should opt for the replacement. Present calculations
of discounted annual cash flows to the nearest rupee without netting off.
(ii) Will there be any change in your view, if machine-M has not been installed, but
the company is in the process of selecting one or the other machine ?
Support your view with necessary workings. Cash flows of revenue and cost may
be taken at year ends.
8
(b) From the following project details, calculate the sensitivity of the
(i) Project cost
(ii) Cash inflows
(iii) Which variable is more sensitive ?
Project cost Rs. 12,000 Salvage value Nil
Life of the project 4 years Cost of capital 14%
Nil salvage value
Cash inflows after tax :

end of year 1 : Rs. 5,000
end of year 2 : Rs. 5,000
end of year 3 : 10% increase over year 1 inflow
end of year 4 : 10% increase over year 1 inflow
(iv) Would you conclude that cost of capital is more sensitive than (i) or (ii) above? 8
Answer : 7(a) (i)

Replacement : Rs.
Cash outflow on Machine – N 2,50,000
Less : Sale value of Machine- M 1,10,000
Less : Cost of Dismantling and Removal = 40,000 70,000
------------- -------------
Net outflow = 1,80,000
P.V. of incremental cash inflows = (From (ii) workings below)
13,32,200 (N) – 11,34,308 (M) = 197892
NPV of Machine – N = 1,97,892 – 1,80,000 = 17,892
Rs. 210000 spent on Machine – M is a sunk cost and hence not relevant for deciding the
replacement.
Decision : Since NPV of Machine – N is positive, replacement is advised.
(ii) Independent evaluation :

Machine- M
Total Cost Sale Value Net C/I PV Total Inflow
(Op + Fixed)
Y1 6,50,000 9,00,000 2,50,000 0.870 2,17,500
Y2 6,50,000 9,00,000 2,50,000 0.756 1,89,000
Y3 7,15,000 10,50,000 3,35,000 0.658 2,20,430
Y4 7,80,000 12,00,000 4,20,000 0.572 2,40,240
Y5 8,12,500 13,50,000 5,37,500 0.497 2,67,138
--------------
11,34,308
2,10,000
Less : Cash outflow
--------------
NPV 9,24,308
-------------
Machine- N
Y1 6,50,000 9,00,000 2,50,000 0.870 2,17,500
Y2 6,50,000 9,00,000 2,50,000 0.756 1,89,000
Y3 6,50,000 10,50,000 4,00,000 0.658 2,63,200
Y4 6,50,000 12,00,000 5,50,000 0.572 3,14,600
Y5 6,50,000 13,50,000 7,00,000 0.497 3,47,900
--------------
13,32,200
2,50,000
Less : Cash outflow
--------------
NPV 10,82,200
-------------
As the NPV of Machine – N is higher than that of Machine – M, the choice should fall on
Machine – N.
Note : As the company is a zero tax company depreciation and the tax effect on the
same are not relevant for consideration.
Answer : 7(b)
NPV :
End of Year Cash flow PV Factor PV of cash flows
0 -12000 1 -12000 -12000
1 +5000 0.877 4385
2 +5000 0.769 3845
3 +5500 0.675 3713
4 +5500 0.592 3256 +15199
NPV 3199
(i) Project costs is 12000 with NPV = 3199

If project cost increases by 3199, NPV = 0
sensitivity of project cost = = 26.66% or 27%
(ii) Let x be the after tax each inflow in the 1st yr.
PV of inflows = × 0.877 + x 0.769 + 1.1 × 0.675 + 1.1 × 0.592
= (0.877 + 0.769) + 1.1 (0.675 + 0.592)
= (1.646) + 1.1 (1.267)
= (1.646 + 1.3937)
= (3.0397)
For NPV= 0, × 3.0397 = 12000
= 12000 / 3.0397 = 3947.76 = 3948
Difference = 5000 – 3948 = 1052
Sensitivity = 1052/5000 = 21.04% , say = 21%
Or NPV/ Annual cash flow = 3199/15199 x 100 = 21.04%
(iii) Cash inflows are more sensitive than project cost.
(iv) If cost of capital is most sensitive , it should change
NPV to zero by a 20% increase
14% + 20% x 14% = 16.8%
At 17% cost of capital
PV of inflows = 5000(0.855 + 0.731) + 5500(0.624 + 0.534)
= 5000(1.586) + 5500(1.158)
= 7930 + 6369
= 14299
NPV = +2299
Hence, we cannot say that cost of capital is more sensitive than (i) or (ii) above.
OR
with 26.6% discount rate,
PV inflows = 5000(0.790 + 0.624) + 5500(0.493 + 0.389)
= 5000 x 1.414 + 5500 x 0.882
= 7070 + 4851
= 11921
NPV = 12000 -11921 almost zero
Sensitivity = (26.6% - 14%) /14% = 12.6/14 = 90%
Hence cost of capital is the least sensitive.
8. Answer any four out of the following five questions :

(a) Compare commodity futures and financial futures with respect to the following
aspects : 4
(i) Valuation
(ii) Delivery and settlement
(iii) Contract features and life
(iv) Supply and consumption pattern
Answer : 8(a)
(i) Valuation
Financial futures are easier to understand as the cost of carry model for its valuation
applies. The argument of arbitrage also holds because of the absence of convenience
yield in financial futures. Financial futures involve financial instruments which do not have
consumption value. The consumption value makes valuation of futures contracts on
commodities difficult.
(ii) Delivery and Settlement
The provisions of delivery are applicable equally to commodities and financial futures. In
case of financial futures delivery of underlying assets is prompt and hassle free, and so is its
settlement. For futures on financial assets the price adjustment on account of discrepancy
in quality of which was contracted and what is being delivered, is not required. There is
ample scope of controversy over quality in case of commodity futures. In case of futures
on indices or intangibles the underlying is non-deliverable and futures contracts on them
are necessarily cash settled.
(iii) Contract Features and Life.

Commodity futures are governed by seasons and perishable nature of the underlying
asset. The delivery is linked to the availability, and therefore contracts specifications have
to consider physical characteristics of the underlying assets. Futures contracts on
commodities normally do not exceed 90 days, while there is no such limitation on the
financial futures. Financial futures can have much longer life, though generally maturity of
many financial futures is kept at 90 days.
(iv) Supply and Consumption Patterns

In case of financial products, such as stocks, indices and foreign exchange, the supply
can be considered as unlimited and independent of weather and seasons. The supply of
commodities is dependent upon weather, storage capacity, shelf life etc. For
commodity, consumption is uniform throughout the year. Deterioration in value of
commodities with time is another phenomenon that does not effect futures on financial
products.
(b) State the type of risk in each of the following independent situations : 4
(You may present only the question Roman numeral and type of risk without copying
the situations into your answer books).
(i) The owner of a house property wants to sell it, but he is not able to find buyers.
(ii) The risk of recession anticipated by the automobile industry
(iii) The risk of loss in value of investment that cannot be eliminated by an investor
through diversification.
(iv) The risk of a bank which has given a car loan to a person who has no defaulted
two instalments of EMIs.
Answer : 8(b)
(i) Liquidity Risk
(ii) Market Risk
(iii) Systematic Risk
(iv) Credit Risk
(c) Classify the following items under the appropriate category – whether Money Market
(MM) or Capital Market (CM) : (You may choose to write only the Roman numeral
under the appropriate head. Do not use brackets for the Roman numerals)
4
i. Inter Bank Participation Certificate
ii. Equity Shares
iii. SWAPS
iv. REPOS
v. RBI and government are participants
vi. Commercial paper
vii. Global Depository Receipts (GDRs)
viii. Deep Discount Bonds (DDBs)
You may use the following format in your answer books :
MM CM
Answer : 8 (c)
i. Money Market
ii. Capital Market
iii. Money Market
iv. Money Market
v. Money Market
vi. Money Market
vii. Capital Market
viii. Capital Market
(d) Write short notes on ‘repo’ and ‘reverse repo’. 4

Answer : 8(d)
Repo or ready forward contact is an instrument for borrowing funds by selling securities
with an agreement to repurchase the said securities on a mutually agreed future date at
an agreed price which includes interest for the funds borrowed. Repo rate is the return
earned on a repo transaction expressed as an annual interest rate.
The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds
against buying of securities with an agreement to resell the said securities on a mutually
agreed future date at an agreed price which includes interest for the funds lent. It can
be seen from the definition above that there are two legs to the same transaction in a
repo/reverse repo. The duration between the two legs is called the ‘repo period’.
Predominantly, repos and undertaken on overnight basis, i.e., for one day period.
Settlement of repo transactions happens along with the outright trades in government
securities.
(e) What is ‘credit default risk’ and ‘counter party risk’? 4
Answer : 8(e)
i) Credit default risk : The risk of loss arising from a debtor being unlikely to pay its
loan obligations in full or the debtor is more than 90 days past due on any
material credit obligation ; default risk may impact all credit sensitive transactions,
including loans, securities and derivatives.
ii) Counterparty risk : The risk of loss arising from non performance of counterparty in
trading activities such as buying and selling of commodities, securities, derivatives
and foreign exchange transactions. If inability to perform contractual obligations
in such trading activities is communicated before the settlement date of the
transaction, then counterparty risk is in the form of pre-settlement risk, while if one
of the counterparty defaults in its obligations on the settlement date, the
counterparty risk is in the form of settlement risk.
Values for use by candidates,

℮0.0225 1.0228
℮0.225 1.2523
℮.25 1.2840
PV factor table Annuity Factors

End 1 2 3 4 5
of Year 4 yrs 5 yrs
Rate
18% 0.847 0.718 0.609 0.516 0.437 2.69 3.127
9% 0.917 0.842 0.772 0.708 0.650 3.239 3.889
15% 0.870 0.756 0.658 0.572 0.497 2.856 3.353
14% 0.877 0.769 0.675 0.592 0.519 2.913 3.432
10% 0.9091 0.8264 0.7513 0.6830 0.6209
16% 0.877 0.769 0.675 0.592 0.519
17% 0.855 0.731 0.624 0.534 0.456
25% 0.8 0.64 0.512 0.410 0.328
26% 0.794 0.630 0.500 0.397 0.315
26.6% 0.790 0.624 0.493 0.389 0.307
26.65% 0.790 0.623 0.492 0.389 0.307
15.4% 0.867 0.751 0.651 0.564 0.489
12.6% 0.888 0.789 0.700 0.622 0.552
Suggested Answer_Syl16_June2019_Paper_14
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)

JUNE 2019
No present value factor table or other statistical table will be given in addition to this question
paper. Candidates may use the values tabulated at the end of this question paper.
This paper contains two sections, A and B. Section A is compulsory and contains question no. 1
for 20 marks. Section B contains question numbers 2 to 8, each carrying 16 marks.
Section – A
1. (a) Choose the Correct Option from the four alternatives given (1 mark is for the correct
choice and 1 mark for justification/workings. You may present only the Roman numeral,
your choice and the reason/workings, without copying the question.) 2x10=20
(i) A company is considering four projects A, B, C and D with the following information:
Project A Project B Project C Project D

Expected NPV (`) 60,000 80,000 70,000 90,000
Standard deviation (`) 4,000 10,000 12,000 14,000
Which project will fit the requirement of low risk apetite?
(A) Project A
(B) Project B
(C) Project C
(D) Project D
(ii) From the following quotes of a bank, determine the rate at which Yen can be
purchased with Rupees.
`/£ Sterling 75.31 – 33
£ Sterling/Dollar ($) 1.563 – 65
Dollar ($)/Yen (¥) 1.048/52 [per 100 Yen]
(A) ` 124.02
(B) ` 142.02
(C) ` 412.02
(D) ` 214.02
(iii) The spot Value of Nifty is 4430. An investor bought a one month Nifty 4410 call option
for a premium of ` 12. The option is:
(A) In the money
(B) At the money
(C) Out of the money
(D) Insufficient data
(iv) A certain mutual fund has a return of 17% with standard deviation of 3.5% and the
sharpe ratio is 4. The risk free rate is
(A) 12.5%
(B) 4%
(C) 3%
(D) 7.5%
(v) The following information of a project are given below:
Expected cash flow (`) Probability
6,000 0.20
16,000 0.80
If certainty equivalent coefficient is 0.7, what will be certain (Risk less) cash flows of
the project?
(A) ` 12,000
(B) ` 9,800
(C) ` 9,000
(D) ` 15,400
(vi) The spot and 6 months forward rates of US dollar in relation to the rupee (`/$) are `
74.532/75.4143 and ` 75.1278/76.2538 respectively. What will be the annualized
forward margin (with respect to Ask price)?
(A) 2.42%
(B) 1.60%
(C) 2.23%
(D) 2.31%
(vii) B can earn a return of 18% by investing in equity shares on his own. Now he is
considering a recently announced equity based Mutual Fund Scheme in which
initial expenses are 1% and annual recurring expenses are 2%. How much should be
Mutual Fund earn to provide B, a return of 18%?
(A) 18.18%
(B) 20.18%
(C) 22.18%
(D) 21%
(viii) You are given the following information of a stock:
Strike Price ` 400
Current stock price ` 370
Risk free rate of interest 5%
Theoretical minimum price of a European 6 months’ put option after six months is
(A) ` 9.37
(B) ` 20.12
(C) ` 30.76
(D) ` 20.63
(ix) MS Ltd. is planning to invest in USA. The annual rates of inflation are 8% in India and
3% in USA. If spot rate is currently ` 75-50/$, what spot rate can the company expect
after 3 years?
(A) ` 65.49
(B) ` 79.16
(C) ` 87.04
(D) ` 72.00
If the covariance between the returns on a portfolio BC and returns on the market
index is 25 and the variance of returns on the market index is 20, what will be the
systematic risk of BC under the variance approach?
(A) 1.25
(B) 1.56
(C) 5.45
(D) 31.25
Answer:
σ Std dev
(i) (A) Risk per unit of NPV = =
x NPV
4000
A= = 0.066
60000
B = 0.125
C = 0.17
D = 0.16
Hence A is chosen as least risky relative to NPV.
(ii) (A) Yen to be purchased with `
75.33 ` to purchase 1£
1.565 £ for 1 $
1.052 $ for 100 Yen
75.33 1.565 £ 1.052 $

∴ `/100 Yen = 1£
×
1$
×
100 Yen
= 124.02
(iii) (A) In an option, only the premium is paid up front, which is ` 12; ` 4,410 is the strike price
Current spot price = 4430 > 4410.
Hence it is in the money.
RP − RF
(iv) (C) = sharpe ratio, RP − RF = σ × sharpe ratio
σ
∴ RF = RP − σ × sharpe ratio
= 17% – 3.5% × 4
= 17 – 14
= 3%
(v) (B) (Expected cash flow with risk) = [6,000 × .2 + 16,000 × .8]
∴ Certainty adjusted = [6,000 × .2 + 16,000 × .8] × .7
= 9,800
(vi) (C) Ask price diff = 76.2538 – 75.4143
= 0.8395
0.8395
6 m margin = × 100%
75.4143
0.8395
Annualised = × 100% × 2 = 2.23%
75.4143
18
(vii) (B) + 2% = 18.18 %+ 2% = 20.18%
99%
[Initially, only 99% is available for investment]
(viii) (B) Spot price today = 370; Strike price = 400

6
= 400 × e−5% ×12
݁
.
= 400 × = 400x e −.025
400
=
1.02532
= 390.12
Put option value = 390.12 – 370
= 20.12
(ix) (C) 75.50 will become (75.50) (1.08)3 = 75.50 ×1.26
= 95.10
1 $ will become (1.03)3 = 1.09

ଽହ.ଵ଴
∴ Expected rate = = 87.08
ଵ.଴ଽଶ
(D) Sys. risk = ߚ ×

; ߚ

(x) =
= 1.25
= (1.25)2 × 20
= 31.25
Section-B
Answer any five questions.
2. KJ Hospital wants to install a testing equipment. It wants to analyse whether to purchase

the machine from a bank borrowing or to lease it from LR. The following information is
given:
(i) Cost of the equipment ` 50 lacs to be paid at the beginning of the 1st
year
Life 5 years
(iii) Residual value ` 5 lacs at the end of the 5th year

(iv) Depreciation Cost less residual value, written off equally p.a. for
the life of the asset
Annual Lease Rent ` 12 lacs Payable at the end of each year from
year 1 to year 5
(vi) If asset is purchased, bank 10% Year-end payment includes `10 lacs
loan available at interest per each year towards principal and
annum additionally, interest on the balance
outstanding at the beginning of the
year.
(vii) Annual maintenance ` 2 lacs payable at the end of each year
charges to be incurred by per
KJ if the equipment is annum
purchased
(viii) Tax rate applicable for KJ 40% Assume KJ and LR are profitable
and LR
(ix) After-tax weighted 12% p.a. For both LR and KJ
average cost of capital
(x) Long term capital gains tax 20% LR (For sale value in excess of the
residual value)
The lessor LR is an investor company that specializes in the leasing of various medical
equipments across the country. LR would buy the equipment from its own funds, maintain
the machine incurring ` 1 lac p.a. (year end). LR is confident of reworking the equipment
at the end of 5 years at no extra cost and finding a rural hospital which would pay ` 13
lacs for it at the end of the 5th year. However, for its depreciation, it would write off equal
amounts each year considering (i) to (iv) as for KJ. The lessor is also a profit-making
company with a 40% corporate tax rate and 20% tax rate on long term capital gains.
(a) For KJ, present statements of discounted cash flows under the options of buying the
machine with borrowed funds and leasing, using the appropriate discount rate.
Present year wise annual cash flows (in ` lacs, up to two decimal places), without
netting off, arrive at the sub totals of pre-discounted cash flows for each year and
then apply PV factors (up to three decimals as given) and then arrive at the total
present value Use ‘+’ for inflows and ‘- or ( )’ for outflows.
(b) Evaluate the viability of the proposal for the lessor LR. Comment on the situation. 16
Answer:
2. (a) Outright Purchase option
End of Principal Inter Main Deprecia Total Tax Cash Cash PV PV of

year Opening est tenance tion Expenses shield outflow Flow factor cash
Balance for tax 40% Prin+ Int after 6% flows
benefit + Maint tax
shield
0 50
1 40 5 2 9 16 6.4 17 10.6 0.943 -9.99
2 30 4 2 9 15 6 16 10 0.890 -8.90
3 20 3 2 9 14 5.6 15 9.4 0.840 -7.89
4 10 2 2 9 13 5.2 14 8.8 0.792 -6.96
5 0 1 2 9 12 4.8 13 8.2 0.747 -6.12
5 salvage value 5 0.747 +3.73
Total -36.13
Evaluation of leasing option:
End of year 1 2 3 4 5
Lease Rent 12 12 12 12 12
Tax savings 4.8 4.8 4.8 4.8 4.8
Net outflow (7.2) (7.2) (7.2) (7.2) (7.2)
Annuity factor (6%, 5 years) = 4.212
PV of lease outflows for KJ = 4.212 × (7.2) = (30.32)
Leasing is better.
(Lease vs. borrow should be evaluated at after tax cost of debt, i.e. 10% × (1-40%) = 6%)
(b)
From the Lessor’s view point, it is a capital budgeting problem and has to be evaluated at
after tax cost of capital, i.e. 12%
Cash outflow at the beginning of year 1 =` 50 lacs.
Salvage value = ` 13 lacs, WDV =` 5 lacs. Hence Long term capital gains = 8 × 20 % = `1.6 lacs.
Terminal Cash flows = 13 - 1.6 =` 11.40 lacs
Depreciation available = (50 - 5)/5 = ` 9 lacs. Tax shield per annum on depreciation =` 3.60
lacs.
Annual fixed lease rentals = ` 12 lacs. After tax LR = .6 × 12 = ` 7.2 lacs.
Annual Maintenance charges = 1 lac, after tax = ` 0.60 lac
(`)
End of year 0 1 2 3 4 5 5
Capital Cost -50
Lease Rent +7.2 +7.2 +7.2 +7.2 +7.2
Tax Shield on Depn +3.6 +3.6 +3.6 +3.6 +3.6
Maintenance - 0.6 - 0.6 - 0.6 - 0.6 - 0.6
Total Undiscounted -50 +10.20 +10.20 +10.20 +10.20 +10.20 +11.40

Cash flows
PV factor at 12% 1 3.605 0.567
PV of cash flows -50 +36.77 +6.46
Net -6.77
It is not viable for the lessor, LR.
For the lessor, this is an investment proposal of his business. Hence he has to evaluate it at the
weighted average cost of his capital, which is 12%.
Comment: For feasibility, the lessor has to increase the lease rents. But he cannot do so to give
a positive NPV since it will then be infeasible for the lessee, KJ. Then KJ will go for outright
purchase instead of lease. Hence, LR should only consider using borrowed funds, so that at
least he can take the marginal after tax cost of capital to justify this venture. However, in the
long run, it has to earn a positive NPV at the weighted average after tax cost of capital to
justify acceptability. He could work on decreasing the initial cost, since he may be buying
many such machines and therefore be eligible for substantial discounts. He could aim at a
better residual value. Most importantly, he should lower his cost of capital to be competitive.
3. (a) IP, an importer in India has imported a machine from USA for US $ 20,000 for which the
payment is due in three months. The following information is given:
Money Market Rates (p.a.)

Foreign Exchange Rates (`/US $)
(Compounded annually)
Bid Ask Deposit Borrowing
Spot 74.60 74.90 USS 6% 9%
3 months forward 75.50 75.90 Rupees 7% 11%
(i) Show with appropriate supporting calculations whether a money market hedge is
possible or not.
(ii) Compute the cost (in annualized percentage) of a Forward Contract Hedge.
(iii) Present rupee outflows under (i) and (ii) and advise the importer on the best
course of action to minimize rupee outflow.
(Exchange rate and values should be shown upto two decimal places) 8
(b) An investor had purchased a 4 month call option on the equity shares of N Ltd. of ` 10
of which the current market price is ` 132 and the exercise price is ` 150. You expect
the price to range between ` 120 to ` 190. The expected share price of N Ltd. and
related probability is given below:
Expected Price (`) 120 140 160 180 190
Probability 0.05 0.20 0.50 0.10 0.15
You are required to compute the following:

(i) Expected share price at the end of 4 months
(ii) Value of call option at the end of 4 months, if the expected price prevails.
(iii) In case the option is held to its maturity, what will be the expected value of the
call option? 8
Answer:
3. (a)
(i) After 3 months, the importer will purchase US$, i.e. it is a payable. For money market
hedge, he should create a US$ asset by borrowing `, investing in $ @ $ Deposit rate and
receiving $ at the end of three months.
(1+ ` borrowal rate for 3 months)

= Spot Ask Rate × (1+ $ deposit rate for 3 months)
1+ 0.11 × 3
 12 
= 74.9 ×
1+ 0.06 × 3
 12 
1.0275
= 74.9 × = ` 75.82
1.015
This value 75.82 is less than the three months’ forward ask rate of ` 75.90. Hence money
market hedge is possible.
ቈ
.
×

(ii) . − 1቉×100×12/3
×

1.0275 
Effective rate of money market hedge =  1.015 − 1 × 400 = 4.926%
 
Under forward contract hedge, effective rate annualized
(Forward Ask − Spot Ask) 12
= × 100 ×
Spot Ask 3
1 100 × 12
= × = 5.34%
74.90 3
(iii) Money market hedge:
 
20,000 
Amount to be borrowed =  × 74.90
 1+ 6% × 3 
 12 
20,000
= × 74.90 = 19,704.43 $ ×74.90 `/$
1.015
= ` 14,75,861.81
Rupee needed today = 74.90 × 19704.43 = ` 14,75,861.81
Interest on this sum if borrowed today at 2.75% for 3 m (i.e. 11% pa) = ` 40586.20
Rupee outflow after 3 m = ` 15,16,448
Forward Contract Hedge:
Book a forward contract to purchase $ at 75.90 after 3 months.
Outflow after 3 m = 20,000 x 75.90 = ` 15,18,000
No initial outflow is required.
Equivalent outflow today = 15,18,000/1.0275 = ` 14,77,372.26
Money Market Forward Contract Difference
Today’s rupee outflow 14,75,861.81 14,77,372.26 1510.45
Rupee outflow after 3 m 15,16,448 15,18,000 1552
1510.45 today will become 1510.45 x 1.0275 = 1552 after 3 m.
Cash outflow under Money Market hedge is lowest, therefore it should be preferred.
3. (b)
Price Pi Probability Price x prob If held till maturity Call value Call value
after 4 m ×
probability
120 0.05 6 Call lapses 0 0
140 0.20 28 Call lapses 0 0
160 0.50 80 Call exercised +10 5
180 0.10 18 Call exercised +30 3
190 0.15 28.5 Call exercised +40 6
Total 160.50 14
(I) Expected share price after 4 months = ` 160.50
(ii) If price after 4 m = 160.50, value of call = 160.50 - 150 = 10.50. Since exercise price <
market price, call will be exercised.
(iii) Expected value of the option = ` 14
(iv) Expected pay off = Expected value of the option less option premium. Hence option
premium should be at the most ` 13 to make it worthwhile. At ` 14, pay-off is zero and
there is indifference,
4. (a) EC Limited is considering a new project with initial investment. It is estimated that IRR of
the project is 16% having an estimated life of 5 years. The Finance Manager has
studied that project with sensitivity analysis and informs that annual fixed cost sensitivity
is 7.8416%, whereas cost of capital (discount rate) sensitivity is 60%.
Other information available are:
Profit Volume Ratio (P/V) is 70%
Variable cost ` 60 per unit
Annual Cash Flow (year end) ` 57,500
Ignore depreciation on initial investment and taxes.
Calculate:
(i) Initial investment of the project
(ii) Net Present Value of the project
(iii) Annual Fixed Cost
(iv) Estimated annual sales units
(v) Break Even Units 8
(b) The expected returns on two stocks for particular market returns are given in the
following table:
Market Return Stock A Stock B

7% 4% 9%
25% 40% 18%
You are required to calculate:
(i) The beta of the two stocks.
(ii) The expected return of each stock, if the market return is 60% likely to be 7% and
40% likely to be 25%.
(iii) The security market line (SML), if risk free rate is 7.5% and market return is with
likelihood as per (ii).
(iv) The Alpha of the two stocks. 8
Answer:
4. (a)
(i) Initial Investment
At IRR of 16%, NPV = 0, Hence,
Initial Cost of Investment = PVIFA (16%, 5) × Cash Flow (Annual)
= 3.274 × ` 57,500
= ` 1,88,255
(ii) Net Present Value (NPV)
Let Cost of capital be x, then, (16-x)/x = 60%; x= 10%
Thus, NPV of the project = [Annual Cash Flow x PVIFA (10%, 5)] - Initial Investment
= (` 57,500 x 3.791) - ` 1,88,255
= ` 29,727.50
(iii) Annual Fixed Cost
Let change in the Fixed Cost which makes NPV zero is X. Then,
` 29,727.50 - 3.791 X = 0
Thus X = ` 7,841.60
Let original Fixed Cost be Y. Then,
Y x 7.8416% = ` 7,841.60
Y = ` 1,00,000
Thus, Fixed Cost = ` 1,00,000
(iv) Estimated Annual Units of sales
Selling Price per unit = ` 60/(100% - 70%) = ` 200
(Annual Cash Flow + Fixed Cost)/ P/V Ratio = Sales Value
(` 57,500 + ` 1,00,000)/0.70 = ` 2,25,000
Sales in Units = ` 2,25,000/ ` 200 = 1,125 units.
(v) Break Even Units
Fixed Cost/ Contribution per Unit = 1,00,000/140 = 714.285 units
Answer:
4.(b)
(i) Change in stock return = β (Change in market return)
A : (40-4) = β (25 – 7)
36
β= =2
18
B : (18 – 9) = β (25 – 7)
9
β= = 0.5
18
(ii) Expected returns of the stock A: 60 % x 4 + 40 % x 40 = 2.4 + 16 = 18.40%
Stock B: 60 % x 9 + 40 % x 18 = 5.40 + 7.2 = 12.60%
(iii) Expected return of market = 60% x 7 + 40% x 25 = 4.2 + 10 = 14.20%
Security market line SML is the line drawn with betas on x axis and expected return on the
y axis and risk free rate = 7.5 % when x = 0, i.e. at zero beta.
Expected return based on SML = y = 7.5 % + β (14.20 % - 7.5%)
SML: y = 7.5% + β (6.7)%
(iv) For stock A, expected return y = 7.5 + 2 x 6.7 = 7.5+13.4 = 20.9
Average return = 18.40.
Alpha of A = – 20.9+18.4 = – 2.5%
For Stock B, expected return y = 7.5+0.5 x 6.7 = 7.5+3.35 = 10.85
Average return = 12.60.
Alpha of B = – 10.85 + 12.60 = 1.75%
5. (a) During a five year period, the relevant results for the aggregate market are that the
risk-free rate (rf) is 8% and the return on market (rm) is 14%. For that period, the results of
five portfolio managers are as follows:
Portfolio Manager Actual Average Return (%) Beta (/B)
A 13 0.80
B 14 1.05
C 17 1.25
D 13 0.90
E 15 0.95
Using CAPM model, you are required to
(i) calculate the expected rate of return for each portfolio manager and compare
the actual returns with the expected returns; and
(ii) find which of the mangers need to be warned for under-performance? 8
(b) A mutual fund made an issue of 20,00,000 units of ` 10 each at the beginning of the
year. No entry load was charged. It made the following investments:
Particulars Amount (`)
1,00,000 Equity shares of ` 100 each @ ` 160 1,60,00,000
8% Government Securities 16,00,000
11% Debentures (unlisted) 10,00,000
10% Debentures (listed) 10,00,000
Total 1,96,00,000
During the year, dividends of ` 24,00,000 were received on equity shares. Interest on all
securities was received for a full year as on the valuation date. Equity shares have a
value of ` 180 per share as on valuation date and unlisted debentures are to be valued
at 85% of the invested value. Initial expenses were ` 3 lacs, which are fully charged to
the scheme in the first year. Up to the end of the year, operational expenses incurred
were ` 4 lacs, of which ` 1.5 lacs remains payble next year. Just before the year end,
60,000 units were redeemed when the NAV was ` 12.5 NAV per unit and an exit load of
1 % was charged. Find the NAV per unit as on valuation date which is at the end of the
year. 8
Answer:
5. (a)
(i) CAPM Equation:
R, = Rf + β (Rm - Rf)
Where Rj = Expected rate of return
Rf = Risk free rate
Rm = Return on Market
β = Beta
The expected rates of return are as follows:
Portfolio Expected Return (%) Actual Average Difference between Actual

Manager Return (%) & Expected Returns
A 8% + 0.80 (14%-8%) = 12.8 13 + 0.2
B 8% + 1.05(14%-8%)= 14.3 14 - 0.3
C 8% + 1.25(14%-8%)= 15.5 17 +1.5
D 8% + 0.90(14%-8%)= 13.4 13 - 0.4
E 8% + 0.95(14%-8%)= 13.7 15 +1.3
(ii) Managers B and D did not perform upto expectation ,they have to be warned.
(b) (`)
Investments made as per question 196,00,000
Initial Expenses 3,00,000
Cash balance (initial) 1,00,000
Amount collected = 20 lakh units × ` 10 /u. 200,00,000
Value of Investments at valuation date (`) Income(`)

Equity share 1,80,00,000 24,00,000
8% Govt. securities 16,00,000 1,28,000
11% Debenture (Unlisted) 8,50,000 1,10,000
10% Debenture (Listed) 10,00,000 1,00,000
214,50,000 (A) 27,38,000
Less : Redemption ` 12.5 × 60,000U (7,50,000)
Add : Exit load 1% 7,500
Less : Expenses paid (2,50,000)
Add : Cash 1,00,000
(B) 18,45,000
Total : Assets (A) + (B) 232,95,500
Less : Expenses payable (1,50,0000)
Net Assets ` 231,45,500
Units = 20,00,000 – 60,000 = ` 19,40,000
231, 45, 500

NAV per unit = = ` 11.93
19, 40,000
6. (a) An investor has the following constituent holdings in his portfolio:
Security No. of shares Price per share (`) Share Beta
A 400 500 1.4
B 500 750 1.2
C 200 250 1.6
(i) Find the market value weighted average beta of his portfolio.
(ii) If the investor wants a target beta for his portfolio at 0.9, how would he dispose of his
securities and replace them with Government securities if he want to sell in the
order of risk? Present the revised tabulation of his holding and prove that the target
beta has been achieved by your advice.
(iii) If he is willing to invest further, how much investment should he make in G Sec
to make his beta 0.9, without selling any share at all? 10
(b) An 8.5% bond of `1,000 face value with five year maturity at par and a yield to maturity
of 10% has `954.74 as the current market value. Calculate the price of the bond and
compare it with the market price. What action should the holder of the bond take? 6
Answer:
6. (a)
(i)
Security Nos Price(`) Value(`) Beta Weight Weight x Beta
A 400 500 2,00,000 1.4 0.32 0.448
B 500 750 3,75,000 1.2 0.6 0.72
C 200 250 50,000 1.6 0.08 0.128
Total 1100 625000 1.296
Portfolio’s beta based on market value weights is = 1.296
(ii) Target beta = 0.9.
We should first replace the riskiest of the securities with Govt. zero beta securities. Then
we go for the next riskier one. Hence, C, being of lower market value should be fully
replaced by Govt. securities.
If we assume full of A to be sold, then, b x 1.2 = .9 × 625000 = ` 562500. Then, solving, we

get b = 468750 which is more than ` 3,75,000 . This means that any of B should not be
sold and that A too should not be sold in full.
Hence, 375000 × 1.2 + a × 1.4 = 625000 × 0.9
450000 + 1.4 a = 562500
Or, a = 112500/1.4 = ` 80357.
` 80357 value of A should be retained in the portfolio. This amounts to 80357/500
= `160.714 shares, which is 161 shares.
Hence the new portfolio will consist of 161 shares of A, 500 shares of B and no share of
C and Govt., securities worth ` 169500 (50,000 from C and 200000 – 80500 = ` 119500
from A)
Proof:
Security Nos Price Value Beta Weight Weight

(`) (`) x Beta
A 161 500 80,500 1,4 0.1288 = 80500/625000 0.18032

B 500 750 3,75,000 1.2 0.6 = 375000/625000 0.72
C 0 250 0 1.6 0
Govt. Securities 169500 0 0
Total 625000 0.90032
Thus the new portfolio beta will be the targeted 0.9
(iii) Without selling any share, if investment has to be made, say for value ‘g’ in govt,
security, weighted beta
(6,25,000 × 1.296) + (g × 0)
= (6,25,000 + g) = 0.9
= 6,25,000 (1.296 – 0.90) = 0.90 g
625000 × 0.396
g= = ` 2,75,000 market value worth G Sec should be purchased.
0.90
6. (b)
Year PV factor 10% Cash Flow(`) PV at 10% (`)

1 0.909 85 77.27
2 0.826 85 70.21
3 0.751 85 63.84
4 0.683 85 58.06
5 0.621 85 52.79
5 0.621 1000 621.00
Total 943.17
The bond is overpriced since the present value at 10% is only ` 943.17 whereas the
market price is ` 954.74. Hence it should be sold.
7. (a) Companies X and Y want to raise US$ 50 million each. They have been offered the
following rates per annum:
Company Fixed Floating
X 7.5 LIBOR + 25 bps
Y 8.45 LIBOR + 37 bps
Bank B, on a commission of 0.2% (fully borne by Y) is arranging an interest rate swap

between X and Y. X wants a floating rate and Y wants a fixed rate. Work out the
payables and receivables on the swap (in %), given that the benefits (after
commission) are shared between X and Y in the ratio 60 : 40. What will be the effective
rate of interest payable by X and Y their respective gains (in %) due to the swap? How
many dollars does each save per annum due to the swap? 8
(b) The US $ is selling in India ` 75.90. The interest rate for a 6 months borrowing in India is
10% per annum and the corresponding rate in US is 4%.
(i) Do you expect that US$ will be at a premium or at a discount in the Indian Forex
Market? Why?
(ii) What will be the expected 6-months forward rate for US $ in India?
(iii) What will be the annualised rate of forward premium or discount? 8
Answer:
7. (a)
Company Fixed Floating

X 7.5 LIBOR + 25 bps
Y 8.45 LIBOR + 37 bps.
Differential 0.95 0.12
Net difference 0.95-0.12 = 0.83
Bank’s Commission 0.20
Balance Gain 0.83 – 0.20 = 0.63 60% x 0.63 = 0.378 40% × 0.63 = 0.252
X Y
Borrow At fixed rate 7.5% At floating rate LIBOR + 0.37%
Pay bank (7.5%) (LIBOR+ 0.37%)
Collect differential from Y + 7.25 % - LIBOR (7.25-LIBOR)
7.5% - (LIBOR+ 0.25%)
Pay Bank’s Commission (0.2)
Receive gain from Y +0.378 (0.378)
Net interest = Effective rate - 0.25-LIBOR + 0.378 (7.25+0.37+0.2+0.378) = 8.198
of interest = (LIBOR -0.128)
Original Interest LIBOR+ 0.25 8.45
Gain p.a. due to the swap 0.378 0.252
Gain in dollars p.a. 0.378% x 50 m 0.252 x 50 m
= $ 1,89,000 = $1,26,000
(b)
(i) The US $ is expected to quote at a premium in India as the interest rate is higher in
India.
(ii) Calculation of Forward Rate:
1+ Rh F1
=
1+ Rf E 0
Rh is home currency interest rate, Rf is foreign currency interest rate, F1 is end of the
period forward rate and Eo is the spot rate.
1+ ( 0.10 / 2) F1
=
1+ ( 0.04 / 2) 75.9
1+ 0.05 F1
or 1+ 0.02 = 75.9
1. 05 F1
or =
1.02 75.9
79. 70
or = F1
1.02
or F1 = ` 78.14
(iii) Rate of Premium
78.14 − 75.9 12
× × 100 = 5.90% or 2.95% for 6 months.
75.9 6
(a) State the differences between Commercial Papre (CP) and Certificate of Deposit (CD)
on the following aspects: 4
(i) Issuer
(ii) Conditions to be satisfied by an issuer to be eligible for an issue.
(b) State the differences between Indian Treasury Bills and Central Government securities
on the following aspects: 4
(i) Purpose of issue
(ii) Tenor
(c) Name the most appropriate combined trading strategy on the stock of PQ Ltd. in the
following independent cases. (You may present only columns I and II in your answer
books.) 4
SI. No. Strategy Action Expiry Date Strike Price
Buy Sell
I II HI IV V VI
(i) One call 30th June 215

One put 30th June 215
(ii) Two Calls 20th June 220

One Put 20th June 220
(iii) One Call 20th June 230

Two Puts 20th June 230
(iv) One call 20th June 215

One Put 20th June 220
(d) State the differences between the commodity market and equity market futures in the
following aspects: 4
(i) Initial Margin
(ii) Basis of price movements
(e) How would you choose indivisible projects under capital rationing? Can there be a
situation where a project with lower NPV is chosen while discarding a project with
higher NPV? Explain. 4
PV Factor Table:
Annuity Factors
End of Year
1 2 3 4 5 4 yrs 5 yrs
Rate
4% 0.962 0.925 0.890 0.855 0.822 3.632 4.454
4.8% 0.954 0.910 0.869 0.829 0.791 3.562 4.353
6% 0.943 0.890 0.840 0.792 0.747 3.465 4.212
7.2% 0.933 0.870 0.812 0.757 0.706 3.372 4.078
8.5% 0.922 0.849 0.783 0.722 0.665 3.276 3.941
10% 0.909 0.826 0.751 0.683 0.621 3.169 3.791
12% 0.893 0.797 0.712 0.636 0.567 3.038 3.605
e-0225 1.0228 e-0.0225 0.978
e0.025 1.02532 e-0.25 0.975
e0-225 1.2523 e-0.225 0.799
e0.25 1.2840 e-0.025 0.779
e0.5 1.6458 e-05 0.608
Annuity factors for 5 years:
Rate 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18%
Factor 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127
Answer:
8 (a)
CP CD
Issuer Corporates, Primary Dealers Scheduled Commercial Banks other

than RRBs, Local Area Banks
Eligibility Tangible net worth not less than `4 cr. Banks have to maintain CLR and SLR
Working capital limit not to be less on the issue price of CDs
than ` 4 cr.
Credit rating to be at least P-2 of
CRISL or PP2/ P2 of D2 of other rating
agencies
(b)
T Bill G Sec
Purpose To tide over short term liquidity To meet Govt, expenditure

shortfalls commitments
Tenor 91 days, 182 days, 364 days. More than 1 year, up to 30 years.
(c)
Sl. No. Strategy
I II
(i) Straddle or
Long Straddle
(ii) Strap
(iii) Strip
(iv) Strangle
(d)
Futures Commodity Market Equity Market
Initial Margin Lower in the range of 4-5-6% Higher in the range of

25-40%
Basis of Price Movements Purely based on Demand Based on expectation

and supply of commodities of future performance
(e)
Capital Rationing: This refers to prioritizing the projects based on NPV. The available
capital is limited and therefore all projects with positive NPV cannot be selected. Hence,
projects are arranged in the order of NPV (descending order) and the cumulative project
cost is tabulated. When available capital is exhausted, the process of selection has to
stop. But in the case of indivisible project, i.e. part project cannot be undertaken and
therefore, we may have unutilized capital. Therefore, we may leave out the last one and
choose the combination which maximizes the NPV. While doing so, we may have a
situation where the project with better NPV is not selected since its selection would involve
under utilization of capital. For example, consider the following table:
Project Capital Outlay NPV (` lacs) Cumulative outlay
A 200 +250 200
B 225 +200 425
C 400 +180 825
D 175 +100 600
Suppose that available capital is ` 600 lacs. If we stop with B, since funds will be insufficient
for C, we are not utilizing ` 175 lacs of capital. Hence, We can go for D, which has lesser
NPV. The project is indivisible. Hence we cannot go for part of C which yields proportional
NPV.
Suggested Answer_Syl16_December 2019_Paper_14
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)

DECEMBER 2019
No present value factor table or other statistical table will be given in addition to this question
paper. Candidates may use the values tabulated at the end of this question paper.
This paper contains two sections, A and B. Section A is compulsory and contains question no. 1
for 20 marks. Section B contains question numbers 2 to 8, each carrying 16 marks.
Section – A
Answer all the questions.
Each question carries two marks.
1. (a) Choose the correct option from the four alternatives given: (1 mark is for the correct
choice and 1 mark for justification/workings. You may present only the Roman numeral,
your choice and the reason/workings, without copying the question.) 2×10=20
(i) Which of the following investment avenues has the least risk associated with it?
(A) Corporate Fixed Deposits
(B) Deposits in commercial banks
(C) Public Provident Fund
(D) Non-convertible zero coupon bonds
(ii) M uses 12% as nominal required rate of return to evaluate its new investment
projects. It has recently been decided to protect shareholders’ interest against loss
of purchasing power due to inflation. If the expected inflation rate is 5%, the real
discount rate will be
(A) 6.67%
(B) 6%
(C) 17.6%
(D) 7%
(iii) A wants to hedge its portfolio of shares worth ` 150 million using the Index futures.
The contract size is 100 times the index. The index is currently quoted at 7500. The
beta of the portfolio is 0.9. Consider the beta of the index as 1. The number of
contracts to be traded is
(A) 18000
(B) 180
(C) 22
(D) 200
(iv) The following information is extracted from MF, a mutual fund scheme. NAV on 01-
11-2019 is ` 65.78, annualized return is 15%. Distributions of income and capital
gains were ` 0.50 and ` 0.30 per unit in the month. What is the NAV on 30-11-2019?
(A) ` 67.50
(B) ` 66.14
(C) ` 65.80
(D) ` 66.96
(v) A portfolio holding 90% of its assets in CNX Nifty stocks in proportion to their market
capitalization and 10% in Treasury Bills is more sensitive to
(A) Systematic Risk
(B) Unsystematic Risk
(C) Interest Rate Risk
(D) Index Risk
(vi) Project X is to be financed by 40% debt (with zero beta) and balance with equity
(with 1.3 beta). If the risk free rate is 13% and return on market portfolio is 22%, the
return from the project will be
(A) 13.07%
(B) 13.70%
(C) 24.70%
(D) 20.02%
(vii) Z Ltd. invests ` 20 lacs in a project with life 5 years and no salvage value. Tax rate is
50% and straight line depreciation is used. The uniform expected cash flows after
tax and before depreciation shield are:
Year end 1 2 3 4 5
Cash flows after tax (` lacs) 4 5 6 6 7
The payback period is
(A) 3 years
(B) 3 years and 11 months
(C) 2 years and 11 months
(D) 2 years and 6 months
(viii) The probability distribution of security N is given below:
Probability Return (%)
0.30 30
0.40 20
0.30 10
The risk of the return of the security will be around
(A) 60%
(B) 8%
(C) 20%
(D) 24%
(ix) A company’s share is currently trading at ` 240. After 6 months, the price will be
either ` 250 with probability of 0.80 or ` 220 with probability 0.20. A European call
option exists with an exercise price of ` 230. The expected value of call option at
maturity date will be
(A) ` 10
(B) ` 16
(C) ` 4
(D) ` 14
(x) The value of beta of a security does not depend on
(A) standard deviation of the security
(B) standard deviation of the market
(C) correlation between the security and the market
(D) risk free rate
Answer:
(i) (C) Public Provident Fund
The other three are subject to only capital adequacy norms and the funds can be
invested freely to fetch returns commensurate with the risk. PPF is required to invest
only in specified risk free securities.
(ii) (A) 6.67%
(1 nominal rate) (1 nominal rate)

Real rate =  1 or = 1 + Real rate
(1 inflation rate) (1 inflation rate)
Real rate = (1.12/1.05) – 1 = 1.0667 – 1 = 6.67%
(iii) (B) 180
Value per future contract = 7500 × 100 = `7.5 lacs
Value of portfolio = 1500 lacs
Hedge ratio = 0.9/1 = 0.9
No. of futures contracts to be traded = Value of portfolio x hedge ratio/ value per
contract.
= 0.9 × 1500/7.5 = 180 contracts.
(iv) (C) 65.80
Monthly return = 1.25% = (NAV – 65.78 + 0.5 + 0.3)/65.78
0.82225 = NAV – 64.98
NAV = 65.80225 = 65.80
(v) (A) Systematic risk
Unsystematic risk is eliminated since the portfolio follows the index. Only 10% is
invested in T Bills and therefore the portfolio is not too much affected by interest rate
risk. Systematic risk is the market risk which is replicated by the portfolio.
(vi) (D) 20.02%
Project beta = 0.4 x 0 + 0.6 x 1.3 = 0.78
Rp = Rf + βp (Rm – Rf)
= 0.13 + 0.78 (0.22 – 0.13) = 0.13 + 0.78 × 0.09 = 0.13 + 0.0702 = 0.2002 = 20.02%
(vii) (C) 2 years and 11 months.
CFAT, depn shield = 6,7,8,8,9 For years 1,2,3,4,5.
Cum flows = 6, 13, 21, 29, 38
Pay back = 2 years + 7/8 × 12 = 2 +10.5 = 2 years and 11 months
(viii) (B) 8%
Probability Return xi-20 (xi-20)2 Pi (xi-20)2

Pi Xi
0.3 30 +10 100 30
0.4 20 0 0 0
0.3 10 -10 100 30
Mean = 0 60
Variance = 60
Std deviation = 60 = 7.746% = 8%
(ix) (B) 16
If price is 250, option is exercised and profit = 250 – 230 = 20. Probability = 0.8
If price is 220, option lapses and profit = 0.
Expected value = 20 × 0.8 + 0 × 0.2 = 16
(x) (D) Risk free rate
β = r σy/σm where r is correlation coefficient, σ y is standard deviation of security and

σm is the standard deviation of market. Hence beta is independent of risk free rate.
Section-B
2. (a) R Ltd., a profitable company is considering the purchase of a new machine for `
75,00,000. The machine’s useful life is 5 years, with annual maintenance, insurance and
administration costs of ` 12 lacs. Depreciation is over its life on straight line basis,
considering zero scrap value. The tax rate is 30%. R Ltd. has a capital structure of 60%
debt and 40% equity. Cost of debt before tax is 8% and the cost of equity is 12%. R Ltd. is
interested in leasing out this machine to a lessee ‘L’ on year end annual lease rents and
R will have to maintain the equipment at the costs stated above.
What should be the lease rents to be billed to ‘L’ for the lease proposal to break-even if:
(i) R Ltd. acquires the machine from its total finance pool.
(ii) R Ltd. uses a bank borrowing specifically for this purpose at 10% interest rate on
outstanding principal at the beginning of each year, with year-end installments
comprising `15 lacs towards principal and balance towards interest for the year?
Present calculations to the nearest rupee. 10
(b) GLOBAL Limited, an Indian company will need $ 5,00,000 in 90 days. The following
information is given:
Spot Rate $ 1 = ` 69-50
90 days forward rate of $ 1 as of today = ` 71.50
Interest Rates are as follows:
Particulars US India
90 days deposit rate 1.25% 2%
90 days borrowing rate 2.00% 3%
Compare the strategies of money market hedge vs. no hedging and compute the net
advantage. Present calculations up to two decimal places. 6
Answer:
(a) Depreciation per annum = `75/5 = `15 lacs ; tax shield = 0.3 × 15 = `4.5 lacs
Capital: 60% debt at 8% before tax = 5.6% after tax; 40% equity = 12%
Weighted average cost of capital after tax = 0.6 × 5.6 + 0.4 × 12 = 3.36 + 4.8 = 8.16%
After tax cost of bank loan = 10% (1 – 0.3) = 7%.
Annual Cash cost = `12 lacs before tax = `8.4 lacs after tax.
Annual cash cost after tax and depn shield = `(8,40,000 – 4,50,000) = `3,90,000
(i) If the funding is out of the general finance pool, discount rate to be used = wacc
= 8.16%.
End of year Factor Cash (`) PV of cash

Inflows/(outflows) flows
0 PV1 (75,00,000) (75,00,000)
1-5 Annuity factor 8.16%, (3,90,000) (15,50,640)

5 years = 3.976
90,50,640
P.V. of After tax lease rents to break even = `90,50,640
After tax annual lease rentals = 90,50,640/3.976 = `22,76,318
Annual billable lease rents = 22,76,318/70% = `32,51,883
(ii) This is a lease v/s borrow decision applicable to the lessor. The break -even lease rents
should cover the after tax cost of specific borrowing. The applicable discount rate =
7%.
End Outstanding Interest After tax Principal Cash PV PV of
of principal interest payments outflow factor outflows
year
0 75,00,000
1 60,00,000 7,50,000 5,25,000 15,00,000 20,25,000 0.935 18,93,375
2 45,00,000 6,00,000 4,20,000 15,00,000 19,20,000 0.873 16,76,160
3 30,00,000 4,50,000 3,15,000 15,00,000 18,15,000 0.816 14,81,040
4 15,00,000 3,00,000 2,10,000 15,00,000 17,10,000 0.763 13,04,730
5 0 1,50,000 1,05,000 15,00,000 16,05,000 0.713 11,44,365
74,99,670
Total outflows including maintenance, etc = 3,90,000 x annuity factor 7%, 5 years +
74,99,670
= 390000 × 4.10 + 7499670 =15,99,000 + 74,99,670 = `90,98,670
After tax annual lease rentals to break even = 90,98,670/4.10 = `22,19,188
Billable lease rentals = 22,19,188/0.7 = ` 31,70,269
(b) Spot Rate = 69.50 ; Theoretical forward rate = 69.50 (1 + 2%) = 69.50 × 1.02 = 70.90,
Which is < 71.50, the forward rate.
Therefore cannot invest in India.
Money Market Hedge:
Invest in US at 1.25%,
Borrow in India at 3%, convert at 69.50, Invest in USA at 1.25%.
To get 1.25%, Investment = 5,00,000/ 1.0125 = $4,93,827.16
Equivalent INR = 493827.16 × 69.50 = `3,43,20,987.62
Interest at 3% = `10,29,629.63
Total Outflow INR = `3,53,50,617.25
No hedge option:
Outflow after 3 m INR = 71.50 × 5,00,000 = `3,57,50,000
Net advantage by hedging = `3,57,50,000 – `3,53,50,617 = `3,99,383
Alternative:
Money market hedge:
Borrow in `, convert to $, invest $, repay ` loan in 90 days
Amount in $ to be invested = 5,00,000/1.0125 = $4,93,827
Amount of ` needed to convert into $ = 4,93,827 x 69.50 = `3,43,20,977
Interest and principal on ` loan after 90 days = `3,43,20,977 x 1.03 = `3,53,50,606
No hedge option:
Outflow after 3months INR = 71.50 x 5,00,000 = `3,57,50,000
Net advantage by hedging = `3,57,50,000 – `3,53,50,606 = `3,99,394
3. (a) A silver merchant requires in three months’ time, 3000 kg of silver for making silver
articles during a wedding season. He expects the price to increase. Silver sells at spot
rate of ` 5,100 per kg. Each silver futures contract (for 50 kg), expiring in three
months sells at ` 5,200 per kg. The merchant wants to hedge half his requirement
through futures and leave the remaining half uncovered. Explain his position and the
gains/losses in the spot and futures market, the number of futures to trade in, the
effective price per kg for his entire requirement if after 3 months,
(i) Spot rate is ` 5,250/kg and futures is at ` 5,400 per kg.
(ii) Spot rate is ` 5,000/kg and futures is at ` 4,900 per kg. 10
(b) Mr. NK has categorized stock in the market into four types, viz. Small cap growth
stocks, Small cap value stocks, Large cap growth stocks and Large cap value stocks.
Mr. NK also estimated the weights of the above categories of stocks in the market
index. Further, the sensitivity of returns on these categories of stocks to three important
factors are estimated to be:
Category of Weight in the Factor I Factor II Factor III

Stocks Market Index (Beta) (Book Price) (Inflation)
Small cap growth 25% 0.80 1.39 1.35
Small cap value 10% 0.90 0.75 1.25
Large cap growth 50% 1.165 2.75 8.65
Large cap value 15% 0.85 2.05 6.75
Risk Premium 6.85% – 3.5% 0.65%
The rate of return on treasury bonds is 4.5%.
(i) Using Arbitrage Pricing Theory, determine the expected return on the market index.
(ii) Mr. NK wants to construct a portfolio constituting only the ‘small cap value’ and
‘large cap growth’ stocks. If the target beta for the desired portfolio is 1, determine
the composition of his portfolio. 6
Answer:
(a) Requirement = 3000 kg
Covered Uncovered
1500 kg 1500 kg
Spot Market Futures Market Spot = 5100
Short position Long position 3m = 5250
1500/50 = 30 contracts Effective price

5250 per kg for 1500 kg
(i) After 3 months
Loss = (5100-5250) x1500 kg Gain = (5400-5200) ×1500 kg
= -150 × 1500 = 200 × 1500
Net gain = ` 50 per kg
Price paid = 5200 per kg for 1500 kg Price paid = 5250 per kg
for 1500 kg
Effective price for total requirement of 3000 kg = 5225 `/kg
(ii) After 3 months
Gain = (5100-5000) x 1500 kg Loss = (5200-4900) × 1500 kg
= 100 × 1500 = 300 × 1500
Net loss = ` 200 per kg
Price paid = 5000 + 200 = 5200 per kg for 1500 kg Price paid = 5000 per kg
for 1500 kg
Effective price for total requirement of 3000 kg = 5100 `/kg
(b) (i)
Category Wts Factor I Factor II Factor III Wts x FI Wts x FII Wts x FIII
S Cap Gr 0.25 0.80 1.39 1.35 0.2 0.3475 0.3375
S Cap V 0.10 0.90 0.75 1.25 0.09 0.075 0.125
L Cap Gr 0.50 1.165 2.75 8.65 0.5825 1.375 4.325
L Cap Va 0.15 0.85 2.05 6.75 0.1275 0.3075 1.0125
Total 1 2.105 5.8
Risk Premium 6.85 -3.5 0.65
Product 6.85 -7.3675 3.77
Total 3.2525
Expected Return on market index under APT = 4.5 + 3.2525 = 7.7525%
(ii) Let S be the investment in small cap value and L in large cap growth
Thus, 0.9S + 1.165L/(S+L) = 1
S(0.9-1) = L(1-1.165)
0.1S = 0.I 65L, or S = 1.65L, i.e. 1/1 + 1.65 = 1/2.65 = 37.74% in Land 62.26 or 62.3% in S
Alternative solution:
(i) Stock’s return according to Arbitrage Pricing Theory:
Small cap growth = 4.5 + 0.80 × 6.85 + 1.39 × (-3.5) + 1.35 × 0.65 = 5.9925%
Small cap value = 4.5 + 0.90 × 6.85 + 0.75 × (-3.5) + 1.25 × 0.65 = 8.8525%
Large cap growth = 4.5 +1.165 × 6.85 +2.75 × (-3.5) + 8.65 × 0.65 = 8.478%
Large cap value = 4.5 + 0.85 × 6.85 + 2.05 × (-3.5) + 6.75 × 0.65 = 7.535%
Expected return on the market index
= 0.25 × 5.9925 + 0.10 × 8.8525 + 0.50 × 8.478 + 0.15 × 7.535 = 7.7526%
(ii) Let us assume that Mr. Nirmal will invest X1 % in small cap value stock and X2% in large
cap growth stock.
XI + X2 =1
0.90X1 + 1.165 X 2 =1
0.90X1 + 1.165(1-X1) =1
0.90X1 + 1.165 - 1.165X1 =1
0.165 = 0.265X1
XI = 0.165/0.265 = 0.623
X2 = 0.377
Thus, composition of his portfolio would be 62.3% in small cap value & 37.7% in large
cap growth stocks.
4. (a) On 1st August 2019, a bank entered into a forward purchase contract with an export
customer for USD 25,000 due on 1st November at an exchange rate of INR 72.6000 and
covered its position in the market at INR 72.6500. The customer remained silent on the
due rate. On 16th November, the bank cancelled the contract without further notice as
fifteen days had expired after the contract due date. The following exchange rates
prevailed:
1st November Inter bank TT rates USD 1 = INR 72.7500/7600
1 month forward INR 72.9500/9600
Merchant TT rates INR 72.6700/9000
16th November Interbank TT rates INR 72.7000/7100
Merchant TT rates INR 72.6400/7800
Interest on outlay of funds is 12% p.a.
Explain the position of the bank in relation to the customer and the market on various
dates, compute the swap loss/gain, ignore margin and find out the charges payable by
the customer on cancellation. 10
(b) The following information about two funds, TB (all equity fund) and MB (equal debt and
equity fund) is given below:
Particulars TB MB
Average return (%) 25 18
Standard deviation (%) 10 5
Coefficient of Correlation with market 0.3 0.7
RBI Bond carries an interest rate of 5% and the expected return on market portfolio is
16% with a standard deviation of 4%.
(i) Find the covariance of each fund with the market
(ii) Find the systematic risk and the expected return of each fund under the Capital
Asset Pricing Model (CAPM) 6
Answer:
(a) Export Customer.
Customer wants to sell US $ after three months.
Bank will purchase after 3 m from this customer.
1st Aug: Forward contract by bank to purchase on 1st November 25000 $ at 72.6000
1st Aug: Bank covers its position by forward sale agreement due on 1st Nov in inter-bank
market at 72.65
1st Nov: Customer default.
Bank sells in inter bank market at 72.6500, buys for this purpose in spot at 72.7600
1st Nov: Bank enters into 1 m forward sale with inter-bank market at 72.9500, due 16th
November.
Bank’s position is open until 16th November
16th November: Bank has to close its position by selling at 72.9500 and purchasing at
72.7100, while charged customer as if it purchased for 72.7800
Exchange Difference: 72.7800 - 72.6000 = 0.1800 per $ x 25000 = 4500, Charged to

Customer
Swap Difference: 72.76-72.95 = 0.19 favorable, not passed on to customer
Gain to bank = 0.19 per $ x 25000$ = `4,750
Interest for outlay of funds for 15 days from 1st to 15th Nov 72.76-72.65 = 0.11 per $ per day
Interest = 0.11 x 12% x 15/365 x 25000 = ` 13.56 or ` 14, Charged to Customer.
(b) (i) Covariance of TB (Market) = Correln coefft × std dev TB × std dev mkt
= 0.3 × 10 × 4 = 12%
Covariance of MB (Market) = 0.7 x 5 x 4 = 14%
(ii) Systematic risk TB = (TB) = Corr coefft x std dev TB/ std dev market
= 0.3 × 10/4 = 0.75
βMB = 0.7 x 5/4 = 0.875
CAPM Return TB = Rf + TB (Rm-Rf)
= 5% + 0.75 x (16-5) %
= 5% +11 x 0.75
= 13.25%
CAPM Return MB = 5% + 0.875 × (16-5) %
= 14.625%
5. (a) A has invested in different points in time, in three schemes of a mutual fund. The
following details are given:
Scheme MF-P MF-Q MF-R
Amount of investment (`) 2,00,000 4,00,000 2,00,000
NAV (`/unit) on purchase date 10.30 10.10 10.0
Dividend received up to 30-11-2019 (`) 6000 0 5000
NAV (`/unit) on 30-11-2019 10.25 10.0 10.20
Effective annual yield (%) as on 30-11-2019 9.66 -11.66 24.15
Find out the following:
Number of units
Holding period (no. of days)
Holding period yield (%) up to

two decimal places
NAV (`) on 30-11-2019
Also compute the overall effective annual yield for A. Consider 365 days p.a. 10
(b) An investor holds the following securities:
Securities Cost (`) Dividend/ Market Value Beta

Interest (`) (`)
Equity Shares
A Ltd. 1,00,000 17,250 98,000 0.6
B Ltd. 1,50,000 10,000 1,62,000 0.8
C Ltd. 1,40,000 7,000 1,85,000 0.6
GOI Bonds 3,60,000 36,000 3,60,000 0.01
Calculate:
(i) Portfolio beta using market value weights (up to two decimal places).
(ii) Market rate of return using CAPM, taking a risk free rate of 7%.
(iii) Would you rate the investor as risk-averse? 6
Answer:
(a)
P Q R
Investment (a) 2,00,000 4,00,000 2,00,000
NAV per unit on (b) 10.30 10.10 10.00

purchase date
No of units (c) = (a)/(b) 19417.48 39603.96 20000
NAVp.u.30/11 (d) 10.25 10.00 10.20
NAV Rs 30/11 (e) = (c)x(d) 199029.17 396039.6 204000
Dividend/u (f) 0.31 0 0.25
Cap gain/u (g) = (d)-(b) -0.05 -0.10 +0.20
Return p.u (h) = (f) + (g) 0.26 -0.10 +0.45
Annual yield (i) 9.66 -11.66 24.15
Holding period (j) = (h x 365) 95.38 = 95 30.99 = 31 68.01 = 68

(days) (i)x(b)
Holding period yield (k) = (j x i)/365 2.52% -0.989% 4.5%

(%)
Overall effective annual yield = (a) × (i) / 8,00,000 = 2.62%
Alternative solution:
(i) Number of units in each Scheme
MF-P ` 2,00,000 = 19,417.48

` 10.30
MF-Q ` 4,00,000 = 39,603.96
` 10.10
MF-R ` 2,00,000 = 20,000.00
` 10.00
(ii) Total NAV on 30.11.2019
MF-P = 19,417.48 x 10.25 ` 1,99,029.17

MF-Q = 39,603.96 x 10.00 ` 3,96,039.60
` 2,04,000.00
MF-R = 20,000.00 x 10.20
Total ` 7,99,068.77
(iii) Total Yield
Capital Yield Dividend Yield Total

MF-P `1,99,029.17 - `2,00,000 `6,000 `5,029.17
= - `970.83
`3,96,039.60 - `400000 Nil - `3,960.40
MF-Q = - `3,960.40
`2,04,000 - `2,00,000 `5,000 `9,000.00
MF-R = `4,000
Total ` 10,068.77
(iv) No. of days investment held
MF-P MF-Q MF-R
Initial investment (`) 2,00,000 4,00,000 2,00,000
Yield (`) 5,029.17 -3,960.40 9,000.00
Yield (%) 2.5146 -0.9901 4.5
Period of Holding 2.5146 0.9901 4.5

× 365 × 365 × 365
(days) 9.66 11.66 24.15
= 95 days = 31 days = 68 days
19320 * 46640 * 48300 *

Overall effective annual yield =  100 = 2.62%
8,00,000
*(Yield x 365 )/ Period of holding in days
(b)
Cost Income Capital Total Market Β Mv × β

Gain Return Value
Equity Share:
A Ltd. 1,00,000 17,250 -2,000 15,250 98,000 0.6 58,800
B Ltd. 1,50,000 10,000 +12,000 22,000 1,62,000 0.8 129,600
C Ltd. 1,40,000 7,000 +45,000 52,000 1,85,000 0.6 1,11,000
GOI Bonds 3,60,000 36,000 0 36,000 3,60,000 0.01 3,600
7,50,000 70,250 55,000 1,25,250 8,05,000 3,03,000
303000
(i) Portfolio β = = 0.376 = 0.38
805000
125250
(ii) Average return of portfolio = = 16.7%
750000
 16.7 = Rf + (RM-Rf)β
= 7 + (RM-Rf)0.38
16.7  7
RM – Rf = = 25.53
0.38
RM = 7 + 25.53 = 32.53%
(iii) The investor is risk averse because his portfolio β = 0.38, due to a high GOI investment
proportion, which yields 10% against a risky market yield of 32.53%.
6. (a) A company has to replace its machine with either machine EM or LM. The following
details are given:
Particulars EM LM
Purchase price (`) 20,00,000 10,00,000
Scrap value at the end of its life (`) 3,00,000 3,00,000
Life (no. of years) 12 6
Overhauling due at the end of year 8 4
Overhauling cost (`) 4,00,000 2,00,000
Annual repair cost (`) 2,00,000 2,80,000
If LM is chosen, it has to be replaced by another LM machine at the end of the 6th year
at ` 12,00,000. Ignore depreciation and taxes. Use a discount rate of 10% p.a. with
annual rests. Present annual pre-discounted cash flows for each machine, then apply
the PV or annuity factors and show computations to the nearest rupee.
Compare the equivalent annual cash flows for the machines.
Which machine should the company choose based on NPV? 8
(b) The equity shares of MNB Ltd. are being sold at ` 315. A 3-month call option is available
for a premium of ` 9 per share and a 3 month put option is available for a premium of `
8 per share. Find out the net pay off of the holder of the call option and put option given
that:
(i) The strike price in both cases is ` 330 and
(ii) The share price on the exercise day is ` 300 or ` 315 or ` 345 or ` 360. 8
Answer:
(a)
EM:
Year Cash flows Factor PV
0 - 20,00,000 1 - 20,00,000
1-12 - 2,00,000 6.814 - 13,62,800
8 - 4,00,000 0.467 -1,86,800
12 + 3,00,000 0.319 + 95,700
NPV - 34,53,900
LM:
Year Cash flows Factor PV
0 -10,00,000 1 -10,00,000
1-12 -2,80,000 6.814 -19,07,920
4 -2,00,000 0.683 - 1,36,600
10 -2,00,000 0.386 -77,200
6 +3,00,000 0.564 -5,07,600

-12,00,000
12 +3,00,000 0.319 +95,700
NPV -35,33,620
Equivalent annual cash flows EM: -34,53,900/12 = - 2,87,825
LM: -35,33,620/12 = - 2,94,468
EM is better
(b)
Call option holder
Exercise Price 330 330 330 330
Spot Price 300 315 345 360
Option Lapse Lapse Exercise Exercise
Gain - - 15 30
Premium -9 -9 -9 -9
Net Pay off (9) (9) +6 +21
Put option holder
Option Exercise Exercise Lapse Lapse
Gain 30 15 - -
Premium -8 -8 -8 -8
Net Pay off +22 +7 (8) (8)
7. (a) JASPAL Ltd. is currently considering two mutually exclusive projects, A and B. The
following are some of the information concerning the two projects:
Project A Project B
Initial investment ` 15,000 ` 20,000
Project life 3 years 3 years
Annual cash inflow ` 7,000 ` 10,000
Risk index 0.4 1.8
In addition, the firm uses two different techniques to adjust for the different risk levels of
projects: certainty equivalent factors and risk adjusted discount rate. Additional
information is provided below:
Certainty equivalent factors
Year Project A Project B
0 100 100
1 0.95 0.90
2 0.90 0.85
3 0.90 0.70
Risk index RADR (%) Risk index RADR (%)
0.0 7.0 1.0 12.0
0.2 8.0 1.2 13.0
0.4 9.0 1.4 14.0
0.6 10.0 1.6 15.0
0.8 11.0 1.8 16.0
The company’s cost of capital is 10%.
(i) Calculate the NPV of Project A and Project B at 10% discount rate.
(ii) Determine the NPV of Project A and Project B using certainty equivalent (CE) to
account for Risk.
(iii) Determine the NPV of Project A and Project B using Risk Adjusted Discount Rate
(RADR) to account for Risk.
(iv) Compare and explain your findings in (i), (ii) and (iii) 10
(b) The spot price of a share of Bevel Ltd. is ` 356 with a face value of ` 10 per share. The 3
months’ futures contract is ` 386 per share.
Other features of the contract and the related information are as follows:
(i) Time to expiration of the contract is 3 months
(ii) Annual dividend of the stock of 30% is payable after 3 months
(iii) Borrowing rate is 20% p.a. continuously compounded.
Based on the above information, as an investor, you are required to calculate the
theoretical forward price for Bevel share. Also explain whether any arbitrage
opportunity exists or not. 6
Answer:
(a)
(i) NPV at 10% Discount rate
End of year PV factor Cash flows A PV Proj A Cash flows B PV Proj B
0 1 -15,000 -15,000 -20,000 -20,000
1-3 2.487 +7,000 +17,409 +10,000 +24,870
NPV +2,409 +4,870

B is preferred
(ii) Rf = 7%
End of year PV factor 7% Cash flow A PV Proj A Cash flow B PV Proj B

(Certainty Eq) (Certainty Eq)
C/I x CE Factor C/I x CE Factor
0 1 -15,000 -15,000 -20,000 -20,000
1 0.935 +6,650 +6,218 +9,000 +8,415
2 0.873 +6,300 +5,500 +8,500 +7,421
3 0.816 +6,300 +5,141 +7,000 +5,712
NPV +1,858 +1,548

A is preferred
(iii) RADR. Discount factor for A is 9% and for B 16%
End of PV factor Cash PV Proj A PV factor Cash flows PV Proj B

year 9% flows A 16% B
0 1 -15,000 -15,000 1 -20,000 -20,000
1-3 2.531 7,000 +17,717 2.246 10,000 +22,460
NPV +2,717 +2,460

A is better.
(iv) When we ignore risk we see that both projects give NPV of greater than zero. Since they
are mutually exclusive, we need to select the project which gives higher NPV. Therefore,
we select Project B. When we apply the certainty equivalent approach, we see that
Project A is better with a higher NPV. Similarly even under RADR method, Project A gives
higher NPV. The choice is therefore obvious that we should select Project A as it gives a
higher NPV even after adjusting for risk under both the methods.
(b)
(i) Calculation of future price
Spot Price (ST) = ` 356
Expected Rate of Dividend = ` 30% or 0.30
Borrowing rate = 20% p.a. continuously compounded
Time to expiration of the contract = 3 months = (0.25 year)
Present value of dividend = (30%, `10) x e-0.20×0.25 = 3x e-0.05
= ` 3/1.05127 = ` 2.8537
Adjusted spot price = ` 356 - 2.8537 = ` 353.1463
[Spot price-Present value of dividend]
Theoretical Future Price = ` 353.1463 x e0.20×0.25 = ` 353.1463×1.05127
= ` 371.25211
3-month Futures Price = ` 386
So, 3-month future price is greater than the theoretical Future price and it is overvalued. In
this case, buy spot and sell futures.
(ii) Here arbitrage opportunity exists
The following steps to be followed.
(a) Borrow ` 356 for a period of 3 months at the rate of 20% p.a. continuously
compounded.
(b) Buy one unit of share for ` 356 at T0
(c) Receive the dividend at the end of 3 months [` 10 x 30% = ` 3]
(d) Sell the stock future at the rate of ` 386 for 3 months
(e) Repay of borrowing together with interest = ` 356 x e0.20×0.25 = ` 374.25
(f) Net Cash inflow = ` [386+3-374.25] = ` 14.75
8. Answer any four out of the following five questions: 4x4=16
(a) (i) B is an Indian buyer of goods from S, a seller in USA. B’s bank, BK, issues a
document undertaking to pay S, a sum of $ 5000 on presenting evidence of
shipping the goods. BK’s agent bank in USA, upon confirmation by BK, pays S the $
5000.
You are required to identify the document.
(ii) ‘K’ is a short term instrument issued by the RBI on behalf of the Government. K is
issued at a discount to face value and is repaid at par on maturity. K is negotiable,
with no default risk and eligible for SLR purposes. It is issued through the SGL
account and only in book entry form. K has a secondary market also.
You are required to identify instrument ‘K’. 4
(b) If A, B denote risk of return of securities A and B and Cov (A, B) is the covariance of
the return of securities A and B in a portfolio consisting of only these two securities,
what should be the proportion of investment in A so that the portfolio is of minimum
variance? Explain. 4
(c) M is a person who has studied the trends and analyzed the equity market. He feels that
he is certain to gain due to increasing prices, but does not have the required money to
invest and hold shares. He would like to benefit from the purchase of 10,000 shares of
A Ltd. which is trading on BSE at ` 205 per share. According to his estimate, it will fetch
him at least ` 215 per share within a month. He can spare only ` 3,00,000 for a month.
Advise him on whether and how he can or cannot fulfill his desire, assuming that he
will not borrow and invest, but is willing to trade in the equity market and assuming that
his prediction comes true. 4
(d) If A and B are the only two securities of equal value in a portfolio, A,B the respective
standard deviations of their returns and ‘’ the correlation coefficient between A and B
and if A has almost the same return as the market, explain whether the following
statements are valid or not.
(i) If  = 1 and the market is doing well as of now, the portfolio has maximum risk and
the investment can be wiped out later.
(ii) If  = -1, even if the market is doing well now, the returns will be almost negligible,
but the investment will be safe. 4
(e) State the equation which has to be violated so that there is arbitrage opportunity.
Define the variables in die equation:
(i) Domestic vs. foreign currency and interest rates.
(ii) CAPM return vs. expected return 4
PV factor table Annuity factor table
End of yr. 1 2 3 4 5 3 4 5
Rate
4.00% 0.962 0.925 0.889 0.855 0.822 2.775 3.630 4.452
4.80% 0.954 0.910 0.869 0.829 0.791 2.733 3.562 4.353
5.00% 0.952 0.907 0.864 0.823 0.784 2.723 3.546 4.329
5.60% 0.947 0.897 0.849 0.804 0.762 2.693 3.497 4.259
6.00% 0.943 0.890 0.840 0.792 0.747 2.673 3.465 4.212
7.00% 0.935 0.873 0.816 0.763 0.713 2.624 3.387 4.100
8.00% 0.926 0.857 0.794 0.735 0.681 2.577 3.312 3.993
8.16% 0.925 0.855 0.790 0.731 0.676 2.570 3.300 3.976
9.00% 0.917 0.842 0.772 0.708 0.650 2.531 3.239 3.889
9.60% 0.912 0.832 0.760 0.693 0.632 2.504 3.198 3.830
10.00% 0.909 0.826 0.751 0.683 0.621 2.487 3.170 3.791
11.00% 0.901 0.812 0.731 0.659 0.593 2.444 3.102 3.696
12.00% 0.893 0.797 0.712 0.636 0.567 2.402 3.037 3.605
13.00% 0.885 0.783 0.693 0.613 0.543 2.361 2.974 3.517
14.00% 0.877 0.769 0.675 0.592 0.519 2.322 2.914 3.433
15.00% 0.870 0.756 0.658 0.572 0.497 2.283 2.855 3.352
16.00% 0.862 0.743 0.641 0.552 0.476 2.246 2.798 3.274
PV factor table Annuity factor table
End of 6 7 8 9 10 11 12 6 10 11 12
yr.
Rate
10.00% 0.564 0.513 0.467 0.424 0.386 0.350 0.319 4.355 6.145 6.495 6.814
e-0.05 0.95123
e0.05 1.05127
e0.15 1.16183
e-0.15 0.86071
e0.35 1.41907
e-0.35 0.70469
Answer:
(a) (i) Letter of Credit.
(ii) Treasury Bills.
(b) In a portfolio of two securities, w1, & 1 – w1, are the respective weights of A & B, the
minimum variance portfolio will have for weightage of A,
B2  cov(A, B)
1 
  B2  2 cov (A, B)
2
A
This is derived from the following:
Variance of portfolio = Vp
2 2
Vp = 1 VA  2 VB  2 1 2 AB AB
2 2 2 2
= 1 A  2 B  21 2 AB AB
where AB = correlation coefficient between
Cov (A, B)
A & B, given by
 AB
and where w2 = 1 – w1, when w1 & w2 are expressed in % or fraction or ratios.
Minimising the equation with respect to w 1 after substitution will give the formula stated
above.
(c) He can trade in the futures market.
215 x10000 = 2150000.
Approx 10 % margin = 2.15 lacs. He can buy futures for 10000 shares and with 3 lacs,
maintain the margin.
His gain will be 10 x 10000 = 100000 for an investment of less than 3 lacs for the month.
However, in the event of fall in prices, he will have to use the cash or liquidate part of the
futures if he cannot provide for the maintenance margin. But if his prediction comes true,
his margin will be restored when prices move up.
(d) When  = 1, both A and B move proportionally in the same direction which is as per the
market. If the market is doing well, the returns are the best, but when the market falls, both
fall. The portfolio’s investment is at risk, which is the highest. There is no diversification at all.
Hence the unsystematic risk is maximum.
When p = -1, A will do as well as the market, but B will have the opposite value, i.e. capital
depreciation. Hence returns on A will be offset exactly by B, Total returns are almost nil,
but there is perfect diversification and therefore, unsystematic risk is zero and the
investment is safe.
Forward rate (1 interest rate in home currency)

(e) (i) 
Spot Rate (1 interest rate in foreign currency)
(1 rh)
i.e. Expected forward rate or theoretical forward rate = spot rate ×
(1 rf)
If this equation is violated, there will be arbitrage.
(ii) if CAPM return = Expected return, there is no arbitrage.
i.e. Rf + β(Rm-Rf) = E(R)
Where Rf = risk free rate of return,
β is the risk of security or portfolio,
Rm = market return.
If E(R) is higher, it is overpriced. Stock is sold.
If E(R) is lower, it is underpriced. Stock is bought.
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)
DECEMBER 2021
Section : A MCQ 20X1 = 20 Marks
Q.1 The intercept of the security market line on the y axis is

Ans 1. the risk free return
2. the positive risk premium
3. the beta of the security
4. the expected return when β = 1
Q.2 Security A has a total risk of ‘a’ and Security B has a total risk of ‘b’. a is greater than
b. The following is true:
Ans 1. If A has a higher systematic risk, B will have a higher unsystematic risk.
2. A has to have a higher systematic risk than B
3. A has to have at least the same amount of systematic risk as B
4. A can have a lower systematic risk than B
Q.3 The following is true of standard deviation of returns of a portfolio under CAPM:
Ans 1. Market rewards the investor in proportion to the risk taken in the form of (the standard deviation of the
portfolio x(1-ρ), where ρ is the correlation coefficient between the portfolio and market returns
2. Standard deviation of the portfolio is the sum of the standard deviations of thesecurities in the portfolio
3. Standard deviation is a good measure to compare as it is the deviation per unit of themean return
4. Standard deviation is greater than the systematic risk of the portfolio
Q.4 The following various currency quotes are available:Rs. / 1£ 103.0213/ 103.5404
£ /1 $ 0.7354 / 0.7385
$ /100 ¥ 0. 8720 / 0. 8810
The rate at which 100 Yen (¥) can be purchased with rupees will be
Ans1. Rs. 66.40
2. Rs. 67.03
3. Rs. 66.06
4. Rs 67.37
Q.5 An option’s theoretical value increases by 1.75 if the interest rate is decreased by 1%.Then, 1.75 is
Ans 1. The rho of a put option
2. The rho of a call option
3. The theta of call option
4. The theta of a put option
Q.6 Which of the following is not an assumption of Black-Scholes Model?

Ans 1. The risk-free rate of interest is known
2. Options can be exercised only at expiration
3. Dividend is paid on the shares
4. No imperfection exists in writing an option
Q.7 An investor invested 40% of her money in Stock A and 60% in Stock B. Stock A has a beta of 1.2 and Stock B
has a beta of 1.6. If the risk-free rate is 5% and the expected return on the market is 12%, the expected return of
the investor would be the following under Capital Asset Pricing Model:
Ans 1. 10.08%
2. 15.08%
3. 14.80%
4. 21.80%
Q.8 The market price (ex-dividend) of a unit of an open-ended mutual fund scheme was ₹30 at the beginning of the
year. A dividend of ₹3 has been paid during the year. The price of the unit is ₹35 at the year end. The rate of return
of the past year of the unit is
Ans 1. 24.32%
2. 26.67%
3. 25.52%
4. 28.56%
Q.9 An investor has limited funds to invest. The following information of four securities isgiven below:
The best security to invest in if he wants more safety in relation to the return will be:
Ans 1. Security D
2. Security C
3. Security A
4. Security B
Q.10 A project has a 10% discounted pay back of 2 years with annual after tax cash inflows commencing from year
end 2 to 4 of ₹400 lakhs. How much would have been the total project cash outlay which was made in two
installments equally at the beginning and end of year 1?
Ans 1. ₹381.81 lakhs
2. ₹347.11 lakhs
3. ₹346.15 lakhs
4. ₹330.58 lakhs
Q.11 When the spot price decreases, the value of a call option
Ans 1. is equal to its premium
2. decreases
3. increases
4. does not change
Q.12 The following is true in a capital budgeting exercise with discounted cash flow technique:
Ans 1. When there is capital rationing, Net Present Value is better than the Internal Rate ofReturn.
2. The Net Present Value highlights the significant minus cash flows occurring between the inflows when the
incomes are being generated more than the Internal Rate of Return.
3. When there are mutually exclusive proposals of different scales, the Internal Rate of Return is better than the
NPV.
4. The internal rate of return assumes that the cash flows are reinvested at the requiredrate of return.
Q.13 The spot rate is USD 1 = Rs. 75.4035/75.9848. 3 months’ swap points are 0.80-0.70. The forward rates are
Ans 1. 74.7035/75.1848
2. 75.80/75.70
3. 74.6035/75.2848
4. 76.2035/76.6848
Q.14 Buying a call and put with the same expiry date, on the same stock with a differentstrike price is a
Ans 1. Strangle
2. Strap
3. Straddle
4. Strip
Q.15 The spot and 3 months’ forward rates of US $ in relation to Rupee (Rs. /1 US $) are Rs. 75.00 / 75.35 and Rs.
74.60/75.05 respectively. What will be the annualized forwarddiscount (with respect to ask price)?
Ans 1. 1.59%
2. 0.53%
3. 0.40%
4. 2.13%
Q.16 An Indian invested USD 1,00,000 in USA when the US$ was Rs. 72. The investment has appreciated by 10%,
while the US$ has become stronger by 4%. The investment returnin Rupees is
Ans 1. 6%
2. 5.58%
3. 14.40%
4. 9.60%
Q.17 The following is not a disadvantage of pay-back period as an evaluation measure forselecting a project:
Ans 1. Before the payback period, the mix of cash flows can be rearranged to get the same result
2. It does not consider the magnitude of cash flows after the payback period.
3. It can give a conflicting decision compared to the net present value method
4. A company that is cash-poor gauges the early recovery of funds invested.
Q. 18 An Indian Company is planning to invest in USA. The annual rates of inflation are 8%in India and 3% in USA.
If the spot rate is currently Rs. 73.50/1$, what spot rate can you expect after 2 years, assuming the inflation rates
will remain the same over 2 years?
Ans 1. Rs. 66.85
2. Rs. 80.81
3. Rs. 70.09
4. Rs. 77.07
Q. 19 A buy signal provided by moving average analysis of stock prices is when the stockprice line
Ans 1. rises above a falling moving average line
2. falls below a flattening moving average line.
3. falls below a falling moving average line
4. falls below a rising moving average line
Q. 20 X imports goods from USA. X will not do the following as a hedging measure:
Ans 1. Buy call options
2. Buy currency forward
3. Buy put options
4. Buy currency futures
Section : B SAQ 20X1 = 20 Marks
Q.1 Y is an instrument that entitles the holder to buy the underlying stock from the issuer company itself at a
fixed exercise price until the expiration date. Identify Y.
Answer: Y is a warrant.
Q.2 The spot Nifty is ₹ 18,150. An investor purchases fifty one-month Nifty put options (lot size 50) with a strike
price of Rs 18,200 for a premium of ₹ 60. One month later,if the index closes at ₹ 18,160, what is his net pay-off?
Answer: ₹ 50,000 loss
Q.3 A company’s equity β is 1.6 and debt β is 0.20. Its debt ratio is 25%. What is itsasset β?
Answer: β = 1.25
Q.4 The current spot and one year forward rates between 1US$ and ₹ are ₹ 73.42 and 74.56 respectively. Annual
inflation rate in India is expected at 6%. What is theexpected annual inflation rate in US?
Answer: 4.38 %
Q.5 X Ltd. has two divisions. Division A has a market value of Rs.5 Cr. and a beta of 1.2, while Division B has a
market value of Rs.3 Cr. and a beta of 0.9. What is the company’s asset beta?
Answer: 1.0875
Q.6 An investor owns a stock portfolio consisting of four stocks. He has invested 20%in stock A; 25% in stock B;
30% in stock C and 25% in stock D. The betas of thesefour stocks are: 0.9, 1.3, 1.2 and 1.7 respectively. What is the
beta of the portfolio?
Answer: 1.29
Q.7 X is a type of negotiable financial security that is traded on a local stock exchange but represents an equity
that is issued by a foreign publicly listed company. IdentifyX.
Answer: Depository Receipt
Q.8 You are given the following information of a stock: Strike Price ₹400 Current stock price ₹370 Risk free rate
of interest 6%
Find the theoretical minimum price of a three months’ European put option.
Answer: ₹24.04
Q.9 The following details relate to an investment proposal of XYZ Ltd. Investment outlay is ₹100 lakhs Lease
Rentals are payable at ₹180 per ₹1,000 Term of lease is 8 years Discount rate to be applied is12% What is the
present value of lease rentals (ignoring tax), if lease rentals are payableat the beginning of the year?
Answer: 100,15,200
Q.10 A, an American company has to pay 1,00,000 Euros to a European company in onemonth’s time. A converts
USD at current spot rate an amount less than 1,00,000 Euros and loans out the Euros for 30 days so that it grows
to 1,00,000 Euros at themonth end to pay off its dues. This is an example of theory.
Answer: Covered Interest Rate parity theory.
Q.11 The face value of a 182 day T-Bill is Rs. 100. If the purchase price is Rs. 98.5 after 10 days of issue, calculate
the yield of the T- Bill.
Answer: 3.23%
Q.12 If the Future Spot Price is less than the Forward Rate what action should be takenby an arbitrageur?
Answer: Sell Forward and Buy Spot.
Q.13 Farmers and food processing companies come under the category ofcommodity market participants.
Answer: Hedger
Q.14 If an equipment costs ₹20,00,000 and lasts 8 years, what should be the minimum pre-discounted equal
annual cash inflow for it to be worthwhile to purchase the equipment ? Assume that the cost of capital is 14% and
that there is no salvage value.
Answer: Rs. 4,31,128
Q.15 K owns 10000 shares of stock A. He is anxious about the budget next week. Onecontract on A is 100 shares.
He will buy/sell number of futures contracts to have 40 % hedging coverage.
Answer: Sell 40 contracts
Q.16 A put option with a strike price of Rs. 160 is traded in the market at Rs. 8. The spot price is Rs. 170. The
intrinsic value of the option is
Answer: 0
Q.17 An investor has ₹ 5,00,000 to invest. What will be his expected risk premium (%) in investing in equity versus
risk-free securities under the following conditions?
Answer: 7%
Q.18 Droner Ltd. is an Indian company that wishes to buy 100 drones for rescue operations in the mountain
regions for letting out on hire to Indian clients. Its charges are fixed per hour of hire for the next two years. The
cost of one drone is 5000 US$. It wants to cover its exposure to pay US$ after three months by buying
(call/put) option on rupees. The option lapses when (₹/ $) appreciates.
Answer: Put; Rupee
Q.19 An investor has invested in a mutual fund when the NAV was ₹15.50 per unit. After 90 days the NAV was
₹14.45 per unit. During the period the investor got a cash dividend of ₹1.35 per unit and capital gain distribution
of ₹ 0.20. Calculate the annualized return based on 360 days year count.
Answer: 12.9%
Q.20 Consider the following data relating to a security: Rate of inflation=2.1% Beta=0.60 Real rate of return = 4.2%
Market return=8.6%. What is its risk premium?
Answer: 1.38% or, alternatively, 3.08%

Section : C
(4X12 = 48 Marks)
ONE LAQ
Q.1 You are given the following data relating to a project: Initial Outlay (Project Cost) ₹1,20,00,000 Annual Cash Inflow
(at each year end) ₹45,00,000 (After 40% tax) Life of the Project 4 years Cost of Capital 10% (weighted average cost
after tax) Salvage Value Nil
(Sensitivity should be calculated by setting NPV to zero and should be expressed as a percentage. Ignore
depreciation. Round off rates to the nearest whole numberswhile referring to the table values).
2+2+2+2+4 = 12 Marks
(i) Find the Net Present Value (NPV) using the given 10% discount rate.
(ii) Determine the sensitivity of the annual cash inflows.
(iii) Determine the sensitivity of the project cost.
(iv) Determine the sensitivity of the cost of capital.
(v) After (i) to (iv), if you are given the following information:
Equity beta = 1.2, market return = 11 %, risk free rate = 6 %, debt cost is 8% after tax of 40% and debt and
equity are in equal proportion, what would be the NPV if the tax rate falls to 30 %?
Answer:
(i) Net Present Value (NPV) = Rs. 22,65,000
(ii) Sensitivity of annual cash Inflow = 15.88%
(iii) Sensitivity of the project cost = 18.88%
(iv) Approximately 18 %
(v) NPV at 11% = Rs. 42,85,500 or Rs. 44,27,250 (If Wtd.avg cost of capital after tax considered as10.67%
instead of 11%)
TWO LAQ
Q.1 The following information is available for Mutual Fund A, Mutual Fund B and Market Portfolio (M) for six
months:
6+3+3 = 12 Marks
Risk-free interest rate is 6% p.a.
(i) Compute Average Returns (AR), Risk of Losses (RL) of Funds A, B and M.
(ii) Compute the Morning Star Index of A, B and M.
(iii) Compute the standard deviation (s.d) of the returns of A, B and calculate the SharpeRatio of A.
Answer:
(i) Average Returns:
Fund A = 1.46
Fund B = 1.25
Market Portfolio = 1.25
Risk of Losses:
Fund A = 0.33
Fund B = 0.38
(ii) Morning Star Index:

Fund A = 1.13
Fund B = 0.87
(iii) Standard Deviation of the Returns:

Fund A = 1.57
Fund B = 1.5
Sharpe Ratio:
Fund A = 0.611
THREE LAQ
Q.1 Shares of M Ltd. are currently trading at Rs. 190. At the end of three months, the stock price is expected to
be Rs. 125 or Rs. 225 with respective probabilities 1/3 and 2/3. The 3-months’ European call option on M Ltd. is
available with an exercise priceof Rs.175. The risk-free rate of interest is 6% per annum continuously compounded.
(i) Find out the value of a 3-month European Call under the Binomial Model (DeltaMethod).
(ii) Calculate the value of the put option under Put-Call Parity.
(iii) If an investor wants to buy 100 shares, how many call options should be transacted in for a complete
hedge? Present workings to prove that the risk is covered.
(iv) What is the expected value of the option and also of the stock price at the end ofthree months?
3+3+4+2 = 12 Marks
Answer:
(i) Value of Call Option = Rs.33.43
(ii) Value of Put Option = Rs.15.82
(iii) If an investor wants to buy 100 shares, he has to sell 200 call options since option delta is ½. His position
at the end of 3 months will be:
Value of long Value of short Value of combined

Stock price at the end of 3 m
position in stock position in option hedged position
225 100 x 225 =22500 -200 x 50 = -10000 12500

125 100 x 125=12500 0 12500
Thus his position is hedged, whichever be the price, 225 or 125 three months later.
(iv) Expected value of option = Rs. 33.33

Expected value of stock price 3 months later = Rs. 191.67
FOUR LAQ
An investor has the following four stocks in his portfolio: 3+3+2+4 = 12 Marks
(i) Compute the portfolio beta (β).

(ii) If the investor seeks to reduce the β to 0.8, how much risk-free investmentshould he bring in?
(iii) Independent of (ii), if the investor would like to have an overall weighted β of 1.02 without bringing in
more money, by selling shares of C and buying A instead,
How many shares of C should be sold?
(iv) Independent of (ii), if the investor would like to have an overall weighted β of 1.02 without bringing in
more money, by selling shares of C and buying A instead,
What would be the revised weighted β of A, B, C and D?
Answer:
(i) Portfolio Beta = 1.094 or 1.0938
(ii) ₹2,38,828
(iii) 3296.69 shares of C should be sold.
(iv) Revised weighted Beta = 1.01775 or 1.02

FIVE LAQ
An ayurvedic product is manufactured by ‘A’ with turmeric as the basic ingredient. A requires 50000 kg of turmeric
three months later for processing. The current spot price is Rs. 7380 per quintal. A futures contract on turmeric
with three months to maturity is trading at Rs.7400 per quintal. One contract of turmeric is 10 MT with a 12%
margin. (1 MT= 1000 kg and 1 quintal = 100 kg).
2+3+2+2+3 = 12 Marks
A Wishes to hedge 60 % of his requirement using futures.
(i) What is his position in the spot market and the futures market?
(ii) How many futures contracts should he transact in? Will he buy or sell futures? What is the amount of
margin required?
(iii) At the end of three months, if the price increases to Rs. 7450 per quintal, what is the effective price he
would pay for the quantity hedged with futures? What is his benefit by the futures contract?
(iv) Independent of (iii), if the prices fell to Rs. 7350 per quintal, what would be his effective price per quintal
for his total requirement?
(v) Suggest two other ways in which he could have hedged his risk and state thedisadvantage with each.
Answer:
(i) A is short in the spot market. He takes the opposite position in the futures market. He will be long in
futures market.
(ii) Rs. 2,66,400
(iii) Futures Market: Gain Rs. 50/q =(7400-7450)Rs/q x 300q = ( 15,000)
Net effective price per quintal = 7400Rs/q
(iv) Effective price he has to pay Rs/q 7400
(v) He could have used forward contracts, whereby similar hedging could have been done using a tailor
made forward contract. Margin would not be necessary, but the contract itself may not be honoured and
counterparty risk is not assumed by an exchange. The other way is to buy the turmeric physically and
stock. But this would entail storage costs and investment outlay.
Other instruments like swaps and options may be used to offset price risk. Options will cost him the
premium while swaps have counterparty risks.
Agri index has also been recently introduced. Options and futures on indexes can also be done.
Premium cost, probability of loss for options and margin, contract size may be unsuitable for futures.
SIX LAQ
(3x4 = 12 Marks)
3 Marks
Q.1 Write Short Notes on Leading and Lagging in foreign exchange management.
Answer: Leading and Lagging.

It refers to the adjustment of the times of payments that are made in foreign currencies. Leading
is the payment of an obligation before due date while lagging is delaying the payment of an
obligation past due date. The purpose of these techniques is for the company to take advantage of
expected devaluation or revaluation of the appropriate currencies. Lead and lag payments are
particularly useful when forward contracts are not possible. It is more attractive to use for the
payments between associate companies within a group. Leading and lagging are aggressive
foreign exchange management tactics designed to take the advantage of expected exchange rate
changes.
Q.2 Write Short Notes on The Efficient Frontier in portfolio comparison. 3 Marks
Answer: Efficient Frontier.

Markowitz developed the concept of efficient frontier. For selection of a portfolio, comparison
between combinations of portfolios is essential. A portfolio is not efficient if there is another
portfolio with —
Higher expected value of return and a lower standard deviation (risk).
Higher expected value of return and the same standard deviation (risk).
Same expected value but a lower standard deviation (risk).
3 Marks
Q.3 Write Short Notes on Exposure netting of currency.
Answer: Exposure Netting.

Exposure netting is the act of offsetting exposures in one currency with exposures in the same or
another currency. Example: If an entity has Dollar Receivables, which is exposed to currency risk, it
may enter into an offsetting position by entering into a Dollar Payable arrangement.
Objective: The objective of netting is to offset the likely loss in one exposure, with the likely
gain in another.
Hedging tool: It is a form of hedging foreign exchange risks. When a Firm opts for exposure netting,
it hedges its risk without taking any forward cover or options cover.
3 Marks
Q.4 Write Short Notes on Asset-Backed Risk.
Answer: Asset-Backed Risk.

It is the risk that the changes in values of one or more assets that support an asset-backed security
will significantly impact the value of the supported security. This kind of risk especially arises in
securitisation transactions where by cash flows due on assets/receivables are pooled together to
issue securities, the servicing of which is backed by the cash flows on such underlying assets.
3 Marks
Q.5 Write Short Notes on Foreign Currency Convertible Bonds.
Answer: Foreign Currency Convertible Bonds

A foreign currency convertible Bond (FCCBs) is a quasi-debt instrument that is issued in a
currency other than the issuer’s domestic currency. Over the last few years, a majority of Indian
Companies issuing FCCBs raised fund in several foreign currency. FCCBs could have a coupon
rate of zero but have yield on maturity or FCCBs could also carry lower interest rate and yield
on maturity. This is a bullet payment of interest at maturity if the bondholder opts for
redemption.
This bond is a mix between the debt and equity instrument and provides the bondholders an
option to convert the bonds into equity. This bond gives the issuers an ability to access capital
available in foreign markets and make their presence felt in the international market.
7+3+2 = 12 Marks
Q.1 XYZ Ltd. is a company that has been a market leader for a considerable period of time. It makes strategic
improvements to existing products or transforms products through latest technology and has been able to be
sufficiently above competition. Ithas a wide range of products which are all profitable.
One of its products ‘ X ‘ is in the maturity stage of its lifecycle and XYZ has identified a start-up (SU) which has
successfully improved upon the product and has made it viable and attractive as value for money. XYZ is keen to
buy up the know-how of SU at 50 lacs (to be paid at the beginning of year 1) and release the product as its own
upgraded version of X. This cost will be amortised equally over five years at year-ends. If it does not act now,
competition is sure to do it and XYZ may lose out on its market position. However, XYZ has a team to evaluate the
financials using appropriate capital budgeting techniques and present an analysis before it takes a deliberate
decision to phase out X or sustain its improved version.The following information is available:
SU recommends an intermediary process to be done before the finishing stage of X to transform it into its new
version. The machinery available to fulfill the estimated demand has to be purchased at Rs. 100 crores. A further
sum of Rs. 20 crores will have to be spent for its transport and installation at the beginning of year 1. The new
machine will last for five years after which there is no significant residual value. It may be depreciated
accordingly, equally over five years.
The old version of X will also be made in addition to the new one. The contribution from the new version’s sales
will be Rs. 60 lacs per annum before tax. However, sales of the old version will decline resulting in a loss of the
usual annual contribution by Rs. 18 lacs, of which Rs. 6 lacs can be attributed to shifting of sales to the new
version instead of the old and the remaining due to the normal fall in demand due to its lifecycle stage.
In order to make this new machine functional, it has to be installed in a portion of the land in the factory which
was until now fetching an annual lease rent of Rs. 2,00,000 before tax. This lease will have to be cancelled at no
penalty cost and usedfor the new machine.
Due to the increased production and sales, working capital will have to be introduced to the extent of Rs. 30 lacs
at the beginning of the first year and this willbe released at the end of five years.
It is the policy of XYZ to adhere to its target capital structure in the long term to evaluate projects. Finance is also
raised in the same manner. Accordingly, 60% of the cost is funded by equity capital which costs 12% p.a. and 40
% is funded by debt which costs 10 % before taxes (30 % tax rate). Interest amounts on debts are to be paid at the
end of each year and the principal is returned in one full repayment after 5 years.
XYZ requires you to evaluate whether the purchase of the new machine is justified considering its Net Present
Value (NPV).
(i) Calculate the NPV and advise XYZ if it should go in for the new version of X. (Write only the NPV value
and your advice in the answer box on the computer screen.)
Suggested Rough Work: (Use ‘+’ for inflows and ‘-‘or ‘( )’ for outflows. Display Rs in lacs up to two
decimals. Use PV factors up to 3 decimals.
(ii) Compute the discount rate to be applied to the cash flows for evaluation of the proposal with a brief
reasoning for your choice.
(iii) Identify cash flows that you will consider irrelevant in determining the NPV under i) and briefly state why
you consider them irrelevant.
Answer:
(i) Net Present Value(NPV) = Rs. - 4.71 lacs

Advice : XYZ should not go in for the new version.
(ii) The Cost of capital is 10 % after tax, computed as follows:

Ke= Cost of equity = 12 %.
Kd= After tax cost of debt = 10% (1-0.3) = 10% x 0.7 = 7 %
Weighted average cost of capital is the discount factor rate to be used in the capital budgeting decision. This
works out to 60% Ke + 40 % Kd = 0.6 x 12 + 0.4 x 7 = 10%. We are not evaluating whether to borrow or use own
funds. Viability of an investment is concerned only with the cash flows that a project brings to its equity and
debt funders. Hence principal and interest cash flows, which are part of financing decision, will not figure in
the choice of discount rate. Since cash flows are after tax, we compute the after tax cost of capital, which is
cost of equity (no tax element) and cost of debt (after tax) in the given ratio.
(iii) Irrelevant cash flows: Interest and principal costs of financingContribution lost on old X due to its
stage in lifecycle Rs. 12 lacs
Gain in contribution is 60 lacs. Less loss in old version of X due to new X = 6lacs. Net gain is Rs. 60 – 6 = 54
lacs. Gain after tax = 0.7 x 54 = 37.8 lacs. The other 12lacs of loss in contribution of old X is irrelevant cash flow
since this loss exists in the old and new versions of X.
Cost of the machine = 100 + transport + installation = 100 + 20 = 120 lacs. Depreciation per annum = 24 lacs. Tax
benefit on depreciation = 0.3 x 24 = +7.2 lacs.
Rs. 50 lacs for know how is amortised at Rs. 10 lacs every year end. Tax benefit = 3 lacsp.a. Interest outflows
and principal repayment should not be considered in the capital budgeting decision as they do not arise out of
the deployment of the machine. That is afinancing decision and not an investment decision. Only cash flows
relating to the investment decision are to be considered for NPV. However, the cost of raising the fundswill be
the long term target cost of capital since the marginal cost of capital may give misleading decisions on
investments by choosing the lower than best investment proposals.
Moreover, financing the project is from debt and equity. Cash flows that haveto be considered are
those that accrue to debt and equity. Hence interest is not part of thecash flows for evaluation.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
DECEMBER - 2017

Wherever necessary candidates may make appropriate assumptions and clearly state them.
Section – A
1. Choose the Correct Option from amongst the four alternatives given (1 mark is for the
correct choice and 1 mark for justification/workings) 2×10=20
(i) A project has a 10% discounted pay back of 2 years with annual after tax cash
inflows commencing from year end 2 to 4 of ` 400 lacs. How much would have been
the initial cash outlay which was fully made at the beginning of year 1?
(A) ` 400 lacs
(B) ` 452 lacs
(C) ` 633.80 lacs
(D) ` 497.20 lacs
(Use p.v. factors only up to 3 decimal places.)
(ii) A project is expected to yield an after tax cash inflow at the end of year 2 of ` 150
lacs and has a cost of capital of 10%. Inflation is expected at 3% p.a. While
computing the NPV of t the project, this cash flow will be taken as the following:
150
(A) 1.03
2
(1.1)
150
2
(1.03)
(B)
2
(1.1)
150
(C)
2
(111.33%)
2
150 (1.03)
(D)
2
(1.11)
(iii) A firm has an asset β = 1.3, equity β = 1.5. Then, which of the following is true?
(A) The firm is unlevered.
(B) Debt β is also 1.3.
(C) The above data is not possible.
(D) The firm is leveraged and the debt β is lower than the asset β.
(iv) For a portfolio containing three securities A, B and C,

correlation coefficients ρAB = +0.4; ρAC = +0.75; ρBC = - 0.4;
standard deviation σA = 9; σB = 11; σC = 6;
weights ωA = 0.2; ωB = 0.5; ωC = 0.3;
the covariance of securities A and B is
(A) 3.96
(B) 24.75
(C) 39.6
(D) 247.5
(v) A ` 1,000 per value bond bearing a coupon rate of 14% matures after 5 years. The
required rate of return on this bond is 10%. The value of the bond (to the nearest
rupee) will be:
(A) 1,125
(B) 1,152
(C) 1,512
(D) 862.20
(vi) The following information is available for a mutual fund:

Return 13%
Risk (S.D. i.e. σ) 16%
Beta (β) 0.90
Risk Free Rate 10%
Treynor's Ratio of the mutual fund is:
(A) 3.85
(B) 4.43
(C) 3.33
(D) 3.73
(vii)The 90 day interest rate is 1.85% in USA and 1.35% in the UK and the current spot
exchange rate is $ 1.6/£. The 90-day forward rate is
(A) $ 1.607893
(B) $ 1.901221
(C) $ 1.342132
(D) $ 1.652312
(viii) The intercept of the Security Market Line (SML) on the y axis is
(A) E(Rm) - Rf
(B) 1/[E(Rm) - Rf]
(C) Rf - E(Rm)
(D) Rf
(ix) A mutual fund wants to hedge its portfolio of shares worth ` 10 crore using the NIFTY
Index Futures. The contract size is 100 times the index. The index is currently quoted at
6840. The Beta of the portfolio is 0.8. The beta of the index may be taken as 1. What is
the number of contracts to be traded?
(A) 110
(B) 116
(C) 145
(D) 123
(x) A call option at a strike price of ` 200 is selling at a premium of ` 24. At what share
price on maturity will it break-even for the buyer of the option?
(A) ` 200
(B) ` 176
(C) ` 224
(D) ` 248
Answer:
1. (i) (B) ` 452 lacs

Justification:
Sum of PV Factors year 2 to 4 @10%= 2.26
Discounted cashflow after tax=400x2.26=904 lacs
904
Hence, Investment = = 452 lacs.
2
150
2
(1.03)
(ii) (B)
2
(1.1)
Justification: Nominal Cash Flow = 150
P.V. of nominal cash flow = Real Cash Flow = 150/(1.03)2
150
2
(1.03)
P.V. of real cash flow =
2
(1.1)
(iii) (D) The firm is leveraged and the debt β is lower than the asset β.
Justification: Debt β is lower than equity β. Asset β is the weighted average of debt
and equity and it has to be between 1.5 and debt β.
(iv) (C) 39.6

Justification: ρAB × σA × σB = 0.4 × 9 × 11 = 39.6
(v) (B) 1,152

Justification: Value of the bond = ` [140 × PVIFA10% 5 year + 1,000 × PVIF10% 5 year]
= 140 × 3.7907 + 1,000 × 0.6209 = 1,151.598 = 1,152
(vi) (C) 3.33

Justification: Treynor’s Ratio = (Rp – Rf)/β = (13 – 10)/0.90 = 3.33
Where, Rp = Return; Rf = Risk Free Rate of Return; β = Beta
(vii) (A) $ 1.607893

Justification: [Forward Rate / Spot Rate]
= [(1 + domestic interest rate)/(1 + foreign interest rate)]
F/$1.6 = [(1 + 0.0185)/(1 + 0.0135)] = $1.607893
(viii) (D) Rf
Justification: Rf, The risk free rate.
Beta (risk)
(ix) (B) 116

Justification: Hedge Ratio = Beta of the portfolio / Beta of the index = 0.8/1.0 = 0.8
Number of contracts to be traded
Hedge Ratio
= Portfolio Value ×
Value of a Futures Contract
Portfolio Value = `10 crore
Value of a Futures Contract = 6840 x 100 = ` 6,84,000
0.8
No. of Contracts = 100000000 × = 116.96 = 117, or, 116.
684000
(x) (C) ` 224

Justification: To recover the call option premium of ` 24, the share price on the date
of expiration should rise to (` 200 + 24) = ` 224.
Section – B
Answer any five questions from question No. 2 to 8. Each question carries 16 marks.
2. (a) The following are returns in % of securities A, B and the market in excess of the risk-
free rate:
Security A Security B Market
12 16 14
15 18 16
18 20 18
(i) Determine the characteristic line for securities A and B.
(ii) What would be the beta of a portfolio consisting of 75% investment in A and 25%
in B?
(iii) When the market return is 15%, what would be the return on the portfolio? 10
(b) A firm has an investment proposal, requiring an outlay of ` 80,000. The investment
proposal is expected to have two years economic life with no salvage value.
In year 1, there is a 0.4 probability that cash inflow after tax will be ` 50,000 and 0.6
probability that cash inflow after tax will be ` 60,000. The probability assigned to cash
inflow after tax for the year 2 are as follows:
Cash inflow year end 1 (`) 50,000 60,000

Cash inflow year end 2 (`) Probability Probability
0.2 24,000 0.4 40,000
0.3 32,000 0.5 50,000
0.5 44,000 0.1 60,000
The firm uses 8% discount rate for this type of investment.
Construct a DECISION TREE for the proposed investment project and calculate the
expected Net Present Value (NPV). 6
Answer:
2. (a) (i)
Mkt X A B X-E(X) A-E(A) B-E(B) [X-E(X)]2 [X-E(X)][A-E(A)] [X-E(X)][B-E(B)]

14 12 16 -2 -3 -2 4 6 4
16 15 18 0 0 0 0 0 0
18 18 20 +2 +3 +2 4 6 4
48 45 54 0 0 0 8 12 8
Mean = Mean = Mean = V(X) = Cov(X,A)=12/3 Cov(X,B) = 8/3
48/3=16 45/3=15 54/3=18 8/3 =4
Cov (A, Market)

Characteristic line of Security A : y - E(Y) = × (Market – 16)
Var (Market)
4
y – 15 =
(x-16)
8/3
or, y-15 = 1.5x-24
y = 1.5x - 9
or, a = 1.5m-9
(Any alphabet may be used for the variables. Market should be the independent
variable and the security should be the dependent variable)
Cov (B, Market)

Characteristic line of Security B : y = × (Market -16)
Var (Market)
4
y-18 = (x-16)
8/3
8/3
Or, y-18 = (x-16)
8/3
y = x + 2, or, b = m + 2
(ii) βA = 1.5 and βB =1. Therefore, beta of a portfolio containing 75% A and 25% B will
be: βp = 0.75 x 1.5 + 0.25 x 1 = 1.375
Portfolio = 0.75A + 0.25B
(iii) When market return is 15% above risk free rate, y = (1.5 x 15)-9 = 22.5 - 9 = 13.5 and
y = 15 + 2 = 17, Stock A return =13.5 and Stock B return = 17, as per the
characteristic line equations. Substituting these values in the portfolio, we get,
Expected return on portfolio = E(P) = E (0.75A + 0.25B) = 0.75 x 13.5 + 0.25 x 17 =
10.125+4.25 = 14.375%.
This return is above the risk - free rate.
(b) Decision Tree Diagram is presented in a chart below:

Path No. Jt. Prob.
24,000 1 (0.4×0.2) = 0.08
50,000 2 (0.4×0.3) = 0.12

32,000
44,000 3 (0.4×0.5) = 0.20

Cash
outlay
4 (0.6×0.4) = 0.24
80,000 40,000
60,000 50,000 5 (0.6×0.5) = 0.30
60,000 6 (0.6×0.1) = 0.06
NPV of each path at 8% discount rate are:

Path Year 1 Cash Flows Year 2 Cash Flows Total Cash NPV (`)
(`) (`) Cash Inflows Outflows
1 50,000x0.9259=46,295 24,000x0.8573=20,575 66,870 80,000 (-)13,130
2 50,000x0.9259=46,295 32,000x0.8573=27,434 73,729 80,000 (-) 6,271
3 50,000x0.9259=46,295 44,000x0.8573-37,721 84,016 80,000 4,016
4 60,000x0.9259=55,554 40,000x0.8573=34,292 89,846 80,000 9,846
5 60,000x0.9259=55,554 50,000x0.8573=42,865 98,419 80,000 18,419
6 60,000x0.9259=55,554 60,000x0.8573=51,438 1,06,992 80,000 26,992
Statement showing Expected NPV:

Path NPV (`) Joint Probability Expected NPV (`)
1 (-)13,130 0.08 (-)1,050.40
2 (-) 6,271 0.12 (-) 752.52
3 4,016 0.20 803.20
4 9,846 0.24 2,363.04
5 18,419 0.30 5,525.70
6 26,992 0.06 1,619.52
8,508.54
3. (a) The following information is given in respect of two projects X and Y:

X Y
Initial outlay at the beginning of 6000 5000
the first year
After Tax year end cash inflows Cash Probability Cash Probability
with probabilities: inflow inflow
Year 1 2000 0.4 800 0.2
3000 0.6 2000 0.8
Year 2 4000 0.3 2000 0.4
2000 0.7 1000 0.6
Year 3 3000 0.5 2025 0.2
2200 0.5 4000 0.8
The risk free discount rate is 10% and the risk adjusted discount rate is 14.13%.
Assume that cash flows are independent from year to year.
It is given that the annual standard deviation of cash inflows for X are 490, 916.5 and
400 and for Y are 480, 490 and 790.
(i) Find the NPVs for both the projects and based on this, which would you choose?
(ii) Which project would you prefer in terms of risk? Why? 8
(b) The NAV of a mutual fund having 4,00,000 units are ` 9.25 and 9.95 per unit at the
beginning and end of the year respectively. If the fund has to pay a dividend of ` 0.85
per unit and ` 0.70 as capital gain per unit what would be the annual returns
expressed as a percentage?
If instead of paying dividend and capital gain, the scheme decided to reinvest the
distributable amounts at an average NAV of ` 9.15 per unit, compute the revised
returns and show how the balance sheet would appear after the reinvestment. 8
Answer:
3. (a) (i) Multiplying by the respective probabilities, cash inflows have been adjusted for
certainty equivalents.
Hence, the appropriate discount rate is the risk free discount rate.
Project X:
Cash inflow Probability Expected PV Factor PV of Cash Inflows
Cash flow
Year 1 2000 0.4 800
3000 0.6 1800 2600 0.909 2363.4
Year 2 4000 0.3 1200
2000 0.7 1400 2600 0.826 2147.6
Year 3 3000 0.5 1500
2200 0.5 1100 2600 0.751 1952.6
Total of PV of inflows 6463.6
Less : Initial Outlay 6000.0
NPV 463.6
Project Y:
Cash inflow Probability Expected PV Factor PV of Cash
Cash flow Inflows
Year 1 800 0.2 160
2000 0.8 1600 1760 0.909 1599.84
Year 2 2000 0.4 800
1000 0.6 600 1400 0.826 1156.4
Year 3 2025 0.2 405
4000 0.8 3200 3605 0.751 2707.355
Total of PV of inflows 5463.595
Less : Initial Outlay 5000
NPV 463.595
Cash inflows are independent from year to year. Hence total variance = Sum of
the individual variances.
Variance of Cash inflows:

Year Std Square of PV Square Variance Std Square PV Square Variance
Dev X SD factor of PV PV Dev of SD factor of PV PV
factor Y factor
1 490 240100 0.909 0.826 198322.6 480 230400 0.909 0.826 190310.4
2 916.5 839972.3 0.826 0.682 572861.1 490 240100 0.826 0.682 163748.2
3 400 160000 0.751 0.564 90240 790 624100 0.751 0.564 351992.4
861423.7 706051
Std Deviation of PV of inflows 928.1291 Std Deviation of PV of inflows 840.2684
Coefficient of variation of inflows 928.1291/ Coefficient of variation of 840.2684/
6463.6 inflows 5463.6
= 14.36% =15.38%
Based on NPV, both are the same. Hence, we would prefer Y for a lower capital
outlay.
The return is better per rupee invested.
(iii) Based on risk factor, X is preferable since risk per unit of investment is higher for
Y than for X as measured by the coefficient of variation.
Mere standard deviation cannot be used since the outlays are almost 25%
higher for X.
(b) NAV on closing date = 4,00,000 x 9.95 = `39,80,000

Dividend Payable = 4,00,000 x 0.85 = ` 3,40,000
Capital Gain to be distributed = ` 2,80,000
Closing Fund Assets = `46,00,000
Closing Fund Assets - Opening Assets Value 4600000 - 3700000
Returns = =
Opening Asset Value 3700000
900000
= = 24.32%
3700000
Total Distribution = 3,40,000 + 2,80,000 = ` 6,20,000
No. of units @ ` 9.15 per unit = 6,20,000/9.15 = 67,759.56
The return will be the same as the above.
Balance Sheet (After Reinvestment)

Liabilities ` Assets `
NAV on closing date Fund Assets (Balancing Figure)
4,00,000 units @ 9.95 39,80,000
67,759.56 units @ 9.15 per unit 6,20,000 46,00,000
Total 46,00,000 Total 46,00,000
4. (a) Lee Industries wishes to install a plant in its factory at a cost of ` 100 lacs. It can lease
the plant from LOR Co. for 3 year end payments of 34 lacs. LOR will maintain the plant
at ` 5 lacs per annum payable at the end of each year with no charge to Lee for
maintenance. Alternatively, Lee could borrow ` 100 lacs from the bank, either take an
upfront extended warranty for 3 years for an additional 10 lacs, or incur 5 lacs
maintenance charges like LOR without this extended warranty. Bank loan would
involve an initial payment of ` 1 lac and three year end equated payments of
principal together with 14% interest. The plant will qualify for annual depreciation of 31
lacs and 7 lacs is the expected salvage value. Both LOR and Lee have an after tax
weighted average cost of capital of 10% and a tax rate of 50%.
Find out if the extended warranty is worthwhile.
Compute the Net Advantage to Leasing for Lee under the better option chosen for
maintenance. Assume that extended warranty costs qualify for tax deduction at the
end of year 1.
While evaluating this proposal for LOR, which discount rate would you use to
determine the present value of the cash flows? Why?
(Show calculations in ` lacs up to 2 decimal places and use p.v. factors up to 3
decimal places. Present your cash flows for each year.) 8
(b) An Oil Company needs 1000 barrels of crude oil after six months. The current price
per barrel of crude oil is ` 3,300. It is expected that after 6 months, the price per barrel
of crude oil is likely to touch ` 3,700. The company wants to hedge against the rising
price for its requirement after 6 months. The 6 months futures contract price is now
traded ` 3,500 per barrel. The size of a futures contract is 100 barrels.
(i) If the cost of capital, insurance and storage is 15% p.a., examine whether it is
beneficial for the oil company to buy now.
(ii) If the upper limit to buying price is ` 3,500, what strategy can the firm adopt?
(iii) If the company decided to hedge through futures, find out the effective price it
would pay for crude oil if at the time of lifting the hedge the spot and future prices
are: Spot price- ` 3,420; Futures ` 3,600. 8
Answer:
4. (a) Evaluation of lease proposal

Lease rentals=34 lacs
After tax LR=17lacs
Discount rate=7% after tax cost of debt
PV of lease rents=17*2.624=44.608 lacs.
Whether to take extended warranty or not:
Discount factor = after tax cost of capital, since it is a capital budgeting type of
decision internally made - whether annual maintenance or one time maintenance.
This decision does not depend on whether to decide to lease or not.

End of Year Extended Warranty After Tax PV Factor PV of Cash Flows
0 -10,00,000 -10,00,000 1 -10,00,000
1 +5,00,000 +5,00,000 0.909 +4,54,500
2
3 -5,45,500
PV of after tax annual maintenance = 50% x 5,00,000 x (PV annuity factor 10%, 3 yrs)
= 2,50,000 x 2.486 = 6,21,500
Hence, it is better to take up the one time warranty.
Evaluation of the buying proposal:
End Warranty Principal Interest on Tax on Tax on Salvage Cash PV PVof

of Repay- O/s interest Depre- value inflows / factor cash
year ments Principal @ ciation (outflows) at 7% flows `
14% lacs
0 (10,00,000) (1,00,000) (11,00,000) 1 -11
1 +5,00,000 (33,00,000) (13,86,000) +6,93,000 +15,50,000 (19,43,000) 0.935 -18.16
2 (33,00,000) (9,24,000) +4,62,000 +15,50,000 (22,12,000) 0.873 -19.31
3 (33,00,000) (4,62,000) +2,31,000 +15,50,000 +7,00,000 (12,81,000) 0.816 -10.45
-58.93
PV of lease rentals is lesser by `14.32 lacs (58.93 - 44.61) than PV of purchase option.
Hence it is better to lease.
While evaluating the proposal for LOR, it is an investment decision, being the lessor, it
must be in the business of normal leasing and hence, like any other capital budgeting
decision, 10%, its after tax cost of capital should be taken.
(b) (i) If the cost of carry (including interest, insurance and storage) is 15%, the fair price
of the futures contract is = S0ert = 3300 e6/12x0.15 = 3300 x 1.0779 = ` 3,557.07. It implies
that if the company buys crude oil today to be used after six months, it would
effectively cost ` 3,557.07. It is not beneficial to buy now.
(ii) Since futures are trading at ` 3,500. It can lock up in the price of around ` 3,500
through a long hedge. Under the long hedge the company would buy the futures
on crude oil today and sell it six months later, the firm would end up paying a
price of ` 3,500.
(iii) If the company adopts the strategy mentioned in (ii), the effective price to be
paid by the firm in the two cases of rise and fall in spot values is calculated as
follows:
Quantity of crude oil to be hedged 1000 barrels

Size of futures contract 100 barrels
Number of futures contract bought = 1000 / 100 10 contracts
Futures price ` 3500
Value of Futures Bought = ` 3500 x 10 x 100 ` 35,00,000
Six months later the company would unwind its futures position and buy its
requirement from the spot market.
1. Futures sold at price ` 3,600
2. Value of futures sold = ` 3600 x 10 x 100 ` 36,00,000
3. Gain on Futures (` 36,00,000 - ` 35,00,000) ` 1,00,000
4. Spot Price ` 3,420
5. Actual cost of buying for 1000 barrels ` 3420 x 1000 ` 34,20,000
6. Effective cost of buying (` 34,20,000 - ` 1,00,000) ` 33,20,000
7. Effective price per barrel (` 33,20,000/1000 barrels) ` 3,320
5. (a) A manufacturing company has an old machine having no book value which can be
sold now for ` 1,00,000. It can be used for another five years after which it will have to
be condemned without any sale value. The company is examining the following
options:
Option I: To upgrade the existing machine at a cost of ` 20 lacs and continue

operations for a further 5 years at the end of which the ` 20 lacs would have also fully
been depreciated equally over the next 5 years and will fetch a sale value of ` 50,000
at the end of the 5th year.
Option II: To replace the old machine with a new one costing ` 40 lacs which will
have a useful life of 5 years, during which it will be fully depreciated equally. At the
end of the 5th year, this machine will have a resale value of ` 10 lacs.
The following figures are the after-tax cash profits in rupees without the depreciation
shield and the salvage values for the existing situation and the fresh options:
End of year Existing Machine Upgraded Machine New Machine

1 10,00,000 11,00,000 12,00,000
2 10,80,000 11,80,000 12,80,000
3 11,20,000 12,20,000 13,80,000
4 12,00,000 13,00,000 14,80,000
5 13,00,000 14,00,000 16,00,000
The hurdle rate used for evaluation is 15%.

Consider that the salvage values and profits will be subjected to tax at the normal tax
rate of 40%.
Present an incremental analysis of options I and II and state which is better.
Evaluate the better option above over continuing with the old machine without
upgrading. 8
(b) The following information is given:

Current Stock Price ` 190
Strike Price ` 210
Price of 6 months' European Put Option ` 10
Risk free interest rate p.a. 5%
(i) Calculate the theoretical minimum price of the put option at the end of 6 months.
Show the arbitrage process step by step and find out the gain if
(ii) the price on the expiration day is ` 200
(iii) the price on the expiration day is 220. 8
Answer:
5. (a) Option I vs Option II - Incremental Analysis
End of Year Operating Profits PV factor PV of cash profits (`)

0 1
1 100000 0.870 87,000
2 100000 0.756 75,600
3 160000 0.658 1,05,280
4 180000 0.572 1,02,960
5 200000 0.497 99,400
Total 3.353 4,70,240
New Machine Vs Upgraded Machine.

Operating Profits `4,70,240
Depreciation shield (800000 - 400000) x 40% = 160000 with annuity `5,36,480
factor 3.353 = 3.353 x 160000
Salvage value (1000000 - 50000) x 60% = 570000 @ PVF 0.497 `2,83,290
Incremental cost of 20,00,000 with PV factor 1 `(20,00,000)
new machine
Sale value of old 60% x 1 lac, PV 1 `60,000
machine
Decrease in NPV with `6,49,990
new machine
Decision : Continue with the upgraded machine, Option 1
Analysis - Continue without upgrade vs upgrade old machine

`
Increase in operating profits 1,00,000 x annuity factor 3,35,300
5 years =100000x3.353
Depreciation shield 400000 x 40% x 3.353 5,36,480
Salvage value at yr 5 end 50000 x 60% x 0.497 14,910
Sub Total - Incremental benefits over upgrade 886690
Incremental cost of upgrade 20,00,000 x 1 (20,00,000)
Net disadvantage of upgrade 11,13,310
Conclusion: Do not upgrade. Continue with the old machine as it is.
(b) (i) Theoretical Minimum Price: Present value of Exercise price - Current stock price
= 210 x e-rt - 190
= 210 x e-0.05×0.5 - 190
= 210 x e-0.025 - 190
= 210 x 0.9753 - 190
= 204.813 - 190
= 14.813
Since value of put option is more than price of put option, recommended action
is buy put option.
Arbitrage Process:
`
Borrow for spot purchase of stock and the put option 190 + 10 200
Amount including interest (continuous compounding) 200 xe0.025 = 205.06
1.02532x200
(ii) Price on exercise day is 200 210
Action : Exercise put option, sell for 210
Gain after repayment of borrowal 210-205.06 4.94
(iii) Price on exercise day is 220 220
Action : Let the put lapse. Sell in spot market and get 220
Gain after repayment of borrowal 220-205.06 14.94
Thus the minimum gain is 4.94 even if the spot price on exercise day falls below
the strike price. If the price rises, the gain would be 4.94 + (difference between the
spot price on exercise day and 210).
6. (a) Companies M and N have the following interest rates:

M N
U.S. Dollars (floating rate) LIBOR + 0.5% LIBOR + 1%
Canadian Dollars Fixed Rate 6% 4.5%
M wants to borrow Canadian Dollars at fixed rate while N wants US dollars at floating
rate.
F, a financial institution charges, if it arranges a swap, 50 basis points spread.
Design, if possible, a swap to share the benefits equally between M and N. Discuss the
steps of action in the swap and arrive at the final effective interest rate for M and N.
In case a swap is not possible, give your calculations to substantiate why it is not
possible. 8
(b) From the following information, find out the market price of risk of portfolio.
Market Return Standard Deviation of Return on Government Standard Deviation of
Market Return Bonds Portfolio
20% 7% 7% 9%
22% 8% 8% 5%
24% 10% 9% 13%
Also determine the expected return for each of the above cases. 8
Answer:
6. (a) M has an advantage over N in floating rate USD and N has an advantage in
Canadian Dollar fixed rate.
Effective net benefit between the rates = 2% (0.5% in floating and 1.5% in fixed)
Less : Share of benefit for the banker = 0.5%
Balance to be shared by M and N equally = 1.5% totally, each getting 0.75%
M will borrow USD at floating rate and pay N will borrow Canadian Dollars at fixed
its banker LIBOR + 0.5% rate 4.5%
It will collect from N, LIBOR + 0.5% - 6%, i.e., It will collect from M, LIBOR + 1% - 4.5% ,
collect, - 5.5% + LIBOR i.e., collect, LIBOR-3.5%
It will collect its share of benefit (2 - 0.5) / 2 It will collect its share of benefit from the
= 0.75% swap 0.75%
Effective interest rate = + (LIBOR + 0.5%) -(- Effective rate = LIBOR + 1% - 0.75% =
5.5% + LIBOR) - 0.75% = 5.25% LIBOR + 0.25%
i.e., desired fixed rate 6% less advantage i.e., desired floating rate LIBOR + 1% less
share 0.75% = fixed 5.25% advantage share 0.75% = floating LIBOR +
0.25%
(b) Expected Return of the Portfolio Rp = Rf + λ x σp

Market price of risk of the portfolio λ = (Rm - Rf)/σm
Market Standard Deviation Return on Standard Market Expected

Return (Rm) of Market Return (σm) Government Deviation of price of Return (Rp)
Bonds (R0) Portfolio(σp) Risk (λ)
1 2 3 4 5 = [1-3]/2 6=[3+(5x4)]
20% 7% 7% 9% 1.85 23.65%
22% 8% 8% 5% 1.75 16.75%
24% 10% 9% 13% 1.50 28.50%
7. (a) The following information is given:

Spot rate for 1 US Dollar ` 64.0123
180 days' forward rate for 1 USD ` 64.9120
Annualised interest rate for 6 months-Rupee 12%
Annualised interest rate for 6 months - US Dollar 8%
Does any arbitrage opportunity exist? Discuss the sequence of activities for gain using
1000 units of currency and compute the gains, if any. 8
(b) An investor has a sum of ` 40 lacs with which he wishes to construct a portfolio of
securities X and Y. The following information is provided:
Security Expected Return (%) Standard Deviation (%)

X 18 12
Y 20 15
The coefficient of correlation between the returns of X and Y is 0.7.

(i) How much should he invest in X and Y in order to have a portfolio of minimum
variance: What would be this minimum variance?
(ii) If he invested equally in X and Y, what would be the variance of the portfolio?
(iii) Would you consider his portfolio in (i) and (ii) sufficiently diversified? Why? 8
Answer:
7. (a) Using the interest rate parity rule, there will be an arbitrage opportunity if:
Forward rate (1+ home currency interest rate for theperiod)

≠
Spot rate (1+ foreign interest rate for the period)
Forward rate 64.9120
Here, = = 1.01406
Spot rate 64.0123
(1+12% / 2) (1+ 0.06)
And the RHS = = = 1.01923
(1+ 8% / 2)
(1+ 0.04)
Hence arbitrage opportunity exists in a small measure, where money invested in
rupees will earn higher interest in India and can be converted to dollars after 6
months.
Arbitrage process: Borrow 1000$, convert at spot rate into INR, invest at 12% for 6
months in India, convert total amount into $ and get the gain.
Borrow 1000$ 1000

Interest @ 8% for 6 m 40
Repay amount $ after 6 m 1040 (A)
Convert 1000$ to INR at spot rate 64.0123 = INR 64012.3
Interest on this amount at 12% p.a. for 6 m = INR 3840.74
Total amount available after 6 m = INR 67853.04
Convert this amount at forward rate 64.9120 =$1045.31 (B)
Gain due to arbitrage (B - A) $ 5.31
Gain per 1000$ invested thus = 5.31$
Verification: Parity theorem approximately gives 0.00517 per $, which is 5.17 per
1000$.
(1.01923-1.01406 =-0.00517)
(b) (i) Weightage of securities for minimum variance of portfolio W, for portion in X and
1-Wx for proportion in Y.
2
σ y - cov(X, Y) 225 - 0.7×12 ×15 225 -126 99
Wx = = = = = 0.8462
2 2 144 + 225 - 2(0.7×15 ×12) 369 - 252 117
σ x + σ x - 2cov(X, Y)
= 84.62%
Hence investment in X = 84.62% of 40 lacs = 33,84,615, or rounded off to 33.85 lacs

or even 34 lacs.
Investment in Y would be 6,15,385, or, 6.15 lacs or 6 lacs.
The variance of this portfolio will be :

V(0.8462X + 0.1538Y) = 0.84622V(X) + 0.15382V(Y)
+2 x 0.8462 x 0.1538 x cov(X,Y) = 103.11+ 5.32 + 32.8 = 141.23
(ii) If he invested equally in X and Y,

V(0.5X + 0.5Y) = 0.52 V(X) + 0.52 V(Y) + 2 x 0.5 x 0.5 x cov(X, Y)
= 36 + 56.25 + 63 = 155.25
(iii) The portfolios in (i) and (ii) are not sufficiently diversified since the correlation
coefficient is high at +0.7. If the securities do well individually, both do well and if
one falls, the other also falls significantly.
(a) Fill in the following table - Identify the function of the bank under the appropriate
classification and tick to mention whether it is a banking or a non-banking function:
(You are required to write only columns I, III, IV and V in your answer.)
I II III IV V
SI. Activity Category of Banking Non-Banking
No Function Function Function
(i) Discounting bills of exchange
(ii) Electronic Funds Transfer between
accounts of customers
(iii) Periodic payments of electricity bills of
customers
(iv) Acceptance of Public Provident Fund
Deposits
(b) Discuss the nature of call money market in India with reference to the duration,
borrowers and security.
(c) Differentiate between yield based auction and price based auction in the securities
market regarding acceptance and cut off points.
(d) Identify the type of risk in each of the following (Present only the Roman numeral and
state the risk in your answers without copying the statements given below.):
(i) Frauds committed by employees.
(ii) The fear of the seller of a fall in prices and of the buyer, of rise in prices.
(iii) Risk of loss arising from the inability of a debtor to pay his loan obligation.
(iv) Risk that a borrower of a housing loan prepays his loan much ahead of his
scheduled duration. 4
(e) State any four features of Foreign Currency Convertible Bonds (FCCB). 4
Candidates may choose appropriate values from the following tables for use in
various answers.
1
PV factor , where x is the interest rate, n is the number of years.
n
(1+ x)
n→ 1 2 3 4 5 6 7 8 9 10
Rate ↓
6% 0.943 0.890 0.837 0.792 0.747 0.705 0.665 0.627 0.592 0.558
7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508
8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463
10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386
14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270
14.13% 0.876 0.768 0.673 0.589 0.516 0.452 0.396 0.347 0.304 0.267
14.3% 0.875 0.765 0.670 0.586 0.513 0.448 0.392 0.343 0.300 0.263
15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247
e0.005 1.005 e-0.005 0.9950

e0.05 1.0513 e-0.05 0.9512
e0.025 1.0253 e-0.025 0.9753
e0.25 1.2840 e-0.25 0.7788
e0.15 1.618 e-0.15 0.8607
e0.6 1.8221 e-0.6 0.5481
e1.5 4.4817 e-1.5 0.2231
e0.075 1.779 e-0.075 0.9277
e0.0375 1.0382 e-0.0375 0.9632
e0.075 2.1170 e-0.75 0.4724
e0.9 2.4596 e-0.9 0.4066
e0.075 1.0779
Answer:
8. (a)
1 II III Iv V
SI. Activity Category of Banking Non-Banking
No. Function Function Function
(i) Discounting bills of exchange Advancing loans √
(ii) Electronic funds transfer between Remittance of √
accounts Funds
(iii) Periodic payments of electricity Agency service √
bills of customers
(iv) Acceptance of Public Provident General Utility √
Fund Deposits Service
(b) Nature of call money market with reference to duration, borrowers and security are
discussed below:
Duration: These loans are given for a very short duration, between 1 day to 15 days.
Borrowers: These are mainly interbank loans, among commercial banks from each
other. Other borrowers are bill market, dealers in stock exchange for purpose of
dealings in stock exchange, individuals of high financial status in Mumbai etc for
ordinary trade purpose in order to save interest on cash credit and overdrafts.
Security: There are no collateral securities demanded against these loans, i.e.,
unsecured.
(c) Yield based auction: This is generally conducted when the Government issues new
security. Investors bid in yield up to two decimal places, e.g., 8.19% etc. Bids are
arranged in ascending order and the cut off yield is arrived at the yield
corresponding to the notified amount of the auction. Since payment is by the
Government at the bid rate as coupon rate, those bids above the cut off are
rejected.
Price Based Auction: This is conducted when the Government re-issues securities.
Prices are bids that are collected from the bidders per `100 face value of the
securities, e.g., 102, etc. Bids are arranged in descending order and bidders quoting
below the cutoff point are rejected.
(d) (i) Frauds committed by employees - operational risk.

(ii) The fear of the seller of a fall in prices and of the buyer of rise in prices-market risk
or price risk.
(iii) Risk of loss arising from the inability of a debtor to pay his loan obligation – credit
default risk or simply, credit risk.
(iv) Risk that a borrower of a housing loan prepays his loan much ahead of his
scheduled duration -asset backed risk or prepayment risk.
(e) Features of Foreign Currency Convertible Bonds:

(i) FCCB can be either secured or unsecured.
(ii) FCCB issues have a call and put option.
(iii) Public issue shall be through reputed lead managers and private placement is
subjected to certain conditions.
(iv) It is also possible to issue zero coupon bonds where the holders are generally
interested in converting them into equity.
(v) The yield to maturity is normally between 2 - 7%.
(vi) FCCBs are normally listed to stock exchanges to increase liquidity.
(vii) FCCB issue related expenses shall not exceed 4% of issue size for public and 2% for
private placement.
SUGGESTED_ANSWER TO QUESTION_SYL2016_JUNE2017_PAPER-15
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

JUNE - 2017
Paper-15 : STRATEGIC COST MANAGEMENT – DECISION MAKING
Answer Question No. 1 in Section A, which is compulsory, carrying 20 marks.
Further, answer any 5(five) Questions from Section B, each carrying 16 marks.
Section – A (20 Marks)
1. Choose the most appropriate answer to the following questions giving justification. Each
question carries 2 (two) marks. 2x10=20
(i) Stock Control data for Material P are:

Annual usage: 3600 units; Cost per unit: `100/-; Cost of placing an order: `40;
Stockholding Cost: 20% of the overall stock volume; Lead time: One month
The EOQ based on the above data is:
(a) 210 units
(b) 175 units
(c) 90 units
(d) 120 units
(ii) Which of the following would take place if a company is able to reduce its variable
cost?
Contribution Margin Break-Even Point
(a) Increase Increase
(b) Decrease Decrease
(c) Increase Decrease
(d) Decrease Increase
(iii) The following details relate to Product P-1 of a manufacturing company:
Level of activity (units) 1000 2000
Cost per unit (`):
Direct materials 4.00 4.00
Direct labour 3.00 3.00
Production Overheads 3.50 2.50
Selling Overheads 1.00 0.50
11.50 10.00
The total fixed cost and variable cost per unit are:
Total Fixed Cost (`) Variable Cost per unit (`)
(a) 2,000 7.00
(b) 2,000 8.50
(c) 3,000 7.00
(d) 3,000 8.50
(iv) A company makes a single product which it sells at `10 per unit. Fixed costs are `
48,000 per month and the product has a contribution to sales ratio of 40%. In a period
when actual sales were `1,40,000, the company's margin of safety in units was:
(a) 2000
(b) 3000
(c) 3500
(d) 4000
(v) The following tasks are associated with ABC system:
I. Allocation of costs to products
II. Identification of cost pools
III. Identification of cost drivers
IV. Calculation of pool rates
The proper order of the preceding tasks is:
(a) III, II, IV, I
(b) I, II, III, IV
(c) III, IV, II, I
(d) IV, III, II, I
(vi) A company has the capacity of production of 80000 units and presently it sells 20000
units at ` 100 each. The demand is sensitive to selling price and it has been observed
that every reduction of ` 10 in selling price the demand is doubled. What should be
the target cost at full capacity it profit margin on sales is taken at 25%?
(a) ` 58 lakhs
(b) ` 52 lakhs
(c) ` 48 lakhs
(d) ` 50 lakhs
(vii)The information relating to the direct material cost of a company is as follows:
Standard price per unit ` 7.20
Actual quantity purchased in units 1600
Standard quantity allowed for actual production in units 1450
Material price variance on purchase (Favourable) ` 480
What is the actual purchase price per unit?
(a) `7.50
(b) `6.40
(c) `6.50
(d) `6.90
(viii)Backflush costing is most likely to be used when:
(a) Management desires sequential tracking of costs
(b) A Just-in-Time inventory philosophy has been adopted
(c) The company carries significant amount of inventory
(d) Actual production costs are debited to work-in-progress
(ix) The preparation and use of standard cost, their comparison with actual costs and the
measurement and analysis of variances to originating causes is defined as:
(a) Marginal Costing
(b) Standard Costing
(c) Throughput Costing
(d) Kaizen Costing
(x) The following are cost data for two alternative ways of processing the clerical work for
legal cases brought before the district court:
Semi-automatic Fully automatic
Monthly fixed costs (`):
Occupancy 15,000 15,000
Maintenance contract 5,000 10,000
Equipment lease 25,000 1,00,000
Unit variable cost (per report) (`)
Supplies 80 20
Labour 60 20
The cost indifference point will be:
(a) 800 cases
(b) 850 cases
(c) 750 cases
(d) 700 cases
Answer:
1. (i) (d)
Explanation: 120 units as per the following computation:
EOQ = 2AB/C, where
A = Annual Requirement of the material = 3,600 units.
B = Buying or Ordering Cost /Order = ` 40.
C = Carrying or Stockholding Cost per unit per annum = ` 100 × 20%
EOQ = 2 x 3,600 x 40/20 =120 units (d).
(ii) (c)
Explanation: Contribution margin = Sales Less Variable Cost
So, reduction in variable cost will increase contribution.
BEP = FC/Contribution Margin
Hence, increase in contribution will reduce BEP.
(iii) (d)
Explanation: Variable Cost per unit = 4.00 + 3.00 = ` 7.00
Total FC (included in Production Overheads and Selling Overheads) is as follows:
Units 1,000 2,000
Total OH 4.50 × 1,000 = 4,500 3.00 × 2,000 = 6,000
Difference in Overhead = ` 1,500
Difference in Volume = 1,000
 Variable per unit = `1.50
Add this to Variable cost per unit of ` 7.00.
The Total variable cost = ` 1.50 + ` 7.00 = ` 8.50
Fixed Cost = `4,500 - (1,000 × 1.50) = ` 4,500 - ` 1,500 = ` 3,000.
(iv) (a)
FC ` 48,000
Explanation: BEP = = = ` 1,20,000 or 12,000 units.
C/S Ratio 0.4
When sells are ` 1,40,000, the volume is ` 1,40,000 ÷ 10 = ` 14,000 units
 Margin of Safety is 14,000 – 12,000 = 2,000 units.
(v) (a)
Explanation: Because cost is allocated based on the cost pool rates. So, whole
process starts with identification of cost drivers followed by identification of cost pools,
determination of rates and then allocation.
(vi) (c)
Explanation:
Maximum Capacity 80,000 Units
Present Sale 20,000 Units @ ` 100/-per Unit
Selling Price/Unit Demand
100 20,000
90 40,000
80 80,000
Target Price ` 80
Target Cost/Unit 80 - 25% of Sales = 80 - 20 = ` 60/- per unit
Total Target Cost 80,000 Units × `60/- per unit = ` 48 lakhs.
(vii) (d)
Explanation:
Material Price Variance (MPV) = Standard cost of Actual Quantity - Actual Cost
480 = 7.20 × 1,600 - Actual Cost
or, Actual Cost = 11,520 - 480 = 11,040
Actual Price / Unit = 11,040 ÷ 1,600 = ` 6.90.
(viii) (b)
Explanation: A Just-in-Time inventory philosophy has been adopted. The reason for this
is that JIT assumes zero inventory for raw materials, work-in-progress and finished goods
and the system of backflush accounting records the transaction only at the
termination of the production and sales cycle.
(ix) (b)
Explanation: Because standard costing only involves the process described.
(x) (a)
Explanation: Cost Indifference Point is calculated as follows:
Difference in monthly FC
Difference in unit VC
`1,25,000 - ` 45,000 ` 80,000
= = = 800 Cases.
`140 - ` 40 `100
Section – B
Each Question carries 16 Marks.
16×5=80
2. (a) What is Value Chain? How does it help modern cost management? 2+4=6
(b) (i) What are the problems of Traditional Costing arising out of volume-based cost
allocation to products?
(ii) How can Activity-Based Costing help refining such costing system? 1+3=4
(c) (i) What are relevant costs and relevant revenues?

(ii) In making repetitive decisions using relevant costs and benefits, should a decision
maker be aware of several pitfalls? If so, mention a few and briefly explain them.
2+4=6
Answer:
2. (a) A value chain is the sequence of business functions in which utility (usefulness) is
added to the products or services of the firm. Through proper analysis and
management of each segment of the value chain, customer value is enhanced. Non-
value creating activities are eliminated.
In value chain analysis, each of the business functions is treated as an essential and
valued contributor and is constantly analyzed to enhance value relative to the cost
incurred. Like business functions, in value chain approach also, it is important that the
efforts of all functions are integrated and co-ordinated to increase the value of the
products or services to the customers.
The following diagram shows the important functions or activities of a firm and the role
of the cost accountant in cost management.
Michael Porter introduced the value chain concept in cost management is 1985. It
was developed further by Ahw subsequently. When the supplier and customers are
included, the firm is viewed as an extended value chain as shown below:
The value chain approach is an integral part of strategic cost management, which is
an approach to Management Accounting that explicitly highlights strategic issues
and concerns. It sets cost analysis as a broader context in which cost information is
used to develop superior strategies.
Modern cost accountant has an important role to play in analyzing cost information
relating to each of the segments of the value chain and supplying the same to other
functional managers for improved decisions.
(b) (i) Under traditional costing, overhead which occupies and important share of the
total cost structure of the firm is generally allocated based on volume-based
allocation rates viz. rates per labour hour, rate per machine hour, % of labour cost,
etc. It does not take into consideration disproportionate consumption service
department services. As a result, the product cost gets distorted i.e., some
products are over costed while others are under costed. The basic assumption in
cost allocation is; the higher the volume, the greater the share of indirect costs to
the product or service. This simplistic assumption dies not hold good in reality.
(ii) The Activity-Based Costing (ABC) is a system that focuses on activities as the
fundamental cost objects and uses the cost of these activities for computing the
costs of products. The Activity-Based Costing refines the problems of Traditional
Costing System by the following means:
1) In the traditional system, cost analysis is done by product. In ABC, the
managers focus attention on activities rather than products because activities
in various departments may be combined and costs of similar activities
ascertained, e.g., quality control, handling of materials, repairs to machines
etc., If detailed costs are kept by activities, the total company costs for each
activity can be obtained, analysed, planned and controlled.
2) Unlike the Traditional Costing Systems, managers under ABC, manage activities
and not products. Changes in activities lead to changes in costs. Therefore, if
the activities are managed well, costs will fall and the resulting products will be
more competitive.
3) Allocating Overhead Cost to production based on a single cost driver
(allocation base, such as unit basis, percentage of material, percentage of
prime cost, labour hour rate, machine hour rate etc.) can result in an unrealistic
product cost because the traditional system fails to capture cause-and-effect
relationships. To manage activities better and to make wiser economic
decisions, managers need to identify the relationships of causes (activities)
and effects (costs) in a more detailed and accurate manner.
4) ABC highlights problem areas that deserve management's attention and more
detailed analysis. Many actions are possible, on pricing, on process
technology, on product design, on operational movements and on product
mix. Traditional Costing can lead to under costing for over costing of products
or services. Over or Under Costing of products distorts cost information. A poor
quality of cost information causes management to make poor decisions for
pricing, product emphasis, make or buy etc.
ABC differs from the traditional system only in respect of allocations of
overheads or indirect costs. Direct Costs are identified with, or assigned to, the
cost object, in the same manner as is done in case of traditional costing
system. Overhead costs are linked to the cost objects based on activities.
(c) (i) Relevant costs are costs appropriate to aiding the making of specific
management decisions (CIMA). They are estimated future costs that differ among
alternatives. Similarly, relevant revenues and expected future revenues that differ
among alternatives. The two key aspects of relevance are:
(1) The costs and revenues must occurs in future, and
(2) They must differ among alternatives.
(ii) In such decision making, the decision maker must be aware of some pitfalls.
Examples are:
(1) Sunk cost – be ignored as not relevant.
(2) Fixed Costs – if they change for the decision at hand, the changed portion
only becomes relevant.
(3) Opportunity costs – They need not be overlooked (e.g., to outsource an
activity when there is no idle capacity). An opportunity cost is the cost of an
opportunity foregone by not using a limited resource in its next best alternative
use.
3. (a) Accelerate Co. Ltd., manufactures and sells four types of products under the brand
names of A, B, C and D. The sales mix in value comprises 33 1/3%, 41 2/3%, 16 2/3%
and 8 1/3% of products A, B, C and D, respectively. The total budgeted sales (100%)
are ` 60,000 p.m. Operating Costs are — Variable costs: Product A 60% of selling
price, Product B 68% of selling price, Product C 80% of selling price, Product D 40% of
selling price; Fixed costs: ` 14,700 p.m.
Required:
Calculate the break-even-point for the products on overall basis. 8
(b) A2Z p.l.c supports the concept of tero technology or life cycle costing for new
investment decisions covering its engineering activities. The financial side of this
philosophy is now well established and its principles extended to all other areas of
decision making. The company is to replace a number of its machines and the
Production Manager is torn between the Exe Machine, a more expensive machine
with a life of 12 years, and the Wye machine with an estimated life of 6 years. If the
Wye machine is chosen, it is likely that it would be replaced at the end of 6 years by
another Wye machine. The pattern of maintenance and running costs differs between
the two types of machine and relevant data are shown below:
Exe Wye
Purchase price ` 19,000 `13,000
Trade-in value/breakup/scrap ` 3,000 ` 3,000
Annual repair costs ` 2,000 ` 2,600
Overhaul costs (at year 8) ` 4,000 (at year 4) ` 2,000
Estimated financing costs 10% p.a. 10% p.a.
averaged over machine life

Required: Recommend with supporting figures, which machine to purchase, stating
any assumptions made? 8
Answer:
3. (a) Computation of overall breakeven point

A B C D Total
a Sales (`) 20,000 25,000 10,000 5,000 60,000
b Variable cost (`) 12,000 17,000 8,000 2,000 39,000
c Contribution (`) 8,000 8,000 2,000 3,000 21,000
d Fixed cost (`) 14,700
e Profit (`) 6,300
f P/V ratio (%) 40% 32% 20% 60% 35%
g Break even sales (`) 14700/35% = 42,000
(b) Profitability of Alternate Machines

Exe Machine WYE Machine
Initial cost(`) 19,000 13,000.00
Less: Scrap at the end of the (3,000x0.32) 960.00 (3,000x0.56) 1,680.00
life(`)
18,040.00 11,320.00
Present value of total annual (2,000x6.81) 13,620.00 (2,600x4.36) 11,336.00
cost(`)
Overhaul Cost (4,000x0.47) 1,880.00 (2,000x0.68) 1,360.00
33,540.00 24,016
Capital recovery factor (1/6.81) 0.15 (1/4.36) 0.23
Equivalent annual cost (`) 5,031.00 5,523.68
Conclusion:
As the equivalent annual cost is less for Exe Machine, it is better to purchase the same.
4. (a) SRM Ltd. has developed a new product 'Kent' which is about to be launched into the
market and anticipates to sell 80,000 of these units at a sale price of ` 300 over the
product's life cycle of four years. Data pertaining to product 'Kent' are as follows:
Costs of Design and Development ` 10,25,000
of Moulding Dies and Other tools
Manufacturing costs ` 125 per unit
Selling costs ` 12,500 per year + ` 100 per unit
Administration costs ` 50,000 per year
Warranty expenses 5 replacement parts per 25 units at ` 10 per part,
1 visit per 500 units (cost ` 500 per visit)
Required:
(i) Compute the product Kent's Life Cycle Cost.
(ii) Suppose SRM Ltd. can increase sales volume by 25% through 15% decrease in
selling price, should SRM Ltd. choose the lower price? 8
(b) BCG Manufacturers sell their product at ` 1,000 per unit. Their competitors are likely to
reduce the price by 15%. BCG Manufacturers want to respond aggressively by cutting
price by 20% and expect that the present volume of 150000 units per annum will
increase to 200000 units. BCGM want to earn a 10% target profit on sales. Based on a
detailed value engineering, the comparative position is given below:
Particulars Existing (`) Target (`)
Direct Material Cost per unit 400 385
Direct Labour Cost per unit 55 50
Direct machinery costs per unit 70 60
Direct Manufacturing expenses per unit 525 425
Manufacturing Overheads
No. of orders (` 80 per order) 22,500 21,250
Testing hours (` 2 per hour) 45,00,000 30,00,000
Units reworked (` 100 per unit) 12,000 13,000
Manufacturing overheads are allocated using relevant cost drivers. Other operating
costs per unit for the expected volume are estimated as follows:
Research and Design ` 50
Marketing and Customer Service ` 130
` 180
Required:
(i) Calculate target costs per unit and target costs for the proposed volume showing
break up of different elements.
(ii) Prepare target product profitability statement. 4+4=8
Answer:
4. (a)
Statement showing 'Kent's Life Cycle Cost (80,000 Units)
Costs of Design and Development of Moulds, Dies and other tools 10,25,000
Manufacturing Costs (`125 × 80,000 units) 1,00,00,000
Selling Costs (`100 × 80,000 units + ` 12,500 × 4) 80,50,000
Administration Costs (` 50,000 × 4) 2,00,000
Warranty :
(80,000 units / 25 units × 5 parts × ` 10) 1,60,000
(80,000 units / 500 units × 1 visit × ` 500) 80,000
Total cost 1,95,15,000
Statement showing 'Kent's Life Cycle Cost (1,00,000 Units)

Costs of Design and Development of Moulds, Dies and other tools 10,25,000
Manufacturing Costs (`125 × 1,00,000 units) 1,25,00,000
Selling Costs (`100 × 1,00,000 units + ` 12,500 × 4) 1,00,50,000
Administration Costs (` 50,000 × 4) 2,00,000
Warranty:
(1,00,000 units / 25 units × 5 parts × `10) 2,00,000
(1,00,000 units / 500 units × 1 visit × ` 500) 1,00,000
Statement showing "Kent's Life Time Profit"

Particulars Amount (`) 80,000 units Amount (`) 100,000 units
Sales (80,000 × ` 300) 2,40,00,000 (1,00,000 × ` 255) 2,55,00,000
Less : Total Cost 1,95,15,000 2,40,75,000
Profit 44,85,000 14,25,000
Decision: Reducing the, price by 15% will decrease profit by ` 30,60,000. Therefore,
SRM Ltd. should not cut the price.
(b) Part 1:
Target Selling Price: ` 1000 less 20% ` 800
Less: Target Profit Margin (10% of ` 800) ` 80
Target Cost per unit ` 720
The breakup of the target cost per unit of ` 720 per unit is as follows:
Direct Materials 385
Direct Labour 50
Direct Machinery costs 60
Direct Manufacturing Costs 495
Add: Manufacturing Overheads:
Ordering and receiving (21250 × ` 80)/200000 8.50
Testing and Inspection (30,00,000 × `,2)/200000 30.00

Rework (13,000 × ` 100)/200000 6.50 45
Other Operating Costs:
Research and Design 50
Marketing and Customer Service 130 180
Full Product Costs 720
Part 2:
Target Product Profitability
Particulars Per Unit (`) Total for 200000 units (`)
1. Sales 800 16,00,00,000
2. Cost of Goods Sold:
Direct Materials 385 7,70,00,000
Direct Labour 50 1,00,00,000
Direct Manufacturing Costs 60 1,20,00,000
495 9,90,00,000
Manufacturing Overheads 45 90,00,000
540 10,80,00,000
3. Gross Margin (1-2) 260 5,20, 00,000
4. Operating Costs:
Research and Design 50 1,00,00,000
Marketing and Customer Service 130 2,60,00,000
180 3,60,00,000
5. Operating Profit (3 - 4) 80 1,60,00,000
5. (a) A manufacturing company currently operating at 80% capacity has received an

export order from Middle East, which will utilise 40% of the capacity of the factory. The
order has to be either taken in full and executed at 10% below the current domestic
prices or rejected totally.
The current sales and cost data are given below:
Sales ` 16.00 lakhs
Direct Material ` 5.80 lakhs
Direct Labour ` 2.40 lakhs
Variable Overheads ` 0.60 lakhs
Fixed Overheads ` 5.20 lakhs
The following alternatives are available to the management:

(I) Continue with domestic sales and reject the export order.
(II) Accept the export order and allow the domestic market to starve to the extent of
excess of demand.
(Ill) Increase capacity so as to accept the export order and maintain the domestic
demand by:
(i) Purchasing additional plant and increasing 10% capacity and thereby
increasing fixed overheads by ` 65,000, and
(ii) Working overtime at one and half time the normal rate to meet balance of the
required capacity.
Required:
Evaluate each of the above alternatives and suggest the best one. 6
(b) The following particulars are extracted from the records of Ajanta Works Limited:
Particulars Product A Product B

Selling price per unit ` 1,000.00 ` 1,200.00
Consumption of Material Kg. 20.00 Kg. 30.00
Material cost ` 100.00 ` 150.00
Direct wages `150.00 ` 100.00

Direct expenses ` 50.00 ` 60.00
Machine Hours used 3 2
Overhead Expenses:
Fixed ` 50.00 ` 100.00
Variable ` 150.00 ` 200.00
Note: Direct wages per hour is ` 50.00

Required:
(i) Comment on the profitability of each product (both use the same raw material)
when:
(I) Total sales potential in units is limited
(II) Total sales potential in value is limited
(III) Raw Material is in short supply, and
(IV) Production Capacity (in terms of Machine Hours) is the limiting factor.
(ii) Assuming raw material as the key factor, availability of which is 10000 Kg., and
maximum sales potential of each product being 3500 units, find out the product
mix which will yield the maximum profit. 4+6=10
Answer:
5. (a)
Present 40% - Foreign 40% - Foreign
Sales 80% 60% - Domestic 80% - Domestic
1. Sales 16.00 (7.20+12.00)= 19.20 (7.20 + 16.00) = 23.20
2. Variable Cost
Direct Material 5.80 7.25 8.70
Direct Labour 2.40 3.00 3.60
Variable Overheads 0.60 0.75 0.90
Overtime Premium -- --- 0.15
8.80 11.00 13.35
3. Contribution 7.20 8.20 9.85
4. Fixed Cost 5.20 5.20 (5.20 + 0.65) = 5.85
5. Profit 2.00 3.00 4.00
As per the above calculations, it is evident that the profit is maximum in Alternative III i.e.,
accepting the foreign order fully and monitoring the present domestic sales. It is the best
alternative to be pursued by the management.
(b) Marginal Cost Statement of Ajanta Works Limited

Particulars Cost Per Unit (`)
A B
Selling Price 1000 1200
Direct Materials 100 150
Direct Wages 150 100
Direct Expenses 50 60
Variable Overheads 150 200
Marginal Cost 450 510
Contribution Margin 550 690
P/V Ratio 55% 57.50%
Contribution per Kg of material 27.5 23.0
Contribution per Machine Hour 183 345
(i) The comments based on the above statement are as follows:
I. When total sales potential in units is a limiting factor, Product B is more profitable, as it
is making a larger contribution margin per unit as compared to A.
II. When total sales potential in value is a limiting factor, Product B is still more profitable,
as its P/V ratio is more than that of A.
III. When Raw Material is in short supply, A is more profitable as its contribution in per kg,
of material is more than that of Product B.
IV. When production capacity is limited, B is more profitable as it makes larger
contribution per machine hour than A.
(Note: Best position is reached when contribution per unit of key factor is maximum.)
(ii) Contribution per kg. of materials of A is more than that of B. So, 10,000 kg. ÷ 20 kg.
= 500 units of A will only be produced and sold.
6. (a) Nikee Ltd. manufactures and sells one variety of sports-shirt in India. Noted football
clubs and supporters of these clubs are the main customers. Nikee's products show
some rectifiable defects. These problems can generally be detected and repaired
during internal inspection at a cost of ` 15 per unit.
During 2016, 50000 shirts were produced and sold. After inspection defect was
detected in respect of 5% of output. Inspection cost is `25 per shirt. After sales,
customers reported defects in respect of 6% of output. These shirts were received
back from customers at a transportation cost of `8 per unit. Because of negative
publicity due to defects, there would be loss of sales in 2017 to the extent of 5% of
external failures.
Required:
(i) Analyse costs of quality showing separately (with workings) the:
(I) Inspection or appraisal cost
(II) Internal failure cost
(III) External failure cost
(IV) Opportunity cost due to external failure, and
(V) Total costs of quality
(ii) If the selling price per shirt is `250 and variable cost is 60% of sales, fixed cost
`5,50,000 p.a., prepare a statement showing profitability of the product during
2016. 6+2=8
(b) You are given the following estimates for next year's budgeted sales and costs of
single product produced by Bee Ltd.:
Selling Price *12
Sales demand: Units Probability
3200 0.50
4000 0.30
5000 0.20
` Probability
Variable cost per unit 5.00 0.3
6.00 0.5
7.00 0.2
Fixed cost for the period: ` 20,000
Required:
(i) Expected value of sales for the period.
(ii) Expected variable cost and contribution for the period.
(iii) Expected profit or loss for the budget period. 2+4+2=8
Answer:
6. (a)
Statement of Costs of Quality
`
(a) Inspection or Appraisal Cost (` 25 × 50,000 shirts) 12,50,000
(b) Internal failure (re-work) cost (5% × 50,000 × ` 15) 37,500
(c) External failure cost (i.e., transportation + re-work cost) 39,000

[6% × 50,000 × (` 8 + 15)]
(d) Opportunity cost (i.e., loss of contribution) 25,000
[10% × (5% × 50,000) × (` 250 × 40%)]
Total Quality Cost 13,51,500
Profitability statement
`
Sales (50,000 × ` 250) 1,25,00,000
Less: Variable Cost (60%) 75,00,000
Contribution 50,00,000
Less: Quality Cost (as above) 13,51,500
Contribution, net of quality costs 36,48,500
Less: Fixed Cost 10,00,000
Net Profit 26,48,500
(b)
(1) Expected Value of Sales:
Expected Sales × Profitability
3,200 × 0.5 = 1,600
4,000 × 0.3 = 1,200
5,000 × 0.2 = 1,000 3,800 @ ` 12 45,600
(2) Expected Variable Cost:

Unit Variable costs × Profitability
` 0.5 × 0.3 = 1.5
` 0.6 × 0.5 = 3.0
` 0.7 × 0.2 = 1.4 5.9 × 3,800 22,420
Expected Contribution 23,180
(3) Expected Profit:

Expected Contribution 23,180
(-) Fixed Cost 20,000
Expected Profit ` 3,180
7. (a) XYZ Auto-manufacturing company has to prepare a design of its latest model of
motorcycle. The various activities to be performed to prepare a design are as follows:
Activity Description of activity Preceding activity
A Prepare drawing -
B Carry out cost analysis A
C Carry out financial analysis A
D Manufacture tools C
E Prepare bill of material B,C
F Receive material D,E
G Order sub-accessories E
H Receive sub-accessories G
I Manufacture components F
J Final assembly I,H
K Testing and shipment J
Prepare an appropriate network diagram. 8
(b) In a processing industry two products A and B are made involving two operations. The
production of B also results in a by-product C. The product A can be sold at a profit of ` 3
per unit and B at a profit of ` 8 per unit. The by-product C has a profit of ` 2 per unit.
Forecast shows that upto 5 units of C can be sold. The company gets 3 units of C for each
unit of B produced. The manufacturing times are 3 hours per unit for A on each of the
operation one and two and 4 hours and 5 hours per unit for B on operation one and two,
respectively. Because the product C results from producing B, no time is used in
producing C. The available times are 18 hours and 21 hours of operation one and two
respectively. The company desires to know how much of A and B should be produced
keeping C in mind to make the highest profit.
Required:
Formulate LP model for this problem. 8
Answer:
7. (a) The network diagram will be as follows:
(b) Let X1, X2, X3 be the number of units produced of products A, B and C respectively.
Objective function:
Then the profit gained by the industry is given by
Z = 3x1 +8x2 + 2x3
Here it is assumed that all the units of products A and B are sold.
Condition-1:
In first operation, A takes 3 hrs of manufacturer's time and B takes 4 hrs of
manufacturer's time. Therefore, total number of hours required in first operation
becomes - 3x1 +4x2
In second operation, per unit of A takes 3 hrs of manufacturer's time and per unit B
takes 5 hrs of manufacturer's time. Therefore, the total number of hours used in second
operation becomes - 3x1 + 5x2
Since there are 18 hours available in first operation and 21 hours in second operation,
the restrictions become
3x1+4x2 ≤ 18
3x1+5x2≤21
Condition-2:
Since the maximum number of units of C that can be sold is 5, therefore,
X3 ≤ 5
Condition-3:
Further, the company gels three units of by product C for every unit of product B
produced, therefore,
X3 = 3X2
Now, the allocation problem of the industry can be finally put in the following linear
programming problem:
Maximise
Z = 3x1 + 8x2 + 2x3
Subject to the Constraints

3x1+4x2≤18
3x1 + 5x2 ≤ 21
x3 ≤ 5
x3 = 3x2
x 1, x 2 , x 3 ≥ 0
8. Write short notes on any four of the following: 4x4= 16

(a) Variants of Backflush Accounting
(b) Transfer Pricing
(c) Principles of Total Quality Management (TQM)
(d) Learning Curve Theory
(e) Simulation Technique
Answer:
8. (a) There are a number of variants of the Backflush system, each differing as to the
'trigger points' at which costs are recognized within the cost accounts and thus
associated with products. Variant-1-This has two trigger points (TP): TP 1 - purchase of
raw materials/components. A 'raw and in process (RIP)' account will be debited with
the actual cost of materials purchased, and creditors credited. TP 2 - completion of
good units. The finished goods (FG) account will be debited with the standard cost of
unit produced and the RIP and CC account will be credited with the standard cost.
Variant-2- This has only one trigger points - the completion of good units. The FG
account is debited with the standard cost of units produced, with corresponding
credits to the CC account and the creditors account.
(b) Transfer Pricing:

A transfer price is the price of one segment(sub unit, department, division etc.,) of an
organization charges for a product or services supplied to another segment of the
same organization. Transfer prices are used when individual entities of a larger multi-
entity firm are treated and measured as separately run entities.
The benefits of Transfer Pricing Policy are as under:

(i) Divisional performance evaluation is made easier.
(ii) It will develop healthy inter-divisional competitive spirit.
(iii) Management by exception is possible.
(iv) It helps in co-ordination of divisional objectives in achieving organizational goals.
(v) It provides useful information to the top management in making policy decisions
like expansion, sub-contracting, closing down of a division, make or buy decisions,
etc,
(vi) Transfer Price will act as a check on supplier's prices.
(vii) It fosters economic entity and free enterprise system.
(viii) It optimizes the allocation of company's financial resources based on the relative
performance of various profit centres, which in turn, are influenced by transfer
pricing policies.
(c) Principles of Total Quality Management (TQM):

The philosophy of TQM rest on the following principles, which are enlisted below:
(i) Clear exposition of the benefits of a project.
(ii) Total Employee Involvement (TEI).
(iii) Process measurement.
(iv) Involvement of all customers and contributors.
(v) Elimination of irrelevant data.
(vi) Understanding the needs of the whole process.
(vii) Use of errors to prompt continuous improvement.
(viii) Use of statistics to tell people how well they are doing.
(d) Learning Curve Theory:

Learning Curve Theory is concerned with the idea that when a new job, process or
activity commences for the first time, it is likely that the workforce involved will not
achieve maximum efficiency immediately. Repetition of the task is likely to make the
people more confident and knowledeable and will eventually result in a more
efficient and rapid operation. Eventually the learning process will stop after continually
repeating the job. As a consequence the time to complete a task will initially decline
and then stabilize once efficient working is achieved. The cumulative average time
per unit is assumed to decrease by a constant percentage every time that output
doubles. Cumulative average time refers to the average time per unit for all units
produced so far, from and including the first one made.
Learning is the process by which an individual acquires skill, knowledge and ability.
When a new product or process is started, the performance of a worker is not at its best
and a learning phenomenon takes place. As the experience is gained, the
performance of a worker improves, time taken per unit of activity reduces and his
productivity goes up. This improvement in productivity of a worker is due to learning
effect. Cost predictions especially those relating to direct labour cost must allow for the
effect of learning process. This technique is a mathematical technique. It can be very
much used to accurately and graphically predict cost.
Learning Curve is essentially a measure of the experience gained in production of an

article by an individual or organization. As more units are produced, people involved
in production become more efficient than before. Each subsequent unit takes fewer
man-hours to produce. The amount of improvement will differ with each type of article
produced. This improvement or experience gain is reflected in a decrease in man-
hours or cost.
The learning curve ratio can be calculated with the help of the following formula:
Learning Curve ratio = Average cost of first 2 units/Average labour cost of first unit.
(e) Simulation:
Simulation is a modelling and analysis tool that is widely used for the purpose of
designing, planning and control of manufacturing systems. Simulation in general is to
pretend that one deals with a real thing while really working with an imitation. In
Operations Research, the imitation is a computer model of the simulated reality. The
task of executing simulations provides insight and a deep understanding of physical
processes that are being modelled.
Simulation is generally referred to as computer simulation, which simulates the

operation of a manufacturing system. A computer simulation or a computer model is a
computer program, which attempts to simulate an abstract model of a particular
system.
A simple example of a simulation involves the tossing of a ball mto the air. The ball can
be said to "simulate" a missile, for instance. That is, by experimenting with throwing balls
starting at different initial heights and initial velocity vectors, it can be said that we are
simulating the trajectory of a missile.
Monte Carlo method of simulation is the most popular method of simulation. In Linear
Programming, Simulation is called as the 'technique of last resort'. It means, when all
other methods fails, we resort to Simulation as the last resort.
SUGGESTED_ANSWERs TO QUESTION_SYL2016_JUNE2018_PAPER-15
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

JUNE - 2018
1. Choose the most appropriate answer to the following questions giving justification:
2x10=20
(i) A Company requires ` 85,00,000 in sales to meet its target net profit. Its contribution
margin is 30% and the fixed costs are ` 15,00,000. What is the target net profit?
(a) ` 10,50,000
(b) ` 19,50,000
(c) ` 25,50,000
(d) ` 35,00,000
(ii) In a factory where standard costing system is followed, the production department
consumed 1100 kgs of a material @ ` 8 per kg for product X resulting in material price
variance of ` 2200 (Fav) and material usage variance of ` 1000 (Adv). What is the
standard material cost of actual production of product X?
(a) 11,000
(b) 20,000
(c) 14,000
(d) 10,000
(iii) The following information relate to ABC

Activity level 60% 80%
Variable costs (`) 12,000 16,000
Fixed costs (`) 20,000 22,000
The differential cost for 20% capacity is
(a) ` 4,000
(b) ` 2,000
(c) ` 6,000
(d) ` 5,000
(iv) By making and selling 9,000 units of a product, a company makes a profit of ` 10,000,
whereas in the case of 7,000 units, it would lose ` 10,000 instead. The number of units to
break-even is
(a) 7,500 units
(b) 8,000 units
(c) 7,750 units
(d) 8,200 units
(v) 1200 units of microchips are required to be sold to earn a profit of ` 1,06,000 in a
monopoly market. The fixed cost for the period is ` 74,000. The contribution in the
monopoly market is as high as 3/4th of its variable cost. Determine the target selling
price per unit.
(a) 450
(b) 325
(c) 400
(d) 350
(vi) An operation has a 90% learning curve and the first unit produced took 28 minutes.
The labour cost is ` 20 per hour. How much should the second unit cost?
(a) ` 9.80
(b) ` 7.60
(c) ` 8.40
(d) ` 6.60
(vii) If project A has a net present value (NPV) of ` 30,00,000 and project B has an NPV of `
50,00,000, what is the opportunity cost if project B is selected?
(a) ` 23,00,000
(b) ` 30,00,000
(c) ` 20,00,000
(d) ` 50,00,000
(viii)A company operates an activity based costing (ABC) system to attribute its overhead
costs to cost objects. In its budget for the year-ending 31st August, 2018. The company
expected to place a total of 2000 purchase orders at a total cost of ` 1,00,000. This
activity and its related costs were budgeted to occur at a constant rate throughout the
budget year which is divided into 13 four week periods.
During the four week period ended 30th June 2017, a total of 200 purchase orders
were placed at a cost of ` 9,000. The over recovery of these costs for the four week
period was
(a) ` 2,000
(b) ` 3,000
(c) ` 1,500
(d) ` 1,000
(ix) Empire Hotel has a capacity of 100 single rooms and 20 double rooms. Average
occupancy is 70% for 365 days of the year. The rent for a double room is kept at 130%
of a single room. The total room occupancy days in a year in terms of single room is
(a) 32193
(b) 30660
(c) 31660
(d) 30993
(x) Which of the following is correct in the context of network analysis?
(a) There can be one or more activities without a predecessor in a network.
(b) Where two activities have the same start and end events, the end event of one
activity is numbered differently and then connected by a dummy to the original
start event.
(c) When crashing is carried out, the non-critical paths have to remain non critical.
(d) If the critical path is longer than the other paths, the project may be completed by
using a path having a shorter duration.
Answer:
1. (i) (a)
Explanation: ` 10,50,000
= (85,00,000 × 30%) – 15,00,000 = 10,50,000
Or
Sales × Contribution margin ratio or P.V. Ratio – Fixed Cost
(ii) (d)
Explanation: Actual Cost + Favourable Cost Variance = Standard Cost
1100 × 8 + 2200 – 1000 = 8800 + 1200 = 10,000
(iii) (c)
Explanation: Differential Costs = Differences in Fixed and Variable Cost = 4000 + 2,000
= 6,000.
(iv) (b)
Explanation:
Contribution for 2000 units = 20,000 (difference in profits for two output
levels)
Hence, contribution per unit = 10.
Substituting in equation 1,00,000 = F + 10,000. Or F = 80,000.
BEP = 80000 / 10 = 8000.
(v) (d)
Explanation: Contribution = 1,06,000 + 74,000 = 1,80,000
Contribution/Unit = 180000/1200 = 150
Variable cost/unit = 150 ÷ ¾ = ` 200
Selling price = 350
(vi) (b)
Explanation:
1st unit = 28 min.
Average time p.u. for 2 units = 0.9 × 28 = 25.2
Total time for 2 units = 25.2 × 2 = 50.4
Time for second unit = 50.4 – 28 = 22.4 minutes
Cost for second unit = 22.4 × 20 ` /hr./60 minutes = 7.47
Since, (b) is close to 7.47, b is acceptable. Otherwise, none of the given data.
(vii) (b)
Explanation:
Opportunity cost represents the next best alternative foregone.
If B is chosen, only A is being foregone and hence the NPV of 30,00,000 is the present
value of the opportunity lost.
(viii) (d)
Explanation:
For 2,000 purchase orders, cost budgeted is 1 lac. For 200, corresponding amount
would be 10,000. But actual = 9,000. Hence over recovered is 10,000 – 9000 = 1000.
Or
Cost driver rate for order = 1,00,000 / 2,000 = 50 per order.

Cost recovered = 50 × 200 = 10,000.
Actual = 9,000
Over recovery = 1000
(ix) (a)
Explanation:
1 double room = 1.3 single in terms of revenue.
Capacity = 100 + 1.3 × 20 = 100 + 26 = 126 equivalent single rooms.
Total Room Occupancy p.a. = 126 × 365 × 70% = 32193 days.
Note: This can be arrived at by other ways also, taking for example 70% of only single
rooms and then double rooms, etc.
(x) (a)
Explanation:
More than 1 activity can begin at the first node, say 1 – 2, 1 – 3, 1 – 4, etc. Each of
these will have no predecessor.
Section – B
16×5=80
2. (a) Relevant data relating to Trident Industries Limited are:
Products
P Q R Total
Production and Sales (Units) 60,000 40,000 16,000
Raw Material Usage (in Units) 10 10 22
Raw Material Costs (`) 50 40 22 24,76,000
Direct Labour Hours 2.5 4 2 3,42,000
Machine Hours 2.5 2 4 2,94,000
Direct Labour Costs (`) 16 24 12
No. of Production Runs 6 14 40 60
No. of Deliveries 18 6 40 64
No. of Receipts 60 140 880 1080
No. of Production Orders 30 20 50 100
Overheads: `
Set-up 60,000
Machines 15,20,000
Receiving 8,70,000
Packing 5,00,000
Engineering 7,46,000
The Company operates a JIT inventory policy and receives each component once
per production run.
Required:
(a) (i) Compute the product cost based on direct labour hour recovery rate of
overheads.
(ii) Compute the product cost using Activity Based Costing. 4+8=12
(b) What is Target Cost? How would you determine it? 2+2=4
Answer:
2. (a) (i) Computation of overhead rate based on direct labour hour hours:
P 60,000 2.5 150000
Q 40,000 4 160000
R 16,000 2 32000
Total 342000
Total Overheads = 60,000 + 15,20,000 + 8,70,000 + 5,00,000 + 7,46,000 = 36,96,000
Overhead rate per direct labour hour = 36,96,000/3,42,000 = 10.807 = 10.81
Product Cost based on direct labour recovery rate:

P Q R
Raw Material 50 40 22
Direct Labour 16 24 12
Overheads @ ` 10.81 per hour
2.5 × 10.81 27.03
4 × 10.81 43.24
2 × 10.81 21.62
Total Cost 93.03 107.24 55.62
(ii) Cost Driver Rates:

Nature of Overhead Total Quantity of Activity Driver Cost Driver Rate `/
Overhead cost (`) activity Driver unit of Cost driver
Set-up 60,000 60 Production Runs 1000
Machines 15,20,000 294000 Machine Hours 5.17
Receiving 8,70,000 1080 No. of Receipts 805.56
Packing 5,00,000 64 No. of Deliveries 7812.5
Engineering 7,46,000 100 No. of Production 7460
Orders
Total
Overhead allocation to products based on Activity Based Costing: (Total Value for
Production units Basis)
Based on the whole production figures,

P Q R
Production units 60,000 40,000 16,000
Raw Material 30,00,000 16,00,000 3,52,000
Direct Labour 9,60,000 9,60,000 1,92,000
Overheads Set-up @ ` 1000 per hour
production run
1000x6 6000
1000x14 14,000
1000x40 40,000
Machines @ ` 5.17 per machine hour
2.5x60,000x5.17 7,75,500
2x40,000x5.17 4,13,600
4x16,000x5.17 3,30,880
Receiving @ 805.56 per receipt
60x805.56 48,333.60
140x805.56 1,12,778.40
880x805.56 7,08,892.80
Packing @ 7812.5 per delivery
18x7812.5 1,40,625
6x7812.5 46,875
40x7812.5 3,12,500
Engineering @ 7460 per production order
30 x 7460 2,23,800
20 x 7460 1,49,200
50x7460 3,73,000
Total Overhead Cost 11,94,258.60 7,36,453.40 17,65,272.80
Total Cost 51,54,258.60 32,96,453.40 23,09,272.80
(b) Target Cost is the cost at which a proposed product with specified functionality and
quality must be produced to generate a desired level of profitability at its anticipated
selling price.
Target cost is Target selling price less the required profit margin
The target selling price is the price that is dictated by competition in case there are
comparable products, or the perceived value that a customer will pay for the
product in case there is no competition.
The desired profit level is fixed by the seller. The difference between the selling price
and the profit margin represents the target cost to be achieved by design or cost
reduction or by economies of scale or by other means.
How to determine target cost:

The market requirement is identified regarding design, utility, need for the product.
Target selling price is determined based on customer expectation and sales forecast.
Target production volume is set based on price volume relationship
Target profit margin is established based on the company's long term profit
objectives, projected volumes, course of action, etc.
The target cost or allowable cost is determined as the target selling price minus the
target profit margin.
3. An Engineering Co. manufactures a single product whose standard cost structure is as

follows:
Direct materials: 24 kg at ` 30 per kg 72.00

Direct Labour : 6 hours at ` 4 per hour 24.00
Factory Overheads : 6 hours at ` 0.75 per hour 4.50
Total 100.50
The factory overheads are based on the following flexible budget:

Capacity 80% 90% 100% 100%
Production (units) 6,000 6,750 7,500 8,250
Overheads (`) 29,250 3,150 33,750 36,000
Actual data for the month of January, 2018:

Budgeted production 7,500 units
Materials used 19,240 kg at ` 31 per kg
Direct labour 46,830 hours at ` 4.20 per hour
Actual factory overheads ` 36,340
Production completed 7,620 units
Details of Work-in-Progress:
Opening : 120 units, materials fully supplied, 50% converted.
Closing : 100 units, materials fully supplied, 50% converted.
Required:
(i) Effective or Equivalent Production for each element of cost.
(ii) Calculate:
(a) Material variances (cost, price and usage)
(b) Labour variances (cost, rate of pay and efficiency)
(c) Overhead variances (expenditure and volume variance, efficiency and capacity
variance) 4+3+6=13
Answer:
3. (i) Statement of Equivalent Production

Units Material Labour and Overheads
% Units % Units
Opening Work-in-Progress 120 --- --- 50 60
Completely processes during the month 7,500 100 7,500 100 7,500
Closing Work-in-Progress 100 100 100 50 50
7,720 7,600 7,610
Some required data (computed)

Material:
Standard Quantity : 7,600 @ 2.40 kg = 18,240 kg
Standard Value : 18,240 kg @ ` 30 = ` 5,47,200
Labour:
Standard Hours : 7,610 @ 6 hours = 45,660 hours
Standard Wages : 45,660 @ ` 4 per hour = ` 1,82,640
Actual Hours 46, 830

Standard Production = = = 7,805 units
Standard Hours per Unit 6
Budgeted Production = 7,500 units
Budgeted Overheads ` 33,750

Standard rate per unit = = = ` 450
Budgeted Production 7,500
Standard Overheads (or overheads recovered) = 7,610 @ ` 4.50 = ` 34,245
Actual cost of materials: 19,240 kg @ ` 31 = ` 5,96,440

Actual Wages: 46,830 hr @ ` 4.20 = ` 1,96,686
(ii) Statement of Variances

(a) Material cost variance: (SC - AC) = (` 5,47,200 - 5,96,440) = ` 49,240 (A)
which can be analyzed into:
(a) Material price variance: (SP - AP) AQ = (30 - 31) x 19,240 = ` 19,240 (A)
(b) Material usage variance: (SQ - AQ) SP = (18,240 - 19,240) x `30 = `30,000 (A)
(b) Labour cost variance: (SC - AC) = (` 1,82,640 - 1,96,686) = ` 14,046 (A)
which can be further analyzed as follows:
(a) Rate variance: (SR - AR) AT = (4.00 - 4.20) 46,830 = ` 9,366 (A)
(b) Efficiency variance: (AP - SP) SR = (7,610 - 7,805) x ` 24 = ` 4,680 (A)
(c) Factory O.H. cost variance: Std. O.H. - Actual O.H. = `34,245 - 36,340 = `2,095 (A)
which can be analyzed as follows:
(a) Expenditure or Budgeted variance: Budgeted O.H. - Actual O.H.
` 33,750 - 36,340 = ` 2,590 (A)
(b) Volume variance: SR (AP - BP) = ` 4.5 (7,610 - 7,500) = ` 495 (F)
Volume variance can be further divided as follows:

1. Efficiency variance: SR (AP - SP) = ` 4.50 (7,610 - 7,805) = ` 877.50 (A)
2. Capacity variance: SR (SP - BP) = ` 4.50 (7,805 - 7,500) = ` 1372.50 (F)
4. (a) A company manufactures two types of herbal product, A and B. Its budget shows
profit figures after apportioning the fixed joint cost of ` 15 laksh in the proportion of the
numbers of units sold. The budget for 2018 indicates:
Particulars A B
Profit (`) 1,50,000 30,000
Selling price per unit (`) 200 120
P/V Ratio (%) 40 50
Required to advise on the best option among the following, if the company expects
that the number of units to be sold would be equal.
(i) Due to change in manufacturing process, the joint fixed cost would be reduced by
15% and the variable cost would be increased by 7%.
(ii) Price of A could be increased by 20% as it is expected that the price elasticity of
demand would be unity over the range of price.
(iii) Simultaneous introduction of both the options, viz. (i) and (ii) above. 4+4+4=12
(b) What are the advantages of Inter-firm comparison? 4
Answer:
4. (a) Contribution of A = 40% x 200 = 80

Contribution of B = 50% x 120 = 60.
Average contribution per unit, considering equal units of both = (80 + 60)/2 = 70
15,00,000 + 1,80,000
Total units of production = (Total fixed costs + Profits)/70 = =
70
16,80,000
= 24,000
70
Of which 12000 of A and 12000 of B
Evaluation of Option:
(i)
A B
Selling price/u 200 200 120 120
Variable Cost /u 120 128.4 60 64.20
Contribution/u 80 71.6 60 55.80
Contribution for 12000 units 859200 669600
Total Contribution 1528800
Fixed Cost 15,00,000 x 85% = 12,75,000
Profits 1528800-1275000 = 2,53,800
(ii) Volume for A originally = 12,000.

Since price elasticity of demand = 1, for 20 % increase in unit selling price, there will
be a drop in demand by 20 %, i.e. 20% of 12,000 = 2400.
Revised sales quantity for A at increased price = 12000 - 2400 = 9600
A B
Selling price/u 200 240 120
Variable Cost /u 120 120 60
Contribution/u 80 120 60
Contribution for 9600 units For 12000 units 1152000 720000
Total Contribution 1872000
Fixed Cost 15,00,000
Profits 1872000-1500000 = 3,72,000
(iii) Simultaneous introduction of both:

A B
Selling price/u 200 240 120 120
Variable Cost /u 120 128.4 60 64.20
Contribution/u 80 111.6 60 55.80
Contribution for 9600 units For 12000 1071360
units 669600
Total Contribution 17,40,960
Fixed Cost 15,00,000 x 85% = 12,75,000
Profits 1740960-1275000 = 465960
Decision: Option (iii) has the maximum profits and should be chosen.
(b) The advantages of Inter-firm Comparison are appended below –

(1) Inter-firm Comparison makes the management of the organisation aware of
strengths and weakness in relation to other organisations in same industry.
(2) As only the significant items are reported to the Management time and efforts are
not unnecessary wasted.
(3) The management is able to keep up to data information of the trends and ratios
and it becomes easier for them to take the necessary steps for improvement.
(4) It develops cost consciousness among the members of the industry.
(5) Information about the organisation is made available freely without the fear of
disclosure of confidential data to outside market or public.
(6) Specialized knowledge and experience of professionally run and successful
organisations are made available to smaller units who can take the advantages it
may be possible for them to have such an infrastructure.
(7) The industry as a whole benefits from the process due to increased productivity,
standardization of products, elimination of unfair comparison and the trade
practices.
(8) Reliable and collective data enhance the organising power in deal in with various
authorities and Government bodies.
(9) Inter firm comparison assists in a big way in identifying industry sickness and gives a
timely warning so that effective remedial steps can be taken to save the
organisation.
5. A regional audit firm offers audit, tax and consulting services. The segmented profit and
loss position for the next year shows the following position:
Audit (`) Tax (`) Consulting (`)
1. Revenues 60,000 1,00,000 1,20,000
2. Costs:
Service-level 50,000 60,000 70,000
Facility-level (apportioned) 10,000 12,000 16,000
Total 60,000 72,000 86,000
3. Operating Profit (1-2) Nil 28,000 34,000
Partners are concerned about the profitability of their audit business and contemplate to
close it down. In the event of closure of audit service, it might do more tax work. If audit
service is discontinued, 50 per cent of the facility costs associated with auditing would be
saved. More tax work would increase tax revenues by 45 per cent, but tax service-level
costs would also increase by 45 per cent.
Required:
(a) Determine whether the firm should drop auditing service and the impact on its closure
on profit. Assume that audit centre facility level costs can be allocated to two other
centres based on revenues. Compare Profitability of Tax and Consulting Services
before and after closure of Audit Centre.
(b) What other considerations are important to drop auditing service? 12+4=16
Answer:
5. (a) Whether to drop auditing service and the impact on profits:

Item of Cost/ Revenue Incremental impact
Revenue loss from Audit -60000
Savings in facility level costs +5000

Decrease in Service Level cost (Audit ), considered avoidable +50,000
Increase in Tax Service Revenue by 45% +45000
Increase in service level cost for Tax Service -27000
Cumulative Impact +13000
Decision: Close the Audit function and improve Tax Service.

Tax Consulting
Before After Before After
Revenue 100000 145000 120000 120000
Costs:
Service- level 60000 87000 70000 70000
Facility -level 12000 14736 16000 18264
Total Costs 72000 101736 86000 88264
Operating Profits 28000 43264 34000 31736
Total operating profits before dropping: 28000+34000 = 62000

Total operating profits after dropping Audit function: 43264+31736 = 75000
Impact = 13,000
(b) Other important considerations for dropping Audit function:

(i) The Audit function is not unprofitable or with Nil profit as shown in the question. Its
revenues less its service level costs and avoidable facility level costs are 60,000 -
50,000 - 5000 = 5000. Hence, it is only due to allocated overhead that Audit
function appears to be a non contributor.
(ii) While the release of Audit function strengthens the Tax Service, the overall impact
being ` 13,000 increase in profits, it is a major risk that the firm will be taking, since it
is an audit firm.
(iii) In the medium to long term, it could lose other potential clients who may go
elsewhere to have more diversified services.
(iv) The firm should try to improve its costs and increase its fees to have more
comfortable profits.
6. (a) Explain the concept of 'quality' and enumerate 'costs of quality' under different groups.
3+5=8
(b) What is Learning Curve? What factors affect Learning Curve? 4+4=8
Answer:
6. (a) The term quality is a perception which is personal to an individual. In plain terms,
quality is ―features‖ or ―worth‖ or ―value‖.
Conformance to specifications measures how well the product or service meets the
targets and tolerances determined by its designers.
Fitness for use focuses on how well the product performs its intended function or use.
Value for price paid is a definition of quality that consumers often use for product or
service usefulness. Support services provided are often how the quality of a product or
service is judged. Quality does not apply only to the product or service itself; it also
applies to the people, processes, and organizational environment associated with it.
Psychological criteria is a subjective definition that focuses on the judgmental

evaluation of what constitutes product or service quality.
Quality has many other costs, which can be divided into two categories. The first
category consists of costs necessary for achieving high quality, which are called
quality control costs. These are of two types:
Prevention costs and appraisal costs. The second category consists of the cost
consequences of poor quality, which are called quality failure costs. These include
external failure costs and internal failure costs.
Prevention costs are all costs incurred in the process of preventing poor quality from
occurring. They include quality planning costs, such as the costs of developing and
implementing a quality plan. Also included are the costs of product and process
design, from collecting customer information to designing processes that achieve
conformance to specifications. Employee training in quality measurement is included
as part of this cost, as well as the costs of maintaining records of information and data
related to quality.
Appraisal costs are incurred in the process of uncovering defects. They include the
cost of quality inspections, product testing, and performing audits to make sure that
quality standards are being met. Also included in this category are the costs of worker
time spent measuring quality and the cost of equipment used for quality appraisal.
Internal failure costs are associated with discovering poor product quality before the
product reaches the customer site. One type of internal failure cost is rework, which is
the cost of correcting the defective item. Sometimes the item is so defective that it
cannot be corrected and must be thrown away. This is called scrap, and its costs
include all the material, labor, and machine cost spent in producing the defective
product.
External failure Costs are incurred when inferior products are delivered to customers.
They include cost of handling customer complaints, warranty replacements, repairs of
returned products and cost arising from a damaged company reputation.
(b) Learning Curve Theory is concerned with the idea that when a new job, process or
activity commences for the first time it is likely that the workforce involved will not
achieve maximum efficiency immediately. Repetition of the task is likely to make the
people more confident and knowledgeable and will eventually result in a more
efficient and rapid operation. Eventually the learning process will stop after continually
repeating the job. As a consequence the time to complete a task will initially decline
and then stabilise once efficient working is achieved. The cumulative average time
per unit is assumed to decrease by a constant percentage every time that output
doubles. Cumulative average time refers to the average time per unit for all units
produced so far, from and including the first one made.
Learning curve is essentially a measure of the experience gained in production of an

article by an individual or organization. As more units are produced, people involved
in production become more efficient than before. Each subsequent unit takes fewer
man-hours to produce. The amount of improvement will differ with each type of
article produced. This improvement or experience gain is reflected in a decrease in
man-hours or cost.
Factors affecting Learning Curve:

1. While pricing for bids, general tendency is to set up a very high initial labour cost
so as to show a high learning curve. This should the learning curve useless and
sometimes misleading.
2. The method of production i.e. whether it is labour oriented or machine oriented
influences the slop of the learning.
3. When labour turnover rate is high management has to train new workers
frequently. In such situations the company may never reach its maximum
efficiency potential. One of the important requisites of the learning curve concept
is that there should be uninterrupted flow of work. The fewer the interruptions, the
grater will be the improvement in efficiency.
4. Changes in a product or in the methods of production, designs, machinery, or the
tools/used affect the slope of the learning curve. All these have the effect of
starting learning a fresh because of new conditions If the changes are frequent,
there may be no learning at all.
5. Also other factors influencing the learning curve are labour strikes, lock outs and
shut downs due to other cause also/affect the learning curve. In each such case
there is interruption in the progress of learning.
7. (a) A small project is composed of 8 activities whose estimated time are listed below:
Activity 1-2 2-3 2-4 3-5 4-6 5-6 5-7 6-7
Optimistic time (in weeks) 3 3 2 4 4 0 3 2
Most likely time (in weeks) 3 6 4 6 6 0 4 5
Pessimistic time (in weeks) 3 9 6 8 8 0 5 8
Required:
(i) Draw the project network.
(ii) Find the expected duration and variance for each activity.
(iii) Find the critical path and expected project length.
(iv) The probability that the project will be completed in 23 weeks.
Given that:
Z Value: 1.00 1.91 1.92 1.93 1.94
Probability: 0.9713 0.9719 0.9726 0.9732 0.9738
3+3+2+2=10
(b) The management of SAB Ltd. has suggested that a linear programming model might
be used for selecting the best mix of five possible products — A, B, C, D and E. The
following information are available:
Per Unit of Product
A B C D E
Selling Price (`): 96 84 76 62 54
Costs (`):
Material 30 28 32 30 32
Direct Labour 36 32 12 8 8
Fixed Overhead 18 16 6 4 4
Total Costs 84 76 50 42 44
Expected maximum unit demand per week for each product at the prices indicated:
A B C D E
3000 24000 1800 1200 1200
Cost of material includes a special component which is in short supply. It costs ` 6 per
unit. Only 11,600 units are available to the company during the week. The number of
units of the special component needed for a unit of each product is:
A B C D E
2 1 4 3 6
The management of SAB Ltd. has ruled that expenditure on materials must not exceed
a sum of ` 60,000.
All other resources are freely available in sufficient quantities for planned need.
Formulate a linear programming model stating clearly the criterion you use. 6
Answer:
7. (a) (i) The network diagram for the given data is shown below:
Network Diagram
(ii) The earliest and latest expected time for each event is calculated by considering
the expected time of each activity as shown in the following table:
TABLE: CALCULATION OF EXPECTED TIMES AND VARIANCES

Activity to tm Tp 1 1
te = [to + 4tm + tp] σe =[ [tp - to]2
6 6
1–2 3 3 3 3 0
2–3 3 6 9 6 1
2-4 2 4 6 4 4/9
3–5 4 6 8 6 4/9
4–6 4 6 8 6 4/9
5–6 0 0 0 0 0
5–7 3 4 5 4 1/9
6-7 2 5 8 5 1
The expected duration and variance for each activity is shown in the above table.
(iii) Critical path is : 1 — 2 — 3 — 5 — 6 — 7.
Expected project length. Te = 3+6+6+0+5 = 20 weeks
(iv) Probability that the project will be completed in 23 weeks is given by:
23 - 20
P(0 ≤ X ≤ 23) = P(0 ≤ Z ≤ ) = P(0 ≤ Z ≤ 1.920) = 0.9726 or 97.26%.
2.444
(b)
A B C D E
Selling Price 96 84 76 62 54
Variable Cost 66 60 44 22 40
Contribution 30 24 32 40 14
Let a, b, c, d, e be the number of units respectively of A,B,C,D and E to be produced.

Objective function: Maximise contribution: Z = 30a+24b+32c+40d+14e
Subject to: Demand Constraint
a ≤ 3000
b ≤ 2400
c ≤ 1800
d ≤ 1200
e ≤ 1200
Special Raw Material availability constraint

2a + b + 4c + 3d + 6e ≤ 11600
Special raw material cost constraint

12a + 6b + 24c + 18d + 36e ≤ 60,000
Non negativity constraint: a,b,c,d,e ≥ 0

(a) Backflush Accounting
(b) Relevant Cost Analysis
(c) Treatment of Variances in cost accounts
(d) Value Engineering
(e) Life Cycle Costing
Answer:
8. (a) Backflush accounting is when you wait until the manufacture of a product has been
completed, and then record all of the related issuances of inventory from stock that
were required to create the product. This approach has the advantage of avoiding
all manual assignments of costs to products during the various production stages,
thereby eliminating a large number of transactions and the associated labor. This
system records the transaction only at the termination of the production and sales
cycle. The emphasis is to measure cost at the beginning and at the end with greater
emphasis on the end or outputs. Backflush accounting is entirely automated, with a
computer handling all transactions.
The backflushing formula is:

Number of units produced x unit count listed in the bill of materials for each
component
(b) Relevant Cost Analysis: For decision making purpose, it is necessary to classify costs
and revenues based on whether they are relevant or irrelevant to the decisions.
Relevant costs and revenues are those, that are influenced by the decisions. Irrelevant
costs and revenues are those, that are not affected or influenced by the decisions.
Relevant costs are those expected future costs that are essential but differ for
alternative courses of action. It is a future cost that would arise as a direct
consequence of the decision under review.
The costs which should be used for decision making are often referred to as ―relevant
costs‖. CIMA defines relevant costs as ‗costs appropriate to aiding the making of
specific management decisions‘.
Relevant costing is an incremental analysis which means that it considers only relevant
costs i.e. costs that differ between alternatives and ignores sunk costs i.e. costs which
have been incurred, which cannot be changed and hence are irrelevant to the
scenario.
(c) In Standard Cost Accounting Systems which contain both actual and standard costs
in the accounting records and financial statements, the question of adjustment of the
cost variances at the end of the accounting period arises.
Three methods of disposal of variances and the advantages and disadvantages of

each are discussed below:
1. Transfer to Profit and Loss Account.
2. Allocation of Variances to Finished Stock, Work-in-Progress and Cost of Sales
Account.
3. Transfer of Variances to the Reserve Account.
Under the method ‗Allocation of Variances to Finished Stock, Work-in-Progress and
Cost of Sales Account‘, the variances are distributed over stocks of finished and partly
finished products and to the cost of sales. The distribution of each variance is made to
the three accounts on a percentage basis according to the closing balance (value)
of each account.
(d) Value Engineering is an organized/systematic approach directed at analyzing the

function of systems, equipment, facilities, services, and supplies for the purpose of
achieving their essential functions at the lowest life-cycle cost consistent with required
performance, reliability, quality, and safety. Value Engineering is an effective problem
solving technique. Value engineering is essentially a process which uses function
analysis, teamwork and creativity to improve value. Value Engineering is not just
―good engineering.‖
It is not a suggestion program and it is not routine project or plan review. It is not
typical cost reduction in that it doesn‘t ―cheapen‖ the product or service, nor does it
―cut corners.‖
Value Engineering methodology is a powerful tool for resolving system failures and
designing improvements in performance of any process, product, service or
organization.
(e) Life Cycle Costing; aims at cost ascertainment of a product, project etc. over its
projected life. It is a system that tracts and accumulates the actual costs and
revenues attributable to cost object (i.e., product) from its inception to its
abandonment. Sometimes the terms; cradle-to-grave costing and womb-to-tomb
costing convey the meaning of fully capturing all costs associated with the product
from its initial to final stages.
Product Life Cycle is a pattern of expenditure, sale level, revenue and profit over the
period from new idea generation to the deletion of product from product range. It
spans the time from initial R&D on a product to when customer servicing and support
is no longer offered for the product. Product life cycle costing involves tracing of costs
and revenues of each product over several calendar periods throughout their entire
life cycle. Traces research, design and development costs and total magnitude of
these costs for each individual product and compared with product revenue. Assists
report generation for costs and revenues.
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)

DECEMBER 2018
Paper- 15: STRATEGIC COST MANAGEMENT – DECISION MAKING
Further, answer any 5(five) Questions from Section B, each carrying 16 marks
SECTION – A
(20 marks)
1. Choose the most appropriate answer to the following questions giving justification :
2x10=20
(i) A company has a break even point when sales are Rs. 3,20,000 and variable cost at
that level of sales are Rs. 2,00,000. How much would contribution margin increase or
decrease if variable expenses are dropped by Rs.30,000 ?.
(A) Increase by 27.5%
(B) Increase by 9.375%
(C) Decrease by 9.375%
(D) Increase by 37.5%
(ii) Twin Ltd. uses JIT and back flush accounting. It does not use a raw material stock
control account. During September 2018, 10000 units were produced and sold. The
standard cost per unit is Rs. 150 which includes materials of Rs. 60. During September
2018, Rs. 9,90,000 of conversion costs were incurred. The debit balance in cost of
goods sold account for September 2018 was
(A) Rs.14,00,000
(B) Rs.14,80,000
(C) Rs.15,90,000
(D) Rs.16,20,000
(iii) A company operates a standard absorption costing system. The budgeted fixed
production overheads for the company for last year were Rs. 3,30,000 and budgeted
output was 220,000 units. At the end of the company’s financial year, the total of the
fixed production overheads debited to the Fixed Production Overhead Control
Account was Rs. 2,60,000 and the actual output achieved was 2,00,000 units. The
under/over absorption of overhead was
(A) Rs. 40,000 over absorbed.
(B) Rs. 40,000 under absorbed.
(C) Rs. 50,000 over absorbed.
(D) Rs. 50,000 under absorbed.
(iv) A company has the capacity of producing 80000 units and presently sells 20000 units
at Rs. 100 each. The demand is sensitive to selling price and it has been observed
that with every reduction of Rs. 10 in selling price the demand is doubled. What
should be the target cost in selling price if the demand is doubled at full capacity
and profit margin on sale is taken at 25%?
(A) Rs.75
(B) Rs.90
(C) Rs.25
(D) Rs.60
(v) A factory can make only one of the three products X, Y or Z in a given production
period. The following information are given :
Per unit Rs. X Y Z
Selling Price 1500 1800 2000
Variable Cost 700 950 1000
Assume that there is no constraint on resource utilization or demand and similar

resources are consumed by X,Y and Z. The opportunity cost of making one unit of Z is
(A) Rs. 850
(B) Rs. 800
(C) Rs. 1800
(D) Rs. 1500
(vi) AB company is a supermarket group that incurs the following costs :

(A) The bought-in price of the goods
(B) Inventory finance costs
(C) Self refilling costs
(D) Costs of repacking or ‘pack out’ prior to storage before sale
AB company’s calculating of direct product profit (DPP) would include

(A) Costs (a) and (c) only.
(B) All of the above cost except (b)
(C) All of the above costs except (d)
(D) All of the above costs.
(vii) S Ltd. manufactures a product whose time for the first unit is 1000 hours. It experience
a learning curve of 80%, What will be the total time taken in hours for unit 5 to 8 ?
(A) 4096 hours
(B) 3200 hours
(C) 1536 hours
(D) 2000 hours
(viii) H Group has two divisions, Division P and Division Q. Division P manufactures an item
that is transferred to Division Q. The item has no external market and 6000 units
produced are transferred internally each year. The costs of each division are as
follows ?
Division P Division Q
Variable Cost Rs. 100 per unit Rs. 120 per unit
Fixed cost each year Rs. 1,20,000 Rs. 90,000
Head Office management decided that a transfer price should be set that provides a
profit of Rs. 30,000 to Division P. What should be the transfer price per unit ?
(A) Rs.145
(B) Rs. 125
(C) Rs. 120
(D) Rs. 135
(ix) In the context of Critical Path Analysis, the portion of the float of an activity which
cannot be consumed without affecting adversely the float of the subsequent
activities is called
(A) Free float
(B) Interfering float
(C) Independent float
(D) Total float
(x) In CPA (Critical Path Analysis) which of the following is not a correct step in
sequence?
(A) Understanding the logic of the system under consideration
(B) Constructing the net work
(C) Providing estimates for activity duration.
(D) Implementing and controlling the net work.
Answer: 1
(i) (b) S – V = C = Rs. 3,20,000 – 2,00,000 = Rs. 1,20,000

c/s ratio = x 100 = 37.5%
New VC = Rs. 1,70,000,
C = Rs. 1,50,000
c/s ratio = x 100 = 46.875%
% increase in c = 46.875 – 37.5% = 9.375%
(ii) (c) Rs.

Standard cost of goods sold 15,00,000
(10,000 units @ Rs.150)
Less : Std. material cost 6,00,000
(10,000 @ Rs. 60) 9,00,000
Standard conversion cost
Conversion cost incurred 9,90,000
Excess charged to cost of goods -------------
sold a/c. (debit) 90,000
Total debit balance of cost of goods sold
Account = Rs. 15,00,000 + 90,000 = Rs. 15,90,000
(iii) (a)
Overhead Absorption Rate = = Rs.1.50/unit
Overhead Absorbed : 2,00,000 @ Rs. 1.50 = Rs. 3,00,000
Actual overhead Rs. 2,60,000
Over absorbed overhead Rs. 40,000
(iv) (d) as per following :

Demand price (Rs.)
20,000 100
40,000 90
80,000 80
Target cost = Rs. 80 – (25% of 80) = Rs. 60/-
(v) (a)
Opportunity cost is the cost of next best alternative foregone. Between X and Y, y
has a better contribution i.e. Rs. 850 as against X (Rs. 1500 – 700) = Rs. 800.
(vi) (d) Because all of the costs mentioned can be identified with specific goods/product
and would be deducted from the selling price to determine the direct product profit.
(vii) (c) as per the following :

At 80% Learning Curve, the total time for 8 units will be 8*512 i.e. 4096 hours and for 4
units it is 4*640 i.e. 2560 hours. Hence the time taken for units 5 to 8 will be 1536
(4096 – 2560)
(viii) (b) variable cost + (Fixed cost + Profit Desired) ÷ Volume = Rs. 100 + (1,20,000 +
30,000) ÷ 6000 = Rs. 125/-
(ix) (b) Interfering float is that part of the total float which causes a reduction in the float
of the successor activities. It is the difference between the latest finish time of the
activity in question and the earliest starting time of the following activity or zero,
whichever is larger.
(x) (d) Because step no. 4 i.e. (d) should be satisfying the objectives. Implementing and
controlling the network would be the final step.
SECTION – B
Answer any five question
Each Question carries 16 Marks
16 x 5 = 80
2. (a) You are given the following data for a period in respect of two products, X and Y,
which consume support services in different proportions :
Product X Product Y
Unit produced 40 40
Material moves per product unit 12 28
Direct labour hrs. per unit 1740 1740
Budgeted material handling costs :Rs. 3,48,000
Required :
(i) Determine cost per unit of X and Y using the volume-based allocation method
(direct labour hrs.)
(ii) Compute cost per unit of X and Y using ABC.
(iii) How would you explain the results ? 1+3+4=8
2. (b) The profit for The Forward Look Ltd. works out to 12.5% of the capital employed and the
relevant figures are as under :
Rs.
Sales 5,00,000
Direct Materials 2,50,000
Direct Labour 1,00,000
Variable Overheads 40,000
Capital employed 4,00,000
The new Sales Manager who has recently joined the Company estimates for the next
year a profit of about 23% on the capital employed provided the volume of Sales is
increased by 10% and simultaneously there is an increase in Selling Price of 4% and an
overall cost reduction in all the elements of cost by 2%.
Verify the contention of the Sales Manager by computing in detail the cost and profit for
the next year and state whether his proposal can be adopted by the management. 8
Answer : 2(a)
(i) Direct labour hour rate =
= = =Rs. 2.5
Product X Product Y
Total direct labour hours taken 69,600 69,600
Labour rate Rs. 2.5 Rs. 2.5
Material handling cost absorbed
(hrs x Rate) 1,74,000 1,74,000
Units produced 40 40
Material handling cost per unit 4,350 4350
(ii) Since number of material moves causes material handling costs, use of this
cost driven gives a better result :
Rate per material move = = Rs. 8,700
Product X Product Y
Total Material moves 12 28
Material handling
costs applied @ Rs. 8,700/- Rs. 1,04,400 2,43,600
units produced 40 40
Material handling cost per unit Rs. 2,610 6,090
(iii) Product Y requires more material moves and hence shares nationally more
material handling costs under (ii) above. In other words, the complexity or
diversity of Product Y is taken care of when overhead costs are allocated to
this product using appropriate cost driven under ABC.
Answer : 2(b)
Computation of Fixed Cost:

Rs.
Annual Sales 5,00,000
Less Profit :Rs. 4,00,000 x 12.5% 50,000
Total Cost 4,50,000
Less Variable Cost : Direct Material Rs. 2,50,000
Direct Labour Rs. 1,00,000
Variable Overhead Rs. 40,000
3,90,000
60,000
Statement showing Profit obtained upon adopting the Sales Manager’s proposal :
Rs.
(i) Revised Sales : Rs. 5,00,000 x 110% x 104% 5,72,000
(ii) Variable Cost :Rs. 3,90,000 x 110% x 98% 4,20,420
(iii) Contribution 1,51,580
(iv) Fixed Cost Rs. 60,000 x 98% 58,800
(v) Profit 92,780
Percentage of Profit on Capital Employed = (Rs. 92,780 /4,00,000) × 100 = 23.195 > 23%
Conclusion : The Sales Manager’s proposal can be adopted.
3. (a) XYZ Ltd. produces three products. The cost data are as under :
Particulars X Y Z
Direct Materials Rs.64 Rs.152 Rs.117
Direct Labour :
Dept. Rate per hour (Rs) Hrs. Hrs. Hrs.

1 5 18 10 20
2 6 5 4 6.5
3 4 10 5 20
Variable overheads Rs.16 Rs.9 Rs.24
Fixed overheads Rs. 4,00,000 per annum
The budget was prepared at a time, when market was sluggish. The budgeted
quantities and selling prices are as under :
Product Budged Quantity Selling price (Rs.) unit
X 9750 270
Y 7800 280
Z 7800 400
Later the market improved and the sale quantities could be increased by 20% for
product X and 25% each for products Y and Z. The Sales Manager confirmed that the
increased quantities could be achieved at the prices originally budgeted. The
Production Manager has stated that the output cannot be increased beyond the
budgeted level due to limitation of direct labour hours in Department 2.
Required :
(i) Set optimal product mix.
(ii) State profit under optimal product mix. 6+6 = 12
(b) A company is producing and selling three products. How would you determine
relative profitability of products in each of the following independent situation ?
(i) Total sales potential in unit is limited,
(ii) Total sales potential in value is limited,
(iii) Raw materials are in short supply,
(iv) Production capacity (machine hours) is limited.
1+1+1+1 = 4
Answer : 3(a)
Products : X Y Z
Budged Quantity (units) : 9,750 7,800 7,800
Selling price (p.u.): (i) 270 280 400
Variable cost (p.u.):
Direct materials 64 152 117
Direct labour 160 94 219
Variable overheads 16 9 24
Total variable cost (p.u.) (ii) 240 255 360
Contribution (p.u) (Rs.) (i) – (ii) 30 25 40
Statement of optima product mix and profit.
Products : X Y Z Total
Contribution (p.u) : (Rs.) (a) 30 25 40
Direct labour hours in Dept.2 (b) 5 4 6.5
Contribution per hr: (a)/(b) 6 6.25 6.15
Ranking III I II
Optimal product mix units (c) 5655 9750 9750
(28275 hrs.) (39000 hrs) (63375 hrs)
Total contribution (Rs.) (a)x(c) 169650 243750 390000 803400
Less : Fixed cost (Rs.) 400000
Optimal profit 403400
Working Notes
(1) Total hours available in Department 2
Products Units Hrs.(p.u.) Total hrs.
(a) (b) (c) (d) = (b) x (c)
X 9,750 5 48,750
Y 7,800 4 31,200
Z 7,800 6.5 50,700
Total available hrs. for budgeted production 1,30,650
(2) Maximum Sales Quantities of Products (under improved market conditions)

Products Units Increase Total
in percentage number of units
X 9,750 20 11,700
Y 7,800 25 9,750 x 4 = 39,000
Z 7,800 25 9,750x6.5=63,375
Required hours for Y+Z 1,02,375
Hours available for X : 1,30,650 – 1,02,375 = 28,275
Production for X 28,275 ÷ 5 = 5655 units
Answer : 3(b)
The Section process will be based on optimization of contribution in relation to constraint.
(i) Unit contribution
(ii) P/V or C/S ratio
(iii) Contribution per Kg of RM
(iv) Contribution per machine hour.
4. a) A company is organized into two divisions, namely X and Y, and produces three
products A, B and C. Data per unit are :
A B C
Market price (Rs.) 240 230 200
Variable costs (Rs) 168 120 140
Direct Labour (hours) 4 5 3
Maximum sales potential (units) 1600 1000 600
Division Y has a demand for 600 units of product B for its use. If Division X cannot supply
the requirement, Division Y can buy a similar product from market at Rs. 224 per unit.
Required :
What should be the transfer price of 600 units of B for Division Y, if the total direct labour-
hours available in Division X are restricted to 15000 ?
8
Answer : 4(a)
Product
Particulars A B C
Market price (Rs.) 240 230 200
Less : Variable costs (Rs.) 168 120 140
Contribution p.u (i) 72 110 60
Direct labour hours p.u. (ii) 4 5 3
Contribution per D.L.H. (i)/(ii) 18 22 20
Rank III I II
Production Max. Sales Hrs/Unit Production Hours used Balance hours

A 1000 5 1000 5000 10000
B 600 3 600 1800 8200
C 1600 4 1600 6400 1800
Spare hours available in Division X = 1800 hrs

Division X can produce Product B in 1800 spare hours
= 1800 hrs/5 hrs. pu = 360 units of product B
Balance units of Products B required by Division Y = 600 units – 360 units = 240 units
Labour hours required for 240 units of Product B = 240 units x 5 hrs. per unit = 1200 hours.
Opportunity contribution of A per hr. = Rs. 18
Calculation of Minimum Transfer Price p.u. Rs.

Variable cost (600 units ×Rs. 120) 72000
Opportunity cost of contribution lost (1200 hrs×Rs. 18) 21600
Amount to be recovered 93600
Transfer price p.u. (Rs.) (Rs. 93600 / 600 units) 156
(b) Prism Ltd. has decided to adopt JIT policy for materials. The following effects of JIT
policy are identified :
(i) To implement JIT, the company has to modify its production and material
receipt facilities at a capital cost of Rs. 2,00,000. The new machine will require
a cash operating cost Rs. 2,16,000 p.a. The capital cost will be depreciated
over 10 years.
(ii) Raw material stockholding will be reduced from Rs. 40,00,000 to Rs. 15,00,000.
(iii) The company can earn 12% on its long-term investments.
(iv) The company can avoid rental expenditure on storage facilities amounting to
Rs. 66,000 per annum. Property Taxes and Insurance amounting to Rs. 44,000
will be saved due to JIT programme.
(v) Presently there are 7 workers in the Store department at a salary of Rs. 10,000
each per month. After implementing JIT scheme, only 4 workers will be
required in this department. Balance 3 workers’ employment will be
terminated.
(vi) Due to receipt of smaller lots of Raw Materials, there will be some disruption of
production. The costs of stockouts are estimated at Rs. 1,54,000 per annum.
(vii) Since the supplier is new having no reputation as yet in the market, an
additional inspection cost of Rs. 12,000 p.a. has to be incurred.
Required :
Determine the financial impact of the JIT policy. Is it advisable for the
company to implement JIT system ? 6+2= 8
Answer :4(b)
(b) Cost-Benefit Analysis of JIT policy.
Costs Rs. Benefits Rs.

Interest on capital for 24000 Interest on investment on released 300000
funds
modifying production facilities
(Rs. 2,00,000 x 12%) (Rs. 40,00,000 – Rs. 15,00,000) x 12%
Operating Costs of new 216000 360000

production facilities Saving in salary of 3 workers
terminated
Depreciation of new Nil (Rs. 10,000 x 12 months x 3) 66000
production facilities
Saving in rental Expenditure
Stock-Outs costs (given) 154000 44000
Inspection cost 12000 Saving in Property Tax & Insurance

----------
Net benefit due to JIT policy 364000
Total 770000 Total 770000
Conclusion : The JIT policy may be implemented, as there is a Net Benefit of Rs. 82000 per
annum.
Note : Depreciation, being apportionment of non-cash capital cost, is ignored in decision-
making. Tax saving on Depreciation is not considered in the above analysis.
5. (a) One kilogram of product ‘K’ requires two chemical A and B. The following were the
details of product ‘K’ for the month of June 2018 :
(i) Standard mix ratio is 1:1
(ii) Standard price per kilogram of chemical ‘A’ Rs. 12 and chemical ‘B’ Rs. 15.
(iii) Actual input of chemical ‘B’ 70 kilograms
(iv) Actual price per kilogram of Chemical ‘A’ Rs. 15
(v) Standard normal loss 10% of total input.
(vi) Materials cost variance total Rs. 650 adverse and the same was fully attributable
to Chemical ‘B’.
(vii) Materials yield variance total Rs. 135 adverse.
Required :
Compute all missing variances and complete the Variance Report. 6+4=10
Answer : 5(a)
SPSQ SPRSQ SPAQ AQAP
A 12*? 12*? 12*? ?*15
B 15*? 15*? 15*70 70*?
1) Let the total actual input be X kgs. Therefore applying the Standard Mix Ratio, the
Revised Standard Quantity of Chemicals A and B each would be 0.5 kgs.
2) Total YIELD VARIANCE of 135 adverse can be split according to the ratio of SPSQ.
Since inputs are equal the ratio will be that of price i.e. 4:5. Hence YIELD VARIANCE of
A is 60 Adverse and B is Rs. 75 Adverse. Substituting yield variance we get SQ of A & B
each as 50 kgs.
A = 12*(SQ – 0.5X) = -60 SQ-0.5X = .5 SQ=0.5X-5
Similarly for B SQ= 0.5X-5
3) total actual input = X kgs. : Actual input of A = (X-70)

4) Material Cost Variance of A = Nil (i.e. SPSQ-AQAP)=0
i.e., 12*(05.X-5) – 15*(X-70)
Solving this X = 110
Therefore, Revised Standard Quantity of A and B each is 55 kg and

Standard Quantity of A and B each is 50 Kgs.
Material cost variance of B = Rs. 650 Adverse

i.e. (15*50) – 70*AP = -650 750 – 70AP = -650, 70AP = 1400, AP = 20
The final variance report is as follows

SPSQ SPRSQ SPAQ AQAP
A 600 660 480 600
B 750 825 1050 1400
Total 1350 1485 1530 2000
Yield Mix Variance Usage Variance Price Variance Cost Variance

A 60A 180F 120F 120A 0
B 75A 225A 300A 350A 650A
Total 135A 45A 180A 470A 650A
(b) For a machine the financial data are given below :

Time (Year) 0 1 2 3 4
Outlay (Rs) 5000
Operating Costs (Rs) 1400 1500 1600 1700
Maintenance (Rs.) 300 400 500
Value if scrapped (Rs.) 3400 2000 800 600
The appropriate interest rate is 12% p.a. and the discount factor is as follows :
Year 0 1 2 3 4
12% Disc. Factor 1 0.893 0.797 0.712 0.636
Required :
Determine the optimal length of replacement cycle. 4+2=6
Answer : 5(b)
Year 0 1 2 3 4 Present Annuity Average
Value Factor PV
12% Disc Factor 1 0.893 0.797 0.712 0.636
1 -5000 2000 3214 0.893 3599
2 -5000 -1400 200 6091 1.69 3604
3 -5000 -1400 -1800 -1200 8539 2.402 3555
4 -5000 -1400 -1800 -2000 -1600 10126 3.038 3333
Decision: Better to replace at the end of year 4 as the average present value is the
lowest.
6. (a) The following is the information regarding turnover and quality cost of a company.
(i) Sales revenue Rs. 10,000,000 ; net income Rs. 10,00,000
(ii) During the year, customers returned 30000 units needing repair. Repair cost
averages Rs. 7 per unit.
(iii) Six inspector are employed, each earning an annual salary of Rs. 25,000.
These six inspectors are involved only with final section (Production
acceptance).
(iv) Total scrap is 30000 units. All scrap is quality related. The cost of scrap is
about Rs. 15 per unit.
(v) Each year, approximately 150000 units are rejected in final inspection. Of
these units, 80 per cent can be recovered through rework. The cost of rework
is Rs. 3.00 per unit.
(vi) A customer cancelled an order that would have increased the profits by Rs.
2,50,000. The customer’s reason for cancellation was poor product
performance. The accounting and marketing departments agree that the
company loses at least this much during the year for the same reason.
(vii) The company employs five full time employees in its complaint department.
Each earns Rs. 20,000 a year.
(viii) The company gave sales allowances totaling Rs. 1,30,000 due to substandard
products being sent to the customer.
(ix) The company requires all new employees to take in three hour Quality-
Training programme. The estimated cost for the programme is Rs. 80,000.
(x) Inspection of the final product requires testing equipmenet. The annual cost
operating and manufacturing this equipment is Rs. 1,20,000.
Required :
Prepare a simple quality cost report classifying costs by rational category. 8
Answer : 6(a) Quality Cost Report

Quality Costs Percentage of sales
i) Prevention costs
Quality training 80,000 0.8%
ii) Appraisal costs :

Product inspection 150,000
Test equipment 120,000
270,000 2.7%
iii) Internal failure costs :
Scrap 450,000
Rework 360,000
810,000 8.1%
iv) External failure costs :
Repair 210,000
Order cancellation 250,000
Customer complaints 100,000
Sales allowance 130,000
690,000 6.9%
Total quality costs 1,850,000 8.5%
(i to iv)
(b) The following was the pattern for demand of cars rented out by a tourist operator
observed for 100 days :
No. of cars 5 7 10 15
No. of days 20 30 40 10
The random numbers are 88, 76, 10, 05, 23
Required :
(i) Simulate the demand for cars over five days.
(ii) How many cars should the operator have in order to have at least 75% probability
of fulfilling the demand based on your simulated results ? 5+3=8
Answer : 6(b)
No. of No. of Probability Cumulative Random Day Random Demand
cars Days Prob No. No.
Interval
5 20 0.20 0.20 00-19 1 88 10
7 30 0.30 0.50 20-49 2 76 10
10 40 0.40 0.90 50-89 3 10 5
15 10 0.10 1.00 90-99 4 05 5
5 23 7
(1) (1) (1) (a)
(i) For 75% or more probability, we need more than 3 days when demand is fulfilled
i.e. 3/5 = 60%. Therefore at least 4 days’ demand is fulfilled.
(ii) In this case, 10 cars when there is a 100% chance of all demand being fulfilled
based on simulated results.
7. (a) Given the following information regarding a project and the time duration of each
activity :
Activity Preceding activity Normal Time (days)
A - 16
B - 20
C A 8
D A 10
E B,C 6
F D,E 12
Required :
(i) Draw the activity network of the project.
(ii) Find critical path and duration of the project.
(iii) Find the total float and free-float for each activity.2+2+4 = 8
(b) Coffee provider is made by a shop by blending different flavours of coffee seeds. 520
gms of Plantation A seeds and 510 gms of Plantation B seeds are ground to yield 1000
gms of Special Blend power. 520 gms of Peaberry seeds and 560 gms of Plantation A
seeds are ground to yield 1050 gms of Special Peaberry powder. 500 gms of
Plantation B seeds and 510 gms of Robusta seeds are ground to get 980 gms of
Normal Blend powder. The contribution per kg of Special Blend, Special Peaberry
and Normal Blend are Rs. 100, 120 and 140 respectively. The following stock are
available for the production period:
Plantation A : 200 kgs ; Plantation B : 300 kgs ; Peaberry : 250 kgs ; Robusta : 51 kgs.
Grinding capacity on a total is limited to 500 kgs of output in a production period.
Required :
Formulate the above as a linear programme with the objective to maximize
contribution. Identify the variables and give the constraints. (Consider 1000 gms = 1
kg).
8
Answer : 7(a)
(i) The network for the given problem
E=0 F(12)E = 42
L=0 L = 42
A D F = 16 +10 + 12 = 38
B E F = 20 + 6 + 12 = 38
(ii) A – C – E – F = 16 + 8 + 6 + 12 = 42 days (Critical path)
(iii) Total float and free float for each activity.
Activity Normal time EST EFT LST LFT Total Float Free Float
(Days)
A 16 0 16 0 16 0 0
B 20 0 20 4 24 4 4
C 8 16 24 16 24 0 0
D 10 16 26 20 30 4 4
E 6 24 30 24 30 0 0
F 12 30 42 30 42 0 0
Answer : 7(b)
Let x, y and z be the no. of kgs of Special Blend, Special Peaberry and Normal Blend
respectively to be produced in the production period.
Then, Objective fn : Max Z = 100x + 120y + 140z
The flowing are resources per kg of output :
x Y Z Availability
Plantation A 520 / 1000 560/1050 200
Plantation B 510 / 1000 500/980 300
Peaberry 520/1050 250
Robusta 510/980 51
Resource constraint :
x + y 200
x + 300
250
51
Production Capacity : x + y + z 500

x, y, z 0
8. Write short notes on any four of the following : 4×4=16

(a) Business Process Re-engineering
(b) Assignment
(c) Features of Target Costing
(d) Differences between Standard Costing and Kaizen Costing
(e) Methods of Solving Transportation Problem.
Answer : 8(a)
Business Process Re-engineering (BPR) refers to fundamental rethinking and redesign of
business processes to achieve improvement in critical measures of performance such
as cost, quality, service,speedand customer satisfaction. In contrast, the concept of
Kaizen, which involves small, incremental steps towards gradual improvement, re-
engineering involves a giant leap. It is the complete redesign of a process with an
emphasis on finding creative new way to accomplish an objective. It has been
described as taking a blank piece of paper and starting from scratch to redesign a
business process. Rather than searching continually for minute improvement,
reengineering involves a radical shift in thinking about how an objective should be met.
Re-engineering prescribes radical, quick and significant change. Admittedly, it can
entail high risks, but it can also bring big rewards. These benefits are most dramatic,
when new models are discovered for conducting business.
Answer : 8(b)
Assignment is a special linear programming problem. There are many situations where
the assignment of people or machines etc. may be called for. Assignment of workers to
machines, clerks to various check-out counters, salesmen to different sales areas are
typical examples of these. The Assignment is a problem because people possess
varying abilities for performing different jobs and therefore the costs of performing jobs
by different people are different. Thus, in an assignment problem, the question is how
the assignments should be made in order that the total cost involved is minimized.
The following are the methods of solving an assignment problem. They are:
(1) Complete Enumeration Method

(2) Simplex Method
(3) Transportation Method and
(4) Hungarian Method
Answer : 8(c)
Target Costing is defined as “a structured approach in determining the cost at which a
proposed product with specified functionality and quality must be produced, to generate
a desired level of profitability at its anticipated selling price.” The main features or practices
followed in Target Costing are:
Step 1: Identify the market requirements as regards design, utility and need for a new
product or improvements of existing product.
Step 2: Set Target Selling Price based on customer expectations and sales forecasts.
Step 3: Set Target Production Volumes based on relationships between price and volume.
Step 4: Establish Target Profit Margin for each product, based on the company’s long term
profit objectives, projected volumes, and course of action, etc.
Step 5: Set Target Cost (or Allowable cost) per unit, for each product. Target cost = Target
selling price less Target profit margin
Step 6: Determine Current Cost of producing the new product, based on available
resources and conditions.
Step 7: Set cost reduction Target in order to reduce the Current Cost to the Target Cost.
Step 8: Analyze the Cost Reduction Target into various components and identify cost
reduction opportunities using Value Engineering (VE) and Value Analysis (VA) and
Activity Based Costing (ABC)
Step 9: Achieve cost reduction and Target profit by Effective Implementation of Cost
Reduction decisions
Step 10: Focus on further possibilities of cost reduction ie Continuous Improvement
program.
Answer : 8(d)
Basis of difference Standard costing Kaizen Costing
Concepts It is used for cost control It is used for cost reduction.
It is assumed that It assumes continuous
currentmanufacturing conditions improvement.
remain unchanged.
The cost focus is on standard costs The cost focus is on actual costs
based on static conditions assuming dynamic conditions
The aim is to meet cost The aim is to achieve cost
performance standards reduction targets.
Techniques Standards are set every six or Cost reduction targets are set
twelve months and applied monthly
Costs are controlled using Costs are reduced by
variance analysis based on implementing continuous
standard and actual costs. improvement (kaizen) to attain
the target profit or to reduce
the gap between target and
estimated profit.
Management should Management should
investigateand respond when investigate and respond when
standards are not met. target kaizen amount are not
attained.
Employees They are often viewed as the They are viewed as the source
cause of problems of, and are empowered to find,
the solutions.
Answer : 8(e)
The following are the methods of solving transportation problem:
1. The North-West corner rule
2. LeastCost Method
3. Vogel’s Approximation Method
1. North West Corner Method (NWCM):

The simplest of the procedures used to generate an initial feasible solution is NWCM. It is so
called because we begin with the north west or upper left corner cell of our transportation
table. Various steps of this method can be summarized as under:
Step 1: Select the north west (upper left-hand) corner cell of the transportation table and
allocate as many units as possible equal to the minimum between available supply and
demand requirement, i.e., min
Step 2:Adjust the supply and demand numbers in the respective rows and columns
allocation.
Step 3:
(a) If the supply for the first row is exhausted, then move down to the first cell in the second
row and first column and go to step 2.
(b) If the demand for the first column is satisfied, then move horizontally to the next cell in
the second column and first row and go to step 2.
Step 4:If for any cell, supply equals demand, then the next allocation can be made in cell
either in the next row or column.
Step 5:Continue the procedure until the total available quantity is fully allocated to the
cells required.
2. Least Cost Method
The allocation according to this method is very useful as it takes into consideration the
lowest cost and therefore, reduces the computation as well as the amount of time
necessary to arrive at the optimum Solution. Various steps of this method can be
summarized as under:
Step 1:
(a) Select the cell with the lowest transportation cost among all the rows or columns of the
transportationtable.
(b) If the minimum cost is not unique, then select arbitrarily any cell with this minimum cost.
Step 2:Allocate as many units as possible to the cell determined in step 1 and eliminate
that row (column) in which either supply is exhausted or demand is satisfied.
Step 3:
Repeat steps 1 and 2 for the reduced table until the entire supply at different factories is
exhausted to satisfy the demand at different warehouses
3. Vogel’s Approximation Method

This method is preferred over the other two methods because the initial basic feasible
solution obtained is either optimum or very close to the optimum solution. Therefore, the
amount of time required to arrive at the optimum solution is greatly reduced. Various
steps of thismethod are summarized as under:
Step 1:Compute a penalty for each row and column in the transportation table. The
penalty for a given row and column is merely the difference between the smallest
elementand the next smallest elementin that particular row or column.
Step 2: Identify the row or column with the largest penalty. In this identified row or column,
choose the cell which has the smallest cost and allocate the maximum possible quantity
to the lowest cost cell in that row or column so as to exhaust either the supply at a
particular source or satisfy demand at a warehouse.
If a tie occurs in the penalties, select that row/column which has minimum cost. If there is
a tie in the minimum cost also, select that row/column which will have maximum possible
assignments. It will considerably reduce computational work.
Step 3: Reduce the row supply or the column demand by the amount assigned to the
cell.
Step 4:If the row supply is now zero, eliminate the row, if the column demand is now zero,
eliminate the column, if both the row supply and the column demand are zero, eliminate
both the row and column.
Step 5:Re-compute the row and column difference for the reduced transportation table,
omitting rows or columns crossed out in the preceding step.
Step 6: Repeat the above procedure until the entire supply at factories isexhausted to
satisfy demand at different warehouses.
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)

JUNE 2019
Paper- 15: STRATEGIC COST MANAGEMENT – DECISION

MAKING
Section – A
1. Choose the most appropriate answer to the following questions giving justification: 2x10=20
(i) XYZ Ltd. has the following alternative planned activity levels.
Level E F G
Total cost ` 1,00,000 ` 1,50,000 ` 2,00,000
No. of units produced 5000 10000 15000
If fixed overhead remains constant, then fixed overhead cost per unit at Level E is
(A) ` 20
(B) `15
(C) ` 13-33
(D) ` 10
(ii) T Ltd. produces and sells a product. The company expects the following revenues and
costs in 2018:
Revenues (400 sets sold @ `600 per product) ` 2,40,000
Variable costs `1,60,000
Fixed costs `50,000
What amount of sales must T Ltd. have to earn a target net income of ` 63,000 if they
have a tax rate of 30%?
(A) ` 4,20,000
(B) `4,29,000
(C) ` 3,00,000
(D) ` 4,89,000
(iii) Excel Products Ltd. manufactures four products e.g. Product E, Product F, Product G
and Product H using same raw materials. The input requirements for Products E, F, G
and H are 1kg, 2kgs, 5kgs and 7kgs, respectively. Product-wise Selling Price and
Variable Cost data are given hereunder:
Products E F G H
Selling Price (`) 100 150 200 300
Variable Cost (`) 50 70 100 125
Assuming raw material availability is a limiting factor, the correct ranking of the
products would be:
(A) E, F, G & H
(B) E, F, H & G
(C) F, E, G & H
(D) F,E,H&G
(iv) S Ltd. recently sold an order of 50 units having the following costs:
`
Direct materials 1,500
Direct labour (1000 hours @ ` 8-50) 8,500
Variable overhead (1000 hours @ ` 4-00)1 4,000
Fixed overhead2 1,400

15,400
1 Allocated on the basis of direct labour-hours.
2 Allocated at the rate of 10% of variable cost.
The company has now been requested to prepare a bid for 150 units of the same
product.
If an 80% learning curve is applicable, Stone Isle’s total cost on this order would be
(A) ` 38,500
(B) ` 37,950
(C) ` 26,400
(D) ` 31,790
(v) A company manufactures and sells packaging machines. It recently introduced
activity-based costing to refine its existing system. Each packaging machine requires
direct materials costs of ` 50,000; 50 equipment parts; 12 machine hours; 15 assembly
line hours and 4 inspection hours. The details about the cost pools, allocation bases
and allocation rates are given below:
Indirect cost pool Cost allocation base Budgeted allocation rate
Material handling No. of component parts ` 8 per part
Machining Machine hours ` 68 per machine hour
Assembly Assembly line hours ` 75 per assembly hour
Inspection Inspection hours ` 104 per inspection hour
The company has received an order for 40 can-packaging machines from a

customer. Using activity-based costing, indirect costs allocated to the order of the
customer would be:
(A) ` 1,30,850
(B) ` 1,25,280
(C) ` 1,15,050
(D) `1,10,280
(vi) AB Ltd. uses standard cost system. The following information pertains to direct labour
for Product X for the month of March, 2019:
Standard rate per hour `8
Actual rate per hour ` 8.40
Standard hours allowed for actual production 2000 hours
Labour Efficiency variance ` 1,600 (Adverse)
What were the actual hours worked?
(A) 1,800
(B) 1,810
(C) 2,200
(D) 2,190
(vii) X Ltd. has 1000 units of an obsolete item which are carried in inventory at the original
price of ` 50,000. If these items are reworked for ` 20,000, they can be sold for ` 36,000.
Alternatively, they can be sold as a scrap for ` 6,000 in the market. In a decision
model used to analyse the reworking proposal, the opportunity cost should be taken
as
(A) ` 16,000
(B) ` 6,000
(C) ` 30,000
(D) ` 20,000
(viii) Uniform Costing may not be successfully applied in the following case:
(A) In a single enterprise having a number of branches, each of which manufactures

the same set of products with the same facilities.
(B) In a number of entities in the same industry bound by a trade association.
(C) In a number of units across different geographical locations manufacturing one or

more of a given set of products.
(D) In different branches of the same company, each branch making a different
product using a unique process.
(ix) Which of the following is a valid constraint for a linear programming problem?
(A) 3x2 + 4x + 1 = 0
(B) 5xt + 2x2 ≤ 10
(C) 4xx + 3x2> 7
(D) (12x1 + 4x2)/3x2 ≤ 8x1
(x) The shadow price of skilled labour for SD Ltd. is currently `10 per hour. What does this
mean?
(A) The cost of obtaining additional skilled labour is `10 per hour.
(B) There is a hidden cost of `10 for each hour of skilled labour actively worked.
(C) Contribution will be increased by `10 per hour for each extra hour of skilled labour
that can be obtained.
(D) The total costs will be reduced by `10 for each additional hour of skilled labour
that can be obtained.
Answer:
1.
(i) (D)
Change in Costs (B – A) ` 50,000
Change in Units (B – A) ` 5,000
VC per unit = `50, 000 ÷ 5,000 = ` 10
Total Cost at A ` 1,00,000
VC : 5,000 × ` 10 50,000
Total FC ` 50,000 ÷ 5,000 units
= ` 10 per unit
(ii) (A)
Desired Profit
FC 
Required Sales = 1 tax rate
Contribution
Sales
` 50,000  90,000
= = ` 4,20,000
1/ 3
(iii) (B)
Ranking of products would in order of contribution per limiting factor, in relative value.
E F G H
SP (`) 100 150 200 300
VC (`) 50 70 100 125
Contribution per unit 50 80 100 175
RM/unit (kg) 1 2 5 7
Contribution per kg of RM (`) 50 40 20 25
Rank 1 2 4 3
 Correct Order of ranking : E, F, H & G
(iv) (C)
Cumulative hours 200 × (20×0.8×0.8) = 2560
Less: 50×20 = 1000
Net hours for 150 units = 1560
Cost : Direct Materials 150×30 = 4,500
Direct Labour 1560 × 8.50=13,260
Variable Overhead 1560 × 4 = 6,240
Total Variable Cost = 24,000
Allocated Fixed OH = 10% = 2400
Estimated Cost of the Order = 26,400
(v) (D)
Indirect costs per machine: `
Material handling ` 8 × 50 = 400
Machining ` 68 × 12 = 816
Assembly ` 75 × 15 = 1,125
Inspection ` 104 × 4 = 416

`2,757
For the order: ` 2,757 × 40 = ` 1,10,280
(vi) (C)
Labour Efficiency Variance = (ST – AT) × SR
or, (2,000 – AT) × ` 8 = (–) ` 1,600
or, AT = 7,600 ÷ 8 = 2,200 hours
(vii) (B)
Original price is not relevant
Rework income ` 36,000

Less: Cost of rework ` 20,000
Net inflow ` 16,000, it is relevant
The other alternative relevant cash flow is from sale as scrap = `6,000
Hence the opportunity cost is `6.000
(viii) (D)
Though the entity is the same, different products using different (unique) process cannot
follow uniform costing.
(ix) (B)
Other options do not conform to linearity or fundamental of constraints.
(x) (C)
A shadow price for a scarce resource is its opportunity cost.lt is the amount of
contribution that would be lost if one unit less of that resource were available.lt is similarly
the amount of additional contribution that would be earned if one unit more of that
resource were available.(This is on the assumption that that the scarce resource is
available at its normal variable cost).
Section-B
Answer any five questions. 16x5=80
Each Question carries 16 marks.
2. (a) A toy manufacturing company produces different models of toy. The budget in
respect of a model for the month of March, 2019 is as under:
(`lakhs)
Budgeted output 40000 units
Variable costs:
Materials 528
Labour 104
Direct expenses 248 880
Fixed costs:
Specific fixed costs 180
Allocated fixed costs 225 405
Total costs 1285
Add: Profit 115
Sales 1400
Required:
(i) Calculate profit with 10% increase in selling price with a 10% reduction in sales
volume.
(ii) Determine volume to be achieved to maintain the original profit after a 10% rise in
material costs, at the originally budgeted selling price per unit.
(b) SRM Ltd. manufactures and sells a single product X whose selling price is ` 80 per unit
and the variable cost is ` 32 per unit.
(i) Assume that for first year fixed costs are ` 9,60,000 and the annual sales are at
60% margin of safety.
(ii) For second year, it is proposed to add another product line Y whose selling price
would be ` 100 per unit and the variable cost ` 20 per unit. The total fixed costs
are estimated at ` 13,33,200. The sales mix of X : Y would be 7 : 3 based on value.
Required:
(I) For the first year, calculate the rate of net return on sales, assuming an
income tax level of 30%.
(II) For second year, at what level of sales would SRM Ltd. break even? Give
separately for both X and Y the break even sales in rupees and quantities.
(4+2)+(5+5)=16
Answer:
2. (a)
(i) Present selling price ` 14001akhs/40,000 units 3500
Add: 10% Increase 350
Revised selling price ` 3850
Present sales volume 40,000 units
Less: 10% Decrease 4000
Revised sales volume 36,000 units
Revised sales revenue = 36,000 × `3,850 = `1386 lakhs
Total variable cost/unit: Material + Labour + Direct expense
1320 + 260 + 620 = `2200
Profitability statement:
Sales 1386
Less: Variable costs (36000 units × `2,200) 792
Contribution 594
Less: Fixed costs 405
Profit ` 189 lakhs
(ii) Total variable cost/unit: Material + Labour + Direct expense
1452 + 260 + 620 = `2,332
Calculation of sales to be achieved to maintain the original profit of `115 lakhs:
Selling price 3500
Less: Variable costs 2332
Contribution per unit 1168
Desired sales = (Fixed cost + Desired profit)/Contribution p.u.
= (405 lakhs +115 lakhs)/1168 p.u = 44,521 units
2. (b)
(i) Contribution per unit = SP-VC = `(80 - 32) = `48
Break-even Point = 960000/48 = 20,000 units
Percentage Margin of Safety = (Actual Sales – Break-even Sales)/Actual Sales
Or, 60%
= (Actual Sales – 20,000 units)/Actual Sales
Actual Sales = 50,000 units

`
Sales value (50,000 units x `80) 40,00,000
Less: Variable costs (50,000 units x `32) 16,00,000
Contribution 24,00,000
Less: Fixed cost 9,60,000
Profit 14,40,000
Less: Income Tax @30% 4,32,000
Net Return 10,08,000
Rate of net return on sales = (10,08,000/40,00,000) × 100 = 25.2%
(ii) Products
X (`) Y (`)
Selling price per unit 80 100
Variable cost per unit 32 20
Contribution per unit 48 80 -
Individual products contribution margin 60% (48/80) × 100 80% (80/100) × 100
Contribution margin (X and Y)
60% × 7/10 + 80% × 3/10 = 66%
Break even sales = ` 20,20,000 (`13,33,200/66%)
Break even sales mix
X - 70% of 20,20,000 = `14,14,000 i.e. 17,675 units
Y - 30% of 20,20,000 = `6,06,000 i.e. 6,060 units
3. (a) Vikas Associates a firm of Chartered Accountants offers three different types of
services, namely, accounting and auditing, taxation and management consultancy.
Each service is charged on the basis of number of billable hours. The average charge
per billable hours is ` 500. For the year ending 31.03.2019 the firm projects the following
estimate of direct and indirect costs:
` (Lakhs)
Direct Costs: Accounting and Auditing 100.00
Taxation 100.00
Management consultancy 50.00 250.00
Indirect Costs: Planning and review 7.50
Computer processing 7.20

Professional salaries 5.60
Books, Seminars, periodicals 1.80
Programming costs 8.00
Building costs 4.90
General administration costs 15.00 50.00
TOTAL 300.00
Until 31.03.2018 the firm has been allocating the indirect costs on the basis of billable
hours. For the year ending 31.03.2019 it was decided to introduce a system of activity
based costing to capture the indirect cost more accurately. The following data were
gathered accordingly:
Particulars Accounting Taxation Management

and Auditing Consultancy
Billable hours 55000 35000 10000
EDP hours 5000 2500 500
Professionals (No) 30 16 10
Books, Seminars and periodicals (`) 57,500 62,500 60,000
Programming hours 1250 500 2250
Building (Sqft) space occupied 8000 4000 2000
Administration (No. of clients) 150 250 100
Required:
(i) Prepare a comparative profitability statement on the basis of (A) conventional

costing and (B) activity- based costing (ABC)
(ii) Any suggestion for improving the billable charge on the basis of ABC?
(b) AB Ltd. produces a variety of products, each having a number of component parts.
Product X takes 5 hours to produce on machine no. 55 which is working at full
capacity. X has a selling price of ` 50 and a marginal cost of ` 30 per unit. Y-5, a
component part, could be made on the same machine in 2 hours for a marginal cost
of ` 5 per unit. The supplier’s price is ` 13-50 per unit.
Required:
Should AB Ltd., make or buy Y-5? (4+4)+(3+1)+4=16
Answer:
3. (a)
SCHEDULE OF ALLOCATION OF INDIRECT COST BY ABC
` In lakhs
Cost Driver Accounting Management
& consulting
Overhead Ratio Total Auditing Taxation
` ` ` `
Planning and Review Billable Hrs 7.500 4.125 2.625 0.750
Computer Processing EDP Hour 7.200 4.500 2.250 0.450
Professional Salaries 30:16:10 5.600 3.000 1.600 1.000
Books, Seminar, Periodicals Actual 1.800 0.575 0.625 0.600
Programmed Costs 5:2:9 8.000 2.500 1.000 4.500
Building Costs Sq Ft 4.900 2.800 1.400 0.700
Administration Cost 3:5:2 15.000 4.500 7.500 3.000
Total 50 22 17 11
COMPARATIVE PROFITABILITY STATEMENT (` in Lakhs)

Conventional ABC
A&A Tax MGMT A&A Tax MGMT
Revenue 275.00 175.00 50.00 275.00 175.00 50.00
Direct Costs 100.00 100.00 50.00 100.00 100.00 50.00
Overhead Cost 27.50 17.50 5.00 22.00 17.00 11.00
Profit 147.50 57.50 -5.00 153.00 58.00 -11.00
Suggestions:
On the basis of the ABC system the total cost of each division/service is `122 Lakhs, ` 117 Lakhs
and `61 Lakhs respectively. Hence the billable charge should be revised accordingly.
Assuming the same margin i.e. 40% of revenue overall or 662/3 % on cost the revenue works out
to
A&A Tax Mgmt
Cost 122.00 117.00 61.00
Margin 81.33 78.00 40.67
203.33 195.00 101.67
Billable Hours 55,000 35,000 10,000
Charge per Hour 370 560 1017
The analysis clearly reveals that Management Accountancy services are under charged
(b)
Selling Price of product X ` 50
Marginal cost 30
Contribution per unit 20
Contribution per machine hr. = ` 20 ÷ 5 = ` 4
For Component Y-5: `
Marginal cost 5 per unit
Opportunity cost :` 4×2 = 8
Total (to make) 13
Supplier’s price ` 13.50
So, AB Ltd. should make Y-5 for gain of (` 13.50 – 13.00)
= Re 0.50 per unit.
4. (a) A company produces three products A, B and C, from a joint process. Costs and other
details are given below:
Joint Costs Post-separation Costs

(`)
Costs: A B C
(`) (`) (`)
Materials 20,000 1,500 3,500 2,000
Labour 8,000 1,000 1,000 1,500
Overhead 4,000 500 1,000 500
32,000 3,000 5,500 4,000
Others:
Sales value (`) 10,000 25,000 15,000
S & D Exp. (as % of sales) 20% 20% 20%
Estimated Net Profit 20% 10% 20%

(as % of sales)
Required:
Prepare a statement showing the apportionment of joint costs over three products
using Net Value Method.
(b) Fifteen workers (10 Type I workers and 5 Type II workers) work in a production process
during a month of 25 working days. Each Type I worker is expected to produce 8 units
per day and Type II worker is expected to produce 12 units per day. They work on the
regular shift from 9:00 a.m. to 5 p.m. and have a tea break between 10:30 to 10:45
a.m. and 3:00 to 3:15 p.m. and also have a lunch break from 1:00 to 1:30 p.m. The
actual production was 1800 units by Type I workers and 1200 units by Type II workers.
The standard wage rate per hour were `50 and `60 for Type I and Type II workers,
respectively and corresponding actuals were 60 and 70, respectively. During the
month, 16 hours were lost actually for both types of workers, which is also as per
expectation for waiting for materials and inspection.
Required:
Calculate the following:
(i) Standard labour cost for the month
(ii) Labour cost variance
(iii) Labour efficiency variance
(iv) Idle time variance
Indicate (A) or (F) to denote whether the variances are adverse or favourable.
8+(3+3+1+1)=16
Answer:
4. (a)
Statement of Allocation of Joint Costs
A B C Total
Sales (`) 10,000 25,000 15,000 50,000
Less:
Estimated NP 2,000 2,500 3,000 7,500
S & D Cost (20%)` 2,000 5,000 3,000 10,000
Post-separation cost (`) 3,000 5,500 4,000 12,500
Total 7,000 13,000 10,000 30,000
Net Value (i.e. basis of allocation) 3,000 12,000 5,000 20,000
Share of joint costs (`) 4,800 19,200 8,000 30,000
 3  32,000  12  32,000  5  32,000

 20   20   20 
4. (b)
Type I Type II Total
Available/m (hrs) 10 workers x 25 5 workers x 25

days/m x 8 hrs/day days/m x 8hrs/day
(bet 9 to 5) = 2000hrs = 1000hrs
Units per day per 8 12

worker
Hours/unit 8/8 = 1 hr/u 8 hrs/12 units = 2/3

= 0.67 hrs/unit
Actual production 1800 1200

(u)
Std hrs for actual 1800 x 1 = 1800 1200x2/3 = 800

production
Standard rate/hr 50 60
Std cost of 1800x50 = 90,000 800 x 60 =48,000 138,000
production
Actual hours paid 2000 hours 1000hrs
Actual rate 60 70
Actual cost 120,000 70,000 190,000
Labour cost variance 52,000 (A)
Efficiency variance (1800-2000)x50 (800-1000)x60 22,000(A)

= 10,000(A) = 12000(A)
Idle time variance Nil Nil

(Since normal
waiting and break
are included in
standard labour
hours)
(Standard production hours per day = 8 (normal breaks and waiting time have to be
include in the standard)
No. of days per month = 25.
Standard hours per month = 25 x 8 = 200 hours per worker x 10 workers = 2000 hours.)
5. (a) X Ltd. manufactures and sells a special component. It follows a Standard Marginal
Costing system. For the year ended 31.03.2019, it produced 1500 components against
a budgeted capacity of 2000 components. Out of the production 100 components
were scrapped. Due to a computer virus most of the financials could not be retrieved.
However, the Chief Cost Accountant gave the following information:
Particulars (`)
Selling Price per component 213
Direct materials total cost 84,000
Direct labour cost per component (Actual efficiency 80%) ?
Variable Manufacturing overhead per component 15
Variable Selling overhead per component 8
Fixed Selling and Administration overheads 48,000
Fixed overhead manufacturing absorption rate per 30

component (on the basis of budgeted capacity)
Closing stock (200 units) (Valued at prime cost for financial 18,000
purpose)
Required:
(i) Prepare the Profitability statements as per Marginal Costing, Absorption Costing
and the actual Profit & Loss Account.
(ii) Reconcile the actual profit with that of the Break-even profit under Marginal
Costing.
(b) What do you understand by Learning Curve? What are its different phases? State the
possible areas of application of Learning Curve. (6+2)+(2+2+4)=16
Answer:
5. (a) (i)
(1) Fixed Manufacturing Overheads = 60,000
Budgeted Capacity × Absorption Rate (2000×30)
Fixed administrative Overheads = 48,000
Total Fixed cost = 108,000
(2) Contribution per Unit
Selling 213
Price Prime Cost
(Material + Labour)(18000/200) 90
Variable Manufacturing Overhead 15
Variable Selling Overhead 8
Contribution/Unit 100
(3) Break Even volume (108000/100 Units) = 1,080 Units
(4) Total Absorption Cost / Unit (60+30+15) = 105
(Materials + Labour + Variable Manufacturing OH)
Profit under Marginal Costing:
Contribution (1200×100) = 1,20,000
Less: Fixed Cost 1,08,000
Profit under Marginal Costing 12,000
Particulars Profit under Actual P&L
Absorption A/c
Costing
Sales (1200 Units × `213) 255,600 255,600
Cost of Goods Manufactured
Production (1500 Units × `105) 202,500 202,,500
Additional Labour cost - 12,750
Less: Closing Stock(200 units x 135 p.u.) 27,000 18,000

(18000 given in the question)
Less: Scrap 100 units x 135 13500
Add: Under absorption of OH (500×30) 15,000 15,000
Add: Manufacturing Fixed OH - -
Total Cost of Manufacture 177,000 2,12,250
Gross Profit 78,600 43,350
Less: Fixed Administrative OH 48,000 48,000
Less: Variable Selling OH 9,600 9,600
Profit/(Loss) 21,000 (14,250)
(ii)
Reconciliation (actual P& L with Marginal Costing)
Profit at Break Even point 0
Margin of Safety +12,000
Stock Valuation -3000
(at variable cost under marginal costing 105 x 200 = 21000 and at 90 as per actual P and
L given= 18000)
Less: Scrap (variable mfg cost 105 x 100) = -10,500
Less: Labour - 12,750
Actual Loss -14,250
5. (b)
Learning Curve Theory is concerned with the idea that when a new job, process or activity
commences for the first time it is likely that the workforce involved will not achieve maximum
efficiency immediately. Repetition of the task is likely to make the people more confident and
knowledgeable and will eventually result in a more efficient and rapid operation. Gradually
the learning process will stop after continually repeating the job. As a consequence the time
to complete a task will initially decline and then stabilise once efficient working is achieved.
Cost predictions especially those relating to direct labour cost must allow for the effect of
learning process. This technique is a mathematical technique. It can be very much used to
accurately and graphically predict cost. It is a geometrical progression, which reveals that
there is steadily decreasing cost for the accomplishment of a given repetitive operation, as the
identical operation is increasingly repeated. The amount of decrease is less and less with each
successive unit produced.
The cumulative average time per unit is assumed to decrease by a constant percentage
every time that output doubles. Cumulative average time refers to the average time per unit
for all units produced so far, from and including the first one made.
The slope of the decision curve can be expressed as a percentage. Experience curve,
improvement curve and progress curve are other terms which can be synonymously used.
Learning curve is essentially a measure of the experience gained in production of an article by
an individual or organization. The improvement or experience gain is reflected in a decrease in
man-hours or cost.
Phases in Learning Curve
The learning curve will pass through three different phases:
In the first phase, there will be gradual increase in production rate until the maximum
expected rate is reached and this phase is generally steep.
In the second phase, the learning rate will gradually deteriorate because of the limitations of
equipment.
In the third phase, the production rate begins to decrease due to a reduction in customer
requirements and increase in costs.
Learning curve is essentially a measure if the experience gained in production of an article by

an organization. As more and more units re-produced, workers involved in production become
more efficient than before.
The learning curve ratio can be calculated with the help of the following formula:
Learning curve ratio = Average labour cost of first 2 units /Average labour cost of first units
Following are the possible areas of application of Learning Curve:
1. Learning curve suggests great opportunities for cost reduction to be achieved by

improving learning.
2. The learning curve concept suggests a basis for correct staffing in continuously expanding
production. The curve shows that the work force need not be increased at the same rate
as the prospective output.
3. Learning curve concept provides a means of evaluating the effectiveness of training

programs.
4. Learning curve is frequently used in conjunction with establishing bid price for contracts.
5. Learning curve is applicable in relation to the working capital required. If the requirement
is based on average cumulative unit cost, the revenues from the first few units may not
cover the actual expenditures.
6. It affects the rate of production by increasing.
7. Learning curve techniques are useful in exercising control. Specific or average incremental
unit cost should be used for this purpose.
8. The learning curve may be used for make-or- buy decisions especially if the outside
manufacturer has reached the maximum on the learning curve.
6. (a) AB Ltd. has two manufacturing divisions, A and B, operating as profit centres. A has a
production capacity of 3500 units of product A per month, but presently, it produces
2000 units for a special customer S, @ a selling price of ` 400 per unit (which will not
accept partial supply) and 1000 units for B. S has an agreement with AB that A shall not
supply to the external market at any price lower than that to S, or it can supply to the
market at any price after discontinuing supplies to S. Division B does some further work
on A, incurs a variable processing cost of `220 per unit to produce its product B. The
monthly fixed costs of Division A are ` 2,00,000. The monthly fixed costs of B are`
1,50,000. Division A’s raw material cost is `150 per unit and its variable manufacturing
costs are ` 100 per unit. Variable selling overhead of ` 50 per unit of A and ` 70 per unit
of B are incurred for sales other than transfers.
A had been selling to the outside market at a price of `460 per unit. Due to
competition, it has to reduce its price to `380 per unit on the entire supplies if it has to
sell any quantity above 2000 units. At `380/unit, its entire output can be sold. B has an
outside market price of ` 800 per unit and can sell up to 2500 units. If A does not supply
to B, a close substitute is available in the market for purchase by B at ` 380, on which
some additional work costing ` 40 per unit has to be done to make it comparable to
A. Assume that B will accept partial supply from A and that both divisions have
complete autonomy in deciding their strategy and they have the knowledge of
costs/revenues/supply conditions in each other’s divisions.
Required:
Using figures relevant for the following questions and calculations for the monthly
period:
(i) Find out the optimal strategy for A - how much to produce each month, how
much to supply to external market and how much to supply to B and at what
minimum cost to maximize its Divisional profits.
(ii) What would be the range of transfer price per unit and the quantity that Manager
of A will try to successfully negotiate with the Manager of B?
(iii) What would be the range of transfer price that the Manager of B would consider
to negotiate with A?
(iv) As the top management person, what would you quote as the appropriate
transfer price to be fair to A and B in their performance evaluation?
(b) Briefly state the significance of Margin of Safety in management decisions.
(4+4+2+2)+4=16
Answer:
6. (a)
Strategy for A:
Strategy I:
Sell 2000 units to S at 400 `/u and 1500 units outside @ 460 `/u
Contributions: 100x2000 = 200,000
Contribution (outside) 160 x 1500 = 240,000
Total Contribution for 3500 units 440,000
Less: Fixed Cost = 200,000
Profit 240,000
Strategy II:
Sell 1500 units to B at 380/unit and 2000 units outside at 460/u
Contribution B: 380-250 excluding selling cost = 130x1500 = 195,000
Contribution outside = 160 x 2000 = 320,000
Total Contribution = 515,000
Less: Fixed Cost = 200,000
Profit 315,000
Selling all 3500 units only to B or only outside are less profitable than the above two options and
are rejected. Select Strategy II for A.
B can get an equivalent product outside at ` 380, but has to incur additional costs up to `420.
A can negotiate anything between 380 and` 420
The Manager of B knows that A will save on the external sales’ variable selling overhead. What
is Rs. 380 for A from outside selling price (380-300 = 80) is equivalent of Rs. 330 from B
(contribution = 330-250 = 80).
Manager of B will negotiate between `330 per unit to `420 per unit, beyond which B will not
pay.
Top Management:
At 380 transfer price, A saves Rs. 50 on selling overhead. B saves Rs. 40 on reworking. Hence, at
375, A saves Rs. 45 and B also saves Rs. 45. Hence Rs. 375 will be a fair cost.
Alternatively,
As top management, the price to be decided will be midway between 380 and 420, which is
400,equally fair to A and B.
(b)
Significance of Margin of Safety in Management Decisions:
Margin of Safety (MOS) is the excess sales over and above the break-even sales. It is generally
expressed in % form. The size of margin of safety is a very important indicator of the soundness
of a business. It shows how much sales may decrease before the firms will suffer a loss. If the
size of margin of safety is high, chances of incurring loss by the business will be remote but if it is
low, a small reduction in sales may lead to loss. The common cause of lower margin of safety is
higher fixed costs. In such a business, a high level of activity is required. A low margin of safety
is a matter of concern and so the following steps may be taken to improve an unsatisfactory
margin of safety:
1. Increase the selling price.
2. Reduce the fixed or variable costs or the both.
3. Increase the volume of output by utilizing the unutilized production capacity.
4. Stop production of unprofitable products and concentrate only on the profitable

products.
7. (a) In the manufacturing plant of Delite Industries Ltd., four jobs can be processed on four
different machines, one job on one machine. Resulting profits vary with assignments.
They are given below:
Machines
I 42 35 28 21
Jobs n 30 25 20 15
m 30 25 20 15
IV 24 20 16 12
Required:
Find the optimum assignment of jobs to machines and the corresponding profit.
(b) The following information are given:
Arrival of patients Services
Inter-arrival time Probability Inter-Service time Probability

(minutes) (minutes)
2 0-20 4 0-25
4 0-24 6 0-34
6 0-28 8 0-26
8 0-18 10 Balance
10 Balance
The following random number are to be used for the simulation of arrival and service
patterns:
Arrival 740 225 906 048 421

Service 402 183 706 923 638
Required:
(i) Find out the average time spent by the patient in the queue by simulation.
Assume that the time starts at 6:00 a.m. and that there is only one counter and
there is no time gap between finishing with one patient and starting the next
patient if the next patient is already in the queue.
(ii) A second counter is to be set up if the probability of waiting beyond 3 minutes

exceeds 40% or if the average waiting time of a patient exceeds 5 minutes if
there is a wait. Should the second counter be set up? Substantiate based on the
simulation results. 8+(6+2)=16
Answer:
7. (a)
Profit Matrix
0 7 14 21
12 17 22 27
12 17 22 27
18 22 26 30
Row Operation
0 7 14 21
0 5 10 15
0 5 10 15
0 4 8 12
Column Operation
0 3 6 9
0 1 2 3
0 1 2 3
0 0 0 0
Improved Matrix
0 2 5 8
0 0 1 2
0 0 1 2
1 0 0 0
Further Improvement
0 2 4 7
0 0 0 1
0 0 0 1
2 1 0 0
I - 1 - 42
II - 2 - 25
III - 3 - 20
IV - 4 - 12
99
Maximum Profit = ` 99
7. (b)
Arrivals Service
Minutes Probability Cumulativ Random Minutes Probability Cumulative Random

e No. Probability No.
Probability Interval Interval
2 0.20 0.20 000-199 4 0.25 0.25 000-249
4 0.24 0.44 200-439 6 0.34 0.59 250-589
6 0.28 0.72 440-719 8 0.26 0.85 590-849
8 0.18 0.90 720-899 10 0.15 1.00 850-999
10 0.10 1.00 900-999
Sl. No Random Time Entry Service Random Service Service Waiting Idle
No. time In Start No For Time End Time Of Time Of
Arrival queue time Service Time Patient Centre
1 740 8 6:08 6:08 402 6 6:14 - 08
2 225 4 6:12 6:14 183 4 6:18 2 -
3 906 10 6:22 6:22 706 8 6:30 - 4
4 048 2 6:24 6:30 923 10 6:40 06 -
5 421 4 6:28 6:40 638 8 6:48 12
Probability of waiting time being more than 3 minutes = 2/5 = 40%
Hence is not exceeding 40%.
Average waiting time of a patient = Total of waiting time column / 3 instances of waiting
= 20/3 = 6.67
Hence the second counter should be set up based on simulated results.
Note: Ideally, for best results and interpretation, simulation should be carried out a large
number of times. The decision based on small numbers, tend to be unrealistic and erroneous.
(a) Principal Budget Factor
(b) Lean Accounting
(c) Differential Costs
(d) Product Life Cycle Costing
(e) Activity Ratio
Answer:
(a) Principal Budget Factor
The principal budget factor is the factor that limits the activities of functional budgets of
the organisation.
The early identification of this factor is important in the budgetary planning process
because it indicates which budget should be prepared first. In general sales volume is the
principal budget factor. So, sales budget must be prepared first, based on the available
sales forecasts. All other budgets should then be linked to this.
Failure to identify the principal budget factor at an early stage could lead to delays later
on when managers realize that the targets they have been working with are not feasible.
In case of one limiting factor, we shall need to apply the concept of Marginal costing. In
this we initially allot the limiting resource on the basis of highest contribution per limiting
factor.
Principal Budget Factor is important concept in the process of budgetary control. This is
the factor the extent of whose influence must first assessed in order to ensure that the
functional budgets are reasonably capable of fulfillment. A budget key factor or principal
budget factor is described as - The factor which at a particular time or over a period
which limit the activities of an undertaking.
The limiting factor is usually the level of demand for the products or services of the
undertaking but it could be a shortage of one of the productive resources, e.g., skilled
labour, raw material or machine capacity. In order to ensure that the functional budgets
are reasonably capable of fulfillment the extent of the influence of this factor must first be
assessed.
(b) Lean Accounting
What we now call lean manufacturing was developed by Toyota and other Japanese
companies. Toyota executives claim that the famed Toyota Production System was
inspired by what they learned during visits to the Ford Motor Company in the 1920s and
developed by Toyota leaders such as Taiichi Ohno and consultant Shigeo Shingo after
World War II. As pioneer American and European companies embraced lean
manufacturing methods in the late 1980s, they discovered that lean thinking must be
applied to every aspect of the company including the financial and management
accounting processes.
Lean Accounting is the general term used for the changes required to a company’s
accounting, control, measurement, and management processes to support lean
manufacturing and lean thinking. Most companies embarking on lean manufacturing
soon find that their accounting processes and management methods are at odds with
the lean changes they are making. The reason for this is that traditional accounting and
management methods were designed to support traditional manufacturing; they are
based upon mass production thinking. Lean manufacturing breaks the rules of mass
production, and so the traditional accounting and management methods are (at best)
unsuitable and usually actively hostile to the lean changes the company is making.
(c) Differential Accounting
The essential features of differential costs are as follows:-
(i) The basis data used for differential cost analysis are costs, revenue and the
investment factors which are relevant in the problem for which the analysis is
undertaken.
(ii) Total differential costs rat her than the costs per unit are considered.
(iii) Differential cost analysis is made outside the accounting records.
(iv) As the differences in the costs at two levels are considered, absolute costs at each
level are not as relevant as the difference between the two. Thus, items of costs
which do not change but are identical for the alternatives under consideration, are
ignored.
(v) The differentials are measured from a common base point or position.
(vi) The stage at which the difference between the revenue and the cost is the highest,
measured from the common base point, determines the choice from amongst a
number of alternative actions.
(vii) In computing differential costs, historical or standard costs may be used but they
should be adjusted to the requirements of future conditions.
(viii) The elements and items of cost to be considered in differential cost analysis will
depend upon the nature of the problem and the alternatives being considered.
(d) Product Life Cycle Costing is considered important due to the following reasons
(i) Time based analysis: Life cycle costing involves tracing of costs and revenues of
each product over several calendar periods throughout their life cycle. Costs and
revenues can analysed by time periods. The total magnitude of costs for each
individual product can be reported and compared with product revenues
generated in various time periods.
(ii) Overall Cost Analysis: Production Costs are accounted and recognized by the
routine accounting system. However non-production costs like R&D; design;
marketing; distribution; customer service etc. are less visible on a product — by —
product basis. Product Life Cycle Costing focuses on recognizing both production
and non-production costs.
(iii) Pre-production costs analysis: The development period of R&D and design is long
and costly. A high percentage of total product costs may be incurred before
commercial production begin. Hence; the Company needs accurate information on
such costs for deciding whether to continue with the R&D or not.
(iv) Pre-production costs analysis: The development period of R&D and design is long
and costly. A high percentage of total product costs may be incurred before
commercial production begin. Hence; the Company needs accurate information on
such costs for deciding whether to continue with the R&D or not.
(v) Better Decision Making: Based on a more accurate and realistic assessment of
revenues and costs, at least within a particular life cycle stage, better decisions can
be taken.
(vi) Long Run Holistic view: Product Life Cycle Costing can promote long-term rewarding
in contrast to short-term profitability rewarding. It provides an overall framework for
considering total incremental costs over the entire life span of a product, which in
turn facilitates analysis of parts of the whole where cost effectiveness might be
improved.
(vii) Life Cycle Budgeting: Life Cycle Budgeting, i.e., Life Cycle Costing with Target Costing
principles, facilitates scope for cost reduction at the design stage itself. Since costs
are avoided before they are committed or locked in the Company is benefited.
(viii) Review: Life Cycle Costing provides scope for analysis of long term picture of product
line profitability, feedback on the effectiveness of life cycle planning and cost data
to clarify the economic impact of alternatives chosen in the design, engineering
phase etc.
(d) Activity Ratio
It is the number of standard hours equivalent to the work produced, expressed as a

percentage of the budgeted standard hours.
Standard Hours for Actual Work

Activity Ratio =  100
Budgeted Standard hours
Activity ratios gauge an organization’s operational efficiency and profitability. These

rations are most useful when compared to a competitor or industry to establish whether
an entity’s processes are favourable or unfavourable. Activity ratios can form a basis of
comparison across multiple reporting periods to determine changes over time.
Suggested Answers_Syl 2016_December 2019_Paper 15
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
DECEMBER - 2019
Section – A
1. Choose the most appropriate answer to the following questions giving justification /
reasonable workings: 2x10=20
(i) The break-even p oint of a manufacturing company is ` 1,60,000. Fixed cost is ` 48,000.
Variable cost is ` 12 per unit. The PV ratio will be:
(A) 20%
(B) 40%
(C) 30%
(D) 25%
(ii) A factory has a key resource (bottleneck) of Facility A which is available for 31,300
minutes per week. The time taken by per unit of Product X and Y in Facility A are 5
minutes and 10 minutes respectively. Last week’s actual output was 4750 units of
product X and 650 units of Product Y. A ctual factory cost was ` 78,250. The throughput
cost for the week would be:
(A) ` 75,625
(B) ` 76,225
(C) ` 77,875
(D) ` 79,375
(iii) In a PERT network, the optimistic time for a particular activity is 9 weeks and the
pessimistic time is 21 weeks. Which one of the following is the best estimate of the
standard deviation for the activity?
(A) 12
(B) 9
(C) 6
(D) 2
(iv) The higher the actual hours worked,
(A) The lower the capacity usage ratio.
(B) The higher the capacity usage ratio.
(C) The lower the capacity utilization ratio.
(D) The higher the capacity utilization ratio.
(v) X is a factory making a certain product where learning curve ratio of 80% and 90%
apply respectively for two equally paid workers, A and B
(A) The labour cost of manufacturing the 4 th product will be more for A.
(B) The labour cost of manufacturing the 4 th product will be more for B.
(C) The labour cost is the same for the fourth product.
(D) Nothing can be said about the specific product since learning applies ratio to the
average quantity of the product.
(vi) What is the opp ortunity cost of making a component part in a factory given no
alternative use of the capacity?
(A) The variable manufacturing cost of the component
(B) The total manufacturing cost of the comp onent
(C) The total variable cost of the component
(D) Zero
(vii)The product of XYZ company is sold at a fixed price of ` 1, 500 per unit. As per
company’s estimate, 500 units of the product is expected to be sold in the coming
year. If the value of investments of the company is ` 15 lakh and it has a target ROI of
15%, the target cost would be:
(A) ` 930
(B) ` 950
(C) ` 1050
(D) ` 1130
(viii)Max Ltd. fixes the inter divisional transfer prices for its products on the basis of cost
plus a return on investment in the division. The budget for division X for 2019 – 20
appears as under –
`
Fixed assets 5,00,000
Current assets 3,00,000
Debtors 2,00,000
Annual fixed cost of the division 8,00,000
Variable cost per unit of the product 10
Budgeted volume 4,00,000 units per year
Desired ROI 28%
Transfer price for division X is

(A) ` 12.70
(B) ` 10.70
(C) ` 8.70
(D) ` 14.70
(ix) Which of the following is not a correct match?
Activity Cost Drivers

(A) Production scheduling Number of production runs
(B) Despatching No. of Despatch orders
(C) Goods receiving Goods received order
(D) Inspection Machine hours
(x) A manufacturing company uses two types of materials. X and Y, for manufacture of a
standard product. The following information is given:
Standard mix Actual mix

Materials X 120 Kg. @ ` 5 = ` 600 112 Kg. @ ` 5 = ` 560
Y 80 Kg. @ ` 10 = ` 800 88 Kg. @ ` 10 = ` 880
200 ` 1,400 200 ` 1,440
30% loss 60 25% loss 50
140 ` 1,400 150 ` 1,440
Direct Materials Mix Variance is:

(A) ` 40 (fav.)
(B) ` 40 (unfav.)
(C) ` 80 (fav.)
(D) ` 80 (unfav.)
Answer:
1. (i) (C)
FC FC Rs. 48,000
Explanation: BEP = = P/V Ratio = = = 30%
P/V ratio BEP 1,60,000
(ii) (A)
Explanation: Cost per Factory Minute = Total Factory Cost / Minutes Available = `
78,250/31,300 = ` 2.50
Standard Minutes of throughput for the week = (4750 × 5) + ( 650 × 10) =
30,250 minutes
Therefore, throughput Cost for the week = 30,250 × ` 2.50 = ` 75,625
(iii) (D)
Explanation: Standard Deviation equals (pessimistic time minus optim istic Time)/6 that
is 21-9/6 = 2
(iv) (D)
Actual Hours
Explanation: Capacity utilization ratio =
Budgeted Hours
So, the capacit y utilization ratio would be higher.
(v) (B)
Explanation: The labour cost of manufacturing the 4 t h product will be more for B since
B will take more time per unit of product.
(vi) (D)
Explanation: Opportunity cost is not an out of pocket cost. It is the benefit given up by not
selecting the next best alternative. Therefore, answers A, B and C are
incorrect and D is correct.
(vii) (C)
Explanation: ROI at 15% of total investment ` 15 lakhs = ` 15,00,000 × 0. 15 = ` 2,25,000.
Profit per unit of future output = ` 2,25,000/500 = ` 450 per unit.
Therefore, target cost per unit = Selling Price – Profit per unit = ` 1,500 – `
450 = ` 1,050 per unit.
(viii)(A)
Explanation:
Per unit (`)
VC 10
FC (` 8,00,000 ÷ 4,00,000) 2
Investment : (FA + CA + Debtors) = ` 10,00,000
Rs. 10,00,000 0.28 0.70
Return =
4,00,000
TP for Div. X 12.70
(ix) (D)
Explanation: Inspection hours, and not machine hours, drive the cost of inspection.
(x) (B)
Explanation: A manufacturing company uses two type of Materials, X and Y, for
manufacture of a standard product:
Standard mix Actual mix

Mat erials X 120 Kg. @ ` 5 = ` 600 112 Kg. @ ` 5 = ` 560
Y 80 Kg. @ ` 10 = ` 800 88 Kg. @ ` 10 = ` 880
200 ` 1,400 200 ` 1,440
30% loss 60 25% loss 50
140 ` 1,400 150 ` 1,440
Direct Mat erials Mix Variance is: ` 40 (unfav.)
SP (SQ – AQ)
X ` 5 (120 – 112) = ` 40 (fav.)
Y ` 10 (80 – 88) = ` 80 (unfav.)
` 40 (unfav.)
Section – B
16×5=80
2. (a) State with brief reason whether you would recommend an A ctivity Based Costing
system is each of the following independent situations:
(i) A consultancy firm consisting of Lawyers. Accountants and Computer Engineers
provides management consultancy services to clients.
(ii) Company X produces one product. The overhead costs mainly consist of
Depreciation.
(iii) Company Z produces two different labour intensive products. The contribution per
unit in both products is very high. The BEP is very low. All the work is carried on
efficiently to meet target costs.
(iv) Company Y produces 4 different products using different production fa cilities.
1½×4=6
(b) Following is the operating results of Premier hospital for the year ended 31 st march
2019:
Particulars `
Revenue 1,13,88,000
Cost: Variable 26,28,000
Bed capacity cost (fixed) but varies with number of beds 45,30,000
Staff cost 35,10,000
Profit 7,20,000
The hospital charged each patient and average of ` 650 per day, had a capacity of
60 beds operated 24 hours per day for 365 days. The hospital has minimum
departmental personnel requirements based on totals annual patient days and
following table gives the Salary to be paid.
Annual patient days Salary (` in 000s)

10,000 – 14,000 32,00
14,001 – 17,000 33,80
17,001 – 23,725 35,10
Required:
(i) Compute the Break even patient days for the year ended 31 st March, 2019.
(ii) Compute the Break even patient days for the year ended 31 st March, 2020 if the
hospital capacity is raised to 80 beds. Patient demand is unknown but assume that
revenue per patient and cost p er patient day, cost per bed, and employee salary
will remain the same as for the year ended 31st March, 2019. 6+4=10
Answer:
2. (a) (i) ABC system uses the cost of activities as the basis for assigning cost of services to
jobs which provides more accurat e cost information for services. Hence ABC can
be used for the consultancy firm.
(ii) ABC is needed by organizations for product costing where there is a great diversity
in product range. Since company X produces only one product, ABC is not
necessary. Moreover overhead consists of mainly depreciation. ABC is not
required.
(iii) Company Z is highl y labour intensive and do es not have a great diversit y of
products. All work is carri ed out effici ently, hence ABC is not required. Moreover
Target costs are achieved, N VA activities have already been identified and
eliminated.
(iv) There is diversity in product range which use different amounts of OH resources as
different production facilities are involved. ABC improves product costing by
avoiding over or under costing of products. ABC system is recommended.
(b) (i)
No of patient days operated 1,13,88,000/650 17,520
Variable Cost per patient day 26,28,000/17520 150
Contribution per patient day 650 – 150 500
Fixed Cost
Bed Capacity cost 45,30,000
Staff Cost – Salary 35,10,000 80,40,000
Break Even Patient days 80,40,000 / 500 16,080

Since it falls in the previous range revised fixed cost will be
Fixed Cost
Bed Capacity cost 45,30,000
Break Even Patient days 79,10,000/500 15,820
(ii)
Expected patient demand with 80 beds 80×365×17,520/365×60 23,360
Existing Staff salary will return unchanged
Fixed Cost
Bed Capacity cost (80/60 × 45,30,000) 60,40,000
Break Even Patient days 9550000/500 19,100
Since it is in the same range there is no change in the breakeven.
3. (a) Zenith Ltd. manufacturers tablet batteries. The company is preparing a product life
cycle budget for a new type of battery. Development on the new battery is to start
shortly. Estimates for the new battery are as follows:
Life cycle units manufactured and sold 2,00,000

Selling price per battery ` 55
Life cycle costs:
R&D and design cost ` 8,00,000
Manufacturing:
Variable cost per battery ` 25
Variable cost per batch ` 300
Battery per batch 250
Fixed costs ` 12,00,000
Marketing
Variable cost per battery ` 3.50
Distribution:
Variable cost per battery ` 140
Battery per batch 100
Customer service cost per battery (Variable) ` 1.70
Ignore the time value of money.
Required:
(i) Calculate the budgeted life cycle operating income for the new battery.
(ii) What percentage of the budget total product life cycle costs will be incurred by
the end of the R&D and design stages?
(iii) Company’s market research d epartment estimates that reducing price by ` 2.50
will increase life cycle unit sales by 8%. If unit sale increases by 8%, the company
plans to increase manufacturing and distribution batch sizes by 8% as well.
Assume that all variable costs per battery, per batch and fixed costs will remain
the same. Should the company reduce battery price by ` 2.50? Show y our
calculations. 5+2+5=12
(b) What do you mean by Incremental cost? Is it always variable? 3+1=4
Answer:
3. (a) (i) Statement of Budgeted Life Cycle revenue and cost

Revenue (200000 × 55 = 11000000
Costs:
Pre-manufacturing cost `
Research and design 8,00,000
Manufacturing Costs:
Variable Cost (25 × 200000) 50,00,000
Batch (300 × 200000/250) 2,40,000
Fixed cost 12,00,000
Mark eting Costs:
Variable Costs (3.5 × 200000) 7,00,000
Fixed cost 8,00,000
Distribution costs
Batch (140 × 200000/100) 2,80,000
Fixed Cost 4,60,000
Customer Service (Variable) 1.7 × 200000 3,40,000
Total cost 98,20,000
Operating Income 11,80,000
(ii)
Budgeted product life cycle costs for R&D and design ` 8,00,000
Total budgeted life cycle product costs ` 98,20,000
Percentage of budgeted product life cycle cost incurred

Till the R&D and design ` 8,00,000/98,20,000 = 8.14%
(iii) Statement of Revised Budgeted Life C ycle revenue and cost

Revenue (2,16,000 × 52.50) = 1,13,40,000
Costs:
Pre-manufacturing cost `
Research and design 8,00,000
Variable Cost (25 × 216000) 54,00,000
Batch (300 × 800) 2,40,000
Fixed cost 12,00,000
Mark eting Costs:
Variable Costs (3.5 × 216000) 7,56,000
Fixed cost 8,00,000
Distribution costs
Batch (140 × 2000) 2,80,000
Fixed Cost 4,60,000
Customer Service (Variable) 1.7 × 216000 3,67,200
Operating Income 10,36,800
Since profit is lower, price should not be reduced.
(b) Increm ental costs are costs that are incurred for the additional cost object with
reference to the base. It could be for any additional resource or for any de cision that
is over and above the current scenario. It includes all costs that are incurred in
addition to the existing base level. It could be fixed or variable or both.
4. XY Co. has Profit Centre Divisions X and Y, making products X and Y respectively. Each
unit of Y requires one unit of X and Y can sell a maximum of 50,000 units in the external
market at a selling price of ` 150 per unit. X has the capacity to produce 1,00,000 units of
X. The variable cost per unit is 12. Fixed costs are ` 7,20, 000. X can sell the following
quantities in the external market:
Price per unit (`) Demand Units
18 84,000
20 76,000
22 70,000
24 64,000
26 54,000 or less
Assume no stock to build up for X or Y.
Y can purchase its requirement from the external market at ` 22 per unit, but has to incur a
bulk transportation cost of `1,50,000 for any quantity, which will not be incurred on
transfers from X.
Required:
(i) Assuming no demand from Y, what will be the best strategy for X?
(ii) What will be the minimum transfer price that X will agree to if X has to supply 50,000
units to Y? What price will Y offer as the maximum?
(iii) If Y is acceptable to partial supplies, what will be X’s best strategy under no
compulsion to transfer, but with the option to transfer as many units that it wants to?
What will be the quantity that X will agree to transfer and the corresponding price,
assuming both divisions agree to share the benefits of transfer equally?
(iv) What is the best strategy of the company? Will the company’s overall strategy differ
from the individual divisions’ strategy? Compute the
benefits/disadvantages/indifference between the divisional best and company best
strategies.
Present relevant calculations to substantiate all your answers. 2+4+3+3+4=16
Answer:
4. Variable cost is constant at ` 12. Hence the value that will give the maximum contribution
will be relevant.
Price per unit Demand Units Contbn `/u Contbn Value
18 84,000 6 5,04,000
20 76,000 8 6,08,000
22 70,000 10 7,00,000
24 64,000 12 7,68,000
26 54,000 14 7,56,000
(i) The optimal strategy for X would be to manufacture 64000 units for external demand
in the absence of demand from Y.
(ii) If X has to supply 50,000 units to Y, then, it can supply onl y 50,000 units for external sales
at ` 26. Contribution from external sales will be ` 14 × 50,000 = 7,00,000
Minimum contribution from Y will be 56,000 for 50,000 units. Hence, X will transfer at a
minimum price of ` 12 + (56,000/50,000) = 13.12 or ` 13 so that it is able to maintain the
contribution from its optimal strategy.
However, if X is strong enough, it can demand a price of ` 22 which Y will be paying to
outside suppliers.
Y will not pay anything more than 22 + 1,50,000/50,000, i.e., 25 ` /unit.
(iii) If X can choose, X will supply 64000 units for external demand and suppl y 36000 units
to Y. Y will have to incur transport even for the 14000 units it purchases from outside.
Hence it will not pay anything above ` 22. X will not accept anything below ` 13.
Benefits to be shared equall y between X and Y = 22 – 13 = 9 per unit. Hence Transfer
price per unit will be ` 13 + 4.5 = ` 17.5, so that Y benefits by ` 4.5 and X also gets
additional ` 4.5 contribution per unit transferred. Quantity transferred will be 36,000
units.
(iv) For the company as a whole, it is incurring a variable cost of ` 22 plus transport of ` 3
= ` 25 for every unit of Y purchased. Contribution of X as per best strategy = ` 13.
Hence, for the company, best strategy will be to transfer 50,000 units to Y and sell
50,000 units to external sales.
Contribution lost by sub optimal strategy in Div X will be 68,000 =[768000 - (50000 ×14)]
Gain by transfer
= transport of 1,50,000 + savings in purchase cost (22 – 13) × 50,000
= ` 1,50,000 + 450,000. = ` 600,000.
Net gain = - 68,000 + 6,00,000 = 5,32, 000.
5. (a) (i) Discuss briefly on the significance of Margin of Safety in the context of a business.
(ii) The following are the data for two business units, P and Q. You are required to find
out which of the two units has a better Margin of Safety.
Unit P (`) Unit Q (`)
Sales Price per unit 100. 00 250. 00
Variable Cost per unit 80.00 150. 00
Total Fixed Cost 1,75,000 2,25,000
Budget Sales 1,00,000 2,50,000
4+4=8
(b) Company XYZ produces two comp onents (M and N) and is planning the allocation of
its available resources for the next period.
75 units of comp onent M and 60 units of comp onent N are required to be produced
but machine hour capacity is restricted to a total of 300 hours. Any deficit of
components produced in-house can be made up by the purchase of any quantity of
either component from an outside supplier.
The objective of company XYZ is to satisfy the requirement for components at minim
um total cost. The following information is available concerning each component.
Cost (` per unit) M N

Direct materials 6.20 8.70
Direct Labour 5.10 7.50
Variable production overheads 1.20 1.30
Fixed production overheads 4.80 6.40
Total 17.30 23.90
Machine hours (per unit) 2.00 3.00
Price from outside supplier (` per unit) 18.50 25.90
Required:
For the next period:
(i) Calculate the variable costs of producing each component in – house.
(ii) Calculate the extra costs of buying-in each comp onent
(iii) Determine which component should have production priority. Show workings
clearly and justify your conclusion.
(iv) Calculate the number of units of each component that should be manufactured
by company XYZ. 2+2+2+2=8
Answer:
5. (a) (i) The expression Margin of Safet y (MOS) signifies the difference between actual
sales and break even sal es. In other words, all sales reven ue above the break-
even point represents the margin of safety. For example, if actual sales for the
month of December 2015 are ` 50,00,000 and the break-even sales are `
37,00,000, the difference of ` 12,50,000 is margin of safet y. It can be expressed in
percentage also.
Margin of safet y is an important figure for any business because it tells

management how much reduction in revenue will result in break -even. A higher
MOS reduces the risk of business losses. Generally, the higher the margin of safety,
the better the strength of business.
The formula or equation for arriving at MOS is stated as under:

Margin of safety = Actual or budgeted sales – Sales required to break-even
Margin of safet y is also expressed in the form of ratio or percentage that is

calculated by using the following formulae:
Profit
M/S = or Sales over BEP / Total Sales.
Contribution
MOS ratio = MOS/Actual or budgeted sales
MOS percentage = (MOS/Actual or budgeted sales) × 100
(ii) The following table shows calculation of margin o f safety in units and rupees and
the margin of safety ratio:
Particulars Unit P Unit Q
Sales Price p.u. (`) (1) 100 250*
Variable Cost p.u. (`)(2) 80 150
Contribution p.u. (`)(3)=(1-2) 20 100
Fixed Cost (`)(4) 175000 225000
Budgeted Sal es (`)(5) 100000 250000
Budgeted Sal es in units (6) = (5/1) 1000 1000
B.E.P in units (7) = 4/3 8750 2250
Margin of Safet y in units (8) = (6-7) -7750 -1250
Margin of Safet y Ratio (9) = 8/6×100 -775% -125%
*This figure was stated as 225 in the suggested solution given, hence, the
calculation stated was wrong.
(b) (i) Calculation for variable cost of producing in-house

Products M (`) N (`)
Variable Cost:
Direct material 6.20 8.70
Direct labour 5.10 7.50
Variable production cost in-house 1.20 1.30
Total 12.50 17.50
(ii) Calculation of Extra Cost of Buying–in each component

Products M N
Price to be charged by outside Supplier 18.50 25.90
Variable cost of producing in-house [as per (a)] 12.50 17.50
Extra cost of buying – in 6.00 8.40
(iii) Machine hour cost per unit

Products M N
Machine Hours per unit 2.00 3.00
Extra cost of buying – in per unit (`) 6.00 8.40
Extra cost of buying (per machine hour) (`) 3.00 2.80
Priority should be given to the In-house production of component M in order to

minimize the extra cost of buying-in.
(iv) Components to be manufactured by XYZ

M = 75 units (75 units × 2 hours) = 150 machine hours
N = 50 units [(300 – 150 machine hours)/ 3]
6. (a) An agro-based farm is planning its production for next year. The followin g is relating to
the current year:
Products/Crops M N O P
Area occupied (acres) 125 100 150 125
Yield per acre (ton) 50 40 45 60
Selling price per ton (`) 100 125 150 135
Variable cost per acre (`):
Seeds 150 125 225 200
Pesticides 75 100 150 125
Fertilizers 62.50 37.50 50 62.50
Cultivations 62.50 37.50 50 62.50
Direct wages 2,000 2,250 2,500 2,850
Fixed overhead per annum ` 13,44,000.
The land that is being used for the production of O and P can be used for either crop.
But not for M and N. the land that is being used for the production of M and N can be
used for either crop, but not for O and P. In order to provide adequate market service,
the company must produce each ear at least 1,000 tons of each of M and N and 900
tons each of O and P.
Required:
(i) Determine the profit for the production mix fulfilling market commitment.
(ii) Assuming the land could be cultivated to produce any of the four products and
there was no market commitment, calculate the profit amount of most profitable
crop and break-even point of most profitable crop in terms of acres and sales
value. 5+3=8
(b) Nava Bharat Industries Ltd. manufactures four products (1,2, 3,4) on two ma chines (X
and Y). The time (in minutes) to process one unit of ea ch product on ea ch machine is
shown below:
Machine
X Y
Product 1 12 26
2 15 19
3 18 30
4 10 25
The profit per unit for each product (1,2,3,4) is ` 120, ` 150, ` 190 and ` 100
respectively. Product 1 must be produced on both machines X and Y but products 2, 3
and 4 can be produced on either machine.
Due to acute space constraints in the company’s works, only one week’s production is
stored in 4,000 square feet for floor space where the floor space taken up by each
product is 1.0, 1.5, 5.0 and 0.50 (square ft.) for products 1,2,3 and 4 respectively.
As per customer requirements the output of Product 2 is related with that of Product 3
and over a week approximately twice as many units of product 2 should be produced
as product 3.
Machine X is out of action (for maintenance/because of breakdown) 8% of the time

and machine Y 10% of the time.
Required:
Assuming a working week 42 hours, formulate the problem of how to manufacture

these products as a linear programme. 8
Answer:
6. (a) (i) Profit Statement of Recommended mix:

Product M N O P
Yield per acre (tons) 50 40 45 60
Selling price per ton 100 125 150 135
Sales revenue per acre 5000 5000 6750 8100
Variable cost per acre 2350 2550 2975 3300
Contribution per acre 2650 2450 3775 4800
Rank 1 2 2 1
Minimum sales requirement in acre 25 20
(1000/ 40) (900/45)
Recommended mix in acre 200 25 20 255

Total Contribution 530000 61250 75500 1224000 1890750
Less – Fixed cost 1344000
Profit 546750
(ii) Most profitable crop. Production should be concentrated on P which gives highest
contribution per acre of ` 4800.
Overall contribution if complete land is used for P = (500 × 4800) = ` 24,00, 000
Less: Fixed cost = ` 13,44,000
Profit = ` 10,56,000
Break -even point in acres for P = 1344000/48000 = 280 acres
Break -even point in sales value = 280 × 135 × 60 = ` 22,68,000
(b) Variables:
Essentially the company is interested in the amount produced on each machine.
Hence let:
xi = amount of product i (i = 2,3,4) produced on machine X per week

yi = amount of product i (i = 2,3,4) produced on machine Y per week
where xi >=0 i = 1,2,3,4 and yi>=0 i=2,3,4
it may be stated here that as product 1 must be processed on both machines X and Y
,yi has not been defined here.
Then objective function will be
Maximize 120x1 + 150(x2 + y2)+190(x3 + y3)+100(x4 + y4) subject to constraints
 Floor space
1x1 + 1.5(x2 + y2) + 5(x3 + y3) + 0.5(x4 + y4) <=4000
 Customer requirements
x2 + y2 = 2(x3 + y3)
 Available time
12x1 + 15x2 + 18x3 + 10x4<= 0.92(42)(60) (machine X)
26y1 + 19y2 + 30y3 + 25y4<= 0.90(42)(60) (machine Y)
With non negative constraints to be inserted: X1, X2, X3, X4 and Y1, Y2, Y3, Y4 >_ 0.
7. The Following table gives data on normal time & cost and crash time & cost for a project.
Activity Normal Crash

Time (days) Cost (`) Time (days) Cost (`)
1-2 6 600 4 1,000
1-3 4 600 2 2,000
2-4 5 500 3 1,500
2-5 3 450 1 650
3-4 6 900 4 2,000
4-6 8 800 4 3,000
5-6 4 400 2 1,000
6-7 3 450 2 800
The indirect cost per day is ` 100.
(i) Draw the network and indentify the critical path.
(ii) What are the normal project duration and associated cost?
(iii) Crash the relevant activities systematically and determine the optimum project
completion time and cost. 4+2+10=16
Answer:
7. (i) The network for normal activity times indicates a project time of 22 weeks with the
critical path 1-2-4-6-7.
(ii) Normal project duration is 22 weeks and the associated cost is as follows: Total
cost = Direct normal cost + indirect cost for 22 weeks.
= 4,700 + 100 × 22 = ` 6,900.
(iii) For critical activities, crash cost – slope is given below:

Critical activity Crash cost-slop
1-2 1000  600
= 200
64
2-4 1500  500
=500
53
4-6 3000  800
= 550
84
6-7 800  450
= 350
32
Of the activities lying on the critical path, activity 1-2 has lowest cost slope.
Therefore, we shall first crash this activity by just one day.
Duration = 21 days, and cost = 4700 + 1 × 200 + 100 × 21 = ` 7,000.
Other activities too have become critical. Now we have 2 critical paths:
1→2→4→6→7 and 1→3→4→6→7.
To reduce duration of the activity further, we shall have to reduce duration of both
the paths. We have following alternatives:
Crash activity 6 - 7 by 1 day at a cost of ` 350.
Crash activity 4 – 6 by 4 days at the cost of ` 550 per day.
Crash activities 1-2 and 1-3 by 1 day each at a cost of ` (200 + 700) = ` 900.
Crash activities 2-4 and 3-4 by 2 day each at a cost of ` (500+550) = ` 1,050/day.
Thus, we shall first crash activities 6-7 by 1 day and then activity 4-6 by 4 days.
On crashing activity 6-7 by 1 day, cost = 4900 + 350 × 1 + 100 × 20 = ` 7,250, and
duration = 20 days. Next we crash 4 -6 by 4 days.
Cost = 5250 + 550 × 4 + 100 × 16 = ` 9,050. Duration = 16 days.
Next we crash activities 1-2 and 3-4 by 1 day each,

Cost = 7450 + 200 × 1 + 550 × 1 + 100 ×15 = ` 9,700.
Next we crash activities 2→4 and 3→4 by 1 day each.

Cost = 8200 + 500 × 1 + 550 × 1 + 100 × 14 = ` 10,650. Duration = 14 days.
We crash activities 1-3 and 2-4 by 1 day each.

Cost = 9250 + 700 × 1 + 500 × 1 + 100 × 13 = ` 11,750. Duration = 13 days.
Now there are three critical paths:

1-2-5-6-7, 1-2-4-6-7, 1-3-4-6-7
Also, no further crashing is possibl e. Hence minimum duration of the project = 13

days with cost ` 11,750.

(a) List down the situations where a product can be sold below the marginal cost.
(b) Price sensitivity
(c) Target costing
(d) Six sigma in quality control process
(e) Assignment
Answer:
8. (a) List down the situations where product can be sold below the marginal cost
1. When one has already produced and paid for the units and:
 There is no more market for the product at any price other than the one is
below the marginal cost
 Any organization cannot keep the business open to clear the rest of the
inventory because any profit you may see is not enough to cover the cost to
stay open.
 As a loss leader to attract customers that can be up sold. Works only if the
customer margin - sum of contribution margins from the basket of products
and services customers buy is more than other available options.
2. When one has produced each unit on demand (truly marginal):

 Onl y case is as a loss leader
 Any other reason not only generates a loss in the short term but also sets reall y
bad reference price in the minds of customers. It is not going to be easy to
improve prices when the seller gives it away at very low price.
 The seller has to make sure that the cost is truly marginal cost and does not
include overheads and COGS (Cost of Goods Sold) is not MC (Marginal Cost).
(b) Price sensitivity:

Price sensitivity is the degree to which the price of a product affects consumers'
purchasing behaviors. It may also be said that through price sensitivity analysis, any
organization measure how it’s demand changes with the change in the cost of it’s
products. Price sensitivity is commonly to measure of the change in demand based on
its price change.
For example, some consumers are not willing to pay a few extra cents per gallon for
gasoline, especially if a lower-priced station is nearby.
When they study and anal yze price sensitivity, companies and product manufacturers
can make sound decisions about products and services.
Price sensitivity can basi cally be defined as being the extent to which demand
changes when the cost of a product or service changes. The pri ce sensitivity of a
product varies with the level of importance consumers place on price relative to other
purchasing criteria. Some peopl e may value quality over price, making them less
susceptible to price sensitivity. For example, customers seeking top-quality goods are
typicall y less pri ce sensitive than bargain hunters, so they' re willing to pay more for a
high-quality product. By contrast, people who are more sensitive to price may be
willing to sacrifice quality. These individuals will not spend more for something like a
brand name, even if it has a higher quality over a generi c store brand product.
Price sensitivity also varies from person to person, or from one consumer to the next.
Some people are abl e and willing to pay more for goods and services than others.
Companies and governments are also able to pay more compared to individuals.
Consumers are less sensitive to price when the total cost is low compared to their total
income. Likewise, the total expenditure compared to the total cost of the end
product affects price sensitivity.
(c) Target Costing:

Target Costing: This technique has been developed in Japan. It aims at profit
planning. It is a device to continuously control costs and manage profit over a
product’s life cycle. In short, it is a part of a comprehensive strategic profit
management system. For a decision to enter a market prices of the competitors’
products are given due consideration. Target Costing initiates cost management at
the earliest stages of product development and applies it throughout the product life
cycl e by actively involving the entire value chain. In the product concept stage
selling price and required profit are set after consideration of the medium term profit
plans, which links the operational strategy to the long term strategic plans.
Target Cost = Planned Selling Price - Required Profit.
From this, the necessary target cost can be arrived at. Target cost, then, becomes the
residual or allowable sum. If it is thought that the product cannot generate the
required profit, it will not be produced as such and aspects of the product woul d be
redesigned until the target is met. Target profit is a commitment agreed by all the
people in a firm, who have any part to play in achieving it.
(c) Six sigma in quality control process:
Six Sigma is a set of practices originally developed by Motorola to systematically
improve processes by eliminating defects. A defect is defined as non-conformity of a
product or service to its specifications. While the particulars of the methodology were
originally formulated by Bill Smith at Motorola in 1986, Six Sigma was heavily inspired by
six preceding decades of quality improvement methodologies such as quality control,
TQM, and Zero Defects.
Like its predecessors, Six Sigma asserts the following:

(a) Continuous efforts to reduce variation in process outputs i s key to business success
(b) Manufacturing and business pro cesses can be measured, anal yz ed, improved
and controlled
(c) Succeeding at achieving sustained quality improvement requires commitment
from the entire organization, particularly from top-level management.
The t erm “Six Sigma” refers to the ability of highly capable pro cesses to produce
output within specification. In particular, pro cesses that operat e with six sigma quality
produce at defect levels below 3.4 defects per (one) million opportunities (DPMO). Six
Sigma’s implicit goal is to improve all processes to that level of quality or better.
(e) Assignment:
Assignment is a special linear programming problem. There are many situations where
the assignment of people or machines etc. may be called for. Assignment of workers
to machines, clerks to various check-out counters, salesm en to different sales areas
are typi cal examples of these. The Assignment is a problem because people possess
varying abilities for performing different jobs and therefore the costs of performing jobs
by different people are different. Thus, in an assignment probl em, the question is how
the assignments should be made in order that the total cost involved is minimized.
There are four methods of solving an assignment problem and they are:
(1) Complete Enumeration Method
(2) Simplex Method
(3) Transportation Method and
(4) Hungarian Method.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
DECEMBER – 2021
Section A MCQ 20X1= 20 Marks

Q.1 In cost-plus pricing, the markup consists of
Ans 1. total cost and desired ROI.
2. selling and administrative costs.
3. manufacturing costs.
4. desired ROI
Q.2 A manufacturing company has the following information pertaining to a normal monthly production of 10,000 units of
a product.
Standard factory overhead rates are based on a normal monthly volume of one standard direct hour per unit.
Standard factory overhead rates per direct labor hour are:
Fixed Rs. 6.00
Variable Rs. 10.00
Rs. 16.00
Units actually produced in current month 9,000 units
Actual factory overhead costs incurred
(Includes Rs. 70,000 fixed) Rs. 156,000
Actual direct labor hours 9,000 hours
The variable overhead spending variance is

Ans 1. Rs.0
2. Rs.10,000 (F)
3. Rs.4,000 (F)
4. Rs.86,000 (A)
Q.3 A factory is setting up a special inspection at the supply point of raw materials at Rs. 80,000. Consequent to this,
there is lesser number of returns from customers. These goods used to be sold for Rs. 1,00,000 and variable costs
are Rs. 80,000. The changein quality costs are
Ans 1. Decrease by Rs. 80,000
2. Decrease by Rs. 60,000
3. Decrease by Rs. 20,000
4. No change
Q.4 Companies that would benefit from back-flush costing include companies
Ans 1. None of these.
2. whose inventories vary from period to period.
3. which have fast manufacturing lead times.
4. companies that require audit trails.
Q.5 A learning curve is a function

Ans 1. where unit costs increase as productivity increases.
2. that increases at a greater rate as workers become more familiar with their tasks.
3. that is linear.
4. that measures the decline in labor-hours per unit due to workers becoming better at a job.
Q.6 Which of the following is TRUE about the theory of constraints?
Ans 1. TOC recognizes that lower inventories means slower response to customers.
2. TOC recognizes that lowering inventory decreases carrying costs and thus decreases operating expenses
and improves net income.
3. TOC recognizes that lower inventories means more defects.
4. TOC recognizes that EOQ is important.
Q.7 Activities required to design, develop, produce, market, distribute, and service aproduct are known as
Ans 1. target activities.
2. value-chain activities.
3. whole life activities.
4. overhead.
Q.8 Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when
using
Ans 1. absorption costing.
2. full costing.
3. variable costing.
4. product costing.
Q.9 When there is excess capacity, it makes sense to accept a one-time-only special orderfor less than the current selling
price when
Ans 1. incremental revenues exceed incremental costs.
2. additional fixed costs need not be incurred to accommodate the order.
3. there is a positive contribution per unit of the product under normal capacity and spare capacity
4. the special order is from a normal customer.
Q.10 A company that is a price-taker would most likely use which of the following methods?
Ans 1. Target costing
2. Cost plus pricing, contribution approach
3. Cost plus pricing, absorption approach
4. Time-and-material pricing
Q.11 To complete the first setup on a new machine took an employee 200 minutes. Using an 80% incremental unit-time
learning model indicates that the second setup on the new machine is expected to take
Ans 1. 120 minutes.
2. 160 minutes.
3. 60 minutes
4. 80 minutes.
Q.12 The following will be the appropriate action to finish a project early
Ans 1. Crash activities on the non critical path so that they become critical
2. Crash activities on the non critical paths so that they remain non critical
3. Crash activities on the critical path so that they become non critical
4. Crash activities on the critical paths such that the critical paths remain critical
Q.13 If the unit level of inventory increases during an accounting period, then
Ans 1. operating income will be the same under absorption costing and variable costing.
2. the exact effect on operating income cannot be determined.
3. more operating income will be reported under absorption costing than variablecosting.
4. less operating income will be reported under absorption costing than variable costing.
Q.14 In a transportation matrix (where Ri are rows and Cj are columns), the second allocation under the North West Corner
Rule can be
Ans 1. R1C2
2. None of these
3. R2C3
4. R1C3
Q.15 is the difference between the sales price needed to capture a predetermined market share and the desired profit
per unit.
Ans 1. Gross profit
2. Target cost
3. Target price
4. None of these.
Q.16 Liability claims is an example of

Ans 1. prevention costs.
2. appraisal costs.
3. external failure costs.
4. internal failure costs.
Q.17 The is a period of time when sales increase at a decreasing rate.

Ans 1. maturity stage
2. growth stage
3. introduction stage
4. decline stage
Q.18 NM paid Rs.5,30,000 for a machine used to powder wheat. The machine can be sold for Rs.1,30,000. The sale value of
wheat is Rs 8,00,000 and its variable cost is Rs.4,50,000.The opportunity cost of producing wheat flour is
Ans 1. Rs. 5,30,000
2. Rs. 3,50,000
3. Rs. 8,00,000
4. Rs. 1,30,000
Q.19 Which of the following will always be a relevant cost?

Ans 1. Fixed cost
2. Opportunity cost
3. Variable cost
4. Sunk cost
Q.20 The operational activity of setting up equipment is classified as a
Ans 1. unit‑level activity.

2. facility‑level activity.
3. batch‑level activity.
4. product‑level activity.
Section : B SAQ 20X1= 20 Marks
Q.1 MK Company incurred the following costs for 60,000 units: Variable costs Rs.18,00,000 Fixed costs Rs. 24,00,000
MK has received a special order from a foreign company for 5,000 units. There is sufficient capacity to fulfill the
order without jeopardizing regular sales. Filling the order will require spending an additional Rs.85000 for
shipping.
If MK wants to break even on the order, what should the unit sales price be?
Answer: Rs. 47
Q.2 At KL Company, the cost of the personnel department has always been charged to production departments based
upon number of employees. Recently, opinions gathered from the department managers indicate that the
number of new hires might be a better predictor of personnel costs.
Total personnel department costs are Rs.200,000.
Department A B C
Number of employees 30 270 100
The number of new hires 8 12 5
If number of new hires is considered the cost driver, what amount of personnel costs will be allocated to
Department A?
Answer: Rs. 64,000
Q.3 Spoilage is an example of quality cost
Answer: Internal failure
Q.4 During the lockdown days, a hospital that was running to capacity in terms of medical staff available on regular
shifts proposes to share profits with staff that are willing to work extra time. Can this be termed lean
management?
Answer: Yes. Planning from a lean perspective-invest in people
Q.5 A hand crafted product is produced in a factory taking 8 hours per unit against the standard set at 9 hours. The
production manager is trying to find means of reducing the standard to lesser hours by improving material
handling, etc. This measure is considered as (Cost Reduction/ Cost Control)
Answer: Cost Reduction
Q.6 Hardware Company reported the following results from the sale of 5,000 hammers in May: sales Rs. 200,000,
variable costs Rs.120,000, fixed costs Rs.60,000, and net income Rs.20,000. Assume that Hardware increases the
selling price of hammers by10% on June 1. How many hammers will have to be sold in June to maintain the same
level of net income?
Answer: 4,000
Q.7 A factory is trying to establish standard time for a certain job. Workers arrive at 8:00 am, during the day take tea
and lunch breaks for 1 ½ hours, machines need set up for ½ an hour and workers leave by 4 p.m A worker can
ideally produce a unit of output if he is at his job for two hours. How much is the standard labour hour per unit?
Answer: 2.67 hours
Q.8 The average demand per day of cars from a travel company by past weeks observation is 4, whereas, by a
simulation for 7 days using random numbers, the average demand is 7 per day. Should you advise the company
to go by the simulation result?
Answer: No. Simulation is required for a large no. of days in order to arrive at a reasonable conclusion for
taking action.
Q.9
Activities Total Costs Rs. Activity – cost drivers
Account inquiry hours 400000 10.000 hours
Account billing lines 280000 40,00,000 lines
Account verification accounts 150000 40,000 accounts
Correspondence letters 50000 4,000 letters
Total cost 8,80,000
M provides the above ABC information. The above activities are used byDepartments A and B as follows:
Dept A Dept B
Account inquiry hours 2,000 4,000
Account billing lines 400,000 200,000
How much of the account inquiry cost will be assigned to Department A?
Answer: Rs. 80,000
Q.10 At the breakeven point of 200 units, variable costs total Rs. 400 and fixed costs total Rs.600. The 201st unit sold will
contribute ----------------------------------------------------------- to profits.
Answer: Rs. 3
Q.11 In a network, can you have nodes 1 and 2 to be starting nodes, so that the activities 1-3 and 2-3 have no
predecessors?
Answer: Yes. 1-2 is a dummy
Q.12 Kraft Kay sells a single product. 7,000 units were sold resulting in Rs.70,000 of sales revenue, Rs.28,000 of
variable costs and Rs.12,000 of fixed costs. Contribution margin per unit is?
Answer: Rs. 6 per unit
Q.13 Activity 1-2 lies on the critical path which has three other activities, each of the same duration of 1 week. If the
project can be completed in 4 weeks, what is theearliest finish time of 1-2?
Answer: 1 week
Q.14 How many separate cost pools should be formed given the following information:
Cost Cost driver
Postage costs No. of brochures mailed
Printing and paper costs No. of brochures mailed
Quality control costs No. of inspections
Customer service costs No. of customers served
Answer: 3 different cost pools
Q.15 If there were 60,000 kgs of raw materials on hand on January 1, 120,000 kgs are desired for inventory at January 31, and
360,000 kgs are required for production in January after a normal loss of 10% of input, how many kgs of raw materials
shouldbe purchased in January?
Answer: 4,60,000 kgs

Q.16 Hefty Company produces A and B with contribution margins per unit of Rs.40 and
Rs.30, respectively. Only 500 labor hours and 300 machine hours are available for
production.
Time requirements to produce two unit of A and three units of B are as follows:
A B
Labour hours 5 2
Machine hours. 1 4
Write the constraint on labour in a linear programming model considering x units of A and y units of B before
simplifying the coefficients.
Answer: 5/2x+2/3y ≤ 500
Q.17 Oasis Ltd. Wants to produce and sell a new mineral water. In order to penetrate the market, the product will hav to
sell at Rs. 20,00 per bottle. The following data has been collected:
Answer: Rs. 16
Q.18 P Ltd. has old inventory on hand that cost Rs.12,000. Its scrap value is Rs.16,000. The inventory could be sold for
Rs.40,000 if manufactured further at an additionalcost of Rs.12,000. What should P Ltd. do?
Answer: Manufacture further and sell it for Rs. 40,000
Q.19 GI can produce 100 units of a necessary component part with the following costs:Direct Materials Rs.40,000
Direct Labor Rs. 18,000 Variable
Overhead Rs.42,000 Fixed
Overhead Rs.16,000
If GI purchases the component externally, Rs.4,000 of the fixed costs can be avoided. Below what external price
for the 100 units would GI choose to buy instead of make?
Q.20 In a 4 x 4 assignment algorithm carried out by a student, the number of lines used to cover the zeroes was 4,
though he could have covered them in three lines. Whatwill he face in the next step?
Answer: 3 allotments and zeros will be exhausted

Section : C
(12X4= 48 Marks)
One LAQ
Q.1 Manton Moulders is operating at 70% capacity and presents the following information:
9 Marks
BEP= Rs.200 lakhs, PV Ratio= 40% and Margin of Safety= Rs.50 lakhs
The management has decided to increase production to 95% capacity level with thefollowing changes:
Selling price will be reduced by 8%
Variable cost will be reduced by 5% on sales
Fixed cost will increase by Rs.20 lakhs,including depreciation on additions but excluding
interest on additional capital.
Additional capital of Rs.50 lakhs will be needed for capital expenditure and working capital
i)Calculate the present profit at 70% capacity [3]
ii) Calculate the sales that will be required to earn Rs.10 lakhs over and above the present profit and also meet 20%
interest on the additional capital. [3]
iii) What will be the revised Break Even Point? [2]
iv) What will be the new Margin of Safety? [1]
Answer:
(i) Computation of present profit at 70% capacity:
= Rs. 20 lakhs
(ii) Sales required to earn target profit:
= Rs. 311.12 lakhs
(iii) New BEP = Rs. 244.45 lakhs.
(iv) New MOS = Rs. 66.67 lakhs
Q.2 Write a brief note on Pricing in Service sector.

3 Marks
Answer:
- Supply and labour billing.

- Pure labour billing
Cost plus pricing
Service overhead based billing
Two LAQ
Q.1 X Ltd is a diversified corporation with separate and distinct operating divisions. Each
8 Marks
division’s performance is evaluated on the basis of total profits and return on division
investment. The Division A manufactures and sells table top air cooler units. Division
A currently produces 15,000 units. Division A’s manager believes that sales can be
increased if the unit selling price of the table top air cooler is reduced. A market
research study conducted by an independent firm at the request of the manager
indicates that a 15% reduction in the selling price (Rs.60) would increase volume by
16% or 2,400 units, the reduced price applying to all the units. Division A has sufficient
production capacity to manage this increased volume withno increase in fixed costs.
At present, Division A uses a filter in each of its units that it purchases from an
outside supplier at a cost of Rs.70 per filter. The manager of Division A has
approached the manager of the Division B regarding the sale of a filter unit to
Division A. The Division B currently manufactures and sells exclusively to outside
firms a filter that is similar to the one used by Division A. The specifications of the
Division A filter are slightly different which would reduce the Division B’s direct
material cost by Rs.5 per unit. In addition, the Division B would not incur any variable
selling costs in the units sold to Division A. The manager of Division A wants all of
the filters it uses to come from one supplier, and has offered to pay B Rs.50 for each
filter unit. Division B has the capacity to produce 75,000 units and currently sells
64,000 units in the market.
(Rs.)
Particulars Division A Division B

Selling Price per unit 400 100
Filter 70 -
Variable Manufacturing Cost 112 30
Variable Marketing Cost 18 6
i) Should Division A go for the increased volume of sales from a financial

perspective? Justify your recommendation with appropriate figures. [2]
ii) If B should supply the entire requirement of A after considering i) above, what is the
minimum transfer price that B will agree to, given that a single transfer price applies
to all units transferred to A ? Is B likely to accept A’s proposed transfer price? [3]
iii) In the interest of X Ltd. as a whole, what should be the best strategy in terms of
sourcing and selling the filters? Work out a suitable transfer price for the
management to convince A and B. Assume that X Ltd. is not constrained about
avoiding partial supply.[3]
Answer:
(i) Sales revenue for 15000 units = 15000 x 400 = Rs. 60,00,000
Sales Revenue for 17400 units = 17400 x 0.85x 400 = 17400 x 340=Rs. 59,16,000
A should not go for the increased sales at that discount since there is no incremental revenue or
contribution.
Alternatively, Contribution per unit 200, for 15000 units = Rs. 30,00,000
Contribution per unit 140, for 17400 units = Rs. 24,36,000
The volume of 15000 units of air coolers is more profitable for A.
(ii) B has spare capacity of 75000-64000 = 11000 units. This can be supplied at variable cost
less selling and material saving, i.e. 11000 units at 25 Rs. per unit.=Rs. 2,75,000
4000 units have to be supplied by diverting market sales at Rs. 100 = Rs. 4,00,000
Transfer price for 15000 units = Rs. 6,75,000
Rs/unit = 675000/15000 = 45
A has offered Rs. 50. It will be in B’s interest to accept the offer.
(iii) For every unit of B sold outside, the company earns a contribution of Rs. 64, whereas, if it transfers
to A, the cost saved is just Rs. 70-25, which is Rs. 45 per unit.
For X Ltd’s best strategy, B should supply 11000 units to A out of its spare capacity and not divert
from the market. X Ltd should convince A to accept partial supply from B. A also stands to gain
since instead of paying Rs. 70 outside for the entire requirement of 15000 units, A will incur only
Rs. 50, which is also acceptable by B for its spare capacity. A should buy 4000 units from the
market at Rs. 70 and 11000 units from B at Rs. 50 which it offered earlier. B will not sell below Rs.
25 per unit(its variable cost to A) even from its spare capacity.
Q.2 The following data of manufacture and sale is obtained from ABC Ltd. for the year 4 Marks
ending 31st March,2021
Product A B C D E F Total
Contribution (Rs.) 500 200 1500 75 100 125 2500
Prepare a Pareto product contribution chart and comment on the sales.
Answer:
Rearrange the products in descending order of contribution and find out the cumulative contribution percentage.
Product Contribution Rs. Cumulative Contribution Cumulative

Rs. Contribution(%)
C 1500 1500 60%
A 500 2000 80%
B 200 2200 88%
F 125 2325 93%
E 100 2425 97%
D 75 2500 100%
Total 2500
On analysis it is found that 80% of the total contribution is earned by C and A. Hence these two products should be
carefully monitored and nurtured. The other products should be investigated for improvement of contribution.
Three LAQ
Q.1 A company has four territories open, and four salesmen available for assignment. The territories are not equally rich
in their sales potential; it is estimated that typical salesman operating in each territory would bring in the following
annual sales.
8 Marks
Territory 1 2 3 4
Annual Sales (Rs. In 000’s) 60 50 40 30
The four salesmen are also considered to differ in their ability; it is estimated that, working under the same conditions,
their yearly sales would be proportionately asfollows:
i) If the criterion is maximum expected sales, the cost minimization matrix is
ii) Matrix for Column minimum operation is
iii) If the criterion is maximum expected sales, final assignment of salesman to the territories that result in optimum
expected sales is
Answer:
Maximisation matrix (i)Cost Minimisation matrix Row Minimum Operation

0 6 12 18
T/ 6 5 4 3 12 18 24 30
S 0 4 8 12
24 28 32 36
6 36 30 24 18 0 3 6 9
4 24 20 16 12 30 33 36 39
0 8 16 24
3 18 15 12 9 0 8 16 24
8 48 40 32 24
(ii)Column Minimum operation Minimum uncovered element operation Minimum uncovered element
0 3 6 9 0 2 5 8 operation
0 2 4 7
0 1 2 3 0 0 1 2
-
0 0 0 1
-
0 0 0 0 -
1 0 0 0 -
2 1 0 0
0 5 10 15 0 4 9 14 0 4 8 13
Minimum uncovered element

operation
0 0 2 5
2 0 0 1
-
4 1 0 0
0 2 6 11
(iii)Optimal assignment. Optimum Sales Value is as follows :

Sales Man Territory Sales (Rs 000)
A 2 30
B 3 16
C 4 9
D 1 48
Total 103
Q.2 Define Value Engineering(VE).What are the issues considered during a VE review?
Answer: 4 Marks
Value engineering involves searching for opportunities to modify the design of each component or
part of a product to reduce cost, but without reducing the functionality and quality of the product.
The Issues are as follows :
- Elimination of unnecessary functions from the production process.
- Elimination of unnecessary product qualities
- Design minimisation
- Substitution of parts
- Search for better way of doing things.
Four LAQ
Q.1 ST Ltd. uses a standard costing system. The following data relating to a single product for the month of September
has been furnished to you. The Standard costper unit was:
8 Marks
Direct Material: Standard Price Rs.10 per kg, Standard quantity 20 kgs per unit
Direct Labour : Standard Rate of pay Rs.5.50 per hour, Standard Time 12 hours per unit
Production OH Costs, all classified as fixed, were budgeted at Rs.9,00,000 p.a. Thestandard time for producing
one unit is 12 machine hours and normal capacity is60,000 machine hours p.a. Production OH is absorbed on
machine hours. The costs incurred and other relevant information for the month is given below:
Direct Material used-1,00,000 kgs at a cost of Rs.10,50,000
Direct Wages paid-Rs.3,10,000 for 62,000 hours
Production Overhead-Rs.9,26,000
Machine capacity used-60,000 hours
Actual output-4,800 units. Assume no stocks of WIP or Finished Goods at the yearend.
i) The standard product cost for one unit is
ii) Variance for Material (Usage and Price) are
iii) Variance for Labour(Rate and Efficiency) are:
iv) Variance for Fixed OH (Volume and Expenditure) are
Answer:
i) Standard Product Cost for one unit = Rs. 446

ii) Material Usage Variance:= Rs. 40,000 (A)
Material Price Variance:= Rs. 50,000 (A)
iii) Labour Efficiency Variance:= Rs. 24,200 (A)
Labour Rate Variance:= Rs. 31,000(F)
iv) Fixed OH Volume Variance: = Rs. 36,000(A)
Fixed OH Expenditure Variance: = Rs. 26,000(A)
Q.2 What is the impact of Just-in-time on Product Prices?

4 Marks
Answer:
When a company achieves a higher level of product quality, along with ability to deliver products on the dates required,
customers may be willing to pay a premium. This is particularly true in industries where quality or delivery reliability is
low. If customers are highly sensitive to these two factors, it may be possible to increase the price substantially.
Alternatively, if these factors are not of great importance, if customers place a higher degree of importance on other
factors, then there will be no opportunity for a price increase.
In industries where many companies are adopting JIT systems at the same time or have already installed them, an
improvement in product quality and delivery times does not differentiate a company from its peers. Instead, since
everybody else is offering the same level of quality and service it just keeps a company from losing sales to its
competitors. In such a situation it is more likely that all companies remaining in the industry will use their new-found
lower costs to initiate a price war that will result in a drop in prices. Consequently, the impact of a JIT system on product
pricing is primarily driven by customers’ perceived need for higher product quality and reliable delivery times, as well as
the presence of competitors with JIT system, the same installation, and operational base.
Five LAQ
Q.1 A project consists of 7 activities and the time estimates of the activities arefurnished as under:
7 Marks
i) Possible paths of the project are

ii) Identify the critical path and its duration
iii) Variance of the critical path is:[1]
iv) What project duration will provide 95% confidence level of completion (Z0.95=1.65)?
Answer:
(i) te=(t0+4tm+tp)/6
Possible paths are= 1 – 3 – 5 – 6=6+14+5= 25 days
1 – 2 – 5 – 6= 10+5+5= 20 days
1 – 4 – 6= 8+6= 14 days
(ii) Critical path is 1 – 3 – 5 – 6= 6+14+5= 25 days
(iii) Variance of Critical path is:[(tp-t0)/6]2= 1+16+ 1= 18 days
(iv) Given that Z= 1.65 for probability of 95%
So [Tr – Tcp]/SD= [Tr– 25]/4.24= 1.65
Hence Tr = 25 + 6.996 = 32 days
Q.2 (i) State the major reasons for using Simulation technique to solve management problem.
5 Marks
ii) Outline the limitations of Simulation.
Answer:
(i) - A simulation model is easier to explain to management.

- Model experimentation. Experimenting with the actual system itself would be too costly.
- Suitable in cases of large complex problems.
- Cost savings.
(ii) Limitation of Simulation :
- Simulation is not precise.
- Only situations involving uncertainty an be measured.
- Simulation generates only a way to evaluate solutions but does not generate the solution techniques.
- Choice of random numbers is subjective.
Six LAQ
(4X3 = 12 Marks)
Q.1 Write short note on advantages of Target costing

3 Marks
Answer:
Advantage of Target Costing :
(i) Innovation
(ii) Competitive advantage
(iii) Market driven management
(iv) Real cost reduction
Q.2 Write short note on Rate of return pricing. What are the issues that may arise due toadoption of this pricing?
3 Marks
Answer:
Rate of Return Pricing :
Determination of return on capital employed is one of the most crucial aspects of price fixation process. In
this process instead of arbitrarily adding a percentage on cost of profit, the firm determines an average mark
up on cost necessary to produce a desired rate of return on its investment. Under this method three issues
arise:
• The basis on which the capital employed is computed.
• Which items should be covered on the return on capital.
• What rate of return can be regarded as fair?
Q.3 Write short note on Lean Accounting 3 Marks

Answer:
Lean Accounting :
It is the general term used for the changes required to a company’s accounting, control, measurement and
management processes to support lean manufacturing and lean thinking. Lean manufacturing breaks the
rules of mass production and so the traditional accounting and management methods are at best unsuitable
and usually activity hostile to the lean changes the company is making.
Q.4 Write short note on Project crashing

3 Marks
Answer:
Project Crashing :
Project crashing is a network technique with a focus on reducing the project duration to the optimum
level. Reduction in project duration may involve extra costs. Hence, project crashing seeks to determine
the optimum duration of the project, i.e. time that corresponds to the minimum costs. The activity cost
slope indicates the additional cost incurred per unit of time saved in reducing the duration of an activity.
Q.5 Write short note on concept and aim of Theory of Constraints

3 Marks
Answer:
Concept and aim of theory of Constraints :
TOC analyses the Bottlenecks and constraints within the firm that restrict output and hinder speedy
production. Through put is related directly to the ability to cope with the constraint and to manage the
bottle neck. This focus on throughput enables management to examine both constraints and bottlenecks
in order to increase Throughput contribution.
Q.1 Getwell Hospitals is a recently constructed multi speciality hospital and has beenoperating for the last three years
quite successfully. A group of doctors who were founders of this hospital could not use the entire facility by itself
to recover costs and make profits. They rented out the hospital facilities to different expert groups like pediatrics,
cardiology etc. and collected amounts consisting of two elements- the variable portion relating to the number of
patient days and a fixed portion irrespective of the number of beds occupied. Apart from common facilities, the
respective expert groups had to engage its own nurses, aides and supervisory nurses on a full time basis. This is
being done carefully after assessing the abilityto attend on the requirements of patients.
During COVID, the number of patients who came for regular check-ups and undertook consequent preventive
medical treatments dwindled drastically and therefore the whole hospital saw the necessity and opportunity to
function as a COVID Care hospital. Now the facilities were rented to Covid treatment groups and all groups had a
hundred per cent occupancy.
One such group called Covid Sure Cure (CSC) that rented this facility had the following figures for the past year:
It had taken up 60 beds for 365 days. It was charged by Getwell a sum of Rs. 9,31,80,000 as the fixed charge and
Rs. 9000 per patient day as the variable charge.CSC in turn charged its patients Rs. 15000 per bed per day.
The range of requirements beginning from the minimum relating to nursing staff isgiven below: 4+2+2+4= 12 Marks
CSC was comfortable during the pandemic as all the beds were occupied all the time and there was a growing
demand for more. But in the coming year, as the number of patients has come down and some beds are now
being given for post- covid complication care patients, CSC wants to look at its cost structure to be able to
negotiate a different pricing with Getwell.
i) Under the given conditions of outflows to salaries and to Getwell, how many patient days will be
required by CSC for the earliest break-even?
ii) How many beds does this figure translate to, on an average?
iii) Will it be substantially worthwhile for CSC to consider trimming its requirement on the number of
nursing staff?
iv) If CSC expects an 80 % level of occupancy during the current period, what should be the amount to be
paid to Getwell with a 25 % margin of safety? It feels it cannot increase the charge to patients.
Answer:
i) BEP patient days = 18020.
ii) This translates to about 49.36, say 50 beds occupancy. (18020 ÷ 365)
iii) The staffing cost is very low considering the huge bulk of fixed cost to Getwell. As seen above, one
level of pruning will only save 230 patient days, which is not even one bed occupancy. Hence it is not
worthwhile for CSC to trim its staff. Another aspect is that trimmed workforce may be stressed and
may not render adequate quality. Further, it is stated that the staffing is already done carefully. Hence
there is no likelihood of a substantial reduction in nursing staff cost.
iv) Amount to be paid to Getwell towards fixed and variable component = Rs. 18,21,60,000.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
DECEMBER - 2017
Paper-15: STRATEGIC COST MANAGEMENT-DECISION MAKING
Further, answer any 5 (five) Question from Section B, each carrying 16 marks.
Section – A
(20 Marks)
1. Choose the most appropriate answer to the following questions giving justification. Each
question carries 2 (two) marks. 2×10=20
(i) The following figures are extracted from the books of a company:
Budgeted O/H ` 10,000 (Fixed ` 6,000, Variable ` 4,000)
Budgeted Hours 2000
Actual O/H ` 10,400 (Fixed ` 6,100, Variable ` 4,300)
Actual Hours 2100
Variable O/H cost variance and Fixed O/H cost variance will be:
(a) 100 (A) and 200 (A)
(b) 100 (F) and 200 (F)
(c) 100 (A) and 200 (F)
(d) 200 (A) and 100 (F)
(ii) A company produces a product which is sold at a price of ` 80. Its Variable cost is
` 32. The company’s Fixed cost is `11,52,000 p.a. The company operates at a margin
of safety of 40%. The total sales of the company is:
(a) 4,000 units
(b) 40,000 units
(c) 30,000 units
(d) 20,000 units
(iii) The P/V ratio of a firm dealing in Electrical equipment is 50% and the margin of safety
is 40%. BEP of the firm at a sales volume of ` 50,00,000 will be
(a) ` 25,00,000
(b) ` 35,00,000
(a) ` 30,00,000
(b) ` 36,00,000
(iv) ABC Limited has current PBIT of `19.20 lakhs on total assets of `96 lakhs. The
company has decided to increase assets by `24 lakhs, which is expected to
increase the operating profit before depreciation by `8.40 lakhs. There will be a net
increase in depreciation by `4.80 lakhs. This will result in ROI
(a) to increase by 1%
(b) to decrease by 1%
(c) to decrease by 1-5%
(d) to remain the same
(v) For a Learning Curve percentage of 72%, the time to be taken to complete the 4th
unit of a 12-unit job involved in the assembly line, if the initial unit requires 80 hours,
will be
(a) 43.50 hrs
(b) 41.47 hrs
(c) 46.71 hrs
(d) 40.95 hrs
(vi) Marketing department of an organisation estimates that 40,000 of new mixers could
be sold annually at a price of `60 each. To design, develop and produce these new
mixers an investment of `40,00,000 would be required. The company desires a 15%
return on investment (ROI). Given these data, the target cost to manufacture, sell,
distribute and service one mixer will be
(a) ` 37.50
(b) ` 40.00
(a) ` 45.00
(c) ` 48.60
(vii) When you wait until the manufacture of a product has been completed and then
record all of the related issuances of inventory from stock that were required to
create the product, it is called
(a) Forensic Accounting
(b) Back-flush Accounting
(c) Tax Accounting
(d) Lean Accounting
(vii) Match the following:
(A) Dr. Deming believes (1) Common causes
(B) Ishikawa development (2) To prevent defect
(C) Type of variation is due to (3) Cause & effect diagram
(D) Crosby’s objective of quality (4) Histogram
The correct order is

(a) A-3, B-2, C-1, D-4
(b) A-2, B-3, C-4, D-1

(c) A-2, B-3, C-1, D-4
(d) A-4, B-3, C-1, D-2
(ix) Sab Ltd. fixes the inter-divisional transfer prices for its products on the basis of cost
plus a return on investment in the division. The budget for division X for 2016-17
appears as under:
`
Fixed Assets 5,00,000
Current Assets 3,00,000
Debtors 2,00,000
Annual Fixed cost of the Division 8,00,000
Variable cost per unit of product 10
Budgeted Volume 400000 units per year
Desired R.O.I. 28%
Transfer price for division X is
(a) ` 12.70
(b) ` 10.70
(c) ` 8.70
(d) ` 14.70
(x) A company uses traditional standard costing system. The inspection and set-up
costs are actually ` 1,760 against a budget of ` 2,000. ABC system is being
implemented and accordingly the number of batches is identified as the cost driver
for inspection and set up. The budgeted production is 10,000 units in batches of 1,000
units whereas actually 9,000 units were produced in 11 batches. The cost per batch
under ABC system will be
(a) ` 160
(b) ` 200
(c) ` 180
(d) ` 220
Answer:
1.
(i) (c) Variable O/H Cost variance = Recovered O/H - Actual O/H
= 4200 – 4300 = 100(A)
Fixed O/H Cost variance = 6300 - 6100 = 200 (F).
(ii) (b) SP 80 – VC 32 = Contribution 48
F.C. 11,52,000
B.E.P. = 11,52,000/48 – 24,000 units
MOS = 40%; B.E.P. = 60%
24,000 × 100
∴ Total sales = = 40,000 units.
60
(iii) (c) Actual Sales - M.O.S. = BEP Sales
Sales = ` 50,00,000
Less: Margin of safety 40% on sales = ` 20,00,000
Break even sales = ` 30,00,000
(iv) (b) Before installing new assets After installing new assets
PBIT ` 19.20 lakhs = ` 19.20 lakhs +(` 8.40 lakhs
– ` 4.80 lakhs = ` 22.80 lakhs
Value of Assets ` 96.00 lakhs ` 96.00 lakhs + ` 24.00 lakhs
= ` 120.00 lakhs
ROT = 20% = 19%
Conclusion: There will be a decrease of 1% in ROI under the proposed

dispensation.
(v) (b) At 72% Learning Curve,
T-4 - Time taken by the 4th Unit = 80 (.72)(.72) = 41.47 hrs.
Note: In the arithmetic method followed above, every time the number the
number of repetitions doubles, the time to perform the activity is reduced by the
Learning Curve Coefficient.
(vi) (c) Projected sales (40,000 mixers X `60 per mixer) (A) = ` 24,00,000
Less desired profit (15% of ` 40,00,000) (B) = ` 6,00,000
Target Cost for 40,000 mixers (A - B) = ` 18,00,000
Target cost per mixer (` 18,00,000 / 40,000 mixer) = ` 45.00 per unit
(vii) (b) Back-flush Accounting
(viii) (c) A-2, B-3, C-1, D-4
(ix) (a) VC ` 10; FC per unit = ` 8,00,000 ÷ 4,00,000 = ` 2
Total Cost = 10 + 2 = ` 12
` 10,00,000 × 28%
Required Return = = 0.70
4,00,000
∴ T.P. ` 12 + 0.70 = ` 12.70
(x) (b) Number of batches under ABC = 9000 ÷ 1000 = 9
Std. Cost under ABC = Budg Cost / Batch × ABC number of batches
= ` 200 × 9 = ` 1800
Production 9000 Units
Number of batches 9
Cost /Batch ` 200
Section-B
Each Question carries 16 Marks. 16×3=80
2. (a) What do you understand by ‘quality’ in the context of Quality Cost Management?
Explain. 8
(b) Why would you classify costs of quality into different groups? Enumerate them and
give suitable examples where possible. 4+4=8
Answer:
2. (a) Quality is defined (by the American Society) as the total features and characteristics
of a product or service made or rendered according to specifications to satisfy
customers at the time of purchase and during use. There are two basic aspects of
quality: (a) design quality, and (b) conformance quality. Quality of product or
service is decided by the customer and is built into the service on product through
the design for it. A customer has certain needs or requirements for product or
service. It is the design of product or service which builds these requirements as
product or service specifications into the product or service–including the way the
product or service would be delivered to the customer. The way the product is
made or the service is delivered is according to a set of processes which are in
sequence. This set of processes, their sequence and interdependence gets defined
while the design activity is performed and the design of process has a direct impact
on the outcome, that is, the extent to which the outcome meets the specifications
developed during design. Process design also contributes to quality. Conformance
to specifications measures how well the product or service meets the targets and
tolerances determined by its designers. For example, the dimensions of a machine
part may be specified by its design engineers as 3 + .05 inches. This would mean that
the target dimension is 3 inches but the dimensions can vary between 2.95 and 3.05
inches. Similarly, the wait for hotel room service may be specified as 20 minutes, but
there may be an acceptable delay of an additional 10 minutes. Also, consider the
amount of light delivered by a 60 watt light bulb. If the bulb delivers 50 watts it does
not conform to specifications. As these examples illustrate, conformance to
specification is directly measurable, though it may not be directly related to the
consumer’s idea of quality.
Thus, actual performance (quality) of a product or service may fall short of customer
expectation either due to design quality failure and/or due to conformance quality
failure.
Quality has both financial and non-financial perspectives. Financially, it, represents
costs of quality where as non-financial measures are the number of customer
complaints, defectives to good production (%), employee empowerment and
training, etc. Quality affects all aspects of the organization and has dramatic cost
implications. The most obvious consequence occurs when poor quality creates
dissatisfied customers and eventually leads to loss of business. However, quality has
many other costs, which can be divided into two categories. The first category
consists of costs necessary for achieving high quality, which are called quality
control costs. These are of two types: prevention costs and appraisal costs. The
second category consists of the cost consequences of poor quality, which are
called quality failure costs. These include external failure costs and internal failure
costs. The first two costs are incurred in the hope of preventing the second two.
(b) Costs of quality can be classified into the following groups for better quality costs
management: (1) Prevention costs, (2) Appraisal costs, (3) Internal failure costs, (4)
External failure costs, (5) opportunity costs (e.g. loss of contribution).
Prevention costs are all costs incurred in the process of preventing poor quality from
occurring. They include quality planning costs, such as the costs of developing and
implementing a quality plan. Also included are the costs of product and process
design, from collecting customer information to designing processes that achieve
conformance to specifications. Example; Quality training, Quality circles, Statistical
process control activities, System Development for prevention, Quality improvement.
Appraisal costs are incurred in the process of uncovering defects. They include the
cost of quality inspections, product testing, and performing audits to make sure that
quality standards are being met. Also included in this category are the costs of
worker time spent measuring quality and the cost of equipment used for quality
appraisal. Example:-testing and inspecting materials, final product testing and
inspecting, WIP testing and inspecting, package inspection and depreciation of
testing equipment.
Internal failure costs are associated with discovering poor product quality before the
product reaches the customer site. One type of internal failure cost is rework, which
is the cost of correcting the defective item. Sometimes the item is so defective that it
cannot be corrected and must be thrown away. This is called scrap, and its costs
include all the material, labor, and machine cost spent in producing the defective
product. Example: - cost of scrap (net of realization), cost of spoilage, cost of
rework, down time due to defect in quality and retesting.
External failure Costs are incurred when inferior products are delivered to customers.
They include cost of handling customer complaints, warranty replacements, repairs
of returned products and cost arising from a damaged company reputation.
Example: - cost of field servicing, cost of handling complaints, warranty repairs, lost
sales, warranty replacements.
For better management, quality costs may be classified into direct (e.g. employees
and inspectors involved in defect rectification) and indirect costs (indirect costs are
incurred in each of the costs-of-quality activities.
3. (a) The Stock Control Policy of Vidhata Co. is that each stock is ordered twice a year,
the quantum of each order being one-half of the year’s forecast demand. The
Materials Manager, however, wishes to introduce a policy in which for each item of
stock, Re-order Levels and EOQ are calculated. For one of the items X, the following
information are available:
Forecast Annual Demand 3,600 units
Cost per unit ` 100
Cost of Placing an order ` 40
Stockholding Cost 20% of the average stock value
Buffer Stock to cover fluctuations in demand 100 Nos.
Required:
If the new policy is adopted, calculate for stock item X,
(i) Re-order Level that would be set by the Materials Manager.
(ii) Anticipated reduction in value of the average stock investment.
(iii) Anticipated reduction in total inventory costs in the first and subsequent years.
2+3+(3+2)=10
(b) The management of W Ltd., which is now operating at 50% capacity, expects that
the volume of sales will drop below the present level of 5,000 units per month. The
operating statement prepared for monthly sales shows:
` `
Sales (5,000 units at ` 3 per unit) 15,000
Less: Variable Costs at ` 2 per unit 10,000
Fixed Overheads 5,000 15,000
Net Profit Nil
It is proposed that the company should suspend production until market conditions
improve. The General Manager estimated that a minimum of fixed cost (shut down
costs) amounting to ` 2,000 would be necessary in any event.
Required:
(i) Advise Management at what level of sales it could think of suspending

production.
(ii) If the sales price is ` 2.80, what should be the level of sales for shut down
decision? 3+3=6
Answer:
3. (a)
i. Reorder Level = Safety Stock + Lead Time Consumption = 100 units (given) + (3,600
units ÷ 12 months) = 100 + 300 = 400 units.
ii. Economic Order Quantity - Square Root of (2AB ÷ C) where
A = Annual Requirement of Raw Materials = 3,600 units,
B = Buying or Ordering Cost per order = ` 40
C = Carrying or Stockholding Cost p.u per annum = ` 100 × 20%= ` 20
On substitution, EOQ = 120 units
Average Stock Quantity under Old Policy = (1,800 units ÷ 2) = 900 units
Average Stock Quantity under EOQ = Safety Stock + (120 units ÷ 2) = 100 units + 60
units = 160 units
Reduction in the value of the Average Stock Investment = (900 – 160) × ` 100 = `
74,000.
iii. Cost Comparison of Old Policy and EOQ
Particulars Old Policy EOQ

Quantity ordered every time 1,800 units 120 units
Number of orders per annum 2 orders 30 orders
Buying Cost at ` 40 per order 2 × `40 = ` 80 30 × `40 = ` 1,200
Average Inventory =½ x Quantity 900 units 160 units (iucl. Safety
Stock)
Carrying Cost at ` 20 per unit 900 × ` 20 = ` 18,000 160 × `20 = `3,200
Total Associated Cost ` 18,080 ` 4,400
Savings in Cost per annum due to EOQ Policy = ` 18,080 - `4,400 =` 13,680
However, for the first year, the Company has to specifically purchase the safety
stock also, in addition to the annual consumption requirements. This will be at a
cost of `100 x 100 units = ` 10,000. Hence, savings in the first year will be ` 13,680 -
` 10,000 = ` 3,680.
3. (b)
(i) If selling price is ` 3 per unit
F. Cost - Shut down cost

Shutdown Point = × SP
Contribution pu.
5000 − 2000
= ×`3
(` 3 −` 2)
= 3000 × 3 = ` 9,000
or, 3000 units
Verification of the above is as under:

`
Sales 3,000 units @ ` 3 9,000
Less: Variable Cost 3,000 units @ ` 2 6,000
Contribution 3,000
Less: Fixed Cost 5,000
Operating Loss 2,000
Operating Loss = Loss at Shutdown Point
(ii) If selling price is reduced to ` 2.80
 5000 − 2000  × ` 2.80

 2.80 − 2.00 
= ` 10,500
or 3,750 units
4. (a) The following data are obtained from the records of a company:
Year 1 Year 2
(`) (`)
Sales 80,000 1,00,000
Profit 10,000 15,000
Required:
(i) Calculate Break-even Point
(ii) Profit or Loss when sales amount to ` 60,000, and
(iii) Required sales for level of profit of ` 20,000.
4+2+2=8
(b) Your company wants to buy one machine. Two alternative models are available —
A and B. The following information are available with respect to them:
Model A Model B
Output p.a. 10,000 10,000
Fixed costs p.a. (`) 30,000 16,000
Profit at 100% capacity (`) 30,000 24,000
Both the machines will produce identical products. The annual market demand for
the product is 10,000 units @ ` 10 per unit.
Required:
(i) The level of sales at which both are equally profitable;
(ii) The range of sales at which one is more profitable than the other.
4+4=8
Answer:
4. (a)
Change in profit 5,000 1 th

P/V ratio = Change in= =
sales 20,000 4 or 25%
C=F+P
or, F = C – P = 25% of 8,000 – 10,000
= ` 10,000
[ or, 25% of 1,00,000 – 15,000 = ` 10,000]
FC ` 10,000
(i) ∴ BEP = P/ V ratio = .25 = 40,000
`
(ii) S = ` 60,000
P = C – F = 25% of 60,000 – 10,000 = ` 5,000
(iii) Required Sales for (P) = ` 20,000
C= F + P = ` 10,000 + 20,000 = ` 30,000
` 30,000
∴ Required Sales = = ` 1,20,000
.25
(b)
[C = F + P]
A B
` `
Sales @ ` 10 1,00,000 1,00,000
Contribution 60,000 40,000
P/V ratio 60% 40%
Contribution/unit 6 4
Variable cost/unit 4 6
BEP 5,000 units 4,000 units
(i) For A : 4x + 30,000
B : 6x + 16,000
∴ 4x + 30,000 = 6x + 16,000 ; Solving X = 7,000 units
(ii) At 7,000 units both are equally profitable. BEP of A and B being 5,000 units and 4,000
units, Machine B is more profitable below 7,000 units, and A will be more profitable
above 7,000 units.
A : Range of production 7,000 to 10,000 units
B : Range of production 4,000 to 6,999 units
5. (a) Zip Ltd. manufactures three products. The material cost, selling price and bottleneck
resource details per unit are as follows:
Particulars Product T Product C Product S

Selling Price (`) 66 75 90
Material and other variable cost (`) 24 30 40
Bottleneck resource time (minutes) 15 15 20
Budgeted factory costs for the period are ` 4,43,200. The bottleneck resource time
available is 1,50,240 minutes per period.
Required:
(i) Company adopted throughput accounting and products are ranked according
to ‘product return per minute’.
Select the highest rank product.
(ii) Calculate throughput accounting ratio and comment on it. 3+3=6
(b) Force Ltd. is a manufacturer of a fire fighting equipment which consists of five
components three of which are made using general purpose machines and two by
manual labour. The data for the manufacture of the equipment are as follows:
Components F O R C E Total
Machine hours required per unit 20 28 24 72 hrs
Labour hours required per unit 2 1 3 hrs
Variable cost per unit ` 64 108 116 24 8 320
Fixed cost per unit (apportioned) ` 96 204 232 48 72 632
Total component cost ` 160 312 348 72 60 952
Assembly cost/unit (all variable) ` 80
Selling price/unit ` 1,200
The marketing department of the company anticipates 50% increase in demand

during the next period. General purpose machinery used to manufacture. F, O and R
are already working to the maximum capacity of 9,504 hours and there is no
possibility of increasing this capacity during the next period. But labour is available
for making components C and E and also for assembly according to demand. The
management is considering the purchase of one of the components F, O or R from
the market to meet the increase in demand. These components are available in the
market at the following prices:
Component F : ` 160
Component O : ` 320
Component R : ` 250
Required:
(i) Profit made by the company from current operations.
(ii) If the company buys any one of the components F, O or R, what is the extent of
additional capacity that can be created?
(iii) Assuming 50% increase in demand during the next period, which component
should the company buy from the market?
(iv) The increase in profit, if any, if the component suggested in (iii) is purchased
from the market. 2+3+2+3=10
5. (a) (i) Calculation of Rank according to product return per minute.

(`)
Particulars T C S
Selling price 66 75 90
Less : Variable Cost 24 30 40
Throughput contribution (a) 42 45 50
Minutes per unit (b) 15 15 20
Contribution per minute (a) ÷ (b) 2.8 3 2.5
Ranking II I III
(ii) Calculation of Throughput Accounting ratio:
Particulars T C S
Factory cost per minute (` 2,21,600/75,120 minutes) (`) 2.95 2.95 2.95
TA Ratio (Contribution per minute/Cost per minute) 0.95 1.02 0.85
Ranking based on TA ratio II I III
Analysis - Product C yields more contribution compared to average factory

contribution per minute, whereas T and S yield less.
(b) (i) Statement showing profit at current operations :
`
SP 1200
Variable Cost 320+80 400
Contribution 800
Number of units 9504/72 Units 132
Total contribution 1,05,600
Fixed Cost 83,424
Profit 22,176
(ii)
F 0 R
` ` `
Buying cost 160 320 250
Variable Cost 64 108 116
Extra buying cost 96 212 134
Excess buying cost per 4.8 7.571 5.583
hour
It is better to buy component F from the market because excess buying cost per
machine hour is less. Computation of additional capacity created if components
are bought from outside:
If F is bought:
Number of units that can be manufactured (9504/52) 182.76 units

Increase in capacity (182.76 - 132/132 x 100) 38.46%
If O is bought:
Number of units (9504/44) 216
Increase in capacity (216 - 132 / 132 x 100) 63.64%
If R is bought:
Number of units 9504/48 198
Increase in capacity (198 - 132 /132 x 100) 50%
(iii) F is cheaper to buy. But the increase in capacity will not be sufficient to meet the
expected demand for next year. Therefore, we shall try to buy the next cheaper
component, i.e., R and by buying it the increase in capacity will be exactly equal to
the demand for our product during the next year. Hence, component ‘R’ should be
bought from the market.
(iv) Statement showing computation of profit by buying R from outside :
(i) No. of units (9504 / 48) Units 198

(ii) Selling price `1200
(iii) Variable Cost (400-116 + 250) `534
(iv) Contribution `666
(v) Total Contribution `131868
(vi) Fixed Cost `83424
(vii) Profit `48444
Less : Existing Profit `22176
Increase in profit `26268
6. (a) Wipro is examining the profitability and pricing policies of its Software Division. The
Software Division develops Software Packages for Engineers. It has collected data on
three of its more recent packages — (i) ECE Package for Electronics and
Communication Engineers, (ii) CE Package for Computer Engineers, and (iii) IE
Package for Industrial Engineers.
Summary details on each package over their two-year cradle to grave product lives
are:
Package Selling Price Number of units sold

Year 1 Year 2
ECE ` 250 2,000 8,000
CE ` 300 2,000 3,000
IE ` 200 5,000 3,000
Assume that no inventory remains on hand at the end of year 2. Wipro is deciding
which product lines to emphasize in its software division. In the past two years, the
profitability of this division has been mediocre.
Wipro is particularly concerned with the increase in R & D costs in several of its
divisions. An analyst at the Software Division pointed out that for one of its most
recent packages (IE), major efforts had been made to reduce R&D costs. Last week,
Amit, the Software Division Manager, decides to use Life Cycle Costing in his own
division. He collects the following Life Cycle Revenue and Cost information for the
packages (in `):
Particulars Package ECE Package CE Package IE

Year 1 Year 2 Year 1 Year 2 Year 1 Year 2
Revenues 5,00,000 20,00,000 6,00,000 9,00,000 10,00,000 6,00,000
Costs:
R&D 7,00,000 — 4,50,000 — 2,40,000 —
Design of Product 1,15,000 85,000 1,05,000 15,000 76,000 20,000
Manufacturing 25,000 2,75,000 1,10,000 1,00,000 1,65,000 43,000
Marketing 1,60,000 3,40,000 1,50,000 1,20,000 2,08,000 2,40,000
Distribution 15,000 60,000 24,000 36,000 60,000 36,000
Customer Service 50,000 3,25,000 45,000 1,05,000 2,20,000 3,88,000
Required:
Prepare a Product Life Cycle Income Statement for each Software Package. Which
package is most profitable and which is the least profitable? How do the three
packages differ in their cost structure (the percentage of total costs in each
category)? 6+2+2=10
(b) A practicing Cost and Management Accountant now spends ` 0.90 per K.M. on taxi
fares for his client’s work. He is considering two other alternatives - the purchase of a
new small car or an old bigger car.
Item New Small Car Old Bigger Car

(`) (`)
Purchase Price 35,000 20,000
Sale Price after 5 years 19,000 12,000
Repairs and servicing per annum 1,000 1,200
Taxes and insurance p.a. 1,700 700
Petrol consumption per litre (k.m.) 10 7
Petrol price per litre 3.5 3.5
He estimates that he will travel 10000 K.M. annually.
Required:
Which of the three alternatives will be cheaper? If his practice expands and he has
to travel 19,000 K.M. per annum will the cost of the two cars break even and why?
Ignore interest and Income tax. 6
Answer:
6. (a) Life Cycle Income Statement (in ` ’000)
Particulars Package Package Package

ECE CE IE
Y1 Y2 Total % Y1 Y2 Total % Y1 Y2 Total %
Revenues 500 2,000 2,500 100% 600 900 1,500 100% 1,000 600 1,600 100%
Costs
R&D 700 - 700 28% 450 - 450 30% 240 - 240 15%
Design 115 85 200 8% 105 15 120 8% 76 20 96 6%
Manufacturing 25 275 300 12% 110 100 210 14% 165 43 208 13%
Marketing 160 340 500 20% 150 120 270 18% 208 240 448 28%
Distribution 15 60 75 3% 24 36 60 4% 60 36 96 6%
Cust. Service 50 325 375 15% 45 105 150 10% 220 388 608 38%
Total Costs 1065 1085 2150 86% 884 376 1260 84% 969 727 1696 106%
Profit 350 14% 240 16% (96) -6%
Observation: Package ECE is most profitable, while package IE is least profitable.
(b) Statement showing computation of break-even point for three alternatives:
Taxi (`) New smaller car (`) Old bigger car (`)
Fixed Cost: Depreciation 16000/5 = 3200 8000/5 = 1600
Repairs 1000 1200
Taxes 1700 700
5900 3500
Variable cost per KM 0.9 0.35 0.5
TOTAL COST PER 10000 KMS 9000 3500 + 5900 = 9400 5000 + 3500 = 8500
Cost per 19000 KMS 17100 12550 13000
(a) At 10000 KMS old bigger car is cheaper than the other two alternatives.
(b) At 19000 KMS it is better and cheaper to purchase the new smaller car.
Indifference point = (difference in fixed cost/difference in variable cost per unit)
= (2400/0.15) = 16000 kms
7. (a) Draw a network from the following activities. Find the critical path and total duration
of the project.
Immediate Duration (days)

Activity predecessor activity
A — 10
B A 5
C A 4
D A 7
E B,C 6
F C,D 4
G E,F 7
(b) A company produces products P, Q and R from three raw materials A, B and C. One
unit of product P requires 2 units of A and 3 units of B. One unit of product Q requires
2 units of B and 5 units of C and one unit of product R requires 3 units of A, 2 units of B
and 4 units of C. The company has 8 units of material A, 10 units of B and 15 units of C
available to it. Profits per unit of product P, Q and R are ` 3, ` 5 and ` 4 respectively.
(i) Formulate the problem mathematically.
(ii) Write the Dual problem. 4+4=8
Answer:
7. (a) The network is drawn as follows :
Network Diagram
Various paths Duration of paths (days)
(i) 1-2-4-6-7 10 + 5 + 6 + 7 = 28
(ii) 1-2-3-4-6-7 10 + 4 + 0 + 6 + 7 = 27
(iii) 1-2-3-5-6-7 10 + 4 + 0+4 + 7 = 25
(iv) 1-2-5-6-7 10 + 7 + 4 + 7 = 28
Critical paths are 1-2-4-6-7 and 1-2-5-6-7 with duration of 28 days and are marked
with double lines.
(b)
Raw Materials P Q R Available Units
A 2 - 3 8
B 3 2 2 10
C - 5 4 15
Profits 3/- , 5/-, 4/-

Let x1 be the number of units of P
Let x 2 be the number of units of Q
Let x 3 be the number of units of R
(i) Formulation of the problem

Objective function:
Max Z = 3x1 + 5x2 + 4x3
Subject to constraints:
2x1+3x3 ≤8
3x1+2x2+2x3 ≤10
5x2+4x3 ≤15
X1, X2, X3 ≥0.
(ii) Dual of the problem
Min C = 8y1+10y2+15y3
Subject to constraints:
2y1+3 y 2 ≥3
2 y 2+5 y 3 ≥5
3 y 1+2 y 2+4 y 3 ≥4
y 1, y 2, y 3 ≥ 0.
8. Write short notes on any four of the following:
(a) Usefulness of Pareto Analysis
(b) Seven Principles of BRR
(c) Four P’s of TQM
(d) Lean Accounting
(e) Value Engineering
Answer:
8.
(a) Pareto analysis is useful to: 1. Prioritize problems, goals, and objectives to Identify
root causes, 2. Select and define key quality improvement programs, 3. Select key
customer relations and service programs, 4. Select key employee relations
improvement programs, 5. Select and define key performance improvement
programs, 6. Maximize research and product development time, 7. Verify
operating procedures and manufacturing processes, 8.Product or services sales
and distribution, 9.Allocate physical, financial and human resources.
(b) Seven Principles of BPR: 1. Processes should be designed to achieve a desired

outcome rather than focusing on existing tasks, 2. Personnel who use the output
from a process should perform the process, 3. Information processing should be
included in the work, which produces the information, 4. Geographically dispersed
resources should be treated, as if they are centralized, 5. Parallel activities should
be linked rather than integrated, 6. Doers should be allowed to be self-managing,
7. Information should be captured once at source.
(c) Four P’s of TQM
The 4P’s
People To ovoid misdirection, TQM teams should consist of team spirited

individuals who have a flair for accepting and meeting challenges
Individuals who are not ideally suited to the participatory process
of TQM. Should not be involved at all. e.g. lack of enthusiasm, non-
attendance at TQM meetings, failure to complete delegated work,
remaining a “Mute Spectator” at TQM meetings, etc.
Process It is essential to approach problem-solving practically and to

regard the formal process as a system designed to prevent
participants from jumping to conclusions. As such, it will provide a
means to facilitate the generation of alternatives while ensuring
that important discussion stages are not omitted.
Problem Problems need to be approached in a systematic manner, with

teams tackling solvable problems with a direct economic impact,
allowing for immediate feedback together with recognition of the
contribution made by individual participants.
Preparation Additional training on creative thinking and statistical processes

are needed in order to give participants a greater appreciation of
the diversity of the process. This training must quickly be extended
beyond the immediate accounting circle to include employees at
supervisory levels and also who are involved at the data input
stagey
(d) Lean Accounting is the general term used for the changes required to a
company’s accounting, control, measurement, and management processes to
support lean manufacturing and lean thinking. Most companies embarking on lean
manufacturing soon find that their accounting processes a management methods
are at odds with the lean changes they are making. The reason for this is that
traditional accounting and management methods were designed to support
traditional manufacturing; they are based upon mass production thinking. Lean
manufacturing breaks the rules of mass production, and so the traditional
accounting and management methods are (at best) unsuitable and usually
actively hostile to the lean changes the company is making.
(e) Value Engineering : Value engineering is an organized / systematic approach

directed at analyzing the function of systems, equipment, facilities, services, and
supplies for the purpose of achieving their essential functions at the lowest life-cycle
cost consistent with required performance reliability, quality and safety. Society of
Japanese Value Engineering defines VE as:
“A systematic approach to analyzing functional requirements of products or

services for the purposes of achieving the essential functions at the lowest total
cost”.
Value Engineering is an effective problem solving technique. Value engineering is

essentially a process which uses function analysis, team-work and creativity to
improve value. Value Engineering is not just “good engineering”. It is not a
suggestion program and it is not routine project or plan review. It is not typical cost
reduction in that it doesn’t “cheapen” the product or service, nor does it “cut
corners”.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

JUNE - 2017
Paper-16 : DIRECT TAX LAWS AND INTERNATIONAL TAXATION
Wherever required, the candidate may make suitable assumptions and

state them clearly in the answers.
Working notes should form part of the relevant answers.
All questions relate to Assessment Year 2017 – 18 and the provisions
referred are those of the Income-tax Act, 1961.
Answer Question No. 1 which is compulsory and any five from question Nos. 2 to 8.
Section – A
1. Choose the most appropriate alternative and give justification in brief/brief working for
your answer: 2x10=20
(a) Health insurance premium paid for Mr. Ram being non-resident (age 70) is deductible
up to ______________.
(A) ` 25,000
(B) ` 30,000
(C) ` 5,000
(D) ` 50,000
(b) Mr. Xavier (age 55) a non-resident individual received dividend of ` 12 lakhs from
Fair Trading Co (P) Ltd. in August, 2016. He has no other income in India. His tax
liability for the dividend income would be
(A) Nil
(B) ` 1,90,550
(C) ` 61,800
(D) ` 3,70,800
(c) XYZ (P) Ltd. decided to buy-back shares from the shareholders. It bought 30000
shares of ` 10 each by paying ` 40 per share. The accumulated profits of the company
on the date of buy-back was ` 30 lakhs. The buy-back was 30% of the total paid up
capital. The tax liability on the company for buy-back of shares would be
(A) Nil
(B) ` 12,36,000
(C) ` 4,32,600
(D) ` 1,85,400
(d) Kumar Industries is engaged in manufacture of leather products. It was set up in
backward area and became eligible for subsidy @25% for the generator acquired by
it for ` 12 lakhs on 15.12.2016. It received the subsidy in March 2017. The amount of
depreciation for the year at the applicable rate would be
(A) Nil
(B) ` 90,000
(C) ` 67,500
(D) ` 1,80,000
(e) Ms. Pinky resigned from employment from Zeet University after serving for 4 years and
8 months. She received ` 1,40,000 from recognized provident fund. The amount of tax
deductible at source under section 192A would be
(A) Nil
(B) @ 20% being ` 28,000
(C) @ 30% being ` 42,000
(D) @ 10% being ` 14,000
(f) Mr. Murali employed in a company constructed a residential house property for self-
occupation by availing bank loan of ` 50 lakhs. Interest on the loan for the year
amounts to ` 2,60,000. He paid ` 1,70,000 up to 31.03.2017. The amount of interest
eligible for deduction in the hands of Mr. Murali would be
(A) ` 30,000
(B) `2,60,000
(C) `2,00,000
(D) ` 1,70,000
(g) Mr. Santhanam is employed in Gama Ltd. He opted for transfer of funds from
superannuation fund to National Pension Systems Trust referred to in section 80CCD
and accordingly ` 5 lakhs was transferred from approved superannuation fund to an
account held with National Pension Systems Trust. His salary income (excluding the
said transfer) amounts to ` 9,40,000 (computed). His total income after considering
the transfer would be
(A) ` 9,40,000
(B) ` 10,90,000
(C) ` 12,90,000
(D) ` 14,40,000
(h) Pai Softwares Ltd. is engaged in BPO at Bengaluru. It acquired computers for ` 20 lakhs
on 10.05.2016. It also acquired computer softwares for ` 10 lakhs in July 2016. The total
amount of depreciation claim in respect of these assets would be
(A) ` 4,50,000
(B) ` 12,00,000
(C) ` 7,50,000
(D) ` 14,50,000
(i) Beta Ltd. of Mumbai is subsidiary of Unity Inc. of USA. Beta Ltd. purchased goods from
Unity Inc. Transfer pricing adjustment would arise between them when
(A) Sale price is less than arm's length price.
(B) Sale price is equal to Indian market price.
(C) Purchase price is more than arm's length price.
(D) Purchase price is less than arm's length price.
(j) An advance pricing agreement is valid for a period specified in APA but not
exceeding __________ consecutive financial years.
(A) 1
(B) 5
(C) 3
(D) 10
Answer:
1. (a) (A) ` 25,000

Justification for the answer: Explanation to section 80D says senior citizen means an
individual resident in India who is of the age of 60 years or more during the relevant
previous year. Thus a non-resident though has completed 60 years is not eligible for
enhanced deduction of ` 30,000 but eligible for regular deduction of ` 25,000.
(b) (A) NIL

Justification for the answer: Section 115BBDA does not cover non-resident individuals, HUF
or firm (including LLP). Therefore, the dividend distributed by the domestic company for
which DDT is paid under section 115-0 is eligible for exemption under section 10(34).
(c) (D) ` 1,85,400
Justification for the answer: Under section 115QA, when shares are liable for
buyback in the case of company not being a listed company, the company
has to pay 20.6% on the distributed income as tax. In this case the company
pays ` 12 lakhs of which ` 9 lakh belongs to accumulated profits.
Tax at 20.6% being ` 1, 85,400 is the liability on the company.
Alternatively, the workings are as under:

FSC 30,000 x 40 12,00,000
Less: COA 30,000x 10 3,00,000
9,00,000 x 20.60% = ` 1,85,400
(d) (C) ` 67,500

Justification for the answer: The amount of subsidy received from the State
Government or any other authority shall go to reduce the actual cost of asset
computed under section 43(1) and hence the applicable depreciation would
be computed on the resultant value. Depreciation at 15% on ` 9 lakhs being `
1,35,000 and 50% thereon being ` 67,500 would be the eligible amount.
(e) (D) @ 10% being `14,000

Justification for the answer: Amount received from accumulated balance by the
employee when it is taxable as per the provisions of rule 8 of Part A of the 4th
Schedule, tax is deductible at source @ 10% when the aggregate payment
exceeds `50,000.
(f) (C) ` 2,00,000

Justification for the answer: Where a house property acquired or constructed with
borrowed capital on or after 01.04.1999 and is used for self residential use, the
maximum amount of deduction allowable would be `2,00,000. The balance
amount is eligible for carry forward and set off in the subsequent assessment
years.
(g) (A) ` 9,40,000
Justification for the answer: Section 10(13)(v) was amended to provide
exemption in respect of transfer from approved superannuation fund to National
Pension Systems Trust referred to in section 80CCD. Hence the amount transferred is
not chargeable to tax.
(h) (B) ` 12,00,000

Justification for the answer: Depreciation On computers is 60% of ` 20 lakhs,
which works out to ` 12 lakhs.
Software ` 10 lakhs is a deductible business expenditure u/s 37(1).
(i) (C) Purchase price is more than arm's length price.

Justification for the answer: When the purchase price is more than arm's length
price the income of the Indian undertaking chargeable to tax in India is
understated. Hence, the transfer pricing adjustment would arise.
(j) (B) 5
Justification for the answer: As per section 92CC(4) an advance pricing
agreement is valid for a period but not exceeding 5 consecutive financial
years.
Section – B
2. (a) Mitra & Co. a partnership firm consisting of 5 partners was constituted on 01.04.2016.
On the same date all the partners contributed capital of ` 5 lakhs each. Also, one
partner Ashwin contributed a vacant land owned by him as his capital contribution
on the same date besides capital contribution in cash. The land was inherited by him
from his father in June 2009 when the fair market value was ` 15 lakhs. It was acquired
originally by his father in April, 1991 for ` 1 lakh. The fair market value on the date of
contribution was ` 30 lakhs and it was recorded in the books at ` 40 lakhs by credit to
his capital account.
The firm was engaged in developing and trading of vacant sites. It incurred
development expenses of ` 18 lakhs on the land contributed by the partner Ashwin.
The total extent of land contributed amounts to 30,000 sq. ft. After leaving space for
road, park etc. the firm could plot 8 sites of 2400 sq.ft. each, which were sold for ` 10
lakhs each after incurring brokerage @ 2.5% of the sale price. The stamp duty
valuation was ` 12 lakhs for each plot of land.
The deed of partnership provides for monthly working partner's salary of ` 20,000 each
and interest on capital (including contribution of land) at 15% per annum.
Cost inflation index: F.Y. 1991-92 = 199; F.Y. 2009-10 = 632; F.Y. 2016-17 = 1125
Compute the presumptive income under section 44AD and income as per the regular
provisions of the firm for the Assessment Year 2017-18. Also, work out the tax
implication in the hands of partner, Mr. Ashwin. 8
(b) ACHARYA LLP, a limited liability partnership in India is engaged in development of

software and providing IT enabled services through two units, one of which is located
in a notified Special Economic Zone (SEZ) in Chennai (commenced from 01.04.2006).
The particulars relating to previous year 2016-17 furnished by the assessee are as
follows:
Total Turnover: SEZ unit ` 120 lakhs and the other unit ` 100 lakhs
Export Turnover: SEZ unit ` 100 lakhs and the other unit 60 lakhs
Profit: SEZ unit ` 48 lakhs and the other unit ` 42 lakhs
Amount debited to Profit and Loss Account towards Special Economic Zone Re-
Investment Reserve Account ` 21 lakhs.
The Assessee has no other income during the year.
(i) Compute tax payable by ACHARYA LLP for the Assessment Year 2017-18.
(ii) Will the amount of tax payable change, if ACHARYA LLP is an overseas entity? 8
Answer:
2. (a)
Computation of Total Income of Mitra & Co. for the Assessment Year 2017-18
Regular Presumptive
provisions provisions
Sale consideration 80,00,000 80,00,000
Income @ 8% 6,40,000
Cost of land as recorded in the books (As per section 40,00,000

45(3)
Brokerage @ 2.5% 2,00,000
Development expenses 18,00,000
Interest on capital-cash `25 lakhs @ 12% 3,00,000
Interest on capital in kind `40 lakhs @ 12% 4,80,000

67,80,000
Book Profit 12,20,000
Less deduction U/s.40(b)
Actual salary paid `20,000 × 5 ×12 (A) 12,00,000
Allowable U/s.40(b)
On first `3,00,000 @ 90% 2,70,000
On balance `9,20,000 @ 60% 5,52,000
(B) 8,22,000
Lesser of the two is deductible 8,22,000
3,98,000
Add: The difference between fair market price and
sale consideration under section 43CA
` 2,00,000 × 8 16,00,000 16,00,000
Total Income 19,98,000 22,40,000
Impact on partner Mr. Ashwin
Sale consideration (deemed) 40,00,000
Less: Indexed cost
` 1,00,000 × 1125/199 [See Note below] 5,65,327
Long-term capital gain 34,34,673
Income from Business

Interest on capital – cash 60,000
Interest on capital contributed - in kind 4,80,000
Working partner salary @ 20% `8,22,000 1,64,400
Total Income 41,39,073
Note: Ashwin inherited the land from his father in June 2009 and his father had acquired the
same in April, 1991. There are number of High Court decisions which state that in such a
situation, one has to go back till the capital asset was acquired in a mode other than those
not regarded as “Transfer”.
(b)
Profit of unit in SEZ 48 Lacs
Add: Amt debited to SRA 21 Lacs
POB 69 Lacs
Less: Exemption u/s 10AA
50% (69 x 100/120) or 21 WEL 21 Lacs
48 Lacs
Add: Others 42 lacs
Total Income 90 Lacs
Computation of total income and tax liability of ACHARYA LLP as per the normal
provisions of the Act for A.Y. 2017-18
Particulars ` (in lakh)

Business income (before deduction under section 10AA)(` 48 lacs 90.00
+ ` 42 lacs)
Add: Amount debited to SEZ Re-investment Reserve 21.00
111.00
Less: Deduction under section 10AA
= `48 lacs×` 100 lacs/` 120 lacs = 40×50% (being the 11th year) 28.75
Amount debited to SEZ Re-investment Reserve Account 21.00
Whichever is less is deductible 21.00
Total Income 90.00
Tax on total income@30% 27.00
Add: Education cess @2% & SHEC @1% 0.81
Tax liability (as per normal provisions) 27.81
Computation of Adjusted total income and Alternate Minimum tax of ACHARYA LLP
as per the provisions of section 115JC for A.Y. 2017-18
Total income as per the normal provisions 90.00

Add: Deduction under section 10AA 21.00
Adjusted total income 111.00
Tax @18.5% of Adjusted Total Income 20.535
Add: Surcharge @12% as the adjusted total income is >1 crore 2.4642
22.9992
Add: Education cess @2% & SHEC @1% 0.6899
Alternate Minimum Tax as per section 115JC 23.6891
(i) Since the tax payable as per the normal provisions of the Act is more than the
alternate minimum tax payable, the total income as per normal provisions shall
be liable to tax and the tax payable for A.Y. 2017-18 shall be ` 27.81 lakhs.
There would be no tax credit for ACHARYA LLP to carry forward and set off
against income-tax payable in the subsequent 10 assessment years.
(ii) The provisions of alternate minimum tax would also be applicable to an overseas
LLP. Hence, the tax liability would remain the same even where ACHARYA LLP is
an overseas entity.
3. (a) What are the incomes which can be declared under the Income Declaration
Scheme, 2016? Narrate the step by step processes involved in the declaration
process. 8
(b) (i) Balaji Airlines Ltd. paid ` 10 lakhs to Airport Authority of India towards landing and
parking charges. The payment was towards use of land in the airport besides
technical services involving navigation, security and other ancillary services. The
tax was deducted at source under section 194C at 2%. The Income Tax Officer
(TDS) held that the assessee ought to have deducted tax under section 194-I i.e.
towards rent. Discuss the consequence of the action of the Assessing Officer and
also the correctness of such decision.
(ii) Venkat & Co. a partnership firm was constituted on 01.06.2015 with four partners.
All the partners contributed ` 10 lakhs each by way of capital. While examining
the return of the Assessment Year 2016-17, the Assessing Officer verified the
source of investments made by the partners. Not satisfied with the explanation of
the partners/firm, the Assessing Officer assessed to tax ` 25 lakhs as unexplained
cash credit under section 68 of the Act in the hands of the firm. Decide the validity
of the action of the Assessing Officer. 4+4=8
Answer:
3. (a) Declaration of Undisclosed Income

As per Section 183(1) of the Income Declaration Scheme the following incomes can
be declared-
(1) Any income chargeable to tax which has not been declared by a person by filing
return of income
(2) Any income chargeable to tax which has not been disclosed in the return of
income furnished by the person before the date of commencement of the
scheme
(3) Any income chargeable to tax which has escaped assessment as such person
omitted or failed to furnish a return or to disclose truly and fully all material facts
necessary for assessment or otherwise
(a) Declaration under the Scheme Form No. 1
(b) Jurisdictional Principal CIT to issue acknowledgement Form No. 2
(c) Proof of payment of tax, surcharge, penalty Form No 3
(d) Certificate of acceptance of declaration to be issued within 15 days of
submission of proof of payment Form No 4.
(b) (i) The assessee has deducted tax at source under section 194C at 2% and the
Assessing Officer holds that the tax ought to have been deducted under section
194-I @ 10%. The obvious consequence of the action would be disallowance at
30% of expenditure by invoking section 40(a)(ia) of the Act.
In this case, the assessee has not paid the amount merely for use of land. The
payment is also towards other services such as use of airport land for landing, the
technical services involving navigation, security and other ancillary services.
As the payment was not for use of land, the provisions of section 194-I are not
attracted.
The payment is for various composite services and hence only the provisions of
section 194C could be applied and not section 194-I. Thus the disallowance
contemplated by the Assessing Officer is not tenable in law.
Case law reference Japan Airlines Co Ltd v. CIT(2015)377 ITR 372 (SC)
(ii) When there is a credit in the books of the firm and if the source for such credit is not
explained, the Assessing Officer may assess the same as deemed income of the
assessee of the year of such credit by invoking section 68.
When section 68 is invoked for the purpose of taxing the unexplained tax credit, such
income is liable to tax at 30% under section 115BBE. [Now taxable at 77.25% plus
penalty under section 271AAC @ 10% of the credit]
In the case of a firm, the onus of the firm is discharged when the amounts credited in
the books of account is attributed to the partners who paid the amount to the firm.
The Assessing Officer may well verify the capacity of the partners who contributed the
amounts as capital and he cannot saddle the firm with addition under section 68.
When the firm was constituted on 01.06.2015 with a capital contribution of ` 40 lakhs by
the partners, it could not be assessed to tax in its hands since it has come to
existence only on that date and it could not have earned such income on that date.
Thus the action of the Assessing Officer is not tenable in law.
Case law reference: CIT v. M. Venkateswara Rao (2015) 370 ITR 212 (T & AP).
4. (a) Outline the legislative objective of bringing into existence the provisions relating to
transfer pricing in relation to international transactions? 5
(b) The statement of profit & loss of BG (P) Ltd, a resident company engaged in
manufacturing activity, shows a net profit of ` 36 lakhs for the year ended 31.03.2017,
after debit/credit of the following items:
Credited to Profit and Loss Account:
(i) Long term capital gain on sale of vacant site ` 25,00,000.
(ii) Dividend from Indian companies ` 10,20,000.
(iii) Rent from commercial property ` 3,00,000.
Debited to Profit and Loss Account:

(i) Depreciation ` 13,00,000.
(ii) Donation to electoral trust ` 80,000.
(iii) Advertisement in souvenir of political party ` 45,000.
(iv) Interest paid to non-resident ` 1,00,000 (without deduction of tax at source).
(v) Salary payable to managing director ` 15,00,000 but not paid till 31. 03. 2017. (no
tax was deducted at source).
(vi) Sold goods for ` 5 lakhs to a firm in which the wife of managing director had 25%
share. Discount @ 10% of the sale price was given to the firm.
(vii) Loss from trading in commodity derivatives ` 1,60,000.
(viii) Provision for income-tax ` 4,25,000.
(ix) Proposed dividend ` 7,50,000.
Additional Information:
Depreciation allowable as per the Income-tax Act, 1961 ` 14,50,000.
The long-term capital gain on sale of unused land (computed) is ` 21,20,000. The
company purchased a residential building in December 2016 by investing the entire
sale consideration. The newly acquired building was meant to be used as quarters by
managing director.
Compute the total income of the company for the Assessment Year 2017-18. Ignore
MAT provisions. 11
Answer:
4. (a) The presence of multinational enterprises in India and their ability to allocate profits in
different jurisdictions by controlling prices in intra-group transactions prompted the
Government to set up an Expert Group to examine the issues relating to transfer
pricing.
There is a possibility that two or more entities belonging to the same multinational
group can fix up their prices for goods and services and allocate profits among the
enterprises within the group in such a way that there may be either no profit or
negligible profit in the jurisdiction which taxes such profits and substantial profit in the
jurisdiction which is tax haven or where the tax liability is minimum. This may adversely
affect-a country's share of due revenue.
The increasing participation of multinational groups in economic activities in India has
given rise to new and complex issues emerging from transactions entered into
between two or more enterprises belonging to the same multinational group. The
profits derived by such enterprises carrying on business in India can be controlled by
the multinational group, by manipulating the prices charged and paid in such intra-
group transactions, which may lead to erosion of tax revenue.
Therefore, transfer pricing provisions have been brought in by the Finance Act, 2001
with a view to provide a statutory framework which can lead to computation of
reasonable, fair and equitable profits and tax in India, in the case of such
multinational enterprises.
(b)
Computation of total income of BG (P) Ltd for the Assessment Year 2017-18
Profits and gains of business or profession: ` `
Net Profit as per Profit and Loss Account 36,00,000

Add:
Depreciation debited to Profit and Loss Account 13,00,000
Donation to electoral trust 80,000
Advertisement in souvenir of political party - disallowed 45,000
Interest paid to non-resident without deduction of tax at source – 1,00,000
disallowed @ 100%
Salary payable to managing director - shown as payable hot Nil
liable for tax deduction at source when shown as payable. Tax is
deductible only at the time of actual payment
Discount to related party - not covered by section 40A(2)(b) Nil
Loss from commodity trading being regular business loss, no Nil
adjustment is required
Provision for income-tax 4,25,000
Proposed dividend 7,50,000
63,00,000
Less:
Long term capital gain on sale of vacant site 25,00,000
Dividend from Indian companies 10,20,000
Rent from commercial property - considered separately 3,00,000
Depreciation allowable as per Income-tax Act 14,50,000
52,70,000
Income from Profits and gains of business or profession 10,30,000
Income from House property:

Rent received 3,00,000
Less : Deduction U/s. 24 @ 30% 90,000
2,10,000
Long term capital gain
From sale of unused land 21,20,000
Less: Exemption U/s.54 F - not available for company assesse Nil
21,20,000
Income from Other Sources:
Dividend from other Indian companies - taxable as it is more than Nil
` 10 lakhs(Note:1)
Gross Total Income 33,60,000

Less: Deduction under section 80GGB in respect of donation to 80,000
electoral trust
Note:1 Dividend in excess of ` 10 Lakh is taxable only in case of an Individual, HUF,
and Firm being resident in India.
5. (a) Saraswati Ltd. has received a proper notice under section 148 for the Assessment
Year 2014-15 on 22.03.2017. They also anticipate similar notices for the Assessment
Years 2011-12 and 2012-13 for which they have already furnished return of income
and for which assessments have been completed. On a scrutiny of the books of
account produced, you have seen huge amounts of income which has escaped
taxation. The tax effect for AY 2014-15 is ` 35 lakhs and for AYs 2011-12 and 2012-13
the differential tax is likely to exceed ` 1 crore.
The company seeks your advice as to what should be done now. Advise the
company suitably. 7
(b) Brahma Ltd., discarded certain number of assets forming part of a block of assets
during the previous year 2016-17. The Assessing Officer has disallowed the
depreciation pertaining to such discarded assets.
Discuss whether such action of the Assessing Officer is tenable in law. 4
(c) Maushyaputra Ltd., issued debentures of `5 crores, redeemable after six years. The
debenture holders were given an option of taking up the interest for all the six years
upfront, at a discount. All the debenture holders opted for the same. The company
complied with the TDS formalities. The Assessing officer is of the view that only one-
sixth of the interest is allowable in the current year.
Is the contention of the Assessing Officer correct in law? 5
Answer:
5. (a) Settlement Commission

As per section 245C, an assessee may, at any stage of a case relating to him, make
an application in the prescribed form and manner to the Settlement Commission.
"Case" means any proceeding for assessment which may be pending before an
Assessing Officer on the date on which such application is made.
A proceeding for assessment or reassessment or recomputation under section 147 is
deemed to have commenced from the date of issue of notice under section 148.
Where a notice under section 148 is issued for any assessment year, a proceeding
under section 147 shall be deemed to have commenced on the date of issue of such
notice and the assessee can approach the Settlement Commission for other
assessment years as well, even if notice under section 148 for such other assessment
years have not been issued but could have been issued on that date. However, a
return of income for such other assessment years should have been furnished under
section 139 or in response to notice under section 142.
In the case on hand, M/s. Saraswati Ltd. has received a notice under section 148 for
the A.Y.2014-15 and also anticipates similar notices for the A.Y. 2011-12 and A.Y. 2012-
13, for which return of income has been furnished. Thus, a proceeding for assessment
is pending before an Assessing Officer i.e., the basic condition for approaching
Settlement Commission is satisfied.
Moreover, since after examination of the books of account, huge amount of

concealed income is also noticed, it is presumed that the second condition that the
additional amount of income-tax payable on the income disclosed in the application
should exceed ` 10 lakhs has also been satisfied.
Based on these facts, assuming that the necessary conditions are fulfilled, our advice
as consultant to M/s. Saraswati Ltd. would be to approach the Settlement
Commission to have his case settled and apply for grant of immunity from penalty
and prosecution.
(b) Depreciation on discarded assets

The issue under consideration is whether disallowance of depreciation made by the
AO in arriving at the WDV of the block of asset, with regard to the discarded asset is
justified.
One of the conditions for claim of depreciation under section 32 is that the eligible
asset must have been put to use for the purpose of business or profession.
The other aspect to considered is whether merely discarding an obsolete machinery,

which is physically available, will attract the expression "moneys payable" appearing
in section 43(6), so as to deduct its value from the WDV of the block.
The expression "used for the purposes of the business" in section 32 when used with
respect to discarded machinery would mean the use in the business, not only in the
relevant financial year/previous year, but also in the earlier financial years.
The discarded machinery may not be actually used in the relevant previous year but
depreciation can be claimed as long as it was used for the purposes of business in the
earlier years provided the block continues to exist in the relevant previous year.
Therefore, the condition for claiming depreciation in respect of the discarded machine
would be satisfied if it was used in the earlier previous years for the business.
Coming to the issue of "moneys payable" as per section 43(6), the machinery has not
been sold as machinery or scrap or disposed off, and it continues to exist. Hence it will
not form part of "moneys payable", which alone is deductible while computing the
WDV of the block to which it belongs.
The disallowance by the AO is hence not tenable in law.
Such a view was taken in the case of CIT v. Yamaha Motor India Pvt. Ltd, (2010) 328
ITR 297 (Del).
(c) The issue under consideration is whether, in a case where debentures are issued with
maturity at the end of five years, and the debenture holders are given an option of
upfront payment of interest in the first year itself, whether the entire upfront interest
paid be claimed as deduction by the company in the first year or should the same
be deferred over a period of five years; and would the treatment of such interest as
deferred revenue expenditure in the books of account have any impact on the tax
treatment.
Under section 36(1)(iii), deduction of the amount of interest paid in respect of capital
borrowed for the purposes of business or profession, is allowable as deduction.
The moment the option for upfront payment was exercised by the subscriber, the
liability of X Ltd. to make the payment in that year had arisen. Not only had the
liability arisen in the previous year in question, it was even quantified and discharged
as well in that very year.
When the deduction of entire upfront payment of interest is allowable as per the
Income-tax Act, 1961, the fact that a different treatment was given in the books of
account could not be a factor which would bar the company from claiming the
entire expenditure as a deduction.
The contention of the AO is not correct. The assessee can claim the entire amount of
debenture interest paid upfront, in the current year,
The Supreme Court has taken the said view in the case of Taparia Tools Ltd. v. JCIT
(2015) 372 ITR 605.
6. (a) Pradhan (P) Ltd. gives you the following information for the Financial Year 2016-17:
(i) It paid a refundable deposit of ` 5 lakhs to the landlord where the company has
commenced manufacturing activity during the year.
(ii) It paid ` 3 lakhs to a hotel accommodation where the training programme for the
marketing force was conducted.
(iii) Paid non-compete fee of ` 10 lakhs to a director who was associated with the
company for the last 15 years.
(iv) It filed the quarterly statement of TDS for the quarter ended 30.09.2016 on
05.01.2017. The amount of tax deducted and remitted in the quarter is ` 60,000.
(v) It received interest-free loan of ` 7 lakhs from its subsidiary company in
December 2016 to meet its working capital requirements. The subsidiary
company has accumulated profit of ` 20 lakhs.
(vi) It engaged a famous tennis player Mr. Mahesh as Brand Ambassador for
promoting its products and paid ` 2 lakhs as fee to him.
(vii) It acquired a luxury car for ` 15 lakhs by making payment by cheque on
01.10.2016.
(viii) It paid ` 30,000 to travel agents for purchase of train and air tickets to the
company officials during the year.
You are requested to state in brief the consequences of the above transaction as per
TDS/TCS provisions of the Income-tax Act, 1961. 8
(b) Parthiv, aged 45, is resident of India. During the F.Y. 2016-17, interest of ` 3,10,000 was
credited to his Non-resident (External) Account with UBI ` 70,000 being interest on
fixed deposit with UBI, was credited to his saving bank account during this period. He
also received ` 13,000 as interest on this saving account.
Is Parthiv required to file return of income?
What will be your answer, if he also owns one shop in Delhi having area of 250 sq.ft.,
for which he has received gross rent of ` 21,000 per month, property taxes being
borne by the tenant? 8
Answer:
6. (a) (i) Payment of refundable deposit to landlord would not attract TDS provisions of section
194-1 (Circular No. 718 dated 22.08.1995).
(ii) Payment to hotel accommodation would be in the nature of rent attracting the
provisions of section 194-1. Hence the company must deduct tax at source @ 10% on
the payments made to hotel if the same is more than ` 1,80,000 in aggregate in a
financial year.
(iii) Non-compete fee is chargeable to tax under section 28(va). It is also liable for tax
deduction under section 194J at 10% as the payment exceeds the threshold limit of `
30,000.
(iv) Fee for late filing quarterly statement is ` 200 per day to be reckoned from 01.11.2016
to 05.01.2017 (65 days). The late fee payment is ` 13,000 which is less than the amount
of tax deducted at source for the quarter ended 30.09.2016.
(v) Receipt of interest-free loan from subsidiary company in which the company has
substantial interest is chargeable to tax as deemed dividend. No tax is deductible
at source on the amount of deemed dividend by the payer viz. subsidiary
company.
(vi) Payment to brand ambassador being a sports person covered by notified
profession under section 194J, tax is deductible at source @ 10% on the payment. Where
PAN of the payee is not available, the tax deductible at source would be 20%.
(vii) Purchase of luxury car exceeding ` 10 lakhs is liable for tax collection at source at
1% w.e.f. 01.06.2016. Hence the company has to pay 1% more to the vendor by way
of TCS.
(viii)Payment to travel agents for purchase of tickets would not attract the provisions
of section 194C and hence no tax is deductible at source. [Circular 713 dated
02.08.1995).
(b) An individual is required to furnish a return of income under section 139(1) if his total
income, before giving effect to the deductions under Chapter Vl-A, exceeds the
maximum amount not chargeable to tax i.e. ` 2,50,000 (for A.Y. 2017-18).
Computation of total income of Mr. Parthiv for A.Y. 2017-18

Particulars `
Income from other sources

Interest earned from Non-resident (External) Account ` 3,10,000 section
10(4)(ii), assuming that Mr.Parthiv has been permitted by RBI to the aforesaid
account]
Interest on fixed deposit with SBI 70,000
Interest on savings bank account 13,000
Gross Total Income 83,000
Less: Deduction under section 80TTA (Interest on saving bank account) 10,000
Total Income 73,000
Since the total income of Mr. Parthiv for A.Y. 2017-18, before giving effect to the
deductions under Chapter Vl-A, is less than the basic exemption limit of ` 2,50,000, he
is not required to file return of income for A.Y. 2017-18.
Situation 2
When he receives shop rent, his income from house property is `21,000×12 = ` 2,52,000
Standard deduction of 30% is available. Net income is ` 176,400.
This will get added to the gross total income.
Revised GTI is ` 2,59,400
As this exceeds ` 2,50,000 he will be required to file the return of income.
7. (a) Mr. Ram gave cash gift of ` 10 lakhs to his younger brother Mr. Bharat's wife Smt.
Mandavi. On the same date Mr. Bharat gave gift to wife of Mr. Ram viz, Smt. Sita a
vacant land measuring 2000 sq.ft. The stamp duty valuation of the land on the date of
gift was ` 8 lakhs.
Smt. Mandavi invested ` 8 lakhs in bank fixed deposit fetching interest at 7% per
annum and commenced a business with the balance of ` 2 lakhs along with her own
capital of ` 3 lakhs. The profit for the year from the business amounts to ` 1,50,000.
Determine the tax implication of the above transaction in the hands of all the parties.
Would your answer be different if all of them are non-relatives? 8
(b) In the context of e-commerce transactions, explain why the existing income tax laws
are inadequate. 8
Answer:
7. (a)
The amount gifted by Mr. Ram and Mr. Bharat would fall in the exceptions to section
56(2)(vii) as they are 'relatives'. The amount gifted hence would not be liable to tax as
income.
The relationship from donee's perspective it would be brother of spouse.
The gift up to ` 8 lakhs is covered by cross-transfer. Hence, the income arising
therefrom is liable for clubbing in the hands of spouse of the person deriving such
income.
In the case of Smt. Sita, who received vacant site there is no income. Hence, the
clubbing provision will not operate.
As regards Smt. Mandavi, the interest income of ` 56,000 (`8 lakhs × 7%) is liable for clubbing
in the hands of Mr. Bharat.
As regards income from business which includes the extra gift of ` 2 lakhs by Mr. Ram
(brother of her spouse) is not liable for clubbing. Hence the business income will have
no tax implication.
In case they are not relatives:
The principles relating to cross-transfer will not apply when they are not relatives.
The amount received by Smt. Mandavi from Mr. Ram would be assessed as income under
section 56(2). The business income of Smt. Mandavi and interest income will not be
liable for any clubbing and hence would be taxed in her hands.
The stamp duty value of land received by Smt. Sita is assessable to tax as income under
the head 'other sources'.
(b) Why the existing rules are inadequate for taxation of e-commerce transactions?
There are several reasons for which the nexus based or permanent establishment-
based concept of tax regime is unsuitable for the digital economy.
First, in a digital economy, a company or business enterprise has the ability to have
significant digital presence in the economy of a country without being liable to
taxation due to the lack of nexus under the current tax regimes.
Second, International tax treaties do not usually permit taxation of business profits of a
non-resident enterprise in the absence of a permanent establishment to which these
profits are attributable. For example, many jurisdictions would not tax income derived
by a non-resident enterprise from remote sales to customers located-in that jurisdiction
unless the enterprise maintained some degree of physical presence in that jurisdiction.
As a result, the issue of nexus also relates to the domestic rules for the taxation of non-
resident enterprises.
Third, there remains considerable ambiguity regarding the characterization of income

arising from transactions involving telecommunication networks, software and data
exchange. These disputes on characterization of payments are more commonly
observed in countries like India, having tax treaties that allocate taxing rights to the
source jurisdiction in respect of royalty and fee for technical services.
Finally, the continuing ambiguity related to nexus and characterization of the

payments have the potential of giving rise to tax disputes, particularly in countries like
India, where the tax treaties allocate taxing rights to the source jurisdiction. The
resultant ambiguity, uncertainty and unpredictability can develop as a significant
constraint for the expansion of digital economy in India. This makes an important case
for finding a solution to all these issues, in the form of a simple, clear and predictable
tax rule that unambiguously defines the tax liability of digital enterprises, thereby
facilitating their business planning, reducing their tax risk and contingent liabilities,
while also reducing compliance costs, disputes and administrative burden.
8. Write Short notes (any four): 4x4=16

(a) Distinction between Tax Avoidance and Tax Evasion
(b) Penalties that are imposable for violation of Transfer pricing provisions
(c) Best Judgement Assessment
(d) Memorandum of Cross Objection
(e) Condonation of delay in filling appeal before CIT (Appeal)
Answer:
8. (a) Distinguish between Tax avoidance & Tax evasion.
Tax avoidance Tax evasion

It is termed as a planning to reduce Methods adopted illegally to avoid payment
tax burdens taking all permissible of tax liability. Suppression Income, Inflation of
ways within the law. expenditure are some of the attempts to
reduce or negate tax liability.
It defeats the basic intention of law. It is totally against the law.
The loopholes of law taken in It is an attempt to evade the tax by unfair
to the advantages of tax payers means.
It evolves mala fide intension. It is unlawful.
It has legal sanction. As it is unlawful, punishable under relevant law.
(b) List out four Penalties that are imposable under Transfer Pricing:
Following are the penalties to be imposed due to noncompliance of provisions of
Transfer Pricing,
Relevant Particulars of penalty Quantum of Penalty
Sections
271AA Failure to keep and maintain prescribed 2% of value of each
information/documents in respect of international transaction
international or specified domestic transaction or or specified domestic
failure to report any international or domestic transaction entered by
transaction or furnish incorrect information such person
271(l)(c) Adjustment to tax payers income during 100% to 300% of tax on
assessment adjusted amount
271BA Failure to furnish accountant's report u/s 92E ` 1,00,000
271G Failure to furnish information/documents during 2% value of international
assessment u/s 92D(3) transactions or specified
domestic transactions for
each failure.
(c) Best Judgment Assessment:

The Assessing Officer after considering all material facts which he has gathered is
under an obligation to make an assessment of the total income or less to the best of
his judgment in the following cases.
• If the person fails to make a return as required under s. 139(1) and he has not
made a return or a revised return under section 139 (4) or section 149(5).
• if any person fails to comply with all the terms and conditions stipulated under a
notice u/s. 142(1) or fails to comply with the directions requiring him to get his
accounts audited in terms' of section 142(2A).
• If the person alter having filed a return, fails to comply with the terms of a notice
under section 143(2) requiring his presence or production of evidence and
documents.
• If the Assessing officer is not satisfied about the correctness and the completeness
of the accounts of the Assessee or if no method of accounting has been regularly
employed by the Assessee.
In case of best judgment assessment an Assessee has a right to file an appeal under
section 246A or to make an application for revision under section 246 to the Income
Tax Commissioner. The best judgment assessment can only be made after giving the
Assessee an opportunity of being heard. Such opportunities shall be given by
issuance of notice by way of a showcase as to why the assessment should not be
completed to the best of the judgment and that opportunity for hearing will not be
necessary where notice u/s 142(1) has already been issued. The best judgement
assessment needs to be completed by 21 months from end of the assessment year in
which income was first assessable. Before assume the assessment, the AO must
record that there has been noncompliance on the part of assesse to various notices.
(d) Memorandum of Cross Objection

On filing of the appeal to the ITAT by the taxpayer or by the Assessing Officer (as the
case may be) the opposite party will be intimated about the appeal and the
opposite party has to file a memorandum of cross objection with the ITAT. The
memorandum of cross objection is to be filed within a period of 30 days of receipt of
notice. The memorandum of cross objection is to be filed in Form No. 36A. There is no
fee for filing the memorandum of cross objection. The ITAT may accept a
memorandum of cross objection even after the period of 30 days if it is satisfied that
there was sufficient cause for not submitting the same within the prescribed time.
(e) Condonation of delay in filing appeal before CIT (Appeal)

Section 249(3) enables the CIT (Appeal) to admit an appeal after the examination of
the time limit of 30 days if he is satisfied that the appellant had sufficient cause for not
presenting it within the time limit prescribed. In case of an appeal filed beyond the
period of 30 days, it is recommended that the same shall be accompanied by a
petition for condonation of delay explaining the reasons for the delay. In appropriate
cases, it is also advisable to file an affidavit confirming the reasons for the delay. As
far as possible an attempt shall be to explain the reasons for each and every day's
delay in filing the appeal. The words sufficient cause shall be interpreted liberally with
a view to advance the cause of justice. The provision conferring right of appeal
should be construed in a reasonable, practical and liberal manner [Mela Ram and
Sons vs. CIT (29-ITR-607) (SC); CIT vs. Grafik India (194-ITR-645) (SC)].
If the appellant has acted diligently then normally the delay gets condoned.
However if the delay is caused due to negligence on the part of the appellant, it
become difficult to get the delay condoned. Where the reason for delay in filing first
appeal is attributed to negligence or inaction on the part of tax consultant and there
is no malafide imputable to the assessee the delay can be condoned. -Shakti
Clearing Agency (P) Ltd. vs. ITO (2003) 127 Taxmann 49.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
JUNE - 2018
The figures in the margin on the right side indicated full marks.
Wherever required, the candidate may make suitable assumption(s) and
All questions relate to Assessment Year 2018 – 19, unless otherwise stated.
Answer Question No. 1 which is compulsory and
any five from Question No. 2 to Question No. 8.
Section – A
(i) When Mr. Hari engaged in manufacturing activity with turnover of ` 125 lakhs has
realized sale proceeds through banking channel of ` 90 lakhs and balance by cash,
his income under section 44AD would be
(A) ` 10 lakhs
(B) ` 7.50 lakhs
(C) ` 8.20 lakhs
(D) Not eligible for presumptive income under section 44AD
(ii) When a company engaged in the business of bio-technology incurs (i) expenditure
on scientific research towards land and building ` 20 lakhs; (ii) other capital
expenditures ` 10 lakhs and (iii) revenue expenditure of ` 8 lakhs. The quantum of
deduction under section 35 (2AB) shall be
(A) Nil
(B) ` 16 lakhs (200% of revenue expenditure)
(C) ` 27 lakhs (150% of total expenditure other than cost of land and building)
(D) ` 38 lakhs (100% of capital expenditure including cost of land and building)
(iii) Mr. Malik received a notice under section 148 for the assessment year 2013-14 in
March, 2018. He wants to make application to the Settlement Commission. The
additional amount of income-tax payable on the income disclosed in the application
to the Settlement Commission must exceed _________ .
(A) ` 5 lakhs
(B) ` 10 lakhs
(C) ` 25 lakhs
(D) ` 50 lakhs
(iv) ABC & Co. Ltd. earned ` 15 lakhs by way of transfer of carbon credit. The tax liability in
respect of carbon credit is
(A) Nil
(B) ` 1,54,500 (@ 10.3%)
(C) ` 4,63,500 (@ 30.9%)
(D) ` 2,31,750 (@ 15.45%)
(v) When Mr. Atul doing business has gross total income of ` 9 lakhs, the maximum
amount he can claim deduction in respect of the pension scheme of the Central
Government under section 80CCD would be
(A) ` 50,000 (monetary limit)
(B) ` 90,000 (10% of gross total income)
(C) ` 1,00,000 (monetary limit)
(D) ` 1,80,000 (20% of gross total income)
(vi) When interest paid by an Indian company to a foreign company being an

associated enterprise, such interest must not exceed ________% of the Indian
company's earnings before interest, taxes, depreciation and amortization (EBITDA).
(A) 10
(B) 20
(C) 30
(D) 40
(vii)Secondary adjustment has to be made when the primary adjustment exceeds .

(A) ` 50 lakhs
(B) ` 100 lakhs
(C) ` 300 lakhs
(D) ` 500 lakhs
(viii)When Mr. Singhania having total income exceeding ` 10 lakhs files the return of
income for the assessment year 2018-19 in January, 2019, the fee payable under
section 234F for the delayed filing of return would be
(A) ` 1,000
(B) ` 5,000
(C) ` 10,000
(D) ` 20,000
(ix) When Mr. Gautam doing business paid hall rent of ` 80,000 for 3 days for doing Diwali
sale, the amount of tax deductible at source under section 194-IB would be
(A) ` 8,000 @ 10%
(B) ` 16,000 @ 20%
(C) Nil
(D) ` 4,000 @ 5%
(x) When an Indian company pays ` 5 lakhs to a foreign company for online
advertisement of its products, it has to deduct
(A) tax at source @ 2%
(B) tax at source @ 10%
(C) equalization levy @ 6%
(D) equalization levy @ 8%
Answer:
1. (i) (C) `8.20 lakhs
Brief answer: When the sale proceeds are realized through banking channel, 6%
of the amount shall be deemed to be the income and for the balance amount
realized otherwise than through banking channel 8% shall be deemed to be the
presumptive income under section 44AD. Hence ` 5,40,000 + `2,80,000 = `
8,20,000 is the presumptive income under section 44AD.
(ii) (C) ` 27 lakhs (150% of total expenditure other than cost of land and building)
Brief answer: The quantum of deduction in respect of the company engaged in
the business of bio technology is limited to 150% of the total expenditure
excluding the cost of land and building.
(iii) (B) `10 lakhs.

Brief answer: Where the application is filed in a case not being a case in which
assessment under sections 153A, 153B or 153G are initiated, the additional
amount of income-tax payable on the income disclosed in the application must
exceed `10 lakhs.
(iv) (B) `1,54,500 (@ 10.3%)

Brief answer: As per section 115BBE carbon credit is taxable at the concessional
rate of 10.3% on the gross amount of such income.
(v) (D) `1,80,000 (20% of gross total income)

Brief Answer: As per section 80CCD in the case of a person other than an
employee contribution to Central Government Pension Scheme is deductible up
to a maximum of 20% of the gross total income of the assessee.
(vi) (C) 30
Brief answer: As per section 94B any expenditure by way of interest paid by Indian
company to a foreign associated enterprise in excess of 30% of the EBITDA is
liable for disallowance. It is to be carried forward to subsequent year and could
be allowed in that year to the extent of the maximum allowable interest
expenditure of that year.
(vii) (B) `100 lakhs

Brief answer: When the primary adjustment i.e. adjustment towards arm's length
price exceeds ` 1 crore, the secondary adjustment must be made in the books of
account to remove imbalance between cash account and actual profit of the
assessee.
(viii)(C) ` 10,000
Brief answer: As per section 234F when the total income of the assessee exceeds
`5 lakhs and the return is filed after 31st December of the relevant assessment
year, the assessee shall pay a fee of `10,000
(ix) (D) ` 4,000 @ 5%

Brief answer: As per section 194-IB when rent paid per month or part of a month
exceeds ` 50,000 and the payer is individual or HUF assessee, tax is deductible at
source at 5% of the amount.
(x) (C) Equalization levy @ 6%

Brief answer: As per the Finance Act, 2017 when an Indian company pays to a
foreign company towards online advertisement a sum exceeding ` 1 lakh, it has
to pay equalization levy at 6% of the amount paid.
Section – B
2. (a) PQR Co. Ltd. engaged in manufacturing activity reports a Net Profit of ` 15 lakhs for
the year ended 31.03.2018. The below said items are debited/credited to statement of
profit and loss.
(i) CSR expenditure incurred during the year ` 5 lakhs.
(ii) Non-compete fee paid to DEF Ltd for not marketing their products in North-
Eastern States ` 10 lakhs. The non-complete agreement bars DEF Ltd for a period
of 5 years ending 31.03.2022. No tax was deducted at source on the said
payment.
(iii) A building was constructed on the leasehold land for ` 30 lakhs and it was
completed on 30.11.2017. The lease agreement is for 3 years and after the lease
period, the building must be handed over to the lessor.
(iv) The company during the year paid donation of ` 1 lakh to Dalmia Research
Centre Ltd. which is engaged in approved scientific research.
(v) The company introduced VRS scheme during the financial year 2014-15 and
paid ` 60 lakhs as VRS compensation. The company transferred the entire
unamortized amount of ` 24 lakhs to statement of profit and loss.
(vi) Paid ` 2 lakhs to Registrar of Companies as fee for issue of bonus shares.
(vii) It incurred ` 25 lakhs towards feasibility study for new product manufacture
which eventually was aborted.
(viii) Cost of EPABX and mobile phones acquired on 01.06.2017 for use by executives
` 10 lakhs. Depreciation @ 60% was charged in the books.
(ix) Compounding fee paid for violation of municipal laws in construction of
buildings ` 1,20,000.
(x) Depreciation debited ` 24,60,000.
(xi) Royalty from patent developed by the company credited to Statement of profit
and loss ` 22 lakhs.
(xii) Dividend received from foreign company in which the assessee company
holds 26% shares ` 8 lakhs.
Eligible depreciation ` 32,30,000 under section 32 without considering item (iii) and
(viii) given above.
You are required to compute the total income and income tax liability of PQR Ltd for
the assessment year 2018-19.
Note: Your answer must be supported by reasons for treatment of each item. Ignore
MAT provisions.
(b) A partnership firm with three equal partners authorized payment of monthly salary of `
1 lakh each to all the partners w.e.f. 01.04.2017. Earlier, the partnership deed
authorized payment of monthly salary of ` 50,000 each to all the partners. The
business of the firm has more than doubled during the financial year 2017-18 and the
partners anticipating such increase in business/profit have changed accordingly the
condition for working partner salary.
The profit of the firm was ` 50 lakhs for the year ended 31.03.2018 and the
corresponding profit was ` 20 lakhs for the year ended 31.03.2017. The partners of the
firm want to know whether increase in payment of salary to working partners would be
subjected to disallowance under section 40A(2)(a). 4
Answer:
2. (a)
PQR Co Ltd
Computation of Total Income for the Asst. Year 2018-19
Rs.
Net Profit as per statement of profit and loss 15,00,000
Add:
CSR expenditure debited, not deductible in view of 5,00,000
Explanation
2 to section 37
Non-compete fee on which tax was not deducted at 3,00,000

source as per section 194J and hence @ 30% to be
disallowed as per section 40(a)(ia)
Building on leasehold land debited to Statement of 30,00,000
profit and loss is eligible for depreciation only. Hence
disallowed
VRS Compensation to be amortised in 5 annual
instalments as per section 35DDA. The unamortized
amount is Rs.24 lakhs of which Rs.12 lakhs is
deductible in assessment year 2018-19 and balance 12,00,000
Rs.12 lakhs in assessment year 2019-20. As the full
amount has been debited to Statement and profit
and loss, the excess Rs.12 lakh is added back.
Expenditure towards feasibility study for examining 25,00,000
new line of activity has no connection to the present
business and hence it is a capital expenditure to be
disallowed.
Depreciation on the cost of EPABX and mobile 6,00,000
phones debited to Statement of profit and loss @ 60%
disallowed
Compounding fee paid for violation of local laws in 1,20,000
construction is a expenditure for violation of law
hence not deductible (Millenia Developers v. DCIT
(2010) 322 ITR 401(Ker).
Depreciation debited in the books 24,60,000
1,21,80,000
Less: Depreciation on leasehold building
on Rs.30 lakhs @5% (since the building 1,50,000
was put to use for less than 180 days)
Donation to scientific research company Nil
eligible for deduction @ 100% only. As the
amount is already debited no adjustment
is required. [Section 35(1)(iia)]
Amount paid to ROC as fee for issue of Nil
bonus shares is deductible expenditure as
the payment does not create any asset
or increase in capital base
Depreciation on EPABX and mobile
1,50,000
phones @ 15% on Rs.10 lakhs
Royalty from patent credited to P&L – 22,00,000
considered separately
Dividend from foreign companies – 8,00,000
considered separately
Depreciation eligible under section 32 32,30,000
65,30,000
Income from Business or Profession 56,50,000
Royalty from patent developed by the

22,00,000
company
Dividend from foreign companies 8,00,000
Computation of Tax liability
On Rs.56,50,000 @ 30% 16,95,000
Royalty from patent Rs.22 lakhs @ 10% 2,20,000
Dividend from foreign companies Rs.8
1,20,000
lakhs @ 15%
20,35,000
Add: Cess @ 3% 61,050
Total tax liability 20,96,050
(b) The facts of the case given above are similar to that of CIT v: Great City
Manufacturing Co (2013) 351ITR 156 (All).
Section 40(b) provides for disallowance of remuneration to working partners subject
to the limits prescribed therein.
Section 40A(2)(a) provides for disallowance of expenditure when it is excessive in the
opinion of the Assessing Officer considering the fair market value of the goods or
services.
Remuneration allowable subject to section 40(b) or disallowable as the case may be
is subject to the limits specified therein.
The Assessing Officer must ensure that the remuneration to working partner is
authorized by the deed of partnership and the allowance is subject to the limits
prescribed in section 40(b)(v).
If the above conditions are satisfied, the Assessing Officer cannot disallow a salary
under section 40A(2)(a) when it is allowable under section 40(b).
3. (a) S Limited, an Indian Company supplied billets to its holding company, G Limited,
Germany during the previous year 2016-17. S Limited also supplied the same product
to another German-based company, Z Limited, an unrelated entity. The transactions
with G Limited are priced at Euro 500 per MT (FOB), whereas the transactions with Z
Limited are priced at Euro 900 per MT (CIF). Insurance and Freight amounts to Euro
300 per MT. Compute the arm's length price for the transaction with G Limited.
During the year, 10,000 MT were supplied to G Limited. What will be the effect of the
change in the ALP on the profits of S Limited? Assuming that its export profits are
covered by exemption u/s 10AA (seventh year), will there be any increase in the
quantum of exemption u/s 10AA? Assume an exchange rate of 1 Euro = 90 INR. 8
(b) Enumerate the consequences that would ensue if the Assessing Officer makes
adjustment to arm's length price in international transactions of the assessee resulting
in increase in total income of the assessee. What are the remedies available to an
assessee to dispute such adjustment made? 4
(c) When is a transaction treated as an international transaction for the transfer pricing
provisions as per section 92CB? 4
Answer:
3. (a) In this case, S Limited, the Indian company, supplied billets to its foreign holding
company, G Limited. Since the foreign company, G Limited, is the holding company
of S Limited, S Limited and G Limited are the associated enterprises within the
meaning of section 92A.
As S Limited supplies similar product to an unrelated entity, Z Limited, Germany, the

transactions between S Limited and Z Limited can be considered as comparable
uncontrolled transactions for the purpose of determining the arm's length price of the
transactions between S Limited and G Limited Comparable Uncontrolled Price (CUP)
method of determination of arm's length price (ALP) would be applicable in this
case.
Transactions with G Limited are on FOB basis, whereas transactions with Z Limited are
on CIF basis. This difference has to be adjusted before comparing the prices.
Particulars Amount (in Euro)

Price per MT of billets to Z Limited 900
Less: Cost of insurance and freight per M.T. 300
Adjusted Price per M.T. 600
The price charged to G Ltd., is Euro 500 and the variation is more than 16% of the
adjusted price.
Since the adjusted price for Z Limited, Germany and the price fixed for G Limited are
not the same, the arm's length price is Euro 600 per MT. Since the sale price to related
party (i.e., G Limited) and unrelated party (i.e., Z Limited) is not the same and the
variation is more than 16%, the transaction with related party G Limited has not been
carried out at arm's length price.
There has been under invoicing to the tune of Euro 100 per MT.
Increase in profits of S Ltd for 10,000 MT is Euro 10,000 × 100 - 10,00,000
In terms of INR, it is 10,00,000 × 90 = ` 9 crore.
S Ltd. will not be entitled to any exemption u/s 10AA in respect of the above increase
in profits and hence its total income will go up by the above figure.
(b) Consequences of adjustments made to ALP
In case the Assessing Officer makes adjustment to arm's length price in an
international transaction which results in increase in taxable income of the assessee,
the following consequences shall follow:-
(1) No deduction under section 10AA or Chapter VI-A shall be allowed from the
income so increased.
(2) No corresponding adjustment would be made to the total income of the other
associated enterprise (in respect of payment made by the assessee from which
tax has been deducted or is deductible at source) on account of increase in the
total income of the assessee on the basis of the arm's length price so
recomputed.
Remedies available to the assessee

The remedies available to the assessee to dispute such an adjustment are:-
(1) In case the assessee is an eligible assessee under section 144C, he can file his
objections to the variation made in the income within 30 days [of the receipt of
draft order by him] to the Dispute Resolution Panel and Assessing Officer. Appeal
against the order of the Assessing Officer in pursuance of the directions of the
Dispute Resolution Panel can be made to the Income-tax Appellate Tribunal.
(2) In any other case, he can file an appeal under section 246A to the Commissioner
(Appeals) against the order of the Assessing Officer within 30 days of the date of
service of notice of demand.
(3) The assessee can opt to file an application for revision of order of the Assessing
Officer under section 264 within one year from the date on which the order
sought to be revised is communicated, provided the time limit for appeal to the
Commissioner (Appeals) or the Income-tax Appellate Tribunal has expired or the

assessee has waived the right of such an appeal. The eligibility conditions
stipulated in section 264 should be fulfilled.
(c) As per section 92B, an international transaction is one which satisfies the following
criteria -
(i) A transaction between two or more associated enterprises, either or both
of whom are non-residents;
(ii) It is in the nature of purchase, sale or lease of tangible or intangible
property, or provision of services, lending/borrowing money or any other
transaction having a bearing on the profits, income, losses or assets of such
enterprises;
(iii) It includes a transaction in the nature of a mutual agreement, or arrangement
between two or more associated enterprises for the allocation or
apportionment of, or any contribution to, any cost or expense incurred (or
to be incurred) in connection with a benefit, service or facility provided (or
to be provided) to any one or more of such enterprises.
4. (a) Mahavishnu Tea Pvt. Ltd., is engaged in the business of tea as well as development of
infrastructural facility (covered by section 35 AD).
The company has brought forward business loss of 3 lakhs from tea business and ` 4
crores from the business of infrastructural facility, relating to the AY 2017-18.
During the year ended 31.03.2018, the company has shown a net profit of ` 82 lakhs
from business of tea in its books, before current depreciation of ` 12 lakhs.
From the infrastructural facility business, it has earned profit of ` 2.2 crores.
The company has credited a sum of ` 30 lakhs in the share application money on 28-
2-2018, for which it is unable to explain the source satisfactorily.
Compute the total income of the company for the assessment year 2018-19. 8
(b) Lakshmi Fertilizers Ltd. set up an industrial unit for manufacturing fertilizers in notified
backward area in the State of Bihar, on 11.05.2016.
The following details of investment in plant and machinery are made available to you:
Date of investment/ Type of assets purchased Amount
installation (` in crores)
21-7-2017 Plant and machinery (including second hand 32
machinery ` 2 crores)
1-12-2017 Plant and machinery 10
All the assets were put to use immediately. Excepting the machinery for ` 2 crores, all
other assets are new.
Compute the depreciation allowable under section 32 of the Income-tax Act, 1961
and the WDV of the relevant block of assets.
Is the assessee entitled for any other benefit in respect of aforesaid investments? If so,
what is the benefit available?
Would your answer be different where such manufacturing unit is set up by a
partnership firm?
Append suitable notes, wherever required. 8
Answer:
4. (a)
Set off and carry forward
Particulars (` in lakhs)
Income from tea business
Net profit as per books 82
Less: Current depreciation 12
Profit from tea business 70
Chargeable profits at 40% 28
Less: Brought forward business loss 3
Chargeable income from tea business 25
Income from specified business covered by section 35AD
Net profit as per books 220
Less: Brought forward loss from specified business 220
Chargeable income from specified business Nil
Income from other sources
Unexplained cash credit 30
[Share application money not explainable]
Gross total income/total income 55
Notes:
1. Brought forward loss from specified business covered by section 35AD can be set
off only against income from specified business in the current year.
2. Balance loss of `1.8 crores (4 - 2.2) from specified business can be carried forward
to subsequent year.
3. Unexplained cash credit of ` 30 lakhs cannot be reduced by brought forward loss
from specified business, as per section 115BBE(2).
(b) Computation of depreciation under section 32 for Lakshmi Fertilizers Ltd. for A.Y. 2018-19
Particulars ` (in crores)
Plant and machinery acquired on 21.07.2017 32.00
Plant and machinery acquired on 01.12.2017 10.00
Gross block as on 31.03.2017 42.00
Less: Depreciation @ 15% on ` 32 crore 4.80
Depreciation @ 7.5% (50% of 15%) on ` 10 crore 0.75
Additional Depreciation @ 35%on ` 30crore 10.50
Additional [email protected]% (50% of 35%) on 10 Crore 1.75 17.80
Closing WDV as on 31.03.2018 24.20
Computation of deduction u/s 32AC & 32AD for Lakshmi Fertilizers Ltd. for A.Y. 2018-19
` In Crores
Deduction under section 32AC(1A) @ 15% on `40 crore (since 6
investment in new plant and machinery acquired and installed in the
previous year 2015-16 by the assessee., a manufacturing Company
exceeds ` 25 crore)
Deduction under section 32AD @ 15% on Rs 40 crore 6
Total benefit available to the assessee-company 12
Where the assessee is a partnership firm
Yes, the answer would be different, where the manufacturing unit is set up by a firm.
The deduction under section 32AC is available only to corporate assesses, and
therefore, the deduction under section 32AC would not be available if the
manufacturing unit is set up by a firm.
However, it would be eligible for deduction of ` 6.30 crore under section 32AD.
Notes:
(i) Where an eligible asset is put to use for less than 180days, normal and additional
depreciation available will be 50% of the specified rate.
(ii) Additional depreciation as well as deduction u/s 32AC is available only in respect
of new plant and machinery. Second hand machinery is not eligible.
5. (a) Fried pepper Inc (FPI), a foreign company, is supplying frozen chicken to several
Indian concerns, including LMN & Co. FPI has made an application to the AAR for
determination of the rate of tax to be applied on its total income arising from the said
operations in India.
LMN & Co, has made an application to the ITO, TDS Ward for determination of the rate
of tax to be deducted at source from payments to be made to FPI.
The AAR wants to reject the application of FPI on the ground that the matter is already
pending before the income-tax authority. Is this stand tenable in law? 6
(b) Anupam Gulati, a resident in India, is a famous badminton player, who plays in
several tournaments. For the year ended 31-03-2018, he has derived income from
playing in tournaments outside India and also share income from a firm, from nations
with which no DTAA exists.
The summarized results of the income earned during the year are as under:
`
Income from tournaments in India 32,50,000
Income from tournaments outside India (as converted into INR) 16,00,000
Share of loss from a partnership firm abroad (Set off permitted in that nation) 2,00,000
Residential house property purchased at Colombo (including registration 4,00,00,000
and stamp duty for ` 1,80,000)
On the foreign income, he has paid tax of ` 3,50,000.

You are required to compute the tax payable by the assessee. 6
(c) India Telephones Ltd. paid ` 15 lakhs per annum to Bharat Mobiles Ltd. for each of the
mobile towers used by it. During the financial year 2017-18, India Telephones Ltd.
paid ` 435 lakhs to Bharat Mobiles Ltd. It deducted tax at source under section 194C
and whereas the Assessing Officer claimed that the assessee must have deducted
tax at 10% under section 194-I. Decide the correctness of the action of assessee vis-a-
vis the Assessing Officer. 4
Answer:
5. (a) Advance ruling

The issue involved is concerned with the admission or rejection of the application
filed before the Advance Ruling Authority on the grounds specified in clause (i) of the
first proviso to sub section (2) of section 245R of the Income-tax Act, 1961.
Clause (i) of the first proviso of section 245R(2) provides that the AAR shall not allow
the application where the question raised in the application is already pending
before any income-tax authority or Appellate Tribunal or any Court, (except in case
of resident falling in sub clause (iii) of clause (b) of section 245N)
In the above case, no application had been filed or contention urged by the
applicant (foreign company) before any income-tax authority/Appellate Tribunal/
court, raising the question raised in the application filed with AAR. The question
sought is with regard to the rate of tax applicable on the total income of the foreign
company.
One of the Indian companies, however, had raised the question before the Assessing
Officer, not on the applicant's behalf or with a view to benefit the applicant, but only
to safeguard its own interest, as it had a statutory duty to deduct the proper amount
of tax from payments made to a non-resident. Although the question raised pertains
to one of the payments made or to be made to the non-resident applicant, it was
not one pending determination before any income-tax authority in the applicant's
case.
Therefore, as held by the AAR in Ericsson Telephone Corporation India AB v. CIT (1997)
224 ITR 203, the application filed by the Indian company before the ITO, TDS Ward
cannot be treated to have been filed by the non-resident.
Hence, it would not be proper to reject the application of the foreign company
relying on clause (i) of the proviso to sub-section (2) of section 245R of the Income-
tax Act, 1961.
ALTERNATIVE VIEW
The issue involved is concerned with the admission or rejection of the application
filed before the Advance Ruling Authority on the grounds specified in clause (i) of the
first proviso to sub-section (2) of section 245R of the Income-tax Act, 1961.
Clause (i) of the first proviso of section 245R (2) provides that the AAR shall not allow
the application where the question raised in the application is already pending
before any income-tax authority or Appellate Tribunal or any Court, (except in case
of resident falling in sub-clause (iii) of clause (b) of section 245N)
W.e.f. 1-6-2000, the proviso to s. 245R(2) reads thus:
"Provided that the Authority shall not allow the application where the question raised
in the application is already pending before any income-tax authority or Appellate
Tribunal or any court." The words "in the applicant's case" have been omitted.
The AAR, in Nuclear Power Corporation of India Ltd., In Re, [2012] 343 ITR 220, held
that an advance ruling is not only applicant specific, but is also transaction specific.
The advance ruling sought for from the AAR is in respect of a specific transaction
entered into by the applicant. It is for this reason that section 245S specifies that a
ruling is binding on the applicant, the transaction and the Principal Commissioner of
Income-tax and those subordinate to him, and not only on the applicant.
What is barred by the proviso to section 245R(2) of the Act in the context of clause (i)
thereof is the allowing of an application under section 245R(2) of the Act where "the
question raised in the application is already pending before any Income-tax
authority, or Appellate Tribunal or any court". The significance of the dropping of the
words, "in the applicant's case" with effect from June 1, 2000, cannot be totally lost
sight of.
On the basis of this view taken by the AAR in the aforesaid case, explaining the
impact of the dropping of the words "in the applicant's case" with effect from
1.6.2000, a view can be taken that the AAR can reject the application filed before
the AAR on the ground that in respect of the same transaction, an issue is pending
before the Assessing Officer.
(b)
Profits and gains of business or profession: `
Income from tournaments in India 32,50,000
Income from tournaments outside India 16,00,000
Share of loss from a partnership firm abroad: Not to be considered being Nil
exempt income
Gross total income 48,50,000
Residential house property purchased at Colombo (registration and 1,50,000
stamp duty for ` 1,80,000 is eligible for deduction u/s 80C:)
Subject to ceiling of ` 1,50,000
Total income (T) 47,00,000
Tax on above Including Cesss (A) 12,59,175
Indian rate of tax (A)/(T) = 26.79%
Tax rate of foreign nation:
Foreign income (16L - 2L) (F) ` 14,00,000
Tax paid abroad (B) ` 3,50,000
Foreign rate of tax (B)/(F) 25%
Less: Rebate u/s 91 (See Note below) 3,50,000
Balance tax payable 9,09,175
Note: Rebate U/s 91 will be at the Indian rate of tax or foreign rate of tax, whichever
is lower.
Same has to be applied on income which is doubly taxed, which is ` 14,00,000.
Hence rebate is 25% of ` 14,0,000 i.e. ` 3,50,000.
(c) The facts of the case given above are similar to that of Indus Towers Ltd v. CIT (2014)
364 ITR 114 (Del).
The towers rented out was a passive infrastructure facility which enabled the parties
to use technical and specialized equipment maintained by the assessee.
The mobile towers are neutral platform without which the mobile operators could not
operate.
The renting of mobile tower cannot be called as renting of land.
The arrangement was the use of machinery plant or equipment i.e. the passive
infrastructure and it is incidental that it was necessary to house the equipment in
some premises.
The renting of machinery hence is liable for tax deduction under section 194-l(a) at
the rate applicable for the payment made for use of plant and machinery.
6. (a) Search under section 132 was conducted in the premises of Mr. Balaji on 15.12.2017.
Incriminating materials such as unaccounted sale deed dated 08.10.2009 for ` 60
lakhs and company deposits dated 05.07.2006 for ` 30 lakhs were found in addition
to unaccounted transactions of his business by name Balaji Traders which
commenced from 01.04.2013. The assessment under section 143(3) for the assessment
year 2016-17 is pending and reassessment proceeding for the assessment year 2015-
16 was also pending on the date of search.
(i) State the assessment years for which notice can be issued for making post search
assessments.
(ii) What will happen to regular assessment under section 143(3) and reassessment
under section 147 because of search?
(iii) Can the unaccounted company deposits be subjected to tax in case Mr. Balaji is
a non-resident? 6
(b) Monohar & Hari LLP is engaged in multiple business activities. The following
information is furnished for the year ended 31.03.2018:

(i) Net profit as per Profit and Loss Account ` 52 lakhs.
(ii) Working partner salary debited to profit and loss account ` 40,20,000 as
authorized by the LLP agreement.
(iii) Interest on capital paid to partners @ 15% ` 15,75,000. This is authorized by the
LLP agreement.
(iv) Depreciation debited to profit and loss account ` 8,10,000.
(v) Eligible depreciation under section 32 ` 10,35,000.
(vi) The Net Profit includes profit from under taking located in SEZ (4th year) ` 20
lakhs. The total turnover is ` 200 lakhs and the export turnover is ` 150 lakhs.
(vii) The unit has earned income from generation of power and the eligible
deduction under section 80-IA amounts to ` 8 lakhs.
You are required to compute the total income of the firm and also the alternative
minimum tax (AMT) and decide the final tax liability of the firm for the assessment year
2018-19. 10
Answer:
6. (a)
(i) Where a search is conducted after 01.04.2017 the Assessing Officer can issue
notice for search assessment for not later than 10 assessment years preceding
the assessment year relevant to the previous year in which the search was
conducted if the undisclosed income escaping assessment amounts to or is
lightly to amount to ` 50 lakhs or more.
Therefore, as the unaccounted document for ` 60 lakh dated 08.10.2009 was
found, notice under section 153A can be issued from the assessment year 2008-
09 onwards.
The unaccounted company deposits dated 05.07.2006 cannot be subjected to
tax under section 153A as the time limitation will operate.
(ii) The regular assessment under section 143(3) and reassessment under section
147 will abate as the incriminating materials found consequent to search relates
to both the assessment years referred therein.
(iii) In case Mr. Balaji is a non-resident the time limit for issue of notice under section
147 would be 16 years from the end of the relevant assessment year and hence
the unaccounted company deposit can also be subjected to tax by issuing
notice under section 147 instead of section 153A for the assessment year 2007-
08.
(b)
Manohar & Hari LLP
Computation of the Total Income for the Asst. Year 2018-19
As per Normal Provisions `
Net Profit as per Profit and Loss Account 52,00,000
Add:
Working partner salary debited to Profit and loss account 40,20,000
Interest on capital in excess of 12% disallowed 3,15,000
Depreciation debited to P&L account 8,10,000
1,03,45,000
Less:
Eligible depreciation under section 32 10,35,000
Book Profit 93,10,000
Less: Deduction U/s.40(b)
On first ` 3 lakhs @ 90% 2,70,000
On the balance ` 90% @ 60% 54,06,000 56,76,000
Restricted to the amount authorized by LLP Agreement 40,20,000
Deduction U/s. 10AA in respect of unit in SEZ
` 20,00,000 × 150 /200 15,00,000

Deduction U/s. 80-IA 8,00,000 23,00,000
Tax there on @ 30% (A) 8,97,000
Computation of adjusted total income U/s.115 JC
Total income as per normal provisions 29,90,000
Add: Deduction under section 80-IA 8,00,000
Deduction U/s. 10AA 15,00,000
Adjusted total income 52,90,000
Tax thereon @ 18.5% (B)
9,78,650
Computation of final tax liability

Higher of (A) or (B) shall be the tax payable 9,78,650
Add: Education cess @ 3% 29,360
Total Tax Payable 10,08,010
7. (a) Kite & Co. (firm) had sold all its assets and liabilities on 31.03.2018 to ABC Co. (P) Ltd.
for a lump sum consideration of ` 500 lakhs.
The Balance Sheet of Kite & Co. as on 31.03.2018 is as below:

Liabilities ` in lakhs Assets ` in lakhs
Capital 1,500 Fixed Assets:
Unsecured loans 100 Plant & Machinery at WDV 300
Bank borrowing 700 Land (At revalued figure) 1,200 1,500
Sundry Creditors 200 Current Assets:
Sundry Debtors 500
Cash & Bank balance 50
Loans & Advances 340
Closing stock 110 1,000
2,500 2,500
(1) The land was acquired in March, 2006 for ` 200 lakhs.
(2) WDV of plant & machinery under section 43(6) was ` 250 lakhs.
(3) Cost inflation index for the financial year 2005-06 was 117 and for 2017-18 is 272.
(4) Stock is overvalued by 10%.
(5) Loans and advances include ` 150 lakhs due from ABC Co. (P) Ltd.
Compute capital gain arising from slump sale and tax liability on such gain. 7
(b) Mr. Prasoon acquired a vacant land at Cuttack in April, 2000 for ` 2 lakhs. He went
out of India for employment in USA in June 2004. He contemplated return to India and
begin a start-up business in the manufacture of medicines. In October, 2017 he
entered into an agreement for sale of land for ` 100 lakhs to Mr. Rahul. The sale took
place in March, 2018. The fair market value as on 01.04.2001 was ` 5 lakhs.
Mr. Prasoon wants to start a company for manufacture of medicine by using the sale
proceeds besides availing loan from financial institutions. He wants to know the
conditions of section 54 GB which are to be satisfied for the purpose of availing
exemption under section 54 GB and the conditions for availing tax holiday under
section 80-IAC for the new business. Advise him with brief points the conditions to be
satisfied for optimum tax benefit. 9
Answer:
7. (a) When the entire business is transferred for a lump sum consideration it is slump sale
which is governed by section 50B of the Act. The unit is in existence for more than 2
years (as reflected in acquisition of land in March, 2006) and therefore the capital
gain on transfer of business is taxable as long term capital gain.
Computation of capital gain from slump sale and tax on such gain
` In lakhs
Slump sale consideration 500.00
Less: Cost of acquisition (net worth) [ Working note] 440.00
Long-term Capital Gain 60.00
Income tax @ 20% (under section 112) 12.00
Add: Surcharge Nil
Add: Education cess @ 3% 0.36
Total tax liability 12.36
Computation of Net worth of the undertaking

` `
WDV of block of assets 250
Book value of non-depreciable assets
Land (revaluation not to be considered) 200
Sundry Debtors 500
Bank & cash balance 50
Loans & advances 340
Closing stock 110 × 100/110 100 1190
1440
Less: Liabilities
Unsecured loans 100.00
Bank borrowing 700.00
Sundry Creditors 200.00 1000
Net Worth 440
(b)
The assessee in this case has to pay capital gains tax in India, whether or not is
resident or non-resident as the vacant land being capital asset is situated in India.
The indexed cost of acquisition of the asset by adopting the FMV as on 01.04.1981 to
be ascertained by taking the actual cost of acquisition. The indexed cost would be
` 5 lakh × 272/100 = ` 13,60,000. The long term capital chargeable to tax would be `
86,40,000.
He can avail exemption under section 54GB in respect of the capital gain if the
following conditions are satisfied:
The assessee before the due date for filing the return under section 139(1) must
utilize the sale consideration (i.e. `100 lakhs) for subscription in equity shares of an
eligible company.
The eligible company would mean a company incorporated after 01.04.2018 (in this
case) and which is engaged in the business of manufacture of an article or thing.
The assessee must have more than 50% of the share capital or more than 50% of
voting rights after subscription.
The company must be a company which qualifies to be MSME under the Micro,
Small and Medium Enterprises Act, 2006.
The MSME within one year must utilize the amount so contributed for the purpose of
purchase of new plant and machinery.
The term new plant and machinery does not include-
(i) any machinery or plant which before its installation was used within India or
outside India by any other person. In other words, it must not be second-hand
machinery.
(ii) The new plant and machinery is not meant for installation in office premises.
(iii) It does not include office appliances including computer or computer software.
(iv) Any vehicle
(v) Any machinery or plant the whole of the actual of cost of which is allowed as a
deduction in computing income chargeable under the head profits and gains of
business or profession.
(vi) The new asset shall be include computer or computer software in the case of
eligible start-up, being a technology driven start-up so certified by the Inter-
Ministerial Board of Certification notified by the Central Government in the Official
Gazette.
Conditions for availing deduction under section 80-IAC:
Section 80-IAC provides for tax exemption at 100% of the profits and gains from
eligible business for a period of 3 consecutive years out of 7 years beginning from
the year in which the eligible start-up is incorporated.
The other conditions to be satisfied are:
(i)Eligible business involving innovation, development, deployment or
commercialization of new products, process or services driven by technology or
intellectual property.
(ii) The eligible start-up must have been incorporated after 01.04.2016 but before
01.04.2019.
(iii) The total turnover of its business must not exceed ` 25 crores in any of the
previous years on or after 01.04.2016 and ending on 31.03.2021.
(iv) The eligible business or start-up must hold a certificate from the Inter-Ministerial
Board of Certification.
(v) An LLP is also eligible to claim the benefit of this deduction but to avail the
exemption under section 54GB it has to be a company and not LLP.
8. In the light of decided case laws, answer any four of the following [Your answer should be
under the following heads: (i) Issue involved (ii) Brief discussion on provisions applicable
to the issue (iii) Analysis of the issue involved and (iv) Conclusion [Citation of the case law
is NOT required)]: 4x4=16
(a) Bharathi Co-operative Housing Society collects fees at the time of transfer of flat, from
the outgoing member, as well as the incoming member. As per the bye-laws, the
receipts are used for meeting the various expenses of the society. During the year
ended 31-03-2018, the society has collected a sum of ` 5 lakhs as transfer fees from
outgoing members and like amount from the incoming members. The Assessing
Officer (AO) has brought to tax the entire receipts of ` 10 lakhs. Is his action valid in
law?
(b) Kaushiba Logistics Pvt. Ltd., borrowed a sum of ` 50 lakhs from a bank for business
purposes. For the sanction of the bank loan, two directors gave guarantee to the
bank. The assessee paid guarantee commission of ` 80,000 to the two directors in this
regard and claimed the same as business expenditure. The AO has disallowed the
same on the ground that this is an indirect payment of dividend to the two directors. Is
this correct?
(c) A, B and C were partners in the firm RR & Co. B died on 31-03-2017. The firm was
dissolved and the business was continued in the same name by A. The firm had
unabsorbed losses to the tune of ` 10 lakhs. Against the individual business income
earned by A, the losses of the erstwhile firm were set off. This has been disallowed by
the AO. Is this disallowance justified?
(d) Saravanan & Co., a firm, had borrowed moneys for its windmills, on which interest of `
23 lakhs had been paid by the firm. The income from the generation and distribution
of electricity by the windmills was subject to 100% deduction u/s 80-IA. The Assessing
Officer wants to disallow the interest of ` 23 lakhs, invoking section 14A. Is he justified?
(e) Saipriya Charities had applied for registration of the trust u/s 12AA on 01-04-2017. No
order was passed in this regard by the Commissioner of Income-tax/Director
(Exemptions). Hence the trust took the view that its application was accepted and
proceeded to file its return of income. Is this view of the trust correct in law?
Answer:
8. (a) Issue involved

The issue under consideration is whether the transfer fees received by a co-operative
housing society from its incoming and outgoing members is chargeable to tax.
Provisions involved
Any transfer fee received by a co-operative housing society, whether from outgoing
or from incoming members, are not liable to tax in the hands of the co-operative
society on account of the principle of mutuality, since the predominant activity of
such co-operative society is maintenance of property of the society and there is no
taint of commerciality, trade or business.
Analysis
Under the bye-laws of the society, charging of transfer fees had no element of
trading or commerciality. Both the incoming and outgoing members have to
contribute to the common fund of the assessee. The amount paid was to be
exclusively used for the benefit of the members as a class.
Further, section 28(iii), which provides that income derived by a trade, professional or
similar association from specific services performed for its members shall be treated
as business income, can have no application since the co-operative housing society
is not a trade or professional association.
Conclusion
Therefore, the action of the Assessing Officer, in bringing to tax the transfer fees under
the head "Profits and gains of business or profession" in the hands of Bharati Co-
operative Housing Society is not correct.
Refer the decision in Sind Co-operative Housing Society v. ITO (2009) 317ITR47.
(b) Issue involved

The issue under consideration in this case is whether guarantee commission paid by a
company to its employee directors is deductible as its business expenditure, where
such guarantee was given by the employee directors to the bank for enabling credit
facility to the company, and whether it can be contended that the same would
have been payable as dividend had it not been paid as commission.
Provisions involved
In the absence of any specific disallowance, an expenditure incurred wholly and
exclusively for the purpose of business has to be allowed under section 37. It has also
to be seen whether such payment was a device used to outwit the provisions of
section 115-0, which requires payment of dividend distribution tax.
Analysis
The directors of the company are employees of the company and are entitled to
remuneration for the services rendered as employees. In this case, they also provided
personal guarantee to banks, since it was a pre-condition laid down by the bank to
provide financial assistance to the company. This act of providing personal
guarantee was clearly beyond the scope of their services as employees of the
company.
The assessee-company, in its commercial wisdom, passed a resolution resolving that

the directors be paid commission for providing their personal guarantees for the
financial assistance availed by the assessee-company from the bank. In such a case,
the Assessing Officer only has to determine whether the transactions are real and
genuine.
As regards section 36(1)(ii), the recipient directors were not entitled to receive the
amount as commission in lieu of dividend. Dividend is paid to all the shareholders and
the recipient directors were not the only shareholders of the company. The payment
of commission, hence, cannot be taken as payment of dividend, since payment of
dividend would result in payment to all the shareholders and not to select
shareholders.
Conclusion
Therefore, the action of the Assessing Officer, holding that if the amount was not paid
to them as commission, the same would have been payable as dividend, and
contending that the company avoided dividend distribution tax under section 115-0
which was otherwise payable, is not valid.
Reference may be made to Controls & Switchgear Contractors Ltd v. Dy. CIT (2014)
365 ITR 312.
(c) Issue involved

The issue under consideration in this case is whether the loss suffered by an erstwhile
partnership firm, which was dissolved, can be carried forward for set-off by the
individual partner who took over the business of the firm as a sole proprietor,
considering the succession as a succession by inheritance.
Provisions involved
Section 78(2) deals with carry forward of losses in case of succession of business. It
provides that only the person who has incurred the losses, and no one else, would be
entitled to carry forward the same and set it off. An exception provided thereunder is
in the case of succession by inheritance.
Analysis
Upon dissolution, the partnership firm, RR & Co. ceased to exist. Also, the partnership
firm, RR & Co. and the sole proprietorship concern are two separate and distinct units
for the purpose of assessment. The income earned by the sole proprietor would
include his share of loss as an individual but not the loss suffered by the erstwhile
partnership firm in which he was a partner.
The exception given in section 78(2), permitting carry forward of losses by the
successor in case of inheritance, is not applicable in the present case since the
partnership firm was dissolved and ceased to continue. Taking over of business by a
partner cannot be considered as a case of inheritance due to death as per the law
of succession.
Conclusion
The action of the Assessing Officer in disallowing the claim of set-off of losses suffered
by the erstwhile partnership firm RR & Co. against the income earned as an individual
proprietor is, therefore, correct.
Reference may be made to the decision in Pramod Mittal v. CIT (2013) 356ITR 45
(Delhi).
(d) Issue Involved:
The issue under consideration is whether the provisions of section 14A can be invoked
in disallowing the expenditure incurred in respect of the income for which deduction
is claimed under Chapter Vl-A.
Provisions applicable:
As per section 14A, expenditure incurred in relation to income which does not form
part of the total income under the Act, will not be allowed in computing the total
income of the assessee.
Analysis:
The words "do not form part of the total income under this Act" used in section 14A
are significant and important. Income which qualifies for deductions under section
80C to 80U has to be first included in the total income of the assessee and then
allowed as a deduction.
However, income referred to in Chapter III do not form part of the total income and
therefore, as per section 14A, no deduction shall be allowed in respect of
expenditure incurred by the assessee in relation to such income which does not form
part of the total income. Deduction under section 80P covered in Chapter VIA is
different from the exclusions/exemptions provided under Chapter III.
Conclusion:
The action taken by the Assessing Officer in disallowing the expenditure incurred with
respect to income for which deduction under Chapter VI-A is claimed, by invoking
the provisions of section 14A is, therefore, not tenable in law.
In this context, the rationale of the decision in CIT v. Kribhco (2012) 349 ITR 0618 may
be looked into.
(e) Issue Involved:

The issue under consideration in this case is whether, in a case where the
Commissioner of Income-tax has not passed any order for granting or refusing to
grant registration within the prescribed time limit under section 12AA, the trust can
take the view that it is deemed to be registered under section 12AA.
As per section 12AA, every order granting or refusing registration shall be passed
before the expiry of 6 months from the end of the month in which the application
was received.
Analysis:
Non-consideration of the application for registration within the time fixed by the legal
provision would lead to deemed grant of registration, since the assessee cannot be
made to suffer merely because the timely decisions are not taken by the Revenue
Officers.
Accordingly, in this case, the trust would be deemed to be registered since no order
granting or refusing to grant registration has been passed by the CIT on or before
30th September, 2017 and even thereafter upto the due date of filing of return for the
A.Y.2018-19.
Conclusion:
The view taken by the assessee trust that the trust would be deemed to be registered
under section 12AA, since no order granting or refusing to grant registration has been
passed by the Commissioner of Income-tax within the prescribed period of six months
is, therefore, correct.
Reference may be made to the decision in CIT v. Society for the Promotion of
Education (2016) 382ITR 6 (SC).
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)
DECEMBER 2018
Paper- 16: Direct Tax Laws and International Taxation

All questions relate to Income-Tax Assessment Year 2018-19 and the provisions referred to
are those of the Income-Tax Act,1961, unless stated otherwise.

any five from Question Nos. 2 to 8
1. Find the most suitable alternative and give brief justification/working for your answer :
2x10=20
(i) Tax payable by a firm whose total income is Rs. 11 crores isRs. ________ crores.
(A) 3.7389
(B) 3.390
(C) 3.80688
(D) None of the above.
(ii) A businessman at Delhi is using a car exclusively for business purposes. As per Union
Territory rule, his car can be used in Delhi only on alternate days. Car is the only asset
in the block. Car has thus been used for only 50% of the number of days in the year.
WDV of the car as on 1.4.2017 is Rs. 10 lakhs. Rate of depreciation is 15%.
Depreciation allowable is Rs. _________.
(A) 75,000
(B) 1,50,000
(C) 1,00,000
(iii) Safe Harbour Rules are relevant in the context of

(A) Maritime Law (Maintenance of sea harbours in a safe manner).
(B) Customs Act, 1962
(C) Transfer pricing.
(iv) Mr. A acquired a house property on 12.3.1990 for Rs. 5 lakhs. He gifted the same to
his brother on 16.5.1993, who gifted it to his son S on 22.7.2015, when the stamp
valuation was Rs.12 lakhs. S sold the house on 14.5.2016 for Rs.24 lakhs, which was
also the stamp duty value. For computing capital gain, the date of acquisition is
(A) 1.4.1981
(B) 12.3.1990
(C) 16.5.1993
(D) 22.7.2015
(v) When total income of resident assessee, Mr. Ram (age 50) is Rs.50,65,000, his net tax
liability (including cess) and after marginal relief would be _____________.
(A) Rs.14,18,830
(B) Rs.13,31,000
(C) Rs.13,70,930
(D) Rs.12,84,500
(vi) Mr. Cheema withdrew Rs. 2 lakhs out of his own contribution with National Pension
System Trust. On the date of withdrawal, the balance in the account consisted of his
own contribution of Rs.6 lakhs and Employer’s contribution of Rs.8 lakhs. The amount
of withdrawal liable to tax in the hands of Mr. Cheema would be
(A) Nil
(B) Rs.3,00,000
(C) Rs.1,50,000
(D) Rs.50,000
(vii) Mahan Charitable Trust (registered under section 12AA) is engaged in running
education institutions. It paid Rs.5 lakhs to Malar Charitable Trust (registered under
section 12AA) as corpus donation out of its income of the previous year 2017-18. The
amount of corpus donation is
(A) Taxable in the hands of both the trusts.
(B) Exempt in the hands of both the trusts.
(C) deductible for prayer as application and taxable for the payee.
(D) not deductible for prayer as application but exempt for payee.
(viii) Real Builders (A partnership firm) admitted income under section 44AD up to the
assessment year 2017-18 resorted to determination of income as per regular
provisions by getting the books of account audited for the assessment year 2018-19.
The assessee firm cannot revert to presumptive provisions contained in section 44AD
up to the assessment year ___________.
(A) 2023-24
(B) 2024-25
(C) Indefinitely
(D) 2019-20
(ix) M/s. KLM Ltd. a company having international transactions of Rs. 7 crores related to
purchase of raw materials from its subsidiary company. M/s. BL Inc., in USA. M/s.
KLM Ltd. is required to keep and maintain certain information and documents under
section 92D for period of _________ years.
(A) five
(B) eight
(C) ten
(D) fourteen
(x) In the assessment of Mr. Amar, the Assessing Officer has observed that he has
purchased diamonds for Rs.18 lakhs on 1st October, 2017 which was not recorded in
the books of account and he is unable to offer any explanation. Applicable rate of
income tax leviable under section 115BBE is _____________ plus surcharge and
education cess as applicable.
(A) 20%
(B) 30%
(C) 40%
(D) 60%
Answer: 1
(i) (C) 3.80688
Where the total income of a firm exceeds Rs 1 crore, surcharge of 12% is payable. Tax is Rs. 3.3
crore. SC at 12% is 0.396 cr. On 3.696cr, Cess at 3% is payable. Total amount is the tax due.
Particulars Working Rs. in Crore
Tax on `11 crore Rs.11 crore x 30% 3.30000
Add: Surcharge Rs. 3.30 crore x 12% 0.39600
Tax and Surcharge 3.69600
Add: Education Cess& SAHEC Rs.3.6960 crore x 3% 0.11088
Total taxpayable 3.80688
(ii) (B)Rs. 1,50,000

Where an asset is put to use during the year, there is no provision in the Act for
proportionate disallowance, based on the number of days used. Hence full
depreciation of Rs. 1,50,000 is to be allowed.
(iii) (C) Transfer pricing

Safe Harbour Rules were framed in the context of advance pricing agreements,
relevant to transfer pricing provisions.
(iv) (B) 12-3-1990

The issue has to be seen I the light of the provisions of section 47 read with section 49.
Where any asset is acquired through modes like gift, partition, etc. for determining the
date of acquisition, one has to go back to the date when it was acquired in a mode
other than these specified modes. Hence, the date of acquisition of Mr. A is relevant
here. This view is supported by several decisions.
(v) (A) Rs. 14,18,830

Brief answer : When the income of an individual resident assessee exceeds Rs. 50
lakhs, surcharge @ 10% is payable. However, marginal relief is to be given. The excess
tax payable by way of surcharge must not exceed the excess income less tax thereon.
Excess income Rs. 65,000 less tax thereon is Rs. 19,500 and hence the surcharge levy is
limited to Rs. 45,500 instead of 10%. The total tax liability on total income of Rs.
50,65,000 would be Rs. 13,32,000 + surcharge Rs. 45,500 + cess @ 3% which would be
the final tax liability.
(vi) (D) Rs. 50,000

Brief answer : As per section 10(12B) amount withdrawn from NPS trust to the extent it
does not exceed 25% of the contributions made by the assessee is exempt from tax.
The amount of withdrawal eligible for exemption would be Rs. 1,50,000 (25% of Rs. 6
lakhs) and excess of Rs. 50,000 is taxable.
(vii) (D) Not deductible for payer as application but exempt for payee
Brief answer : As per Explanation 2 to section 11 amount paid as contribution with a
specific direction that it shall form part of the corpus of the trust, shall not be treated as
application of the donor-trust. In the hands of done-trust, the said corpus donation is
exempt under section 11(1)(d).
(viii) (A) 2023-24

Brief answer : As per section 44AD(4) when a taxpayer declares profit under section
44D and subsequently departs from the presumptive provision and opts for regular
provision, he is not eligible to claim the benefit of presumptive provision for 5
assessment years subsequent to the assessment year in which the profit has not been
declared in accordance with section 44AD.
(ix) (B) Eight

Justification of correct answer : Section 92D of income tax act provides for keeping &
maintaining information and documents in case the aggregate value of international
transaction entered into exceeds Rs. 1 crore, which shall be available by the due date
of submission of return of income. The information and document are specified in
section 92D of income tax act. Since the company has entered into international
transactions with its Subsidiary Company in USA for purchase of raw materials having
aggregate value of Rs. 7 crores during the previous year 2017-18 is required to comply
with the provisions of section 92D. This information and documents shall be kept and
maintained for a period of eight years from the end of the relevant assessment year.
(x) (D) 60%

Justification of correct answer : Unexplained / unrecorded investment in diamond
attracts provisions of section 69. When income is taxed under section 68 to 69D, tax is
calculated as per provisions of section 115BBE. Rs. 18 lakhs would be taxable @ 60%.
2. (a) M/s. NIACO Ltd., an Indian Company reports total income of Rs. 10,50,000 for the
previous year ending March 31, 2018. Tax deducted at source by different payers
amounts to Rs.24,450 and tax paid in foreign country on a doubly taxed income
amounts to Rs. 10,000 for which the company is entitled to relief under section 90 as
per DTAA. During the year the company pays advance tax on June 15, 2017 –
Rs.40,000 ; on September 12, 2017 - Rs.65,000; on December 15, 2017 – Rs.1,00,000
and on March 15, 2018 - Rs.62,000. The company files its return of income for the
assessment year 2018 – 19 on October 15, 2018. There is no international transaction
and no transfer pricing provisions are applicable. Compute interest, if any, payable by
the company under sections 234A, 234B and 234C. The due date for filing return of
income is September 30, 2018.
8
(b) State with brief reason, whether the following would fall in the category of tax
planning, tax avoidance or tax evasion :8
(i) Setting up of a liaison office in India by a foreign company, instead of a full

fledged establishment to run its business activities in India ;
(ii) Investment in bonds approved under section 54EC ;
(iii) Claiming depreciation for business purposes for a solar power generation system
installed in the residential premises of Proprietor ;
(iv) A Hindu Undivided Family (HUV) engaged in business, paid salary to family
members who were actually involved in day to day business activities of the
HUF.
Answer : 2(a)
Computation of Interest Payable under section 234A, 234B & 234C – M/S. NIACO LTD.
AY 2018-19
In Rs.
Tax on total income @30.9% (Income tax @30%+SC–Nil + EC & HEC @3%) 3,24,450
Less :- Double taxation relief 10,000
Balance 3,14,450
Less : Tax Deducted at Source 24,450
Balance assessed tax 2,90,000
Interest under section 234A :
The due date of submission of return of income is September 30, 2018 &
actual date of submission is taken as October 15, 2018.
The assessed tax is Rs. 2,90,000. Advance tax paid during the financial
year is Rs. 2,67,000. Short fall of advance tax is Rs. 23,000 (Rs. 2,90,000 – 230
Rs. 2,67,000)
Interest on shortfall amount is Rs. 23,000 @ 1% per month for 1 month
Interest under section 234B : Nil
Advance tax paid during the financial year is Rs. 2,67,000 (i.e. Rs. 40,000 +
Rs. 65,000 + Rs. 1,00,000 + Rs. 62,000). 90% of assessed tax of Rs. 2,90,000 is
Rs. 2,61,000. Advance tax paid is not less than 90% during assessment
year. So no interest under section 234B is not applicable.
Interest under section 234C : (Rs. Nil + Rs. Nil + Rs. 375 + Rs. 230) – Note1 605
Note- 1 : Calculation of interest on Shortfall of Advance Tax – u/s. 234C

First installment : Advance tax paid up to June 15, 2017 – Rs. 40,000. Nil
12% of assessed tax – Rs. 34,800 (12% x 2,90,000).
Interest under section 234C is not applicable for short payment as
advance tax paid is not less than 12% of assessed tax.
Second instalment :Advance tax paid up to September 15, 2017 is Rs. Nil
1,05,000. 36% of assessed tax is Rs. 1,04,400.
Interest under section 234C is not applicable for short payment as
advance tax paid is not less than 36% of assessed tax.
Third instalment : Advance tax paid up to December 15, 2017 is Rs. Rs. 375
2,05,000. 75% of assessed tax is Rs. 2,17,500.
There is a short fall of Rs. 12,500 (Rs. 2,17,500 – Rs. 2,05,000). So interest
payable is Rs. 12,500 x 0.01 x 3 months).
Fourth instalment : Advance tax paid up to March 15, 2018 is Rs. 2,67,000. Rs. 230
100% of assessed tax is Rs. 2,90,000.
There is a short fall of Rs. 23,000. So interest payable is Rs. 23,000 x 0.01
Total Rs. 605
8
Answer : 2(b)
Tax planning/management/evasion
(i) Setting up of a liaison office in India by a foreign company, instead of a full
fledged establishment to run its business activities in India : This is an act of tax
planning.
The underlying intention is to reap the benefit of the DTAA instead of coming
under the clutches of section 9 of the Act, and to thus plan for lower tax in the
long run.
(ii) Investment in bonds approved u/s. 54EC : it is an act of tax planning. Investment in
section 54EC bond is a genuine investment to reduce/mitigate incidence of tax
on capital gain. Hence, it is tax planning.
(iii) Claiming depreciation on an asset used for personal purposes as a business asset
is an act of Tax evasion.
Depreciation is allowable only for assets used for business purposes. Even though
the asset is installed at residence, showing it as a business asset and claiming
depreciation with a view to evade tax, constitutes tax evasion.
(iv) When HUF pays salary to members for their individual effort to take care of the
affairs of the business, it is a fair compensation permissible in law. Such salaries
paid are permissible deductions. Therefore, it is a case of tax planning.
8
3. (a) Vimala Boilers Pvt. Ltd. furnishes the following summarized position of its statement of
profit and loss and pertinent additional information thereto, for the year ended
31.3.2018.
[All amounts are Rs. in lakhs]
(i) Net profit as per books 26
(ii) Share income from an AOP 6
Expenditure debited in books for earning such income 0.8
(iii) Compounding fee paid to the Corporation authorities 1.2
(iv) Provision for income-tax 2
(v) Provision for loss of foreign subsidiary 4
(vi) CSR expenditure debited to statement of profit and loss 14
(vii) Royalty received relating to business 6
(Chargeable at 10%)
(viii) The brought forward business loss and depreciation are as under (Rs. in
lakhs):
Particulars As per books As per Income Tax Act

Business loss for AY 2017-18 4 12
Unabsorbed Depreciation 3 11
(ix) The members as well as their shares in the AOP (in which the assessee is a
member) are specific and determinate.
Compute Minimum Alternate Tax (MAT) payable by the company for the
Assessment Year 2018-19. The company is not an Ind-AS complaint company.
8
(b) AKP is a public charitable trust created under a trust deed for providing relief to
physically challenged persons and registered under section 12AA. The following are
the particulars of receipts of the trust during the year ending March 31, 2018 :
Particulars Rs. in lakhs

Income from properties held by trust (net) 15
Income (net) from business (incidental to main objects) 14
Voluntary contributions from public (including the corpus donation 18
of Rs. 7 lakhs)
The trust applied Rs. 18 lakh towards various activities and programmes undertaken
for the benefit of physically challenged persons during the year. The trust has also
paid Rs. 8 lakh towards repayment of a loan taken two years back for the purpose of
construction of its centre for training the handicapped persons in various handicraft
works and sports.
Determine the tax liability, if any of the trust for the Assessment Year 2018-19 ad also
state how the trust can mitigate such liability.
8
Answer : 3(a)
Computation of book profits u/s. 115JB of Vimala Boilers Pvt. Ltd. for A.Y. 2018-19
(Rs. in lakhs)
(i) Net profit as per books 26
(ii) Share income from an AOP 0
[This is not an AOP which pays tax at the maximum marginal
rate
Hence no adjustment is required]
Expenditure debited in books for earning such income
[as above] 0
(iii) Provision for income-tax 2
[This is an item to be specifically added back for MAT]
(iv) Provision for loss of foreign subsidiary 4
[This is an item to be specifically added back for MAT]
(v) CSR expenditure debited to P & L a/c 0
[no need to add back this expenditure for MAT]
(vi) Royalty received relating to business -6
[To be considered separately, as it is taxed at special rate
of 10%] 26
Less : Lower of B/fwd business loss or depreciation 3
Book Profit 23
Tax payable
Royalty at 10% 0.6
Other income at 18.5% 4.25500
4.85500
Add : Edu Cess and SAH Edu Cess at 3% 0.14565
Total tax as per MAT provisions 5.00065
Rounded off 5.00070
Note:
Compounding fee paid to the Corporation authorities, which is in the nature of penalty, will
be disallowed while computing income as per normal provisions, but will not have any
impact in the computation of book profits as per MAT provisions.
8
Answer : 3(b)
Computation Tax liability of AKP public charitable trust for the assessment year 2018-19
Particulars Rs. in lakhs
Income from properties held by trust for charitable purposes 15.00
Income from business incidental to main objects of trust 14.00
Voluntary contributions (excluding corpus donations) 11.00
Total 40.00
Less : 15% set apart for future 6.00
Amount available for charitable purpose 34.00
Less : Amount utilized for charitable purposes (Rs. 18,00,000 + Rs. 26.00
8,00,000)
Net income 8.00
Tax liability on Rs. 8,00,000 at tax rates applicable in the case of 0.74675
individual
Rounded off 0.74680
The trust can mitigate the tax liability by accumulating the unspent income of Rs. 8 lakhs for
any specific purpose for maximum period of 5 years as per section 11(2).
8
4. (a) Answer the following with reference to assessment and reassessment provisions :
4x2=8
(i) Mr. Bharadwaj (age 50) returned to India in April, 2016 after remaining outside
India for 22 years. He continued to hold a bank account outside India during the
financial yaer 2017-18. In September, 2018 the Assessing Officer wants to issue a
notice under section 148 for the assessment year 2005-06 in order to tax a
vacant land purchased (outside India) out of income chargeable to tax in India
and which excepted assessment previously. Is the issue of notice valid in law ?
(ii) A notice under section 143(2) was served on Mr. Imaan for the assessment year
2017-18 on 05.09.2018. State the time limit within which the assessment would be
completed in his case.
(iii) Can the Joint Commissioner issue directions to the Assessing Officer for
completion of assessment in a particular case ? Is such direction binding on the
Assessing Officer ?
(iv) In the assessment order passed under section 143(3) dated 10.10.2018 for the
assessment year 2016-17 there is an error apparent on record by not allowing set
off of brought forward depreciation. The assessee wants to know the time limit
for passing order of rectification under section 154. State.
(b) ABC & Co. a partnership firm got converted into ABC Co. (P) Ltd. on 01.09.2017. It
furnishes you the following details for the year ended 31st March, 2018.
(i) Unabsorbed depreciation Rs.15 lakhs relating to assessment year 2012 – 13.
(ii) Business loss Rs. 20 lakhs relating to assessment year 2010-11.
(iii) Unadjusted AMT credit Rs.2 lakhs of the assessment year 2017-18.
(iv) Written down value of assets under the Income-tax Act, 1961 [Section 43(6)] :
Plant & Machinery (15%) Rs.20 lakhs (market value Rs. 25 lakhs)
Plant & Machinery cost Rs.50 lakhs – deduction claimed under section 35 AD.
Factory Building (10%) Rs.30 lakhs (market value Rs.50 lakhs)
(v) Cost of land (acquired in 2008) Rs.50 lakhs (market value Rs.90 lakhs)
(vi) Bad debt written off in assessment year 2013-14 Rs. 8 lakhs. Amount recovered in
December 2017 from the debtor Rs.6 lakhs.
Explain the tax treatment of each of the items given above in the hands of the company
on the assumption that all the conditions laid down in section 47(iii) are satisfied.
8
Answer : 4(a)
(i)
Section 149(1)I provides for time limit of 16 years for reopening the assessment when
the income in relation to the asset is located outside India is chargeable to tax and
has escaped assessment.
Since Mr. Bharadwaj has bank account outside India which is still operative, the
extended time limit 16 years will apply.
(ii)
Section 153 provides time limit for completion of assessment under section 143 or
section 144
The time limit is 21 months from the end of the assessment year in which the income
was first assessable.
Therefore, for the assessment year 2017-18, the time limit is available up to 31.12.2019
(iii)
Section 144A empowers the Joint Commissioner to issue guidance to the Assessing
Officer for completing the assessment.
Such guidance is binding on the Assessing Officer and the assessment has to be
made in the light of such guidelines only.
(iv)
Section 154 provides relief to the tax payer or to the Assessing Officer to rectify any
error which is apparent on record. Therefore, the error of not allowing set off of
brought forward depreciation is eligible for rectification under section 154.
The time limit is 4 years from the end of the financial year in which the order sought to
be rectified was passed.
The order was passed on 10-10-2018 only. Hence the time limit available to the
assessee for filing rectification petition is 31-03-2023
Answer 4(b)
(i) Unabsorbed Depreciation

Unabsorbed depreciation of the firm is eligible for set off in the hands of
successor company as though the depreciation belongs to the successor
company
(ii) Business loss
Business loss of the predecessor is eligible for set off by the successor upto 8
years. In this case the loss was incurred in the assessment year 2010-11 and the
assessment year 2018-19 would be the 8th year for set off of the brought
forward loss. Brought forward business loss can thus be set off.
However, as the succession had taken place in the previous year 2017-18, the
loss will be treated as if the loss so brought forward was incurred in a previous
year in which the conversion took place.; as per section 72A(6) such loss is
eligible for fresh period of 8 assessment years for carry forward and set off i.e.
upto the assessment year 2025-26.
(iii) The AMT brought forward by the firm is not eligible for credit upon conversion
in to a company. However, the vice versa that a company when it
converted into firm it is eligible for such credit. The AMT credit of the firm
hence would be lost.
(iv) Depreciation on assets :
Depreciation on plant and machinery would be apportioned between the
predecessor and successor in the number of days of use during the previous
year. The succession had taken place on 01.09.2017 and hence the
depreciation would be allocated in 153 : 212 (days ratio) between the firm
and the company.
Firm Company
On plant and machinery Rs.20 lakhs x 15%= Rs.
3 lakhs:
Apportioned in the ratio of 153 : 212 ratio 125753 174247
Plant and machinery of unit covered by NIL NIL
section 35AD
Factory Building Rs. 30 lakhs x 10% = Rs. 3 lakhs:
Apportioned in the ratio of 153 : 212 ratio 125753 174247
Total Depreciation 251506 348494
(v) Cost of land: In the hands of successor company, the original cost of
acquisition of the predecessor (firm) would be adopted as and when it is sold
by the successor-company.
(vi) Bad debt recovery : The amount of bad debt recovery of the successor is
chargeable to tax in its hands as per section 41(4)
5. Answer any four of the following [Your answer should be under the following heads : (i)
Issue involved (ii) Brief discussion on provisions applicable to the issue (iii) Analysis of the
issue involved, and (iv) Conclusion [Citation of case law is NOT required] :
4 x 4=16
(a) Ram and Rahim were Executive Directors of Saraswati Tea Pvt. Ltd. In respect of a
bank loan, they gave their personal guarantee. The assessee-company paid them
guarantee commission of Rs.1 lakh each. The Assessing Officer feels that this is a
disguised payment of dividend under section 2(22) and is not a commission which is
deductible as business expenditure. He has disallowed the same. Is the action of the
AO valid in law ?.
(b) Govinda and Vaamana were partners in a firm, which got dissolved consequent to the
demise of Govinda. The firm had unabsorbed losses. Vaamana, who took over the
business, has set off the said loss in his personal hands in the subsequent year. Such
set off is not allowed by the Assessing Officer. Is his action correct ?
(c) MNC Ltd. is engaged in this business of managing and operating hotels. The assessee
allowed the employees to accept tips from customers. Some customers paid the bill
and tips to the employees through credit card. The assessee, being employer
collected the amounts and disbursed tips to the employees on monthly basis. The
assessee did not deduct tax at source on the said payments as the amounts were not
in the nature of salary. Does the action of the assessee satisfy the legal requirements ?
(d) Dempo Ltd. transferred its factory building for Rs.65 lakhs. The company owned only
one such building in the block of assets. The written down value of the factory building
was Rs.13.95 lakhs. The company acquired the building 10 years ago for Rs.40 lakhs.
It deposited Rs. 50 lakhs in REC bonds within one month after the transfer of factory
building. The company claimed exemption under section 54EC. Is the claim of the
company tenable in law ?
(e) Jayakrishna Flour Mills Pvt. Ltd., has derived an income of Rs.1.2 crore from generation
and distribution of electricity, using windmills. Such profits have been claimed as
100% deduction under section 80-IA. The assessee has paid interest of Rs.60 lakhs to a
bank in respect of the term loans on the windmills. The Assessing Officer wants to
invoke the provisions of section 14A in respect of such interest. Can he do so ?
Answer : 5(a)
Allowability of commission paid to directors:
Issue involved
The issue under consideration in this case is whether guarantee commission paid by a
company to its employee directors is deductible as its business expenditure, where such
guarantee was given by the employee directors to the bank for enabling credit facility to
the company, and whether it can be contended that the same would have been
payable as dividend had it not been paid as commission.
Provisions applicable
In the absence of any specific disallowance, expenditure incurred wholly and exclusively
for the purpose of business has to be allowed under section 37. It has also to be seen
whether such payment was a device used to outwit the provisions of section 115-O, which
requires payment of dividend distribution tax.
Analysis of the issue

The directors of the company are employees of the company and are entitled to
remuneration for the services rendered as employees. In this case, they also provided
personal guarantee to banks, since it was a precondition laid down by the bank to
provide financial assistance to the company. This act of providing personal guarantee
was clearly beyond the scope of their services as employees of the company.
The assessee-company, in its commercial wisdom, passed a resolution resolving that the
directors be paid commission for providing their personal guarantees for the financial
assistance availed by the assessee-company from the bank. In such a case, the Assessing
Officer only has to determine whether the transactions are real and genuine.
As regards section 36(1)(ii), the recipient directors were not entitled to receive the amount
as commission in lieu of dividend. Dividend is paid to all the shareholders and the
recipient directors were not the only shareholders of the company. The payment of
commission, hence, cannot be taken as payment of dividend, since payment of dividend
would result in payment to all the shareholders and not to shareholders holding prescribed
percentage of the voting power/share capital in the company.
Conclusion
Therefore, the action of the Assessing Officer, holding that if the amount was not paid to
them as commission, the same would have been payable as dividend, and contending
that the company avoided dividend distribution tax under section 115-O which was
otherwise payable, is not valid.
Reference may be made to the decision in Controls & Switchgear Contractors Ltd. v. Dy.
CIT (2014) 365 ITR 312.
Answer : 5(b)
Set off of losses:
Issue involved
The issue involved in this case is whether the loss suffered by an erstwhile partnership firm,
which was dissolved, can be carried forward for set-off by the individual partner who took
over the business of the firm as a sole proprietor, considering the succession as a
succession by inheritance.
Section 78(2) deals with carry forward of losses in case of succession of business. It
provides that only the person, who has incurred the losses, and no one else, would be
entitled to carry forward the same and set it off. An exception provided thereunder is in
the case of succession by inheritance.

Upon dissolution, the partnership firm, ceased to exist. Also, the partnership firm, and the
sole proprietorship concern are two separate and distinct units for the purpose of
assessment. The income earned by the sole proprietor would include his share of loss as
an individual but not the loss suffered by the erstwhile partnership firm in which he was a
partner.
The exception given in section 78(2), permitting carry forward of losses by the successor in
case of inheritance, is not applicable in the present case since the partnership firm was
dissolved and ceased to continue. Taking over a business by a partner cannot be
considered as a case of inheritance due to death as per the law of succession.
Conclusion
The action of the Assessing Officer in disallowing the claim of set-off of losses suffered by
the erstwhile partnership firm ST & Co. against the income earned as an individual
proprietor is, therefore, correct.
Reference may be made to the decision in Pramod Mittal v CIT (2013) 356 ITR 456.
Answer : 5(c)
TDS on tips collected by a hotel from customers:
Issue involved
The issue is whether tax is required to be deducted at source under section 192 from the
tip (collected from customers) distributed by the assessee-employer. In other words, it
has to be seen whether the action of the assessee satisfies the legal requirements.
Section 192 provides that tax is to be deducted at source by the employer from salary at
the time of payment, if the amount of salary (after permissible deductions under sections
80C, 80D, etc.) exceeds the maximum amount not chargeable to tax.

The employer has collected the tips paid by the customers voluntarily and was not
collected as a matter of right. Further the employment contract does not show the
obligation to collect tips and disburse to employees.
There is no vested right in the employee to claim the amount of tips from the employer.
It is voluntary payment which cannot be called as salary within the meaning of section
15.
When an amount is received from a person other than employer, such payment cannot
be charged to tax under the head “salaries”. Therefore, the provision of section 192
does not get attracted.
Conclusion
The action of non-deduction of tax at source from tips collected from customers and
distributed to the hotel employees satisfies the legal requirement.
Reference may be made to the decision inITC Ltd vs. CIT (TDS) 384 ITR 14 (SC)
Answer : 5(d)
Exemption u/s 54EC relating to depreciable assets
Issue involved:
The issue is whether exemption under section 54EC can be claimed in respect of capital
gain on transfer of depreciable capital asset computed under section 50 where the asset
had been held for more than 24 months before transfer of such asset.
As per section 54EC, where capital gain arises from transfer of any long- term capital asset
and such capital gain or part thereof is invested in specified asset (which includes REC
bonds) within 6 months from date of transfer, exemption is available up to maximum limit
of Rs. 50 lakhs.
Under section 50, capital gain arising from transfer of depreciable asset shall be deemed
to be capital gain. However, the deeming provision is limited to computation of capital
gain and does not go beyond to deny the benefits of exemption under section 54EC or
section 54F.
Where the asset forming part of the block was held for more than the specified period (24
months for building/ 36 months for other capital assets) and eligible to be categorized as
long term capital asset, the benefit of exemption for investment of the long- term capital
gain or sale proceeds as the case may be, contained in the applicable legal is allowable
provision.
Conclusion
Hence, the claim of the company is tenable in law.
Reference may be made to the decision inCIT vs. Dempo Co Ltd (2016) 387 ITR 354 (SC)
Answer : 5(e)
Applicability of Section 14 A to income for which deduction under Chapter VI A is

available:
Issue involved
The issue under consideration is whether the provisions of section 14A can be invoked in
disallowing the expenditure incurred in respect of the income for which deduction is
claimed under Chapter VI-A.
As per section 14A, expenditure incurred in relation to income which does not form part of
the total income under the Act, will not be allowed in computing the total income of the
assessee.

The words “do not form part of the total income under this Act” used in section 14A are
significant and important. Income which qualifies for deductions under section 80C ti 80 U
has to be first included in the gross total income of the assessee and then allowed as a
deduction.
However, income referred to in Chapter III do not form part of the total income and
therefore, as per section 14A, no deduction shall be allowed in respect of expenditure
incurred by the assessee in relation to such income which does not form part of the total
income.
Deduction under section 80P covered in Chapter VIA is different from the
exclusions/exemptions provided under Chapter III.
Conclusion
The stand of the Assessing Officer in disallowing the expenditure incurred with respect to
income for which deduction under Chapter VI-A is claimed, by invoking the provisions of
section 14A is, therefore, not tenable in law.
Reference may be made to the decision in CIT v.Kribhco (2012) 349 ITR 0618.
6. (a) Mr. Amin, a resident individual in India (age 42) furnishes you the following particulars
of income for the previous year 2017 – 18 :
Particulars Rs.
(i) Income from business in India (computed) 11,00,000

(ii) Dividend received from Company incorporated in Country X 2,00,000
(gross)
(iii) Royalty income from writing text book for schools in Country Y 6,00,000
(gross)
(iv) Expenditure incurred for authoring text book 50,000
(v) Business loss in Country Y (gross) 2,50,000
(vi) Health insurance premium paid by credit card for his father (age 31,000
67) a resident in India (His father is not dependent on Mr. Amin)
The business loss in Country Y is eligible for set off against other income as per the
Income-tax law of that country.
Note : There is no DTAA between India and Country “X” and Country “Y” given above.
The rate of tax in Country “X” and Country “Y” may be taken as 10% and 25% respectively
(without any threshold exemption limit).
Compute the total income and tax payable by Mr. Amin in India for the Assessment Year
2018 – 19.
8
(b) Chetan (P) Ltd. located in Special Economic Zone (SEZ) since April, 2012 is engaged
in manufacturing activity by importing raw materials from its holding company Bada Inc.
of UK. The following details are furnished :
Chetan (P) Ltd. imported goods for Rs.60 crores during the financial year 2017 – 18
from Bada Inc.
Bada Inc. supplied similar raw materials to unrelated parties with a mark-up of 20%,
whereas for Chetan (P) Ltd. it provided a mark-up of 25%.
Chetan (P) Ltd. was allowed to use the brand name of Bada Inc. without any
payment and whereas the unrelated parties cannot use such brand name in India.
The annual cost of brand value is Rs.100 lakhs.
Chetan (P) Ltd. was allowed credit period of 2 months, whereas for the unrelated
parties, Bada Inc. allowed only 1 month as credit period. The interest cost may be
taken as 12% per annum and the purchases were uniform throughout the year.
The Assessing Officer referred the matter to Transfer Pricing Officer (TPO) for
determination of Arm’s Length Price (ALP).
(i) Compute the ALP of the transaction and adjustments to be made to the
income of Chetan (P) Ltd.
(ii) What is the due date for Chetan (P) Ltd. for furnishing audit report under
section 92E ?
(iii) If TPO had enhanced the income of Chetan (P) Ltd. by Rs.2 crores, will that
enhanced amount of income be eligible for deduction under section 10AA ?
(iv) Will Chetan (P) Ltd. become liable for penalty for under-reporting of income
based on the report of the TPO ?
8
Answer : 6(a)
Computation of Total Income of Mr. Amin for A.Y. 2018 – 19

Particulars Rs. Rs.
Profits and gains of Business or profession
Income from business in India 11,00,000
Loss from business in Country “Y” 2,50,000
Less : Set off against royalty income 2,50,000
NIL
Income from other Sources :
Dividend from companies in Country “X” 2,00,000
Royalty income from Country “Y” 6,00,000
Less: Expenditure thereon 50,000
5,50,000
Loss from business in Country “Y” 2,50,000
3,00,000
Less: Deduction under Chapter VI-A
Section 80D
Health insurance premium for father, senior citizen is deductible even 30,000
though he is not dependent on the assessee.
Section 80 QQB:
As the assessee has authored text-book for schools in Country „Y‟ hence it NIL
is not eligible for deduction.
Tax thereon
On Rs. 15,70,000 2,83,500
Add: Cess @ 3% 8505
2,92,005
Less : Rebate U/s. 91 (See working note) 74,180
Total tax liability 2,16,210
Average rate of tax in India
Rs. 2,83,500 x 100 / Rs. 15,70,000 = 18.06%
Average rate of tax in country x = 10%
Doubly taxed income of country x = 2,00,000
Rebate u/s. 91 would be 10% or average rate @ 18.06% - whichever
is less.
10% on Rs. 2 lakhs = Rs. 20,000 20,000
Doubly taxed income of country Y (after set off of business loss) =
3,00,000
Rate of tax country Y = 25%
Rebate u/s. 91 would be @ 18.06% or 25% whichever is less.
Rebate @18.06% on Rs. 3 lakhs = Rs. 54,180 54,180
Total rebate under section 91 74,180

Total Marks
Answer : 6(b)
(i) Computation of income to be adjusted to the income of Cheten (P) Ltd. Rs. in
for AY 2018-19 Lakhs
Difference in mark up price between related parties and unrelated

parties. The mark up was cost plus 25% for related party and whereas it
was cost plus 20% for unrelated parties. The cost of goods to related (+) 240
party is Rs. 48 crores plus 25%. To the unrelated party it would have
been 20%. Hence the adjustment would be 5% which means Rs. 48
crores x 5% = 2.40 crores being the extra expenditure incurred by
Chetan (P) Ltd. in India.
Cost of brand value usage obtained by Chetan (P) Ltd. free of cost due (-) 100
to its association with Bada LLC. This would have been incurred if it were
an unrelated party.
Interest on extended credit period obtained from associated enterprise. (-) 5
The purchases were uniform throughout the year. Hence the benefit of
the cost of capital is Rs. 5 crores x 12% x 1/12 being the extra credit
period enjoyed.
Income to be adjusted in the hands of Chetran (P) Ltd. by apply CUP (+) 135
method of ALP determination.
(ii) The due date for furnishing the report under section 92E is 30th November, 2018.
(iii) The income enhanced because of the order of TPO will not be eligible for
deduction under section 10AA or under Chapter VI-A in view of second proviso to
section 92C.
(iv) If the assessee has under-reported the income it is liable for penalty @ 50% of tax
payable on under-reported income as per section 270A.
However, if the assessee has maintained information and documents as prescribed
in section 92D, it would not be construed as under-reported income.
7. (a) (i) Under the provisions of the Income-tax Act, 1961 read with the Income-tax Rules,
1962, what is the meaning of Foreign Tax Credit (FTC) ?
2
(ii) To whom is FTC allowed and in which year ?
4
(iii) An assessee has to pay income-tax of Rs. 92 lakhs, surcharge of Rs.9.2lakhs,
Education Cess& SAH CessRs.3,03,600 and interest under section 234B of
Rs.9,78,700. Against which of these item/amounts is FTC available ?
2
(b) Kiwi LLC., is a foreign company incorporated in Singapore, Brightstars Inc. (BI), is a
foreign company incorporated in Australia, Daffodils Pvt. Ltd. (DPL), is an Indian
Company.
The Indian company has taken a loan of Rs.120 crore from Moonshine Inc., a
foreign company, at the rate of 10% per annum on 1st October, 2017. The
guarantee for this loan has been provided by BI. This is the only loan taken by DPL
during the year.
Kiwi LLC, holds 27% of the voting power in BI as well as in DPL.
The net profit of DPL, after above interest and depreciation of Rs.1.8 crore, but
before income-tax is Rs. 9.2 crore, for the year ended 31.3.2018. Income-tax
liability for the year may be taken as Rs.1.2 crore.
Is any disallowance warranted in respect of interest in the hands of DPL, as per the
transfer pricing provisions, for the assessment year 2018-19 ? Append suitable
notes.
8
Answer : 7(a)
Foreign Tax Credit [Rule 128]

(i) Meaning of foreign Tax Credit.
The foreign tax credit means :
(a) In respect of a country or specified territory outside India with which India has
entered into double taxation of income in terms of section 90 or section 90A,
the tax covered under the said agreement ;
(b) In respect of any other country or specified territory outside India, the tax
payable under the law in force in that country or specified territory in the
nature of income-tax referred to in clause (iv) of the Explanation to section
91.
(ii) Eligible assessee and year of credit.

An assessee, being a resident, shall be allowed a credit ;
Same shall be for the amount of any foreign tax paid by him in a country or
specified territory outside India, by way of deduction or otherwise ;
Same is allowed in the year in which the income corresponding to such tax has
been offered to tax or assessed to tax in India.
In a case where income on which foreign tax has been paid or deducted, is
offered to tax in more than one year, credit of foreign tax shall be allowed
across those years in the same proportion in which the income is offered to tax
or assessed to tax in India.
(iii) Eligible items for set off of FTC
FTC shall be available against the amount of tax, surcharge and cess payable
under the Act but not in respect of any sum payable by way of interest, fee or
penalty.
Thus FTC can be used against IT, SC and education & SAH Cess. Rs.104.236 lakhs in
total.
Answer : 7(b)
Applicability of section 94B
Kiwi LLC., holds 27% of the voting power in BI as well as in DPL, which is more than 26%.
Hence BI and DPL will be deemed associated enterprises.
Where the debt is issued by a lender which is not associated but an associated enterprise
either provides an implicit or explicit guarantee to such lender, such debt shall be
deemed to have been issued by an associated enterprise (AE) and limited of interest
deduction would be applicable.
If an Indian company, being the borrower, incurs any expenditure by way of
interest in respect of any debt issued by its non-resident associated enterprise
(AE),and
Such interest exceeds Rs. 1 crore, then,

The interest paid or payable by such Indian company in excess of
- 30% of its earnings before interest, taxes, depreciation and amortization
(EBITDA) or
Interest paid or payable to associated enterprise,
Whichever is lower, shall not be allowed as deduction as per section 94B.
Hence DPL shall be deemed to have taken loan from BI, an AE. Restriction laid down in
section 94B may come into play.
Particulars Rs. in crore

PBT, but after interest and depreciation 9.2
Add : Depreciation 1.8
Interest 6.0
EBITDA 17.0
Permissible interest is lower of 30% of EBITDA, i.e. 30% of 17C, i.e. 5.1C or
actual interest 6C. Hence 5.1C will be allowed as deduction.
Amount to be disallowed u/s. 94B is Rs. 0.9 crore (6-5.1)
8. Write short notes on any four of the following : 4 x 4 = 16

(a) Scope of undisclosed foreign income and asset under the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
(b) Fees prescribed for filing appeal before the Commissioner (Appeals)
(c) Valuation of inventory as per ICDS in case of dissolution of firm.
(d) Assessment of persons leaving India.
(e) Impermissible Avoidance Arrangement.
Answer : 8(a)
Scope of Undisclosed Foreign income and Asset:
Scope of total undisclosed foreign income and asset as per section 4 of the Black Money
(undisclosed Foreign Income and Assets) and Imposition Act.
The total undisclosed foreign income and asset of any previous year of an assessee shall
be :
(i) The inform from a source located outside India, which has not been disclosed in the
return of income furnished under section 139 of the Income Tax Act ;
(ii) The income from a source located outside India, in respect of which a return is
required to be furnished under section 139 of the Income Tax Act, but no return has
been furnished ;
(iii) The value of an undisclosed asset located outside India.
Any variation made in the income from a source outside India in the assessment or
reassessment of the total income of any previous year of the assessee under the Income
Tax Act in accordance with the provisions of section 29 to section 43C (profits and gains
from business or profession ) or section 57 to section 59 (income from other sources) or
section 92C (transfer pricing) of the said Act shall not be included in the total undisclosed
foreign income
To avoid double taxation, the income included in the total undisclosed foreign income
and asset under the Black Money (undisclosed Foreign Income and Assets) and
Imposition Act shall not form part of the total income under the Income Tax Act.
Answer : 8(b)
Fees prescribed for filing appeal before the CIT (A)
In case of an appeal made to the Commissioner (Appeals), irrespective of the date of

initiation of the assessment proceedings, the appeal shall be accompanied by a fee of :
Situation Fees Rs
(i) Where the total income of the assessee as computed by the 250
Assessing Officer is Rs. 1,00,000 or less
(ii) Where the total income of the assessee computed as above is 500
more than Rs. 1,00,000 but not more than Rs. 2,00,000
(iii) Where the total income of the assessee computed as above is 1,000
more than Rs. 2,00,000
(iv) In any case other than (i), (ii) and (iii) above 250
Answer : 8(c)
Valuation of inventory in case of dissolution of firm as per ICDS
ICDS II deals with valuation of inventories
ICDS II says that the value of inventory on the date of dissolution of the firm shall be valued
at net realizable value (NRV), irrespective of whether the business of the firm is continued
or not.
When a firm is dissolved and the surviving partners continue the business of the firm, the
inventory need not be valued at net realizable value as per Supreme Court decision in
the case of Sakthi Trading Co. v CIT (2001) 258 ITR 871 (SC).
As the ICDS specifically mandates the firm to adopt only NRV method of stock valuation
on dissolution of firm, regardless of whether the business in continued or not, the stock
valuation must be as per NRV method.
Answer : 8(d)
Assessment of persons leavingIndia
Section 174 deals with persons leaving India.
Where it appears to the Assessing Officer that any individual may leave India during the
current assessment year or shortly after its expiry and that he has no present intention of
returning to India, the total income of such individual for the period from the expiry of the
previous year for the assessment year up to the probable date of his departure from India
shall be chargeable to tax in that assessment year.
The total income of each completed previous year or part of any previous year included
in such period shall be chargeable to tax at the rate or rates in force in that assessment
year. Separate assessments shall be made in respect of each such completed previous
year or part of any previous year.
The AO may estimate the income of such individual for such period or any part thereof,
where it cannot be readily determined in the manner provided in the Act.
For the purpose of making an assessment, the AO may serve a notice upon such
individual requiring him to furnish, within such time, not being less than 7 days, as may be
specified in the notice, a return in the same form and verified in the same manner as a
return under section 142(1), setting forth his total income for each previous year and his
estimated total income for any part of the previous year and the provisions of the Act
shall, so far as may be, and subject to the provision of this section, apply as if the notice
was a notice issued under section 142(1).
Answer : 8(e)
Impermissible Avoidance Arrangement
As per section 96, an impermissible avoidable arrangement means an arrangement, the

main purpose of which is to obtain a tax benefit.
It –
(a) Creates rights or obligations, which are not ordinarily created between persons
dealing at arm‟s length ;
(b) Results, directly or indirectly, in the misuse, or abuse, of the provisions of the Act;
(c) Lacks commercial substance or is deemed to lack commercial substance under

section 97 ;
(d) Is entered into, or carried out, by means, or in a manner, which are not ordinarilly
employee for bona fide purposes.
An arrangement shall be presumed, unless it is proved to the contrary by the assessee,

to have been entered into, or carried out, for the main purpose of obtaining a tax
benefit.
FINAL EXAMINATION
GROUP III
(SYLLABUS 2016)
JUNE 2019
Paper- 16: DIRECT TAX LAWS AND INTERNATIONAL TAXATION

State them clearly in the answers.
Working Notes should form part of the relevant answers.
All questions relate to Income-tax Assessment Year 2019-20 and the

Provisions referred to are the Income-tax Act, 1961,
unless stated otherwise.

any five from Question No. 2 to Question No. 8
Section – A
1. (a) Choose the most appropriate alternative and give justification in brief/brief working for
(i) Alpha Ltd., Mumbai has 27% shareholding in Beta Pte. Inc. of Singapore. Alpha Ltd.
received ` 15 lakhs (converted in Indian rupee) by way of dividend in October,
2018. The dividend so received is taxable in the hands of Alpha Ltd. at
(A) Nil, Fully exempt
(B) 10%
(C) 15%
(D) 30%
(ii) Gama Traders is a partnership firm consisting of 4 equal partners. One partner retired
on 31.03.2018. The firm has eligible brought forward loss of ` 4 lakhs relating to the
assessment year 2017-18. The total income of the firm of the previous year 2018-19
before set off of the said brought forward loss is ` 7,20,000. The amount of brought
forward loss eligible for set off would be
(A) `4,00,000
(B) Nil
(C) ` 1,00,000
(D) `3,00,000
(iii) The provisions of Alternate Minimum Tax (AMT) will be applicable when the adjusted
total income of the individual taxpayer exceeds
(A) ` 10,00,000
(B) ` 20,00,000
(C) ` 50,00,000
(D) `1,00,00,000
(iv) Mr. Ram Chandran a resident individual (age 52) has income of ` 51,00,000 for the
year ended 31.03.2019. His income-tax liability after marginal relief would be
(A) ` 14,76,250
(B) ` 14,69,000
(C) ` 14,12,500
(D) `13,62,400
(v) Y & Co. is a partnership firm which was dissolved on 31.03.2018. The return of income
of the firm for the assessment year 2018-19 was filed on 31.08.2018. The return of
income of the firm was selected for scrutiny assessment under section 143(3). The
notice for scrutiny assessment under section 143(2) has to served on
(A) all the partners.
(B) any working partner.
(C) any partner having long association.
(D) any partner.
(vi) Sakshita Fertilisers P Ltd., is a manufacturer. A factory building has been constructed
for ` 40 lakhs and occupied on 12.02.2018. Additional depreciation allowable for the
said factory building is
(A) Nil
(B) ` 4 lakhs
(C) ` 2 lakhs
(vii) Mr Nyati has won a lottery prize. After deduction of tax, he received `7lakhs. He as
spent ` 20,000 by way of purchase of lottery tickets and for collecting the prize
money. The amount chargeable to tax in his hands in this regard is
(A) ` 7 lakhs
(B) ` 10 lakhs
(C) `6.8 lakhs
(D) `9.8 lakhs
(viii) Mr. Janak‘s turnover during the year ended 31.03.2017 was ` 3 crores. He has paid a
sum of `3 lakhs to an engineer for supervision of a residential house for his own
occupation. The amount of tax to be deducted at source from such payment u/s
194-J is
(A) `3 lakhs
(B) ` 3.3 lakhs
(C) `30,000
(D) Nil
(ix) Mrs. Rakshita, a Cost Accountant has raised a fees bill on LMN P Ltd., for ` 3,00,000
and in addition, has charged separately IGST of 18% i.e. `54,000, the total amount of
the bill being ` 3,54,000. The amount of tax to be deducted at source by LMN P Ltd.,
is
(A) `30,000
(B) `30,900
(C) `35,400
(x) Harivallabh Pvt. Ltd., has spent a sum of ` 10 lakhs towards meeting its corporate
social responsibility (CSR) under the Companies Act, 2013. The amount of deduction
available while computing the business income is
(A) ` 10 lakhs
(B) ` 15 lakhs
(C) `12.5 lakhs
(D) Nil
Answer:
(i) (C) 15%
Justification: When an Indian company receives income by way of dividend from a

foreign company in which the Indian company holds 26% or more in nominal value of the
equity share capital of the foreign company, the amount of dividend shall be taxable at
15%. The amount so received would be reduced from the total income of the Indian
company and no expenditure is allowable against such dividend income.
(ii) (D)` 3,00,000
Justification: Section 78 says that where a change has occurred in the constitution of a
firm and the firm has brought forward loss, the amount of such loss proportionate to the
retired or deceased partner as exceeds his share of profits in the respective previous year
shall not be eligible for set off. In this case, one partner has retired on 31.03.2018 and the
brought forward loss will not be reduced since there is no share of profit for the partner in
the previous year 2018-19.
(iii) (B)` 20,00,000
Justification: Section 115JEE(2) says that the provisions of Chapter XII-BA dealing with
Alternate Minimum Tax applicable for persons other than company will not apply if the
adjusted total income of the taxpayer does not exceed ` 20 lakhs.
(iv) (B)`14,69,000
Justification: The tax on total income of ` 51 lakhs before cess@ 4% would be ` 14,76,250
and tax on income of ` 50 lakhs is ` 13,12,500 plus excess of income over ` 50 lakhs being
` 1 lakh would result in aggregate tax liability of ` 14,12,500. The marginal relief would be
`64,250. The final tax payable hence would be ` 14,69,000.
(v) (D) any partner
Justification: As per section 283(2) where a firm is dissolved, notices under the Income-tax
Act in respect of the firm may be served on any person who was a partner (not being a
minor) immediately before its dissolution.
(vi) (A) Nil
Additional depreciation is available only in respect of eligible plant and machinery to a

manufacturer and not in respect of factory building. Hence the amount is Nil.
(vii) (B) ` 10 lakhs
Gross winnings must be taxed. Since TDS rate is 30%, gross amount will be ` 10 lakhs. No
expenditure is allowable from this amount.
(viii) (D) Nil
Where the house is meant exclusively for personal use, there is no need to deduct tax at
source u/s 194-J.
(ix) (A) ` 30,000
CBDT has clarified that there is no need to deduct tax at source in respect of GST
charged and shown separately in the bill Hence as per section 194-J, from the sum of ` 3
lakhs, .10% i.e. ` 30,000 is to be deducted.
(x) (D) Nil
Section 37 clearly enjoins that no deduction is available in respect of CSR expenditure

incurred by a corporate assessee.
Section B
2. (a) Mrs. Malavika commenced the business of warehousing of food grains on 1st April,
2018.
The under-mentioned summarised data relating to the warehousing business are

furnished to you:
Particulars (ìn lakhs)
Net profit from business 126.5
Capital expenditure on Land & Building (35+20) incurred on 19.05.2018 55
Warehouse building additional cost incurred towards above building 50

(completed on 20.12.2018)
The assessee did not derive any other income during the year.
You are required to compute the total income and the tax payable by the assessee for
the assessment year 2019-20. 8
(b) State whether ‗business connection‘ is established as envisaged by section 9 of the

Income-tax Act, 1961, in the under-mentioned situations: 2+2=4
(i) Jupier Pty Ltd., London (JPL), a non-resident company, has set up a liaison office at
Kolkata, with the permission of the RBI. Indian customers, who are briefed of the
products of JPL by the liaison office, interact directly with JPL for placing and
processing of their orders.
(ii) Madan & Co. (MC), is acting on behalf of Nelson Inc., Sydney, a non-resident
company. MC can accept the order, negotiate the price and coordinate with
Nelson Inc. for delivery of product to the Indian clients. MC is paid commission in
this regard.
(c) On 20th Feb., 2019, Vaamana Textiles Pvt. Ltd., has given a trade advance of `50 lakhs
to Ms. Poorvisha, a shareholder holding 30% of the equity shares and voting power in
the company. On this date, the company has credit balance of `35 lakhs in the profit
and loss account.
Ascertain the quantum of deemed dividend which is assessable in the hands of Ms.
Poorvisha. 4
Answer:
2.(a) Since the assessee is eligible for deduction u/s 35AD, provisions of AMT will be applicable
and its impact has to be seen.
Particulars (` in lakhs)
Net profit from business 126.5
Less: Deduction u/s 35D (for warehouse business)
Capital expenditure on land 35 lakhs not eligible Nil
Warehouse building (`20+`50) lakhs(A) 70
Business income after above deduction 56.5
Less: Depreciation allowable (`20L × 10% + `50L × 5%) 4.5
Chargeable business income/total income (B) 52
Tax on above (`1,12,500 + 30% of `42L) 13.725
Add: SC at 10% as income exceeds `50L 1.373
15.098
Add: Cess on above at 4% 0.604
Tax liability as per normal provisions 15.702
Alternate minimum tax
Adjusted total income (A)+(B) 122

AMT at 18.5% 22.57
ADD: SC at 15% as income exceeds `1 crore 3.386
25.956
Add: cess at 4% 1.038
AMT 26.994
Since the regular income-tax is lower than the AMT,
• adjusted total income will be deemed to be the total income (` 122 lakhs) and
• the tax payable will be ` 26.994 lakhs.
(b) Business connection:

(i) When a liaison Office is maintained solely for the purpose of carrying out activities
which are preparatory or auxiliary in character, and such activities are approved
by the Reserve Bank of India, then, no business connection is established.
Indian customers, who are briefed of the products of JPL by the liaison office,
interact directly with JPL for placing and processing of their orders. The liaison
office does not procure orders or process them. Hence there is no business
connection, as envisaged by section 9.
(ii) „Business connection‟ shall include any business activity carried out through a person
acting on behalf of the non-resident. For a business connection to be established,
the person acting on behalf of the non-resident -
* must have an authority which is habitually exercised in India to conclude

contracts on behalf of the non-resident or;
* in a case where he has no such authority, but habitually maintains in India a

stock of goods or merchandise from which he regularly delivers goods or
merchandise on behalf of the non-resident, or
* habitually secures orders in India, mainly or wholly for the non-resident.
Here, MC can accept the order, negotiate the price and coordinate with MC for
delivery of product to the Indian clients. Hence there exists a business connection
in this situation.
(c) Deemed dividend:
Section 2(22)(e) provides that “dividend” includes any payment by a company in

which public are not substantially interested, of any sum by way of
* advance or loan
* to a shareholder who is the beneficial owner of shares holding not less than 10% of
the voting power,
or to any concern in which such shareholder is a member or a partner and in which he

has a substantial interest or any payment by any such company on behalf, or for the
individual benefit, of any such shareholder, to the extent to which the company in
either case possesses accumulated profits.
Some Courts in the recent past has held that trade advances in the nature of
commercial transactions would not fall within the ambit of the provisions of section
2(22)(e).
In view of the above, the CBDT has, vide circular 19/2017, dated 12.06.2017, clarified
that it is a settled position that trade advances, which are in the nature of commercial
transactions, would not fall within the ambit of the word „advance‟ in section 2(22)(e)
and therefore, the same would not to be treated as deemed dividend.
Hence in the given situation there will not be any amount which is assessable as
deemed dividend.
3. King Metals (P) Ltd. reports a Net Profit `10,20,000 as per Statement of Profit and Loss for the
year ended 31.03.2019. The following additional information is provided:
(i) Opening stock as on 01.04.2018 was `9,00,000 and the closing stock as on 31.03.2019
was `16,50,000. The opening stock was overvalued by 10% and the closing stock was
undervalued by 10%.
(ii) Dividend received from a foreign company credited to Statement of Profit and Loss `
31,000. The company has 2% shareholding in the foreign company.
(iii) The company sold a vacant land for `23 lakhs on 05.07.2018. The original cost of
acquisition is `12 lakhs. The indexed cost of acquisition is `16,17,000. Profit on sale of
vacant land has been credited to Statement of Profit and Loss. The company
subscribed to REC bonds for `5,30,000 on 20.12.2018.
(iv) The company made a provision for bad and doubtful debts @ 5% of debtors on the
closing date. The debtors outstanding as on 31.03.2019 was `62 lakhs.
(v) Depreciation debited to Statement of Profit and Loss `7,50,000. Depreciation allowable
as per Income-tax Rules `6,55,000.
(vi) Salary expenditure includes `3,60,000 paid to son of managing director who was no
way connected with the business of the company. It also includes commission paid to
a director‘s son 3% being `2,40,000 and whereas for other commission agents it was
paid @2%.
(vii) The company has paid term loan interest to SBI relating to previous year 2017-18
` 2,10,000 in December, 2018. It has not paid term loan interest of `1,90,000 of the
previous year 2018-19 during the year and proposes to make the payment only in
January, 2020.
(viii) The company took factory premises on lease and paid lease rent of `60,000 per
month for 2 months to Mr. Akhil. No tax was deducted on such rent payment.
(ix) Directors sitting fee of `50,000 was paid to 5 directors during the year. Tax was
deducted for 2 directors and for the balance no tax deduction was made.
(x) Provision for loss of subsidiary included in administrative expenses `2 lakhs.
(xi) Amount credited to Statement of Profit and Loss by transfer from revaluation reserve
amounts to `1,10,000.
(xii) Provision for gratuity debited to Statement of profit and loss `7 lakhs. Actual gratuity
paid during the year debited to provision account `4 lakhs.
(xiii) A bad debt claim of `1,60,000 relating to the assessment year 2015-16 allowed in
assessment was recovered and was credited to general reserve account.
You are required to compute the income of King Metals (P) Ltd. by giving brief
explanations for each of the adjustments given above. 16
Answer:
Computation of Total Income of King Metals (P) Ltd for the Asst.Year 2019-20
` `
Profits and gains of business or profession
Net Profit as per Statement of profit and loss 10,20,000
Add:
Undervaluation of closing stock to be adjusted 1,83,333
Overvaluation of opening stock by 10% to be adjusted 81,818
Provision for bad and doubtful debts - disallowed 3,10,000
Depreciation debited to statement of profit and loss 7,50,000
Salary paid to son managing director having no nexus to the business 3,60,000
of the company is not allowable under section 37
Excess commission paid to the director‟s son is liable for disallowance 80,000
under section 40A(2).
Term loan interest debited to Statement of profit and loss of the 1,90,000
previous year 2018-19 not allowable under section 43B.
Premises lease rent paid ` 60,000 per month for 2 months being Nil
`1,20,000. It is not liable for tax deduction under section 194-IB as the
section will apply only to individual and HUF taxpayers. No adjustment
is required.
Directors sitting fee paid without deduction of tax at source liable for 45,000
disallowance @ 30% under section 40(a)(ia) [30% of ` 1,50,000]
Provision for loss of subsidiary company -disallowed 2,00,000
Provision for gratuity debited to Statement of profit and loss ` 7 lakhs 3,00,000
not deductible in view of section 40A(7). However, the amount
actually paid is eligible for deduction. The excess provision is
disallowed.
Bad debt claim allowed in assessment year 2015-16 recovered during 1,60,000
the year but credited to general reserve is chargeable to tax as

income.
36,80,151
Less:
Dividend received from foreign company excluded and to be taxed 31,000

under the head „other sources‟
Profit on sale of vacant land credited to Statement of profit and loss, 11,00,000
to be considered under the head „capital gains‟
Depreciation allowable as per Income-tax rules 6,55,000
Interest on term loan of the previous year 2017-18 paid in December, 2,10,000
2018 deductible under section 43B
Amount withdrawn from revaluation reserve and credited to 1,10,000

Statement of profit and loss excluded
21,06,000
Income from Business 15,74,151
Capital Gain:
Sale consideration 23,00,000
Less: Indexed cost of acquisition 16,17,000
6,83,000
Less: Exemption U/s54EC eligible for corporate taxpayers‟ also. 5,30,000
1,53,000
Income from Other Sources:
Dividend received from foreign company 31,000
Total Income (Rounded off) 17,58,150
4. (a) State the ‗due date‘ for filling the return of the assessment year 2019-20 in the following
cases: 8
(i) Rohan engaged in proprietary business with turnover of less than 50 lakhs and
`
wants to file return of income under section 44AD.
(ii) Vinod Raj (HUF) engaged in manufacture of automobile spare parts with gross
turnover always exceeding ` 200 lakhs per annum, with Karta and two male
members managing the business.
(iii) Vashist& Co. a partnership firm engaged in turmeric brokerage business with
gross receipt below ` 20 lakhs.
(iv) Nehra Trade (P) Ltd. engaged in trading business with loss of ` 2,60,000 and
turnover of ` 82,40,000.
(v) MNO Co. Ltd., Mumbai being subsidiary of Crowe Pte Inc. of Malaysia having
transactions with the parent company of ` 440 lakhs during the year by way of
export to the parent company.
(vi) Welfare Charitable Trust registered under section 12AA having aggregate annual
receipt of ` 6.20 crores and revenue expenditure of ` 4.10 crore and capital
expenditure of ` 1.85 crores.
(vii) Raghu working partner of Raghu Associates with working partner salary of ` 1 lakh
per month and book of account of Raghu Associates is liable for tax audit under
section 44AB.
(viii) Dr. Ravi an orthopaedic surgeon with aggregate annual receipt from profession of
` 24 lakhs and maintaining books of account with income from profession of
` 11,40,000.
(b) Laxmi Ltd transferred its Unit X to Amin Ltd. by way of slump sale on 31st December,
2018. The summarized balance sheet of Laxmi Ltd. as on that date is given below:
Liabilities ` in lakhs Assets ` in lakhs
Share capital-paid up 2,000 Fixed Assets:
Reserves and Surplus 950 UnitX 700
Liabilities: UnitY 900
UnitX 400 UnitZ 1,200
UnitY 600 Other Assets:
UnitZ 1,050 UnitX 650
UnitY 750
UnitZ 800
5,000 5,000
From the information given below compute the capital gain arising from slump sale
of Unit X: 8
(i) Cost inflation index for the financial year 2007-08 is 129 being the year in which the
Unit X was established. The cost inflation index for the financial year 2018-19 is 280.
(ii) The lump sum consideration received for transfer of Unit X is ` 1,100 lakhs. Unit X
owes ` 100 lakhs to the buyer Amin Ltd. in respect of raw materials purchased by it.
This amount would be foregone by the buyer. In other words, the sale
consideration is after set off of ` 100 lakhs.
(iii) The fixed assets of Unit X includes a vacant land which was purchased in the
financial year 2007-08 for ` 50 lakhs and it was revalued at ` 100 lakhs in the year
2018-19.
(iv) Other fixed assets reflected in the balance sheet ` 600 (` 700 lakhs less value of
land) represents WDV of the assets as per books of account. The WDV of these
assets under the Income-tax Act is ` 200 lakhs.
Answer:
4.(a) Determination of due dates for filing the return for Asst. Year 2019-20:
(i) Since the assessee individual is offering income under section 44AD, the "due date"
for filing the return of income under section 139(1) is 31st July, 2019.
(ii) As the HUF engaged in business with turnover exceeding `200 lakhs, the books of
account have to be audited under section 44AB and the "due date" for filing the
return of income is 30th September, 2019.
(iii) The partnership firm is engaged in turmeric brokerage. It is not eligible to opt for
presumptive provisions contained in section 44AD.The "due date" for filing the return
of income is 31st July, 2019 as the gross receipt is less than `100 lakhs.
(iv) In the case of a company, whose accounts are required to be audited under the
Companies Act, 2013, the "due date" for filing the return of income is 30th
September, 2019 regardless of the turnover and income.
(v) As the assessee has entered into international transaction with its associated
enterprise, it is required to furnish report referred to in section 92E and hence the
"due date" for filing the return of income is 30th November,2019.
(vi) The income of charitable trust before giving effect to provisions of section 11 and
12 exceeds the maximum amount which is not chargeable to income-tax and
hence the accounts of the trust have to be audited. Since it is audited the "due
date" for filing the return of income is 30th September, 2019.
(vii) In the case of working partner of a firm whose accounts are liable for audit under
section 44AB, the return of income of the working partner could be filed up to the
"due date" as is applicable for the firm. Thus the "due date" is 30th September, 2019.
(viii) As the assessee wants to declare income which is less than 50% of the gross receipt
from profession, his books of account have to be audited under section 44AB and
thus the "due date" for filing the return of income is 30th September, 2019.
(b) Computation of Net worth of Unit X
` in lakhs
Book value of non-depreciable asset
Land - ignoring the revaluation amount 50

Other assets 650
Depreciable assets - as per WDV 200
900
Less: Liabilities of Unit X 300

Net worth of Unit X 600
Computation of Capital gain on slump sale of Unit X
Sale consideration 1,100

Less: Net worth 600
Long-term capital gain arising on slump sale 500
5. In the light of decided case laws, answer the following [Your answer should be under the
following heads: (i) Issue involved (ii) Brief discussion on provisions applicable to the issue
(iii) Analysis of the issue involved and (iv) Conclusion (Citation of the case law is NOT
required)]: 4x4=16
(a) Mr. Dhanapal, a resident individual, sold a house plot purchased 48 months back for `
70 lakhs and invested the net sale proceeds in purchase of a residential house within
6 months from the date of sale. He does not own any other residential house. The new
house, however, is in the name of his wife. The Assessing Officer refuses to grant
exemption under section 54F on the ground that the new residential house is not in the
name of the assessee.
Is the rejection justified?
(b) ―Ghosh Group of Educational Institutions‖, running three famous colleges in Kolkata,
claimed exemptions under section 10(23C). In all these three colleges, there is a net
surplus after meeting all its expenses. The Assessing Officer (AO) rejected the claim
for exemption on the ground that the presence of net surplus leads to the inference
that the assessee-institution does not exist solely for educational purposes.
Is the rejection of the AO justified in law?
(c) Anustup Chandra Textiles Ltd., had borrowed a sum of ` 2 crores from a bank during
the period when its business was being set up. From the surplus funds, it made short-
term deposits and earned interest of ` 3 lakhs. The assessee claimed that it was not a
revenue receipt but a capital receipt, since the interest was earned prior to
commencement of business and in any case, the interest received would be offset by
the interest paid on the loan borrowed. The Assessing officer negative the claim of the
assessee.
Is the AO justified in his action?
(d) Vishal Hotels Ltd., runs a famous restaurant. Customers frequenting the same, add tips
to be given to the servers in the food bill while making the payment. The tips so
collected by the hotel is pooled and distributed to all the employees. The Assessing
Officer of the TDS Ward has issued a notice stating that the assessee should deduct
tax at source from the tips distributed to the employees, since the same is nothing but
payment of salaries. Assessee seeks your advice.
Answer:
5.(a) Exemption u/s 54F:
Issue involved:
The issue under consideration in this case is whether exemption under section 54F can be
denied to the assessee, if the net sale proceeds of a long term capital asset are invested
in a new residential house within the stipulated time limit but the said house is purchased
in the name of his wife and not in his name.
Section 54F requires purchase or construction of a residential property within the

specified period. It does not require purchase of new residential house property in the
name of the assessee himself. It only requires the assessee to purchase or construct a
residential house within the stipulated time limit.
Analysis of the given issue:
In this case, Mr. Dhanapal had not purchased the new house in the name of a stranger
or somebody who is unconnected with him, but had purchased it in the name of his wife.
The entire investment for purchase of new residential house had come out of the sale
proceeds of the plot belonging to Mr. Ankit and there was no contribution from his wife.
Therefore, having regard to the rule of purposive construction and the object of
enactment of section 54F, Mr. Dhanapal is entitled to claim exemption u/s 54F in respect
of utilization ofsale proceeds of plot of land for investment in residential house property in
the name of his wife.
Conclusion:
As a consequence, the action taken by the Assessing Officer in rejecting the claim for
deduction under section 54F in the hands of Ankit due to the reason that he had
invested the sale proceeds in purchasing a new residential house in the name of his wife
rather than in his name, is not valid.
Reference may be made to the decision in CIT v. Kamal Wahal (2013) 351 ITR4.
(b) Exemption u/s 10(23C):
Issue involved:
The issue under consideration in this case is whether the AO is justified in rejecting the
claim for exemption u/s 10(23C), on the ground that the assessee-institution does not
exist solely for educational purposes.
Section 10(23C)(iiiad) postulates three requirements, namely,
(i)the education institution must exist solely for educational purposes;
(ii)it should not be for purposes of profit; and
(iii)the aggregate annual receipts of such institution should not exceed the amount as
may be prescribed.
Analysis of the issue:
The following tests would apply for determining whether an educational institution exists
solely for education purposes and not for purposes of profit:
(i) Where an educational institution carries on the activity of education primarily for
educating persons, the fact that it makes a surplus does not lead to the
conclusion that it ceases to exist solely for educational purposes and becomes
an institution for the purpose of making profit;
(ii) The predominant object test must be applied - the purpose of education should
not be submerged by a profit making motive;
(iii) A distinction must be drawn between the making of surplus and an institution
being carried on “for profit”. Merely because imparting of education results in
making a profit, it cannot be inferred that it becomes an activity for profit;
(iv) If after meeting expenditure, surplus arises incidentally from the activity carried
on by the educational institution, it will not cease to be one existing solely for
educational purposes.
The ultimate test is whether on an overall view of the matter in the concerned
assessment year, the object is to make profit as opposed to educating persons.
Conclusion:
Therefore, the action of the Assessing Officer, rejecting the claim for exemption u/s
10(23C) not valid.
Reference may be made to the decision of the Apex Court in Queen‟s Educational
Society v. CIT (2015) 372 ITR 699 (SC).
(c) Taxability of interest from deposits made out of borrowed funds:
Issue involved:
The issue under consideration is whether the interest income of ` 2 lakhs on short-term fixed
deposits made out of the unspent amount of term loan disbursed to BSL Ltd., would be a
capital receipt not chargeable to tax or a revenue receipt chargeable to tax.
Interest which is chargeable to tax under the Income-tax Act, 1961 would be assessable
under the head “Income from Other Sources”,
(i) if such income is not exempt, and
(ii) is not chargeable to tax under any other head including “Profits and gains of
business or profession.
Interest earned by the assessee is clearly its income and unless it can be shown that there is
exemption under any provision of the Act, like section 10, such income will be taxable.
The fact that the source of income was borrowed money does not detract anything from
the revenue character of the receipt.
The interest payable on funds borrowed for the business prior to commencement of such
business can be capitalized. However, such interest payable cannot be adjusted against
interest received on investment of surplus funds assessable under section 56 under the
head “Income from Other Sources”.
In this case, since the assessee had deposited the amount of surplus funds available with it
prior to commencement of business with the bank solely for the purpose of earning
interest, such interest, in the absence of specific exemption in respect thereof, is
chargeable to tax under the head “Income from Other Sources”.
Conclusion:
Accordingly, the action of the AO is legally valid/ justified.
Reference may be made to the decision of the Allahabad High Court in PC1T vs. Sangam
Power Generation Co. Ltd.
(d) TDS from tips collected by employer from customers:

Issue involved:
The issue under consideration in this case is whether “tips” received by the hotel-company
from its customers and distributed to the employees fell within the meaning of “Salaries” to
attract tax deduction at source under section 192.
Section 192(1) requires any person responsible for paying any income chargeable under
the head “Salaries” to deduct tax at source at the time of payment. If an employee
receives income chargeable under a head other than “Salaries”, section 192 does not get
attracted at all.

 In respect of tips collected by the company from the customers and distributed
to the employees, the person responsible for paying the employee is not the
employer at all, but a third person, namely the customer.
 There is no vested right in the employee to claim any amount of tip from his
employer. Tips are purely voluntary amounts that may ormay not be paid by
customers for services rendered to them.
 As income from tips would be chargeable in the hands of the employees as

“Income from Other Sources”, on account of such tips being received from
customers and not from the employer, section 192 would not get attracted at all.
 Tips are received by the employer in a fiduciary capacity as trustee to their

employees for service rendered to the customer. There is, therefore, no reference
to the contract of employment when these amounts are paid by the employer to
the employee. Due to this reason the tips received by the employees could not
be regarded as profits in lieu of salary.
 The payments of collected tips included and paid by way of a credit card by a
customer, would not be payments made “by or on behalf of” an employer. The
contract of employment not being the proximate cause for the receipt of tips by
the employee from a customer, such payments would be outside the scope of
sections 15 and 17, and hence section 192 would not get attracted.
 Hence, such payments would not fall within the meaning and scope of the
income chargeable to tax under the “Salaries”.
Conclusion:
Hence, the Assessing Officer is not correct in concluding that “tips” received by the hotel-
company from its customers and distributed to the employees fell within the meaning of
“Salaries” to attract tax deduction at source under section 192.
Reference may he made to the decision of the Apex Court in ITC Ltd. v. CIT (TDS) (2016)
384 ITR 14.
6. (a) Vishnu Polymers Ltd., is an Indian company having transactions which are subject to
transfer pricing regulations. In June, 2018, the assessments for assessment years 2017-
18 and 2018-19 were concluded after the due process under law:
In both the years, in respect of the transactions with its associated enterprises, the ALP
had been determined in Euro. For the assessment year 2017-18, the primary
adjustment, as translated into INR was ` 90 lakhs (for transactions with N Inc.,
Singapore) and for the AY 2018-19, the same being ` 2.4 crores (for transactions with PK
Inc., Melbourne). The assessment order was passed on 12.06.2018. The assessee is
inclined to accept the same and not prefer any appeal.
You are required to answer the following in the light of above:
(i) How will the quantum of primary adjustment be treated in the books of the
assessee vis-a-vis secondary adjustment? How will the aforesaid completed
assessments impact the assessee?
(ii) What steps are to be taken to prevent the secondary adjustment? Will there be
any secondary adjustment in the hands of the assessee if the required steps are
not taken? You are required to outline the concept involved. 8
(b) Ramesh (age 61) an individual resident in India furnishes you particulars of income for
the previous year 2018-19. He earned income in country M and India has not entered
into double taxation avoidance agreement with that country.
Income from house property in country M ` 2,50,000
Business income in India ` 8,00,000
Dividend from company in country M ` 1,00,000
Royalty income country M (see note below) ` 4,00,000
Business income in country M ` 2,00,000
Income from house property in India ` 5,00,000
Donation to Prime Minister‘s National Relief Fund ` 50,000
Incurred medical expenses for his mother aged 85 ` 60,000
Rate of tax in country M (no basic exemption limit) 20%
Note : Ramesh disputed royalty income in country M but paid the tax on
that income in June, 2019 after the appeal was decided by the
appellate authority. The royalty income is charged to tax at
concessional rate of 15% in country M.
8
Answer:
6.(a) Secondary adjustment:
(i) Where a primary adjustment has been made by the AO, the same impacts the
assessee, inter alia, when
 The same relates to an assessment year after 2016-17.
 The quantum of primary adjustment (PA) made in each year is above ` 1

crore.
 The same is accepted by the assessee.
In such a situation, the same will be treated as loan or advance given by the
assessee to the associated enterprise (AE).
In the given case, since the quantum of PA made in the AY 2017-18 is below ` 1
crore, the same is to be ignored for secondary adjustment (SA) purposes. Only the
PA made in AY 2018-19 will have to be considered.
(ii) If the SA is to be avoided, then
 The AE should repatriate the funds into India in foreign exchange
 within 90 days from the date of order.
If the same is not done, then interest will be deemed to accrue on such advance
at the prescribed rate.
Interest would be calculated on such advance at the rate of six month LIBOR as on 30 th
September + 3%, since the international transaction is denominated in Euro.
(b) Computation of Total Income of Ramesh for the Asst. Year 2019-20
Income from house property - in country M 2,50,000
Income from house property - in India 5,00,000
Income from business - in India 8,00,000
Income from business - in country M 2,00,000
Dividend income - country M 1,00,000
Royalty income in country M 4,00,000
Less: Deduction U/s80D in respect of medical expenditure, for 50,000

mother being very senior citizen ` 60,000 but limited to
Deduction U/s80G in respect of donation paid Prime Minister‟s 50,000
National Relief Fund ` 50,000 @ 100%
1,00,000
21,50,000
Tax thereon 4,55,000
Add: Cess @ 4% 18,200
4,73,200
Less: Rebate U/s.91 1,70,000
Tax payable 3,03,200
In Round Figures 3,03,200
Average rate of income-tax in India ` 4,73,200×100/21,50,000 22%
Doubly tax income in country M
Royalty income ` 4,00,000 × 15% `60,000
Other income ` 5,50,000 × 20% `1,10,000

(`2 ,50,000+`2,00,000+`1,00,000)
`1,70,000
Average rate of tax = ` 1,70,000×100/9,50,000 17.89%
Rebate U/s 91 @ 17.89% on ` 9,50,000 1,70,000
7. (a) A Co. Ltd. is an Indian company at Pune. It provides software development service to
various customers and also to its associated enterprise B Co. Ltd. of Mumbai. It billed `
2crores for the software development services rendered to B Co. Ltd. during the year
2018-19. The total costs (direct and indirect) incurred for executing the work was ` 175
lakhs. In the case of unrelated parties for similar services A Co. Ltd. earned a gross
profit of 50% on costs.
The following distinguishing features are observed between the transaction with the
related party (i.e.) B Co. Ltd. and other unrelated parties:
(i) B Co. Ltd. provided technology support to A Co. Ltd. in the software development
project assigned by it. In the case of unrelated parties the value of technology
support expenditure for similar project would be ` 17,50,000.
(ii) A Co. Ltd. gave discount of 10% to B Co. Ltd. and this benefit is not given to outside
customers.
(iii) A Co. Ltd. carried out marketing functions in respect of transaction with B Co. Ltd.
and incurred ` 13,12,500. This marketing function is not normally provided by A Co.
Ltd. to outside parties.
(iv) A Co. Ltd. provided extended credit period and the cost of credit period is
estimated at 2.5% of its cost. This extended credit period is given only because B
Co. Ltd. is its associated enterprise.
State the most appropriate method to be adopted for determination of ALP and
compute the arm‘s length gross profit mark up and how much of income has to be
increased or decreased in the hands of A Co. Ltd. for the transactions carried out for B
Co. Ltd. 8
(b) State whether the following transaction attract transfer pricing regulations: 2x4=8
(i) Bear Ltd., Delhi has 12 directors of which 7 directors are appointed by Lion Trade
SA of France along with its subsidiaries located in US and Europe.
(ii) DEF LLP, United Kingdom holds 28% voting power in PQR Ltd., Kolkata from
01.04.2019 though there were transactions exceeding ` 5 crores between them in
the previous year 2018-19.
(iii) Dizzy Ltd., Chennai exported semi-finished goods to its subsidiary company Tom
Co. Ltd. of Colombo. The subsidiary Tom Co. Ltd. completed the processing and
after packing them dispatched goods back to Dizzy Ltd. During the financial year
2018-19, the total value of goods dispatched by Dizzy Ltd. to Tom Co. Ltd. was `3
crores and processing charges paid was `50 lakhs.
(iv) Karun (HUF) consists of Shir. Karun, two sons and a daughter. It is carrying on
business at Kanpur. Both the sons are in USA owning share capital exceeding 50%
in 2 companies. The HUF purchased raw materials in India and exported the same
to both the companies in USA of sons of Karun.
Answer:
7.(a) Most appropriate method:
In this case the activity involved is provision of service to an associated enterprise. The
direct and indirect costs of production incurred by the enterprise vis a vis the price
charged for similar services to other outsiders is compared. The cost plus method is the
most appropriate method for determination of ALP.
The amount of normal gross profit mark-up to costs arising from rendering services to
unrelated enterprise in relation to a transaction is determined and the said normal gross
profit mark-up is appropriately adjusted to take into account the functional and other
differences if any between the international transaction and other transactions.
Determination of ALP gross profit mark-up
Gross profit mark-up in the case of unrelated parties 50%

Less: Technology support from related party (which is not availed from 10%
unrelated parties) (`17.50 lakhs × 100 /` 175 lakhs)
40%
Add:
Discount to related party which is not given to unrelated parties 10%

Cost of credit to B Co Ltd 2.5%
Marketing functions performed by A Co Ltd. for B Co Ltd.

`13,12,500 × 100 / `175 lakhs = 7.5%
Arm‟s length gross profit mark-up 60%
` in lakhs
Determination of arm‟s length price:
Direct and indirect cost incurred by A Co Ltd. 175.00

Arm‟s length gross profit mark-up 105.00
Arm‟s length income 280.00
Less: Actual price charged 200.00
Income to be increased in the hands of A Co Ltd. 80.00
(b)
(i) As per section 92A(2)(e) where more than half of the board of directors of the
governing board of one enterprise is appointed by the other enterprise, they are
deemed to be associated enterprises.
Since 7 out of 12 directors of Bear Ltd are appointed by Lion Trade SA of France,
the relationship between Bear Ltd and Lion Trade SA, France, is that of associated
enterprise and the transfer pricing regulations will apply.
(ii) When one enterprise holds directly or indirectly not less than 26% of the voting
power in the other enterprise, they are said to be associated enterprises.
However, in this case only from 01.04.2019 such relationship comes into existence.
For the financial year 2018-19 that relationship does not exist and hence the
transfer pricing regulations will not apply.
(iii) Transfer pricing regulations are attracted when there is an international transaction
between the assessee and an associated enterprise. Here the Indian company
and its subsidiary are associated enterprises.
In this case the processing charges paid is an international transaction and

therefore the transfer pricing regulation will apply.
(iv) Where one enterprise is controlled by HUF and another enterprise is controlled by
members of HUF or relatives of members from a company formed outside India,
the relationship of associated enterprise is established between them.
In this case, the HUF is purchasing raw materials and exporting to USA to the
companies were the coparceners of the HUF have more than 50% shareholding.
Therefore, the relationship of associated enterprise is established in this case.
8. Write short notes: 4x4=16
(a) Significance of the PE in transactions governed by the Double Taxation Avoidance

Agreements (DTAA)
(b) Tax Residency Certificate (TRC)
(c) Binding effect of Advance Pricing Agreement (APA)
(d) Scope and disclosure requirement for Revenue Recognition — ICDS IV
Answer:
(a) Significance of the PE in transactions governed by the Double Taxation Avoidance
Agreements (DTAA):
Double Taxation Avoidance Agreements (DTAAs) generally contain an Article providing

that business income is taxable in the country of residence, unless the enterprise has a
permanent establishment (PE) in the country of source, and such income can be
attributed to the PE.
Section 92F (iiia) defines the term “Permanent Establishment” to include a fixed place of
business through which the business of an enterprise is wholly or partly carried on. PE
includes, a wide variety of arrangements shall also include: 1. a place of management;
2. a branch; 3. an office; 4. a factory; 5. a workshop; 6. a mine, an oil or gas well, a quarry
or any other place of extraction of natural resources; 7. a warehouse in relation to a
person providing storage facilities for others; 8. a farm, plantation or other place where
agricultural, pastoral, forestry or plantation activities are carried on; 9. premises used as a
sales outlet or for receiving or soliciting orders; 10. an installation or structure, or plant or
equipment, used for the exploration for or exploitation of natural resources; 11. a building
site or construction, installation or assembly project, or supervisory activities in connection
with such a site or project, where that site or project exists or those activities are carried on
(whether separately or together with other sites, projects or activities) for more than
specified months (generally 6 months).
An enterprise shall not be deemed to have a permanent establishment merely by reason

of : 1. the use of facilities solely for the purpose of storage or display of goods or
merchandise belonging to the enterprise; 2. the maintenance of a stock of goods or
merchandise belonging to the enterprise solely for the purpose of storage or display ; 3.
the maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of processing by another enterprise; 4. the maintenance of a fixed place
of business solely for the purpose of purchasing goods or merchandise, or of collecting
information, for the enterprise; or 5. the maintenance of a fixed place of business solely for
the purpose of advertising, for the supply of information, for scientific research, or for
similar activities which have a preparatory or auxiliary character, for the enterprise.
Section 9(1) (i) requires existence of business connection for deeming business income to
accrue or arise in India. DTAAs however provide that business income is taxable only if
there is a PE in India. It is well established that the beneficial provisions of the DTAA will
prevail over the provisions of the Act. Therefore, in cases where transactions are covered
by DTAAs, where there is no PE in India, business income cannot be brought to tax due to
existence of business connection as per section 9(1)(i).
(b) Tax Residency Certificate (TRC):
If a tax treaty (double taxation avoidance agreement under section 90 & 90A), is
applicable to a nonresident then the provisions of the Indian Income-tax Act, 1961 are
applicable only to the extent they are more beneficial to it. With effect from 1 st April 2013,
treaty benefits shall be allowed to the non-residents subject to furnishing of a valid tax
residency certificate (TRC) and information in Form 10F. The certificate referred to in
section 90(4) and section 90A(4) to be obtained by an assessee, not being a resident in
India, from the Government of the country or the specified territory and shall contain the
following particulars, namely:-
(i) Name of the assessee,
(ii) Status (individual, company, firm etc.) of the assessee,
(iii) Nationality (in case of individual),
(iv) Country or specified territory of incorporation or registration (in case of others);
(v) Assessee‟s tax identification number in the country or specified territory of residence
or in case no such number, then, a unique number on the basis of which the person is
identified by the Government of the country or the specified territory,
(vi) Residential status for the purposes of tax,
(vii) Period for which the certificate is applicable, and
(viii) Address of the assessee in the country or specified territory outside India, during the
period for which the certificate is applicable.
However the above information in Form No.10F is not required if such report is available in
TRC. TRC containing above facts shall be duly verified by the Government of the country
or the specified territory of which the assessee, claims to be a resident for the purposes of
tax.
The assessee shall also keep and maintain such documents that are necessary to
substantiate the information provided in Form No. 10F and an income tax authority may
require the assessee to provide the said documents in relation to a claim by the said
assessee of any relief under a double taxation avoidance agreement.
(c) Binding effect of Advance Pricing Agreement (APA):
Advance Pricing Agreement (APA) includes determination of Arm‟s Length Price (ALP) or
specifies the manner in which ALP is to be determined. ALP can be determined as per
any method prescribed under section 92C for determination of ALP along with necessary
adjustments and variations. [Section 92CC(2)]. APA is binding on the person entering into
international transaction (taxpayer) and the Commissioner of Income Tax including
income-tax authorities‟ subordinate to him. APA is binding only in respect of transaction in
relation to which the APA has been entered into, not binding if there is change in law or
facts having a bearing on such APA. [Section 92CC(6)]. CBDT is empowered to declare
an APA as void ab initio if APA has been obtained by fraud or misrepresentation of facts.
[Section 92CC(7)]. Also as provided in the law, noncompliance with terms of APA
including „critical assumptions‟ may lead to cancellation of the APA. Transactions
covered under APA are not subject to regular audit by Transfer Pricing Officer (i.e. TP
assessment proceedings). APA is valid for a period specified in APA, but not to exceed 5
consecutive financial years [Section 92CC(4)], APA can be extended/renewed for further
period of up to 5 years. Application for APA can be withdrawn any time before finalisation
of terms of APA
(d) Scope and disclosure requirement for Revenue Recognition - ICDS IV:
The Standard deals with the bases for recognition of revenue arising in the course of the
ordinary activities of a person from:
(1) the sale of goods;

(2) the rendering of services;
(3) the use by others of the person‟s resources yielding interest, royalties or dividends.
 Revenue is the gross inflow of cash, receivables or other consideration arising in
the course of the ordinary activities of a person from the sale of goods, from the
rendering of services, or from the use by others of the person‟s resources yielding
interest, royalties or dividends. In an agency relationship, the revenue is the
amount of commission and not the gross inflow of cash, receivables or other
consideration.
 The Standard does not deal with the aspects of revenue recognition which are
dealt with by other ICDS
Disclosure: Following disclosures shall be made in respect of revenue recognition:
(1) in a transaction involving sale of goods, total amount not recognised as revenue
during the previous year due to lack of reasonably certainty of its ultimate collection
along with nature of uncertainty;
(2) the amount of revenue from service transactions recognised as revenue during the
previous year;
(3) the method used to determine the stage of completion of service transactions in
progress; and
(4) for service transactions in progress at the end of previous year:
i. amount of costs incurred and recognised profits (less recognised losses) up to end
of previous year;
ii. the amount of advances received; and
iii. the amount of retentions.
SUGGESTED ANSWERS_SYL2016_DECEMBER2019_PAPER 16
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

DECEMBER - 2019

All questions relate to Income Tax Assessment Year 2019 – 20, and the provisions
referred to are the Income-Tax Act, 1961, unless stated otherwise.
five questions out of Question Nos. 2 to 8.
Section – A
(i) Martin (age 62) resident in India received interest on fixed deposit with SBI of Rs.
45,000 for the year ended 31.03.2019. He does not have PAN. At what rate the bank
must deduct tax at source?
(A) Nil
(B) 10%
(C) 20%
(D) 30%
(ii) Damage (P) Ltd. filed an application in March, 2019 for corporate insolvency
resolution process, which was admitted by the adjudicating authority under
Insolvency and Bankruptcy Code, 2016. The company has two full-time directors and
a managing director. Who must sign the return of income of the company for the
assessment year 2019-20?
(A) Any one of the full-time directors.
(B) The professional appointed by the said adjudicating authority.
(C) Liquidator of the company
(D) Managing director
(iii) Shri Rajiv paid Rs. 1,20,000 by cheque on 05.01.2019 towards medical insurance
premium for his parents who are senior citizens and not dependent on him. The
premium was to provide health insurance cover for 3 years. How much is deductible
under section 80D for the assessment year 2019 – 20?
(A) Nil
(B) Rs. 25,000
(C) Rs. 40,000
(D) Rs. 50,000
(iv) Mahasakthi Sugars Co-operative Society is engaged in manufacture of jiggery from

sugarcane cultivated by its members. What is the ‘due date’ for filing the return of
income for the assessment year 2019-20 in order to be eligible for deduction under
section 80-P?
(A) Due date specified in section 139(1)
(B) No specific date
(C) 31st March, 2020
(D) 31st December, 2019
(v) During the course of survey in the premises of Jagan & Co. on 10.01.2019, stocks of
goods purchased for Rs. 10 lakhs were found to be not recorded in the books of
account. The firm has brought forward loss of Rs. 5 lakhs and incurred business loss of
Rs. 2 lakhs for the year ended 31.03.2019 without considering the unaccounted stock.
The tax liability of the firm including the said unaccounted purchase would be
_________ (including surcharge and cess).
(A) Rs. 3,12,000
(B) Rs. 7,80,000
(C) Nil
(D) Rs. 93,600
(vi) ABC Ltd. declared interim dividend in August, 2018 of Rs. 100 lakhs. The amount
payable by way of dividend distribution tax would be
(A) Rs. 31,20,000
(B) Rs. 26,00,000
(C) Rs. 17,47,200
(D) Rs. 20,55,600
(vii)A certificate issued by a registered valuer contained incorrect information. The CIT
(Appeals) while giving appellate order can
(A) Impose penalty of Rs. 1 lakh on registered valuer.
(B) Not impose penalty on registered valuer
(C) Impose penalty of Rs. 10,000 on registered valuer
(D) Direct registered valuer to rectify the error.
(viii)Tripti Charitable Trust registered under Section 12AA paid rent for premises at Rs.
30,000 per month by cash. It also did not deduct tax on salary paid to its manager
amounting to Rs. 4,80,000 for the previous year 2018-19. The total income of the
assessee would be increased by ___________ because of the above said transactions.
(A) Rs. 3,60,000

(B) Rs. 5,04,000
(C) Rs. 8,40,000
(D) Rs. 2,52,000
(ix) X Co. Ltd. paid interest to its holding company Y Inc. of USA at 15% amounting to Rs.
200 lakhs. The total interest paid by X Co. Ltd. for the previous year 2018-19 was Rs.
500 lakhs. In determining arm’s length price interest paid to Y Inc. was added back
to the extent of Rs. 100 lakhs in the hands of X Co. Ltd. The EBITDA of X Co. Ltd. is Rs.
700 lakhs for the year ended 31st March, 2019. The amount of interest liable for
disallowance in the hands of X Co. Ltd. would be _____________.
(A) Rs. 500 lakhs
(B) Rs. 300 lakhs
(C) Rs. 190 lakhs
(D) Nil
(x) Madan Traders Ltd. Jaipur received Rs. 200 by way of dividend declared by Botham
Co. Ltd. of UK in January, 2019. Madam, Traders Ltd. has 26% shareholding in Botham
Co. Ltd. The tax liability of Madam Traders Ltd. on the dividend income would be
(A) Nil
(B) Rs. 62.4 lakhs
(C) Rs. 34.944 lakhs
(D) Rs. 43.0976 lakhs
Answer:
1. (i) (A) NIL
Brief answer: Since interest on SB and / or fixed deposit below Rs. 50,000 is not
chargeable to tax in the case of senior citizens because of section 80TTB, no tax is
deductible at source by the payer regardless of whether the recipient senior
citizen has PAN or not.
(ii) (B) The professional appointed by the said adjudicating authority

Brief answer: As per sub-clause (c) of the proviso to section 140(c), in the case of
a company which has made an application for corporate insolvency resolution
process and which has been admitted by the adjudicating authority, the return
of income must be signed by the professional who has been appointed by the
said adjudicating authority.
(iii) (C) Rs. 40,000

Brief answer: As per section 80D(4A) when payment is made in lump sum to keep
an insurance on the health of any person specified therein for more than a year,
there shall be allowed for each of the relevant previous year, a deduction equal
to the appropriate fraction of the amount. The proportionate fraction is Rs.40,000
i.e. Rs.1,20,000 /3.
(iv) (A) Due date specified in section 139(1)

Brief answer: As per section 80AC from assessment year 2018-19 any deduction
admissible under any provision of Chapter VI-A under the heading “C-
Deductions in respect of certain incomes” shall not be allowed unless the
assessee furnishes the return of income for such assessment year on or before the
due date specified in section 139(1) of the Act.
(v) (B) Rs. 7,80,000

Brief Answer: As per section 115BBE any addition under sections 68, 69, 69A, 69B
69C or section 69D is chargeable to tax @ 60% plus surcharge @ 25% and HEC @
4%. The effective rate is 78%. Further, sub-section (2) to section 115BBE says no
deduction in respect of any expenditure or allowance or set off of any loss shall
be allowed against such income.
(vi) (D) Rs. 20,55,600

Brief answer: As per section 115-O the dividend distribution tax is payable by ABC
Ltd. on grossing up of dividend paid 100/85×100 lakhs = 117.647 lakhs minus Rs.
100 lakhs = Rs. 17.647 lakhs. Add surcharge @ 12% = Rs. 2.118 lakhs. Add Health
and Education cess @ 4% on 19.765 = Rs. 0.791 lakhs. Total liability = 17.647 lakhs +
Rs. 2.118 lakhs + 0.791 lakhs = Rs. 20.556 lakhs.
(vii) (C) impose penalty of Rs. 10,000 on registered valuer.

Brief answer: As per section 271J the Assessing Officer or the CIT (Appeals) finds
that the registered valuer has furnished incorrect information in any report or
certificate, he may impose a penalty of Rs. 10,000 for each such report or
certificate.
(viii)(B) Rs. 5,04,000

Brief answer: On rent paid exceeding Rs. 10,000 in contravention of section
40A(3) the entire expenditure so incurred will not be treated as application.
Similarly, salary paid to manager of the trust Rs. 4,80,000 without tax deduction at
source under section 192 would attract 30% disallowance. Thus rent Rs. 3,60,000
and salary Rs. 1,44,000 will not be treated as application of income by the trust.
Thus the total income of the assessee would get enhanced by Rs. 5,04,000 for the
above said transaction.
(ix) (D) Nil

Brief answer: Total interest paid Rs.500 lakhs including interest of Rs.200 lakhs paid
to associated enterprise. The EBITDA of the company is Rs.700 lakhs. 30% thereon
being Rs.210 lakhs. As the interest paid to associated enterprise is less than 30% of
EBITDA, no interest is liable for disallowance. The correction option is (D).
(x) (C) Rs. 34.944 lakhs

Brief answer: In the case of an Indian company having income by way of
dividend declared, distributed or paid by a specified foreign company, it is
chargeable to tax at 15% plus surcharge @ 12% and cess @ 4%. The condition is
that the Indian company must have 26% or more in normal value of the equity
share capital of the foreign company. Since Madam Traders Ltd has 26%
shareholding in Botham Co Ltd., it is eligible to pay concessional rate of tax.
Section – B
2. (a) Vittal & Co. is a partnership firm deriving income from an industrial undertaking whose
income is eligible for deduction u/s 80-IA (8th year). During the year ended 31-03-
2019, the firm derived an income of Rs. 5,00,000 from the industrial undertaking. The
firm omitted to file the return of income on the ground that its total income being nil,
no tax was payable by it.
The assessment was later completed on the basis of AMT provisions u/s 115JC, the
income from the industrial undertaking being taken as Rs. 5,00,000.
Discuss whether any penalty leviable in this regard, and if so, specify the quantum.
Will your answer remain the same if the assessable entity is an AOP instead of a firm?
The AOP is one wherein the members and their shares are determinate and known. 8
(b) State whether “business connection” is established as envisaged by section 9 of the

Income – tax Act, 1961, in the under-mentioned situations:
(i) Jupiter Pty Ltd., London (JPL), a non-resident company, has set up a liaison office
at Kolkata, with the permission of the RBI, Indian customers, who are briefed of the
products of JPL by the liaison office, interact directly with JPL for placing and
processing of their orders. 2
(ii) Madan & Co. (MC), is acting on behalf of Nelson Inc., Sydney, a non-resident
company. MC can accept the order, negotiate the price and coordinate with MC
for delivery of product to the Indian clients. MC is paid commission in this regard. 2
(c) On 20th Feb., 2019, Vaamana Textiles Pvt. Ltd., has given a trade advance of Rs. 50
lakhs to Ms. Poorvisha, a shareholder holding 30% of the equity shares and voting
power in the company. On this date, the company has credit balance of Rs. 35 lakhs
in the profit and loss account.
Ascertain the quantum of deemed dividend which is assessable in the hands of Ms.
Poorvisha. 4
Answer:
2. (a) Levy of penalty u/s 270A

Penalty becomes leviable u/s 270A
It is a case of under-reporting of income.
Under-reporting is the amount of deemed total income assessed as per the

provisions of section 115JC. In this case, it is Rs. 5,00,000.
Since there is no basic exemption limit, the whole of Rs. 5,00,000 will be taken as
under reported income.
Taxable on the same is 31.2% of Rs. 5,00,000 i.e., Rs. 1,56,000.
Penalty leviable for under-reporting of income is 50% of above Rs. 78,000.
When the assessee is an AOP

If the assessee were an AOP, the answer will be different.
Basic exemption limit of Rs. 2,50,000 has to be reduced to arrive at the amount of
under reported income.
Under-reported income will be Rs. 5,00,000 – 2,50,000 = Rs. 2,50,000.

Tax on the same will be 10.4% of 2,50,000 = Rs. 26,000.
Penalty u/s 270A is 50% of above i.e., Rs. 13,000.
(b) Business connection

(i) When a liaison Office is maintained solely for the purpose of carrying out activities
which are preparatory or auxiliary in character, and such activities are approved
by the Reserve Bank of India, then, no business connection is established.
Indian customers, who are briefed of the products of JPL by the liaison office,
interact directly with JPL for placing and processing of their orders. The liaison
office does not procure orders or process them. Hence there is no business
connection as envisaged by section 9.
(ii) ‘Business connection’ shall include any business activity carried out through a
person acting on behalf of the non-resident. For a business connection to be
established, the person acting on behalf of the non-resident –
➢ must have an authority which is habitually exercised in India to conclude
contracts on behalf the non-resident or;
➢ in a case where he has no such authority, but habitually maintains in India a
stock of goods or merchandise from which he regularly delivers goods or
merchandise on behalf of the non-resident, or
➢ habitually secures orders in India, mainly or wholly for the non-resident.
Here, MC can accept the order, negotiate the price and coordinate with MC for
delivery of product to the India clients. Hence there exists a business connection
in this situation.
(c) Deemed dividend

Section 2(22)(e) provides that “dividend” includes any payment by a company in
which public are not substantially interested, of any sum by way of
• advance or loan
• to a shareholder who is the beneficial owner of shares holding not less than 10%
of the voting power,
or to any concern in which such shareholder is a member or a partner and in which

he has a substantial interest or any payment by any such company on behalf, or for
the individual benefit, or any such shareholder, to the extent to which the company
in either case possesses accumulated profits.
Some Courts in the recent past has held that trade advances in the nature of
commercial transactions would not fall within the ambit of the provisions of section
2(22)(e).
In view of the above, the CBDT has, vide circular 19/2017, dated 12.06.2017, clarified
that it is a settled position that trade advances, which are in the nature of
commercial transactions, would not fall within the ambit of the word ‘advance’ in
section 2(22) (e) and therefore, the same would not to be treated as deemed
dividend.
Hence, in the given situation there will not be any amount which is assessable as
deemed dividend.
3. Barun Co. Ltd. is engaged in the business of manufacture of chemicals since June, 2005.
The Statement of Profit and Loss for the year ended 31.03.2019 shows a Net Profit of Rs.
35,60,000 and aggregate turnover which never exceeded Rs. 25 crores. The following
additional information is provided:
(a) Depreciation debited in the books Rs. 19,40,000 (it includes depreciation on revalued
plant and machinery of Rs. 3,00,000). Amount of depreciation deductible under
Income-tax Rules Rs. 13,15,000.
(b) Interest payable to financial institutions Rs. 5,20,000 debited in the books but Rs.
3,90,000 was actually paid during the previous year and up to the date of filing the
return of income under section 139(1).
(c) Provision for doubtful debts Rs. 8 lakhs being 5% on debtors debited to Statement of
Profit and Loss.
(d) Expenditure towards issue of bonus shares Rs. 2 lakhs and alteration of memorandum
of association for increasing the authorized capital Rs. 1 lakh. Both have been
debited in the books as expenditure.
(e) Purchase of agricultural produce being raw material for manufacture by making
cash payment on 15.08.2018 Rs. 60,000 and on 26.01.2019 Rs. 40,000. Also, cash
payments of Rs. 50,000 made for purchases of the previous year 2017-2018 on
03.05.2018.
(f) Contract payments made during the year Rs. 5,10,000 to ABC Ltd., Chennai. Tax was
not deducted at source in respect of the payments of Rs. 1,50,000.
(g) Dividend from subsidiary company credited to Statement of Profit and Loss Rs. 90,000.
(h) Provision for taxation Rs. 2 lakhs and proposed dividend Rs. 80,000 debited to
Statement of Profit and Loss.
Compute Total income and tax liability as per regular provision and under section 115JB
(MAT Provision) for the assessment year 2019-20. 16
Note: You have to deal with each and every item given above and provide brief reasons
for treatment given.
Answer:
3.
Computation of Income of Barun Co Ltd. for the Assessment Year 2019 -20
Net Profit as per Statement of Profit and Loss 35,60,000

Add:
Depreciation debited 19,40,000
Interest payable to financial institutions is disallowed to the 1,30,000
extent it is not paid up to the date of filing the return under
section 139(1)
Provision for doubtful debts 8,00,000
Expenditure towards issue of bonus shares is allowed as Nil
there is no fresh inflow of funds or increase in capital
employed. [CIT v. General Insurance Corpn. (2006) 286 ITR
232 (SC)]
Expenditure towards increasing the authorized capital is a 1,00,000
capital expenditure to be disallowed (Punjab State
Industrial Development Corpn Ltd. v. CIT (1997) 225 ITR 792
(SC)].
Purchase of agricultural produce on independence day Nil
and Republic Day are allowable and no disallowance
under section 40A(3)
Cash payment made for purchases/expenditures claimed 50,000
in the earlier year is liable for disallowance under section
40A(3A)
Contract payments without deduction of tax at source 45,000
liable for disallowance @ 30% of Rs. 1,50,.000
Provision for taxation and proposed dividend debited to 2,80,000
Statement of Profit and Loss –added back.
69,05,000
Less:
Depreciation allowable as per Income tax rules 13,15,000
Dividend from subsidiary company credited to profit and 90,000
loss account – to be considered under the head ‘other
sources’ and hence deducted now.
It is exempt under section 10(34)
14,05,000
Tax thereon @ 25% + 4% HEC 14,30,000
Computation of Book Profit of Barun Co. Ltd. u/s 115 JB for the Assessment Year 2019 – 20
Net Profit as per Statement of Profit and Loss 35,60,000

Add:
Depreciation debited in the books to the extent it is attributable to 3,00,000
revalued assets is liable for disallowance
Interest payable to financial institutions is not to be adjusted while Nil
computing book profit.
Provision for doubtful debts liable for add back under section 115JB 8,00,000
Expenditure towards issue of bonus shares is not liable for any adjustment Nil
under section 115JB
Expenditure towards increasing the authorized capital though a capital Nil
expenditure is not liable for any adjustment under section 115 JB.
Purchase of agricultural produce on independence day and Republic Nil
Day – on adjustment under section 115 JB
Cash payment made for purchases / expenditures claimed in the earlier Nil
year – not liable for any adjustment under section 115JB
Contract payments without deduction of tax at source liable for Nil
disallowance @ 30% of Rs. 1,50,000 under section 40(a)(ia) but no
adjustment under section 115JB
Provision for taxation and proposed dividend debited to Statement of 2,80,000
Profit and Loss – added back.
49,40,000
Less:
Dividend from subsidiary company credited to profit and loss account is 90,000
exempt under section 10(34) and hence to be excluded while
computing book profit under section 115JB
Book Profit under section 115JB 48,50,000
Tax thereon @ 18.5% 8,97,250
Add: Health and Education cess @ 4% 35,890
9,33,140
4. (a) Vishwa & Co., a partnership firm has entered a net profit of Rs. 6.2 lakhs after debiting
the following items:
(Rs. in lakhs)
(i) Depreciation as per books for the current year 2
(ii) Interest to partners at 15% 9
(iii) Remuneration to working partners 7
Additional information:
(i) Depreciation for the current year as per Income-tax Rules, 1962 4
(ii) Unabsorbed depreciation of AY 2018-19 pertaining to a business 3
which was discontinued
(iii) Brought forward business loss of AY 2018-19 5
(iv) Remuneration as per partnership deed to working Partners 8
(v) Interest to partners as per partnership deed 15%
You are required to compute the total income for the firm, when the firm files its return
of income on 30.07.2019.
Assuming that a best judgment assessment under section 144 is made, what will be
the total income assessed? 8
(b) Padmaja Textiles Ltd., (PTL) has two separate divisions J and K. Division K was stated
on 14.05.2010. The summarized financial position of the company as on 1 st October,
2018 was as under:
(Rs. in lakhs)
Share capital 1,200
Reserves and surplus 500
Loan creditors:
Division J 400
Division K 300
Total 2,400
Represented by
Fixed assets:
Division J 800
Division K
Goodwill 30
Vacant Land (Purchased on 02.03.2011) 170
Plant and Machinery (WDV) 400
Current assets:
Division J 550
Division K 450
Total 2,400
On 01.10.2018, Division K was acquired by Virat Kohli Textile Pvt. Ltd., in a slump sale,
the entire sale consideration of Rs. 310 lakhs being paid through RTGS.
The following additional information are available relating to the fixed assets of
Division K:
(i) All the plant and machinery were acquired 11 months back.
(ii) The WDV of the plant and machinery of division K as per the Income-tax Act,
1961 was Rs. 350 lakhs.
(iii) Apart from these, there are plant used in scientific research for which deduction
had been availed u/s 35AD in the assessment year 2015-16. The fair market value
of these items of plant is Rs. 12 lakhs.
Cost inflation index for FY 2010-11 is 167 and for FY 2018-19 is 280.
You are required to ascertain the capital gain, if any, arising from the slump sale. 8
Answer:
4. (a)
Computation of total income of Vishwa & Co., for the AY 2019-20
Particulars Amount (Rs.)
Net profit before remuneration to working partners 6,20,000
Add: Depreciation as per books 2,00,000
Remuneration as per books 7,00,000
Adjustment for interest [Interest is allowable at 12% maximum same 1,80,000
debited at 15% in books, hence difference is added back i.e., 9 – 7.2L]
Less: Depreciation as per sec 32 7,00,000
Unabsorbed depreciation of AY 2018 – 19 has to be added to current
depreciation, as per the provisions of section 32(2).
Book profits as per section 40(b) 10,00,000
Less: Remuneration to working partners: Ceiling (First 3 lakhs 90% and 6,90,000
60% of balance). This is within the limit given in the partnership deed,
hence allowable.
Business income before considering set off 3,10,000
Less: Brought forward business loss 5,00,000
Business income / Total income (Loss) (1,90,000)
When assessment is made u/s 144
Interest and remuneration to partners will not be allowed while making the
assessment.
Total income in case of best judgment assessment

Net profit before remuneration to working partners 6,20,000
Add: Depreciation as per books 2,00,000
Remuneration as per books 7,00,000
Interest to members debited 9,00,000
Less: Depreciation as per sec 32 7,00,000
Unabsorbed depreciation of AY 2018-19 has to be added to current
depreciation, as per the provisions of section 32(2).
Business income before b/wd losses 17,20,000
Less: Brought forward business loss 5,00,000
Business income/Total income 12,20,000
(b) Computation of capital gains arising from slump sale

Particulars (Rs. in lakhs)
Sale consideration 310
Less: Net worth [See working below] 700
Long-term capital loss [Division K was stated on 14-05-2010] 390
Working Note: Computation of net worth

Particulars (Rs. in lakhs)
Goodwill (at book value) 30
Land (at book value) [Indexation benefit not available] 170
Plant & machinery (at WDV) 350
Plant & machinery used in special business covered by sec 35AD Nil
[As per section 50B, the value of such plant for which deduction
u/s 35AD had been availed in nil]
Current assets 450
Total value of assets of Division K 1,000
Less: Creditors 300
Net worth 700
5. In the light of decided case laws, answer any four of the following:
[Your answer should be under the following heads: (i) Issue involved (ii) Brief discussion
on provisions applicable to the issue (iii) Analysis of the issue involved, and (iv)
Conclusion [Citation of the case law is NOT required]: 4×4=16
(a) Sagoserve Cooperative Society was a cooperative society deriving income of Rs. 2
crore, for which deduction was allowed under section 80P(2)(d). The total income of
the assessee was Rs. 3 crore. The Assessing Officer disallowed 40% of interest
expenditure, invoking the provisions of section 14A. According to the AO, out of the
aggregate income of Rs. 5 crore, Rs. 2 crore did not form part of the same.
Is the disallowance made by the AO justified?
(b) Lavanya Syndicates Pvt. Ltd., owns several house properties, let out on commercial
basis to various kinds of people like business houses, corporate entities, etc. One of
the objectives of the company is to own and derive income from letting out various
kinds of immovable property. The rental income derived was offered by the
company as its business income. Various deductions for earning such income was
claimed, as also depreciation on the buildings owned by the company.
The Assessing Officer treated the rental income as income from house property and
granted deduction only u/s 24.
Discuss whether the treatment of the impugned income made by the company is
correct.
(c) Mr. Pandurang sold a residential house property and invested whole of the long-term
capital gain for purchasing of residential flat. The possession was not handed over by
the builder to the assessee even after 3 years, even though the entire sale
consideration had been paid.
The Assessing Officer refused to grant exemption u/s 54 on the ground that the
prescribed condition for purchase of a residential house had not been complied
with, in as much as the possession had not been handed over.
Judge the correctness of the action of the Assessing Officer.
(d) Bluesky Airlines, the assessee – company was operating an airlines in India. Payment
of Rs. 34 lakhs was made during the year to the Airport Authority of India. The
assessee deducted tax at source at 2% u/s 194-C. The AO contended that the same
was for parking charges and being payment made for use of land, section 194-I will
apply.
Is the contention of the Assessing Officer correct in law?
(e) The assessee was dealing in Indian Made Foreign Liquor (IMFL). It was purchasing
IMFL in wholesale from the State Govt., and selling it for higher price in the market.
The Department recovered documents during survey which showed that the
assessee had sold IMFL at price higher than what had been sold. Addition was made
u/s 68 for suppressed sales. The assessee objected to the same.
Is the objection sustainable?
Answer:
5. (a) Applicability of Section 14A
Issue involved
The issue under consideration in this case is whether section 14A can be invoked to
disallow expenditure relating to income covered by deduction under Chapter VIA.
Section 14A enjoins that no deduction shall be allowed in respect of expenditure
relating to income which does not form part of the total income of the assessee.
Analysis of the given issue

In the given situation the income in question was not covered by any exemption
under any of the clause of section 10.
This was an income which formed part of the gross total income of the assessee, for
which deduction was availed u/s 80P(2)(d).
Section 14A is applicable only in respect of expenditure relating to income which is
exempt under section 10 and not where the impugned income is one for which
deduction is available under Chapter VIA.
Conclusion
The action of the Assessing officer invoking the provisions of section 14A in the given
situation is incorrect.
Reference may be made to the decision in CIT vs Kribhco 349 ITR 18 (Del)
(b) Business income or income from house property
Issue involved
The issue under consideration whether the income derived by the company by
letting out the properties owned by it is assessable as business income or as income
from house property.
Where the income in question is one earned as a mere owner of the property, it will
be income from house property covered by section 22. If the income is one derived
from the business of the company, which included letting out the properties owned.
It would be business income covered by section 28, for which various deduction
sunder sections 29 to 44 will be available.
Analysis
Where there is a letting out of premises and collection of rents the assessment on
property basis may be correct but not so, where the letting or sub-letting is part of a
trading operation. The directing line is difficult to find; but in the case of a company
with its professed objects and the manner of its activities and the nature of its
dealings with its property, it is possible to say on which side the operations fall and to
what head the income is to be assigned.
In the given case, the objects of the company include carrying of business of letting
out properties. The income has not been earned as mere owner of the let out
properties.
Conclusion
The contention of the assessee-company is hence correct.
Reference may be made to the decisions of the Apex Court the case of Chennai
Properties and Investments Ltd. v. CIT [2015] 373 ITR 673 (SC), reiterated by the Apex
Court in Rayala Corporation (P) Ltd. v. ACIT (2016) 72 taxmann. Com 149 (SC)
(c) Exemption under section 54
Issue involved
The issue involved is whether the exemption u/s 54 can be denied to the assessee on
the ground that the possession of the new residential flat had not been handed over
to him by the builder.
Exemption will be available under section 54, where the long-term capital gain
derived by a resident individual/HUF is invested, inter alia, in purchase of another
residential house within a period of 2 years from the date of transfer.

In the given case the assessee had paid the entire sale consideration to the builder
for purchase of the new residential house/flat. Thus he had complied with the
required condition stipulated u/s 54 for grant of exemption.
There is no provision which prohibits exemption u/s 54 where the possession of the flat
is not handed over to the assessee.
Conclusion:
The Assessing Officer is not justified in denying exemption u/s 54 to the assessee.
Reference may be made to the decision of the Karnataka High Court in CIT vs
Sakuntala Devi 389 ITR 366 (Kar).
(d) TDS u/s 194-C or 194-I?
Issue involved
The issue involved is whether in respect of the payments made by the assessee
(operating its airlines) to the AAI, tax deducted u/s 194-C or u/s 194-I?
As per section 194-C, where any payment is made by a company to another
company for contractual services, tax has to be deducted at source at 2% of the
payments.
As per section 194-I, in simple terms, where the payment is made for lease of land,
tax has to be deducted under that section at the applicable rate, where such
payment exceeds Rs. 1.8 lakhs per annum.

The payment made by the assessee – airlines was not just for use of land alone, but
for number of services like parking space, aero bridge, customer support services for
passengers, etc. It was for a bundle of contractual services and not merely for use of
the land for landing or parking.
Section 194-I can have applicable only where the payment is made, inter alia, for
lease of land/building and not where variety of services are provided to the
assessee.
Conclusion
As a result, section 194C will govern the issue and not section 194-I. The contention of
the AO is incorrect.
Reference may be made to the decision of the Apex Court in Japan Airlines Co. Ltd.
vs. CIT (2015) 60 taxmann. Com 71 (SC).
(e) Unexplained cash credit
Issue involved
The issue involved is whether the addition u/s 68 is justified in law.
Section 68 enjoins that where any sum is found credited in the books of an
assessment maintained for any previous year, and the assessee offers no explanation
about the nature and source thereof or the explanation offered by him is not, in the
opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to
income-tax as the income of the assessee of that previous year.

During survey it was found that the assessee – had sold ‘IMFL’ in excess of price
shown in books of account and return. The Assessing Officer on basis of documents
recovered made addition of income of the assessee on account of suppressed
sales.
There was no restriction with respect to price for which liquor had to be sold by a
person holding licence to run bars under the Aabkari Act. Since, the price was
variable and sale suppression detected during survey was actual price for which
liquor was sold, the addition made on account of sale suppression was to be
sustained.
Conclusion
The assessee’s contention is therefore incorrect and is not sustainable.
Reference may be made to the decision of the Kerala High Court in CIT v. Archana
Trading Co. [2018] 257 Taxman 386 Ker).
6. (a) Bharat Cellphones Ltd. (BCL) of Mumbai and Japan Mobiles Ltd. (JML) of Tokyo are
associated enterprises. BCL imported 10,000 mobile handsets from JML for Rs. 15,000
per handset which are sold to unrelated parties in India for Rs. 20,000 per handset.
BCL also imported similar mobile sets from Europe Ltd. (EL) of London which was sold
with a gross profit margin of 25% on cost. JML offered quantity discount @ Rs. 2,000
per unit and whereas EL offered discount @ Rs. 800 per unit as quantity discount. The
freight and customs duty paid for imports from EL had cost BCL Rs. 1,500 per unit. In
respect of purchases from EL, the expenditure towards freight and customs duty was
Rs. 500 per unit.
State the most appropriate method applicable in this case and determine the arm’s
length price and amount of increase in total income of BCL. 8
(b) Compute the interest income to be disallowed under section 94B in the following
cases: 5
Particulars Case I Case II Case III
Rs. in lakhs
Net Profit after deduction of the following items: 1,000 1,000 1,000
Interest to SBI 70 50 200
Interest to associated enterprise 200 110 320
Interest to unrelated parties 500 190 300
Depreciation 90 80 110
Provision for taxation 340 170 70
Proposed dividend 300 150 100
(c) State briefly whether the following actions would lead to establishment of PE in India: 3
(i) A foreign company having a warehouse for storage of goods procured from
suppliers in India for the purpose for export to various countries.
(ii) Display of goods by a reputed car manufacturer in a trade fair at Delhi for the
purpose of booking orders and supplying directly to the customers in India.
(iii) Extracting oil in a river bed by a foreign company Elegant Inc. by entering into
contract with a public sector undertaking in India.
Answer:
6. (a)
Computation of arm’s length price of BCL for the Assessment Year 2019-20
Since BCL is engaged in purchase of mobile handsets from associated enterprise

and sale of those handsets in India without any value addition, resale price method
is the most appropriate method for computation of arm’s length price.
Resale price of goods purchased from associated enterprise JML 20,000
Less: Adjustment for differences
Normal gross profit margin @ 20% of sale price (25% on cost) 4,000
Incremental quantity discount by JML (Rs. 2,000 – Rs. 800) 1,200
Difference in purchase related expenses (Rs. 1,500 – Rs. 500) 1,000 6,200
Arm’s length price 13,800
Computation of Increase in total income of BCL
Price at which actually bought from JML 15,000

Less: Arm’s length price per unit under resale price method 13,800
Decrease in purchase price per unit 1,200
Number of units purchased from JML 10,000
Increase in total income Rs. 1,200 × 10,000 120 lakhs
(b) Computation of interest liable to be disallowed under section 94B
Particulars Case I Case II Case III

Rs.in lakhs
Net Profit after deduction of the 1,000 1,000 1,000
following items:
Add:
Interest to SBI 70 50 200
Interest to associated enterprise 200 110 320
Interest to unrelated parties 500 190 300
Depreciation 90 80 110
Provision for taxation 340 170 70
Proposed dividend 300 150 100
EBITDA 2,500 1,750 2,100
Less:
Maximum amount of interest
deductible under section 94B @ 30%
of EBITDA or the actual interest paid
whichever is less
30% of EBITDA 750 525 630
Actual amount of interest paid to AE 200 110 320
Disallowance u/s 94B Nil Nil Nil
(c) Taxability of certain income in India

(i) A foreign company maintaining a warehouse solely for the purpose of storage
of goods shall not be deemed to have a permanent establishment in India.
Thus the activity will not lead to taxation of income in India.
(ii) Display of goods belonging to the enterprise in a trade fair in Delhi will not lead
to establishment of PE in India. The display of goods in trade fair cannot lead to
taxation of income in India for the supply of goods made subsequently.
(iii) Extracting oil or gas in India will lead to establishment of PE in India. The
extraction of oil in accordance with an agreement with PSU is liable to tax in
India.
7. (a) Mr. Rupesh is a resident and ordinary resident has furnished following particulars of
income earned during the previous year relevant to the assessment year 2019-20:
In Rs.
(i) Income from agriculture in Pakistan, received there but latter on Rs. 3,41,000
86,000 is remitted to India.
(ii) Income from property in USA received outside India (out of this Rs. 3,40,000
92,000 is used in Canada for meeting education expenses of his
son and Rs. 2,48,000 is latter remitted to India.
(iii) Income from business in Iran which is controlled from New Delhi (Rs. 4,05,000
70,000 is received in India)
(iv) Dividend paid by Indian Company on May 10, 2018 but received 1,95,800
outside India
(v) Profits from a business in New Delhi and managed from outside 92,000
India (60% of profit is received outside India)
(vi) Profits on sale of a building in India but received in Nepal 8,74,000
(vii) Pension from a former employer in India, received in Iran 2,55,000
(viii) Gift in foreign currency from a friend received in India on 80,000
September 6, 2018.
Find out gross total income for the assessment year 2019 – 20. 8
(b) Mr. Ron, a nonresident, is engaged in business of shipping and operating its ships in
Indian ports during the previous year ending on March 31, 2019 had collected freight
Rs. 100 lakhs (collected in US dollars) for the cargo booked for Paradeep Port from
London and Rs. 45 lakhs for shipping goods from Mumbai. Besides above demurrages
Rs. 20 lakhs and handling charges Rs. 10 lakhs also collected. The expenses of
operating its fleets during the year for Indian ports were Rs. 110 lakhs (out of which two
lakhs paid in cash). He has brought forward loss of Rs. 2 lakhs from trading business in
India which is discontinued during the year 2017-18. He has opted for payment of tax
under section 44B (presumptive scheme).
Compute taxable income and explain the basis taken for computation of such
income. 8
Answer:
7. (a)
Computation of gross total income of Mr. Rupesh, a resident and ordinary resident of
India for the AY 2019-20
In Rs.
Income accrued and received outside India – Income from agriculture 3,41,000
in Pakistan even if only Rs. 86,000 has been received.
Income from property in USA received outside India: Income received 3,40,000
outside India (even if Rs. 92,000 spent in Canada the entire amount is
taxable in India)
Income from business in Iran which is controlled from New Delhi: 4,05,000
Taxable on receipt basis – Rs. 70,000 + Balance of Rs. 3,35,000 is also
taxable as the assesse is resident
Dividend paid by India Company on May 10, 2018 but received ---
outside India: Income deemed to accrue or arise in India is exempt
from tax
Profits from a business in New Delhi and managed from outside India 92,000
(60% of profit is received outside India): total amount is taxable as
accrued outside India
Profits on sale of a building in India but received in Nepal: 8,74,000
Income deemed to accrue and arise in India and taxable in India
Pension from a former employer in India, received in Iran: Income 2,15,000
deemed to accrue and arise in India. Taxable after standard
deduction of Rs. 2,15,000 (Rs. 2,55,000 – Rs. 40,000)
Gift in foreign currency from a friend received in India on September 6, 80,000
2018 is taxable an income from other sources and taxable
(b)
Computation of Total Income Mr. Ron, a non-resident, for
AY 2019-20 under section 44B.
Rs. in lakhs
Freight collected for cargo booked for paradeep port from London 100.00
Freight collected for shipping goods from Mumbai 45.00
Demurrages and handling charges 30.00
Total receipt 175.00
Income from shipping business (7.5% of the amount received including 13.125
demurrages and handling charges is deemed to be taxable income
under section 44B) – Note – 1
Add: Disallowances of expenses under section 43A(3) – not applicable – ---
refer Note – 1
Total Income from business 13.125
Less: Brought forward business loss 2.00
Net Income 11.125
Note: 1: Section 44B overrides section 28 to 43A. it should be noted that accordingly
deduction under this provisions are not applicable. So expenses are not deducted.
However other provisions those relating to carry forward and set off of losses will be
applicable. Hence, carry forward of Loss of Rs. 2 lakhs is deducted to arrive the
taxable income.
8. Write Short Notes on any Four: 4x4=16
(a) Capitalisation of Borrowing Costs under ICDS - IX

(b) Consequences of Impermissible Avoidance Arrangement (section 98)
(c) Assessment procedure under Black Money and Imposition of Tax Act.
(d) Secondary adjustments in books of accounts under section 92CE in certain cases.
(e) Filing of documents along with settlement petition before Settlement Commission.
Answer:
8. (a) Capitalisation of Borrowing Costs under ICDS-IX
ICDS-IX provides for capitalisation of borrowing cost which are as follows.
Eligible for Capitalisation:
Specific Borrowing: The extent to which funds are borrowed specifically for the
purposes of acquisition, construction or production of a qualifying asset, the amount
of borrowing costs to be capitalised on that asset shall be the actual borrowing costs
incurred during the period on the funds so borrowed.
Other than specific borrowing: The amount of borrowing costs to be capitalised shall
be computed in accordance with this formula: A × B / C
A) Borrowing costs incurred during the previous year except on specific borrowings
B) i) the average of costs of qualifying asset as appearing in the balance sheet of

a person on the first day and the last day of the previous year
ii) in case the qualifying asset does not appear in the balance sheet of a person
on the first day, half of the cost of qualifying asset; or
iii) in case the qualifying asset does not appear in the balance sheet of a person
on the last day of the previous year, the average of the costs of qualifying
asset as appearing in the balance sheet of a person on the first day of the
previous year and on the date of put to use or completion, as the case may
be, excluding the extent to which the qualifying assets are directly funded
out of specific borrowings
C) the average of the amount of total assets as appearing in the balance sheet of a
person on the first day and the last day of the previous year, other than assets to
the extent they are directly funded out of specific borrowing Commencement of
Capitalisation
The capitalisation of borrowing costs shall commence

• In case of specific borrowing: from the date on which funds were borrowed
• In case of other borrowing: from the date on which funds were utilised
Cessation of Capitalisation: Capitalisation of borrowing costs shall cease:

• In case of asset other than inventory: When such asset is first put to use
• In case of inventory: When substantially all the activities necessary to prepare
such inventory for its intended sale are complete.
(b) Consequences of Impermissible Avoidance Arrangement (section 98)
If an arrangement is declared to be an impermissible avoidance arrangement, then,

the consequences, in relation to tax, of the arrangement, including denial of tax
benefit or a benefit under a tax treaty, shall be determined, in such manner as is
deemed appropriate in the circumstances of the case, including by way of but not
limited to the following:
(i) disregarding, combining or recharacterising any step in, or a part or whole of, the
impermissible avoidance arrangement;
(ii) treating the impermissble avoidance arrangement as if it had not been entered
into or carried out;
(iii) disregarding any accommodating party or treating any accommodating party
and any other party as one and the same person;
(iv) deeming person who are connected persons in relation to each other to be one
and the same person for the purposes of determining tax treatment of any
amount;
(v) reallocating amongst the parties to the arrangement – (a) any accrual, or
receipt, of a capital nature or revenue nature; or (b) any expenditure,
deduction, relief or rebate;
(vi) treating – (a) the place of residence of any party to the arrangement; or (b) the
situs of an asset or of a transaction, at place other than the place of residence,
location of the asset or location of the transaction as provided under the
arrangement; or
(vii) considering or looking through any arrangement by disregarding any corporate
structure.
For this purpose:

(i) any equity may be treated as debt or vice versa;
(ii) any accrual, or receipt, of a capital nature may be treated as of revenue nature
or vice versa; or
(iii) any expenditure, deduction, relief or rebate may be recharacterised
(c) Assessment procedure under Black Money and Imposition of Tax Act.
Sec. 10 and 11 of the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act provides the provisions related to assessment which are as
follows.
A. The Assessing Officer may, on receipt of an information from an income-tax

authority or any other authority under any law for the time being in force or on
coming of any information to his notice, serve on any person, a notice requiring
him, on the specified date, to produce such accounts or documents or evidence
as the Assessing Officer may require for the purposes of this Act.
• No separate return is required to be filed under this Act
• There is no time limit for issuance of the aforesaid notice. The Assessing Officer
may issue such notice any time on the basis of information.
B. The Assessing Officer may, from time to time, serve further notices requiring the
production of such other accounts or documents or evidence as he may require.
C. The Assessing Officer may make such inquiry, as he considers necessary, for the
purpose of obtaining full information in respect of undisclosed foreign income
and asset of any person for the relevant financial year or years.
D. The Assessing Officer, after considering such accounts, documents or evidence,
as he has obtained, and after taking into account any relevant material which
he has gathered and any other evidence produced by the assessee, shall by an
order in writing, assess the undisclosed foreign income and asset and determine
the sum payable by the assessee.
E. Such order shall be made within 2 years from the end of the financial year in
which the notice was issued by the Assessing Officer [Sec. 11]
F. Best Judgment Assessment: If any person fails to comply with all the terms of the
notice, the Assessing Officer shall, after taking into account all the relevant
material which he has gathered, make the assessment of undisclosed foreign
income and asset to the best of his judgment and determine the sum payable by
the assessee. [Sec.10(4)]. Before making such an assessment, an opportunity of
being heard is required to be given to the assessee.
(d) Secondary adjustments in books accounts under section 92CE in certain cases
“Secondary adjustment” means an adjustment in the books of account of the

assessee and its associated enterprise to reflect that the actual allocation of profits
between the assessee and its associated enterprise are consistent with the transfer
price determined as a result of primary adjustment, thereby removing the imbalance
between cash account and actual profit of the assessee. The provisions are
enumerated here-in-below:
• Where a primary adjustment to transfer price,:
(i) Has been made suo motu by the assessee in his return of income;
(ii) Made by the Assessing Officer has been accepted by the assessee;
(iii) Is determined by an advance pricing agreement entered into by the
assessee u/s 92CC;
(iv) Is made as per the safe harbour rules framed u/s 92CB; or
(v) Is arising as a result of resolution of an assessment by way of the mutual
agreement procedure under an agreement entered into u/s 90 or 90A for
avoidance of double taxation, - the assessee shall make a secondary
adjustment.
• Exception: Nothing contained in this section shall apply, if:

(i) the amount of primary adjustment made in any previous year does not
exceed Rs. 1 crore; and
(ii) the primary adjustment is made in respect of an assessment year
commencing on or before 01-04-2016.
• Where, as a result of primary adjustment to the transfer price, there is an increase

in the total income or reduction in the loss, as the case may be, of the assessee,
the excess money which is available with its associated enterprise, if not
repatriated to India within the time as may be prescribed, shall be deemed to be
an advance made by the assessee to such associated enterprise and the
interest on such advance, shall be computed in such manner as may be
prescribed.
➢ Excess money means the difference between the arm’s length price
determined in primary adjustment and the price at which the international
transaction has actually been undertaken;
➢ Primary adjustment to a transfer price, means the determination of transfer

price in accordance with the arm’s length principle resulting in an increase in
the total income or reduction in the loss, as the case may be, of the assesse.
(e) Filling of documents along with settlement petition before Settlement Commission.
The application in the prescribed form (Form No. 34B) to the Settlement Commission
should be accompanied by the following statements etc.
• Statement(s) containing computation of total income of the application for the
assessment year or year(s) to which the application relates.
• Copies of manufacturing and/or trading account, statement of profit and loss /
income and expenditure account/ any other similar account and balance sheet
in respect of the relevant year(s).
• In the case of proprietary business or profession copies of personal account of
proprietor in respect of the relevant year(s)
• In the case of a firm/AOP/BOI, copies of the personal accounts of the
partners/members in respect of the relevant year(s).
• In the case of a partner of a firm/member of an AOP/BOI copies of the personal
accounts of such partner/member in the firm/AOP/BOI in respect of the relevant
year(s).
• Proof of payment of Settlement Application fee of Rs. 500/-.
Seven copies of the application along with the accompaniments as mentioned

above have to be filed in the office of Settlement Commission. The application in
Form No. 34B, the verification appended thereto, he Annexure and statements and
documents enclosed therewith must be signed by the person authorised under
section 140 to sign the return of income.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)
DECEMBER – 2021
Q.1 When a company claimed bogus salary expenditure of Rs.3 lakhs in order to reduce itsincome chargeable to tax, it is called as
Ans 1. Tax planning
2. Tax management
3. Tax avoidance
4. Tax evasion
Q.2 In the case of partnership firm resident in India, the benefit of marginal relief is available in which of the following cases?
Ans 1. Total income Rs.90 lakhs
2. Total income Rs.95 lakhs
Q.3 When unit located in Special Economic Zone has profit of Rs.25 lakhs and it is in the 4th year of its existence, the quantum of
deduction allowable under section 10AA would be.
Ans 1. Rs.25 lakhs (100%)
2. Rs.12.50 lakhs (50%)
3. Rs.5 lakhs (20%)
4. Nil
Q.4 A HUF having income under the head “Profits and gains of business or profession” Rs.10 lakhs wants to pay tax under section
115BAC. Which form has to be filed to convey / intimate its option for availing the benefit of section 115BAC?
Ans 1. It is not eligible for section 115BAC.
2. Form No.3CB and Form 3CD
3. Form No.3CA and Form 3CD
4. Form No.10-IE
Q.5 A company engaged in manufacturing activity opted for section 115BAB. What is the maximum rate of depreciation applicable for
the assets owned by it?
Ans 1. 15%
2. 25%
3. 40%
4. 45%
Q.6 A co-operative society has total income of Rs.42 lakhs. It is eligible for deduction under section 80P of Rs.22 lakhs. What is its tax
liability under section 115BAD? [Ignore surcharge and HEC]
Ans 1. Rs.4,40,000
2. Rs.6,00,000
3. Rs.8,40,000
4. Rs.9,24,000
Q.7 Ram Saha Ltd is located in Assam. The unit began manufacturing activity on 01.04.2016. Its total income from business (computed)
is Rs.11,40,000. How much isthe amount eligible for deduction under Chapter VI-A if the unit is engaged in manufacture of eligible
article and is engaged in eligible business?
Ans 1. NIL
2. Rs.5,70,000
3. Rs.11,40,000
4. Rs.2,85,000
Q.8 Ramesh received Rs.22 lakhs as enhanced compensation relating to compulsory acquisition of land in urban area made in the
financial year 2018-19 as per courtdecree, how much is taxable?
Ans 1. Rs.22 lakhs
2. NIL
3. Rs.11 lakhs
4. Rs.20 lakhs
Q.9 In the case of a foreign company receiving dividend declared by an Indian company in May, 2021 at what rate the tax is deductible
at source on such dividend?
Ans 1. 5%
2. 10%
3. 15%
4. 20%
Q.10 Which of the following incomes of a registered trade union is exempt from tax?
Ans 1. Income from house property
2. Income from other sources
3. All of these
4. None of these
Q.11 When a residential house is transferred and the assessee acquires 2 residential houses it is eligible for exemption in which of the
following cases?
Ans 1. When the capital gain reinvested is more than Rs.200 lakhs
2. When the capital gain reinvested is less than Rs.200 lakhs
3. When the assessee does not own more than one residential house
4. When the assessee does not own any other residential house
Q.12 A wholly religious trust registered under section 12AA received Rs.5 lakh by way of anonymous donation. The trust spent Rs.3.50
lakhs towards renovation of temple building owned by it. How much is the tax payable by the trust in respect of the anonymous
donation?
Ans 1. NIL
2. Rs.45,000
3. Rs.1,50,000
4. Rs.60,000
Q.13 In which of the following method, multiple year data for determination of arm‟s lengthprice is not applicable?
Ans 1. Cost Plus Method
2. Resale Price Method
3. Profit Split Method
4. Comparable Uncontrolled Price Method
Q.14 Mr.X gifted his let out property fetching a monthly rent of Rs.50,000 to his married daughter on 01.10.2020. He paid Rs.1,20,000
towards municipal tax in June, 2020 relating to 5 previous years viz. previous year 2016-17 to 2020-21. How much is taxable in the
hands of Mr.X for the assessment year 2021-22?
Ans 1. Rs.1,26,000
2. Rs.1,93,200
3. Rs.4,03,200
4. Rs.3,36,000
Q.15 When Arvind incurred Rs.60,000 towards surgery of his parents (senior citizens) how much is eligible for deduction under section
80D? Assume they are not covered underany health insurance policy
Ans 1. Rs.25,000
2. Rs.30,000
3. Rs.50,000
4. Rs.60,000
Q.16 What is the maximum of surcharge that can be applied on individual taxpayer in respect of income by way of long-term capital
gain?
Ans 1. 10%
2. 15%
3. 25%
4. 37%
Q.17 When a company is located in International Financial Services Centre what is the rate of tax applicable on book profit under
section 115JB?
Ans 1. 18%
2. 15%
3. 9%
4. 6%
Q.18 An REIT (Real Estate Investment Trust) distributed interest of Rs.2 lakhs to the resident unit holders. At what rate tax is deductible
at source on the income sodistributed?
Ans 1. 10%
2. 20%
3. 30%
4. NIL
Q.19 A survey under section 133A was conducted in the premises of ABC & Co on 11.11.2020. Whose prior authorization must have
been obtained for conducting the survey?
Ans 1. Principal Chief Commissioner
2. Additional Commissioner
3. Joint Commissioner
4. Assistant Commissioner
Q.20 Which of the following perquisite is always a taxable perquisite?

Ans 1. Telephone provided in the residence of the employee
2. Subsidized lunch
3. Employers contribution to staff group insurance scheme
4. Reimbursement of actual sum paid to domestic servant
Q.1 When the assessee has undisclosed assets in foreign country the time limit for issue of notice for reassessment is
years from the end of the assessment year relevant to the financial year in which
such asset was owned by him.
Answer: 16 years
Q.2 A subsidiary company imports goods from parent company and redistributes to customers and unrelated parties in India
without any value addition. The most appropriate method of determining the ALP would be
Answer: resale price method
Q.3 A doctor constructs a residential building for Rs.60 lakhs by appointing a civil engineer. The percentage of tax deductible at
source on the amount paid would be %
Answer: 5
Q.4 No secondary adjustment is required if the primary adjustment does not exceedRs.
Answer: 1. Crore
Q.5 Loss from speculation business is eligible for carry forward for a maximum of
assessment years succeeding the assessment year in which the loss was incurred.
Answer: 4
Q.6 When a contract payment is made and the recipient does not furnish PAN the rate at which the tax is deductible at source would
be
Answer: 20%
Q.7 A minor child has income by way of dance performance Rs.80,000 and fixed deposit interest from SBI of Rs.30,000. The amount
of income liable for clubbing in the hands of parent would be
Answer: Rs.28,500
Q.8 Vijay is engaged in growing and manufacturing tea. He does further process to make the tea leaves into tea dust. His net
income from growing and manufacturing tea is Rs.8 lakhs. His income chargeable to tax would be
Answer: Rs.3,20,000
Q.9 Bhagwat sold a vacant site for Rs.52 lakhs to Venkat. The circle rate (guideline value) of the site was Rs.56 lakhs. The sale
consideration for the purpose of computing capital gain would be
Answer: Rs.52 lakhs
Q.10 For under-reporting of income penalty is leviable @ % of tax on the income assessed less the income originally admitted
by the assessee.
Answer: 50%
Q.11 Advance Pricing Agreement (APA) is applicable for consecutive previous years succeeding the previous year in which the
agreement is made.
Answer: 5
Q.12 Prakash is engaged in business and his income as per section 115BAC is computed at Rs.25 lakhs. He must pay alternative
minimum tax of Rs. .
Answer: Nil
Q.13 Singh Industries Ltd has opted for section 115BAA. The rate of income-tax applicable on its income is %.(Ignore Surcharge
and HEC)
Answer: 22
Q.14 When a non-resident is engaged in the business of operation of aircraft in India,

% of aggregate receipt shall be deemed to be the profits and gains of suchbusiness.
Answer: 5
Q.15 When Laxman citizen of India employed in a country where he need not pay income-tax on his income comes to India and
stays for 130 days in the previous year 2020-21. His income from property in India is Rs.20 lakhs (annually). His residential
status for the assessment year 2021-22 would be .
Answer: RNOR
Q.16 A television channel paid Rs. 5 lakhs on 10/12/2020 to a celebrity for guest appearance in a popular show. The amount of tax
deductible at source would be
Answer: 37,500 @ 7.5%
Q.17 Income-tax Officer can levy penalty without any prior approval from the superior income-tax authority when the quantum of
penalty does not exceed Rs. .
Answer: Rs.10,000
Q.18 The due date for filing quarterly return of TCS for the quarter ended 30th September would be
Answer: 15th October
Q.19 The time limit for revision under section 263 is years from the end of the financial year in which the order sought to be
revised was passed.
Answer: 2
Q.20 Interest on moneys borrowed for renovation of house property is eligible for deduction up to a maximum of Rs. .
Answer: 30,000/ Nil/No limit

Section C
(4X12 = 48 Marks)
One LAQ
6 Marks
Q.1 Ms. P is a dealer in real estate. She buys and sells immovable property like land, buildings, etc. On 30th June, 2019, she had
purchased a building for Rs. 55 lakhs.
As on 31st March 2020, the building remained unsold and the net realizable (NRV) of the building was Rs. 51.5 lakhs only.
Closing stock is valued by her at cost or NRV,whichever is lower.
On 1st April, 2020, she converted this building into capital asset, passing necessary entries in the books there for. The stamp
duty valuation as on this date was Rs 53 lakhs. The building was not suitable for her personal use and hence she sold it on
12th March, 2021 for Rs. 51 lakhs, expenses on sale being Rs 40,000.
Determine the income-tax consequences in the hands of Ms. P for the A.Y . 2021-22 relating to the above.
Answer:
As per amendment made by the Finance Act, 2018, where any business asset is converted into personal asset (capital asset),
there will be tax consequence; fair market value of the asset transferred as on the date of transfer will have to be considered
and business income calculated, as per section 28(via)
In the given situation, being a business asset, inventory on 31-3- 2020, would have been valued at cost or NRV whichever is
lower (as given in the problem), i.e. for Rs 51.5 lakhs. Thus, the opening value as on 1-4-2020 as per books is Rs 51.5 lakhs.
As per section 28(via), the fair market value of the asset transferred, determined in the prescribed manner has to be
determined and adopted for ascertaining the business income. As per the relevant Rule, the FMV is the value adopted for
stamp valuation purposes, i.e. 53 lakhs.
Therefore, the difference between 53 L and 51.5 L i.e. Rs 1.5 lakhs will be treated as business income for the AY 2020-21.
For purposes of capital gain, the FMV as on 1-4-2020 so adopted, will be the cost of acquisition. The date of conversion will be
treated as date of acquisition.
Consequently, when the building is sold on 12-3-2021 for Rs 51 lakhs, the expenses on sale being Rs 0.4 lakhs, there will be
short term capital loss of Rs. 53-50.6 =2.4 lakhs
6 Marks
Q.2 Keshava charitable trust was created on 10.03.2005 with the objective of helping the physically challenged people and
advancement of any other object of general public utility. The charitable trust sells art and crafts items through which it
received an income of Rs. 10,00,000. Total receipts of the trust during the previous year 2020-21 is Rs. 80,00,000. Total receipts
includes anonymous donation of Rs. 12,00,000 with no specific directions for use. It has utilized Rs. 70,00,000 for the
objectives of the trust and accumulated Rs. 10,00,000 for future use.
The accumulated funds are planned to be applied outside India. Examine the taxability of income.
Answer:
An institution having its main object as „‟ advancement of any other object of general public utility‟‟, derives income from the
activity in the nature of trade during a financial year, would retain its charitable status if the receipts from such activity does
not exceed 20% of the total receipts in that year.
As the total receipts from the business is 12.5% (10 lakhs/80 lakhs
*100) which is less than 20% of the total receipts, the status of charitable trust will not be affected.
The exemption u/s 11 or 12 shall not be applicable in respect of anonymous donation with a specific direction that the
donation shall form part of the corpus of the trust or institution, such anonymous donation would not be exempt by virtue of
sec 11(1)(d). It would be taxable at 30% as per sec 115BBC. So, an amount of Rs. 12 lakhs would be taxable at 30%.
As per sec 11, accumulation of 15% of income is permissible. For computing this 15%, voluntary contributions referred to in
the sec 12 shall be deemed to be part of income. Also, accumulation must be with the object of application of the accumulated
amount for charitable or religious purposes in India at a later date. Such facility of accumulation is not available for those
trusts whose income is to be applied outside India.
The accumulation of Rs. 10 lakhs is within the permitted limit of 15% of income but as the same is accumulated for the
objective of being applied outside India, the facility of accumulation u/s 11 is not available and would be included in the total
income.
Two LAQ
Q.1 DKC softeck is a company incorporated in UK in which 55% of shares are held by the FAM softeck which is in India. DKC
softeck has 4 branches in India. The details relating to the DKC softeck for the P.Y. 2020-21, are as under:
8 Marks
Determine the residential status of DKC Softeck for the A.Y. 2020-21 if out of 9board meetings held 6 meetings are held in India.
Answer:
The residential status of a foreign company is determined on the basis of place of effective management (POEM) of the
company.
For determining the POEM of a foreign company, the important criteria is whether the company is engaged in active business
outside India or not (ABOI).
A company shall be said to be engaged in “Active Business Outside India” (ABOI) for POEM, if the passive income is not more
than 50% of its total income; and less than 50% of its total assets are situated in India; and less than 50% of total number of
employees are situated in India or are resident in India; and the payroll expenses incurred on such employees is less than 50%
of its total payroll expenditure.
DKC softeck shall be regarded as a company engaged in active business outside India for P.Y.2020-21 for POEM purpose only
if it satisfies all the four conditions cumulatively.
Condition 1: The passive income of DKC softeck should not be more than 50% of its total income
-
Total income of DKC softeck during the P.Y. 2020-21 is Rs. 300 crores [(Rs. 90 crores +145 crores) + (45 crores + 20 crores)]
Passive income is the aggregate of, -
(i) income from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and
(ii) income by way of royalty, dividend, capital gains, interest or rental income;
Passive Income of DKC softeck is Rs. 100 crores, being sum total of:
(i) Rs. 35 crores, income from transactions where both purchases and sales are from/to associated enterprises (Rs. 15
crores in India and Rs. 20 crores in UK)
(ii) Rs. 65 crores, being interest and dividend from investment (Rs. 45 crores in India and Rs. 20 crores in UK)
Percentage of passive income to total income = Rs. 100 crore/ Rs. 300 crore x 100 = 33.33%
Since passive income of DKC softeck is 33.33%, which is not more than 50% of its total income, the first condition is satisfied.
Condition 2: DKC softeck should have less than 50% of its total assets situated in India
-
Value of total assets of DKC softeck during the P.Y. 2020-21 is Rs. 570 crores [Rs. 195 crores, in India + Rs. 375 crores, in UK]
Note:
Value of fixed assets are taken at the depreciated values and others at the book value.
Percentage of assets situated in India to total assets = Rs. 195 crores/Rs.570 crores x 100 = 34.21%
Since the value of assets of DKC softeck situated in India is less than 50% of its total assets, the second condition for ABOI
test is satisfied.
Condition 3: Less than 50% of the total number of employees of DKC softeck should be situated in India or should be resident
-
in India.
Number of employees situated in India or are resident in India is 135 [(150-30) +15]
Total number of employees of DKC softeck is 350 [ 150 + 200]
Percentage of employees situated in India or are resident in India to total number of employees is 135/350 x 100 = 38.57%
Since employees situated in India or are residents in India of DKC softeck are less than 50% of its total employees, the third
condition for ABOI test is satisfied.
Condition 4: The payroll expenses incurred on employees situated in India or resident in India should be less than 50% of its
-
total payroll expenditure.
Payroll expenses on employees employed in and resident of India = (35/150*120) + (48/200*15) = 28+3.6= 31.6 crores Total
payroll expenses = Rs. 83 crores (Rs. 35 crores + Rs. 48 crores)
Percentage of payroll expenses of employees situated in India or are resident in India to the total payroll expenses =
31.6/83*100 = 38%
Since the payroll expenses incurred on employees situated in India or resident in India is less than 50% of its total payroll
expenditure, the fourth condition for ABOI test is also satisfied.
Thus, since DKC softeck has satisfied all the four conditions, the company would be said to be engaged in “active business
outside India” during the P.Y.2020-21.
POEM of a company engaged in active business outside India shall be presumed to be outside India, if the majority of the
board meetings are held outside India.
Though DKC softeck is engaged in active business outside India in the P.Y. 2020 -21 but the majority of its board meetings
i.e., 6 out of 9, were held in India, POEM of DKC softeck shall be in India. The assessee will be treated as resident.
4 Marks
Q.2 In M/S WER Ltd., shareholding structure is as follows: -Central government 20%
Reserve bank of India 22% Promoters of the company 58% -
Examine whether WER Ltd is a widely held government company u/s 2(18) or not?
Answer:
Company in which public are substantially interested [Sec. 2(18)]
A company is said to be a company in which the public are substantially interested (also known as widely held company):
Government company: A company owned by the Government or the Reserve Bank of India or in which not less than 40% of
the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation
owned by that bank;
In the above case, the 42% shares (which is not less than 40%) of M/S WER Ltd., is held together by the Central government
and RBI. So, M/S WER Ltd is a government company in which public are substantially interested as per sub section 18 of
section 2.
Three LAQ
6 Marks
Q.1 Arnold Ltd, Mumbai is engaged in manufacture of toys. It is the subsidiary of Tony Ltd of UK. It wanted to expand its
operations and accordingly wanted term loan of Rs.100 crores. Based on the guarantee provided by Tony Ltd, a nationalized
bank in India gave term loan of Rs 80 crores on 1.6.2020 for interest @8% per annum. Besides this, Arnold Ltd availed loan of
Rs.20 crores from a yet another bank by giving its own properties as security in December, 2020. No other borrowings were
made by Arnold Ltd except these two borrowings. The total book value of assets of Arnold Ltd was Rs. 200 crores as on
1.6.2020. The net profit of Arnold Ltd as per statement of Profit and loss for the year ended 31st March, 2021 was Rs. 3 crores.
The following amounts are debited to Statement of profit and Loss: (i) Depreciation Rs.5 crores; (ii) Interest to bank (on term
loan based on guarantee of Tony Ltd referred above) Rs. 6 crores; (iii) Interest on bank loan
(based on own security) Rs.1.60 crore; (iv) Provision for taxation Rs. 2 crores; (v) Staff salary Rs12 crores; (vi) Administrative
expenses Rs.15 crores; and (vii) Proposed dividend Rs.3 crores.
You are required to compute the quantum of interest allowable in the hands Arnold Ltd for the Assessment Year 2021-22 and
interest eligible for carry forward to subsequent assessment years.
Answer:
Interest eligible for deduction Rs. 528 lakhs.
Interest liable for disallowance and eligible for carry forward to subsequent 8 assessment years. =Rs.72 lakhs.
6 Marks
Q.2 Amar & Co is a partnership firm consisting of 4 equal partners with 25% share therein. The partnership firm has Net Profit of
Rs.11,20,000 after adjustment of thefollowing:
(i) Interest on capital to partners @ 15% as authorized by the deed Rs.4,50,000
(ii) Working partner salary to partners Rs.6,00,000 as per deed.
(iii) The firm paid rent of Rs.2,70,000 to a partner for the premises occupied by it. No tax was deducted at source on the said
payment.
(iv) The firm paid Rs.60,000 as brokerage to Ramji and tax was deducted at sourceon 31st March, 2021 and was remitted in July
2021.
(v) The firm remitted Rs.60,000 being provident fund recovered from its employees of the previous year 2020-21 on 12th May,
2021.
(vi) The firm paid Rs.5 lakhs towards patent to a non-resident in March, 2021 being the amount payable for the financial year
2020-21. The tax deducted at source at thetime of payment was remitted in June 2020.
Provident fund payable for the previous year 2019-20 Rs. 50,000 was remitted in January, 2021. This amount was shown as
liability in the balance sheet as at 31stMarch, 2020.
You are required to compute the „Book profit‟ of the firm.
Answer:
Book Profit = Rs. 19,11,000
Four LAQ
6 Marks
Q.1 Dr. Chopra is an eminent eye surgeon practicing for more than 3 decades. He was running a hospital as Proprietor. He agreed
to admit his junior Dr. Verma and formed a company by name EYE (P) Ltd. He held 51% share capital and balance 49% was
allotted to Dr. Verma on the condition that Dr. Verma would pay Rs. 25 lakhs personally as goodwill to Dr. Chopra. All the
assets of the profession held till that date was brought as capital contribution of Dr. Chopra in the books of the company. Dr.
Verma contributed Rs. 49 lakhs as his share in the share capital of the company.
Discuss the income tax consequence of conversion of proprietary concern into company and the treatment of goodwill. Would
your answer be different, if the amount of goodwill is debited in the books of proprietary concern before conversion or in the
books of the company with corresponding credit to Dr. Chopra‟s account?
Answer:
Section 47 lists instances where the transactions would not be regarded as „transfer‟.
If the transferor continues to remain as shareholder with more than 50 % share in the company, the conversion of proprietary
business in to a company would be tax neutral as Dr. Chopra holds more than 50% share in the company.
Dr. Chopra has to maintain his shareholding above 50% so as to avail the tax benefit conferred by section 47(xiv).
However, if Dr. Chopra takes Rs. 25 lakhs personally from Dr. Verma then the payment or consideration is received not from
the company and therefore the benefit of exemption cannot be denied to Dr. Chopra.
The amount received by him from Dr. Verma is chargeable to tax as income. It can be called as goodwill with cost of
acquisition being “nil” or if considered as gift from non-relative it could be taxed under section 56(2)(x). Either way it is
taxable. Since it is unrelated to conversion process it is more appropriate to tax under the head „other sources‟.
If Goodwill is created in proprietary concern books by accounting entry:
Since, the book entry made is a notional entry there would be no tax consequence. Neither Dr. Chopra nor the successor
company is liable to tax for creating goodwill account in the books of the predecessor and the successor (i.e. EYE (P) Ltd).
If the goodwill entry is passed in the books of the company:
Again, it is only a notional book entry, with no tax consequence. However, if the goodwill is paid to Dr. Chopra by the
company, then the benefit of section 47(xiv) would not be available.
6 Marks
Q.2 Mr. Jadeja (85 years old) purchased a house property of Rs. 15 lakhs in Jaipur on 24-02-2004. He received a rental income of
Rs. 30,000 p.m. from that house propertyand paid a municipal tax of Rs.20,000 and Rs. 5000 was payable as on 31-03-2021. On
03-10-2020, he sold his property for Rs. 1.5 crores and paid Rs. 3 lakhs as commission to the broker. He purchased 2 new
residential house properties worth Rs. 49 lakhs and 53 lakhs respectively in Kanpur on 31-07-2021. He received Rs. 36,000 as
interest on fixed deposits.
i. Compute total income of Mr. Jadeja for A.Y. 2020-21.
ii. Comment on whether he is required to file return of income u/s 139(1). CII: 2001-02: 100, 2003-04: 109, 2004-05: 113, 2020-21:
301
Answer:
(i) Total income = Rs. 4,69,798

According to sec 139(1), a person other than a company or a firm, if his total income or the total income of any other person
(ii)
in respect of which he is assessable under this Act [income before giving effect to sec. 54, 54B, 54D, 54EC, 54F, 54G, 54GA,
54GB and chapter VIA (i.e., deduction u/s 80C to 80U)] during the previous year exceeded the maximum amount which is not
chargeable to income tax, shall, on or before the due date, furnish a return of his income or the income of such other person
during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other
particulars as may be prescribed.
For Mr. Jadeja, the total income before giving effect to sec 54 and deduction u/s 80TTA is Rs.1,07,05,798 which exceeds
maximum amount which not chargeable to tax of Rs. 5,00,000, he is required to file return for the A.Y. 2021-22.
Five LAQ
8 Marks
Q.1 WER Ltd., is an Indian company, engaged in manufacturing robots for education purposes. In order to promote its sales outside
India also, the company has paid asum of Rs 30 lakhs to HJ Inc., a company incorporated in Colombo, during the PY 2020-21.
Examine whether there is their any obligation to withhold tax/levy in the under-mentioned situations:
(i) When HJ Inc., does not have a PE In India; [4]
(ii) When HJ Inc., has a PE In India and the impugned services are related to suchPE. [4]
...
Answer:
Payment is made by a resident carrying on business in India (DBL);
. Same is for specified services. Online advertisement is covered by the same.

Such payment exceeds Rs 1 lakh.
The payment is made to a non-resident not having a PE in India
Situation 1 Where HJ Inc., does not have PE In India

In this case, equalization levy will not ensue
However, tax has to be deducted at source u/s 195, at the rates in force, since it is taxable in the hands of HJ INC., in India.
Same will be Rs. 9,36,000.
Situation 2 Where HJ Inc., has PE In India

Equalization levy at 6 % will arise, since the payment is for specified services to the non-resident not having PE In India.
Same will be Rs. 1,80,000
4 Marks
Q.2 Is a resident permitted to seek advance ruling from the Authority for Advance Ruling (AAR)? If yes, state the situations in
which the advance ruling can be soughtfor.
Answer:
Advance Ruling by a resident assessee
A resident can make an application to the Authority for Advance Ruling to seek an advance ruling.
The same can be done in the following cases:
(i) Section 245N(b)(A)(III) enables a resident referred in section 245N(a)(iia) falling within any such class or category of
persons as may be notified by the Central Government to make an application to Authority for Advance Rulings. Such
notified resident applicant can seek ruling in relation to his tax liability arising out of a transaction which has been
undertaken or is proposed to be undertaken by such applicant, and such determination shall include the determination of
any question of law or of fact specified in the application. A resident in relation to his tax liability arising out of one or
more transactions valuing Rs.100 crore or more in total which has been undertaken or proposed to be undertaken would
be an applicant for this purpose.
(ii) Section 245N(b)(A)(IV) enables a resident falling within any such class or category of persons as may be notified by the
Central Government to make an application for Advance Ruling. Such notified resident applicant can seek ruling in
respect of issues relating to computation of total income which is pending before any income-tax authority or the
Appellate Tribunal. Such a resident applicant can make an application to seek determination or decision by the AAR on a
question of law or a question of fact relating to such computation of total income specified in the application.
“Public sector companies” as defined in section 2(36A) of the Income- tax Act, 1961 have been notified as applicant for
this purpose.
(iii) A resident can also make an application seeking advance ruling in relation to the tax liability of a non-resident arising out
of a transaction undertaken or proposed to be undertaken by him with such non-resident.
(iv) A resident can make an application seeking advance ruling on whether an arrangement proposed to be undertaken by
him is an impermissible avoidance arrangement under Chapter X-A.
Six LAQ
(4X3 = 12 Marks)
Q.1 Write short notes on Applicability of MAT to foreign companies 3 Marks
Answer:
Applicability of MAT to foreign companies:
The provision of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being
a foreign company; if. The assessee is a resident of a country or a specified territory with which India has an agreement
referred to in section 90 or the Central Government has adopted any agreement under section 90A and the assessee does not
have a permanent establishment in India in accordance with the provisions of such agreement; or The assessee is a resident
of a country with which India does not have an agreement of the nature referred above and the assessee is not required to
seek registration under any law for the time being in force relating to companies. The MAT provision is not applicable to an
assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in
section 44B or 44BB or 44BBA or 44BBB and such income has been offered to tax at the rates prescribed in those sections.
Q.2 Write short notes on Taxation of income from patent 3 Marks

Answer:
Income from Patent:
Where the total income of an eligible assessee includes any income by way of royalty in respect of a patent developed and
registered in India, tax @ 10% shall be payable on such royalty income. Eligible assessee means a person resident in India and
who is a patentee; Developed means at least 75% of the expenditure incurred in India by the eligible assessee for any
invention in respect of which patent is granted under the Patents Act, 1970.
Q.3 Write short notes on Production of additional evidence before CIT ( Appeals)
Answer:
3 Marks
Appellate authority has the power to accept additional evidence (after recording reason for its admission in writing) and may
make further enquiry at his discretion before disposing of the appeal. In the following circumstances additional evidence shall
be admitted by the Commissioner (Appeals);
(i) Where the Assessing Officer has refused to admit evidence with ought to have been admitted; or
(ii) Where appellant was prevented by sufficient cause from producing before the Assessing Officer any evidence, which is
related to any ground of appeal; or
(iii) Where the appellant was prevented by sufficient cause from producing the evidence, which he was called upon to produce by
the Assessing Officer; or
(iv) Where the Assessing Officer has made an order (appealed against) without giving sufficient opportunity to the appellant to
produce evidence relevant to any ground of appeal. Before taking into account the additional evidence filed, Commissioner
(Appeals) is to provide reasonable opportunity to the Assessing Officer for examining the additional evidence or the witness
as well as to produce evidences to rebut additional evidences filed by the taxpayer.
Q.4 Write short notes on Foreign tax credit 3 Marks

Answer:
Foreign Tax credit
An assessee being a resident shall be allowed credit for the amount of any foreign tax paid by him in a country or territory
outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to
tax or assessed to tax in India, in the manner and to the extent specified in rule 128 of the Income-tax Rules, 1962.
More than one year: In a case, where such foreign income is offered to tax is more than one year, credit of foreign tax shall be
allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India.
No credit for interest etc: The credit shall be available against the amount of tax, surcharge and cess payable under the Act but
not in respect of any sum payable by way of interest, fee or penalty.
No credit for disputed tax: No credit shall be available in respect of any amount of foreign tax or part thereof which is disputed
in any manner by the assessee. However, the credit of such disputed tax shall be allowed for the year in which such income is
offered to tax or assessed to tax in India if the assesse within 6 months from the end of the month in which the dispute is
finally settled, furnishes evidence of settlement of dispute and on evidence to the effect ha the liability for payment of such
foreign tax has been discharged by him and furnished an undertaking that no refund in respect of such amount has directly or
indirectly been claimed or shall be claimed.
Q.5 Write short notes on Liability of directors of private company in liquidation undersection 179 of the Income Tax Act.: 3 Marks
Answer:
Where any tax due from a private company -
- in respect of any income of any previous year; or
- From any other company in respect of any income of any previous year during which such other company was a private company.
Cannot be recovered, then, every person who was a director of the private company at any time during the relevant previous
year shall be jointly and severally liable for the payment of such tax.
However, no such director shall be liable if he proves that the non- recovery cannot be attributed to any gross neglect,
misfeasance or breach of duty on his part in relation to the affairs of the company.
Tax point: Tax Due includes penalty, interest or any other sum payable under the Act .
Section : D Case Study Question
3+3+3+3 = 12 Marks
Q.1 Parikh purchased a vacant land at Cuttack at a cost of Rs.90 lakhs in December 2008 and held the same as his capital asset till
30th September, 2019. He started real estate business on 1st October, 2019 and converted the said land into stock intrade of his
business on the said date, when the fair market value of the land was Rs.360 lakhs.
He constructed 30 apartments of equal size, quality and dimension and the construction was completed in December, 2020.
Cost of construction of each apartment is Rs.15 lakhs. He sold 20 apartments at Rs.35 lakhs per apartment during the period
from January, 2021 to February 2021. The remaining 10 apartments were held in stock as on 31st March, 2021. He also holds a
penthouse in Bengaluru, construction of which was completed in March, 2020, as stock-in-trade. He let out the penthouse to
Amit, a salaried individual, for Rs.60,000 per month from April, 2020 to March, 2022., who has furnished his PAN to him. Parikh
paid municipal tax of Rs.40,000 in December, 2020 relating to the year 2020-21.
He invested Rs.20 lakhs in bonds issued by National Highway Authority of India on 31st March, 2021; Rs.20 lakhs in bonds of
Rural Electrification Corporation Ltd on 31st August, 2021; Rs.10 lakhs in bonds of Rural Electrification Corporation Ltd on 30th
September, 2021 and Rs.10 lakhs in bonds of National Highway Authority of India on 31st December, 2021. Parikh is subjected
to tax audit for the previous year 2020-21.
Cost inflation indices:
F.Y.2008-09; 137; F.Y.2018-19; 280; F.Y.2019-20; 289 F.Y.2020-21; 301
Based on the above facts, you are required to answer the following:
(i) Compute income under the head “Capital Gains” in the hands of Parikh for the Assessment Year 2021-22.
(ii) Compute income under the head “Profits and gains of business or profession” in the hands of Parikh for the Assessment
Year 2021-22.
(iii) Compute income under the head “House property” in the hands of Parikh for the Assessment Year 2021-22.:
(iv) Briefly state the TDS responsibilities of the tenant Amit in respect of rent paid byhim.
Answer:
(i) Capital Gains for the AY 2021-22 = Rs. 73.4307 lakhs

(ii) Income chargeable to tax under the head Profits and gains of business or profession - AY 2021-22 = Rs. 160.00 lakhs
(iii) Income chargeable to tax under the head „house property‟ - AY 2021-22 = Rs. 4.76 lakhs
(iv) Liability to deduct TDS by tenant Amit :

 Amit has to deduct tax at source on rent paid as per section 194-IB since the rent paid exceeds Rs.50,000 per month or part of
a month.
 TDS on Rs.7,20,000 @ 5% thereon is deductible. The amount being Rs.36,000.
 It is deductible only in March, 2011 being the last month of the previous year in the financial year 2020-21.
FINAL EXAMINATION
GROUP - III
(SYLLABUS 2016)

DECEMBER - 2017

All questions relate to Assessment Year 2017 – 18 and the provisions
referred are those of the Income-tax Act, 1961.
Answer Question No. 1 which is compulsory and any five from question Nos. 2 to 8.
Section – A
(i) BG(P) Ltd. received royalty ` 10 lakhs in respect of a patent developed and
registered in India. The income-tax payable on the royalty shall be at
(A) 10%
(B) 15%
(C) 20%
(D) 30%
(ii) In the case of assessee who is covered under section 44AD the amount of tax
payable by way of advance tax shall be paid on or before
(A) 15th day of March.
(B) 31st day of March.
(C) 31st day of December.
(D) the date of filing the return of income.
(iii) When a motor car is acquired for ` 12 lakhs by Mr. Johnson on 01.11.2016 by availing
bank loan of ` 10 lakhs for such acquisition, the car dealer selling the motor car must
collect tax at source of
(A) Nil
(B) ` 10,000 @ 1% exceeding ` 2 lakhs.
(C) ` 12,000 @ 1% on the entire sale price.
(D) ` 24,000 @2% on the entire sale consideration.
(iv) When Mr. Arun (age 50) has business loss of ` 15 lakhs and unexplained cash credit
of ` 20 lakhs, the total tax liability including cess would be
(A) ` 4,37,750
(B) ` 6,18,000
(C) ` 25,750
(D) ` 1,54,500
(v) In December, 2016 Excel Ltd. and Exceed Ltd. got amalgamated to form Excellence
Ltd. The expenditure for the purpose of amalgamation was ` 10 lakhs. The amount of
amalgamation expenditure deductible for the assessment year 2017-18 would be
(A) ` 10 lakhs
(B) ` 2 lakhs (one-fifth)
(C) ` 1 lakh (one-tenth)
(D) ` 5 lakhs (one-half)
(vi) Venus Traders engaged in turmeric trade with a turnover exceeding `200 lakhs
dispatched its goods through Indian Railways. The amount of freight payable as on
31.03.2017 was ` 1,40,000. It wants to claim the freight as expenditure. To satisfy such
claim, it has to pay the freight to Indian Railways
(A) before due date specified in Section 139(1).
(B) before the end of the previous year.
(C) before the end of the assessment year.
(D) and there is no time restriction.
(vii)A capital asset being shares in a private company held for more than _______ months
shall be a long term capital asset.
(A) 12
(B) 24
(C) 36
(D) 6
(viii)When wife Laxmi being legal heir of Udayakumar received ` 10 lakhs from National
Pension System Trust referred to in Section 80CCD, the amount of receipt chargeable
to tax is
(A) ` 10 lakhs
(B) ` 4 Lakhs @ 40%
(C) Nil
(D) ` 7,50,000 @ 75%
(ix) In the case of non-government employee the monetary limit for exemption in respect
of leave salary at the time of retirement is
(A) ` 5 lakhs
(B) ` 50,000
(C) ` 3 lakhs
(D) ` 1.50 lakhs
(x) Penalty for failure to furnish statement of financial transaction is
(A) ` 5,000
(B) ` 10,000
(C) ` 200 for every day of delay
(D) ` 100 for every day of delay
Answer:
1. (i) (A) 10%

Justification for the answer: As per section 115BBF income by way of royalty in
respect of a patent developed and registered in India shall be chargeable to tax
at the rate of 10%.
(ii) (A) 15th day of March

Justification for the answer: In the case of persons admitting income under section
44AD, the entire amount of tax by way of advance tax must be paid before 15th
day of March of the previous year as per section 211(1)(b).
(iii) (C) `12,000 @ 1% on the entire sale price

Justification for the answer: As per section 206C(1F) every person being a seller who
receives any amount as consideration for sale of motor vehicle exceeding ` 10
lakhs shall collect from the buyer 1% of the sale consideration as income-tax at
the time of receipt of Such amount.
(iv) (B) `6,18,000

Justification for the answer: When an income is taxable at 30% under Section
115BBE such income shall not be reduced by way of set off of losses against any
other income or head of income. This is provided in section 115BBE(2) of the Act.
(v) (B) ` 2 lakhs (one-fifth)

Justification for the answer: As per section 35DD expenditure incurred in the case of
amalgamation is eligible for amortization over a period of 5 years in equal

installments beginning with the previous year in which the amalgamation takes
place.
(vi) (A) before due date specified in section 139(1)

Justification for the answer: Section 43B has amended by Finance Act, 2016
provides for deduction of any sum payable to Indian Railways for the use of
railway assets only if it is paid before the due date for furnishing the return
specified in section 139(1).
(vii) (B) 24
Justification for the answer: As per the third proviso to section 2(42A), shares in a
private Company shall be treated as long-term Capital asset if it is held for more
than 24 months.
[The period of holding has been reduced from 36 months to 24 months from the AY 2017-18
onwards.]
(viii) (C) NIL

Justification for the answer: As per proviso to section 80CCD(3) amount received
by the nominee legal heir on the death of the assessee shall not be deemed to
be the income of the nominee.
(ix) (C) ` 3 lakhs

Justification for the answer: As per section 10(10AA) leave salary received by a
nongovernment employee is eligible for monetary limit of exemption of ` 3 lakhs.
(x) (D) ` 100 for every day of delay

Justification for the answer: As per section 271FA for delay of every day in
statement of financial transaction, the penalty leviable is `100 for every day.
Section – B
2. (a) Ganga Ltd., is a company in which 70% of the shares are held by Himalaya Ltd.
Ganga Ltd., declared a dividend amounting to ` 40 lacs to its shareholders for the
financial year 2015-16, in its Annual General Meeting held on 19th May, 2016.
Dividend distribution tax was paid by Ganga Ltd. on 21st May, 2016. Himalaya Ltd.
declared an interim dividend amounting to ` 60 lacs on 15th June, 2016.
Compute the amount of tax on dividend payable by Himalaya Ltd. Detailed note on
the provisions involved is essential. 6
(b) Sanvitha & Co., is a partnership firm trading in fertilisers, consisting of two partners S
and V, who both have individual incomes from all the other sources (except
remuneration and interest from this firm) in excess of ` 10 lakhs.
For the year ended 31.03.2017, the turnover of the assessee is likely to be ` 90 lakhs.
The partnership deed provides for payment of remuneration to S, the working partner
at ` 6 lakhs per annum and ` 1.2 lakhs per annum to V, non-working partner. S and V
are amenable to drafting these terms differently, as per your advice.
Partners' capitals are ` 10 lakhs each and the deed authorises payment of simple
interest at 15%.
Assuming that books of account are maintained, the profits before considering
remuneration and interest on capital is ` 12.4 lakhs.
In the light of above, state
(i) Whether it will be advisable to opt for presumptive taxation u/s 44AD, if the firm
and the partners are desirous of reducing their overall tax liability (tax of firm and
the partners), or should the firm go for maintenance of accounts and audit u/s
44AB. 8
(ii) Will your answer be different, if the assessee were an LLP? 2
Answer:
2. (a) Dividend distribution tax payable by Himalaya Ltd.

As per section 115-0, dividend distribution tax at the rate of 17.304% (i.e., 15% plus
surcharge @12%, education Cess @2% and Secondary and higher education
cess@1%) is leviable on dividend declared, distributed or paid by a domestic
company. As per section 115-0(1A), a holding company receiving dividend from its
domestic subsidiary company can reduce the same from dividend declared,
distributed or paid by it.
The dividend from its domestic Subsidiary Company should be received in the same
financial year in which the holding Company declares, distributes or pays the
dividend. Further, the dividend shall not be considered for reduction more than once.
The conditions to be fulfilled for this purpose are as follows:
(1) The domestic subsidiary Company should have paid the dividend distribution tax
which is payable on such dividend;
(2) The recipient holding company should be a domestic company;
For this purpose, a holding Company is a company which holds more than 50% of the
nominal value of equity shares of another company.
Section 115-0 (1B) provides that for the purposes of determining the tax on distributed
profits payable in accordance with Section 115-0, any amount by way of dividends
referred to in section 115-0(1), as reduced by the amount referred to in section 115-
0(1A) referred to as net distributed profits, shall be increased to such amount as
would, after reduction of the tax on such increased amount at the rate specified in
section 115-0(1), be equal to the met distributed profits.
On the basis of the aforesaid provisions, dividend distribution tax payable by

Himalaya Limited shall be computed as follows:
Particulars `
Dividend distributed by Himalaya Ltd. 60.0
Less: Dividend received from subsidiary Ganga Ltd. (70% of ` 40 lacs) 28.00
Net dividend 32.00
Add. Increase for the purpose of grossing up of dividend % 32 × 100/85 = 5.65
37.65 minus 32.00
Gross dividend 37.65 % 37.65
DDT at 17.304% on above 6.52 1. 6.52
(b) (i) Firm: Whether presumptive taxation u/s 44AD is to be opted

Where books are maintained
Where the shows profits below 8% of the turnover, he/it should maintain books of
account and get the accounts audited u/s 44AB.
In case of a firm, such profits are after deduction of interest and remuneration to
partners; in other words, same cannot be deducted from the 8% amount so
calculated.
Where the books are maintained and the accounts are audited as per section
44AB, the firm will be allowed deduction of the interest and remuneration, as per
section 40(b). To the extent such payments are allowed in the hands of the firm,
the same will be included in the individual hands of the partners.
Partners are already having total income in excess of ` 10 lakhs and hence any
interest on capital and remuneration received from the firm will get taxed at
30.9%.
Particulars `
Income of the firm before interest and remuneration to partners 12,40,000
Less: interest on capital at 12% 2,40,000
Book profits of the firm as per section 40 (b) 10,00,000
Less: Remuneration to S 6,00,000
Lower of (90% of 3 lakhs and balance 60% of ` 7 lakhs) 6.9 lakhs;
Subject to Ceiling ` 6 lakhs as per partnership deed.
Note: Remuneration to non-working partners not allowable.
Total income of the firm 4,00,000
Tax rate is 30.9% for firm (` 1,23,600) as well as the incomes from firm apportioned
to partners (since the income of partners before considering any receipt from firm
already exceeds ` 10 lakhs). Hence income which will get taxed at 30.9% are 4 L+
6 (Remuneration of S) and 2.4 L (interest on capitals) 12.4L at 30.9% ` 3,83,160/-.
When the firm opts for presumptive taxation

As per section 44AD, profits of the firm will be 8% of 90 lakhs 7,20,000
This alone will get taxed at 30.9% Tax payable will be ` 2,22,480
Partnership deed should not contain any clause about payment of
remuneration or interest to partners.
By opting for presumptive tax u/s 44AD, tax saving will be (3,83,180- 1,60,680
2,22,480)
(ii) Where the assesseee is a LLP

For a LLP, there is no option to get assessed as per section 44AD.
Hence, it is bound to maintain books of account and get its accounts audited u/s
44AB.
3. (a) Mr. Manekshaw a resident sold a residential property for ` 90 lakhs to Mr. Sunderlal
on 17.08.2016. The stamp duty valuation on the date of sale was ` 105 lakhs. Earlier in
February, 2016 an agreement was entered into by the parties and Mr. Sunderlal gave
` 5 lakhs as advance by means of electronic transfer. The stamp duty valuation at
the time of agreement was ` 95 lakhs. Mr. Manekshaw paid ` 1 lakh as commission
to broker, Mr. Vaidya. The property was acquired by Mr. Manekshaw in December,
2000 for ` 20 lakhs.
In July, 2016 Mr. Manekshaw sold a vacant site to Mr. Dayal for ` 30 lakhs. The stamp
duty valuation of the site at the time of sale was ` 27 lakhs. The site was acquired in
April, 2013 for ` 7 lakhs.
Mr. Manekshaw acquired a residential building in June, 2016 for ` 120 lakhs by
availing a bank loan. Stamp duty and registration fee paid for the property amounts
to ` 6 lakhs. He repaid the bank loan out of the sale proceeds of both the assets
referred earlier. The new residential building was let out for a monthly rent of ` 1 lakh
from 01.07.2016. Interest for the year 2016-17 in respect of the property amounts to ` 6
lakhs.
Compute the total income of Mr. Manekshaw for the Assessment Year 2017-18.
Cost inflation index F.Y. 2000-01 = 406; F.Y.2013-14 = 939; F.Y. 2016-17 = 1125
9
(b) ABC Ltd. was amalgamated with XYZ Ltd. on 01.04.2016. All the conditions of Section
2(1B) were satisfied and amalgamation is within the meaning of Section 72A of
Income-tax Act. ABC Ltd. has the following carried forward losses as assessed till the
Assessment Year 2016-17.
Particulars ` (in lakhs)

Speculative loss 4
Unabsorbed depreciation 18
Unabsorbed expenditure of capital nature on scientific research 2
Business loss (Non speculative) 120
XYZ Ltd. has computed a profit of ` 140 lakhs for the financial year 2016-17 before
setting off eligible losses of ABC Ltd. but after providing depreciation at 15% per
annum on `150 lakhs, being the consideration at which plant and machinery were
transferred to XYZ Ltd. The written down value as per income tax record of ABC Ltd. as
on 31st March, 2015 was ` 100 lakhs. Above profit of XYZ Ltd. includes speculative
profit of ` 10 lakhs. Compute the total income of XYZ Ltd. for Assessment Year 2017-
18. 7
Answer:
3. (a)
Computation of Total income of Mr. Manekshaw for the Assessment Year 2017 – 18
Particulars ` ` `
Income from property
Rental income 9,00,000
Less: Deduction U/s.24 (0.30% 2,70,000
Interest on moneys borrowed 6,00,000
8,70,000
Chargeable income from property 30,000
Capital gains
Residential. Property: Deemed sale 95,00,000
consideration
The stamp duty value of the property on the
date of agreement to be adopted as the
advance in pursuance of the sale agreement
was received by means of bank draft /
cheque / electronic transfer etc.
Less: Brokerage 1,00,000
Net sale proceeds 94,00,000
Less: indexed cost of acquisition
2000,000 Χ 1125 / 406 55,41,872
Long term capital gain 38,58,128
Vacant site: Sale consideration 30,00,000
Less: Indexed Cost of acquisition
700,000 Χ 1125 /939 8,38,658
Long term capital gain 21,61342
60, 19470
Less: Exemption U/s.54
In respect of new residential building acquired
by availing bank loan within one year
preceding the date of transfer of the
residential house. The cost of acquisition is ` 120 38,58,128

lakhs but deduction is limited to the long term
capital gain from sale of residential building
being ` 38,58,128
Exemption U/s.54F
The vacant site was sold in July 2016. At the Nil
time of transfer, the assessee had 2 residential
buildings. The section requires that the
assesseee should not own more than one RHP
(other than the new RHP acquired) at the time
of transfer of the capital asset, not being RHP.
The One acquired in June 2016 and the other
one sold in August 2016 i.e. on 17.08.2016. As
the assessee at the time of sale of vacant site
owned more than one residential building, he is
not eligible for exemption under Section 54F.
38,58,128
Long term Capital gain 21,61,342
Gross Total income 21,91,342
Less: Deduction U/s. 80 C
In respect of stamp duty and registration fee 30,000
for acquisition of new residential building in
June 2016 ` 6 lakhs. But limited to `150,000.
However as the total income excluding capital
gain is only ` 30,000 the quantum of deduction
is limited to ` 30,000
Total income 2161,342
Rounded off 21,61,340
(b)
Computation of total income of XYZ Ltd. For the Assessment Year 2017 – 18
Particulars `(In lakhs )
Profits and gains of business or profession 140.00
Business loss before setting off brought forward losses
Add: Excess depreciation claimed in the scheme of

amalgamation of ABC Ltd with XYZ Ltd
Value at which assets were transferred by ABC Ltd 150.00
WDV in the books of accounts of ABC Ltd as on 1-4-2016 (100 - 15 85.00

for the year ended 31-3-2016)
Excess amount accounted 65.00
Excess depreciation claimed in computing taxable income of XYZ

9.75
Ltd (` 65 lakhs 15%) - Ref: Explanation 2 to section 43(6) - Note-1
Less: Set-off of brought forward business losses of ABC Ltd - Note 3 120.00
&4
Less: Set-off of unabsorbed depreciation under Section 32 read 18.00

with section 72A - Note 2 & 4
Less: Set -off of unabsorbed capital expenditure under section 2.00 140.00
2.00 35(1)(iv) depreciation under section 32 read with section
35(4)-Note 5
Total income 9.75
Notes:
(1) In case of amalgamation of Companies, the unabsorbed losses and unabsorbed
depreciation of amalgamating company shall be deemed to be loss or
unabsorbed depreciation of amalgamated company for the previous year in
which the amalgamation was effected. Such business loss shall be carried
forward and set off by the amalgamated Company for a period of 8 years and
unabsorbed depreciation shall be carried forward and set off by the
amalgamated company over indefinite period.
(2) As per section 72A(7), the accumulated loss for carry forwards, does not include
speculative loss. So in view of above speculative loss of ` 4 lakhs of ABC Ltd
cannot be carried forward by XYZ Ltd.
(3) Section 72(2) provides that where any allowance or part there off unabsorbed
under section 32(2) that is unabsorbed depreciation or section 35(4) that is
unabsorbed scientific research capital expenditure is to be carried forward,
effect has to be finally given to brought forward business losses under section 72.
(4) Section 35(4) provides that the provision of section 32(2) relating to unabsorbed
depreciation shall apply in relation to deduction allowable under section
35(1)...in respect of capital expenditure on scientific research related to the
business carried on by assesse. Therefore unabsorbed capital expenditure on i.
scientific research can be set off and carried forward in the same manner as
unabsorbed depreciation.
(5) The restriction contained in section 73 is-only regarding set-off of loss computed in
respect of Speculative business. Such a loss can be set off only against profits of
another speculative business and not non-speculative business. However there is
no restriction under income tax act regarding set-off of normal business losses
against profits of speculative business. Consequently, there is no loss or
allowances to be carried forward by XYZ Ltd to Financial Year 2016-17.
4. (a) Ms. Pallavi is partner in a firm with 30% share. Her capital contribution representing
her own funds in the firm on 01.04.2015 was ` 5 lakhs. She received a gift of ` 10 lakhs
from her husband on 01.07.2015 and invested ` 7 lakhs as her capital contribution in
the firm. She withdrew the entire interest on capital and working partner salary and
share of profit for the year ended 31.03.2016. Her capital on 01.04.2016 was ` 12 lakhs
in the firm. She received a gift of ` 4 lakhs from her father-in-law on 01.05.2016 and
invested the same into the firm.
For the year ended 31.03.2017, her income from the firm are as under:
Interest on capital at 12% on ` 16 lakhs for 11 months ` 1,76,000.
Interest on capital at 12% on ` 12 lakhs for 1 month = ` 12,000.
Share of profit from the firm ` 90,000.
State how Ms. Pallavi's income from the firm would be taxed for the Assessment Year
2017-18. 5
(b) Sony Textiles (P) Ltd., Surat earned a profit of ` 20 lakhs after debit/credit of the
following items to its statement of profit and loss for the year ended 31.03.2017:
Particulars `
Items debited to statement of profit and loss:
(i) Provision for the loss of subsidiary 2,00,000
(ii) Provision for doubtful debts 1,50,000
(iii) Provision for income-tax 3,00,000
(iv) Provision for Gratuity (based on actuarial valuation ` 5 lakhs) 7,00,000
(v) Depreciation 5,60,000
(vi) Interest to financial institution (unpaid till filing of return on 01.12.2017) 2,50,000
(vii) Penalty for infraction of law 60,000
Items credited to statement of profit and loss:
(i) Royalty in respect of patent (chargeable to tax under section 115BBF) 6,00,000
(ii) Share income as partner in a firm 1,20,000
(iii) Dividend from subsidiary company 75,000
(iv) Long term capital gains on sale of vacant land 4,00,000
Other information:
(i) Depreciation includes ` 1,60,000 on account of revaluation of fixed assets.
(ii) Depreciation as per Income-tax Rules is ` 2,80,000.
(iii) Income tax liability on income computed as per regular provisions for the
Assessment Year 2017-18 is ` 1,22,070 excluding tax on royalty chargeable to tax
under section 115BBF.
Compute minimum alternate tax under section 115JB of the Income-tax Act, 1961 for
Assessment Year 2017-18 and tax credit eligible for carry forward by the company
under section 115JAA. 11
Answer:
4. (a)
Taxability in the hands of Ms. Pallavi for the A.Y. 2017-18
As per section 64(1)(iv) income from assets transferred directly or indirectly to the
spouse by the individual is chargeable to tax in the hands of the individual.
However, this will not apply Where the transfer is for adequate Consideration or in
Connection with an agreement to live apart.
As per section 64(1)(vi) income from assets transferred directly or indirectly to son's
wife is chargeable to tax in the hands of the transferor. This will not apply where such
transfer is for adequate Consideration.
In this case, as per Explanation 3 income arising to Ms. Pallavi being wife 1 daughter
in law is chargeable to tax in the hands of husband 1 father in law who gave gift.
However, the computation would be in the proportion in which the capital on 1st
Day of April of the previous year consisting of her own contribution and the funds
given by husband 1 father in law.
The capital as on 01.04.2016 represents her own capital of ` 5 lakhs and gift amount
of ` 7 lakhs given by the husband. The interest on capital of ` 1,88,000 will be
apportioned in 5:7 ratio
The proportion attributable to own her capital being `1,88,000 × 5 / 12 = `78,333 is
chargeable to tax in her hands.
The proportion of capital representing the amount of gift given by husband is liable
for clubbing under section 64(1)(iv) and the amount being ` 1,88,000 × 7/12 =
`1,09,667.
The amount of gift given by father in law on 01.05.2016 and invested in the firm will
not be liable for clubbing for the income arising there from for the financial year
2016-17.
The share income being exempt under Section 10(2A) has no significance in this
regard.
(b)
Computation of Book Profit of Sony Textiles P Ltd., as per section 115 JB
Particulars ` `
Net profit 20,00,000
Add:
Provision for loss of subsidiary 2,00,000
Provision for doubtful debts 1,50,000
Provision for income tax 3,00,000
Provision for gratuity to the extent it is more than the actuarial 2,00,000
valuation is added back
Depreciation including depreciation on revaluation 5,60,000
interest unpaid to financial institution covered by section 43B Nil
not impacted by Sec. 115JB
Penalty for infraction of law covered by Explanation to section Nil
37 is also not impacted by section 115JB
34,10,000
Less:
Depreciation excluding amount on account of revaluation 4,00,000
Depreciation as per income-tax rules has no impact in Nil
Computing book profit U/s. 115JB
Share income from firm exempt u/s. 10(2A) to be excluded 1,20,000
while computing book profit
Dividend, from Indian Company exempt U/s. 10(34) to be 75,000
excluded while Computing book profit
Long term capital gain on sale of vacant land Credited to Nil
Statement of profit and loss not to be excluded while
Computing book profit
Royalty in respect of patent chargeable to tax under section 6,00,000
115BBF to be excluded while computing book profit
Book Profit u/s. 115 JB 11,95,000
22,15,000
Tax on book profit of ` 22,15000 @ 18.5% plus 3% cess i.e. 4,22,070
@19.055% =
Rounded off 4,22,070
Total tax liability
Less:
Tax liability on regular computation (1,22,070+10.3% of 6,00,000) 1,83,870
Tax credit under section 115JJAA 2,38,200
5. (a) Mr. Kamal (Age 55), a resident individual derived following incomes during the year
2016-17:
(i) Income from profession (computed) ` 5,50,000.
(ii) Rent from property located in foreign country 'X' ` 30,000 per month. Municipal
tax paid in that country ` 30,000. Tax paid in foreign country in equivalent Indian
currency is ` 33,000.
(iii) Royalty on books from foreign country 'Y' (converted into Indian currency) ` 10
lakhs. It is eligible for Chapter VI-A deduction under applicable provision. Tax
paid in respect of royalty at 20%. Expenditures incurred for earning royalty ` 2
lakhs.
(iv) Interest from savings bank account ` 15,000.
Note: There is no DTAA between India and country 'X’ /country 'Y’. Compute the total
tax liability of Mr. Kamal for the Assessment Year 2017-18. 8
(b) Enumerate the consequences that would ensue if the Assessing Officer makes
adjustment to arm's length price in international transactions of the assessee resulting
in increase in total income of the assessee. What are the remedies available to an
assessee to dispute such adjustment made? 4
(c) When is transaction treated as an international transaction as per Section 92CB? 4
Answer:
5. (a)
Computation of Total income of Mr. Kamal for the Asst. Year 2017-18
Particular ` `
income from house property:
Gross annual value 3,60,000
Less: Municipal tax 30,000
Net Annual value 3,30,000
Less: Deduction u/s. 24a 30% 99,000
231,000
income from Business or Profession
income from profession 5,50,000
Royalty from books earned from country X
` 10 lakhs less expenditure incurred ` 2 lakhs 8,00,000
13,50,000
income from Other sources:
Savings bank account interest 15,000
Gross Total income 15,96,000
Less: Deduction under Chapter VI-A
Under section 800GB up to a maximum of ` 3,00,000
Under section 80TTA in respect of SB interest 10,000
3, 10,000
Total income 12,86,000
Tax thereon 2,10800
Add: Cess @ 3% 6,324
Total Tax liability 2,17,124
Relief U.S. 91
Average rate of tax in India
` 217,124 / 12,86,000 × 100 = 16,88%
Average rate in Country X
` 33,000/ 2,31,000 × 100 = 14.29%
Average rate in country Y
` 2,00,000/ 10,00,000 × 100 = 20%
Relief in respect of property income (C) 14.29% of ` 231,000 33,010
In respect of royalty income G) 16.88% (` 8 lakhs minus ` 3 84,400
lakhs) i.e. ` 5 lakhs =
1,17,410
Tax payable 99,714
Rounded off (Section 288B) 99,710
(b) Consequences of adjustments made to ALP

In case the Assessing Officer makes adjustment to arm's length price in an
international transaction which results in increase in taxable income of the assessee,
the following consequences shall follow:-
(1) No deduction under section 10AA or Chapter Vl-A shall be allowed from the
income so increased.
(2) No corresponding adjustment would be made to the total income of the other
associated enterprise (in respect of payment made by the assessee from which
tax has been deducted or is deductible at Source) on account of increase in the
total income of the assessee on the basis of the arm's length price so
recomputed.
Remedies available to the assessee

The remedies available to the assessee to dispute such an adjustment are:-
(1) In case the assessee is an eligible assessee under section 144C, he can file his
objections to the variation made in the income within 30 days of the receipt of
draft order by him to. the Dispute Resolution Panel and Assessing Officer. Appeal
against the order of the Assessing Officer in pursuance of the directions of the
Dispute Resolution Panel can be made to the income-tax Appellate Tribunal.
(2) In any other case, he can file an appeal under section 246A to the Commissioner
(Appeals) against the order of the Assessing Officer within 30 days of the date of
service of notice of demand.
(3) The assessee can opt to file an application for revision of order of the Assessing
Officer under section 264 within one year from the date on which the order
sought to be revised is communicated, provided the time limit for appeal to the
Commissioner (Appeals) or the income-tax Appellate Tribunal has expired or the
assessee has waived the right of such an appeal. The eligibility Conditions
Stipulated in section 264 should be fulfilled.
(c) International transaction

As per section 92B, an international transaction is one which satisfies the following
Criteria -
(i) A transaction between two or more associated enterprises, either or both of
whom are non residents;
(ii) It is in the nature of purchase, sale or lease of tangible or intangible property, or
provision of services, lending/borrowing money or any other transaction having a
bearing on the profits, income, losses or assets of such enterprises;
(iii) It includes a transaction in the nature of a mutual agreement, or arrangement
between two or more associated enterprises for the allocation or apportionment
of, or any contribution to, any cost or expense incurred (or to be incurred) in
connection with a benefit, service or facility provided (to be provided) to any
one or more of such enterprises.
6. (a) Discuss how the following items which have been debited to the Statement of Profit &
Loss of Vaibhav Polymers Ltd., will be dealt with, in computing its business income:
(i) ` 20 lakhs paid to ten workmen on account of voluntary retirement of the said
employees;
(ii) ` 2 lakhs paid towards advertisement in a souvenir published by a political party,
by way of account payee cheque;
(iii) One of the units of the company was closed and retrenchment compensation of `
12 lakhs was paid to the employees in that unit;
(iv) Loss incurred by way of trading in commodity derivative transactions in
recognized stock exchange relating to its agro division ` 2,20,000. 8
(b) Discuss the validity of following statements: 2x4=8

(i) Mr. A has long term capital gain of ` 7 lakhs from sale of listed shares for the year
2016-17. He has no other income chargeable to tax. As the long term capital gain
is exempt under section 10(38), he need not file his return of income for the
Assessment Year 2017-18.
(ii) A belated return under section 139(4) cannot be furnished after the end of the
relevant assessment year.
(iii) A belated return filed under section 139(4) cannot be revised.

(iv) Where the return is filed without payment of self-assessment tax it would be
deemed as defective return.
Answer:
6. (a) Treatment of given items while computing business income of company
(i) ` 16,00,000 has to be added back.

Section 35DDA provides for amortization of expenditure incurred under voluntary
retirement scheme over a period of five years in equal installments. The company
is, therefore, entitled to deduction of ` 4,00,000, being one-fifth of the total sum of
` 20,00,000 paid to 10 workmen in connection with their voluntary retirement for
the relevant assessment year.
(ii) This amount has to be disallowed.

Section 37(2B) prohibits allowance of any expenditure incurred by an assessee on
advertisement in any souvenir, brochure, tract, pamphlet or the like published by
a political party. As such, advertisement charges paid in respect of souvenir
published by a political party is not allowable as deduction from business profits
of the company, and hence has to be added back while computing business
income.
(iii) Retrenchment compensation paid to employees at the time of closure of one of

the units of the business is allowable as deduction as per the decision of the
Allahabad High Court in CIT V. JK Cotton Spinning & Weaving Co. Ltd. (2005) 145
taxman 591.
Since the same has been debited to the Profit and Loss A/c, no further
adjustment is required.
(iv) Loss of ` 2,00,000 incurred by way of trading in commodity derivatives in

recognized stock exchange is not a speculative transaction in view of proviso to
section 43(5). Since the same is incurred in relation to the business of agro textiles,
the same is allowable as deduction while computing income from business.
Since the same has been debited to the Profit and loss A/c, no further adjustment
is required.
(b) Validity of the given statements
(i) Invalid,
As per Sixth proviso to section 139(1) if the total income of the assessee exceeds
the basic exemption limit before giving effect to exemption under section
10(38), it is mandatory for him to file the return of income.
The total income in this case is NL but if section 10(38) is not applied, it exceeds
the basic exemption limit and hence the return of income has to be furnished
on mandatory basis.
(ii) Valid
The Finance Act, 2016 has reduced the time limit for filing belated return under
section 139(4). Thus, a belated return cannot be filed after the end of the
relevant assessment year,
(iii) Invalid.
Section 139(5) now provides for revision of a return of income filed within the
time stipulated u/s 139(1), as well as a belated return filed u/s 139(4).
(iv) Invalid
Previously if a return is furnished without payment of self assessment tax, such
return Would be treated as defective return. The Finance Act, 2016 has inserted
clause (aa) in the Explanation to section 139(9) whereby a return which is
otherwise valid Would not be treated as defective merely because self
assessment tax was not paid on or before the date of furnishing the return.
7. (a) In "A Pvt. Ltd.", a closely-held company, following are some of the shareholders
holding equity shares entitled to dividend and voting power:
Mr. Janak (individual) 12%

Janak (HUF) 5%
Thilagam & Co. (LLP) 30%
B Pvt. Ltd. 25%
On 12.01.2017, the company declared dividend of ` 50 lakhs net, after paying

dividend distribution tax u/s 115-O.
During the year, Mr. Janak obtained a loan of ` 7 lakhs on 13.04.2016, which was
repaid on 30.03.2017. As on 13.04.2016, the credit balance in Profit and Loss account
of the company was ` 5 lakhs.
Janak (HUF) has received dividend of ` 8 lakhs from equity-oriented approved

mutual funds.
For investing in the company's shares, Thilagam & Co. (LLP) has borrowed some funds
on which interest of ` 2 lakhs was paid during the year ended 31.03.2017, tax being
duly deducted at source and paid to the credit of the Central Govt.
Determine the income-tax liability in respect of each of the shareholders, in respect
of the aforesaid receipts. 8
(b) Raghunath (P) Ltd. is engaged in multiple business activities. It has brought forward
business loss of Assessment Year 2010-11 of ` 15 lakhs and unabsorbed depreciation
of ` 20 lakhs. The company has 10 shareholders each having 10% of the equity share
capital of the company.
Four shareholders transferred the shares to their relatives in October, 2016.
One shareholder died in February, 2017 and yet another shareholder gifted his shares
to his son in August, 2017.
The company for the previous year 2016-17 earned Net Profit of ` 10 lakhs
(computed) as per regular provisions before set off of brought forward loss and
depreciation given above. Its book profit under section 115JB for the Assessment Year
2017-18 is ` 25 lakhs (computed).
(i) How much of accumulated loss and unabsorbed depreciation, the company
could carry forward to the subsequent assessment years?
(ii) Assume, the company converted into LLP in April, 2017. In the light of such
conversion consider the amount of accumulated loss and depreciation which it
can carry forward. Will there be any reduction of benefit on violation of any
condition? 8
Answer:
7. (a) From the assessment year 2017-18, as per section 115BBDA, where a share holder,
being an individual, HUF or a firm, being residents, receive dividends from Indian
companies on which DDT has been paid u/s 115-0) in excess of ` 10 lakhs, exemption
u/s 10(38) will be only upto ` 10 lakhs and excess amount will be charged to tax at
10% plus 3% education cess.
In this regard, the term "dividend" will have the meaning assigned in section 2(22).
However deemed dividend u/s 2(22)(e) is excluded.
For computing the tax liability u/s 115BBDA, no deduction will be allowed from the
dividend income. Thus interest on borrowings for making the investment in shares will
not be considered while computing the tax liability u/s 115BBDA.
Deemed dividend u/s 2(22)(e)

Janak (individual) holds more than 10% of the holdings in equity shares of the closely
held company and hence loan to him is covered by section 2(22)(e).
Though the loan amount is ` 7 lakhs, the deemed dividend is restricted to ` 5 lakhs,
since the credit balance in P&L a/c is ` 5 lakhs only, as on the date of loan,
Tax liability of Janak (individual) ` Lakhs

Dividend received (normal) 12% of 50 lakhs 6
Deemed dividend u/s 2(22)(e) to be included in income from other
sources
Not included for Section 115BBDA
Since normal dividend received is less than ` 10 lakhs, tax liability u/s
115BBDA is nil
Tax liability of Janak (HUF)

Dividend received (normal) at 5% of 50 lakhs 2.5
Dividend received from equity oriented mutual fund is not covered by Nil
section 115BBDA
Dividend received being less than ` 10 lakhs, section 115BBDA will not apply
Tax liability of Thilagam & Co. (LLP)

Dividend received (normal) 30% of 50 lakhs 15
Less: Exempt u/s 10(34) 10
Amount taxable u/s 115BBDA at 10.3% interest on borrowings is not 5
deductible for Section 115BBDA
Tax liability u/s 115BBDA at 10.3% 51,500
Tax liability of B Pvt. Ltd.

For the R of section 115BBDA, corporate shareholders are not covered.
Hence the dividend received will not be hit by section 115BBDA, regardless of the
quantum of dividend received.
(b)
(i) Carry forward accumulated loss and depreciation:
In the case of a Company in which public are not Substantially interested, the
unabsorbed business loss can be carried forward and set off provided there is no
change in pattern to the extent of 51%.
Change in shareholding pattern as enumerated hereunder:
4 Shareholder transferred shares on Oct, 2016 40%
1 Shareholder died on Feb,2017 10%
50%
In this case, during the previous year relevant to the assessment year 2017-18, out of
100%, 40% of the shareholders have transferred their shares. The balance 10% of the
shareholders got changed because of the reasons such as death of shareholder.
Change in shareholding due to gift of shares to son has taken place in the
subsequent year only. (August, 2017)
Therefore, the entire brought forward business loss and depreciation after set off
against the profits of the previous year 2016-17 is eligible for carry forward.
The unabsorbed business loss would be set off against the income of `10 lakhs and
the balance of unabsorbed business loss of `5 lakhs and unabsorbed depreciation
of ` 20 lakhs would be eligible for carry forward.
The business loss of the assessment year 2010-11 is eligible for carry forward up to the
assessment year 2017-18 and the depreciation is eligible for carry forward infinitum.
In fact, since the business loss is eligible for only 8 year carry forward, it is set off first
and the depreciation is retained for set off as it has no time limitation.
(ii) Conversion into LLP (Section 72A(6A)
When a Company is converted into LLP the unabsorbed depreciation and
accumulated loss of the private Company or unlisted public company shall be
deemed to be the depreciation and loss respectively of the Successor LLP. However,
the Company and the successor LLP have to satisfy the conditions of section 47
(xiiib) in Order to have tax neutral succession besides carry forward benefit.
The accumulated loss is eligible for a fresh carry forward of 8 assessment years from
the year of conversion. The unabsorbed depreciation can be carried forward for an
indefinite period.
The conditions laid out section 47 (xiiib) are to be complied by the successor LLP. if
there is breach of condition the set off of loss and depreciation availed by successor
LLP shall become chargeable to tax as income of the year in which the Conditions
are not complied with.
8. Write Short notes (any four): 4x4=16

(a) Regular assessment
(b) Protective assessment
(c) Best judgement assessment
(d) Liability of members after partition of HUF
(e) Powers of Commissioner (Appeals)
Answer:
8. (a) Regular Assessment:

The term "regular assessment" is defined in section 2(40) to mean assessment made
under section 143(3) or section 144.
When the Assessing Officer makes an order under section 143(3) after serving notice
under section 143(2), it is called as regular assessment.
Where there is failure on the part of the assessee to furnish the return of income
called for or for furnishing the details sought for or similar faults listed in the section,
the best judgment assessment made u/s 144 is also a regular assessment.
The time limit for regular assessment is 21 months from the end of the assessment year
in which the income was first assessable.
(b) Protective Assessment

When there is an ambiguity or dubt as regards a person in whose hands the income is
chargeable to tax, the Revenue would make assessment on both the persons.
This is made as a matter of caution to protect the interest of the Revenue. After the
clearance of ambiguity, one assessment would get cancelled. It is not defined in the
Act but it is in vogue.
There is no time limit specifically provided for completing or cancelling the protective
assessment. When the regular assessment of any other assessment is made by way of
protective assessment, the time limit contained therein will apply.
Protective assessment can be made, but penalty cannot be levied on protective
basis.
(c) Best Judgment Assessment:

When the assessee fails to make a return under section 139(1) or under section 139(4)
or in response to notice under section 142(1) the Assessing Officer may make an
assessment to the best of his judgment.
This would be based on the materials available on record.
An opportunity of being heard however has to be given to the assessee before

making such assessment.
The time limit for best judgment assessment is given in section 153(1) viz. 21 months
from the end of the assessment year in which the income was first assessable.
(d) Liability of members after partition of HUF

In case total partition took place during the previous year, the total income of the
joint family in respect of the period up to the date of partition shall be assessed as if
so far no partition had taken place.
Each member or group of members shall, in addition to any tax for which he or it may
be separately liable and not withstanding' anything contained in section 10(2), be
jointly and Severally liable for the tax on the income So assessed and in case total
partition took place after the expiry of the previous year, the total income of the
previous year of the joint family shall be assessed as if no partition had taken place.
Each member shall be jointly and severally liable for the tax on the income so
assessed.
In case partial partition had taken place after 31.12.1978, the HUF shall continue to
be liable to be assessed under this Act as if no such partial partition had taken place
and each member shall be jointly and severally liable for any tax, penalty, interest,
fine or other Sum payable under this Act.
(e) Powers of Commissioner (Appeals)

The powers of CIT are co-terminus with that of the Assessing Officer and he can do
everything which an AO can do or he has omitted to do.
While deciding an appeal, the CIT (A) may either confirm, reduce, enhance or annul
the assessment.
While deciding appeal against levy of penalty the CT(A) may either confirm such
order or cancel such order or vary it SO as to either enhance Or reduce the penalty.
If the original assessment itself its invalid the CT(A) cannot make enhancement in
such case since he cannot validate and originally invalid assessment.
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
JUNE - 2017
Paper-17 : CORPORATE FINANCIAL REPORTING
The figures in the right side indicate full marks.

Where considered necessary, suitable assumptions may be made
and clearly indicated in the answer.
Both the sections are to be answered subject to instructions given against each.
[All working must form part of your answer.]
Section – A
Answer the following questions.
1. Choose the most appropriate answer from the four alternatives given: (1 Mark for right
choice & 1 Mark for justification): 2x10=20
(i) Jaggu Ltd. obtained a contract for a construction of a building for ` 95 Lakhs. As on
31st March, 2017, it incurred a cost of ` 22 Lakhs and expected that there will be ` 58
Lakhs more needed for completing the building. It has received ` 18 Lakhs as
progress payment. Degree of completion will be
(A) 23.16%
(B) 27.5%
(C) 22.5%
(D) 84.21%
(ii) In case of amalgamation in the nature of purchase, Fixed Assets; Current Assets; Total
Debts; Debit balance of Profit and Loss A/c and Purchase Consideration are
`25,60,000; `12,50,000; `11,30,000; `2,20,000; and `24,00,000 respectively. The amount
of Capital Reserve of Goodwill will be
(A) Goodwill ` 60,000
(B) Goodwill ` 2,80,000
(C) Capital Reserve ` 60,000
(D) Capital Reserve ` 1,60,000
(iii) Chandra Ltd. acquired a machine for ` 65 Lakhs on 1st July, 2014. It has a life of 5
years with a salvage value of ` 7 Lakhs. As on 31st March, 2017, if present value of
future cash flows is `28 Lakhs and net selling price is `25 Lakhs, impairment loss will be
(A) ` 3 Lakhs
(B) ` 30 Lakhs
(C) ` 18.15 Lakhs
(D) `5.10 Lakhs
(iv) Roshan Ltd. agreed to absorb Richa Ltd. For this purpose Richa Ltd's 5000, 9%
Preference shares are valued at ` 124.50 each and 65,000 Equity shares are valued at
` 32 each. If Roshan Ltd. discharged purchase consideration by issuing its Equity
shares of ` 10 each which is having intrinsic value of ` 46 each. No. of Equity shares
issued by Roshan Ltd. to Richa Ltd. will be
(A) 45214
(B) 270250
(C) 58750
(D) 70000
(v) At the time of absorption of B Ltd. by A Ltd., trade receivable of both companies
shown in their Balance Sheets were ` 35 Lakhs and ` 18 Lakhs. On that date trade
payable of B Ltd. includes payable to A Ltd. ` 4.5 Lakhs. After absorption, the amount
of trade receivables will be shown in the A Ltd.'s Balance Sheet as
(A) `35 Lakhs
(B) ` 53 Lakhs
(C) ` 48.50 Lakhs
(D) ` 44 Lakhs
(vi) X Ltd. holds 69% of Y Ltd., Y Ltd. holds 51% of W Ltd., Z Ltd. holds 49% of W Ltd. As per
AS 18 related parties are:
(A) X Ltd., Y Ltd. & W Ltd.
(B) X Ltd. & Z Ltd.
(C) Y Ltd. & Z Ltd.
(D) X Ltd. & Y Ltd.
(vii)Peeru Ltd. acquired 80% Equity shares of Pimo Ltd. on 1st April, 2016. On 31st March,
2017, goods worth ` 65,000 purchased from Peeru Ltd., were included in stock of Pimo
Ltd. Peeru Ltd. made a profit of 25% on cost. At the time of preparation of consolidated
Balance Sheet the amount of unrealized profit on stock will be
(A) ` 1,62,500
(B) ` 21,667
(C) ` 13,000
(D) NIL
(viii)Nikku Ltd. is a Non-banking finance company. It made a provision against the
advances as on 31st March, 2017 of `248 Lakhs. Out of its advances, Sub-standard
assets, Doubtful up to one year and one to three years were `910 Lakhs; `150 Lakhs
and `210 Lakhs respectively. The amount of Doubtful Assets more than three years will
be
(A) ` 1210 Lakhs
(B) ` 121 Lakhs
(C) ` 64 Lakhs
(D) NIL
(ix) In a company net assets available for share holders is `1450 Lakhs; Equity share
capital 60 Lakhs shares of `10 each; An average dividend is `3.20 per equity share
and normal rate of dividend for the company is 10%. The fair value of each share will
be
(A) `32
(B) `24.17
(C) ` 27.81
(D) ` 28.09
(x) Members of Public Accounts Committee are elected by Lok Sabha and Rajya Sabha
and comprise of not more than
(A) 15 members of Lok Sabha and 7 members of Rajya Sabha.
(B) 22 members of Lok Sabha and 7 members of Rajya Sabha.
(C) 22 members of Lok Sabha and 15 members of Rajya Sabha.
(D) No any limit.
Answer:
1. (i) — (B) Degree of Completion
Cost to Date
= ×100
Accumulated Cost Incurred + Estimated Cost to Complete
`22 lakhs
= ×100 = 27.5%
`22 lakhs + `58 lakhs
(ii) — (C) Net Assets = ` (25,60,000 + 12,50,000 – 11,30,000 – 2,20,000) = ` 24,60,000
Capital Reserve = Net Assets - Purchase Consideration
= ` 24,60,000 – ` 24,00,000 = ` 60,000
(iii) — (D) Carrying amount on 31st March 2017 = 65 - [(65 - 7)×33/60]

= 65-31.90 = ` 33.10 Lakhs
Recoverable amount (Present value) = ` 28 Lakhs i.e. higher of `28 Lakhs and `25
Lakhs
Hence, Impairment loss = ` 33.10 – ` 28 = ` 5.10 Lakhs
(iv) — (C) Value of preference shares: 5000 × ` 124.50 = ` 6,22,500

Add: Value of Equity shares: 65000 × ` 32 = ` 20,80,000
Total Amount to be discharged ` 27,02,500
No. of Equity shares Issued by Roshan Ltd. = ` 27,02,500 ÷ ` 46 = 58750 shares.
(v) — (C) ` 35 Lakhs + ` 18 Lakhs – ` 4.50 Lakhs = ` 48.50 Lakhs.
(vi) — (A) Explanation - As per AS 18 holding of 20% or more is necessary to become a

related party. Hence related parties are X Ltd. Y Ltd. and W Ltd.
(vii) — (C) ` 65,000 × 25/(100+25 = ` 13,000)
(viii) — (C) ` 248 – ` [(910 × 10%)+(150 × 20%)+(210 × 30%)]

= ` 248 – ` (91+30+63) = ` 248 – `184 = ` 64 Lakhs
Intrinsic Value + Dividend Yield Value 24.17 + 32

(ix) — (D) Fair value = = = `28.085 per shear
2 2
`1450
Intrinsic value = = `24.17
60
Yield value = 32% × 10 = ` 32
Average Dividend Rate = ` 3.2 / ` 10×100 = 32%.
(x) — (A) Justification not required, as per requirement.
Section – B
Answer any five questions out of seven questions.
16x5=80
2. (a) Shiva Infrastructures Limited obtained a contract for construction of a bridge for ` 100
Lakhs. The contract will be completed within 3 years for which total cost to be
incurred is ` 85 Lakhs. The following data pertain to the construction period:
(` in Lakhs)
Particulars/Year I II III
Cumulative costs incurred to date 30 70 85
Estimated cost yet to be incurred at year end 60 10 —
Progressive billing made during the year 20 65 15
Collections of billings 15 60 25
You are required to calculate the stage of completion and profit recognized in
Statement of Profit and Loss as per AS-7 8
(b) Compute Basic and Adjusted Earnings per share from the following information: 8
Net Profit for 2015-16 ` 44 Lakhs
Net Profit For 2016-17 ` 65 Lakhs
No. of shares before Rights Issue 110000
Right Issue Ratio Two for every four held
Right Issue Price ` 180
Date of exercising Rights Option 31st July 2016
Fair Value of shares before Right Issue ` 270
Answer:
2. (a) Calculation of Stage of Completion (` in Lakhs)

Particulars Year I Year II Year III
A. Cumulative Cost Incurred till the year end 30 70 85
B. Estimated Cost yet to be incurred 60 10 0
C. Total Completion Cost of Project (A + B) 90 80 85
D. Stage of Completion 0.3333 0.875 1
(Cumulative Cost Incurred till year End/ Total or or or
Completion Cost of Project) i.e. (A/C) 33.33 % 87.50 % 100 %
Profit to be recognized in statement of profit as per AS – 7 (` in Lakhs)

Particulars Year I Year II Year III
A. Stage of Completion in % 33.33% 87.50% 100%
B. Revenue to be recognized 33.33 87.50 100.00
Total Contract Revenue x Stage of Completion i.e.
100 Lakhs x A
C. Cumulative Cost Incurred till the year end 30.00 70.00 85.00
D. Cumulative Profit to be recognized at the end 3.33 17.50 15.00
of each year (Revenue Recognized each year –
Cumulative Cost) i.e. (B – C)
E. Profit/(Loss) recognized each year = Cumulative 3.33 14.17 (2.50)
profit to be recognized at the end of current year i.e. i.e.
– Cumulative Profit recognized till previous year (17.50– (15.00-
3.33) 17.50)
` 44,00,000
2. (b) EPS of the year 2015 – 2016 (originally reported) = = ` 40
1,10,000
` 44,00,000
EPS for the year 2015 – 2016 (Restated for the Right Issue) =
1,10,000 1.125
` 44,00,000
= = ` 35.56
1,23,750
EPS of the year 2016 – 2017 including effect of Right issue
` 44,00,000 `65,00,000 `65,00,000
=  = ` 42.98
1,23,750 4 8 1,51,250
(1,10,000 1.125  )  (1,65,000  )
12 12
Working Notes:
(1) Calculation of Theoretical Ex – rights Fair Value per Share
2
(1,10,000 ` 270)  (1,10,000  180)
4 ` 2,97,00,000 `99,00,000
= = ` 240
1,10,000  55,000 1,65,000
(2) Calculation of Adjustment Factor

` 270
= = = 1.125
` 240
3. (a) Sewada Ltd. made the following payments during the year ended 31st March 2017:
Payment made for ` in Lakhs
(i) To acquire a Software 204
(ii) To acquire a Website for a period of 8 years 165
(iii) To acquire a Copyright for a period of 15 years 135
(iv) To acquire Goodwill of a firm 155
(v) To acquire Goodwill arising under amalgamation in the nature of purchase 110
(vi) To acquire a Patent for a period of 5 years. The net cash flows from the 60
product during these 5 years are expected to be ` 36 lakhs; ` 46
Lakhs; ` 44 Lakhs; ` 40 Lakhs and ` 34 Lakhs
You are required to find out the amortization cost of the each of the item to be
charged to Statement of Profit and Loss as per AS-26. 8
(b) State the scope of Ind AS-102. 8
Answer:
3. (a) (i) Amortization Cost of Software = ` 204 Lakhs/5 = ` 40.80 Lakhs per year (Since
maximum amortization period of software is 5 years)
(ii) Amortization Cost of Website = `165 Lakhs/5 = `33 Lakhs per year (Since maximum
amortization period of Website is 5 years)
(iii) Amortization Cost of Copy-right = `135 Lakhs/10 = ` 13.50 Lakhs per year (Since
maximum amortization period of Copy-right is 10 years unless a higher period is
justified with reasons in Notes to Accounts)
(iv) Amortization Cost of Goodwill = ` 155 Lakhs/10 = `15.50 Lakhs per year (Since
maximum amortization period of Goodwill is 10 years unless a higher period is
justified with reasons in Notes to Accounts)
(v) Amortization Cost of Goodwill arising under amalgamation in the nature of
purchase = `110 Lakhs/5 = ` 22 Lakhs per year (Since maximum amortization
period of such Goodwill is 5 years)
(vi) Amortization Cost of Patent
Year Net Cash Flow (`) Amortization Ratio Amortization Amount(`)
1 36,00,000 0.18 10,80,000
2 46,00,000 0.23 13,80,000
3 44,00,000 0.22 13,20,000
4 40,00,000 0.20 12,00,000
5 34,00,000 0.17 10,20,000
2,00,00,000 1.00 60,00,000
3. (b) Scope of lnd AS-102:

An entity shall apply this Standard in accounting for all share-based payment
transactions, whether or not the entity can identify specifically some or all of the goods
or services received, including:
(a) equity-settled share-based payment transactions,
(b) cash-settled share-based payment transactions, and
(c) transactions in which the entity receives or acquires goods or services and the
terms of the arrangement provide either the entity or the supplier of those goods
or services with a choice of whether the entity settles the transaction in cash (or
other assets) or by issuing equity instruments.
(d) A share-based payment transaction may be settled by another group entity (or a
shareholder of any group entity) on behalf of the entity receiving or acquiring the
goods or services. Paragraph 2 also applies to an entity that:
(i) receives goods or services when another entity in the same group (or a
shareholder of any group entity) has the obligation to settle the share-based
payment transaction, or
(ii) has an obligation to settle a share-based payment transaction when
another entity in the same group receives the goods or services unless the
transaction is clearly for a purpose other than payment for goods or services
supplied to the entity receiving them.
4. A Ltd. and B Ltd. were amalgamated on and from 1 April, 2017. A new company AB Ltd.
was formed to take over the business of the existing companies. The Balance Sheets of A
Ltd. and B Ltd. as on 31 March, 2017 are given below:
(Amount ` in Lakhs)
A Ltd. B Ltd.
Particulars Note No. Amount (`) Amount (`)
I. EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital:
Equity shares of ` 100 each 800 750
8% Preference shares of ` 100 each 300 200
(b) Reserve and Surplus:
Capital Reserve 200 150
General Reserve 170 150
Profit and Loss Account 50 30
2. Non-Current Liabilities:
Long term Borrowings (10% Debentures) 48 24
3. Current Liabilities and Provisions:
(a) Trade Payables 270 120
(b) Bills Payables 150 70
Total 1988 1494
II. ASSETS
1. Non- Current Assets
(a) Fixed Assets:
Tangible Assets
Land and Building 550 400
Plant and Machinery 350 250
Intangible Assets
(b) Non-Current Investment 150 50
2. Current Assets:
(a) Inventories 350 250
(b) Trade Receivable 250 300
(c) Bills Receivables 50 50
(d) Cash and Cash Equivalents 288 194
Total 1988 1494
(1) 10% Debenture holders of A Ltd. and B Ltd. are discharged by AB Ltd., issuing such
number of its 12% Debentures of ` 100 each, so as to maintain the same amount of
interest.
(2) Preference shareholders of the two companies are issued equivalent number 10%
preference shares of AB Ltd., at a price of ` 150 per share (face value of ` 100).
(3) AB Ltd. will issue 3 equity shares for every 2 equity shares of A Ltd. and 4 equity shares
for every 3 equity shares of B Ltd. The shares are to be issued at ` 15 each, having a
face value of ` 10 per share.
Prepare the Balance Sheet of AB Ltd. as on 1 April, 2017 in the revised Schedule III format,
after amalgamation has been carried out on the basis of amalgamation in the nature of
purchase. 16
Answer:
4.
Balance Sheet of AB Ltd. as at 31.03.2017
Particulars Note ` in Lakhs
No
I. Equity and Liabilities
(1) Shareholders’ Funds
(a) Share Capital 1 2,700
(b) Reserves and Surplus (Securities Premium) 1,350
(2) Non-Current Liabilities
(a) Long term borrowings (12 % Debentures) 2 60
(3) Current Liabilities & Provisions
(a) Trade Payables (270+120) 390
(b) Bills Payables (150 + 70) 220
Total 4,720
II. Assets
(1) Non-Current Assets
(a) Fixed Assets
Tangible Assets 3 1,550
Intangible Assets (Goodwill: 722 + 516) 1,238
(b) Non – Current Investments 4 200
(2) Current Assets
(a) Inventories (350 + 250) 600
(b) Trade Receivables (250 + 300) 550
(c) Bills Receivables (50 + 50) 100
(d) Cash and Cash Equivalents (288 + 194) 482
Total 4,720
Notes to Accounts:
Particulars ` in Lakhs
1. Share Capital
2,20,00,000 Equity Shares of ` 10 each 2,200
5,00,0000 Preference Shares of `100 each 500
Total 2,700
2. Non – Current Liabilities
12% Debentures 60
Total 60
3. Tangible Assets
Plant & Machinery (350 + 250) 600
Land & Building (550 + 400) 950
Total
4. Non – Current Investments
Investment (150 + 50) 200
Total 200
Working Notes:
(1) Calculation of Purchase Consideration

Particulars A Ltd. B Ltd.
` in Lakhs ` in Lakhs
3,00,000 Preference Shares given to Preference Shareholders of 450
A Ltd. for their 3,00,000 Preference Shares in A Ltd. @ `150 per
share
2,00,000 Preference Shares given to Preference Shareholders of B 300
Ltd. for their 2,00,000 Preference Shares in B Ltd. @ `150 per share
1,20,00,000 Equity Shares given to Equity Shareholders of A Ltd. 1,800
for their 80,00,000 Equity Shares in A Ltd. in the ratio of 3:2 @ `15
per share
1,00,00,000 Equity Shares given to Equity Shareholders of B Ltd. for 1,500
their 75,00,000 Equity Shares in B Ltd. in the ratio of 4:3 @ `15 per
share
Total 2,250 1,800
(2) Calculation of Securities Premium
Particulars ` in
Lakhs
A. Securities Premium in Preference Shares given to Preference Shareholders 150
of A Ltd. (3,00,000 x `50)
B. Securities Premium in Preference Shares given to Preference Shareholders 100
of B Ltd. (2,00,000 x `50)
C. Securities Premium in Equity Shares given to Equity Shareholders of A Ltd. 600
(1,20,00,000 x `5)
D. Securities Premium in Equity Shares given to Equity Shareholders of B Ltd. 500
(1,00,00,000 x `5)
E. Securities Premium Account (A + B + C + D) 1,350
(3) Calculation of Issue of Debentures

A. 12 % Debentures issued to Debenture Holders of A Ltd. 40
(48 Lakhs x 10%/12%)
B. 12% Debentures issued to Debenture Holders of B Ltd. 20
(24 Lakhs x 10%/12%)
C. Total 12% Debentures 60
(4) Calculation of Net Assets

Total Assets (As per Balance Sheet) 1,988 1,494
Less: Liabilities
Non – Current Liabilities (12% Debentures) (40) (20)
Current Liabilities (420) (190)
Net Assets 1,528 1,284
(5) Calculation of Goodwill/Capital Reserve

Purchase Consideration 2,250 1,800
Less: Net Assets 1,528 1,284
Goodwill 722 516
Q 4. Alternate Solution
Balance Sheet of AB LTD. as at 31.03.2017
Particulars Note No ` in Lakhs
(a) Share Capital 1 720
(b) Reserves and Surplus 2 2,092
(a) Long term borrowings (12% Debentures) 60
(a) Trade Payables (270+120) 390
(b) Bills Payables (150 + 70) 220
Total 3,482
II. Assets
(a) Fixed Assets
Tangible Assets 3 1,550
(b) Non – Current Investments 4 200
(2) Current Assets
(a) Inventories (350 + 250) 600
(b) Trade Receivables (250 + 300) 550
(c) Bills Receivables (50 + 50) 100
(d) Cash and Cash Equivalents (288 + 194) 482
Total 3,482
Notes To Accounts:
1. Share Capital
22,00,000 Equity Shares of ` 10 each 220
5,00,0000 Preference Shares of ` 100 each 500
Total 720
2. Reserve & Surplus
Securities Premium 360
Capital Reserve (898 + 834) 1,732
Total 2,092
3. Tangible Assets
Plant & Machinery (350 + 250) 600
Land & Building (550 + 400) 950
Total
4. Non – Current Investments
Investment (150 + 50) 200
Total 200
Working Notes:

3,00,0000 Preference Shares given to Preference 450
Shareholders of A Ltd. for their 3,00,000 Preference
Shares in A Ltd. @ 150 per share
2,00,0000 Preference Shares given to Preference 300
Shareholders of B Ltd. for their 2,00,000 Preference
Shares in B Ltd. @ 150 per share
12,00,000 Equity Shares given to Equity Shareholders of 180
A Ltd. for their 8,00,000 Equity Shares in A Ltd. in the
ratio of 3:2 @ 15 per share
10,00,000 Equity Shares given to Equity Shareholders of 150
B Ltd. for their 7,50,000 Equity Shares in B Ltd. in the ratio
of 4:3 @ 15 per share
Total 630 450
(2) Calculation of Securities Premium

A. Securities Premium in Preference Shares given to Preference 150
Shareholders of A Ltd. (3,00,000 x `50)
B. Securities Premium in Preference Shares given to Preference 100
Shareholders of B Ltd. (2,00,000 x `50)
C. Securities Premium in Equity Shares given to Equity Shareholders of A 60
Ltd. (12,00,000 x `5)
D. Securities Premium in Equity Shares given to Equity Shareholders of B 50
Ltd. (10,00,000 x `5)
E. Securities Premium Account (A + B + C + D) 360
(3) Calculation of Issue of Debentures

A. 12 % Debentures issued to Debenture Holders of A Ltd. 40
(48 Lakhs x 10%/12%)
B. 12% Debentures issued to Debenture Holders of B Ltd. 20
(24 Lakhs x 10%/12%)
C. Total 12% Debentures 60
(4) Calculation of Net Assets

Total Assets (As per Balance Sheet) 1,988 1,494
Less: Liabilities
Non – Current Liabilities (12% Debentures) (40) (20)
Current Liabilities (420) (190)
Net Assets 1,528 1,284
(5) Calculation of Goodwill/Capital Reserve

Purchase Consideration 630 450
Less: Net Assets 1,528 1,284
(Capital Reserve) (898) (834)
5. A Limited is a holding company and B Limited and C Limited are subsidiaries of A Limited.
Their summarized Balance Sheets as on 31.03.2017 are given below:
A Ltd. B Ltd. C Ltd. A Ltd. B Ltd. C Ltd.
(`) (`) (`) (`) (`) (`)
Share capital 1,00,000 1,00,000 60,000 Fixed Assets 20,000 60,000 43,000
Reserves 48,000 10,000 9,000 Investment 95,000
Shares in B Ltd.
Profit & Loss Account 16,000 12,000 9,000 Shares in C Ltd. 13,000 53,000
Trade Payables 7,000 5,000 Inventory in Trade 12,000
A Ltd. Balance 7,000 B Ltd. Balance 8,000
C Ltd. Balance 3,000 Trade Receivables 26,000 21,000 32,000
A Ltd. Balance 3,000
1,74,000 1,34,000 78,000 1,74,000 1,34,000 78,000
The following particulars are given:
(i) The face value of share of all companies is ` 10 each.
(ii) A Ltd. held 8000 shares of B Ltd. and 1000 shares of C Ltd.
(iii) B Ltd. held 4000 shares of C Ltd.
(iv) All these investments were made on 30.09.2016.
(v) On 31.03.2016, the position was as shown below:
B Ltd. (`) C Ltd. (`)

Reserve 8,000 7,500
Profit & Loss Account 4,000 3,000
Trade payables 5,000 1,000
Fixed Assets 60,000 43,000
Inventory in Trade 4,000 35,500
Trade receivables 48,000 33,000
(vi) 10% dividend is proposed by each company.

(vii)The whole of inventory in trade of B Ltd. as on 30.09.2016 (` 4,000) was later sold to A
Ltd. for ` 4,400 and remained unsold by A Ltd. as on 31.03.2017.
(viii)Cash-in-transit from B Ltd. to A Ltd. was ` 1,000 as at the close of business.
You are required to prepare the consolidated Balance Sheet of the group as per
Schedule III as on 31.03.2017. 16
Answer:
5.
Consolidated Balance Sheet of A Ltd.
and its subsidiaries B Ltd. and C Ltd.
as on 31st March, 2017
Particulars Note No. Amount (`)
(1) Shareholder's Funds
(a) Share Capital 1,00,000
(b) Reserves and Surplus 1 60,305
(2) Minority Interest (W.N 5) 37,820
(3) Current Liabilities
(a)Trade payables 12,000
(b)Short term provisions 2 10,000
Total 2,20,125
II. Assets
(2) Non-Current assets
Fixed assets
i. Tangible assets 1,23,000
ii. Intangible assets 3 5,525
(2) Current assets
(a) Inventories 4 11,600
(b) Trade receivables 79,000
(c) Cash and cash equivalents 5 1,000
Total 2,20,125
Notes to Accounts
` `
1 Reserves and surplus
Reserves- Balance as on 31.3.2015 (given) 48,000
Share in
B Ltd. [WN 3] 1,200
C Ltd. [WN 2] 125 49,325
Profit & Loss Account
Balance as on 31.3.2015 (given) 16,000
Share in
B Ltd. [WN 3] 4,800
C Ltd. [WN2] 500
21,300
Less: Proposed dividend (10% of ` 1,00,000) (10000)
Provision for unrealished profit on inventory (320) 10,980
[80% of (` 4,400-` 4,000)]
60,305
2 Short term Provisions
Proposed Dividend 10,000
3 Intangible Assets
Goodwill (W.N 4) 5,525
4 Inventories
Inventory in Trade 12,000
Less: Provision for unrealished Profit (400) 11,600
5 Cash and cash equivalents
Cash in Transit (` 8,000-7,000) 1,000
Working Notes:
Shareholding pattern
B Ltd. C Ltd.
Total Shares 10,000 6,000
Held by A Ltd. 8,000 [80%] 1,000 [1/6th]
Held by B Ltd. N.A. 4,000 [4/6th]
Minority Holding 20% 1/6th
(1) Position on 30.09.2016 i.e. date of investment

B Ltd. Reserves (`) Profit and Loss
A/c (`)
Balance on 30.3.2017 10,000 12,000
Less: Balance on 31.3.2016 -8,000 -4,000
Increase during the year 2,000 8,000
Estimated increase for half year 1,000 4,000
Balance on 30.9.2016 9,000 8,000
(8,000+1,000) (4,000+4,000)
C Ltd.
Balance on 31.3.2017 9,000 9,000
Balance on 31.3.2016 7,500 3,000
Increase during the year 1,500 6,000
Estimated increase for half year 750 3,000
Balance on 30.9.2016 8,250 6,000
(7500+750) (3000+3,000)
(2) Analysis of Profit of C Ltd.

Capital Revenue Revenue
Profit (`) Reserve(`) Profit (`)
Reserves on 30.9.2016 8,250
Profit and loss A/c on 30.9.2016 6,000
Increase in reserves 750
Increase in profit --- --- 3,000
14,250 750 3,000
Less: Minority Interest (1/6) (2,375) (125) (500)
11,875 625 2,500
Share of A Ltd. (1/6) 2,375 125 500
Share of B Ltd. (4/6) 9,500 500 2,000
(3) Analysis of Profit of B Ltd.

Capital Revenue Revenue
Profit Reserve Profit
(`) (`) (`)
Reserves on 30.9.2016 9,000
Profit and loss A/c on 30.9.2016 8,000
Increase in reserves 1,000
Increase in profit 4,000
Share in C Ltd.[WN 1] 500 2000
17,000 1,500 6,000
Less: Minority Interest (2/10) (3400) (300) (1200)
Share of A Ltd. (8/10) 13,600 1,200 4800
(4) Computation of Cost of Control

` `
Investments in
B Ltd. 95,000
C Ltd. [13,000+53,000] 66,000 1,61,000
Less : Paid up value of investments in
B Ltd. 80,000
C Ltd. 50,000 (1,30,000)
Capital Profits in 31,000
B Ltd. [WN 3] 13,600
C Ltd. [WN 2] 11,875 (25,475)
Goodwill 5,525
(5) Minority interest

` `
Share Capital:
B Ltd. [20%] 20,000
C Ltd. [1/6th] 10,000 30,000
Share in profits and reserves (pre and post-
Acquisitions)
B Ltd. [WN 3] 4,900
C Ltd. [WN 2] 3,000 7,900
37,900
Less: Provision for unrealized profit (20% of ` 400) (80)
37,820
Note: The above solution has been done by direct method. Alternatively, Students may
follow indirect method. In indirect method, the share in pre-acquisition profits of B Ltd. in
C Ltd. amounting `9,500 will be included as capital profit while analysing the profits of B
Ltd. and will not be considered for the purpose of cost of control. Thus, in this case, the
amounts of goodwill and minority interest will be shown at `7,425 and `39,720
respectively in the consolidated Balance sheet. Therefore, the total of the assets and
liabilities side of the consolidated balance sheet will be `2,22,025. The W.N. 4,5 & 6 are
recalculated for this alternate solution.
3) Analysis of Profit of B Ltd.

Particulars Capital Revenue Revenue
Profits Reserves Profits
Balance of Revenue Reserve as on 9,000
30/09/2016
Balance of Profit & Loss A/c as on 8,000
30/09/2016
Increase in reserves after acquisition 1,000
Increase in Profit after acquisition 4,000
Share in C Ltd. (W.N. 3) 9,500 500 2,000
Total 26,500 1,500 6,000
Minority Interest (1/5) 5,300 300 1,200
Share of A Ltd. (4/5) 21,200 1,200 4,800
4) Calculation of Cost of Control/Goodwill

Particulars ` `
A. Cost of Investments
Investment in B Ltd. 95,000
Investment in C Ltd. (13,000 + 53,000) 66,000 1,61,000
B. Shares in Net Assets of Subsidiaries
Paid up capital of B Ltd. 80,000
Paid up capital of C Ltd. 50,000
Capital Profits of B Ltd. 21,200
Capital Profits of C Ltd. 2,375 1,53,575
C. Cost of Control/Goodwill (A – B) 7,425
5. Calculation of Minority Interest

Particulars ` `
A. Share Capital
B Ltd. 20,000
C Ltd. 10,000 30,000
B. Capital Profits
B Ltd. 5,300
C Ltd. 2,375 7,675
C. Revenue Reserves
B Ltd. 300
C Ltd. 125 425
D. Revenue Profits
B Ltd. 1,200
C Ltd. 500 1,700
E. Total (A + B + C + D) 39,800
F. Less: Provision for unrealized profits in unsold inventory i.e. 20% of 400 (80)
G. Minority Interest (E – F) 39,720
6. (a) Dhoora Ltd. granted 1500 stock options to its employees on 01.04.2013 at ` 50 per
share. The vesting period is 2½ years and the maximum exercise period is one year.
Market price on that date is ` 190 per share. All the options were exercised on
30.06.2016. Pass journal entries in the books of company, if the face value of equity
share is ` 10 per share and account books are closed on 31st March in every year. 8
(b) Following balances as on 31st March, 2017, are obtained from the account books of
Gunnu Ltd.:
` in Lakhs
200 Lakhs Equity Shares of ` 10 each 2000
10 Lakhs, 10% Preference Shares of ` 100 each 1000
General Reserve 1600
Profit and Loss Account 1400
12% Debentures 1000
Creditors 800
Goodwill 1000
Land and Buildings 2500
Plant and Machinery 1500
Investment in 10% Stock 480
Stock-in-trade 1600
Debtors 400
Cash and Bank 220
Preliminary expenses 100
Additional information are given below:

(a) Nominal value of investment is ` 500 Lakhs and its market value is ` 520 Lakhs.
(b) Following assets are revalued:
` in Lakhs
(i) Land and Building 3200
(ii) Plant and Machinery 1800
(iii) Stock-in-trade 1450
(iv) Debtors 360
(c) Average profit before tax of the company is ` 2,400 Lakhs and 12.50% of the profit
is transferred to general reserve, rate of taxation being 30%.
(d) Normal dividend expected on equity shares is 18% while fair return on closing
capital employed is 12%.
(e) Goodwill may be valued at two year's purchase of super profits.
You are required to calculate the value of goodwill. 8
Answer:
6. (a)
Journal of Dhoora Ltd.
Date Particulars L.F. Debit (`) Credit (`)
31.3.14 Employees Stock Option Expenses A/c Dr. 84,000
To Employees Stock Option Outstanding A/c 84,000
(Being expenses on 1500 stock options recognised)
31.3.14 P/L A/c Dr. 84,000
To Employees Stock Option Expenses A/c 84,000
(Being Employees Stock Options expenses transferred)
31.3.15 P/L A/c Dr. 84,000
31.3.16 P/L A/c Dr. 42,000
30.6.16 Bank A/c Dr. 75,000
Employees Stock Option Outstanding A/c Dr. 2,10,000
To Equity Share Capital A/c 15,000
To Securities Premium Reserve A/c 2,70,000
(Being 1500 options exercised @ ` 50 per option )
Working Notes:
Calculation of intrinsic value of option = Market price per share - Exercisable price per
share = `190 – ` 50 = `140
Employee Compensation Expenses to be recognised:

2013-14 (`) 2014-15 (`) 2015-16 (`)
Gross Value of employee 84,000 1,68,000 2,10,000
compensation expenses
Gross Value = No. of Options [1,500x140x1/2.5] [1,500x140x2/2.5] [1,500x140]
expected to vest × Intrinsic Value ×
expired period/ Vesting period
Less: Expenses already recognised ---- 84,000 1,68,000
upto preceding accounting period
Hence, Expenses to be recognised 84,000 84,000 42,000
6. (b) 1. Calculation of Capital Employed

` in Lakhs
Assets: Land and Buildings 3,200
Plant and Machinery 1,800
Stock 1,450
Debtors 360
Cash and Bank 220
7,030
Less: Liabilities:
Debentures 1,000
Creditors 800 1,800
Capital Employed 5,230
2. Calculation of Actual Profit

` in Lakhs
Average Profit before Tax (given) 2,400
Less: Income from Investment (` 5,00,00,000 × 10%) 50
2,350
Less: Income Tax @ 30% 705
Average Actual Profit 1,645
3. Normal Profit = 12% of Capital Employed

= ` 5,230 Lakhs ×12% = ` 627.60 Lakhs
4. Super Profit = Average Actual Profit - Normal Profit

= ` 1,645 Lakhs – ` 627.60 Lakhs = ` 1,017.40 Lakhs
5. Goodwill = Super Profit × 2 = ` 1,017.40 Lakhs × 2 = ` 2,034.80 Lakhs
7. (a) What are the objectives of Government Accounting? 8

(b) Discuss the role of Public Accounts Committee. 8
Answer:
7. (a) Objectives of government accounting:
The objectives of government accounting are the financial administration of the

activities of the government to promote maximisation of welfare in the form of various
services. The specific objectives can be stated as under:
1. To record financial transactions of revenues and expenditure relating to the
government organizations.
2. To provide reliable financial data and information about the operation of public
fund.
3. To record the expenditures as per the appropriate Act, Rules, and legal provisions
as set by the government.
4. To avoid the excess expenditures beyond the limit of the budget approved by the
government.
5. To help in the preparation of various financial statements and reports.
6. To facilitate the auditing by the concerned government department.
7. To prevent misappropriation of government properties by maintaining the
systematic records of cash and store items.
8. To facilitate for estimating the annual budget by providing historical financial
data of government and expenditures.
7. (b) Role of Public Accounts Committee (P.A.C):
1. Role regarding examination of the C&AG report: The chief function of P.A.C. is to
examine the audit report of Comptroller and Auditor General (C&AG) after it is
laid in the Parliament. C&AG assists the Committee during the course of
investigation.
2. Role regarding unauthorized expenditures or excess expenditures: In examining
the report of the Comptroller and Auditor General of India (C&AG), the
committee has to satisfy itself that:
 the expenditures made by the government, were authorized by the
Parliament; and
 the expenditures under any head has not crossed the limits of parliamentary
authorization.
It is to be noted that, every expenditure made by the government must be
sanctioned by the Parliament. Thus, it is the role of the committee to bring to the
notice of the Parliament instances of unauthorized expenditures or expenditures
beyond sanctioned limits.
3. Role regarding spending of money by ministries: The committee not only ensures
that ministries spend money in accordance with parliamentary grants, it also
brings to the notice of the Parliament instances of extravagance, loss, in fructuous
expenditure and lack of financial integrity in public services. However, the
committee cannot question the polices of the government. It only concerns itself
with the execution of policy on its financial aspects.
4. Scrutinizing the audit reports of public corporations: A new dimension has been
added to the function of the P.A.C. by entrusting it with the responsibility of
scrutinizing the audit report of public corporations.
5. Scrutinising the working process of ministries and public corporations: In examining
the accounts and audits of the ministries and public corporations, the Committee
gets the opportunity to scrutinize the process of their working. It points out the
weakness and shortcomings of the administration of ministries and public
corporations criticisms of the P.A.C. to draw national attention. This keeps the
ministries and public corporations sensitive to the criticisms of the P.A.C. Thus, it is
wrong to suppose that the P.A.C. is only an instrument of financial control, it is as
well an instrument of administrative control.

(a) Features of International Financial Reporting Standards (IFRS).
(b) Conditions for applying Hedge Accounting.
(c) Objectives of Ind AS-110.
(d) Responsibility of GASAB.
(e) Conditions as per AS-14 amalgamation in the nature of merger.
Answer:
8. (a) Features of IFRS:
The characteristics of IFRS are:

 These are global accounting standards.
 These standards are 'principle based', and not 'rule-based'.
 IFRS are developed and maintained by the IASB.
 These are issued with the intention of applying these standards across the globe on
a consistent basis.
 It ensures high quality transparent reporting that would ensure comparability
among the entities across the globe.
 Every standard has a specific structure to ensure uniformity and facilitate reading,
interpretation and application. They are: Introduction, Standards, Basis of
Conclusion (BC), Implementation Guidelines (IG), Illustrative Examples (IE), and
Dissenting Opinions of board members.
(b) Conditions for applying Hedge Accounting:
A hedging relationship qualifies for hedge accounting if, and only if, all of the following
conditions are met:
(a) At the inception of the hedge there is formal designation and documentation of
the hedging relationship and the entity's risk management objective and strategy
for undertaking the hedge. That documentation shall include identification of the
hedging instrument, the hedged item or transaction, the nature of the risk being
hedged and how the entity will assess the hedging instrument's effectiveness in
offsetting the exposure to changes in the hedged item's fair value or cash flows
attributable to the hedged risk.
(b) The hedge is expected to be highly effective in achieving offsetting changes in
fair value or cash flows attributable to the hedged risk, consistently with the
originally documented risk management strategy for that particular hedging
relationship.
(c) For cash flow hedges, a forecast transaction that is the subject of the hedge must
be highly probable and must present an exposure to variations in cash flows that
could ultimately affect profit or loss.
(d) The effectiveness of the hedge can be reliably measured, i.e. the fair value or
cash flows of the hedged item that are attributable to the hedged risk and the
fair value of the hedging instrument can be reliably measured.
(e) The hedge is assessed on an ongoing basis and determined actually to have been
highly effective throughout the financial reporting periods for which the hedge
was designated.
(c) Objectives of Ind AS-110:
The objective of this Indian Accounting Standard (Ind AS) is to establish principles for
the presentation and preparation of consolidated financial statements when an
entity controls one or more other entities.
For the purpose of meeting the above stated objective, this Ind AS:
(a) requires an entity (the parent) that controls one or more other entities (subsidiaries)
to present consolidated financial statements;
(b) defines the principle of control, and establishes control as the basis for
consolidation;
(c) sets out how to apply the principle of control to identify whether an investor
controls an investee and therefore must consolidate the investee;
(d) sets out the accounting requirements for the preparation of consolidated financial
statements; and
(e) defines an investment entity and sets out an exception to consolidating particular
subsidiaries of an investment entity.
(d) Responsibilities of GASAB:
GASAB, inter alia, has the following responsibilities:

1. To formulate and improve standard of Government accounting and financial
reporting in order to enhance accountability mechanisms.
2. To formulate and propose standards that improve the usefulness of financial
reports based on the needs of the users.
3. To keep the standards current and reflect change in the Governmental
environment.
4. To provide guidance on implementation of standards.
5. To consider significant areas of accounting and financial reporting that can be
improved through the standard setting process.
6. To improve the common understanding of the nature and purpose of information
contained in the financial reports.
(e) As per AS-14 Amalgamation in the nature of merger:
(a) All the assets and liabilities of the transferor company are taken over by the
transferee company.
(b) Such assets and liabilities are incorporated without any adjustment (except to
ensure uniformity of accounting policies) in the financial statements of the
transferee.
(c) At least 90 percent equity holders of transferor become equity shareholders of
transferee by virtue of the amalgamation.
(d) The consideration for the amalgamation is discharged by equity shareholders in
the transferee, except for fractional shares by cash.
(e) The business of the transferor is intended to be carried on by the transferee.
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
JUNE - 2018
Where considered necessary, suitable assumptions may be made and clearly
indicated in the answer.
Section – A
choice & 1 Mark for justification): 2x10=20
(i) A firm values goodwill under 'Capitalisation of Profits' method. Average profit of the firm
for past 4 years has been determined at ` 1,00,000 (before tax). Capital employed in the
business is ` 4,80,000 and its normal rate of return is 12%. Tax rate is 28% on average.
Value of Goodwill based on capitalisation of average profit will be:
(A) `1,20,000
(B) `6,00,000
(C) `5,00,000
(D) `4,80,000
(ii) Biomed International Ltd. is developing a new production process. During the financial
year ending 31st Match, 2017, the total expenditure incurred was ` 50 lakhs. This process
met the criteria for recognition as an intangible asset on 1st December, 2016. Expenditure
incurred till this date was ` 22 lakhs. Further expenditure incurred on the process for the
financial year ending 31st March, 2018 was ` 80 lakhs. As at 31st March, 2018, the
recoverable amount of knowhow embodied in the process is estimated to be ` 72 lakhs.
This includes estimates of future cash outflows as well as inflows. The amount of
impairment loss for the year ended 31st March, 2018 is
(A) ` 80 lakhs
(B) ` 36 lakhs
(C) ` 28 lakhs
(D) ` 72 lakhs
(iii) AB Ltd. holds 20% share of CD Ltd. at a cost of ` 10 Lakh as on 31.3.2018. The Reserves and
Surplus of CD Ltd. on that date was ` 25 Lakh. For the year ended 31.3.2018 CD Ltd. made
a profit of ` 2,00,000 and distributed ` 1,00,000 as Dividend. The value of Investment of AB
Ltd in CD Ltd as at 31.3.2018 will be shown as
(A) ` 10 lakhs
(B) ` 15.40 lakhs
(C) ` 15.20 lakhs
(D) ` 15.60 lakhs
(iv) The following data apply to 'X' Ltd.'s defined benefit pension plan for the year ended
31.03.18:
`
• Benefits paid 2,00,000
• Employer contribution 2,80,000
• Fair market value of plan assets on 31.03.18 11,40,000
• Fair market value of plan assets as on 31.03.17 8,00,000
The amount of actual return of plan assets is
(A) ` 2,80,000
(B) ` 2,60,000
(C) ` 2,00,000
(D) ` 4,60,000
(v) On 1st December, 2017, Gruh Construction Company Limited undertook a contract to
construct a building for `108 lakhs. On 31st March, 2018 the company found that it had
already spent `83.99 lakhs on the construction. A prudent estimate of additional cost for
completion was `36.01 lakhs. The amount of the provision for foreseeable loss, which
must be made in the Final Accounts for the year ended 31st March, 2018 based on AS 7
"Accounting for Construction Contracts" is
(A) ` 13.01 lakhs
(B) ` 120.00 lakhs
(C) ` 12.00 lakhs
(D) ` 36.01 lakhs
(vi) ABC Ltd. has equity capital of ` 40,00,000 consisting of fully paid equity shares of `10
each. The net profit for the year 2017-18 was ` 60,00,000. It has also issued 36,000, 10%
convertible debentures of `50 each. Each debenture is convertible into five equity shares.
The tax rate applicable is 30%. The diluted earnings of 2017-18 are
(A) ` 61,80,000
(B) ` 61,26,000
(C) ` 60,00,000
(D) ` 62,34,000
(vii)A Company takes a Machinery on lease for a term of 6 years at a lease rent of ` 4,00,000
p.a. payable at end of each year with guaranteed and unguaranteed residual value of
` 3,00,000. The gross investment will be
(A) ` 24,00,000
(B) ` 7,00,000
(C) ` 1,00,000
(D) ` 27,00,000
(viii)On 1, April, 2017 Mark Ltd. acquired Mask Ltd. by using swap ratio based on EPS of two
companies. The Earnings after Tax of 2016-17 of Mark Ltd. was ` 2,000 lakh and that of
Mask Ltd. was ` 800 lakh. What is the EPS after merger if shares outstanding were 200
lakhs and 100 lakhs for Mark Ltd. and Mask Ltd. respectively?
(A) ` 10
(B) ` 9.33
(C) ` 6.67
(ix) A factory started activities on 1st April.

• Raw materials purchased during April = 80000 kgs. at ` 12 (out of which Excise duty
= ` 2 per kg.). Stock on hand as on 30th April = 5000 kgs.
• Production during April = 14000 units (of which 10000 units were sold). In addition to
the production, 1000 units were lying as WIP on 30th April (100% complete as to
Materials and 60% complete as to conversion).
• Wages and Production Overheads = ` 30 per completed unit.
• Selling Price = ` 110 per unit (of which Excise Duty is ` 10 per unit)
Value of closing stock on 30th April will be
(A) ` 3,60,000
(B) ` 4,10,000
(C) ` 4,78,000
(D) ` 4,28,000
(x) Kaa Ltd. absorbs Baa Ltd. and shares are issued by Kaa Ltd. using swap ratio 3:7. The face
value of each share is ` 10 for both the companies. The intrinsic value of each shares of
Kaa Ltd. is ` 14. Total purchase consideration is equal to
(A) `4,20,000
(B) `6,82,000
(C) `3,78,000
(D) `2,70,000
Answer:
1. (i) (A) Profits after Taxes = (` 1,00,000 - 28% of ` 1,00,000) = `72,000

Capitalisation of Profits = `72,000/0.12 = `6,00,000
Therefore, Goodwill = ` 6,00,000 - ` 4,80,000 = ` 1,20,000
(ii) (B) Calculation of Cost capitalized till 31st March 2018
Cost Capitalised till 31st March 2017

= Total Expenditure till 31st March,2017 — Expenses incurred till recognition criteria
is met
= ` 50 Lakhs - `22 Lakhs = `28 Lakhs
Expenditure incurred in Financial year 2017-2018 = `80 Lakhs
Cost Capitalised till 31st March,2018
= `800 Lakhs + `28 Lakhs =`108 Lakhs
Impairment Loss
= Carrying amount as on 31st March 2018 – Recoverable Amount
= `108 Lakhs - `72 Lakhs = `36 Lakhs.
(iii) (C)
Calculation of amount to be Capitalised
Value of Investment
= Cost of Investment + Proportionate share in Reserve & Surplus
= `10,00,000 + 20% of (`25,00,000 + `2,00,000 - `1,00,000)
= `10,00,000 + 20% of (`26,00,000)
= `10,00,000 + `5,20,000
= `15,20,000
(iv) (B)
Value of Asset without Actual Return
Fair value of plan assets on 31.03.2017 `8,00,000
Add : Employer contribution `2,80,000
Less : Benefits paid (`2,00,000)
8,80,000
Actual Return on Assets
Fair market value as on 31.3.18 `11,40,000
Less: Value of Asset without Actual Return `8,80,000
`2,60,000
(v) (C) Calculation of Estimated Cost of Construction

= `83.99 Lakhs + `36.01 Lakhs
= `120 Lakhs
Calculation of Provision to be made for foreseeable loss
= Contract Revenue – Estimated Cost of Construction
= `108 Lakhs - `120 Lakhs = `12 Lakhs.
(vi) (B)
Increase in earnings due to conversion of Debentures into Equity Shares
Interest on Debentures = 36,000 debentures × `50 per Debenture × 10%
= `18,00,000 × 10% = `1,80,000
Tax on Interest on Debentures = `1,80,000 × 30% = `54,000
Net Savings due to conversion of Debenture into Equity Shares
= `1,80,000 - `54,000 = `1,26,000
Diluted Earnings = Net Profits after tax + Net Savings due to conversion of
Debentures into Equity Shares = `60,00,000 + `1,26,000 = `61,26,000
(vii)(D) Gross investment = Total Lease Payments + Guaranteed and Unguaranteed

Residual Value
Gross Investment = (`4,00,000 × 6 years) + `3,00,000
= ` 24,00,000 + `3,00,000 = ` 27,00,000.
(viii)(A) EPS for Mark Ltd. = `2,000 Lakhs/200 Lakhs = `10

EPS for Mask Ltd. = `800 Lakhs/100 Lakhs = `8
New Shares to be issued to mask Ltd. = 100 Lakhs × (`8/`10) = 80 Lakhs
New EPS = (`2,000 Lakhs + `800 Lakhs)/ (200 lakhs + 80Lakhs)
= `2,800 Lakhs/280 Lakhs = `10
(ix) Excise Duty and other indirect duties have been clubbed into GST and GST arises at
the point of sale and not at the point of manufacturing. Correct option is not
available in the given options.
(x) Purchase consideration cannot be calculated from the information given in the
question.
Section – B
16x5=80
2. (a) Calculate the value of raw materials and closing stock based on the following
information:
Raw material X
Closing Balance 500 units
` per unit
Cost price including GST 200
GST (Input credit is receivable on the GST paid) 10
Freight inward 20
Unloading charges 10
Replacement cost 150
Finished Goods Y
Closing Balance 1200 units
` per unit
Material consumed 220
Direct labour 60
Direct overhead 40
Total Fixed overhead for the year was ` 2,00,000 on normal capacity of 20000 units.
Calculate the value of the closing stock, when
(i) Realizable Value of the Finished Goods Y is ` 440 and Realizable Expenses ` 40
(ii) Realizable Value of the Finished Goods Y is ` 330 and Realizable Expenses ` 30
4+4=8
(b) The Chief Accountant of STOCK Ltd. gives the following data regarding its six
segments:
` in lakhs
Particulars M N O P Q R Total
Segment Assets 50 25 10 5 5 5 100
Segment Results -50 -140 80 10 -10 10 -100
Segment Revenue 200 320 200 90 90 100 1000
Identify the Reportable Segments as per AS-17 8
Answer:
2. (a) Calculation of Cost per unit of Raw Material
Particulars `
Cost Price including GST 200
Less: GST 10
Cost Price net of GST 190
Add: Freight Inward 20
Add: Unloading Charges 10
Cost per unit of Raw Material 220
Calculation of cost per unit of Finished Goods
Particulars `
Raw Materials Consumed 220
Add: Direct Labour 60
Add: Direct Overhead 40
Add: Fixed Overhead (`2,00,000/20,000 units) 10
Cost per unit of Finished Goods 330
Calculation of Value of Closing Stock when Net Realisable Value of Finished Goods is
more that cost of Finished Goods i.e. `440 - `40 = `400.
Particulars `
Cost of Raw Materials (`220 × 500 units) 1,10,000
Cost of Finished Goods (`330 × 1,200 units) 3,96,000
Value of Closing Stock 5,06,000
Calculation of Value of Closing Stock when Net Realisable Value of Finished Goods is
less than cost of Finished Goods i.e. `330 - `30 = `300
Particulars `
Raw Materials to be valued at Replacement Cost (`150 × 500 units) 75,000
Finished Goods to be valued at Net Realisable Value (`300 × 1,200 units) 3,60,000
Value of Closing Stock 4,35,000
(b) As per para 27 of AS 17 'Segment Reporting', a business segment or geographical

segment should be identified as a reportable segment if:
(i) Its revenue from sales to external customers and from other transactions with
other segments is 10% or more of the total revenue - external and internal of all
segments; or
(ii) Its segment result whether profit or loss is 10% or more of:
The combined result of all segments in profit or the combined result of all
segments in loss, whichever is greater in absolute amount; or
(iii) Its segment assets are 10% or more of the total assets of all segments.
Criteria For Reportable Segment Reportable Segment fulfilling Criteria

1. 10% of Total Revenue M, N, O and R
(i.e.10% of `1,000 Lakhs)
2. 10% of Total Result M, N, O
(i.e.10% of `200 Lakhs)
3. 10% of Total Assets M, N, O
(i.e.10% of `100 Lakhs)
Hence, Reportable Segments as per AS 17 are M, N, O and R only.
3. (a) From the given information, you are required to compute the Deferred Tax Assets and
Deferred Tax Liability for Ramanujam Limited as on 31st March 2018. The tax rate
applicable is 35%.
(i) The Company has charged Depreciation of ` 7,42,900 in its Books of Accounts
while as per Income Tax computation, the Depreciation available to the
Company is ` 8,65,400.
(ii) The Company has made Provision for Doubtful Debts for ` 54,300 during the year.
(iii) The Company has debited Share Issue Expenses of ` 6,23,500 which will be
available for deduction under the Income Tax Act from the next year.
(iv) The expenses of ` 7,84,500 has been charged to Profit and Loss Account which
are disallowed under the Income Tax Act.
(v) The Company has made Donation of ` 2,00,000 which has been debited to Profit
and Loss Account and only 50% thereof will be allowed as deduction as per
Income Tax Law. 8
(b) What are the objectives and scopes of Ind AS-1-Presentation of Financial statements?
A Company made a Profit of ` 15 lakhs by selling a portion of vacant factory land and
in the same year lost ` 5 lakhs due to a Fire, which destroyed a part of Factory Shed,
which was not in use. The Company Accountant wanted to set off the loss of ` 5 lakhs
against the Profit on sale of land. Advise whether it would be correct as per Ind AS-1.
8
Answer:
3. (a)
COMPUTATION OF DTA / DTL (`)
Description Adj Net Amt Nature of Treatment DTA/DTL
Diff. at 35%
Profit before Tax as per XXX
Books
Add: Depreciation as 7,42,900 Timing Difference originating (42,875)
per Books in the current year. So,
Create DTL.
Less: Depreciation as (8,65,400) (1,22,500) Permanent Ignored NA
per IT
Add: Provision (54,300) Timing Difference originating 2,18,225
disallowed in IT in the current year. So,
Create DTA.
Add: Share Issue Exp. 6,23,500 Permanent Ignored NA

Disallowed u/s 35D
Add: Expense 7,84,500
Disallowed under IT
(assumed to be
permanent diff)
Add: Donation (50% of 2 1,00,000 Permanent Ignored NA
Lakhs)
Total Income XXX
(b) Objective
Ind AS 1 - Presentation of Financial Statements prescribes the basis for presentation of

General Purpose Financial Statements to ensure comparability both with the entity's
financial statements of previous periods and with the financial statements of other
entities. It sets out overall requirements for the presentation of financial statements,
guidelines for their structure and minimum requirements for their content.
Scope
An entity shall apply this Standard in preparing and presenting General Purpose
Financial Statements in accordance with Indian Accounting Standards (Ind AS).
An Entity should not offset Assets and Liabilities or Income and Expenses, unless
required or permitted by an Ind AS. When material, such items are to be disclosed
separately. Therefore, disclosing Net Profit by setting off loss due to fire against Profit
from sale of Land is not correct. As per lnd AS-1, Profit on Sale of Land and loss due to
fire should be disclosed separately.
4. The summarized Balance Sheets of R. Ltd. and P. Ltd. for the year ending on 31.03.2018
are as under:
R. Ltd. (`) P. Ltd. R. Ltd. P. Ltd.
(`) (`) (`)
Equity share Capital (in 24,00,000 12,00,000 Fixed Assets 55,00,000 27,00,000
shares of ` 10 each)
8% Preference Share Capital 8,00,000 Current Assets 25,00,000 23,00,000
(in shares of ` 10 each)
10% Preference Share Capital 4,00,000
(in shares of ` 10 each)
Reserves 30,00,000 24,00,000
Current Liabilities 18,00,000 10,00,000
80,00,000 50,00,000 80,00,000 50,00,000
The following information are provided
R. Ltd. P. Ltd.
(1) (a) Profit before tax 10,64,000 4,80,000
(b) Taxation 4,00,000 2,00,000
(c) Preference dividend 64,000 40,000
(d) Equity dividend 2,88,000 1,92,000
(2) The equity shares of both the companies are quoted in the market. Both the
companies are carrying on similar manufacturing operations.
(3) R. Ltd. proposes to absorb P. Ltd. as on 31.03.2018. The terms of absorption are as
under:
(a) Preference shareholders of P. Ltd. will receive 8% preference shares of R. Ltd.
sufficient to increase the income of preference shareholders of P. Ltd. by 10%.
(b) The equity shareholders of P. Ltd. will receive equity share of R. Ltd. on the
following basis:
(i) The equity shares of P. Ltd. will be valued by applying to the earnings per
share of P. Ltd. 75% of price earnings ratio of R. Ltd. based on the results of
2017-18 of both the companies.
(ii) The market price of equity shares of R. Ltd. is ` 40 per share.
(iii) The number of shares to be issued to the equity shareholders of P. Ltd. will be
based on the above market value.
(iv) In addition to equity shares, 8% preference shares of R. Ltd. will be issued to
the equity shareholders of P. Ltd. to make up for the loss in income arising from
the above exchange of shares based on the dividends for the year 2017-18.
(4) The assets and liabilities of P. Ltd. as on 31.03.2017 are revalued by professional valuer
as under:
Increased by Decreased by
` `
Fixed Assets 1,00,000 -
Current Assets - 2,00,000
Current Liabilities - 40,000
(5) For the next two years, no increase in the rate of equity dividend is expected. You are
required to:
(i) Set out in detail the purchase consideration.
(ii) Prepare the Balance Sheet as on 31.03.2017 as per Schedule III after absorption.
Note: Journal entries are not required. 16
Answer:
4. Calculation of P/E Ratio for R Ltd.

Particulars `
Profit before tax 10,64,000
Less: Tax 4,00,000
Profit after tax 6,64,000
Less: Preference Dividend 64,000
Earnings available for Equity Shareholders 6,00,000
Numbers of Equity Shares 2,40,000
Earning Per Equity Share (`6,00,000/2,40,000) `2.50
Price-Earning Ratio (P/E Ratio) = `40/`2.5 16
Calculation of Earning per Equity Share of P Ltd.

Particulars `
Profit before tax 4,80,000
Less: Tax 2,00,000
Profit after tax 2,80,000
Less: Preference Dividend 40,000
Earnings available for Equity Shareholders 2,40,000
Numbers of Equity Shares 1,20,000
Earning Per Equity Share (`2,40,000/1,20,000) `2.00
Calculation of number of Equity Shares to be issued to Equity Shareholders of P Ltd. pn the

basis of 75% of P/E — Ratio of R Ltd.
Particulars
Earning per Share of P Ltd. `2.00
75% of P/E Ratio of R Ltd. (i.e. 75% of 16) 12
Value of the share of P Ltd. on the basis of 75% of P/E Ratio of R Ltd. `24.00
( `2 × 12)
Equity Shares outstanding of P Ltd. 1,20,000
Number of Equity Shares to be issued to P Ltd. 72,000
(1,20,000 × 24/40)
Calculation of Amount of 8% Preference Shares to be issued to Equity Shareholders of P

Ltd. to make shortfall in Dividend
Particulars
Dividend distributed to the Equity Shareholders of P Ltd. `1,92,000
Dividend per share distributed by R Ltd. to its. Equity Shareholders `1.20
(`2,88,000/2,40,000)
Estimated Dividend to the Equity Shareholders of P Ltd. `86,400
(72,000 shares ×`1.2)
Estimated Shortfall of Dividend (`1,92,000 - `86,400) `1,05,600
Amount of Preference Shares to be issued to Equity Shareholders of P `13,20,000
Ltd. to make shortfall of Dividend (`1,05,600/0.08)
Calculation of Amount of 8% Preference Shares to be issued to Preference Shareholders

of P Ltd.
Particulars
Preference Dividend available to Preference Shareholders of P Ltd. `40,000
(`4,00,000 × 10%)
Add: Estimated Increase in earnings (`40,000 × 10%) `4,000
Estimated Preference Dividend for P Ltd. `44,000
Amount of Preference Shares to be issued to Preference 5,50,000
Shareholders of P Ltd. (`44,000/0.08)
Calculation of Purchase Consideration

Particulars
Amount of Preference Shares to be issued to Preference `5,50,000
Shareholders of P Ltd.
Equity Shares to be issued to P Ltd. (72,000 × `40) `28,80,000
Amount of Preference Shares to be issued to Equity Shareholders of P 13,20,000
Ltd. to make shortfall of Dividend
Purchase Consideration 47,50,000
R. Ltd.
Balance sheet as at 31st March, 2018
(after absorption)
(1) Shareholder's Funds
(a) Share Capital 1 57,90,000
(b) Reserves and Surplus 2 51,60,000
Current Liabilities (18,00,000 + 9,60,000) 27,60,000
Total 1,37,10,000
II. Assets
(1) Non-current Assets
(a) Fixed Assets
Tangible Assets (55,00,000 + 28,00,000) 83,00,000
Intangible Assets – Goodwill 8,10,000
(2) Current assets
Current Assets (25,00,000 + 21,00,000) 46,00,000
Total 1,37,10,000
Notes to Accounts:
(`)
1. Share Capital
3,12,000 Equity Shares of `10 each 31,20,000

(Out of which 72,000 were issued to vendors for non-cash
consideration)
2,67,000 8% Preference Shares of `10 each 26,70,000
(Out of which, 1,87,000 were issued to vendors for non-cash
consideration)
Total 57,90,000
2. Reserve and surplus
Reserves 30,00,000
Securities premium (72,000 Equity Shares × `30) 21,60,000
51,60,000
Working Note:
Calculation of Goodwill accruing on Absorption

`
Purchase Consideration 47,50,000
Net Assets taken over:
Fixed Assets 28,00,000
Current Assets 21,00,000
Total Assets 49,00,000
Less: Current Liabilities 9,60,000 (39,40,000)
Goodwill (Purchase Consideration – Net Assets taken over) 8,10,000
5. The following are the Balance Sheets of A Ltd. and its subsidiary company B Ltd. as at
31.03.2018
Particulars A Ltd. (` in Lakh) B Ltd. (` in Lakh)

I EQUITY AND LIABILITIES
1. Share holder’s Funds
(a) Share Capital:
(i) Equity Share Capital of `10 each 1,200 400
(ii) 8% Pref. Share Capital of ` 100 each --- 320
(b) Reserves and Surplus:
(i) General Reserve 200 160
(ii) Statement of Profit & Loss (01.04.17) 100 50
(iii) Surplus for the year 240 130
10% Debentures of ` 100 each 100 80
3. Current Liabilities and Provisions
Trade payables 150 82
Bills Payable to A Ltd. --- 50
Debenture Interest Accrued --- 8
Total 1,990 1,280
Particulars A Ltd. (` in Lakh) B Ltd. (` in Lakh)

II ASSETS
1. Non-Current Assets
(a) Fixed Assets:
(i) Tangible Assets
Land and Building 550 480
Plant and machinery 300 300
(ii) Intangible Assets --- ---
(b) Non-Current Investment
30,00,000 Equity shares in B Ltd. 660 ---
20,000; 10% Debentures in B Ltd. 20 ---

2. Current Assets:
(b) Trade receivables 130 170
(c) Bills Receivable 60 ---
(d) Cash and cash Equivalents 120 90
Total 1,990 1,280
(i) B Ltd. incurred a major expenditure of ` 60 Lakh on repairs of a machinery in the
beginning of the current year and wrongly charged the amount to Profit and Loss
Account. Rate of depreciation on plant and machinery is 15% and on Land and
Building is 10%.
(ii) No entries have been made in the books of A Ltd. for debenture interest due from B
Ltd. for the year ended 31st March, 2018.
(iii) A Ltd. acquired shares in B Ltd. on 31st March, 2018. For the purpose of acquisition of
shares, Land & Building and Plant & Machinery were revalued at ` 600 Lakh and ` 280
Lakh respectively.
(iv) Trade Payables of A Ltd. included an amount of ` 30 Lakh, which due to B Ltd.
(v) Contingent liability of A Ltd. ` 40 Lakh in respect of bills discounted which includes
bills of ` 20 Lakh accepted by B Ltd.
(vi) Ignore tax aspects.
You are required to prepare Consolidated Balance Sheet of A Ltd. and its subsidiary B Ltd.
as at 31st March, 2018. 16
Answer:
5.
Consolidated Balance Sheet of A Ltd. and its subsidiary B Ltd.
as on 31st March, 2018
1. Shareholders' Funds:
(a) Share Capital 1,200.00
(b) Reserves and Surplus 1 542.00
10% Debentures (100 + 80 - 20) 160.00
3. Minority Interest (W.N. 4) 549.20
4. Current Liabilities And Provisions:
Trade payables (150 + 82 – 30) 202.00
Bills Payable (50 – 30) 20.00
Debenture Interest Accrued (8 – 2) 6.00
Total 2679.20
II. Assets
Fixed Assets:
Tangible Assets
Land & Building (550 + 600) 1150.00
Plant & Machinery (300 + 280) 580.00
Intangible Assets (W.N.3) 49.20
2. Non-Current Assets:
10% Debentures in B Ltd. (20 - 20)
3. Current Assets
(a) Inventories (150 + 240) 390.00
(b) Trade Receivables (130 + 170 – 30) 270.00
(c) Bills Receivable (60 – 30) 30.00

(c) Debenture Interest (2 – 2)
(d) Cash and Cash Equivalents (120 – 90) 210.00
Total 2679.20
Notes to the accounts:
Reserve & Surplus

Particulars ` `
(a) General Reserve 200.00
(b) Profit and Loss A/c — Balance as on 31.03.2017 100.00
(Given)
(c) Current year Profit (Given) 240.00
Add: Interest on Debentures 2.00 242.00
Total 542.00
Working Notes:
1) Shareholding Pattern of Equity Shares in B Ltd.

Particulars B Ltd.
Total Shares (in Numbers) 40,00,000
Held by A Ltd. 30,00,000
(i.e. 75%)
Held by Minority 10,00,000
(i.e. 25%)
2) Analysis of profit of B Ltd.

Profit Reserves Profits
` ` `
Balance of revenue reserve as on 31.03.2018 160.00
Balance of Profit & Loss A/c as on 01.04.2017 50.00
Profit during the year 181.00
Less: Preference Dividend (25.60)
Less: Revaluation Loss on Plant & Machinery (71.00)
Add: Revaluation Profit on land & Building 120.00
Total 414.40
Share of A Ltd (75%) 310.80
Share of Minority (25%) 103.60

A. Cost of Investment 660.00
B. Less: 75% Share in Paid up capital of B Ltd. 300.00
C. Less: 75% Share in Capital Profits of B Ltd. 310.80
D. Cost of Control/Goodwill (A – B – C) 49.20
4) Calculation of Minority Interest

A. 25% Share in Paid up Capital of B Ltd. 100.00
B. 25% Share in Capital Profits of B Ltd. 103.60
C. 8% Preference Share Capital 320.00
D. Preference Dividend 25.60
Minority Interest 549.20
5) Calculation of Current year Profit of B Ltd.

A. profit as given in Balance Sheet 130.00
B. Add; Capital Expenditure Wrongly Charged as revenue 60.00
Expenditure
C. Less: 15% depreciation on above Capital Expenditure (9.00)
D. profit for the year 181.00
1) Analysis of profit of B Ltd.
Particulars Plant & Land &

Machinery Building
` `
Book Value as given in Balance Sheet on 31.03.2018 300.00 480.00
Adjustment due to Capital Expenditure being treated as 60.00 0.00
revenue Expenditure
Adjustment for depreciation on Capital Expenditure being (9.00) 0.00
treated as Revenue expenditure
Correct Book Value as on 31.03.2018 351.00 480.00
Value after Revaluation 280.00 600.00
Profit/(Loss) on Revaluation (71.00) 120.00
6. (a) Virtual Limited granted on 1st April, 2015, 100000 Employees Stock Option at ` 40,
when the Market Price was ` 60. These options will vest at the end of Year 1, if the
earning of Virtual Limited is more than 15% or it will vest at the end of the year 2, if the
average earnings of two years is more than 12% or lastly it will vest at the end of third
year, if the average earnings of 3 years will be 9% or more. 6000 unvested options
lapsed on 31st March 2016. 5,500 unvested options lapsed on 31st March, 2017 and
finally 3,000 unvested options lapsed on 31st March, 2018.
Year ended on Earnings in %

31.03.2016 13%
31.03.2017 9%
31.03.2018 7%
Employees exercised for 85,000 Stock Options which vested in them at the first
opportunity and the balance options were lapsed. Pass necessary journal entries and
show the necessary working. 8
(b) Following is the Balance Sheet of Rainbow Limited as on 31st March, 2018:
100000 equity shares of ` 10 each 10,00,000 Goodwill 5,00,000
10000, 12% preference shares of `100 10,00,000 Buildings 15,00,000
each
General Reserve 6,00,000 Plant 10,00,000
Profit and Loss Account 4,00,000 Investment in 10% 4,80,000
stock
15% Debentures 10,00,000 Stock-in-trade 6,00,000
Creditors 8,00,000 Debtors 4,00,000
Cash 1,00,000
Preliminary Expenses 2,20,000
48,00,000 48,00,000
(i) Normal value of investment is `5,00,000 and its market value is `5,20,000.
(ii) Following assets are revalued:
Building ` 32,00,000
Plant ` 18,00,000
Stock-in-trade ` 4,50,000
Debtors ` 3,60,000
(iii) Average profit before tax of the company is `12,00,000 and 12-50% of the profit is
transferred to general reserve, rate of taxation being 50%.
(iv) Normal dividend expected on equity shares is 8% while fair return on closing
(v) Goodwill may be valued at three year's purchase of super profits.
Ascertain the value of each equity share under fair value method. 8
Answer:
6. (a)
Journal of Virtual Ltd.
Date Particulars Dr. (`) Cr. (`)
31.3.2016 Employees Compensation Expenses A/c Dr. 9,40,000
To ESOS Outstanding A/c 9,40,000
(Being Compensation Expenses recognized in respect of
Employee Stock Option, i.e. 94,000 options at a discount of `
20 each)
P&L A/c Dr. 9,40,000

To Employees Compensation Expense A/c 9,40,000
(Being the t/f of ECE A/c)
(Being Compensation Expenses recognized in ESOP A/c)
P&L A/c Dr. 2,40,000
(Being Compensation Expenses recognized in ESOP)
P&LA/c Dr. 5,30,000
Bank A/c [85,000 x ` 20] Dr. 34,00,000
ESOS Outstanding A/c Dr. 17,00,000
To Equity Share Capital A/c [85,000 x ` 10] 8,50,000
To Securities Premium A/c [85,000 x ` 50] 42,50,000
(Being 85,000 Options exercised)
ESOS Outstanding A/c [500 x ` 20] Dr. 10,000

To General Reserve A/c 10,000
(Being ESOP outstanding A/c on lapse of 500 options
transferred to General Reserve)
Working Notes:
EXPENSE TO BE RECOGNISED EACH YEAR
Particulars Year 1 Year 2 Year 3
Length of the expected vesting period (at the end of 2 years 3 years 3 years
the year)
A. No. of Options expected to vest 94,000 88,500 85,500
B. Fair Value of An option ` 20 ` 20 ` 20
C. Total Fair Value of Option [A x B ] 18,80,000 17,70,000 17,10,000
D. Total Expense accrued at the end of year (`) 9,40,000 11,80,000 17,10,000
(D/2) (D x 2/3) (D x 3/3)
E. Expense recognised till the end of previous year (`) Nil 9,40,000 11,80,000
F. Expense to be recognized for the year (`) [D - E] 9,40,000 2,40,000 5,30,000
(b) 1. Calculation Capital Employed

Particulars ` `
A. Assets
Buildings 32,00,000
Plant 18,00,000
Stock 4,50,000
Debtors 3,60,000
Cash 1,00,000 59,10,000
B. Liabilities
Creditors 8,00,000
Debentures 10,00,000 18,00,000
C. Capital Employed (A – B) 41,10,000
2. Calculation of Operating Profit

Particulars `
Average profit before taxes 12,00,000
Less: Income from Investment 50,000
Operating Profit before Taxes 11,50,000
Less: Tax @ 50% 5,75,000
Operating Profit 5,75,000
3. Calculation of Profit available for Equity Shareholders

Particulars `
Operating Profit 5,75,000
Less: Transfer to Reserves @ 12.5% 71,875
Less: Preference Dividend 1,20,000
Profit available for Equity Shareholders 3,83,125
4. Calculation of Goodwill
Particulars `
A. Normal 4,11,000
(10% of Capital Employed i.e. 10% of `41,10,000)
B. Operating Profit 5,75,000
C. Super normal Profit (B – A) 1,64,000
D. Goodwill 4,92,000
(Supernormal Profit × years Purchase)
5. Calculation of Net Assets for Equity Shareholders

Particulars `
A. Capital Employed 41,10,000
B. Add: Goodwill 4,92,000
C. Add: Investment 5,20,000
D. Less: Preference Share Capital (10,00,000)
E. Net Assets for Equity Shareholders 41,22,000
6. Intrinsic Value of the Equity Share

= Net Assets for Equity Shareholders/ Number of Equity Shares
= `41,22,000/1,00,000 = `41.22
7. Value of Share as per Yield Method

Particulars `
Profits available for Equity Shareholders `3,83,125
Equity Share Capital `10,00,000
Actual Yield  3,83,125  38.3125%
 ×100 
 10,00,000 
Normal Yield 8%
Value of Share as per yield method `  3,83,125  `47.891
10  
 10,00,000 
8. Value of Equity Share under Fair Value Method

=( Intrinsic Value + Yield Value)/2 =(41.22 + 47.89)/2= ` 44.56
7. (a) State the Objectives, Constitution and Functions of Public Accounts Committee. 8
(b) Write a short note on Consolidated Fund of India, Contingency Fund and Public
Account of India. 8
Answer:
7. (a) Objectives of Public Accounts Committee
The Committee on Public Accounts is constituted by Parliament each year:

1. To examine accounts showing the appropriation of sums granted by Parliament for
expenditure of Government of India.
2. To examine the annual Finance Accounts of Government of India, and such other
Accounts laid before Parliament as the Committee may deem fit (e.g. Accounts of
autonomous and semi-autonomous bodies except those which come under the purview
of the Committee on Public Undertakings).
Constitution of Public Accounts Committee
1. The Committee consists of not more than 22 members comprising 15 members elected
by Lok Sabha every year from amongst its members according to the principle of
proportional representation by means of single transferable vote and not more than 7
members of Rajya Sabha elected by that House in like manner are associated with the
Committee.
2. The Chairman is appointed by the Speaker from amongst its members of Lok Sabha. The
Speaker, for the first time, appointed a member of the Opposition as the Chairman of the
Committee for 1967-68. This practice has been continued since then.
3. A Minister is not eligible to be elected as a member of the Committee. If a member after
his election to the Committee is appointed a Minister, he ceases to be a member of the
Committee from the date of such appointment.
Functions of Public Accounts Committee
1. To Examine the Appropriation Accounts relating to the Railways, Defence Services, P&T
Department and other Civil Ministries of the Government of India and Reports of the
Comptroller and Auditor-General of India thereon as also the Reports of the Comptroller
and Auditor-General on Revenue Receipts mainly form the basis of the deliberation of
the Committee.
2. To ascertain that money granted by Parliament has been spent by Government within
the scope of the demand. It considers the justification for spending more or less than the
amount originally sanctioned. If any money has been spent on a service in excess of the
amount granted by the House for the purpose, the Committee examines with reference
to the facts of each case, the circumstances leading to such an excess and makes such
recommendations as it may deem fit.

3. To examine cases involving losses, nugatory expenditure and financial irregularities.
4. To examine various aspects of Government's tax administration.
5. To examine cases involving under-assessments, tax-evasion, non-levy of duties,
misclassifications etc.
6. To identify the loopholes in the taxation laws and procedures and makes
recommendations in order to check leakage of revenue.
(b) CONSOLIDATED FUND OF INDIA
Subject to assignment of certain taxes to the States,

- all revenues received by the Government of India,
- all loans raised by the Government and
- all moneys received by that Government in repayment of loans
Shall form one consolidated fund to be called "the Consolidated Fund of India"
• No moneys shall be appropriated out of the Consolidated Fund of India except in
accordance with law.
• No money can be issued out of Consolidated Fund of India unless the expenditure is
authorised by an Appropriation Act.
CONTINGENCY FUND (ARTICLE 267) AND CONTINGENCY FUND OF INDIA ACT, 1950
• Parliament may by law establish a Contingency Fund in the nature of an imprest to
be called "the Contingency Fund of India.
• Fund shall be placed at the disposal of the President to enable advances to be
made for meeting unforeseen expenditure, pending authorization by Parliament
PUBLIC ACCOUNT OF INDIA ARTICLE 266(2)

All other public moneys received by or on behalf of the Government of India shall be
credited to the Public Account of India
REVENUE ACCOUNT (ARTICLE 112)

• The estimates of expenditure embodied in the annual financial statement shall show
separately ………………………………………. and shall distinguish expenditure on
revenue account from other expenditure.
• Proceeds of taxation and other receipts classed as revenue and Expenditure met
there from
CAPITAL HEADS
• Expenditure met usually from borrowed funds with the object of increasing concrete
assets of a material and permanent character. Includes receipts of capital nature
intended to be applied as a set off to capital expenditure.
• Receipts of capital nature which cannot be applied as a set off to capital
expenditure.

(a) Meaning and Potential applications of XBRL.
(b) Differences between Ind AS 21 and IAS 21 on treatment of exchange difference.
(c) Functions of Committee on Public Undertakings.
(d) Meaning and Advantages of Triple Bottom Line Reporting (TBL).
(e) Meaning and Advantages of Sustainability Reporting.
Answer:
8. (a) MEANING OF XBRL

XBRL stands for extensible Business Reporting Language. It is one of a family of "XML"
languages which is becoming a standard means of communicating information
between businesses and on the internet.
POTENTIAL APPLICATIONS OF XBRL
1. XBRL for Financial Statements: Financial statements of all sorts used to exchange
financial information
2. XBRL for Taxes: Specification for tax returns which are filed and information
exchanged for items which end up on tax returns
3. XBRL for Regulatory Filings: Specifications for the large number of filings required
by government and regulatory bodies
4. XBRL for Accounting and Business Reports: Management and accounting
reporting such as all the reports that are created by your accounting system
rendered in XML to make reusing them possible
5. XBRL for Authoritative Literature: A standard way for describing accounting
related authoritative literature published by the AICPA, FASB, ASB, and others to
make using these resources easier, "drill downs" into literature from financials
possible
(b) There are some differences between Ind AS 21 and IAS 21 regarding treatment of
exchange differences. Ind AS 21 provides some carve outs.
IAS 21
• Exchange differences arising on translation or settlement of foreign currency

monetary items are recognized in profit or loss in the period in which they arise.
• Exchange differences on monetary items, that in substance, from part of net
investment in a foreign operation, are recognized in profit or loss in the period in
which they arise in the separate financial statements and in other comprehensive
income in the consolidated financial statements and reclassified from equity to
profit or loss on disposal of the net investment.
IND AS 21
• Similar to IFRS, However an entity may continue the policy adopted for exchange
differences arising from translation of long term foreign currency monetary items
recognized in the financial statements for the period ending immediately before
the beginning of the first Ind As financial reporting period as per previous GAAP.
(c) The Committee on Public Undertakings exercises the same financial control on the
public sector undertakings as the Public Accounts Committee exercises over the
functioning of the Government Departments. The functions of the Committee are:-
(a) to examine the reports and accounts of public undertakings.
(b) to examine the reports of the Comptroller & Auditor General on public
undertakings.
(c) to examine the efficiency of public undertakings and to see whether they are
being managed in accordance with sound business principles and prudent
commercial practices.
The examination of public enterprises by the Committee takes the form of

comprehensive appraisal or evaluation of performance of the undertaking. It involves
a thorough examination, including evaluation of the policies, programmes and
financial working of the undertaking.
The objective of the Financial Committees, in doing so, is not to focus only on the
individual irregularity, but on the defects in the system which led to such irregularity,
and the need for correction of such systems and procedures.
(d) Meaning
TBL reporting refers to providing information on the economic, environmental and

social dimensions of the activities carried on by an organisation.
Thus, The Triple Bottom Line is made up of "Social (People), Economic (Profit) and
Environmental (Planet)".
In the private sector, a commitment to CSR implies a commitment to some form of
TBL reporting.
Advantages
1. enhancement of reputation and brand
2. securing a social licence to operate
3. attraction and retention of high calibre employees
4. improved access to investors
5. reduced risk profile
6. identification of potential cost savings
7. increased scope for innovation
8. alilgning stakeholder needs with management focus, and
9. creatino of sound basis for stakeholder dialogue
(d) Meaning
A sustainability report" is an organizational report that gives information about

economic, environmental, social and governance performance.
A sustainability report is the key platform for communicating positive and negative
sustainability impacts.
Sustainability reporting is a vital step for managing change towards a sustainable

global economy - one that combines long term profitability with social justice and
environmental care Sustainability reporting can be considered as synonymous with
other terms for non-financial reporting; triple bottom line reporting, corporate social
responsibility (CSR) reporting, and more. It is also an intrinsic element of integrated
reporting; a recent development that combines the analysis of financial and non-
financial performance.
Advantages
I. Internal benefits for companies and organizations can include:
1. Increased understanding of risks and opportunities

2. Emphasizing the link between financial and non-financial performance
3. Influencing long term management strategy and policy, and business plans
4. Streamlining processes, reducing costs and improving efficiency
5. Benchmarking and assessing sustainability performance with respect to laws,
norms, codes, performance standards, and voluntary initiatives
6. Avoiding being implicated in publicized environmental, social and
governance failures
7. Comparing performance internally, and between organizations and sectors
II. External benefits of sustainability reporting can include:
1. Mitigating - or reversing - negative environmental, social and governance

impacts
2. Improving reputation and brand loyalty
3. Enabling external stakeholders to understand company's true value, and
tangible and intangible assets
4. Demonstrating how the organization influences, and is influenced by,
expectations about sustainable development
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)

DECEMBER 2018
Paper- 17: Corporate Financial Reporting
Both the sections are to be answered subject to instructions given against each
(All working must form part of your answer]
SECTION – A
Answer the following questions
1. (a) Choose the most appropriate answer from the four alternatives given : (1 mark for
right choice and 1 mark for justification) 2 x 10 = 20
(i) Vini Ltd. has an asset, which was purchased on 01.04.2016 at Rs. 1,000 lakhs and
estimated salvage value was Rs.100 lakhs. The life of the asset is 5 years. The
Company applies straight line method for depreciation. As at 31.03.2018 value in
use is Rs.400 lakhs and the net selling price is Rs.375 lakhs. The amount of
impairment loss for 2017 – 2018 is
(A) Rs.420 lakhs
(B) Rs.200 lakhs
(C) Rs. 240 lakhs
(D) Rs. 265 lakhs
(ii) XYZ Ltd. obtained a Loan from a Bank for Rs.240 lakhs on 30.04.2016. It was utilized
for construction of a shed Rs.120 lakhs, Purchase of Machinery Rs.80 lakhs,
Working Capital Rs.40 lakhs. Construction of shed was completed in March, 2018.
The machinery was installed on the same date. Total interest charged by the Bank
for the year ended 31.03.2018 was Rs. 36 lakhs. As per AS- 16, interest to be
debited to Profit & Loss Account will be
(A) Rs.36 lakhs
(B) Rs. 18 lakhs
(C) Rs. 9 lakhs
(iii) As per Ind. As breach of a long-term loan covenant will lead to classification of
loan as a liability payable on demand and classification in the financial statement
to be made accordingly as required in the book of borrower when
(A) such breach occurs after the ends of the financial year and there is no
subsequent agreement between borrower and lender.
(B) such breach occurs after the end of the financial year and before the issue
of the financial statement.
(C) such breach occurs before the end of the financial year and there is an
agreement between lender and borrower after the end of the financial year
and before the issue of financial statement to the effect that lender shall not
demand the payment.
(D) such breach occurs after the end of the financial year and the lender has
sent a demand after requesting immediate payment before the issue of the
financial statement.
(iv) M/s. Power Track Ltd. purchased a plant for US $ 50,000 on 3st October, 2017
payable after 6 months. The company entered into a forward contract for 6
months @ Rs.64.25 per Dollar. On 31st October, 2017 the exchange rate was
Rs.61.50 per Dollar. The profit or loss on forward contract for the year ended 31st
March, 2018 is
(A) Rs.1,37,500
(B) Rs.1,14,583
(C) Rs. 1,14,538
(v) RAJASTHANI Co-operative Society Ltd. has borrowed a sum of US $ 12.50 million at
the commencement of the Financial year 2017-2018 for the solar energy project at
LIBOR (London Interbank Offered Rate of 1%) + 4%. The interest is payable at the
end of the respective financial year. The loan was availed at the then rate of Rs.45
to US dollar while the rate as on 31st March, 2018 is Rs.48 to the US dollar. Had
RAJASTHANI Co-operative Society Ltd. borrowed the Rupee equivalent in India, the
interest would have been 11%. ‘Borrowing Cost’ and exchange difference will be
(A) Rs.61,87,500, Rs.5,62,500
(B) Rs.67,50,000, Rs.5,62,500
(C) Rs.37,50,000, Rs. 5,62,500
(vi) Accounting profit Rs.15,00,000, Book profit as per MAT Rs.8,75,000, Profit as per
Income-Tax Act Rs.1,50,000, Tax rate 30%, MAT rate 7.50%. The deferred tax
asset/liability as per AS- 22 and amount of tax to be debited to Profit and Loss
Account for the year ended 31.03.2018 are
(A) Rs.4,95,000, Rs.5,15,625
(B) Rs.4,05,000, Rs.4,70,625
(C) Rs.4,05,000, Rs. 5,15,625
(vii) TULSIAN Ltd. has initiated a lease for 3 years in respect of a machinery costing
Rs.6,00,000 with expected useful life of 5 years. Machinery would revert to TULSIAN
Ltd. under the lease agreement.The unguaranteed residual value of the machinery
after the expiry of the lease term is estimated at Rs.80,000. The implicit rate of
interest is 8%. The annual payments have been determined in such a way that the
present value of the lease payment plus the residual value is equal to the cost of
machinery. Annual lease payments are made at the end of each accounting
year (PV of Rs.1 @ 8% for 3 years is 0.9259, 0.8573, 0.7938 respectively). The
unearned finance income is
(A) Rs.24,558
(B) Rs.2,08,186
(C) Rs.1,04,558
(viii) X Ltd. holds 51% of Y Ltd., Y Ltd. holds 51% of W Ltd., Z Ltd. holds 49% of W Ltd. The
related Parties as per AS- 18 are
(A) Z Ltd. and W Ltd.
(B) Z Ltd. and X Ltd.
(C) Z Ltd. and Y Ltd.
(ix) A firm values goodwill under ‘Capitalization of profits’ method. Its average profits
for past 4 years has been determined at Rs.72,000. Net assets and capital
employed in the business is Rs.4,80,000 and Rs.5,00,000 respectively and its normal
rate of return is 12%. Value of Goodwill based on capitalization of profit will be
(A) Rs.1,60,000
(B) Rs.1,32,000
(C) Rs.1,20,000
(D) Rs.1,00,000
(x) X Ltd. acquired 150000 shares of Y Ltd. on August, 2016. The Enquiry Capital of Y
Ltd. is Rs.20 lakh of Rs.10 per share. The machinery of Y Ltd. is revalued upwards
by Rs.4,00,000. The minority group interest shown in the consolidated Balance
Sheet as on March 31, 2017 was
(A) Rs.6,00,000
(B) Rs.4,00,000
(C) Rs.1,00,000
Answer : 1
(i) (C)
Explanation :
Recoverable amount is higher of value in use Rs. 400 lakhs and net selling price Rs.
375 lakhs.
Recoverable amount = Rs. 400 lakhs
Impairment loss = Carried Amount – Recoverable amount.
Carried amount or book value as on 31.03.2018
Depreciation for two years = Rs. (1000 – 100) lakhs/ 5*2 = Rs. 360 lakhs
Carried amount = Rs. (1000-360) lakhs = Rs. 640 lakhs.
Therefore, Impairment loss = Rs. (640-400) lakhs = Rs. 240 lakhs.
(ii) (B)
Explanation :
Qualifying Asset as per AS16 = Rs. 120 lakhs (construction of a shed)
Borrowing cost to be capitalized = 36 x 120/240 = Rs. 18 lakhs
Interest to be debited to Profit or Loss Account = Rs. (36 – 18) lakhs = Rs. 18 lakhs
(iii) (C)
Explanation :
The requirement of classification of loan as payable on demand arises only when
there is breach of loan covenant and due to such breach the loan become
payable on demand. When such a breach occurs before the end of financial of
reporting, the loan is required to be classified as loan payable on demand in the
financial statements. Thus, options (A), (B)and (D) are not applicable. Furthermore,
Ind AS 1 provides when as a result of breach of loan agreement if the loan
becomes payable on demand, such obligation shall be classified as “Current”,
even if : Lender agrees between Balance Sheet date and date of authorization
not to demand such loan on account of breach.
(iv) (C)
Loss for 5 months (1st November, 2017 to 31st March, 2018) = ($ 50,000 x Rs.64.25 -
Rs.61.50) x 5/6 = Rs.1,14,583.
(v) (A)
Rs.
A. Increase in liability towards principal amount [USD 12.50 x 37.50
(Rs.48 - Rs.45)]
B. Interest on foreign currency borrowing [USD 12.50 x Rs.48 x 5%] 30.00
C. Exchange differences on the amount of principal of the 67.50
foreign currency borrowings (A + B)
D. Interest on local currency borrowings [USD 12.50 x Rs.45 x 11%] 61.875
E. Total borrowing costs as per AS 16 (C or D whichever is less) 61.875
F. Exchange difference to be treated as per AS 11 (C-D) 5,625
(vi) (B)
Deferred Tax liability = (15,00,000 x 30%) – (1,50,000 x 30%) = Rs.4,05,000
(vii) (C)
Rs.
Cost of the equipment 6,00,000
Less: PV of unguaranteed residual value for 3 years @ 8% (63,504)
(Rs.80,000 x 0.7938)
Fair value to be recovered from 3 years Annual Lease Payment 5,36,496
Annual Lease Payment (Rs.5,36,496/2.577 Annuity for 3 years @ 2,08,186
8%)
Total lease payments [Rs. 2,08,186 x 3] 6,24,558
Add : Residual value 80,000
Gross Investments 7,04,558
Less : Present/Fair value of Investments (6,00,000)
Unearned Finance Income 1,04,558
(viii) (A)
Z Ltd. & W Ltd. are related to each other by virtue of Associate relationship.
(ix) (C) or (D)

Explanation for (C)
Capitalised Value of the Business =72,000/12% = Rs. 6,00,000
Value of Goodwill=Capitalised Value of the Business–Net Assets
= Rs. 6,00,000 – Rs.4,80,000 = Rs. 1,20,000
Explanation for (D)
Super Profit =Rs.72,000– (Rs.5,00,000*12%) =Rs. 12,000
Value of Goodwill= Super Profit/Normal rate of Return(%)
= 12,000/12% = Rs. 1,00,000
(x) (A)
No. of Shares of X Ltd. = Rs. 20,00,000 /10 = 2,00,000
Minority Interest = 50,000 = 25%
Profit on revaluation of Machinery = Rs. 4,00,000
Share of Minority Group of Y Ltd. = 25% of Rs. 4,00,000 = Rs. 1,00,000
Equity Share capital : (50000 x 10) = Rs. 5,00,000
Total Minority Interest Rs. 6,00,000
Section- B
Answer any five from the following seven questions
2. (a) State whether or not Ind As are applicable for the following Companies/Banks. If yes,
also state the effective date of applicability.
(i) A chemical company having Net Worth below INR 250 crore already listed
on National Stock Exchange in India.
(ii) A publishing company having Net Worth below INR 250 crore in process of
listing on National Stock Exchange in India.
(iii) An Unlisted FMCG Company having Net Worth of INR 250 crore.
(iv) An Unlisted NBFCs having Net Worth of INR 500 crore
(v) An Unlisted NBFCs having Net Worth of INR 250 crore
(vi) Scheduled Commercial Banks (excluding RRB’s and UCBs)
(vii) Insurance Companies
(viii) A chemical company listed on SME exchange.
(ix) An Unlisted FMCG Company having Net Worth below INR 250 crore
(x) A listed NBFCs having Net Worth below INR 250 crore
(xi) A Regional Rural Bank having Net Worth of INR 250 crore
(xii) An Urban Cooperative Bank having Net Worth of INR 250 crore
(b) Zee Ltd. purchased raw material of 20000 units at Rs.10 per kilogram during the year
2017-2018. They provide you with the following other information for the year ended
31st March, 2018 :
Particulars Units Rs.

Opening inventory :
Finished goods 2000 50,000
Raw materials 2200 22,000
Labour 1,53,000
Fixed overhead 1,50,000
Sales 20000 5,60,000
Closing inventory :
Finished goods 2400
Raw materials 1800
The expected production of the finished product for the year was 30000 units. Each unit of
finished product requires one unit of Raw Material purchased. Due to a fall in the market
demand, the price of the finished goods in which the raw material is incorporated is,
expected to be sold at Rs.20 per unit. The replacement cost of raw material was Rs.9.50
per unit on the closing day of the accounting period.
You are required to value the closing inventory as on 31st March, 2018 with reference to
Ind AS- 2. 8 + 8 =16
Answer : 2(a)
Companies Whether with effect from
applicable
1. A chemical company having Yes 1st April, 2017 (with comparatives)
Net Worth below 250 crore
already listed on National Stock
Exchanges in India .
2. A publishing company having Yes 1st April, 2017 (with comparatives)
Net Worth below 250 crore in
process of listing on National
Stock Exchanges in India.
3. An Unlisted FMCG Company Yes 1st April, 2017 (with comparatives)
having Net Worth of INR 250
crore
4. An Unlisted NBFCs having Net Yes 1st April, 2018 (with comparatives)
Worth of INR 500 crore.
5. An Unlisted NBFCs having Net Yes 1st April, 2019 (with comparatives)
Worth of INR 250 crore.
6. 0 Scheduled Commercial Banks Yes 1st April, 2019 (with comparatives)
(excluding RRB‟s & UCBs)
7. 0 Insurance Companies Yes 1st April, 2020 (with comparatives)
8. A chemical company listed on No
SME exchange.
9. An Unlisted FMCG Company No
having Net Worth below INR 250
crore.
10. A listed NBFCs having Net Worth No
below INR 250 crore
11. A Regional Rural bank having No
Net Worth of INR 250 crore.
12. An Urban Cooperative bank No
having Net Worth of INR 250
crore.
(b) Calculation of cost for closing inventory (Finished Goods)
Particulars Rs.
Cost of raw material consumed (Refer W.N.) (20,400 kg x Rs.10 per kg) 2,04,000
Director labour 1,53,000
1, 50, 000
Fixed overhead x 20,400
30, 000 1,02,000
Cost of production 4,59,000
Cost of closing inventory of finished goods per unit (4,59,000/20,400) Rs. 22.50
Net realizable value (NRV) per unit Rs. 20.00
Since net realizable value is less than cost, closing inventory of finished goods will be
valued at Rs.20 per unit.
As NRV of the finished goods is less than its cost, relevant raw materials will be valued at
replacement cost i.e. Rs.9.50 per kg.
Therefore, value of closing inventory :
Finished goods (2,400 units x Rs.20 per unit) Rs.48,000
Raw materials (1,800 kg x Rs.9.50 per kg) Rs. 17,100
Rs. 65,100
Working Note :
Calculation of Raw material as consumed during the year
Units in kg
Opening inventory of raw material 2,200
Add : Purchases of raw material 20,000
22,200
Less : Closing inventory of raw material (1,800)
Raw material consumed 20,400
3. (a) Bharat Tushar Ltd. borrowed funds for modernization and development of its factory
as follows :
Date on which Funds borrowed Funds Borrowed Rate of Interest
(Rs.)
01.04.2017 12,00,000 13%
01.07.2017 40,00,000 14%
01.10.2017 16,00,000 15.5%
Expenditure incurred on Construction Date on which it is incurred

of a Building (Rs.)
6,00,000 01.04.2017
2,00,000 01.05.2017
3,00,000 01.07.2017
8,00,000 01.12.2017
The Construction of a Building completed on 31.12.2017. However, it was put to use

only on 01.04.2018. A sum of Rs.20 lakhs has been advanced for purchase of Plant &
Machinery which was installed by 31st March, 2018. Rs. 29 lakhs has been utilized
for working capital requirements. Show the treatment of Interest as per AS- 16.
(b) Discuss the following situations with reference to relevant Accounting Standard
regarding treatment in the Accounts :
(i) An airline is required by law to overhaul its aircraft once in every three years. A
company which operates aircrafts does not provide any provision as required
by law in its Final Accounts.
(ii) A company is in a dispute involving allegation of infringement of patents by a
competitor company who is seeking damages of a huge sum of Rs.900 lakhs.
The Directors are of the opinion that the claim can be successfully resisted by
the company. 8+(4+4)= 16
Answer : 3(a)
As per AS 16, borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset should be capitalized. A qualifying asset is an asset that
necessarily takes a substantial period of time (usually 12 months or more) to get ready for its
intended use or sale. If an asset is ready for its intended use or sale at time of its acquisition
then it is not treated as a qualifying asset for that purposes of AS 16.
Particulars Nature Treatment of Interest
1. Construction of a Qualifying Asset Interest to be capitalized As per
building = Rs.1.12 lakhs W.N. (iii)
2. Advance for Purchase Not a Qualifying Interest to be charged to P&L A/c.
of Plant & machinery Asset*
*On the basis that Plant & Machinery is ready for its intended use at the time of its
acquisition/purchase.
3. Working Capital Not a Qualifying Interest to be charged to P&L A/c.
Asset
Interest Costs to be charged to Profit & Loss Account = Total Interest – Interest to be capitalized
= Rs.7,00,000 – Rs.1,12,000 = Rs.5,88,000.
(i) CALCULATION OF CAPITALIZED RATE

Date of Loan O/S Loan Interest Months for Product Total Interest
Rate Loan is
O/S
A B C D E=BxD F = B x C x D/12
1/4/2017 12,00,000 13% 12 1,44,00,000 1,56,000
1/7/2017 40,00,000 14% 9 3,60,00,000 4,20,000
1/10/2017 16,00,000 15.5% 6 96,00,000 1,24,000
Total 6,00,00,000 7,00,000
Average Amount Outstanding = 600,00,000/12 = 50,00,000

Capitalization Rate = (7,00,000 / 50,00,000)*100 = 14 %
(II) CALCULATION OF AVERAGE CARRYING AMOUNT OF THE BUILDING DURING A PERIOD
Expenditure incurred Date on which it Months Products

is incurred
A B C D=Axc
6,00,000 01/04/2017 9 54,00,000
2,00,000 01/05/2017 8 16,00,000
3,00,000 01/07/2017 6 18,00,000
8,00,000 01/12/2017 1 8,00,000
Total 96,00,000
Average carrying amount of Building during a period = 96,00,000 /12 = 8,00,000
(iii) Interest to be capitalized = Average carrying amount of Building x Capitalization
Rate=Rs.8,00,000 = 0.14 x Rs.1,12,000
Answer : 3(b)
Provision of AS 29: As per para 14 of AS 29, „Provision, Contingent Liabilities and Contingent
Assets‟, a provision should be recognized when
(a) an enterprise has a present obligation as a result of a past event ;
(b) It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation ; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions
are not met, no provisions should be recognized.
If these conditions are not met, no provision should be recognized.
(i) Advice : In the given case, there is no present obligation, therefore no provisions is
recognized as per AS 29. The cost of overhauling aircraft is not recognized as a
provision because it is a future obligation and the incurring of the expenditure
depends on the company‟s decision to continue operating the aircrafts. Even a
legal requirement to overhaul does not require the company to make a provision
for the cost of overhaul because there is no present obligation to overhaul the
aircrafts. Further, the enterprises can avoid the future expenditure by its future
action, for example by selling the aircraft. However, an obligation might arise to
pay fines or penalties under the legislation after completion of three years.
Assessment of probability of incurring fine and penalties depends upon the
provisions of the legislation and the stringency of the enforcement regime. A
provision should be recognized for the best estimate of any fines and penalties if
airline continues to operate aircrafts for more than three years.
(ii) Advice : Since the directors of the company are of the opinion that the claim can
be successfully resisted by the company, therefore there will be no outflow of the
resources. The company will disclose the same as contingent liability by way of the
following note : “Litigation is in process against the company relating to a dispute
with a competitor who alleges that the company has infringed patents and is
seeking damages of Rs.900 lakhs. However, the directors are of the opinion that
the claim can be successfully resisted by the company.”
4. (a) Given below are the extracts from the Balance Sheets of P.Ltd and V. Ltd. as at 31 st
March, 2018 :
Particulars P. Ltd. (Rs.) V. Ltd. (Rs.)
Equity Share Capital of Rs.10 each 6,00,000 2,00,000
General Reserve 1,50,000 20,000
Profit & Loss A/c. 1,77,000 10,000
Statutory Reserves 5,000
10% Debentures of Rs.100 each 50,000
Trade Payables 37,500 1,40,000
Goodwill 1,19,500
Tangible Assets 4,75,000 1,50,000
Non-Current Investments (including 100 Debentures of 1,09,000
V. Ltd. purchased @ Rs.90)
Inventories 95,000 55,000
Trade Receivables 1,40,000 65,000
Cash at Bank 1,45,500 35,500
The business of V. Ltd. is taken over by P. Ltd. as on that date on the following terms :
(i) Prior to absorption, V. Ltd and P. Ltd. decide to declare and pay equity dividend @
5% (Ignore Dividend Distribution Tax).
(ii) 50% of Tangible Fixed Assets are taken over at 100% more than the book value
and the remaining Tangible Fixed Assets are taken over at less than the book
value for Rs.62,500.
(iii) Goodwill of V.Ltd. is to be valued at Rs.50,000.
(iv) Inventories are taken over at book value less 10% and Trade Receivables are
taken over at book value subject to an allowance of 10% to cover doubtful debts.
(v) Trade Payables are to be taken over subject to a discount of 5% an Unrecorded
Loan Liability of Rs.38,500 to be discharged by P. Ltd. at book value.
(vi) The purchase consideration is to be discharged to the extent of 20% in cash
and the balance in the form of equity shares of Rs.10 each, Rs.8 paid up at a
premium of Rs.7 per shares. The market value of an equity share of P.Ltd. at
present is Rs.100.
(vii) The issue of such an amount of fully paid 14% Debentures in P. Ltd. at 96 percent
as is sufficient to discharge 10% Debentures in V. Ltd. at a premium of 20 per
cent.
(viii) Expenses of liquidation of V. Ltd. are to be reimbursed by P. Ltd. to the extent of
Rs.10,000 Actual Expenses amounted to Rs.12,000.
(ix) Statutory Reserves are to be maintained for 2 more years.
Prior to 31st March, 2018 V. Ltd. sold goods costing Rs.30,000 to P. Ltd. for
Rs.40,000. Rs.25,000 worth of goods were still in stock of P. Ltd. Trade
Receivables include Rs.20,000 still due from P. Ltd. On the date of absorption, V.
Ltd. owed P. Ltd. Rs.60,000 for the purchase of stock from P.Ltd. which made a
profit of 20% on cost. Four fifth of such stock were sold till 31.03.2018.
Required (a) PrepareRealisation Account in the books of V. Ltd.
(b) Pass Journal Entries in the books of P. Ltd.
(b) ABC Ltd. acquires 80% of XYZ Ltd. for Rs.12,00,000 paid by equity at par. Fair Value
of XYZ Ltd.’s net assets at the time of acquisition amounts to Rs.10,00,000.
You are required to calculate :
(a) Non controlling interest and Goodwill
(b) Journal entries in the books of ABC Ltd.
12 + 4 =16
Answer : 4(a)
Dr. REALISATION ACCOUNT IN THE BOOKS OF V. LTD Cr.
Particulars Rs. Particulars Rs.
To Goodwill 1,19,500 By 10% Debentures 50,000
To Tangible Fixed Assets 1,50,000 By Trade Payables 1,40,000
To Inventories 55,000 By P. Ltd. (Purchase Consideration) 1,62,557
To Trade Receivables 65,000 By Equity Shareholders‟ A/c. (Loss) 62,443
To Bank [35,500 – 10,000 23,500
(Div) – 2,000 (Exp.)]
To Bank A/c. (Expenses) 2,000
4,15,000 4,15,000
JOURNAL OF P.LTD.
Particular s L.F. Dr. (Rs.) Cr. (Rs.)
Profit & Loss A/c. Dr 30,000
To Dividend Payable a/c. 30,000
(Being the Dividend declared @ 5%)
Dividend Payable A/c. Dr. 30,000
To Bank A/c. 30,000
(Being the Dividend paid)
Business Purchase A/c. Dr 1,62,557
To Liquidators of V. Ltd. 1,62,557
(Being the purchase price agreed to be paid for
the business of V Ltd.)
Goodwill (Balancing figure) Dr. 51,057
Tangible Fixed Assets Dr. 2,12,500
Inventories Dr. 49,500
Trade Receivables Dr. 65,000
Bank Dr. 23,500
Reserve for Discount on Trade Payables [5% of Rs. Dr 4,000
(1,40,000 – 60,000)]
To provision for Doubtful Debts. [10% of Rs. (65,000 4,500
– 20,000)]
To Trade Payables 1,40,000
To 10% Debentures [Rs.50,000 + 20%] 60,000
To Unrecorded Loan 38,500
To Business Purchase A/c. 1,62,557
(Being the assets and liabilities taken over from V.
Ltd.)
Liquidators of V. Ltd. Dr 1,62,557
To Bank A/c. 32,567
To Equity Share Capital A/c. 69,328
To Securities Premium A/c. 60,662
(Being the issue of Shares and payment in cash in
satisfaction of purchase consideration)
Goodwill A/c. Dr. 10,000
To Bank A/c. 10,000
(Being the payment of Realization Expenses of V.
Ltd.)
Goodwill Dr. 6,250
To Inventories A/c. 6,250
(Being the Elimination of unrealized profit on unsold
goods worth Rs.25,000 bought from V. Ltd. still
unsold (25,000 x 10,000 / 40,000)
Trade Payables A/c. Dr. 20,000
To Trade Receivables (V.Ltd.) A/c. 20,000
(Being Elimination of the amount owned by us to
V. Ltd.)
Goodwill A/c. Dr. 800
To Inventories 800
(Being the elimination of unrealized profit included
in goods purchased by V. Ltd.) [(20% of Rs.60,000 x
1/6) – (10% of Rs.12,000)]
Trade Payables (V. Ltd.) A/c. Dr. 60,000
To Trade Receivable A/c. 60,000
(Being the cancellation of Inter Co. Owing)
10% Debentures of V. Ltd. Dr. 60,000
Discount on Issue of 14% of Debentures A/c. Dr. 2,000
To Investments in 10% Debentures of V. Ltd. 9,000
To 14% Debentures A/c. 50,000
To Capital Reserve A/c. 3,000
(Being the investment in 10% Debentures of V. Ltd.
cancelled and the remaining debentures
redeemed by issue of 500, 14% Debentures of
Rs.100 each at a discount of 4%)
[Face Value of Debentures=Rs.48,000/96%=
Rs.50,000]
Unrecorded Loan A/c. Dr. 38,500
To Bank A/c. 38,500
(Being the liabilities of V. Ltd. discharged)
Amalgamation Adjustment A/c. Dr. 5,000
To Statutory Reserves 5,000
(Being the identity of statutory Reserves retained)
Capital Reserve A/c. Dr. 3,000
To Goodwill A/c. 3,000
(Being the goodwill adjusted against Capital
Reserve)
1. CALCULATION OF PURCHASE CONSIDERATION

Particulars Rs.
A. Assets taken over at agreed values
Tangible fixed Assets [(Rs.1,50,000 x 50%) + 100%] 1,50,000
Tangible Fixed Assets [Remaining] 62,500
Inventories [Rs.55,000 - Rs.5,500] 49,500
Trade Receivables [Rs.65,000 - Rs.6,500] 58,500
Cash at Bank [35,500 – 10,000 – 2,000] 23,500
Goodwill 50,000
3,94,000
B. Less : Liabilities taken over
Trade payables 1,40,000
Less : Reserve for Discount @ 5% 7,000 1,33,000
10% Debentures [Rs.50,000 + 20%] 60,000
Unrecorded Loan 38,500
2,31,500
Net Assets taken over (A - B) 1,62,500
(III) DISCHARGE OF PURCHASE CONSIDERATION

Particulars Rs.
Payable in Cash (20% of Rs.1,62,500) 32,500
In shares – [(80% of Rs. 1,62,500 /Rs. 15]
8,666 shares of Rs.10 each, Rs.8 paid up valued at Rs.15 per share 1,29,990
Cash for factional Share (.67 x Rs.100) 67
1,62,557
(b) Fair Value of non controlling interest= Rs 10,00,000 *20% = Rs 2,00,000
Goodwill = consideration paid - holding co ‘s share in net assets
= Rs 12,00,000 - (Rs 10,00,000 *80%) = Rs 4,00,000
JOURNAL ENTRY
Goodwill A/c[balancing figure] Dr. 4,00,000
Net Assets A/c Dr. 10,00,000
To Investments A/c 12,00,000
To Minority Interest A/c[10,00,000*20%] 2,00,000
5. Given below are the extracts from the Balance Sheets of AH Ltd. and AS Ltd. as at 31 st
March, 2018:
Particulars AH Ltd. (Rs.) AS Ltd. (Rs.)
Equity Shares of Rs.10 each 10,00,000 7,00,000
12% Pref. Shares of Rs.10 each 1,00,000 50,000
General Reserve 2,00,000 4,48,000
Profit & Loss A/c. 3,10,000 1,52,000
12% Debentures 2,00,000 2,00,000
Trade Creditors 3,00,000 5,35,000
Bills payables 1,40,000 1,40,000
Land & Building 6,00,000 2,70,000
Plant & Machinery 2,00,000 3,70,000
Shares in AS Ltd. 7,10,000
900, 12% Debentures in AS Ltd. 80,000
Inventories 1,00,000 3,00,000
Trade Debtors 4,00,000 9,10,000
Bills Receivables 1,00,000 1,00,000
Cash at Bank 60,000 2,75,000
Note : Contingent liability in respect of Bills discounted by AH Ltd. Rs.50,000.

Contingent liability in respect of Bills discounted by AS Ltd. Rs.25,000 of which Bills of
Rs.5,000 were accepted by AH Ltd.
Additional Information :
(a) AH Ltd. acquired 40,000 Equity Shares of AS Ltd. and 2,000. 12% Pref. Shares in AS
Ltd. on 01.07.2017 at a cost of was Rs.6,80,000 and Rs.30,000 respectively. The credit
balance of Profit and Loss Account of AS Ltd. as on 01.04.2017 was Rs.2,00,000 and
that of General Reserve on that date was Rs.6,00,000.
(b) On 30.09.2017 AS Ltd. declared dividend @ 20% on equity shares for the year 2016-
2017 AH Ltd. credited the receipt of dividend to its Profit and Loss Account.
(c) On 01.01.2018, AS Ltd. issued 2 shares for every 5 shares held, as Bonus shares. No
entry has been made in the books of AH Ltd. for the receipt of these Bonus shares.
(d) AH Ltd. purchased goods for Rs.3 lakhs from AS Ltd. which made a profit of 20% on
cost. 80% of these goods were sold by AH Ltd. at a profit of 20% on cost till
31.03.2018.
(e) On 01.01.2018, AH Ltd. sold to AS Ltd. a Machine costing Rs.2,40,000 at a profit on
25% on selling price. Depreciation at 10% p.a. was provided by AS Ltd. on this
Machine.
(f) AH Ltd. owed AS Ltd. Rs.2,90,000 but AS Ltd is owed Rs.3,00,000 by AH Ltd.
(g) The Land and Building of AS Ltd. which stood at Rs.3,00,000 on 01.04.2017, was
considered as worth of Rs.6,92,500 on 01.07.2017, for which necessary adjustments
are yet to be made.
(h) All the Bills Payables of AS Ltd. were drawn upon by AH Ltd.
(i) The management of AH Ltd. and AS Ltd. wish to recommend a dividend of 15% p.a.
and 10% p.a respectively on equity shares for the year 2017-2018.
Required : Prepare the Consolidated Balance Sheet of AH Ltd. and its subsidiary, as at 31 st
March, 2018 16
Answer : 5
CONSOLIDATED BALANCE SHEET OF AH. LTD. AND ITS SUBSIDIARY AS LTD. AS AT 31.3.2018
Particulars Note No. Rs.
1. Equity and Liabilities
(1) Shareholders‟ Funds
(2) Minority Interest (v) 3,66,400
(a) Long term Borrowings [12% Debentures ] 3 3,10,000
(a) Trade Payables [5,45,000 + 1,80,000] 3 7,25,000
(b) Short-term Provisions [Proposed Dividend] 1,62,000
[1,50,000 + 12,000]
Total 35,77,000
II. Assets
(a) Fixed Assets
Tangible Assets [12,40,000 + 4,92,000] 3 17,32,000
Intangible Assets
(b) Non-Current Investments
(2) Current Assets
(a) Inventories 3 3,90,000
(b) Trade Receivables [10,10,000 + 1,00,000] 3 11,10,000
(c) Cash and Cash Equivalents 3 3,45,000
Total 35,77,000
Notes to Accounts :
Particulars Rs.
1. Share Capital
100000 Equity Shares of Rs.10 each 10,00,000
1000, 12% Pref. Shares of Rs.100 each 1,00,000
11,00,000
2. Reserves and Surplus
General Reserve 2,28,800
Profit & Loss Account (4,600)
Capital Reserve on Consolidation 6,89,400
9,13,600
3. CONSOLIDATED BALANCES
Particulars Building Machin Inventor Trade B/R Cash & Trade B/P Debent
ery ies Debtors Bank Creditor ures
s
AH Ltd. 6,00,000 2,00,000 1,00,000 4,00,000 1,00,000 60,000 3,00,000 1,40,000 2,00,000
AS Ltd. 2,70,000 3,70,000 3,00,000 9,10,000 1,00,000 2,75,000 5,35,000 1,40,000 2,00,000
Total 8,70,000 5,70,000 4,00,000 13,10,000 2,00,000 3,35,000 8,35,000 2,80,000 4,00,000
Less : - (78,000) (10,000) - - - - - -
Unrealised
Profit
Less : Mutual - - - (3,00,000) (1,00,000) - (2,00,000) (1,00,000) (90,000)
Owings
Add: 4,00,000 - - - - - - - -
Appreciation
Less : Short (30,000) - - - - - - - -
Depreciation
Remittance - - - - - 10,000 - - -
in transit
Consolidated 12,40,000 4,92,000 3,90,000 10,10,000 1,00,000 3,45,000 5,45,000 1,80,000 3,10,000
Balances
4. Contingent Liability = Total Contingent Liability – Internal Contingent Liability

= (Rs. 50,000 + Rs.25,000) – (Rs.40,000 + Rs.5,000) =
Rs.30,000
Working Notes :
Dr. (I) GENERAL RESERVE ACCOUNT OF AS LTD. Cr.
To Equity Share Capital (Bonus) 2,00,000 By Balance b/d. 6,00,000
To Balance c/d 4,48,000 By Profit and Loss A/c. (b.f.) 48,000
6,48,000 6,48,000
Dr. (II) PROFIT AND LOSS ACCOUNT OF AS LTD. Cr.

To Final Dividend for previous 1,00,000 By Balance b/d 2,00,000
To General Reserve 48,000 By Profit earned (b.f.) 1,00,000
To Proposed Preference Dividend 6,000 6,48,000
To Balance c/d. (1,52,000 - 6,000) 1,46,000
3,00,000 3,00,000
(III) CALCULATION OF CHANGE IN THE VALUE OF FIXED ASSET AND

PROVISION OF DEPRECIATION
Particulars Rs.
A. Book Value as on opening date 3,00,000
B. Less : Depreciation upto date of revaluation [Rs.3,00,000 x 10/100 x 3/12] (7,500)
C. Book Value as on the date of revaluation (A – B) 2,92,500
D. Revalued figure as on the date of revaluation 6,92,500
E. Increase in Value (D – C) 4,00,000
F. Short Depreciation since the date of revaluation [Rs.4,00,000 x 10/100 x 30,000
9/12]
(IV) ANALYSIS OF PROFITS AND RESERVES OF AS LTD.

Profits Profits Reserves
Rs. Rs. Rs.
Opening Balance of General Reserve 6,00,000
Less : Utilized for issue of Bonus Shares (2,00,000)
Reserve created 12,000 36,000
Opening Balance of Profits and Loss A/c. 2,00,000
Less : Final Dividend for the previous year (1,00,000)
Profits earned 25,000 75,000
Less : Transfer to General Reserve (12,000) (36,000)
Less : Proposed Preference Dividend (1,500) (4,500)
Add : Increase in value of Fixed 4,00,000
Less : Short Provision of Depreciation (30,000)
Total 9,23,500 4,500 36,000
Share of Minority @ 20% 1,84,700 900 7,200
Share of Holding Company @ 80% 7,38,800 3,600 28,800
(V) MINORITY INTEREST

Particulars Rs.
Paid up Value of Equity shares (including Bonus Shares ) 1,40,000
Paid up Value of Preference Shares presently held by Minority 30,000
Share of Minority in Capital Profit of AS Ltd. 1,84,700
Share of Minority in Revenue Profit of AS Ltd. 900
Share of Minority in Revenue Reserves of AS Ltd. 7,200
Share of Minority in Proposed Preference Dividend of AS Ltd. 3,600
Total 3,66,400
(VI) GOODWILL/CAPITAL RESERVE ON CONSOLIDATION

Particulars Rs.
A. Corrected Net Cost of Investments
(a) Net Cost of Equity Investments 6,80,000
(b) Less : Equity Dividend out of Pre-acquisition Profits (80,000)
(c) Cost of Investments in Pref. Shares 30,000
(d) Less : Pref. Dividend receivable by Holding Co. out of pre-acquisition (600)
profits [1,500 x 2,000 / 5,000]
6,29,400
B. Holding Co.‟s Share in Net Assets of Subsidiary Co.
(a) Paid up Value of Equity Shares (including Bonus Shares) 5,60,000
(b) Paid up Value of Preference Shares presently held by Holding Co. 20,000
(c) Share of Holding Co. in Capital Profits of Subsidiary Co. 7,38,800
13,18,800
C. Capital Reserve (B – A) 6,89,400
(VII) CONSOLIDATED PROFIT AND LOSS ACCOUNT

Particulars Rs.
A. Balance as given in the Balance Sheet of AH Ltd. 3,10,000
B. Add : (a) Holding Co.‟s Share in Revenue Profits of AS Ltd. 3,600
(b) Holding Co.‟s Share in Proposed Pref. Dividend as AS Ltd. 1,800
[4,500 x 2,000/5,000]
(c) Profit on Debentures held in S Ltd. 10,000
[90,000 (Face Value) – 80,000 (Cost)]
C. Less (a) (80,000)
Dividend out of pre-acquisition profits wrongly credited to this account
instead on Investment Account
(b) Unrealized Profit on Inventories [(20% of 3,00,000) x 20/120)] (10,000)
(c) Unrealized Profit on Machine [(2,40,000 x 1/3) – (80,000 x 10% x 3/12)] (78,000)
(d) Proposed Equity Dividend [10,00,000 x 15%] (1,50,000)
(e) Proposed Pref. Dividend [1,00,000 x 12%] (12,000)
D. Closing Balance to be taken to the Consolidated Balance Sheet (A+B–C) (4,600)
(VIII) CONSOLIDATED REVENUE RESERVE ACCOUNT

Particulars Rs.
A. Balance as given in the Balance Sheet of AH Ltd. 2,00,000
B. Add: Holding Co.‟s Share in Revenue Reserves of AH Ltd. 28,800
C. Closing Balance to be taken to be the Consolidated Balance Sheet (A + B) 2,28,800
6. (a) At the beginning of year 1, an enterprise grants 300 options to each of its 1000
employees. The contractual life of option granted is 6 years.
Other relevant information is as follows :
Vesting Period 3 years Exercise Period 3 years
Expected Life 5 years Exercise Price Rs.50
Market Price Rs.50 Expected forfeitures per year 3%
The option granted vest according to a graded schedule of 25% at the end of the
year 1, 25% at the end of the year 2 and the remaining 50% at the end of the year 3.
You are required to calculate total compensation expenses for the options
expected to vest and cost and cumulative cost to be recognized at the end of all
the 3 years assuming that expected forfeiture rate does not change during the
vesting period when,
(i) The fair value of these options, computed based on their respective expected lives,
are Rs.10, Rs.13, Rs.15 per options, respectively.
(ii) The intrinsic value of the options at the grant date is Rs.6 per options.
(b) Following balances as on 31st March, 2017 are obtained from the account books of
Gunnu Ltd. :
Rs.in Lakhs
200 lakhs Equity Shares of Rs.10 each 2,000
10 Lakhs, 10% Preference Shares of Rs.100 each 1,000
General Reserve 1,600
Profit and Loss Account 1,400
12% Debentures 1,000
Creditors 800
Goodwill 1,000
Land and Buildings 2,500
Stock-in-trade 1,600
Debtors 400
Cash and Bank 220
Additional information are given below :

(I) Nominal value of investment is Rs.500 lakhs and its market value is Rs.520 lakhs.
(II) Following assets are revalued :
Rs.in lakhs
(i) Land and Building 3,200
(ii) Plant and Machinery 1,800
(iii) Stock-in-trade 1,450
(iv) Debtors 360
(III) Average profit before tax of the company is Rs.2,400 lakhs, rate of taxation is
30%.
(IV) Fair return on closing capital employed is 12%
(V) Goodwill may be valued at two year’s purchase of super profits.
You are required to calculate the value of goodwill. 8+8=16
Answer : 6(a)
(i) Based on Fair Value Method
1. Since the options granted have a graded vesting schedule, the enterprise
segregates the total plan into different groups, depending upon the vesting
dates and treats each of these groups as a separate plan.
2. NUMBER OF OPTOINS EXPECTED TO VEST UNDER EACH GROUP :
Vesting Date Options
(Year-end) expected to vest
1 300 options x 1,000 employees x 25% x 0.97 72,750 options
2 300 options x 1,000 employees x 25% x 0.97 x .97 70,568 options
3 300 options x 1,000 employees x 50% x 0.97 x .97 x .97 1,36,901 options
Total options expected to vest 2,80,219 options
3. TOTAL COMPENSATION EXPENSE FOR THE OPTIONS EXPECTED TO VEST

Vesting Date Expected Vesting (No. Value Compensation
(Year-end) of Options) per Option (Rs.) Expense (Rs.)
1 72,750 10 7,27,500
2 70,568 13 9,17,384
3 1,36,901 15 20,53,515
2,80,219 36,98,399
4. RECOGNITION OF COMPENSATION EXPENSE

Vesting Date Cost to be recognized
(End of year) Year 1 Year 2 Year 3
1 7,27,500
2 4,58,692 4,58,692
3 6,84,505 6,84,505 6,84,505
Cost for the year 18,70,697 11,43,197 6,84,505
Cumulative cost 18,70,697 30,13,894 36,98,399
(ii) Based on Intrinsic Value Method
TOTAL COMPENSATION EXPENSE FOR THE OPTIONS EXPECTED TO VEST
Vesting Date Expected Vesting Value Compensation
(End of Year) (No. of Options) per Option (Rs.) Expense (Rs.)
1 72,750 6 4,36,500
2 70,568 6 4,23,408
3 1,36,901 6 8,21,406
2,80,219 16,81,314
RECOGNITION OF COMPENSATION EXPENSE

Vesting Date Cost to be recognized
(End of year) Year 1 Year 2 Year 3
1 4,36,500
2 2,11,704 2,11,704
3 2,73,802 2,73,804 2,73,802
Cost for the year 9,22,006 4,85,506 2,73,802
Cumulative cost 9,22,006 14,07,512 16,81,314
Answer : 6(b)
1. Calculation of Capital Employed
Rs. in Lakhs
Assets : Land and Building 3,200
Stock 1,450
Debtors 360
Cash and Bank 220
7,030
Less : Liabilities :
Debentures 1,000
Creditors 800 1,800
Capital Employed 5,230
2. Calculation of Actual Profit

Rs. in Lakhs
Average Profit before Tax (given) 2,400
Less : Income from Investment (Rs.5,00,00,000 x 10%) 50
2,350
Less : Income Tax @ 30% 705
Average Actual Profit 1,645
3. Normal Profit = 12% of Capital Employed

= Rs.5,230 lakhs x 12% = Rs.627.60 lakhs
4. Super Profit = Average Actual Profit – Normal Profit

= Rs.1,645 lakhs – Rs.627.60 lakhs = Rs.1,017.40 lakhs
5. Goodwill = Super Profit x 2 = Rs.1,017.40 lakhs x 2 = Rs.2,034.80 lakhs
7. (a) Make a detailed comparison between Government Accounting and Commercial

Accounting.
(b) Write a note on disclosure requirements under IGAS 1 (Guarantees given by
Government) 8+8= 16
Answer : 7(a)
Although the basic principles of financial accounting that are applicable in regular
commercial activities apply to the government accounts, there are certain features of
governmental accounting which make it quite different from that of regular commercial
accounting. A detailed comparison between commercial and government accounting has
been presented hereunder :
1) Meaning : The accounting system applied in the government departments, offices and
institutions is referred to as government accounting. While, the system of accounting
applied by non-government organizations (whether profit-oriented or non-profit
oriented) is known as commercial accounting.
2) Objective : Government accounting is maintained by the government offices for
recording and reporting the utilization and position of public funds. Commercial
accounting is maintained by business organizations to know the profit or loss for an
accounting period and disclose the financial position of the entity.
3) Scope : The government accounting happens to be more elaborate than that
followed in commercial accounts.
4) Budget : Government accounting is directly influenced by the government budgeting
system, while commercial accounting does not follow the government budgeting
system.
5) Basis : Government accounting is prepared on cash basis. On the other hand,

commercial accounting may be done on cash basis or accrual basis, or sometimes
even on hybrid basis.
6) Level of accounting : Government accounting has the system of central level and
operating level accounting. Commercial accounting has no provision of central level
and operating level of accounting.
7) Rules and Provisions: Government accounting is strictly maintained by following the
financial rules and provisions as set by the concerned government. Commercial
accounting is maintained by following the applicable rules and the „Generally
Accepted Accounting Principles‟ (GAAP).
8) Information : Government accounting provides information to the government about

the receipts, deposit, transfer and utilisation of public funds. Commercial accounting
provides information to the various stakeholders about the operating result and
financial position of business.
9) Auditing : The audit of the books of accounts maintained by government departments,
offices or institutions are to be audited by a recognized department of the government
(namely, the Auditor General Office) ; while the books of accounts maintained under
commercial accounting is audited by any professional auditor.
Answer : 7(b)
IGAS 1 is an Indian Government Accounting Standard that deals with disclosure
requirement relating to guarantees given by the Government. Name of the Standard is
„Guarantees given by the Government Disclosure Requirements‟.
Regarding disclosure, the standard provides that the Financial Statements of the Union
Government, the State Government and the Union Territory Governments (with legislature)
shall disclose the following :
Maximum amount for which Guarantees have been given during the year, additions
and deletions (other than invoked during the year) as well as Guarantees outstanding
at the beginning and end of the year ;
Amount of Guarantees invoked and discharged or not discharged during the year;
Details of Guarantee commission or fee and its realisation ; and
Other material details :
The Financial Statements of the Union Government, the State Governments and the
Government of Union Territories (with legislature) shall disclose in the notes the following
details concerning class or sector of Guarantees ;
Limit, if any, fixed within which the Government may give guarantee ;
Whether Guarantee Redemption or Reserve Fund exists and its details including
disclosure of balance available in the Fund at the beginning of the year, any payments
made and balance at the end of the year ;
Details of subsisting external foreign currency guarantees in terms of Indian rupees on
the date of Financial Statements ;
Details concerning Automatic Debit Mechanism and Structured Payment
Arrangement, if any ;
Whether the budget documents of the Government contain details of Guarantees ;
Details of the tracking unit or designated authority for Guarantees in the Government
and
Other material details.
8. Write short notes on any four of the following : 4 x 4 = 16

(a) Financial Reporting vis-à-vis Triple Bottom line Reporting.
(b) Objectives of IND AS- 103
(c) Accounting treatment of Borrowing Cost as per AS-16.
(d) Functions of Comptroller and Auditor General in case of grants/loans given to other
Authorities/Bodies.
(e) Government Accounting Standard Advisory Board (GASAB)
Answer : 8
(a) Financial Reporting vis-à-vis Triple Bottom Line Reporting.
Origin : The origination of financial reporting precedes that of Triple bottom line
reporting, the latter being just a few decades old.
Nature : It is mandatory for corporate to prepare and present their financial reports ;
while preparation of full TBL reports including social and environment dimension is
voluntary in nature.
Scope : Triple bottom line reporting is broader in scope than financial reporting, as
the former includes the reporting of social and environmental performances in
addition to the financial performance of an organization.
Contents : The information contained within a TBL report is of a different nature to

that included in a financial report. Thus, TBL reporting enables environmental and
social risks that have the capacity to materially affect long-term financial
performance to be identified and, therefore, taken into consideration when
preparing financial reports.
(b) Ind AS- 103 : Business Combination

Objective
The objective of this Indian Accounting Standard (Ind AS) is to improve the
relevance, reliability and comparability of the information that a reporting entity
provides in its financial statements about a business combination and its effects. To
accomplish that, this Ind AS establishes principles and requirements for how the
acquirer :
(a) Recognises and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquire ;
(b) Recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase ; and
(c) Determines what information to disclose to enable users of the financial

statements to evaluate the nature and financial effects of the business
combination.
(c) Accounting treatment of borrowing cost as per AS-16 :
(a) Borrowing costs should either be capitalized or charged to P/L Account
depending on the situation but deferment is not permitted.
(b) Borrowing costs are capitalized as part of cost of qualifying asset when it is
probable that they will result in future economic benefits and cost can be
measured reliably – other borrowing costs are charged to P/L Account in the
accounting period in which they are incurred.
(c) Capitalization, on one hand reflects closely the total investment in the asset and
on the other hand to charge the cost to future period against accrual of
revenue.
(d) National interest cost are not allowed to be capitalized .
(e) A qualifying asset is an asset that necessarily takes a substantial period of time
(usually a period of 12 months unless otherwise justified on the basis of facts and
circumstances) to get ready for its intended use or sale.
(f) Capitalization should be suspended during extended period in which active

development is interrupted.
(g) Capitalization should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete.
(h) Capitalization also ceases „when part is completed, which is capable of being
used independent of the whole.
(d) Functions of Comptroller and Auditor General in the case of grants or loans given to
other authorities or bodies : Where any grant or loan is given for any specific
purpose from the Consolidated Fund of India or of any State or of any Union Territory
having a Legislative Assembly to any authority or body, not being a foreign State or
international organization, the Comptroller and Auditor-General shall scrutinize the
procedures by which the sanctioning authority satisfies itself as to the fulfillment of the
conditions subject to which such grants or loans were given. For this purpose the C &
AG shall have right to access, after giving reasonable previous notice, to the books
and accounts of that authority or body.
However, the President, the Governor of a State or the Administrator of a Union
Territory having a Legislative Assembly, as the case may be, may, where he is of
opinion that it is necessary so to do in the public interest, by order, relieve the
Comptroller and Auditor-General, after consultation with him, from making any such
scrutiny in respect of anybody or authority receiving such grant or loan.
Except where he is authorized so to do by the President, the Governor of a State or
the Administrator of Union territory having a Legislative Assembly, as the case may
be, the Comptroller and Auditor-General shall not have, while exercising the powers
conferred on him by sub-section (1), right of access to the books and accounts of
any corporation to which any such grant or loan as is referred to in subsection (1) is
given if the law by or under which such corporation has been established provides
for the audit of the accounts of such corporation by an agency other than the
Comptroller and Auditor-General:
Moreover, such authorization shall be made except after consultation with the
Comptroller and Auditor-General and except after giving the concerned
corporation a reasonable opportunity of making representations with regard to the
proposal to give to the Comptroller and Auditor-General right of access to its books
and accounts.
(e) Government Accounting Standard Advisory Board (GASAB)
1. Government Accounting Standards Advisory Board (GASAB) has been constituted
by Comptroller and Auditor General of India (CAG), with the support of
Government of India through a notification dated 12th August, 2002.
2. The new priorities focus on good governance, fiscal prudence, efficiency &
transparency in public spending instead of just identifying resources for public
scheme funding.
3. GASAB, as a nodal advisory body in India, is taking similar action to establish and
improve standards of government accounting and financial reporting and
enhance accountability mechanisms.
4. Structure of the GASAB : GASAB is a representative body and is represented by
main stakeholders connected with accounting reforms of Union Government of
India and States. The board consists of the following members :
1. Deputy Comptroller and Auditor General (Accounts) as Chairperson.
2. Controller General of Accounts
3. Financial Commissioner, Railways
4. Controller General of Defence Accounts
5. Member (Finance) Telecom Commission, Department of Telecom.
6. Additional /Joint Secretary (Budget), Ministry of finance, Govt. of India.
7. Secretary, Department of Post.
8. Deputy Governor, Reserve Bank of India or his nominee.
9. Director General, National Council of Applied Economic Research (NCAER), N.
Delhi.
10. President, Institute of Chartered Accountants of India (ICAI) or his nominee.
11. President, Institute of Cost and Works Accountants of India or his nominee.
12. - 15. Principal Secretary (Finance) of four States by rotation.
16. Principal Director in GASAB as Member secretary.
Suggested Answers_Syl2016_June 2019_Paper 17
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
JUNE - 2019
Where considered necessary, suitable assumptions may be made
and clearly indicated in the answer.
Section – A
choice and 1 Mark for justification.): 2x10=20
(i) XYZ Ltd. acquired 2000 equity shares of DEF Ltd. on 01.04.2017 for a price of ` 3,00,000.
DEF Ltd. made a net profit of ` 80,000 during the year 2017-18. DEF Ltd. issued Bonus
shares of one shares for every five shares held out of post-acquisition profits earned
during 2017-18. The share capital of DEF Ltd. is ` 2,50,000 consisting of shares of ` 100
each. If the shares of XYZ Ltd. in the pre-acquisition profit of DEF Ltd. is ` 56,000, the
amount of Goodwill/Capital Reserve to be shown in the consolidated balance sheet
as on 31.03.2018 is:
(A) ` 4,000 (Goodwill)
(B) ` 4,000 (Capital Reserve)
(C) ` 44,000 (Goodwill)
(D) ` 50,000 (Goodwill)
(ii) Mittal Ltd. has provided the following information:

Depreciation as per accounting records ` 30,00,000, Depreciation as per income tax
records ` 75,00,000. Unamortized preliminary expenses as per income tax records
` 4,50,000. Tax rate 35%. There is adequate evidence of future profit sufficiency. As
per AS 22 Deferred Tax Asset/Liability to be recognized will be:
(A) ` 15,75,000 (DTL)
(B) ` 14,17,500 (Net DTL)
(C) ` 72,000 (Net DTA)
(iii) The market price of Company Caa is ` 450 per share and that of Company Baa is `
300. If Caa offers three-fourths a share of common stock for each share of Baa, the
ratio of exchange of market prices would be:
(A) 0.667
(B) 1.000
(C) 1.125
(D) 1.500
(iv) A company has an inter-segment transfer pricing policy of charging at cost less 10%.
The market prices are generally 25% above cost. Policy adopted by the company is
(A) Correct as per AS but not as per Ind AS
(B) Not Correct
(C) Correct, if total transfer is below 10% of total revenue of the Company
(D) Always correct, if applied consistently
(v) Cee Ltd. acquired a 60% interest in Jee Ltd. on January 1, 2017. Cee Ltd. paid ` 700
Lakhs in cash for their interest in Jee Ltd. The fair value of Jee Ltd.'s assets is ` 1,800
Lakhs and the fair value of its liabilities is ` 900 Lakhs. Compute the Non-controlling
interest (NCI) at fair value.
(A) ` 360 Lakhs
(B) ` 700 Lakhs
(C) ` 280 Lakhs
(vi) Utkarsh Ltd. declares the following information:
Exchange Rate (USD/IND `)

Purchased goods on 12.03.2018 of USD 1,00,000 68.60
Exchange rate as on 31.03.2018 69.00
Date of actual payment is 12.04.2018 69.50
What will be the gain/loss to be booked in the financial year 2018-19?

(A) ` 90,000 (loss)
(B) ` 40,000 (loss)
(C) ` 1,30,000 (loss)
(vii) During 2017-18, Mindblogger Ltd. incurred costs to develop and produce a mobile
application computer software product, as follows:
Completion of detailed program design ` 23,000

Cost incurred for coding and testing to establish ` 20,000
technological feasibility
Other coding costs after establishing technological feasibility ` 39,000
Other testing costs after establishing technological feasibility ` 31,000

Cost of producing product masters for training purposes ` 30,000
What amount should be capitalized as software cost?
(A) ` 43,000
(B) ` 70,000
(C) `23,000
(D) `1,00,000
(viii)Suchitra purchased 1000 shares in Tip-Top Ltd. of ` 600 per share in 2016. There was
issue in 2018 of one share for every two held at price of ` 150 per share. If Suchitra
subscribes the rights, what would be carrying cost of 1500 shares as per AS-13.
(A) ` 6,00,000
(B) ` 6,75,000
(C) ` 75,000
(D) Data insufficient
(ix) Future Limited undertakes a contract for construction of a Bridge on 01.04.2017 at a

contract price of ` 1,250 Lakh. The contract was to be completed in two years. Cost
incurred up to 31.03.2018 is ` 780 Lakh. The Company estimated that a further cost of
` 520 lakh would be incurred for completing the project. What amount should be
credited to revenue as Contract Price for the financial year 2017-18 as per the
provisions of Ind AS 11?
(A) ` 780 Lakh
(B) ` 750 Lakh
(C) ` 730 Lakh
(x) Statement - Preparation of CFS is not mandatory for companies having subsidiary in
India. Choose correct option:
(A) Statement is correct as the Companies Act, 2013 does not require preparation of
CFS.
(B) Statement is correct as AS 21 allows it if financial statement of subsidiary is
attached with the stand-alone financial statements of the holding Company.
(C) Statement is incorrect as the Companies Act, 2013 requires preparation of CFS.
(D) Statement is incorrect as the Government of India by notification has imposed the
requirement of preparation of CFS.
Answer:
1. (i) (A) Cost of Control

(`)
Amount invested (A) 3,00,000
Share Capital (80% of 2,50,000 + 80% of ` 50,000*) 2,40,000
Share of capital profit** 56,000
Total(B) 2,96,000
Goodwill (A-B) 4,000
* being amount of bonus issue @1:5

** It is assumed share of profit given in the problem is after issue of bonus shares.
(ii) (B) Explanation:
` 14,17,500 (Net DTL) as calculated below:
Deferred tax liability:

For Depreciation = 35% (75,00,000 - 30,00,000) = ` 15,75,000
Less: For Prel. Exp. 35% of 4,50,000 = ` 1,57,500
Net Deferred tax liability = ` 14,17,500
(iii) (C) Explanation:
3/4th of ` 450 = ` 337.50. Hence, acquiring company is paying ` 337.50 against

market price of ` 300 of Company Baa. Hence, on the basis of market price, the
Exchange ratio is:
` 337.50/` 300 = 1.125
(iv) (C) Explanation:
Transfer price may be below cost if it is internal transfer. However, it should be

applied consistently. It does not affect valuation of inventory. Hence, (D) is the
right option.
(v) (A) Explanation:
` 360 Lakhs is correct option as detailed below:

NCI = 40%, ` (1,800 - 900) Lakhs = ` 360 Lakhs
(vi) (D) Explanation:
As per AS-11, exchange difference on settlement of monitory items should be

transferred to Profit & Loss A/c. Here loss to be debited to Profit & Loss A/c in 2018-
19 is ` (1,00,000 x 69.50) - (1,00,000 x 69.00) = `50,000.
(vii)(D) Explanation:
Costs incurred after establishing technological feasibility should be capitalised

(` 39,000 + ` 31,000 + ` 30,000) = ` 1,00,000 is to be capitalised and costs incurred
before establishing technological feasibility is to be treated as expense as and
when it is incurred.
(viii)(B) Explanation:
Cost of original holding (Purchase) (1,000 x 600) ` 6,00,000

Amount paid for Rights (500 x 150) ` 75,000
Total carrying cost of 1500 shares: ` 6,75,000
(ix) (B) Explanation:
Statement showing the amount to be credited to Revenue as per Ind AS 11
` in Lakh
Cost of construction incurred upto31.03.2018 780
Add: Estimated future 520
Total estimated cost of construction 1300
Degree of completion {(780/1300) x 100} 60%
` in Lakh
Revenue recognition (1250 x 60%) 750
(x) (C) Explanation:
Companies Act, 2013, [Section 129(3)] requires preparation of CFS by company

having subsidiary(ies). Other options are not correct as those are not based on
relevant accounting standard or notification of the Government of India.
Section – B
16x5=80
2. (a) Which is Related Party as per Ind AS 24? State objectives and scopes of the Ind AS 24.
4+4=8
(b) Following are the Extracts of Balance Sheets of Mirchiram Ltd.:
Particulars 31.03.2019(`) 31.03.2018(`)

Equity Share Capital 9,10,000 5,00,000
General Reserve 2,10,000 2,50,000
Profit and Loss A/c 9,50,000 (40,000)
Securities Premium 50,000 —
Capital Redemption Reserve — 1,00,000
Capital Grant 8,00,000 Nil
Convertible Debentures (into equity shares at 25% — 2,00,000
premium)
Trade Payables 1,05,000 1,00,000
Goodwill 15,000 —
Plant and Machinery 7,65,000 5,00,000
Trade Receivables 7,50,000 6,25,000
Less: Provision for Doubtful Debts (1,90,000) (1,50,000)
Voluntary Separation Payments 1,25,000 65,000
(i) Depreciation on Plant and Machinery written off @ 15%.
(ii) It was decided to value Inventories at cost whereas previously the practice was to
value Inventories at cost less 10%. However the closing stock on 31st March, 2019
was correctly valued at cost.
(iii) On 31st March, 2019, the business of Y Ltd. was purchased for ` 60,000 payable in
fully paid equity shares of ` 10 each at a premium of 20%. The assets included
Inventories ` 26,640, Trade Receivables ` 10,000 and Machine ` 18,360. In addition
Trade Payables of ` 15,000 were taken over.
(iv) Debtors of ` 2,30,000 were written off against the Provision for Doubtful Debts A/c
during the year. Grant of ` 10,00,000 amortised in P&L A/c. Compensation
received in a suit filed by the Company ` 90,000. Voluntary Separation Payments
` 50,000 adjusted against General Reserve.
Required : Calculate
(A) Cash Flow Operating Activities.
(B) Cash Flow from Investing Activities.
(C) Cash Flow from Financing Activities
for preparing Cash Flow Statement as per AS-3. 8
Answer:
2. (a) As per Ind AS 24 Related Party means any party that controls or can significantly
influence the operating policy of the Company during reporting period. The criteria
for Related party relationship are control, Common control, Joint control and
significant influence.
The objectives of this Standard is to ensure that an entity's financial statements

contain the disclosures necessary to draw attention to the possibility that its financial
position and profit or loss may have been affected by the existence of related parties
and by transactions and outstanding balances, including commitments with such
parties.
Scope of Ind AS 24:
This Standard shall be applied for the following purposes:

(a) Identifying related party relationships and transactions;
(b) Identifying outstanding balances, including commitments, between an entity
and its related parties;
(c) Identifying the circumstances in which disclosure of the items in (a) and (b) is
required; and
(d) Determining the disclosures to be made about those items.
(b)
CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH, 2019
A Cash Flow from Operating Activities `

Net Profit [9,50,000 - (40,000) + 10,000 (t/f to Reserve)] 10,00,000
Add: Depreciation [(7,65,000 x 15/85)] 1,35,000
Add: Goodwill amortised 5,000
[60,000 - (26,640 + 10,000 + 18,360 - 15,000)]-15,000
Less: Under valuation of Opening stock (54,000 x 10/90) (6,000)
Less: Compensation received (90,000)
Less: Capital Grant amortised (10,00,000)
Operating Profit before Working Capital changes 44,000
Add: Increase in Provision for doubtful debts 40,000

Less: Increase in Inventories [(95,640 - 26,640) - (54,000 + (9,000)
6,000)]
Increase in Trade Receivables [(7,50,000-10,000)-6,25,000] (1,15,000)
Decrease in Trade Payables [(1,05,000 - 15,000) - 1,00,000] (10,000) (94,000)
Operating Profit before extraordinary items (50,000)
Add: Compensation received 90,000
Less: Voluntary Separation Payments [(1,25,000+50,000) - (1,10,000)
65,000]
Cash used in Operating Activities (70,000)
B Cash Flow from Investing Activities
Purchase of Machinery [(7,65,000+1,35,000) - 5,00,000 - (3,81,640)
18,360]
C Cash Flow from Financing Activities
Issue of Equity Share Capital [(9,10,000 – 50,000 (Vendor) - 1,00,000
1,00,000 (Bonus) – 1,60,000 Conversion) – 5,00,000]
Grant Received 18,00,000
3. (a) An equipment is leased for 3 years and its useful life is 5 years. Both the cost and the
fair value of the equipment are ` 6,00,000. The amount will be paid in 3 installments
and at the termination of lease, lessor will get back the equipment. The unguaranteed
residual value at the end of 3 years is ` 80,000. The (internal rate of return) IRR of the
investment is 8%. The annual payments have been determined in such a way that the
present value of the lease payment plus the residual value is equal to the cost of
machinery. The present value of Re. 1 due at the end of 1st, 2nd and 3rd year at 8%
rate of interest is 0.9259, 0.8573 and 0.7938 respectively.
(i) Calculate unearned finance income.
(ii) Segregate the finance income in the hands of lessor. 8
(b) A machine was acquired by ABC Ltd. 15 years ago at a cost of ` 20 crore. Its
accumulated depreciation as at 31st March, 2018 was ` 16.60 crore. Depreciation
estimated for the financial year 2018-19 is ` 1 crore. Estimated Net Selling Price of the
machine as on 31st March, 2018 was ` 1.20 crore, which is expected to decline by 20
per cent by the end of the next financial year.
Its value in use has been computed at ` 1.40 crore as on 1st April, 2018, which is
expected to decrease by 30 per cent by the end of the financial year. Assuming that
other conditions of relevant accounting standard for applicability of the impairment
are satisfied:
(i) What should be the carrying amount of this machine as at 31st March, 2019?
(ii) How much will be the amount of write off (impairment loss) for the financial year
ended 31st March, 2019?
(iii) If the machine had been revalued ten years ago and the current revaluation
reserves against this plant were to be ` 48 lakh, how would you answer to
question (i) and (ii) above? 8
Answer:
3. (a) (i) Calculation of Annual Lease Payment
`
Cost of equipment 6,00,000
Less: PV of unguaranteed residual value for 3 years @ 8% (` 80,000 x (63,504)
0.7938)
Fair value to be recovered from 3 years Annual Lease Payment 5,36,496
Annuity for 3 years @ 8% (0.9253+0.8573+0.7938) 2.577
Annual Lease Payment (` 5,36,496 / Annuity for 3 years @ 8%) 2,08,186
(ii) Unearned Finance Income
`
Total Lease payment (` 2,08,186 x 3) 6,24,558
Add: Residual value 80,000
Gross investment 7,04,558
Less: Present / Fair value of Investment (6,00,000)
Unearned Finance Income 1,04,558
(iii) Segregation of Finance Income

(All figures in `)
Year Lease Finance charges @ 8% Repayment Outstanding
on outstanding
Rentals amount of the year Amount
a b c d
(d of previous year × 8%) a-b (d = d of previous year
- c of current year)
0 6,00,000
I 2,08,186 48,000 1,60,186 4,39,814
II 2,08,186 35,185 1,73,001 2,66,813
III 2,08,186 21,373** 1,86,813 80,000*
6,24,558 1,04,558 5,20,000
*This amount is unguaranteed residual value of equipment i.e. ` 80,000

** Difference in interest value is due to approximation.
Alternative Calculation:
Year Net Investment in the Lease = Finance Income Total Lease Balance
Receivable @ 8% on NI Payments Reduction in
(`) (`) received from Receivable
Leasee (`) (i.e. Principal)
(`)
1 2 3 = 2 × 8% 4 5=4–3
1 6,00,000 48,000 2,08,186 1,60,186
2 6,00,000 – 1,60,186 = 4,39,814 35,185 2,08,186 1,73,001
3 4,39,814 – 1,73,001 = 2,66,813 21,345 2,08,186 1,86,841
3 2,66,813 – 1,86,841 = 79,972 - 80,000(URV) (difference is due
(end) to rounding off)
Nil
(b) As per the requirements of the question, the following solution has been drawn on the
basis of AS 28:
(` In crore)
i Carrying amount of plant (before impairment) as on 31st March 2019 2.40
Carrying amount of plant (after impairment) as on 31st March 2019 0.98
ii Amount of impairment loss for the financial year ended 31st March 2019 1.42
(2.4 Cr-0.98 Cr)
iii If the plant had been revalued 10 years ago
Debit to revaluation reserve 0.48
Amount charged to Capital profit and loss (1.42-0.48) 0.94
Working Notes:
1) Calculation of closing Book Value as at 31st March 2019

` in crore
Opening book value as on 01.04. 2018 3.40
Less: Depreciation for financial year 2018-2019 (1.00)
Closing book value as on 31.03. 2019 (before impairment) 2.40
2) Calculation of Estimated Net selling price on 31st March 2019
` in crore
Estimated net selling price as on 1.4.2018 1.20
Less: Estimated decrease during the year (20% of ` 1.20 Cr.) (0.24)
Estimated net selling price as on 31.03.2019 0.96
3) Calculation of Estimated Value in Use of Plant on 31st March 2019

` in crore
Estimated value in use on 1.4.2018 1.40
Less: Estimated decrease during the year (30% of ` 1.40 Cr.) (0.42)
Estimated value in use as on 31.3.2019 0.98
4) Recoverable amount as on 31.03.2019 is equal to higher of Net selling price and

value in use
` in crore
Net selling price 0.96
Value in use 0.98
Recoverable amount 0.98
Impairment Loss 1.42
[Carrying amount - Recoverable amount i.e., (2.40 Cr - 0.98 Cr)]
Revised carrying amount on 31.03.2019 is equal to recoverable 0.98
amount (after impairment)
Note: Since question requires computation of Impairment loss on 31.3.2019, hence
impairment probability on 31.03.2018 has been ignored. However, since there is
impairment probability at the beginning of the year as well, one may calculate
the carrying amount at the beginning of the year after impairment and then
calculate the impairment possibilities at the end of the year. Accordingly the
solution will be as follows:
` in crore
Carrying amount before impairment on 1.4.2018 (20 - 16.60) 3.40
Recoverable amount i.e., higher of NSP (1.20 cr.) and the value in 1.40
use (1.40 cr.)
Impairment loss 2.00
Revised carrying amount after impairment as on 01.04.2018 1.40
Less: Depreciation for 2018-19 (as given in the question) (1.00)
Carrying amount as on 31.03.2019 0.40
Recoverable amount as on 31.03.2019 (Refer W.N 2,3 and 4 0.98
above)
Impairment Loss as on 31.3.2019 (since carrying amount is less than NIL
recoverable amount)
4. (a) Following are the summarized Balance Sheets of Hope Ltd. and Happy Ltd. as on 31st
March, 2018.
Liabilities Hope Ltd Happy Assets Hope Ltd Happy

(`) Ltd. (`) (`) Ltd. (`)
Equity Share 10,50,000 5,00,000 Building 9,25,000 3,00,000
Capital (` 10 each
fully paid up)
General Reserve 8,16,900 2,23,300 Machinery 2,25,000 75,000
Profit & Loss A/c 1,00,000 1,00,000 Furniture 1,50,000 28,000
Trade Payables 3,81,000 1,60,000 Inventory 3,00,000 3,90,000
Cash at Bank 3,37,900 85,300
23,47,900 9,83,300 23,47,900 9,83,300
On 1st October, 2018 Hope Ltd. decided to take over Happy Ltd. No Balance Sheet
was prepared on that date. For six months period form 1st April, 2018 to 30th
September, 2018, Hope Ltd. and Happy Ltd. earned a profit of ` 3,36,000 and
` 1,98,000 respectively after writing off depreciation @ 15% per annum on Building and
@ 10% per annum on Machinery and Furniture for both the Companies.
Hope Ltd. and Happy Ltd. paid equity dividend @ 8% on 15th July, 2018. Tax @ 10% on
such payments was also paid by each of them. Goodwill of Happy Ltd. was valued at
` 97,320 on the date of takeover.
For the purpose of takeover:
Inventory of both the Companies would be appreciated by 12%. Trade Receivables of

Hope Ltd. and Happy Ltd. would be reduced by 5% and 6% respectively.
Hope Ltd. issued fully paid equity shares of `10 each to the shareholders' of Happy
Ltd., on the basis of comparative intrinsic values of shares on the take-over date.
You are required to calculate total purchase consideration and intrinsic value of
share of both the Companies for the purpose of calculation of share exchange ratio.
All the working are to form part of your answer. 8
(b) What are the objectives of Ind AS 103 ? List the information an acquirer should
disclose to help users of financial statement to evaluate the nature and financial
effect of a business combination. 2+6=8
Answer:
4. (a) Calculation of Intrinsic value

Hope Ltd. Happy Ltd.
(`) (`)
Goodwill - 97,320
Tangible Assets (W.N. 2) 12,11,875 3,75,350
Inventory* 3,36,000 4,36,800
Trade receivables** 3,89,500 98,700
Bank Balance (W.N. 1) 6,69,625 2,66,950
26,07,000 12,75,120
Less : Trade payables (3,81,000) (1,60,000)
Net Assets 22,26,000 11,15,120
Number of Shares 1,05,000 50,000
Intrinsic value 21.20 22.3024
* Including appreciation @12%
** Net of reduction @ 5% for Hope Ltd. and @ 6% for Happy Ltd.
(i) Purchase consideration = `11,15,120 to be paid by Hope Ltd.

11,15,120
(ii) No. of Shares to be issued on the basis of intrinsic value = = 52,600
21.20
Working Notes:
(1) Bank Balance on 30.09.2018 (before absorption)
` Hope Ltd. ` Happy Ltd. `

`
Bank Balance as on 31.3.2018 3,37,900 85,300
Add : Cash net profit
Net profit of 6 months 3,36,000 1,98,000
Depreciation on Building 69,375 22,500
Depreciation on Machinery 11,250 3,750
Depreciation on Furniture 7,500 4,24,125 1,400 2,25,650
7,62,025 3,10,950
Less : Dividend paid (84,000) (40,000)
Less : Dividend distribution tax @10% (8,400) (4,000)
Bank Balance as on 1.10.2018 6,69,625 2,66,950
(2) Tangible Assets
Hope Ltd. Happy Ltd.

(`) (`) (`) (`)
1. Tangible Assets
Building 9,25,000 3,00,000
Less : Depreciation @ 15% for 6 months (69,375) 8,55,625 (22,500) 2,77,500
Machinery 2,25,000 75,000
Less : Depreciation @ 10% for 6 months (11,250) 2,13,750 (3,750) 71,250
Furniture 1,50,000 28,000
Less : Depreciation @ 10% for 6 months (7,500) 1,42,500 (1,400) 26,600
12,11,875 3,75,350
(b) (i) The objectives of Ind As 103:

 To improve the relevance, reliability and comparability of the information that
a reporting entity provides in its financial statements about a business
combination and its effects.
 To accomplish that, this Ind AS103 establishes principles and requirements for
how the acquirer:
(a) Recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree
(b) Recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and
(c) Determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.
An acquirer should disclose information that enables users of financial statement to

evaluate the nature and financial effect of a business combination that were
affected. Pieces of information includes:
(a) the name and a description of the acquiree.
(b) the acquisition date.
(c) the percentage of voting equity interests acquired.
(d) the primary reasons for the business combination and a description of how the
acquirer obtained control of the acquiree.
(e) a qualitative description of the factors that make up the goodwill recognized.
(f) the acquisition-date fair value of the total consideration transferred and the
acquisition-date fair value of each major class of consideration, such as: (i) cash;
(ii) other tangible or intangible assets, including a business or subsidiary of the
acquirer; (iii) liabilities incurred, for example, a liability for contingent
consideration; and (iv) equity interests of the acquirer,
(g) information for contingent consideration arrangements and indemnification
assets.
(h) information for acquired receivables.
(i) information for each contingent liability recognised as prescribed.

(j) the total amount of goodwill that is expected to be deductible for tax purposes.
(k) The amount of the accquiree's profit and loss since the acquisition date included
in acquirer's profit or loss for the period, unless impracticable. If impracticable fact
must be disclosed.
5. (a) Following are the Balance Sheets of three Companies as at 31st March, 2019:
Particulars A Limited B Limited C Limited

(` in lakh) (` in lakh) (` in lakh)
(a) Equity Share Capital (of ` 10 each) 50,000 15,000 4,500
- General Reserve 62,000 6,300 ---
- Statement of Profit and Loss 17,000 2,400 1,125
2. Non-current Liabilities
(a) 10% Debentures of ` 100 each --- --- 2,250
(b) Loan from B Limited --- --- 150
3. Current Liabilities
(a) Trade Creditors 25,200 5,400 1,395
(b) Bills Payables --- --- 225
Total 1,54,200 29,100 9,645
II. Assets
1. Non-current Assets
(a) Fixed Assets:
- Tangible Assets 88,000 18,000 4,090
(b) Non-current Investment
(on 1st April, 2018)
- 900 Lakh Equity Shares in B Ltd. 13,500 --- ---
- 360 Lakh Equity Shares in C Ltd. 3,250 --- ---
- 5 Lakh 10% Debentures in C Ltd. 490 --- ---
(c) Long-term Loans & Advances
- Loan to C Ltd. --- 180 ---
2. Current Assets
(a) Inventories 28,500 6,000 2,270
(b) Trade Debtors 13,500 2,700 1,935
(c) Bills Receivables 390 150 ---
(d) Cash and Cash Equivalents 6,570 2,070 1,350
Total 1,54,200 29,100 9,645
(i) On 1st April, 2018 B Limited showed a balance of ` 5,100 Lakh in General Reserve
and a credit balance of ` 3,800 Lakh in Statement of Profit and Loss. On the same
date, C Limited showed a debit balance of ` 540 Lakh in Statement of Profit and
Loss.
(ii) All the Bills payable appearing in C Limited's Balance Sheet were accepted in
favour of B Limited out of which bills amounting to ` 110 Lakh were endorsed by B
Limited to A Limited and bills amounting to ` 65 Lakh had been discounted by B
Limited with its Bank.
(iii) On 28th March, 2019 C Limited remitted ` 30 Lakh by means of a cheque to B
Limited to return part of the loan, but the cheque was not received by B Limited up
to 31st March, 2019.
(iv) Stock with B Limited includes goods purchased from A Limited for ` 260 Lakh,
which was owing also on 31st March, 2019. A Limited invoiced the goods at cost
plus 30 per cent.
(v) In August, 2018 B Limited declared and distributed dividend @ 20 per cent for the
year ended 31st March, 2018. B Limited credited the dividend received to its
Statement of Profit and Loss Account.
You are required to prepare a Consolidated Balance Sheet of A Limited and its
subsidiaries B Limited and C Limited as at 31st March, 2019. 12
(b) What are the disclosure requirements under Ind AS 112 about subsidiaries that have
non-controlling interests that are material to reporting entity. 4
Answer:
5. (a)
Consolidated Balance Sheet of A Limited and its
subsidiaries B Limited and C Limited as at 31st March, 2019
Particulars Note No. (` in Lakh)

1. Equity and Liabilities
(a) Equity Share Capital( of ` 10 each) 50,000
(b) Reserves and Surplus: 1 81,002
2. Minority Interest (9480 +1125) W.N.(iii) 10,605
3. Non-current Liabilities
-10% Debentures of `100 each 2 1,750
(a) Trade Creditors 2 31,735
(b) Bills Payables 2 65
Total 1,75,157
II. Assets
Fixed Assets: 2
-Tangible Assets 1,10,090
- Intangible Assets (Goodwill - C Ltd.) W.N.(ii) 82
2. Current Assets
(a) Inventories 2 36,710
(b) Trade Debtors 2 17,875
(c) Bills Receivables 2 380
(d) Cash and Cash Equivalents 2 10,020
Total 1,75,157
Notes to Accounts:
Particulars (` in Lakh)
General Reserve {W.N. (iv)} 62,720
Statement of Profit and Loss {W.N. (iv)} 17,442
Capital Reserve ( B Limited) {W.N. (ii)} 840
Total 81,002
2. Consolidated Balances
Particulars Debentu Trade B/P (` Tangible Inventori Trade B/R (` Cash&
res (` in Creditors in Fixed es (` in Debtors in Bank (`
Lakh) (` in Lakh) Assets (` Lakh) (` in Lakh) in Lakh)
Lakh) in Lakh) Lakh)
A Limited --- 25,200 --- 88,000 28,500 13,500 390 6,570

B Limited --- 5,400 --- 18,000 6,000 2,700 150 2,070
C Limited 2,250 1,395 225 4,090 2,270 1,935 --- 1,350
Total 2,250 31,995 225 1,10,090 36,770 18,135 540 9,990
Less: — -------- — --- 60 ------ — ------
Unrealised
Profit
Less: Mutual 500 260 160 ------- ------ 260 160 —
Owings
Add: Cheque — — ------- — — 30
in Transit
Consolidated 1,750 31,735 65 1,10,090 3,6710 17,875 380 10,020
Balance
Working Notes:
(i) Calculation of Pre and Post Acquisition Profits of Subsidiaries
Particulars Total Pre-acquisition Revenue Revenue

(` in Lakh) Capital Profit Reserves Profits
(` in Lakh) (` in Lakh) (` in Lakh)
B Limited:
General Reserve 6,300 5,100 1,200 ---
Statement of P/L (#) 2,400 800 --- 1,600
Total 5,900 1,200 1,600
A Ltd.'s Share (60%) 3,540 720 960
Minority Interest (40%) 2,360 480 640
C Limited: 1,125 (540) --- 1,665
Statement of P/L
A Ltd.'s Share (80%) (432) — 1,332
Minority Interest (20%) (108) 333
(#) Pre-acquisition Profit of B Limited = Cr. balance of Statement of P/L on

1.4.18 - Dividend Paid = ` 3,800 Lakh - 20% of ` 15,000 = ` 800.
(ii) Cost of Control/ Capital Reserve

Particulars B Limited C Limit
(` in Lakh) (` in Lakh)
Investment in Shares 13,500 3,250
Less: Dividend Received & credited to P/L 1,800 ---
Actual Cost of Investment 11,700 3,250
Less: Paid-up Share Capital 9,000 3,600
Less : Share in Capital Profits or Add: Cap. 3,540 12,540 (432) 3,168
Loss
(Capital (Goodwill)
Reserve) 840 82
(iii) Minority Interest
Particulars B Limited C Limited

Share Capital Share 6,000 900
Capital Profit or (Loss) Share 2,360 (108)
Revenue Reserve Share 480 333
Revenue Profit Share 640
9,480 1,125
(iv) Consolidated General and Profit & Loss Account
Particulars B Limited C Limited

A Limited 62,000 17,000
Less: Wrongly Dividend Credited (1,800)
B Limited 720 960
C Limited 1,332
Less: Unrealised Profit (60)
Add: Profit on Debentures(500 - 490) 10
Total 62,720 17,442
(v) Mutual Owing:

Regarding Bills = 225 - 65 = ` 160 Lakh; and
Regarding Debtors & Creditors (Inter-company sale) = ` 260 Lakh
(vi) Unrealised Profit = 260 x 30/130 = ` 60 Lakh
(vii)Dividend from M Ltd. wrongly credited to Statement of P/L = 20% of ` 9,000

Lakh = ` 1,800 Lakh.
(b) An entity shall disclose for each of its subsidiaries that have non-controlling interests
that are material to the reporting entity, the following —
(a) the name of the subsidiary.
(b) the principal place of business (and country of incorporation if different from
the principal place of business) of the subsidiary.
(c) the proportion of ownership interests held by non-controlling interests.
(d) the proportion of voting rights held by non-controlling interests, if different from
the proportion of ownership interests held.
(e) the profit or loss allocated to non-controlling interests of the subsidiary during
the reporting period.
(f) accumulated non-controlling interests of the subsidiary at the end of the
reporting period.
(g) summarised financial information about the subsidiary.
6. (a) (i) Write a brief note on initial measurement of financial asset or financial liability
under Ind AS 109. 2
(ii) A Company has its share capital divided into shares of ` 10 each. On 1st April,
2017 it granted 10000 employees' stock options (ESOP) at ` 40, when the market
price was ` 130. The options were to be exercised between 16th December, 2017
and 15th March, 2018. The employees exercised their options for 9500 shares only;
the remaining options lapsed. The Company closes its books on 31st March every
year. Show Journal entries up to the year ended 31.03.2018. 6
(b) From the following information, calculate the Fair Value of an Equity Share:
(i) 400000 Equity Shares of ` 10 each (paid up ` 8 each).
(ii) 700000 Equity Shares of ` 5 each fully called up (Call-in arrears @ ` 2 on 200000
shares).
(iii) 10000, 9% Preference Shares of ` 100 each fully paid up.
(iv) Reserves and Surplus ` 73,76,000.
(v) Tangible Fixed Assets ` 3,00,000. 50% of total Tangible Fixed Assets are found
undervalued by 50% of market value and 50% of remaining are found
overvalued by 50% of market value. 10% Investments: [Face value ` 80,000] `
1,00,000. Of the Investments 10% is trade and the balance non-trade. All trade
Investments are to be valued at 10% below cost.
(vi) External Liabilities ` 10,00,000.
(vii) Expected Future Maintainable Profits before tax ` 25,59,000.
(viii) Rate of Tax-30% (Ignore Corporate Dividend Tax).
(ix) Normal Rate of Earnings-9%. 8
Answer:
6. (a) (i) An entity shall recognise a financial asset or financial liability in its Balance sheet
when and only when, the entity becomes party to the contractual provisions of
the instrument. For example, unconditional receivables and payables are
recognised as assets or liabilities when the entity becomes party to the contract,
and as a consequence has a legal right to receive or legal obligation to pay.
Alternative Answer:
Except for trade receivables, at initial recognition, an entity shall measure a

financial asset or financial liability at its fair value plus or minus, in the case of a
financial asset or financial liability not at fair value through profit or loss,
transaction costs that are directly attributable to the acquisition or issue of the
financial asset or financial liability.
(ii)
Journal Entries
Date Particulars Dr. Cr.

` `
2017
April, 1 Employee Compensation Expense A/c Dr. 9,00,000
To Employee Stock Option Outstanding A/c 9,00,000
(Being grant of 10,000 stock options to
employees at ` 40 when market price is ` 130)
Dec, 16 to Bank A/c Dr. 3,80,000
15-Mar-18 Employee Stock Option Outstanding A/c Dr. 8,55,000
To Share Capital A/c 95,000
To Securities Premium 11,40,000
(Being allotment to employees of 9,500 equity
shares of ` 10 each at a premium of ` 120 per
share in exercise of stock options by employees)
2018 Employee Stock Option Outstanding A/c Dr. 45,000

Mar, 16 To Employee Compensation Expense A/c 45,000
(Being entry for lapse of stock options for 500
shares)
Profit & Loss A/c Dr. 8,55,000
To Employee Compensation Expense A/c 8,55,000
(Being Employees Stock Options expenses
transferred)
Fair Value of an Equity Share = (Net Assets Value + Earning Yield Based Value)/2
Step 1: Net Assets available for Equity Shareholders ` in lacs

A. Paid up Equity Share Capital [` 32 lacs + ` 31 lacs] 63
B. Notional Uncalled Call 8
Notional Unpaid Call 4
C. Reserves & Surplus 73.76
D. Net Profit on Revaluation of Assets & Liabilities
Increase in Value of Tangible Fixed Assets [ 3,00,000×50%×100%] 1,50,000
Decrease in Value of Tangible Fixed Assets [3,00,000×50%×50%×1/3]
Decrease in Value of Trade Investments [1,00,000×10%×10%] (25,000)
(1,000) 1.24
E. Net Assets for Equity Shareholders 150
Step 2: 7.50
Total Equivalent No. of Equity Shares of ` 10 each [4,00,000 (of ` 10 each) +
3,50,000 (of ` 5 each)]
Step 3: Value of an Equivalent Equity Share of ` 10 each

= Net Assets for Equity Shareholders/Total Equivalent No. of Equity Shares of
` 10 each
= 150/7.50 = ` 20
Step 4: Value of an Equity Share (` 8 paid up) = ` 20 – ` 2 = ` 18

Value of an Equity Share (` 5 paid up) = ` 20 × 5/10 = ` 10
Value of an Equity Share (` 3 paid up) = `10 – ` 2 = ` 8
EARNING YIELD BASED VALUE
Step 1: Expected FMP for Equity Shareholders ` (in lacs)

A. Expected Future Maintainable Profits before tax 25.59
B. Less: Tax @ 30% (7.677)
C. Expected FMP after tax (A-B) 17.913
D. Less: Preference Dividend @ 9% (0.90)
E. Expected FMP for Equity Shareholders 17.013
Step 2: Total Paid up Value of all Equity shares [` 32 lacs + ` 31 lacs] 63 lacs
Step 3: Average Rate of Earning = ` 17.013/` 63 lacs ×100 = 27%
Step 4: Value of an Equity Share

= (Average Rate of Earning/ Normal Rate of Return) × Paid up Value of an
Equity Share
Value of an equity share (` 8 paid up) = 27/9 × ` 8 = 24
Value of an equity share (` 5 paid up) = 27/9 x ` 5 = 15
Value of an equity share (` 3 paid up) = 27/9 x ` 3 = 9
Step 5: Fair Value of an Equity Share = (Net Assets Value + Yield Based Value)/2
Fair Value of an Equity Share (` 8 paid up) = (` 18 + ` 24)/2 = ` 21
Fair Value of an Equity Share (` 5 paid up) = (`10 + `15)/2 = ` 12.50
Fair Value of an Equity Share (` 3 paid up) = (` 8 + ` 9)/2 = ` 8.50
7. (a) State the process of Election of Members of Public Accounts Committee. 8
(b) Write a short note on Government Accounting Standards issued by Government

Accounting Standards Advisory Board (GASAB). 8
Answer:
7. (a) (1) 15 Members of Lok Sabha: In April each year a motion is moved in Lok Sabha by
the Minister of Parliamentary Affairs or Chairman of the Committee, if in office,
calling upon members of the House to elect from amongst themselves 15
members to the Public Accounts Committee. After the motion is adopted, a
programme, fixing the dates for filing the nominations/withdrawal of candidatures
and the election, if necessary, is notified in Lok Sabha Bulletin Part-ll. On receipt of
nominations, a list of persons who have filed nomination papers is put up on the
Notice Boards. In case the number of members nominated is equal to the number
of members to be elected, then, after expiry of time for withdrawal of
candidatures, the members nominated are declared elected and the result
published in Bulletin Part-ll. If the number of members nominated after withdrawals
is more than number of members to be elected, election is held on the stipulated
date and result of election published in Bulletin Part-ll.
(2) 7 Members of Rajya Sabha: Another motion is moved in Lok Sabha

recommending to Rajya Sabha to nominate seven members of that House for
being associated with the Committee. After adoption, the motion is transmitted to
Rajya Sabha through a Message. Rajya Sabha holds election of members to the
Committee and the names of members elected are communicated to Lok
Sabha.
(3) Appointment of Chairman: The Chairman of the Committee is appointed by the

Speaker from amongst the members of Lok Sabha elected to the Committee. As
a convention, starting from the Public Accounts Committee of 1967-68, a member
of the Committee belonging to the main opposition party/group in the House is
appointed as the Chairman of the Committee.
(4) Minister not to be Member of Committee: A Minister is not eligible to be elected as

a member of the Committee and if a member, after his election to the
Committee, is appointed as a Minister, he ceases to be a member of the
Committee from the date of such appointment.
(5) Term of Office: The term of office of the members of the Committee is one year.
(6) Association of Members with Government Committees: A member, on his election
to the Committee, has to communicate to the office of the Committee, the

particulars regarding the various Committees appointed by Government with
which he is associated, for being placed before the Speaker. Where the Speaker
considers it inappropriate that a member should continue to serve on the
Government Committee, the member is required to resign membership of the
Committee constituted by Government. Where the Speaker permits a member to
continue to hold membership of Government Committee, he may require that
the report of the Government Committee shall be placed before the Committee
on Public Accounts for such comments as the latter Committee may deem fit to
make, before it is presented to Government. Whenever the Chairman or any
member of the Committee on Public Accounts is invited to accept membership
of any Committee constituted by Government, the matter is likewise to be placed
before the Speaker before the appointment is accepted.
(b) Government Accounting Standards Advisory Board (GASAB) has been

constituted by Comptroller and Auditor General of India (CAG), with the support
of Government of India through a notification dated 12th August, 2002.
The new priorities focus on good governance, fiscal prudence, efficiency &
transparency in public spending instead of just identifying resources for public
scheme funding.
GASAB, as a nodal advisory body in India, is taking similar action to establish and
improve standards of government accounting and financial reporting and
enhance accountability mechanisms.
The mission of the Government Accounting Standards Advisory Board (GASAB) is

to formulate and recommend Indian Government Accounting Standards (IGASs)
for cash system of accounting and Indian Government Financial Reporting
Standards (IGFRS) for accrual system of accounting, with a view to improving
standards of Governmental accounting and financial reporting which will
enhance the quality of decision-making and public accountability.
GASAB has been developing two types of Accounting Standards, namely Indian
Government Accounting Standards (IGAS) and Indian Government Financial
Reporting Standards (IGFRS) for the Government. These standards have been
developed to address the issues related with the existing cash system of
accounting and its migration to the accrual system of accounting in future.
The standards being developed to make existing cash system of accounting

more transparent are called Indian Government Accounting Standards
(IGAS).The Indian Government Accounting Standards (IGAS), formulated by the
Government Accounting Standards Advisory Board (GASAB) and notified by the
Ministry of Finance, Government of India are:
• Guarantees given by Governments: Disclosure Requirements (IGAS 1);
• Accounting and Classification of Grants-in-aid (IGAS 2)
• Loans and Advances made by Governments (IGAS 3)
The Indian Government Accounting Standards (IGAS), approved by the

Government Accounting Standards Advisory Board (GASAB) and under
consideration of Government of India, are:
• Foreign Currency Transactions and Loss/Gain by Exchange Rate Variations

(IGAS 7);
• Government Investments in Equity (IGAS 9);
Public Debt and Other Liabilities of Governments: Disclosure Requirement (IGAS

10).
There are IGFRS also. The standards being developed for accrual system of
accounting in the Government are called the Indian Government Financial
Reporting Standards (IGFRS). These are approved by the Government
Accounting Standards Advisory Board (GASAB).
(a) Corporate Social Responsibility Reporting

(b) Myth about XBRL reporting
(c) Fair value hierarchy as per Ind AS 113
(d) Meaning and Advantages of Triple Bottom Line Reporting (TBL)
(e) Derivative and an Embedded Derivative as per Ind AS 109
Answer:
8. (a) Annual report on CSR activities to be included in the Board's Report

1. A brief outline of the company's CSR policy, including overview of projects or
programs proposed to be undertaken and a reference to the web-link to the CSR
policy and projects or programs.
2. The Composition of the CSR Committee.
3. Average net profit of the company for last three financial years
4. Prescribed CSR Expenditure (2% of the Average net profit)
5. Details of CSR spent during the financial year.
(a)Total amount to be spent for the financial year;
(b)Amount unspent, if any;
(c)Manner in which the amount spent during the financial year is detailed below.
6. In case the company has failed to spend the 2% of the average net profit of the
last three financial years or any part thereof, the company shall provide the
reasons for not spending the amount in its Board report.
7. A responsibility statement of the CSR Committee that the implementation and
monitoring of CSR Policy, is in compliance with CSR objectives and Policy of the
company.
8. CSR Report is required to be duly signed by:
(i) Chief Executive Officer or Managing Director or Director
(ii) Chairman CSR Committee
(iii) Person specified u/s 380 (1) (d) (wherever applicable)
(b) There are certain myths regarding XBRL. In the following section, certain myths
regarding XBRL are clarified. In other words, it is discussed what XBRL is not:
i. XBRL is not a set of Accounting Standards: It needs to be clearly understood that

XBRL does not represent a set of accounting standards content will reside and be
represented.
ii. XBRL is not a chart of accounts: It is not a detailed universal chart of accounts.
Formulation of a company's chart of accounts is an exercise conducted by its
management with regard to its specific business intricacies. XBRL can facilitate
the implementation of such structures through its ability to transport data
between disparate software applications that might be used within an
organizations operational structure.
iii. XBRL is not a GAAP translator: it does not provide a mechanism for facilitating a
drilldown of existing GAAP information into lower level information that would be
necessary for translating financial statement from one GAAP to another. The
business-reporting documents contain the same GAAP information, be it in an
XBRL format or an MS word or PDF format.
iv. XBRL is not a proprietary technology: XBRL is freely licensed and available to the
public.
v. XBRL is not a Transaction Protocol: XBRL deals with business reporting information,
not with data capture at the transaction level. It is designated to address issues
related to generation and usage of information contained within business reports
and begin at the accounting classification level.
(c) Fair value hierarchy as per Ind AS 113
Ind As 113 establishes a fair value hierarchy into three levels of the inputs to valuation
techniques for measuring fair value.
 Level 1- Based on quoted prices(unadjusted) for identical asset or liabilities that is
traded in a currently active market.
 Level 2- Other than included within Level 1 that are observable for the asset or
liabilities either directly or indirectly.
 Level 3- Unobservable inputs for asset or liabilities
The fair value hierarchy gives the highest priority to quoted prices in active markets for
identical asset or liabilities (Level 1 inputs) and the lowest priority unobservable inputs
(Level 3 inputs).
(d) Meaning
TBL reporting refers to providing information on the economic, environmental and
social dimensions of the activities carried on by an organisation.
Thus, The Triple Bottom Line is made up of "Social (People), Economic (Profit) and
Environmental (Planet)". In the private sector, a commitment to CSR implies a
commitment to some form of TBL reporting.
Advantages
1. enhancement of reputation and brand
2. securing a social licence to operate
3. attraction and retention of high calibre employees

4. improved access to investors
5. establish position as a preferred supplier
6. reduced risk profile
7. identification of potential cost savings
8. increased scope for innovation
9. aligning stakeholder needs with management focus, and
10. creation of sound basis for stakeholder dialogue
(e) (i) A Derivative is a Financial Instrument or other contract with the following all three
characteristics:
(a) Change in Value: Its Value changes in response to the change in a specified
Interest Rate, Financial Instrument Price, Commodity Price, Foreign Exchange
Rate, Index of Prices or Rates, Credit Rating or Credit Index, or other Variable,
provided in the case of a non-financial variable that the variable is not specific to
a party to the contract (sometimes called the 'underlying');
(b) No /Smaller Initial Net Investment: It requires No Initial Net Investment or an initial
net investment that is Smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors;
and
(c) Settlement at a Future Date: It is settled at a Future Date.
(ii) An Embedded Derivative is a component of a hybrid (combined) instrument that

also includes a non-derivative host contract, with the effect that some of the cash
flows of the combined instrument vary in a way similar to a standalone derivative.
Note: A derivative that is attached to a financial instrument but is contractually

transferable independently of that instrument, or has a different counterparty from
that instrument, is not an embedded derivative, but a separate financial instrument.
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)
DECEMBER 2019
Paper- 17: CORPORATE FINANCIAL REPORTING
Time Allowed: 3 Hours Full Marks: 100
Where consid ered necessary, suitable assumptions
may be made, and clearly indicated in answer.
Both the sections are to be answered subject to
instructions given against each.
Section – A
(Answer the following questions.)
1. Choose the most appropriate answer from the f our alternatives given (1 marks for right
choice and 1 mark for justification.): 2×10=20
(i) Downsize Ltd. earned ` 800 lakhs pre-tax profit in the first quarter ended 30.06.2019 and
it expects to incur losses of ` 100 lakhs each of the three remaining quarters of 2019 -20.
Tax rate is 30%. It has carried forward loss of ` 300 lakhs for income tax purpose for
which deferred tax asset is not recognized. The amount of tax expenses reported in the
first and second quarters of 2019-20 are
(A) ` 240 lakhs and ` (30) lakhs
(B) ` 150 lakhs and ` (30) lakhs
(C) ` 15 lakhs and ` 15 lakhs
(D) ` 96 lakhs and ` (12) lakhs
(ii) An engineering goods company provides after sales warranty for 2 years to its
customers. Based on past experience the company has the following policy for making
provision for warranties on the invoice a mount, on the remaining balance of warran tee
period:
Less than 1 year: 2% provision, more than 1 year : 3% provision.
The company has raised invoices as under:

Invoice date Amount (`)
19th January, 2017 40,000
29th January, 2018 25,000
15th October, 2018 90,000
The amount to b e debited to Profit and Loss Account for the year ended 31 st March
2018 would be
(A) ` 1,650
(B) ` 3,200
(C) ` 1,550
(iii) A Company showed a net profit of ` 7,20,000 for the 3rd quarter of the year 2018 – 19
after incorporating the following:
(a) Bad Debts of ` 40,000 incurred during the quarter. 50% of the Bad Debts ha ve b een
deferred to the next quarter.
(b) Extra Ordinary loss of ` 35,000 incurred during the quarter has been fully recognized
in the quarter.
Correct Quarterly Income as per applicable Ind AS will be

(A) ` 6,80,000
(B) ` 7,00,000
(C) ` 6,35,000
(iv) In a conglomerate merger of two companies the merging companies operate

(A) in related markets having similar products lines.
(B) in unrelated markets having no functional economic relationship.
(C) in related markets and merging companies are complimentary to each other.
(D) in two countries and one of them use the product of the others as raw materials.
(v) On April 1, 2018 May Ltd. purchased 40% of the shares of June Ltd. for ` 10 lakhs. At the
time of the purchased June Ltd. reported net assets of ` 20 lakhs. The fair value of
identifiable assets and liabilities of June Ltd. at the time of purchase was appr oximate
to their book value except for Building which had a fair value of ` 2,00,000 more than its
book value stock May Ltd. has significant influence over operating and financial
policies of June Ltd. The amount of purchase price attributable to Good will is
(A) ` 0
(B) ` 1,20,000
(C) ` 2,00,000
(D) ` 2,80,000
(vi) On April 1, 2018 Bob Ltd. Purchased a 30% interest in Dad Ltd. for ` 2,50, 000. On that
date Dad’s share holders equity was ` 5,00,000. The carrying value of Dad’s identifiable
net assets was equal to book value. Bob correctly reports this significant influence
investment using equity methods. Both companies have a March 31 year end. For the
year ended 31.03. 2019. Dad reported net income of ` 1,50,000 and paid total dividends
of ` 40,000. Which of the following amount that Bob would report as its investment in
Dad on March 31, 2019?
(A) ` 2,50,000
(B) ` 2,83,000
(C) ` 2,95,000
(D) ` 3,60,000
(vii)On 01.04.2018 MB Ltd. acquired 80% shares of MC Ltd. at ` 20,00,000 when the fair value
of the identifiable net assets was ` 20,00,000. During 2018 – 19, MC Ltd. R eported Net
income of ` 2,40,000. On that date MB Ltd. sold 20% of its holding to an outsider at `
5,60,000. The amount of gain to be credited to other equity by MB for sale of partial
holding retaining control is
(A) ` 1,12,000
(B) ` 1,60,000
(C) ` 1,21,000
(D) None of these
(viii)Details for an Asset are as under:

Cost of Assets ` 60 lakhs, Useful life period 10 y ears, Salvage value ` 4 lakhs, Useful Life
remaining 3 years. Upward revision done in last year by 50%. Current value in used is `
12 lakhs, Current selling price ` 11 lakhs, Current disposal cost ` 1 lakh. Impairment Loss
to be charged to Profit and Loss Account as per applicable Ind AS would be
(A) ` 18.7 lakhs
(B) ` 13.2 lakhs
(C) ` 5.5 lakhs
(ix) Statement – All NBFCs in India are required to maintain Tier I capital at 10% of risk -
weighted assets. Choose correct option:
(A) Statement is correct as per the RBI norms applicable to NBFCs.
(B) Statement is incorrect as certain categories of NBFCs are exempted from such
requirement by the RBI.
(C) Statement is incorrect as the Ministry of Finance, Government of India exempt all
categories of NBFCs from capital adequacy norms.
(D) Statement is correct as the Ministry of Finance, Government of India by notification
has imposed such requirements to ov ercome liquidity problems.
(x) Which of the following is not a feature of Government Accounting?

(A) Reporting utilization of public funds
(B) Double Entry System
(C) Non-fund based accounting
(D) Both (A) and (B)
Answer:
(i) (D) ` 96 lakhs and ` (12) lakhs
Explanation:
1. The Estimated payment of Annual Tax @ 30%

` in lakh
Total Income – `(800 – 100 × 3) lakh 500
Less: Carried Forward Loss 300
Net Taxable Income 200
Tax Payabl e 60
2. Average Annual Effective Tax Rate (60/500×100) = 12%
3. The Tax Expenses to be reported:
1st Quarter = ` 800 Lakh × 12% = ` 96 lakh

2nd Quarter = ` (100) lakh × 12% = ` (12) lakh
(ii) (D) None of the above
Explanation:
a. Computation of Provision at year – end:
Invoice Date Last Date of Warranty Provision as on 31.03.2017 Provision as on 31.03.2018

19.01.2017 19.01.2019 40,000 × 3% = 1,200 40,000 × 2% = 800
29.01.2018 29.01.2020 (Invoice not yet raised) Nil 25,000 × 3% = 750
15.10.2018 15.10.2020 (Invoice not yet raised) Nil (Invoice not yet raised) Nil
Total 1,200 1,550
b. Amount to be d ebited to Profit & Loss A/c for the year ended 31.03.2018 = Balance of
Provision as on 31.03.2018 Less: Balance of Provision as on 31.03.2017 = `1,550 - `1,200
= ` 350.
(iii) (B) ` 7,00,000
Explanation:
Bad debts of `40,000 have been incurred during current quarter. Out of this, the
company has deferred 50% (i.e.) `20,000 to the next quarter. Therefore, `20,000
should be deducted from `7,20,000. Hence the correct quart erly income =
`(7,20,000 – 20,000) = `7,00,000.
(iv) (B) in unrelated markets having no functional economic relationship.
Explanation:
Conglomerate merger involves coming together of two or more comp0anies

engaged in the different industry and/or services. Their busi nesses or services
are neither horizontally not vertically related to each other. They lack any
commonality either in their product, or in the rendering of any specific t ype of
service to the society.
This is the type of merger of companies which are neither competitors, nor
complementaries nor suppliers of a particular raw material nor consumers of a
product or consumable. In this, the merging companies operate in unrelated
markets having no functional economic relationship. Hence, (B) is the correct.
(v) (A) 0
Explanation:
Since 40% holding entails having significant influence on the investee and not
control, Equity Method should be followed for consolidation. No recognition of
assets and liabilities of the investee, and no recognition of Goodwill is made as
Ind AS 103 is not applicable, rather Ind AS 28 should be applied. Accordingl y,
Goodwill to be recognized shall be Nil.
(vi) (B) ` 2,83,000
Explanation:
Being significant influence investment, equity m ethod is applicabl e as per Ind

AS 28.
Value of Investment
`
Amount invested for 30% interest on 01.04.2018 (A) 2,50,000
Profit earned by Dad Ltd. in 2018 – 19 (B) 1,50,000
Less : Dividends paid 40,000
Net increase in Net worth of Dad Ltd 1,10,000
Net increase in Investment value of 30% share (B) 33,000
Carrying amount of Investment in the books of Bob Ltd. (A + B) 2,83,000
(vii) (D) None of these

MB Ltd sold 20% of its holding i.e.20% of 80% =16%.
Explanation:
Gain on sale
`
Net Assets on 01.04.2018 20,00,000
Add: Profit 2,40,000
Net Assets on 31.03.2018 22,40,000
Carrying amount of 16% holding sold (NCI recognized) 3,58,400
Gain to be credited to other equity ` (5,60,000 – 3,58,400) 2,01,600
(viii) (C) ` 5.5 lakhs
Explanation:
` in
Particulars
lakhs
Carrying Amount in the beginning of 7 t h year [60 – (60 – 4) × 6/10] 26.40
Add: Upward Revaluation (26.4 × 50%) 13.20
Carrying Amount at the end of 7 t h year before Dep. 39.60
Less: Depreciation [(39.6 – 4)/4) (8.90)
Carrying Amount in the beg. of the 8 t h year (including revaluation 30.70
amount of 13.2 lakhs)
Less: Current Recoverabl e Amount (being Net Selling Price or (12.00)
Value in use whichever is higher)
Impairment Loss 18.70
Less: Impairment Loss Charged to Revaluation Reserve (13.20)
Impairment Loss charged to Profit and Loss Account 5.50
(ix) (B) Statement is incorrect as certain categories of NBFCs are exempted from such
requirement by the RBI.
Explanation:
As per the RBI prudential norms applicable to NBFCs, certain categories of

NBFCs are required to maintain capital adequacy i.e., to maintain a required
percentage of risk-weighted assets as Tier I and Tier II capital. But certain
categories of N BFCs are exempt from such requirements. Hence, ‘ B’ is the
correct answer and other options are not correct as those are not based on
relevant RBI norms.
(x) (C) Non-fund based accounting
Explanation:
The features of Government Accounting inter alia include Reporting of

Utilisation of Funds, Double Entry System and Fund-based Accounting. Hence,
‘C’ is the correct answer.
Following are the feature of Government Accounting

A. Reporting of utilisation of public funds
B. Double Entry System
C. Fund Based Accounting
Section-B
Answer any five questions out of seven questions. 16×5=80
2. (a) Discuss the applicability of and disclosure requirement of AS 11. 8
(b) State with reference to accounting standard (AS 2), how you will value the inventories
in the following cases: 8
(i) Raw material was purchased at ` 100 per kilo. Price of raw material is on the
decline. The finished goods in which the raw material is incorporated is expected to
be sold at below cost. 10,000 kg of raw material is on stock at the year end.
Replacement cost is ` 80 per kg.
(ii) In a production process, normal waste is 5% of input 5,000 MT of input were put in
process resulting in a wastage of 300 MT. Cost per MT of input is ` 1,000. The entire
quantity of waste is on stock at the year end.
(iii) Per kg of finished goods consisted of –

Material cost – ` 100 per kg
Direct labour cost ` 20 per kg
Direct variable production overheads – `10 per kg
Fixed production charges for the year on normal capacity of one lakh kg.are`10
lakhs. 2,000 kg of finished goods are on stock at the year end.
Answer:
(a) AS – 11 deals with effects of changes in Foreign Exchange rates.

It is mandatory in respect of:
(a) Accounting for transactions in foreign currencies
(b) Translating the financial statements of foreign branches for inclusion in the financial
statements of the reporting enterprise
Disclosure under AS 11:

(a) The amount of exchange difference included in the net profit or loss for the period
(b) The amount of exchange difference adjusted in the carrying amount of fixed assets
during the accounting period
(c) The amount of exchange difference in respect of forward contracts to be
recognized in the profit/loss for one or more subsequent periods
(d) Foreign currency risk management policy
(b) (i) As per para24 of AS 2 (Revised) on Valuation of Inventories, materials and other
supplies held for use in the production of inventories are not written down below
cost if the finished products in which they will be incorporated are expected to be
sold at or above cost. However, when there has been a decline in the pri ce of
materials and it is estimated that the cost of the finished products will exceed net
realizable value, the materials are written down to net rea lizable value. In such
circumstances, the replacement cost of the materials may be the best available
measure of their net realizable value. Hence, in the given case, the stock of 10,000
kgs of raw material will be valued at ` 80 per kg. The finished goods, if on stock,
should be valued at cost or net realizable value whichever is lower.
(ii) As per para 13 of AS 2 (Revised), abnormal amounts of waste materials, labour

or other production costs are excluded from cost of inventories and such costs are
recognized as expenses in the period in which they are incurred. In this case,
normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be
included in determining the cost of inventories (finished goods) at the year end.
1. Normal Loss Qty = 5% of 5,000 MT = 250 MT

2. Cost per Good unit = (5000 × ` 1,000 )/(5000 – 250) = `1052.6316
3. Cost of Closing Inventory = (5,000 MT – 250 MT – 50 MT) × `1052.6316 = ` 49,47,368
(iii) In accordance with para 8 and 9 of AS – 2 (Revised), the cost of conversion include
a systematic allocation of fixed and variable production overheads that are
incurred in converting materials into finished goods. The allocation of fixed
production overheads for the purpose of their inclusion in the costs of conversion is
based on the normal capacity of the production facilities. Thus, cost per kg. of
finished goods can be computed as follows:
`
Mat erial cost 100
Direct labour 20
Direct variable production overhead 10
Fixed production overhead 10
140
Thus, the value of 2,000 kgs.of finished goods on stock at the year ended will be `
2,80,000 (2,000 kgs × ` 140).
3. (a) Describe what is meant by Joint arrangement as per Ind AS 111. 8
(b) Briefly explain how contingent consideration payable in relation to a business

combination is accounted for on initial recognition and at the subsequent
measurement as per Ind AS in the following case: 8
On 1 April, 2018, Aaa Ltd. acquires 100% interest in Baa Ltd. As per the terms of
agreement the purchase consideration was payable in the following 2 tranches:
(i) an immediate issuance of 5 lakhs shares of Aaa Ltd. having face value of ` 10 per
share.
(ii) a further issuance of 1 lakh shares after one year if the profit before interest and tax
of Baa Ltd. for the year following acquisition exceeds ` 1 crore.
The fair value of the shares of Aaa Ltd. on the date of acquisition is ` 20 per share.
Further, the Management has estimated that on the date of acquisition, the fair value of
contingent consideration is ` 12.5 lakhs. During the year ended 31 March, 2019, the fair
value of shares of Aaa Ltd. was 25 per share.
Answer:
(a) Meaning of Joint Arrangement:
A joint arrangement is an arrangement of which two or more parties have joint control.
[An arrangement can be a joint arrangem ent even though not all of its parties have
joint control of the arrangement, at least two of all the parties must have joint control.]
Joint arrangements are economic arrangement between two or more parties sharing
joint control and make the decision jointly about the business activities.
The purpose of the joint arrangement might be share costs or might be motivated by
profit. The investor will be required to either appl y the equity method of accounting or
recognize, on a line-by-line basis, its share of the underl ying assets, liabilities, revenues
and expenses. The accounting treatment required will depend on the substance of the
arrangement and the nature of the investor’s interest in it.
Characteristics of Joint Arrangement: A joint arrangement has the following

characteristics:
(a) The parties are bound by a contractual arrangement.
(b) The contractual arrangement gives two or more of those parties joint control of the
arrangement.
Joint control is the contractually agreed sharing of control of an arrangement, which

exists only when decisions about the relevant activities require the unanimous consent
of the parties sharing control. [At least two of all the parties must have shared control
as joint operators or joint venturers.]
Type of Joint Arrangement:
An entity shall determine the type of joint arrangement in which it is involved.
A joint arrangement is either a joint operation or a joint venture.

The classification of a joint arrangement as a joint operation or a joint venture depends
upon the rights and obligations of the parties to the arrangement.
(a) A joint operation is a joint arrangement whereby the parties that have joint control
of the arrangement have rights to the assets, and obligations for the liabilities,
relating to the arrangement. Those parties are called joint operators.
(b) A joint venture is a joint arrangement whereb y the parties that have joint control of
the arrangement have rights to the net assets of the arrangement. Those parties
are called joint venturers.
(b) Paragraph 37 of Ind AS 103, inter alia, provides that the consideration transfer red in a
business combination should be measured at fair value, which should be calculated as
the sum of
(a) the acquisition – date fair values of the net assets transferred by the purchaser,
(b) the liabilities incurred by the acquirer to former owners o f the acquire company,
and
(c) the equity interests issued by the purchaser.
Further, paragraph 39 of Ind AS 103 provides that the consideration the acquirer
transfers in exchange for the acquiree includes any asset or liability resulting from a
contingent consideration arrangem ent. The acquirer shall recognize the acquisition –
date fair value of contingent consideration as part of the consideration transferred in
exchange for the acquiree.
With respect to contingent consideration, obligations of an acquirer under contingent

consideration arrangements are classified as equit y or a liability in accordance with Ind
AS 32 or other applicable Ind AS. Paragraph 58 of Ind AS 103 provides guidance on the
subsequent accounting for contingent consideration.
In the given case the amount of purchase consideration to be recognized on initial

recognition shall be as follows:
Fair Value of the Share issued ` 1,00,00,000

Fair Value of the Contingent Consideration ` 12,50,000
` 1,12,50,000
For subsequent measurement the relevant guidelines are as follows:

"The acquirer shall account for changes in the fair value of contingent consideration as
follows: (a)Contingent consideration classified as equity shall not beremeasured and its
subsequent settlement shall be accountedfor within equity." Para 58 of Ind AS 103.
4. (a) Following are the summarized Balance Sheets of Sun Ltd. and Moon Ltd. as on 31st
March, 20109:
Liabilities Sun Ltd. Moon Ltd. Assets Sun Ltd. Moon Ltd.
(`) (`) (`) (`)
Equity Share Capital 10,50,000 5,00,000 Building 9,25,000 3,00,000

(` 10 each fully paid
up)
General Reserve 8,16,900 2,23,300 Machinery 2,25,000 75,000
Profit & Loss A/c 1,00,000 1,00,000 Furniture 1,50,000 28,000
Trade 4,10,000 1,05,000

Receivables
Cash at Bank 3,37,900 85,300
23,47,900 9,83,300 23,47,900 9,83,300
On 1st October, 2019 Sun Ltd. decided to takeover Moon Ltd. No Balance Sheet was
prepared on that date. For six months period from 1st April, 2019 to 30th September,
2019, Sun Ltd. and Moon Ltd. earned a profit of ` 3,36,000 and ` 1,98,000 respectively
after of Machinery and Furniture for both the companies.
Sun Ltd. and Moon Ltd. paid equity dividend @ 8% on 15th July, 2019. Tax @ 10% on
such payments was also paid by each of them. Good will of Moon Ltd. was valued at `
97,320 on the date of takeover.
For the purpose of takeover:

Inventory of both the companies would be appreciated by 12%. Trade Receivables of
Sun Ltd. and Moon Ltd. would be reduced by 5% and 6% respectively.
Sun Ltd. issued fully paid equity shares of ` 10 each to the shareholders’ of Moon Ltd.,
on the basis of comparative intrinsic values of shares on the takeover date.
You are required to calculate Intrinsic value of Shares of the two Companies, Purchase
consideration to be paid and Number of Shares to be issued on the basis of Intrinsic
value. 12
(b) Explain briefly the ‘principle of control’ as mentioned Ind AS 110. 4
Answer:
4. (a)Calculation of intrinsic value

Sun Ltd. (`) Moon Ltd. (`)
Goodwill --- 97,320
Tangible Assets (W.N. 2) 12,11,875 3,75,350
Inventory * 3,36,000 4,36,800
Trade receivables ** 3,89,500 98,700
Bank Balance (W.N. 1) 6,69,625 2,66,950
26,07,000 12,75,120
Less: Trade payabl es (3,81,000) (1,60,000)
Net Assets 22,26,000 11,15,120
Number of Shares 1,05,000 50,000
Intrinsic value 21.20 22.3024
*Including appreciation @ 12%

** Net of reduction @ 5% for Sun Ltd. and @ 5% for Moon Ltd.
(i) Purchase consideration = ` 11,15,120 to be paid by Sun Ltd.

(ii) No. of Shares to be issued on the basis of intrinsic value = `11,15,120/`21.20 = 52,600
Working Notes:
(1) Bank Balance on 30.09.2019 (before absorption)

Sun Ltd. (`) Moon Ltd. (`)
Bank Balance as on 31.03.2019 3,37,900 85,300
Add : Cash net profit
Net profit of 6 months 3,36,000 1,98,000
Depreciation on Building 69,375 22,500
Depreciation on Machinery 11,250 3,750
Depreciation on Furniture 7,500 4,24,125 1,400 2,25,650
7,62,025 3,10,950
Less: Dividend paid (84,000) (40,000)
Less: Dividend distribution tax @ 10% (8,400) (4,000)
(2) Tangible Assets

Sun Ltd. Moon Ltd.
(`) (`) (`) (`)
1. Tangible Assets
Building 9,25,000 3,00,000
Less: Depreciation @ 15% for 6 months (69,375) 8,55,625 (22,500) 2,77,500
Machinery 2,25,000 75,000
Less: Depreciation @ 10% for 6 months (11,250) 2,13,750 (3,750) 71,250
Furniture 1,50,000 28,000
Less: Depreciation @ 10% for 6 months (7,500) 1,42,500 (1,400) 26,600
12,11,875 3,75,350
(b) Principle of Control – An investor shall determine whether it is a parent by assessing

whether it controls the investee. An investor controls an investee if and only if the
investor has all the following:
I. Power over the investee;
II. Exposure or rights, to variable returns from its involvement with the investee; and
III. The ability to use its power over the investee to affect the amount of the investor’s
returns. An investor has power over an investee when the investor has existing rights
that give it the relevant activities, i.e., the activities that significantly affect the
investee’s returns. An investor shall consider all facts and circumstances when
assessing whether it controls an investee. The investor shall reassess whether it
controls an investee if facts and circumstances indicate that there are changes to
one or more of the three el ements of control.
Two or more investors collectively control in investee when they must act together to
direct the investee in such cases, because no investor can direct the activities
without the co-operation of the other. Each investor would account for its interest in
the investee with the relevant Ind Ass, such as Ind AS 111, Joint Arrangements, Ind AS
28, Investments in Ventures, or Ind AS 109, Financial Instruments.
5. (a) Explain the concept of equity method in the context of Ind AS 28. 4
(b) Ganga Limited purchased 40,000 shares in Yamuna limited on 31 st march, 2017, at 505
premium over face value by issue of 8% Debentures at 20% premium. The Balances of
Assets, Liabilities, Equity etc. of Ganga Limited and Yamuna Limited as on 31.03.2017,
i.e., on the date of purchase were as under :
(in`)
Ganga Yamuna Ganga Yamuna

Liabilities Assets
Ltd. Ltd. Ltd. Ltd.
Share Capital of ` 10 10,50,000 6,00,000 Fixed Assets 6,50,000 2,00,000

each
General Reserve 1,20,000 40,000 Inventory in Trade 3,00,000 1,80,000
Profit & Loss A/c 80,000 --- Trade Receivables 3,40,000 2,10,000
Trade Payables 1,00,000 60,000 Cash in hand 60,000 30,000
Profit & Loss A/c --- 80,000
13,50,000 7,00,000 13,50,000 7,00,000
(i) Particulars of Ganga Limited:

(I) Profits made: 2017 – 18 ` 1,60,000
2018 – 19 ` 2,00,000
(II) The above profit was made after charging depreciation of ` 60,000 and ` 40,000
respectively.
(III) Out of profit shown above, every year ` 20,000 had been transferred to General
Reserve.
(IV) 10% Dividend had been paid in both the year.
(V) It has been d ecided to write down investment to face value of shares in 10
years and to provide for share of loss to subsidiary.
(ii) Particulars of Yamuna Limited:

The company incurred losses of ` 40,000 and ` 60,000 in 2017 – 2018 and 2018 –
2019 after charging depreciation of 10% p.a. on the book value of Fixed Assets as
on 01.04.2017.
Prepare Consolidated Balance Sheet of Ganga Limited and its subsidiary as at 31 st

March, 2019 as per requirements of Schedul e III. 12
Answer:
5. (a) In equit y method initial recognition is made at cost. Carrying amount is increased or
decreased to recognize the investor’s share of the profit or loss of the investee aft er the
date of acquisition. The investor’s share of the investee’s profit or loss is recognized in the
investor’s Statement of profit or loss. Distributions received from an investee reduce the
carrying amount of the investment. Alteration in the Investor’s proportionate interest in
the associate arising from changes in the Associate’s equity is considered through
adjustment in the carrying amount through OCI (e.g. Changes arising from the
revaluation of property, plant and equipment and from foreign exchange translation
differences).
(b) Share of NCI is only 1/3 as parent holds `40,000/`60,000=2/3
CONSOLIDATED BALANCE SHEET OF GANGA LTD. AND ITS SUBSIDIARY S LTD AS AT 31.3.2019
Particulars Note No `
(1) Shareholders'Funds
(a) Share Capital (of ` 10 each) 10,50,000
(b) Reserv es and Surplus 1 3,43,333
(2) Minority Interest 1,53,333
(3) Non-Current Liabilities (8% Debentures) 5,00,000
Total 20,46,667
II. Assets
(1) Non-Current Asse ts
(a) Fixed Assets
Tangible Assets 2 7,10,000
Intangible Assets [Goodwill on consolidation] (ii) 1,86,667
(2) Current Assets (Net) 2 11,50,000
Total 20,46,667
Notes to Accounts:
Particulars `
General Reserv e 1,60,000
Profit & Loss Account 83,333
Capital Reserve [Debenture Premium] 1,00,000
3,43,333
2. CONSOLIDATED BALANCES
Particulars Tangible Fixed Net Current

Assets Assets
Ganga Ltd.*[6,50,000 -60,000-40,000] 5,50,000* 8,50,000
Yamuna Ltd. *[2,00,000 -20,000-20,000] 1,60,000* 3,00,000
Total 7,10,000 11,50,000
Working Notes:
(I) CALCULATION OF BOOK VALUE OF INVESTMENT IN YAMUNA LTD. AS AT 31.3.2019
Particulars `
Face v alue of Shares 4,00,000
Premium @ 50% 2,00,000
Cost of Inv estment in shares 6,00,000
8% Debentures (Nominal v alue = 6,00,000/120 × 100) 5,00,000
Securities Premium @ 20% 1,00,000
Cost of Inv estment in Debentures 6,00,000
Writing down of Inv estment
2017-2018 : [1/10 × 2,00,000] (20,000)
[2018-2019 : [1/10 × 2,00,000] (20,000)
Investment as on 31.3.2019 5,60,000
(II) BALANCE OF PROFIT AND LOSS ACCOUNT ON 31ST MARCH, 2019
Particulars Ganga Ltd. Yamuna Ltd.

` `
Balance as on 31.3.2017 80,000 (80,000)
Profit/(Loss)
For 2017-2018 1,60,000 (40,000)
For 2018-2019 2,00,000 (60,000)
Investment written-off
2017-2018 (20,000)
2018-2019 (20,000)
Prov ision for share of loss in Subsidiary
2017-2018 : (2/3 × 40,000) (26,667)
2018-2019 : (2/3 × 60,000) (40,000)
Transfer to General Reserve
2017-2018 (20,000)
2018-2019 (20,000)
Dividend
2017-2018 (1,05,000)
2018-2019 (1,05,000)
83,333 (1,80,000)
(IV) FIXED ASSETS ON 31ST MARCH, 2019
Particulars Ganga Ltd. Yamuna Ltd.

` `
Fixed Assets on 31.3.2017 6,50,000 2,00,000
Less: Depreciation
2017-2018 (60,000) (20,000)
2018-2019 (40,000) (20,000)
5,50,000 1,60,000
(V) BALANCE SHEETS AS AT 31ST MARCH, 2019
Liabilities Ganga Ltd. Yamuna Assets Ganga Ltd. Yamuna

` Ltd. ` Ltd.
` `
Share Capital 10,50,000 6,00,000 Fixed Assets* 5,50,000 1,60,000
Capital Reserve 1,00,000 — Investment 5,60,000
(Debenture premium) Less: Provision for loss
General Reserv e 1,60,000 40,000 in subsidiary 4,49,333 66,667—
Profit and Loss A/c 83,333 — Net Current Assets
8% Debentures 5,00,000 — (Balancing figure) 8,50,000 3,00,000
Profit and Loss A/c — 1,80,000
18,93,333 6,40,000 18,93,333 6,40,000
6. (a) The summarized Balance Sheet of TMI Ltd. for the year ended on 31 st March, 2017, 2018
and 2019 are as follows:
` in thousand
2017 2018 2019
1,60,000 equity shares of ` 10 each fully paid 1,600 1,600 1,600
General Reserves 1,200 1,400 1,600
Profit and Loss Account 140 160 240
Trade Payable 600 800 1,000
3,540 3,960 4,440
Assets:
Good will 1,000 800 600
Building and machinery less depreciation 1,400 1,600 1,600
Inventory 1,000 1,200 1,400
Trade Receivable 20 160 440
Bank Balance 120 200 400
3,540 3,960 4,440
(i) Actual valuations were as under:
2017 2018 2019
Building and machinery less depreciation 1,800 2,000 2,200
Inventory 1,200 1,400 1,600
Net profit (including opening balance after writing off 420 620 820
depreciation, goodwill, tax provision and transfer to
general reserve)
(ii) Capital employed in the business at market value at the beginning of 2016 – 2017
was `36,60, 000 which included the cost of goodwill. The normal annual return on
average capital employed in the line of business engaged by T Ltd. is 12.5%.
(iii) The balance in the general reserve on 1 st April, 2016 was ` 10 lakhs.
(iv) The goodwill shown on 31st March, 2017 was purchased on 1st April, 2016 for ` 10
lakhs on which date the balance in the Profit and Loss Account was ` 1,20,000.
You are required to find out the average capital employed in each year. Also compute
goodwill to be valued at 5 years purchase of Super Profit (Simple average method). 8
(b) Jal Agni Ltd. provides you the following particulars in respect of stock options grade:
Grant Date April 1, 2015
Number of Employees covered 1050
Number of Options granted per Employee 50
Vesting Condition: Continuous employment for 3 years
Nominal Value per share (`) 100
Exercise Price per share (`) 125
Market Price per share on Grant Date (`) 149
Vesting Date March 1, 2018
Exercise Date March 31, 2019
Fair Value of Option per share on Grant Date (`) 30
Position on 31.03.2016 31.03.2017 31.03.2019

Estimated Annual Rate of Departure 2% 3%
Number of employees left 30 20 16
Number of Employees entitled to exercise 984
option
On 31st March, 2019, 960 Employees exercised the option and 24 Employees did not
exercise the option.
Required:
Compute Exp enses to be recognized in each year and Value of Options Forfeited by
Fair Value Method. 8
Answer:
(a) Capital Employed at the end of each year

ìn thousand
31.03.2017 31.03.2018 31.03.2019
(`) (`) (`)
Goodwill * 1,000 800 600
Building and Machinery (Revaluation) 1,800 2,000 2,200
Inventory (Revalued) 1,200 1,400 1,600
Trade Receivables 20 160 440
Bank Balance 120 200 400
Total Assets 4,140 4,560 5,240
Less: Trade Payabl es (600) (800) (1,000)
Closing Capital 3,540 3,760 4,240
Add: Opening Capital 3,660 3,540 3,760
Total 7,200 7,300 8,000
Average Capital 3,600 3,650 4,000
* Since the goodwill has been purchased, it is taken as a part of Capital employed.
Valuation of Goodwill
31.03.2017 31.03.2018 31.03.2019
(i) Future Maintainable Profit 2 3
Net Profit as given 420 620 820
Less: Opening Balance (120) (140) (160)
Adjustment for Valuation of Opening --- (200) (200)
Inventory
Add: Adjustment for Valuation of closing 200 200 200
inventory
Goodwill written off --- 200 200
Transferred to General Reserve 200 200 200
Future Maintainable Profit 700 880 1060
Less: 12.50% Normal Return (450) (456.25) (500)
(ii) Super Profit 250 423.75 560
(iii) Average Super Profit = ` (250 + 423.75 + 560) ÷ 3 = ` 411.25 (thousand).
(iv) Value of Goodwill at five years’ purchase = ` 411.25 × 5 = ` 2,056.25 (thousand).

(b) Calculation of Expenses recognized during the vesting period:
Year Calculation Cumulative Remuneration
remuneration expense recognized
expense (`) in each year (`)
1 980×50×30×1/3 (Note #) 4,90,000 4,90,000
2 970×50×30×2/3 (Note #) 9,70,000 4,80,000
3 984×50×30×3/3 (Note #) 14,76,000 5,06,000
Total 14,76,000
Note #:
At the end of year 1, 30 l eft and annual departure 2% for remaining 2 years, estimated
no. of employees entitled to option = (1,050 – 30) ×0.98×0.98 = 980 approx.
At the end of year 2, 30 + 20 l eft and annual departure 3% for remaining 1 year,
estimated no. of employees entitled to option = (1,050 – 30 -20) ×0.97 = 970.
At the end of year 3, 30+20+16 left and 1,050 -30-20-16 = 984 are entitled to option.
Value of options forfeited = 24×50×30 = 36,000
7. (a) What are the advantages of using XBRL? 9
(b) Write briefly about Consolidated Fund of India, Contingency Fund and Public Accounts
of India. 7
Answer:
(a) (1) Automated Data Processing: XBRL allows very effici ent handling of business data by
computer software and supports all the standard tasks involved in compiling,
storing and using business data. XBRL software also facilitates automatic checking
of information and thus makes the entire process of data collection and analysis
more reliable and accurate.
(2) Cost Saving: Adoption of XBRL for data processing reduces the manpower involved
and result in considerable amount of cost saving.
(3) Time Saving: The powerful XBRL software increases the speed of handling the data
and completes all aspects of data processing in quick time. This time reduction will
allows users to increase their focus on analysis and help in prompt decision making.
For example, searches for particular information which might normally take hours
can be completed with XBRL in a fraction of a second.
(4) Better Financial Reporting: XBRL also facilitates preparation of quality and timely
reports to suit different needs. Once data is gathered in XBRL, different types of
reports using varying subsets of the data can be produced with minimum effort.
(5) Multi Language Capability: XBRL can read and understand data in different
languages and accounting standards and can be flexibly adapted to meet
different needs of various users.
(6) Improved Data Analysis: The XBRL software helps to automatically validate and
manipulate data received el ectronicall y. XBRL facilitates a deeper and accurate
analysis of the automated data to meet the requirements of all t ypes of end users.
This thorough anal ysis of the automated data to meet the requirements of all types
of end users. This thorough analysis will equip business leaders with greater
confidence to make financial decisions that impact their companies.
For example, banks and other financial institutions can analyse loan applications as
well as a borrower’s financial records more quickl y and more accuratel y which
may increase the approval of good loans and significantly lower the acceptance
of loans to high risk borrowers.
(7) Advantages to Individual Stakeholders: All types of organizations can use XBRL to
save costs and improve efficiency in handling business and financial information.
Due to its flexible nature, XBRL can be adapted to suit a wide variety of
requirements of preparers as well as users of financial data.
(b) The Constitution of India provides for the manner in which the accounts of the
Government have to be kept. The accounts of Governm ent are kept in three parts
namely, Consolidated Fund, Contingency Fund and Public Account. They are discussed
as under:
1. Consolidated Funds of India:
The Consolidated Fund is constituted under Article 266 (1) of the Constitution of India. All
revenues received by the Government by way of taxes and other receipts flowing to
the Government in connection with the conduct of Go vernment business i.e. Non-Tax
Revenues are credited into the Consolidated Fund. Similarly, all loans raised by the
Government by issue of Public notifications, treasury bills (internal debt) and loans
obtained from foreign governments and international institutions (external debt ) are
credited into this fund. All expenditure of the government is incurred from this fund and
no amount can be withdrawn from the Fund without authorization from the Parliament.
This is the largest of all the three funds.
2. Contingency Funds of India:
The Contingency Fund of India set by the Governm ent of India under Article 267 of the
Constitution of India. It records the transactions connected with Contingency. It is held
on behalf of President by the Secretary to the Government of India, Ministry of Finance,
Department of Economic Affairs. The corpus of this fund is ` 500 crores. Advances from
the fund are made for the purposes of meeting unforeseen expenditure which are
resumed to the Fund to the full extent as soon as Parliam ent authorizes additional
expenditure. Thus, this fund acts more or less like an imprest account of Government of
India.
3. Public Accounts of India:
The Public Accounts of India is constituted under Articl e 266 (2) of the Constitution. The
transactions to be recorded in it relate to debt other than those included in the
Consolidated Fund of India. The transactions under Debt, Deposits and Advances in this
part are those in respect of which Government incurs a liability to repay the money
received or has a claim to recover the amounts paid. The transactions relating to
‘Remittance’ and ‘Suspense’ shall embrace all adjusting heads. The initial debits or
credits to these heads will be cleared eventually by corresponding receipts or
paym ents. The receipts under Public Account do not constitute normal receipts of
Government. Parliamentary authorization for paym ents from the Public Account is
therefore not required.
(a) Benefits of Integrated Reporting

(b) Responsibilities of GASSB
(c) Meaning and advantages of Sustainability Reporting
(d) Power of C&AG in connection with Audit of Accounts
(e) Non Current Assets held for sale and discontinued operation
Answer:
(a) Benefits of IR
IR is beneficial as it contributes to:
 Incorporate sustainability into its core business
 Communicate the impact of a company’s operations on environment and
community
 Identify ESG related risk and opportunities
 Provide a competitive edge over its peers in the long term
 Informed decisions and improved overall performance
 Identify cost savings by analyzing financial and non-financial metrics together
 Increase internal collaboration
 Increase engagement with internal and external stakeholders through consistent
and balanced reporting
 Address reputational risk.
 Increase brand value and customer loyalty
(b) Responsibilities of GASAB

1. To formulate and improve standards of Government accounting and financial
reporting in order to enhance accountability mechanisms.
2. To formulate and purpose standards that improve the usefulness of financial reports
based on the needs of the users.
3. To keep the standards current and reflect change in the Government environment.
(c) A sustainability report is an organizational report that given information about

economic, environmental, social and governance performance.
A sustainability report is the key platform for communicating positive and negative
sustainability impacts. Sustainability reporting is a vital step for managing change
towards a sustainable global econom y – one that combines long term profitability with
social justice and environmental care Sustainability reporting can be considered as
synonymous with other terms for non-financial reporting; triple bottom line reporting,
corporate social responsibility (CSR) reporting, and more. It is also an intrinsic element
of integrated reporting; and recent development that combines the analysis of
financial and non-financial performance.
Advantages:
I. Internal benefits for companies and organizations can include:
1. Increased understanding of risks and opportunities
2. Emphasizing the link between financial and non-financial performance
3. Influencing long term management strategy and policy and business plans
4. Streamlining processes, reducing costs and improving efficiency
5. Benchmarking and assessing sustainability performance with respect to laws,
norms, codes, performance standards, and voluntary initiatives
6. Avoiding being implicated in publicized environmental, social and governance
failures comparing performance internall y, and between organizations and
sectors
II. External benefits of sustainability reporting can include:

1. Mitigating – or reversing – negative environmental, social and governance
impacts
2. Improving reputation and brand loyalty
3. Enabling ext ernal stakeholders to understand company’s true value, and
tangible and intangible assets
4. Demonstrating how the organization influences, and is influenced by,
expectations about sustainable development.
(d) Powers of Comptroller and Auditor General in Connection with audit of accounts may
be described as under:
The Comptroller and Auditor General shall in connection with the performance of his
duties under this Act, have authority:
 To inspect any office of accounts under the control of the union or of a state,
including treasuries, and such offices responsible for keeping of ini tial or subsidiary
accounts, as submit accounts to him;
 To require that any accounts, books, papers and other document which deal with
or form the basis of or an otherwise rel evant to the transactions to which is duties in
respect of audit extend, shall be sent to such place as he may appoint for his
inspection;
 To put such questions or make such observations as he may consider necessary, to
the person in charge of the office and to call for such information as he may
require for the preparation of any account or report which it is his duty to prepare.
(e) Ind AS 105 provides the accounting treatment regarding Non-current Assets Held for
Sale and Discontinued Operations. Such Assets are is required to be shown separately
in the Balance Sheet from that of other Assets. The value would be recovered from sale
and not to be treated as assets which are in use in operation of the entity. The results of
discontinued operations (i.e. profit/loss earned during reporting period) to be
presented separatel y in the statement of profit and loss.
The information provided helps the users of financial statements to make projections of
an entity’s cash flows, income generating capacit y and financial position. The
Standard requires that the assets that meet the criteria to be classified as held for sale
to be measured at the lower of carrying and fair value less costs to sell, and
depreciation on such assets to cease.
The classification, presentation and measurement requirements of this Ind AS appl y to

all recognized non-current assets and disposal groups, except for those assets listed in
paragraph 5 of the Standard (e.g., Financial Instruments D eferred Tax Assets, ass ets
arising from employee benefits, contractual rights under insurance contract and assets
coming under the purview of Standards on Agriculture) and which shall continue to be
measured in accordance with the Standard noted.
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)
DECEMBER 2021
Paper- 17: CORPORATE FINANCIAL REPORTING
Time Allowed: 3 Hours Full Marks: 100
Q.1 SHEENA TASHIKA Ltd. made the following payments during the year ended 31stMarch 2021:
Rs 60 lakhs to acquire a Software, Rs 60 lakhs to acquire a Website for a period of 8 years,Rs 60 lakhs to acquire a Copy
right for a period of 15 years,Rs 60 lakhs to acquire Goodwill of a firm,Rs 60 lakhs to acquire Goodwill arising under
Amalgamation in the nature of Purchase ,Rs 60 lakhs to acquire a Patent for a period of 5 years.,Rs 60 lakhs to acquire
Stock Exchange Membership Rights, Rs 60 lakhs to the State Govt towards the cost of roads built in the vicinity of the
project for the purpose of carrying materials to the site. The roads so built is the property of State Govt.,Rs 60 lakhs
towards extensive special initial advertisement campaign for the new product.,Rs 60 lakhs to develop a Drug to treat
Cancer but AS 26 criteria for capitalization was not met.,
What is the Total Amortization Cost to be charged to Profit & Loss A/c?
Ans 1. Rs 233.5 lakhs
2. Rs 238 lakhs
3. Rs 246 lakhs
4. None of these
Q.2 X Ltd. holds 51% of Y Ltd.,Y Ltd holds 51% of W Ltd.,Z Ltd holds 49% of W Ltd. TheRelated Parties as per AS-18 are:
Ans 1. Z Ltd. & X Ltd.
2. Z Ltd. & Y Ltd.
3. Z Ltd. & W Ltd.
4. None of these
Q.3 JIVATMA Ltd. purchased a plant for US $ 50,000 on 31st October, 2020 payable after 6 months. The company entered
into a forward contract for 6 months @ Rs 64.25 per Dollar. On 31st October, 2020 the exchange rate was Rs 61.50 per
Dollar. The profit orloss on forward contract for the year ended 31st March, 2021 is
Ans 1. Rs 1,14,538
2. Rs 1,14,583
3. None of these
4. Rs 1,37,500
Q.4 Net Profits of JIV AATMA Ltd. for the years 2020-2021,2019-2020,2018-2019,2017- 2018,2016-2017 are Rs 25 crore,Rs 20
crore, Rs 15 crore,Rs 10 crore and Rs 5 crore respectively. During 2020-2021,the company incurred Rs 7,00,000 and Rs
3,00,000 on free education and medical treatment of the employees of the company and their families respectively under
CSR projects. Calculate the short fall of expenditure on Corporate Social Responsibility as per The Companies Act,2013.
Ans 1. Rs 23,00,000
2. Rs 20,00,000
3. None of these
4. Rs 30,00,000
Q.5

2. Rs 3,217
3. Rs 1,205.90
4. Rs 1,400
Q.6
Ans 1. Rs 100 lakhs

2. None of these
3. Rs 40 lakhs
4. Rs 20 lakhs
Q.7 Net Profit for 2020-2021 Rs 30,00,000,No of shares outstanding prior to right issue 10,00,000 shares. Right issue: One
new share for each five shares outstanding @ Rs 25,Last date to exercise right: 31st July, 2020,Fair value of one equity
share immediately prior to exercise of rights on 31.07.2020 is Rs 32. Basic earnings per share for the year 2020-2021 will
be:
Ans 1. Rs 2.50
2. Rs 2.65
3. None of these
4. Rs 2.62
Q.8 Which of the following statements is false?
Ans 1. An item of income or expenditure is to be disclosed separately as per The Companies Act,2013 if its amount
exceeds 1% of the revenue from operations or Rs 10,00,000, whichever is higher.
2. A company is required to prepare the Consolidated Financial Statements even if it acquires the entire share
capital of another company.
3. Financial Statements ofevery company include Cash Flow Statement” asper TheCompanies Act,2013.
4. All of these
Q.9

2. Rs 5 lakhs, Rs 2.625 lakhs
Q.10 From the given information, you are required to compute the Deferred Tax Assets(DTA) and Deferred Tax Liability
(DTL) for CBDT Ltd as on 31st March 2021. The tax rate applicable is 35%.
The Company has charged Depreciation of Rs 7,42,900 in its Books of Accounts while as per Income Tax computation, the
Depreciation available to the Company is Rs8,65,400.
The Company has made Provision for Doubtful Debts for Rs 54,300 during the year.
The Company has debited Share Issue Expenses of Rs 6,23,500 which will be available for deduction under the Income Tax
Act from the next year.
The expenses of Rs 7,84,500 has been charged to Profit and Loss Account which are disallowed under the Income Tax Act.
The Company has made Donation of Rs 2,00,000 which has been debited to Profit and Loss Account and only 50% thereof
will be allowed as deduction as per IncomeTax Law.
Ans 1. DTA Rs 2,18,225, DTL Rs 42,875
2. DTA Rs 2,18,225, DTL Rs 42,857
3. DTA Rs 2,18,252 DTL Rs 42,875
4. None of these
Q.11
Ans 1. Rs 22.5 lakhs

2. Rs 50 lakhs
3. None of these
4. Rs 27 lakhs
Q.12 DARYAGANJ Co-operative society Ltd has borrowed a sum of US $12.50 million at the commencement of
the financial year 2020-2021 for its solar energy project at LIBOR (London Interbank offered rate of 1%) + 4%. The
interest is payable at the end of the respective financial year. The loan was availed at the then rate of Rs45 to US
dollar while the rate as on 31st March, 2021 is Rs48 to the US dollar. Had DARYAGANJ Co- operative Society Ltd.
Borrowed the Rupee equivalent in India, the interest would have been 11%. ‘Borrowing Cost’ and exchange
difference will be:
Ans 1. Rs 61,87,500, Rs 5,62,500
2. Rs 37,50,000, Rs 5,62,500
3. Rs 67,50,000, Rs 5,62,500
4. None of these
Q.13 M/s. TUSHAR Ltd. is developing a new production process. During the Financial Year ended 31st March,
2016, the total expenditure incurred on the process was Rs 60 lacs. The production process met the criteria for
recognition as an intangible asset on 1st December, 2019. Expenditure incurred till this date was Rs 32 lacs.
Further expenditure incurred on the process for the Financial Year ending 31st March, 2021 was Rs 90 lacs. As
on 31.03.2021, the recoverable amount of know-how embodied in the process is estimated to be Rs 82 lacs. This
includes estimates of future cash outflows and inflows. The expenditure to be charged to Profit & Loss Account
for theyear ended 31st March, 2021 is:
Ans 1. Rs 82
2. Rs 118
3. Rs 36
4. None of these
Q.14
Ans 1. Rs 8,50,000
2. Rs 6,60,000
3. Rs 85,000
4. Rs 4,25,000
Q.15 Which of the following statements is false as per AS 12?
Ans 1. Rs 25 lakhs received from the Local Authority for providing medical facilities to theemployees will be
credited to Profit & Loss A/c or deducted from the Medical Expenses.
2. None of these
3. Rs 50 lakhs received from the State Govt. a Grant for setting up a Water treatment Plant. Cost of Plant
purchased Rs 150 lakhs. The Plant will be shown at Rs 100 lakhs (i.e. Rs150 lakhs minus Rs 50).
4. Land worth Rs 100 lakhs received free of cost from the State Govt. should berecorded at a nominal value.
Q.16 Which of the following statements is false?
Ans 1. All of these

2. While preparing Balance Sheet of HARI OM Ltd (of which operating cycle is 14 months) as at 31st
March,2021,Rs 30 lakh due from Y,a customer on 30th April, 2022 will be classified as Non-Current Asset.
3. Under The Companies Act,2013 “Free Reserves” do not include Securities Premium Account.
4. The figures appearing in the Financial Statements of a company may be rounded offto the nearest crores only if
Turnover is more than Rs 100 crore.
Q.17 NEEM TULSI Ltd. has initiated a lease for 3 years in respect of a machinery costing Rs 6,00,000 with expected useful
life of 5 years. Machinery would revert to NEEM TULSI Ltd. under the lease agreement. The unguaranteed residual value of
the machinery after the expiry of the lease term is estimated at Rs 80,000. The implicit rate of interest is 8%. The annual
payments have been determined in such a way that the present value of the lease payment plus the residual value is equal
to the cost of machinery. Annual lease payments are made at the end of each accounting year. (PV of Rs 1 @ 8% for 3 years
is 0.9259, 0.8573, 0.7938 respectively).The unearned finance income is
2. Rs 24,558
3. Rs 2,08,186
4. Rs 1,04,558
Q.18 An engineering goods company provides after sales warranty for 2 years to its customers. Based on past experience,
the company has the following policy for making provision for warranties on the invoice amount, on the remaining balance
warranty period:
Less than 1 year: 2% provision, More than 1 year: 3% provisionThe company has raised invoices as under:
Invoice Date Amount Rs 19th January, 2019 40,000
29th January, 2020 25,000
15th October, 2020 90,000
The amount to be debited to Profit and Loss Account for the year ended 31st March,2021 is:
Ans 1. Rs 3,200
2. Rs 1,550
3. Rs 1,650
4. None of these
Q.19 Accounting profit Rs15,00,000,Book profit as per MAT Rs 8,75,000,Profit as per Income-tax Act Rs 1,50,000 Tax rate
30%,MAT rate 7.50% . The deferred tax asset / liability as per AS 22 and amount of tax to be debited to Profit and Loss
Account forthe year ended 31.3.2021 are
Ans 1. Rs 4,05,000,Rs 5,15,625
2. Rs 4,05,000, Rs 4,70,625
3. Rs 4,95,000, Rs 5,15,625
4. None of these
Q.20 Which of the following statements is true?

Ans 1. Internal Reconstruction is done in case of companies incurring losses only.
2. All of these
3. Internal Reconstruction may be done in case of companies earning profits orincurring losses.
4. Internal Reconstruction is done in case of companies earning profits only.
Q.1 Property,Plant & Equipment appeared at Rs 50,00,000 in the Trial Balance of MALLYA co which is not a going
concern. Property,Plant & Equipment are subject to depreciation @10% on WDV basis.Realizable value of
Property,Plant & Equipment 80%. Realizable Expenses 5%. At what amount depreciation will be shown in the
Income Statement of MALLYA co.
Ans :- As Mallaya Co. is not a going concern, therefore Property. Plant & Equipment would be shown
at Net Realizable Value. Hence the amount of Depreciation would be = Rs. 12,00,000 [Rs.
50,00,000 – Rs. 38,00,000 (i.e. Rs. 50,00,000 x 0.80 x 0.95)]
Q.2 While finalizing the financial statements of the year ending 31/03/2021 the companyfinds that the stock sheets
of 31/03/2020 did not include two pages containing details of inventory worth Rs 10 lakhs. Comment.
Ans:- In this case, the stock sheet of 31/03/2020 (prior year) did not include two pages containing details of inventory worth
Rs. 10 lakhs which is the omission, and this omission was detected in the current period i.e. 31/03/2021. Therefore, it is a prior
item as per AS – 5. It has resulted in understatement of profit of previous period.
Q.3 On 1st April,2020, the Share Capital of S Ltd. consists of Rs 10 crore Equity ShareCapital (Rs 10 each) and Rs
12 crore ,10% Preference Share Capital(Rs 100 each) (Convertible into Equity Shares of Rs 10 each).On 1st
July,2020,H Ltd. acquires 50 lac equity shares and 6.2 lac Preference Shares of S Ltd. State with reason whetherS
Ltd. has become the subsidiary of H Ltd.
Ans:- S Ltd. has become the subsidiary of H Ltd because H Ltd. holds more than 50% of the total
share capital of S Ltd. (i.e. Rs. 5 crores + Rs. 6.2 crores).
Q.4 As at 31st March,2021,DEC Ltd has Equity Share Capital of Rs 475 lakh, Tangible Fixed Assets of Rs 325 lakh,
Statutory Reserves of Rs 25 lakh, and General Reserve of Rs 140 lakh, Current Liabilities of Rs 80 lakh, Current
Assets of Rs 425 lakh, Non- Current Liabilities of Rs 30 lakh,. 40% Statutory Reserves are to be maintained for 2
more years. The business of MAY Ltd. is taken over by JIWARAM Ltd.for Rs 600 lakh. The purchase
consideration is to be discharged by the issue of equity shares of Rs 100 each, Rs 80 paid up at a premium of Rs
800 per share. The market value of an equity share of JIWARAM Ltd. at present is Rs 1000. Is there any need to
openAmalgamation Adjustment A/c in this case?
Ans:- There is no need to open Amalgamation Adjustment A/c in this case, since it is
Amalgamation in the nature of Merger and not purchase.
Q.5 A company is in a dispute involving allegation of infringement of patents by a competitor company who is
seeking damages of a huge sum of Rs 500 lakhs. The directors are of the opinion that the claim can be
successfully resisted by the company. How will you deal with this case?
Ans:- Since the directors of the company are of the opinion that the claim can be successfully resisted
by the company, therefore there will be no outflow of resources. The company will disclose
the same as a contingent liability by way of the following note: “Litigation is in the process
against the company relating to a dispute with a competitor who alleges that the company has
infringed patents and is seeking damages of Rs. 500 lakhs. However, the directors are of the
opinion that the claim can be successfully resisted by the company.”
Q.6 Goodwill on the basis of Capitalisation of Super Profits Rs 5,00,000.Goodwill on the basis of Capitalisation of
Average ProfitsRs 3,00,000.Goodwill on the basis of four years’ purchase of Super Profits Rs 2,00,000. Opening
Capital Employed is 2/3rd of Closing Capital Employed. Calculate Goodwill of the firm at 3 years’ purchase of
Average Profits of the firm.
Ans:- Goodwill of the firm at 3 years’ Purchase of Average Profit of the firm = Rs. 4,50,000
Q.7 4,00,000 Equity Shares of Rs 10 each,Rs 8 paid up. 7,00,000 Equity Shares of Rs 5 each fully called up (Calls-
in-arrears @Rs 2 on 2,00,000 shares).3. 10,000 9% Preference Shares of Rs100 each fully paid up. Normal Rate of
Earnings—9%. FairValue of an Equity Share (Rs 3 paid up) Rs 8.50.Difference between Yield Based Value and Net
Assets Value is Rs 1. Calculate Net Assets for Equity Shareholders and Expected FMP for Equity Shareholders.
Ans:- Net Assets for Equity Share Holders = Rs. 150 lakhs including uncalled amount and call–in–
arrears or Net Assets for Equity Share Holders = Rs. 138 lakhs excluding uncalled amount and call–in– arrears
Expected Future Maintainable Profit for Equity Shareholders = Rs. 17.01 lakhs
Q.8
Ans:- The company is changing only the product mix and is not disposing of any of its components.
Changing only the product mix is not a discontinuing operation as per AS 24.
Q.9 On 1st April,2020, the Share Capital of S Ltd. consists of Rs 10 crore Equity ShareCapital (Rs 10 each) and Rs
12 crore ,10% Preference Share Capital(Rs 100 each) (Convertible into Equity Shares of Rs 10 each).On 1st
July,2020,H Ltd. acquires 50 lac equity shares and 6.2 lac Preference Shares of S Ltd. with a view to their
subsequent disposal on 1st June,2021? State how will you deal with this case as per AS 21.
Ans:- Investment in S Ltd. shall be accounted for in accordance with AS 13. Hence, the Cost of
Control is not required to be calculated on 31st March 2021.
Q.10 P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd. directly enjoys voting
right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P Ltd. The management of R Ltd.
has not disclosed its relationship with P Ltd. How would you assess the situation from the viewpoint of AS 18 on
Related Party Disclosures?
Ans:- (1) P Ltd. has a direct economic interest in R Ltd to the extent of 14%, and through Q Ltd.
in which it is the majority shareholder therefore it has further control of 12% in R Ltd. (
i.e. 60% of Q Ltd‖s 20%). These two taken together (14% + 12%) make the total control
of 26%.
(2) In the present case, the control of P Ltd. in R Ltd. directly and through Q Ltd. does not
go beyond 26%. However, as per AS 18, significant influence may be exercised if
investing party (P Ltd.) holds, directly or indirectly through intermediaries, 20% or more
of the voting power of the R Ltd.
(3) As R Ltd. is a listed company and regularly supplies goods to P Ltd. therefore, related
party disclosure, as per AS 18, is required.
Q.11 Cashier of X Ltd. embezzled cash amounting to Rs 5,00,000 during March, 2021. However same comes to
the notice of Company management during April, 2021 only. Financial statements of the company are not
approved by the Board of Directors of the company. With the help of provisions of AS 4 “Contingencies and Event
Occurring after the Balance Sheet Date” decide, whether the embezzlement of cash should be adjusted in the
books of accounts for the ending March, 2021?
Ans :-
The embezzlement of cash should be adjusted as per AS – 4 in the books of accounts for the ending March 2021 because
though the theft, by the cashier Rs. 5,00,000 was detected after the balance sheet date (before approval of financial
statements) but it is additional information materially affecting the determination of the cash amount relating to conditions
existing at the balance sheet date.
Q.12 Y Ltd. purchased a machinery for Rs 80 lakhs. (Useful life 4 years and residual value Rs 16 lakhs)
Government grant received is Rs 32 lakhs. Refund of grant was made in the beginning of 3rd year. Calculate the
Depreciation for the 3rd year if theGrant is credited to Deferred Grant Account.
Ans :- Depreciation to be provided in 3rd Year = 16 Lakhs

80 lakhs – 16 lakhs
Depreciation in each year is calculated as-
4 Years
Q.13 Cashier of Y Ltd. embezzled cash amounting to Rs 5,00,000 during March, 2021. However the same comes
to the notice of Company only after approval of financial statements by the Board Directors of the company during
April, 2021 only. How will you deal with this case ?
Ans :- If embezzlement of cash comes to the notice of company management only after approval of financial statements by
the board of directors of the company, then its treatment shall be done as a Prior Period item as per the provisions of AS 5.
The nature and the amount of prior period items should be separately disclosed on the Statement of Profit and Loss in a
manner that its impact can be perceived in the next year. This being is also an extraordinary item and as such disclosed
separately.
Q.14
Ans:- Reportable Segments as per AS – 17 are M, N, O and R

Criteria for identifying Reportable Segments Segments fulfilling Criteria
1) 10% of Total Revenue i.e. 200 M, N, O and R

2) 10% of Total Result (Profit or Loss whichever is
greater in the absolute term) i.e. 40
M, N and O
3) 10% of Total Assets i.e. 20 M, N and O
Q.15 The Cost of the Closing Stock was Rs 5,00,000. Realizable value 120%. Realizable Expenses 5%.At what
amount stock wil be shown in the Income Statement of Mallaya co which is not a going concern.
Ans:- Stock to be shown at Net Realizable Value since Mallaya Co. is not a going concern. The Net
Realizable Value of Stock is Rs. 5,00,000 x 1.20 x 0.95 = Rs. 5,70,000
Q.16 An airline is required by law to overhaul its aircraft once in every three years. A company which operates
aircrafts does not provide any provision as required by law in its final account. State with reason whether there is
any need for provision.
Ans:- No Present Obligation as per AS – 29 because it is a future obligation and the incurring of the
expenditure depends on the company’s decision to continue operating aircraft. However, a
provision should be recognized for the best estimate of any fines and penalties if the airline
continues to operate aircraft for more than three years.
Q.17 State the treatment of Rs 20 lakhs received from the Central Govt. as subsidy for setting up a Plant in
backward area. Cost of Plant Rs 100 lakhs.
Ans:- As per AS 12, Government grants of the nature of promoters’ contribution should be credited to capital reserve and
treated as a part of shareholders’ funds. In this case grant of Rs. 20 lakhs is in nature of promoters’ contribution hence it
should be credited to Capital Reserve which can neither be distributed as divided nor considered as deferred income.
Q.18 X Ltd. purchased a machinery for Rs 80 lakhs. (Useful life 4 years and residual value Rs 16 lakhs)
Government grant received is Rs 32 lakhs. Refund of grant was made in the beginning of 3rd year. Calculate the
Depreciation for the 3rd year if theGrant is credited to Fixed Assets.
rd
Ans:- Depreciation to be provided in 3 Year = 24 Lakhs
Q.19 State the treatment of Refund of grant of Rs 10 crores received from Government for employees welfare
activities due to non-fulfilment of prescribed the conditions
Ans:- As per AS 12, the amount refundable in respect of a government grant related to revenue is
applied first against any unamortised deferred credit remaining in respect of the grant. To
the extent that the amount refundable exceeds any such deferred credit, or where no deferred
credit exists, the amount is charged immediately to the Profit and Loss Statement as an
extraordinary item as per AS-5. Hence, a Refund of the grant of Rs. 10 crores should be charged
to the Profit and Loss Account of the company as an extra-ordinary item.
Q.20 Z Ltd. signed an agreement with its employees union for revision of wages in June, 2021. The wage revision is
with retrospective effect from 1.4.2019. The arrear wages upto 31.3.2021 amounts to Rs 50 lakhs. Arrear wages for
the period from 1.4.2021 to 30.6.2021 (being the date of agreement) amounts to Rs 10 lakhs. Decide whether a
separate disclosure of arrear wages is required.
Ans:- Additional liability on account of wages amounting to Rs. 60 lakhs (from 01/04/2019 to 30/06/2021) should be included in
the current year’s wages. It may be mentioned that
additional wages are expenses arising from the ordinary activities of the company. Although abnormal in amount, such an
expense does not qualify as an extraordinary item.
Wages payable for the current year (from 01/04/2019 to 31/03/2021) amounting to Rs. 50 lakhs is not a prior period item hence
need not be disclosed separately. This may be shown as current year wages.
Section C
12 x 4 = 48 Marks
ONE LAQ
2+2+2+1 = 7 Marks
:
Q.1 On 1.4.2017 OM Ltd grants 50 options to each of its 2100 employees at Rs 70 when the Market price is Rs 110 .
The vesting date is 31st March,2020 and the exercise date is 31st March,2021. At the end of year 1,the company found
that 100 employees had left and estimated the expected annual forfeitures rate at 10%. Earning per Share and Price -
Earning Ratio were Rs 26 and 5 respectively. At the end of year 2,the company found that the actual annual
forfeitures rate was at 4% and re-estimated the expected annual forfeitures rate at 5%. Earning per Share and Price -
Earning Ratio were Rs 27.5 and 4 respectively. At the end of year 3,the company found that the actual annual
forfeitures rate was at 10%. Earning per Share and Price -Earning Ratio were Rs 18 and 5 respectively. Only 1700
employeesexercised their options on 31st March,2021. The face value of equity share is Rs 10 per share.
(i) Calculate Expenses to be recognised in year 1 by Fair Value Method.
(ii) Calculate Expenses to be recognised in year 2 by Fair Value Method.
(iii) Calculate Expenses to be recognised in year 3 by Fair Value Method.
(iv) Calculate Value of Options Forfeited.
Answer:
(i) Expenses to be recognised in the first year = Rs. 16,20,000
(ii) Expenses to be recognised in the Second year = Rs. 8,12,000

(iii) Expenses to be recognised in the Third year = Rs. - 7,04,000 (i.e. expense to be derecognised)
(iv) Value of Options Forfeited = Rs. 28,000
Q.2 5 Marks
Answer: Statement showing the Purchase Consideration
Particulars Rs.
4,79,910
Equity Shares = 79,985 x 2 x Rs. 15
5
1,59,970
Preference Shares = 79,985 x Rs. 10
5
Cash = 79,985 x Rs. 5 3,99,925
Cash for fractional shares = 15 x Rs. 13 195
Total 10,40,000
TWO LAQ
Q.1 4+2+3+3 = 12 Marks
(i) Calculate Operating Profit before Working Capital Changes.
(ii) Calculate Cash flow from Operating Activities
(iii) Calculate Cash Flow from Investing Activities
(iv) Calculate Cash Flow from Financing Activities
Answer :-
(i) Operating Profit before Working Capital Changes = Rs. 44,000
(ii) Cash flow from Operating Activities = Rs. (80,000)
(iii) Cash flow from Investing Activities = Rs. (3,56,640)
(iv) Cash flow from financing Activities = Rs. 19,00,000
THREE LAQ
Q.1
3+2+2+3+2 = 12 Marks
(i) Calculate the Balance of Profit & Loss Account which will appear in the Balance Sheet of Sickness Ltd. as at 30th
September, 2021.
Calculate the Balance of Cash and Bank Balances which will appear in the Balance Sheet of Sickness Ltd. as at
(ii)
30th September, 2021.
(iii) Calculate the Trading Cash Flow for each of the years 2018-2019, 2019-2020 and2020-2021;
(iv) Calculate the Weighted Average Annual Trading Cash Flow.
(v) Calculate the Price which CAS Ltd. should offer for the business.
Answer :-
(i) Balance of Profit & Loss A/c as of 30th September 2021 – Rs. 12,716
(ii) Cash & Bank Balance on 30/09/2021 – Rs. 2,15,630
(iii) Trading Cash Flows for 2018 – 2019 = Rs. 4,000
Trading Cash Flows for 2019 – 2020 = Rs.(3000 )
Trading Cash Flows for 2020– 2021 = Rs. 10,800
(iv) Weighted Average Annual Trading Cash Flows = Rs. 5,000

(v) Price CAS Ltd. should offer for the business = Rs. 50,000
FOUR LAQ
Q.1 1+1+4+4+2 = 12 Marks
(i) Calculate Profit/Loss on Revaluation of Fixed Assets.

(ii) Calculate Unrealized Profit/Loss on Stock.
(iii) Calculate the Balance of Consolidated P& L Account.
(iv) Calculate the Cost of Control.
(v) Calculate the Minority Interest.
[Note: Consolidated Balance Sheet is not required to be prepared.]
Answer :-
(i) Profit on Revaluation of Asset = Rs. 12,000
(ii) Unrealised Loss on Stock = Rs. 1,600
(iii) Balance of Consolidated Profit & Loss A/c = Rs.40,456
(iv) Capital Reserve on Consolidation = Rs. 61,000
(v) Minority Interest = Rs. 60,864
FIVE LAQ
Q.1 Given the following information of NIKITA Ltd. 3 Marks
Goods of Rs 60,000 were sold on 20-3-2021 but at the request of the buyer thesewere delivered on 10-4-2021.
On 15-1-2021 goods of Rs 1,50,000 were sent on consignment basis of which 20% of the goods unsold are lying
with the consignee as on 31-3-2021.
Rs 1,20,000 worth of goods were sold on approval basis on 1-12-2017. The period of approval was 3 months after
which they were considered sold, buyer sent approval for 75% goods up to 31-1-2021 and no approval or
disapproval received for the remaining goods till 31-3-2021.
Apart from the above, the company has made cash sales of Rs 8,70,000 (gross). Trade discount of 5% was allowed
on the cash sale.
Calculate the total revenue to be recognized for the year ending 31-3-2021.
Answer: Total Revenue to be recognized for the year ending 31/03/2021 = Rs. 10,06,500
Q.2
3 Marks
X Ltd. entered into an agreement with Y Ltd. for sale of goods costing Rs 2,40,000 at a profit of 20 % on sale.
The sale transaction took place on 1st February, 2021. On the same day X Ltd. entered into another agreement
with Y Ltd. for repurchasing the same goods at Rs 3,20,000 on 1st August, 2021. The predetermined
repurchasing price covers, inter alia, the holding cost of Y Ltd. Calculate the amount of revenue as per AS - 9 for
the financial statements of X Ltd. for the year 2020–2021.
Answer:- Revenue should not be recognised since the transaction between X Ltd. and Y Ltd. on 1st February 2021 is a financing
2,40,000 ] is not revenue as per AS - 9.
transaction rather than a sale. The resulting cash inflow of Rs. 3,00,000 [i.e. Rs.-
0.8
Q.3 SB Advertisers obtained advertisement rights for one day world cup crickettournament to be held in May 2021 3 Marks
for Rs 1,200 lakhs in February 2021.
By 31/3/2020, they had paid Rs 500 lakhs to secure these advertisements rights. The balance Rs 300 lakhs was
paid in April 2021. By March 2021, they procured advertisement for 75% of the available time for Rs 1500 lakhs.
The advertisers paid60 % of the amount by that date. The balance 40 % was received in April 2021.
Advertisements for balance 25 % time were procured in April 2021 for Rs 300 lakhs. The advertisers paid the full
amount while booking the advertisement. 25 % of the advertisement time is expected to be available in May 2021
and balance in June 2021. Calculate the amount of net revenue as per AS - 9 to be recognised in June, 2021.
Answer: - Amount of Net Revenue as per AS - 9 to be recognised in June, 2021 = Rs. 450 lakhs
3 Marks
Q.4 BS Ltd acquired machinery on lease from BHARAT Ltd on the following terms:
Lease Term 5 Years, Fair Value of Machinery (useful life 15 years) Rs 45 lakhs, Annual Lease Rental payable at Rs
10 lakhs, Rs 8 lakhs, Rs 6 lakhs, Rs 4 lakhs, Rs 2lakh at the end of each year ,
Implicit Rate of Return (IRR) 15%
State with reason whether the Lease is Operating Lease or Finance Lease. Present value. factors @ 15% for years
1 to 5 are 0.8696, 0.7561, 0.6575, 0.5718 and0.4972 respectively.
Who will provide Depreciation and of what amount for the First year? Lessee follows Depreciation rate@ 10% p.a.
on straight line basis. Lessor follows Depreciation rate@ 6–2/3 % p.a. on straight line basis.
Ans:- (i) It is an operating lease since the Present Value of Minimum Lease Payment is substantially less than the Fair Value
of Machinery.
Present Value of Minimum Lease Payment = (10 lakhs × 0.8696) + (8 lakhs × 0.7561) + (6 lakhs × 0.6575) + (4 lakhs × 0.5718) +
(2 lakhs × 0.4972) = Rs. 21.9714 lakhs, whereas Fair Value of Machinery= Rs. 45 lakhs and
Lease Term (i.e. 5 years) is substantially less than the useful life of Machinery (i.e. 15 years).
2
(ii) In the case of Operating Lease, Lessor will provide Depreciation = Rs. 45 lakhs × 6 – % = Rs. 3 lakhs
3
SIX LAQ
(4x3 = 12 Marks)
Q.1 Write short on Characteristics and Types of Joint Arrangement As per Ind AS-111. 3 Marks
Answer:
Characteristics of Joint Arrangement:
A joint arrangement has the following characteristics :
(a) The parties are bound by a contractual arrangement.
(b) The contractual arrangement gives two or more of those parties joint control of thearrangement.
Types of Joint Arrangement As per Ind AS-111
An entity shall determine the type of joint arrangement in which it is involved. A joint arrangement is either a joint
operation or a joint venture. The classification of a joint arrangement as a joint operation or a joint venture depends
upon the rights and obligations of the parties to the arrangement.
(i) A Joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have
rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint
operators.
(ii) A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have
rights to the net assets of the arrangement. Those parties are called joint venturers.
Q.2 Write short on Benefits of XBRL reporting.

3 Marks
Answer: - The benefits of XBRL reporting are enumerated below:-
(1) Automated Data Processing: The use of XBRL offers major benefits to the preparers and users of business and financial
information by enabling this data to be exchanged and processed automatically by the software.
(2) More accurate and efficient: XBRL makes reporting more accurate and more efficient by using comprehensive definitions
and accurate date tags.
(3) Data Review: Organisations can use software to automatically validate data electronically received through XBRL. The
software can help analyze the data and identify problems that accountants and auditors can examine.
(4) Improved reporting quality: XBRL provides its users with increased data integrity and uniformity. It also allows for
increased transparency of public-owned companies financial records for view by ―interested parties.
(5) Interchangeable: Information in reports prepared using XBRL standard is interchangeable between different information
systems in entirely different organisations.
(6) Cost and time savings: Currently all companies file their reports with regulators using formats like the Portable Document
Format (PDF) which has its inherent limitations. Moreover, the costs of sending, receiving storing, validating and auditing the
financial records in this format are comparatively higher, XBRL reduces the involved time and also the cost.
Q.3 Write short on Financial reporting vis-a-vis triple bottom line reporting.
3 Marks
Answer: Financial reporting vis-a-vis triple bottom line reporting:
(1) Origin: the origination of financial reporting precedes that of Triple bottom line reporting, the latter being
just a few decades old.
(2) Nature: It is mandatory for corporates to prepare and present their financial reports; while preparation of full
TBL reports including social and environmental dimensions are voluntary in nature.
(3) Scope: Triple bottom line reporting is broader in scope than financial reporting, as the former includes the
reporting of social and environmental performances in addition to the financial performance of an
organisation.
(4) Contents: The information contained with a TBL report is of a different nature to that included in a financial
report. Thus TBL reporting enables environmental and social risks that have the capacity to materially affect
long-term financial performance to be identified and, therefore, taken into consideration when preparing
financial reports.
Q.4 Write short on Fair value hierarchy as per Ind AS 113. 3 Marks
Answer: Fair value hierarchy as per Ind AS 113:
Ind AS 113 establishes a fair value hierarchy into three levels of the input to valuation techniques for measuring fair value.
(1) Level 1 – Based on quoted prices (unadjusted) for identical asset or liabilities that is traded in a currently active market.
(2) Level 2 – Other than included within Level 1 that are observable for the asset or liabilities either directly or indirectly.
(3) Level 3 –Unobservable inputs for asset or liabilities
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical asset or liabilities (Level
1 inputs) and the lowest priority unobservable inputs (Level 3 inputs).
Q.5 Write short on Objectives and Scope of IGAS - 2 : Accounting Classification of Grant In-Aid. 3 Marks
Answer: The objectives of IGAS-2 are :
(i) To prescribe the principle for accounting and classification of Grants-in-aid in the Financial Statements of Government
both as a grantor as well as a grantee.
(ii) To prescribe practical solutions to remove any difficulties experienced in adherence to the appropriate principles of
accounting and classification of Grant-in-aid by way of appropriate disclosures in the Financial statement of Government.
Scope:
This Standard applies to the Union Government and the State Government in accounting and classification of Grants-in-aid
received or given by them. The Financial Statements should not be described as complying with this Standard unless they
comply with all the requirements contained therein.
This Standard encompasses cases of Pass-Through Grants such as Grants-in-aid given by the Union Government or State
Government and by the State Governments to the Local Bodies discharging functions of local government under the
Constitution.
Section D : Case Study Question
Q.1 2+6+1+1+1+1 = 12 Marks
(i) Compute the Net Profit attributable to Equity Shareholders for the year 2019-2020 and 2020- 2021.
(ii) Compute the Weighted Average Number of Shares Outstanding as on 31.03.2021 for Basic EPS and Diluted EPS.
(iii) Compute the Basic EPS (earning per share) for the year 2020-2021.
(iv) Compute the Net Profit attributable to Equity Shareholders for the year 22020-2021 for Diluted EPS (earning per
share) for the year 2020-2021 .
(v) Compute the Diluted EPS (earning per share) for the year 2020-2021 .
(vi) Compute the Adjusted EPS for the year 2019-2020.
Answer :-
(i) Net Profit attributable to Equity Shareholders for the year 2019–2020 = Rs. 75,00,000
Net Profit attributable to Equity Shareholders for the year 2020– 2021= Rs. 1,00,00,000
(ii) Weighted Number of Shares Outstanding on 31/03/2021 for Basic EPS = Rs.75,00,000
Weighted Number of Shares Outstanding on 31/03/2021 for Diluted EPS = Rs.77,50,000
(iii) Basic EPS (Earning per share) for the year 2020–2021= Rs. 1.33 per Share
(iv) Net Profit attributable to Equity Shareholders for the year 2020–2021 for Diluted EPS = Rs. 1,02,10,000
(v) Diluted EPS (Earning per share) for the year 2020–2021= Rs. 1.3174 per Share
(vi) Adjusted EPS for the year 2019–2020 = Re. 1 per share
Suggested Answer_Syl2016_Dec2017_Paper 17
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

DECEMBER - 2017
[Set-1]
The figures in the right side indicate full marks.

Section – A
1. Choose the most appropriate one from given four alternatives (1 Mark for right choice &
1 Mark for justification): 2x10=20
(i) On 1, April, 2017, H Ltd. acquired 120000 shares out of 150000 equity shares of ` 10 each
of S Ltd. at ` 16,30,000. On that date balance of General Reserve; Capital Reserve; and
Preliminary Expenses in S Ltd. were ` 2,42,000; ` 3,20,000; and ` 70,000 respectively. The
amount of cost of control will be
(A) Capital Reserve ` 19,600
(B) Capital Reserve ` 3,62,000
(C) Capital Reserve ` 2,89,600
(D) Goodwill ` 36,400
(ii) A company undertook to pay contract for a building for ` 90 lakhs. As on 31.03.2017, it
incurred a cost of ` 15 lakhs and expects that there will be ` 68 lakhs more for
completing the building. It has received ` 12 lakhs as progress payment. What is the
degree of completion?
(A) 16.67%
(B) 22.06%
(C) 18-07%
(D) 14-46%
(iii) Shiva Ltd. has obtained an institutional loan of ` 60 Crores for machinery on 01.06.2016.
The machinery installed on 1st February, 2017 with cost of ` 52 Crores and balance
loan has been utilized for working capital. Interest on above loan is @ 11% per annum.
As per AS-16 the amount of interest to be capitalized for the year ended 31st March,
2017 will be
Dos, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(A) ` 4.7667 Crores
(B) ` 3.8133 Crores
(C) ` 5.50 Crores
(D) ` 4.40 Crores
(iv) Chandra Ltd. purchased a machinery on 01.04.2013 for ` 35 Lakhs. Written down value
of the machinery as on 31st March, 2017 is ` 18.27 Lakhs. The recoverable amount of
the machinery is ` 12.45 Lakhs. The impairment loss as per AS-28 will be
(A) ` 16.73 Lakhs
(B) ` 22.55 Lakhs
(C) ` 5.82 Lakhs
(D) ` 4.28 Lakhs
(v) Kovid Ltd. agreed to absorb Shiva Ltd. Shiva Ltd. has been issued 120000 Equity Shares
of ` 10 which having intrinsic value of ` 32 each. If intrinsic value of Kovid Ltd.'s equity
share is ` 64 each, then how many equity shares should be issued by Kovid Ltd. to
Shiva Ltd. to meet out the purchase consideration?
(A) 240000
(B) 120000
(C) 18750
(D) 60000
(vi) At the time of absorption of B Ltd. by A Ltd., 9% debenture-holders of ` 480,00,000 of
` 100 each in B Ltd. are to be paid off at 10% premium by 8% debentures in A Ltd.
issued at a premium of 20%. How many debentures of ` 100 each are to be issued by
A Ltd?
(A) 480000
(B) 440000
(C) 528000
(D) 400000
(vii) Patel Ltd. purchases 75% shares out of 60000 Equity Shares of ` 10 each in Chandu Ltd.
at ` 7,95,000. On that date balance of Capital Reserve; Securities Premium; General
Reserve and Discount on issue of Debentures were ` 69,000; ` 1,20,000; ` 2,15,000; and
` 40,000 respectively. The amount of minority interest will be
(A) ` 2,51,000
(B) ` 2,41,000
(C) ` 1,98,750
(D) ` 1,95,000
(viii) On the year ended 31st March, 2017, a Non-Banking Financial Company (NBFC) had
following advances:
Assets classification ` in Lakhs

Standard 1050
Sub - Standard 750
Doubtful up to one year 200
Doubtful for one year to two year 220
The amount of provision which must be made against the advances will be:-
(A) ` 403 Lakhs
(B) ` 159 Lakhs
(C) ` 163 Lakhs
(D) ` 181 Lakhs
(ix) Capital Employed is ` 255 Lakhs; Annual average profits are ` 57 Lakhs; Normal rate of
return is 12%. The value of goodwill on the basis of Capitalization of super profits will be
(A) ` 220 Lakhs
(B) ` 475 Lakhs
(C) ` 6.84 Lakhs
(D) ` 26.40 Lakhs
(x) Which of the following is constituted under Article 266(2) of the Constitution of India?
(A) Contingency funds of India
(B) Consolidated funds of India
(C) Public Accounts of India
Answer:
(i) (D) Cost of Acquisition - (share capital + G.R.+C.R. – Preliminary Exp.) × 80%
= ` 16,30,000 – ` (15,00,000 + 2,42,000 + 3,20,000 – 70,000) × 80%
= `16,30,000 – `15,93,600 = Cost of control / Goodwill of ` 36,400
Cost to date
(ii) (C) Percentage of Completion =  100
Cumulative cost incurred + Estimated cost to complete
15
×100 =18.07%
15 + 68
11 8
(iii) (B) 5200000   = 3.8133 crores
100 12
(iv) (C) Impairment Loss = Carrying Amount – Recoverable amount

= ` 18.27 Lakhs – `12.45 Lakhs = ` 5.82 Lakhs
(v) (D) (120000 × 32) / 64 = 60000 Shares
(vi) (B) (480000 × 110%) /120% = 440000 Debentures
(vii) (B) (6,00,000+69,000+1,20,000+2,15,000-40,000) × 25% = ` 241000
(viii) Answer is not given in the options:
Provision on Standard Assets = `1,050 Lakhs x 0.4 % = 4.2 Lakhs

Provision on Sub – standard Assets = `750 Lakhs x 15% = `112.50 Lakhs
Provision on Doubtful Assets up to one year = `200 Lakhs x 25% = `50 Lakhs
Provision on Doubtful Assets from one to three year = `220 Lakhs x 40% = `88 Lakhs
Amount of Total Provision for bad debts = `4.2 + `112.50 Lakhs + `50 Lakhs + `88 Lakhs =
`254.70 Lakhs
(ix) (A) Super profit = Average profit - (Capital Employed × Normal Rate of Return)
= ` 57 Lakhs – (` 255 Lakhs × 12%)
= ` 57 Lakhs – ` 30.60 Lakhs
= ` 26.40 Lakhs
26.4
Goodwill = ` = ` 220 lakhs
12%
(x) (C) Public Accounts of India
Section – B
2. (a) N. Ram Co. are heavy engineering contractors specializing in construction of dams.
From the records of the company the following data is available pertaining to year
ended 31st March, 2017:
` in Crores
Total Contract Price 720
Work Certified 300
Work pending certification 60
Estimated further cost to completion 420
Stage wise payments received 264
Progress payments in pipe line 72
Using these data and applying the relevant accounting standard you are required to
(i) compute the amount of profit/loss for the year ended 31st March, 2017.
(ii) arrive at the contract work in progress as at the end of financial year 2016-2017.
(iii) determine the amount of revenue to be recognized out of the total contract
value.
(iv) work out the amount due from/to customers as at year end.
(v) list down relevant disclosures with figures as per relevant accounting standard. 8
(b) Mahi Ltd. began construction of a new building on 1st April, 2016. It obtained ` 50
Lakhs special loan from State Bank of India to finance the construction of the building
on 1st April, 2016 at an interest rate of 10%. The company's other outstanding two
non-specific loans were:
Amount Rate of Interest

` 80 Lakhs 11%
` 150 akhs 13%
The expenditures that were made on the building project were as follows:
` in Lakhs
April 2016 50
July 2016 55
Oct. 2016 125
March 2017 36
Building was completed by 31st March, 2017. Following the principles prescribed in
AS-16 Borrowing Cost, calculate the amount of interest to be capitalized and pass
one Journal entry for capitalizing the cost and borrowing cost in respect of the
building. 8
Answer:
(a)
(i) Calculation of Contract Work – in – Progress and Stage of Completion

(ìn Crores)
Particulars 2017
A. Work Certified 300
B. Work pending Certification 60
C. Contract Work – in – Progress ( A + B) 360
D. Estimated Cost for Completion of Contract 420
E. Total Completion Cost of Project (C + D) 780
F. Stage of Completion 0.461538
(Cost Incurred till year End/ Total Completion Cost of Project) i.e. (D/E) or
46.1538%
(ii) Revenue & Profit/Loss to be recognized in statement of profit as per AS – 7

(` in Crores)
Particulars 2017
A. Revenue to be recognized 332.31
Total Contract Revenue x Stage of Completion
i.e. `720 Lakhs x 46.1538%
B. Cost Incurred till the year end (Contract Expenses recognized during the 360.00
year)
C. Loss to be recognized at the end of each year (Revenue Recognized in year 27.69
– Cost Incurred till year End) i.e. (A – B)
D. Total Expected Loss on Contract i.e. Total Estimated Cost for Completion of 60.00
Contract – Total Contract Revenue = `780 Lakhs – `720 Lakhs
E. Further Loss to be recognized in year = D – C 32.31
(iii) Amount due from / to customers

(` in Crores)
Particulars 2017
A. Contract Work – In – Progress 360.00
B. Add: Contract Revenue Recognized during the year 332.31
C. Less: Contract Expenses Recognized during the year 360.00
D. Less: Further loss recognized during the year 32.31
E. Less: Progress Payment Received/to be Received 336.00
(`264 Lakhs + `72 Lakhs)
F. Amount Due from/(to) Customers ( A + B – C – D – E) (36)
As this amount is in negative it would be treated as amount due to customers
and will be shown in current liabilities.
(iv) The relevant disclosures under AS 7 (Revised) are given below:

ìn crores
Contract revenue till 31st
March, 2017 332.31
Contract expenses till 31st March, 2017 360
Recognized losses for the year 31st March, 2017 (60)
Progress billings (264 + 72) 336
Retention (billed but not received from contractee) 72
Gross amount due to customers 36
(b) (i) Computation of average accumulated expenses
` in Lakhs
` 50 Lakhs × 12/12 50.00
` 55 Lakhs × 9/12 41.25
`125 Lakhs × 6/12 62.50
` 36 Lakhs × 1/12 3.00
156.75
(ii) Calculation of average interest rate other than for specific borrowings.
Amount of loan (`) Rate of interest Amount of interest (`)
` 80 Lakhs 11% = 8.80
`150 Lakhs 13% =19.50
` 230 Lakhs = 28.30
Weighted average rate of interest 28.30/230 = 12.304% (approx)
(iii) Interest on average accumulated expenses

` in Lakhs
Specific borrowings (` 50 Lakhs × 10%) 5
Non- specific borrowings `156.75 – ` 50 = ` 106.75 Lakhs × 12.304% 13.1345
Amount of interest to be capitalized 18.1345
Actual Interest Cost

(50 ×10%) + (80×11%) + (150×13%) = 33.3
Amount to be capitalised is ` 18.1345 as it is not more than 33.3 (actual interest)
(iv) Total expenses to be capitalized for building

` in Lakhs
Cost of building (50+55+125+36) Lakhs 266
Add: Amount of interest to be capitalized 18.1345
284.1345
(v) Journal Entry ` in Lakhs

Date Particulars L.F. Dr. (`) Cr. (`)
31.3.17 Building A/c Dr. 284.1345
To Bank A/c 284.1345
(Being amount of cost of building and
borrowing cost thereon capitalized)
3. (a) Sanwar Ltd. made a loss of ` 50 Lakhs for the year ending 31st March, 2015. For the
year ending 31st March, 2016 and 31st March, 2017 it made profits of ` 25 Lakhs and
` 32 Lakhs respectively. It is assumed that the loss of a year can be carried forward
for eight years and tax rate is 30%. By the end of the 31.03.2015, the company feels
that there will be sufficient taxable income in the future years against which carry
forward loss can be set off. There is no difference between taxable income and
accounting income except that the carry forward loss is allowed in the years ending
on 31st March, 2016 and 2017 for tax purposes. Prepare a statement showing Profit
and Loss before Tax and after Tax for the years ending 31st March, 2015, 2016 and
2017. 8
(b) Describe the objectives and scope of Ind AS - 105. 8
Answer:
(a)
Particulars 2014-15 2015-16 2016-17
(a) Accounting Profit / Loss (50,00,000) 25,00,000 32,00,000
(b) Income Tax Profit before adjustment (50,00,000) 25,00,000 32,00,000
(c) Less: Set off of Brought Forward - (25,00,000) (25,00,000)
Losses
(d) Loss Carried Forward to Subsequent (50,00,000) (25,00,000) -
Years
(e) Income Tax Profit = (b) – (c) NIL NIL 7,00,000
(f) Difference between Accounting & 50,00,000 (25,00,000) (25,00,000)
Taxable Profit (e – a)
(g) Income Difference classified into:
(1) Permanent Diff. NIL NIL NIL
(2) Timing Diff. – Originating (50,00,000) NA NA
(3) Timing Diff. – Reversing NA (25,00,000) (25,00,000)
(h) Current Tax = (e) ×30% - - 2,10,000

(i) Deferred tax (50,00,000×30%)
- DTA / (DTL) originating during the year 15,00,000 -
- (DTA) / DTL reversing during the year - (7,50,000) (7,50,000)
(25,00,000× (25,00,000×3
30%) 0%)
(j) Tax Expense = Current Tax + Deferred (15,00,000) 7,50,000 9,60,000
Tax
(k) Book Profit after Tax = (a – j) (35,00,000) 17,50,000 22,40,000
(b) Ind AS — 105: Non-current Assets Held for Sale and Discontinued Operations
Objective
The objective of this Indian Accounting Standard (Ind AS) is to specify the accounting for
assets held for sale, and the presentation and disclosure of discontinued operations. In
particular, this Ind AS requires:
(a) assets that meet the criteria to be classified as held for sale to be measured at the lower
of carrying amount and fair value less costs to sell, and depreciation on such assets to
cease; and
(b) assets that meet the criteria to be classified as held for sale to be presented separately
in the balance sheet and the results of discontinued operations to be presented
separately in the statement of profit and loss.
Scope
The classification and presentation requirements of this Ind AS apply to all recognised non-
current assets and to all disposal groups of an entity. The measurement requirements of this
Ind AS apply to all recognised non-current assets and disposal groups (as set out in
paragraph-4), except for those assets listed in paragraph 5 which shall continue to be
measured in accordance with the Standard noted.
Assets classified as non-current in accordance with Ind AS 1, Presentation of Financial
Statements, shall not be reclassified as current assets until they meet the criteria to be
classified as held for sale in accordance with this Ind AS.
Assets of a class that an entity would normally regard as non-current that are acquired
exclusively with a view to resale shall not be classified as current unless they meet the criteria
to be classified as held for sale in accordance with this Ind AS.
4. B Ltd. was merged with A Ltd. with effect from 1st April, 2017 and the merger was in
nature of purchase. The Balance Sheets of A Ltd. and B Ltd. as on 31st March, 2017 are
given below:
(` in Lakhs)
Particulars A Ltd. BLtd.
(Amount) (Amount)
(a) Share Capital:
Equity Shares of ` 10 each 160 60
General Reserve 60 40
Profit and Loss Account 50 16
Less: Preliminary Expenses (4) .
Long term Borrowings (10% Debentures) 40 20
3. Current Liabilities and Provisions
(a) Trade Payables 12 10
(b) Provision for taxation 18 10
Total 336 156
Particulars A Ltd. BLtd.

(Amount) (Amount)
II. ASSETS
(a) Fixed Assets:
Tangible Assets 200 90
Intangible Assets __ __
(b) Non-Current Investment 30 10
2. Current Assets
(b) Trade Receivable 16 18
(c) Advance Tax 12 6
(d) Cash and Cash Equivalents 46 22
Total 336 156
A Ltd. would issue 10% Debentures to discharge the claims of the debenture holders of B
Ltd. at par. Non-trade investments of A Ltd. fetched @8% while those of B Ltd. fetched
@10%. Profit (Pre-tax) of A Ltd. and B Ltd. during 2014-15; 2015-16; and 2016-17 were as
follows:
(` in Lakhs)
Year A Ltd. BLtd.

2014-15 67.60 20.00
2015-16 70.00 25.00
2016-17 85.00 26.82
Goodwill may be calculated on the basis of 5 years purchase of super profit method
taking 15% as the pre-tax normal rate of return. Purchase consideration is discharged by
A Ltd. on the basis of intrinsic value per share. Prepare Balance Sheet of A Ltd. after
merger as per revised Schedule III of the Companies Act, 2013. 16
Answer:
Balance Sheet of A Ltd.
as at 1st April 2017 (After Merger)
(` in Lakhs)
1. Shareholders‟ Funds
(a) Share Capital 1 214
(b) Reserves and Surplus 2 203.20
Long term Borrowings: 10% Debentures (`40 + `20) 60
3. Current Liabilities And Provisions
(a) Trade Payables (`12 + `10) 22
(b) Provision for taxational (`18 + `10) 28
Total 527.20
II. ASSETS
(a) Fixed Assets: 290
- Tangible Assets (` 200 + ` 90) 35.20
- Intangible Assets: Goodwill
(b) Non- Current investment (` 30 + `10) 40
2. Current Assets
(a) Inventories (`32 + `10) 42
(b) Trade Receivable(` 16 + `18) 34
(c) Advance Tax (`12 + ` 6) 18
(d) Cash and Cash Equivalents (` 46 + ` 22) 68
Total 527.20
[Relevant Notes]
1. Share Capital
(` in Lakhs)
Authorized, issued, subscribed and paid up capital of 2140000 Equity Shares 214
of ` 10 each (of the above 540000 shares were issued to vendors for non cash
consideration)
Total 214

(` in Lakhs)
Securities Premium (@`18 on 540000 shares) 97.20
General Reserve 60.00
Profit & Loss A/c 50.00
Less: Preliminary Expenses (4.00)
Total 203.20
Working Notes:
(1) Calculation of Net Assets (Capital Employed)
Sundry Assets as per Balance Sheet 336.00 156.00
Less: Non – Trade Investments (30.00) (10.00)
Less: 10% Debentures (40.00) (20.00)
Less: Current Liabilities & Provisions (30.00) (20.00)
Closing Net Capital Employed 236.00 106.00
(2) Calculation of Goodwill

Total of Profits for three years 222.60 71.82
Simple Average Profits (Total of Profits/3) 74.20 23.94
Less: Income from Non – Trade Investments (2.40) (1.00)
Average Income from Capital Employed 71.80 22.94
Less: Normal Profits (Capital Employed x 15%) (35.40) (15.90)
Super – Normal Profits 36.40 7.04
Goodwill (Super – Normal Profits x 5 years) 182.00 35.20
(3) Calculation of Intrinsic Value

Net Capital Employed `236.00 lakhs `106.00 lakhs
Add: Non – Trade Investments `30.00 lakhs `10.00 lakhs
Add: Goodwill `182.00 lakhs `35.20 lakhs
Total `448.00 lakhs `151.20 lakhs
Total Number of Equity Shares 16 lakhs 6 lakhs
Intrinsic Value of Share `28.00 `25.20

Particulars Number of Equity
Shares
Total Number of shares of B Ltd. 6.00 Lakhs
Number of shares of A Ltd to be issued to B Ltd. 5.40 Lakhs
6 Lakhs x (25.20/28.00)
5. The following are the summarized Balance Sheets of A Ltd., B Ltd. and C Ltd. as at
31.03.2017:
Liabilities A Ltd. (`) B Ltd. (`) C Ltd. (`)

Share Capital (Shares of ` 100 each) 6,00,000 4,00,000 2,40,000
Reserves 80,000 40,000 30,000
Profit and Loss Account 2,00,000 1,20,000 1,00,000
Trade payables 80,000 1,00,000 60,000
A Ltd. __ 40,000 32,000
Total 9,60,000 7,00,000 4,62,000
Assets A Ltd. (`) BLtd. (`) CLtd. (`)
Goodwill 80,000 60,000 40,000
Fixed Assets 2,80,000 2,00,000 2,40,000
Shares in :
B Ltd. (3,000 Shares) 3,60,000 __ __
C Ltd. (400 Shares) 60,000 __ __
C Ltd. (1,400 Shares) __ 2,08,000 __
Due from : B Ltd. 48,000 __ __
C Ltd. 32,000 __ __
Current Assets 1,00,000 2,32,000 1,82,000
Total 9,60,000 7,00,000 4,62,000
(i) All shares were acquired on 01.10.2016 by A Ltd.

(ii) On 01.04.2016 the balances to the various accounts were as under
Particulars A Ltd. (`) BLtd. (`) CLtd. (`)

Reserves 40,000 40,000 20,000
Profit and Loss account 20,000 (Dr.) 20,000 12,000
(iii) During 2016-17, Profits accrued evenly.
(iv) In November, 2016, each company paid interim dividend of 10%. A Ltd. and B Ltd.
have credited their profit and loss account with the dividends received.
(v) During 2016-17, C Ltd. sold an equipment costing ` 40,000 to B Ltd. for ` 48,000 and B
Ltd. in turn sold the same to A Ltd. for ` 52,000.
Prepare the consolidated Balance Sheet as at 31.03.2017 of A Ltd. and its subsidiaries as
per Schedule III. 16
Answer:
CONSOLIDATED BALANCE SHEET OF A LTD. AND ITS SUBSIDIARIES B LTD. & C LTD. AS AT
31/03/2017
Particulars Note `
No
(a) Share Capital 6,00,000
(2) Minority Interest (W.N. 6) 2,34,896
Trade Payables (80,000 + 1,00,000 + 60,000) 2,40,000
Total 2,20,125
II. Assets 14,11,000
Fixed Assets
a. Tangible Assets
(2,80,000 + 2,00,000 + 2,40,000 – 12,000 for unrealised
profits) 7,08,000
b. Intangible Assets 2 1,81,000
(2) Current Assets
(a) Current Assets (1,00,000 + 2,32,000 + 1,82,000) 5,14,000
(b) Cash and Cash Equivalents 3 8,000
Total 14,11,000
Notes To Accounts:
Particulars ` `
1. Reserves & Surplus
(a) Reserves – Balance as on 31/03/2017 80,000
Share in B Ltd. (W.N. 4) 2,188
Share in C Ltd. (W.N. 3) 833 83,021
(b) Profit & Loss A/c – Balance as on 31/03/2017 – Given 2,00,000
Share in B Ltd. (W.N. 4) 86,750
Share in C Ltd. (W.N. 3) 9,333
2,96,083
Less: Pre–acquisition – Dividend (34,000)
Less: Provision for unrealised profit
75% on 8,000 + 75% on 4,000 (9,000) 2,53,083
Total 3,36,104
2. Intangible Assets
Goodwill
A Ltd. (given) 80,000
B Ltd. (given) 60,000
C Ltd. (given) 40,000
As per W.N. 5 1,000
Total 1,81,000
3. Cash & Cash Equivalents
Cash – in – Transit (Rs. 48,000 – Rs. 40,000) 8,000
Total 8,000
Working Notes:
1) Shareholding Pattern
Particulars B Ltd. C Ltd.
Total Shares (in Numbers) 4,000 2,400
Held by A Ltd. 3,000 400
(75%) (2/12)
Held by B Ltd. 1,400
(7/12)
Minority Interest 2,000 1,000
(25%) (3/12)
2) Position of Revenue Reserves and Profit & Loss Account as on 01/10/2016 i.e. on date of
investment
Particulars B Ltd. C Ltd.
Revenue Profit & Loss Revenue Profit & Loss
Reserves A/c Reserves A/c
A. Balance as on 31/03/2017 40,000 1,20,000 30,000 1,00,000
B. Balance as on 31/03/2016 40,000 (20,000) 20,000 12,000
C. Add: Interim Dividend Paid 40,000 24,000
during the year (4,00,000 x (2,40,000
10%) x10%)
D. Less: Interim Dividend 14,000 Nil
Received during the year (1,40,000 x
10%)
E. Increase during 2016 – 2017 Nil 1,66,000 10,000 1,12,000
(A – B + C – D)
F. Estimated Increase till Nil 83,000 5,000 56,000
01/10/2016 (E x ½)
G. Balance as on 01/10/2016 (B 40,000 63,000 25,000 68,000
+ F)
3) Analysis of Profit of C Ltd.

Particulars Capital Profits Revenue Revenue
Reserves Profits
01/10/2016
01/10/2016
Less: Interim Dividend Paid (24,000)
Increase in reserves after acquisition 5,000
Total 69,000 5,000 56,000
Minority Interest (3/12) 17,250 1,250 14,000
Share of A Ltd. (2/12) 11,500 833 9,333
Share of B Ltd. (7/12) 40,250 2,917 32,667

Reserves Profits
01/10/2016
01/10/2016
Less: Interim Dividend Paid 40,000
Increase in reserves after acquisition Nil
Share in C Ltd. (W.N. 3) 2,917 32,667
Total 63,000 2,917 1,15,667
Minority Interest (25%) 15,750 729 28,917
Share of A Ltd. (75%) 47,250 2,188 86,750

Particulars ` `
Investment in B Ltd. 3,60,000
Investment in C Ltd. (60,000 + 2,08,000) 2,68,000 6,28,000
B. Less: Pre – acquisition Dividend
Received by A Ltd. (30,000 + 4,000) 34,000
Received by B Ltd. 14,000 48,000
Paid up capital of B Ltd. 3,00,000
Paid up capital of C Ltd. 1,80,000
Capital Profits of C Ltd. (11,500 + 40,250) 51,750 5,79,000
C. Cost of Control/Goodwill (A – B – C) 1,000

Particulars ` `
A. Share Capital
B Ltd. 1,00,000
C Ltd. 60,000 1,60,000
B. Capital Profits
B Ltd. 15,750
C Ltd. 17,250 33,000
C. Revenue Reserves
B Ltd. 729
C Ltd. 1,250 1,979
D. Revenue Profits
B Ltd. 28,917
C Ltd. 14,000 42,917
E. Total (A + B + C + D) 2,37,896
F. Less: Provision for unrealized profits on equipment sold
From C Ltd to B Ltd. (8,000 x 25%)
From B Ltd. to A Ltd. (4,000 x 25%) 2,000
1,000 3,000
G. Minority Interest ( E – F) 2,34,896
Note: The above solution has been done by direct method. Alternatively, Students may
follow indirect method. In Indirect method, the share in pre – acquisition profits of B Ltd. in C
Ltd. amounting to `40,250 will be included as capital profit while analyzing the profits of B Ltd.
and will not be considered for the cost of control. Thus, in this case the amount of goodwill
and minority will be recalculated as `11,062 and `2,44,958 respectively in the consolidated
Balance Sheet. Therefore, the total of the assets and liabilities side of the consolidated
Balance Sheet will be `14,21,062. The W.N. 4,5 & 6 are recalculated for this alternate solution.

Reserves Profits
01/10/2016
01/10/2016
Less: Interim Dividend Paid 40,000
Increase in reserves after acquisition Nil
Share in C Ltd. (W.N. 3) 40,250 2,917 32,667
Total 1,03,250 2,917 1,15,667
Minority Interest (25%) 25,812 729 28,917
Share of A Ltd. (75%) 77,438 2,188 86,750

Particulars ` `
Investment in B Ltd. 3,60,000
Investment in C Ltd. (60,000 + 2,08,000) 2,68,000 6,28,000
B. Less: Pre – acquisition Dividend
Received by A Ltd. (30,000 + 4,000) 34,000
Received by B Ltd. 14,000 48,000
Paid up capital of B Ltd. 3,00,000
Paid up capital of C Ltd. 1,80,000
Capital Profits of C Ltd. 11,500 5,68,938
C. Cost of Control/Goodwill (A – B – C) 11,062
Particulars ` `
A. Share Capital
B Ltd. 1,00,000
C Ltd. 60,000 1,60,000
B. Capital Profits
B Ltd. 25,812
C Ltd. 17,250 43,062
C. Revenue Reserves
B Ltd. 729
C Ltd. 1,250 1,979
D. Revenue Profits
B Ltd. 28,917
C Ltd. 14,000 42,917
E. Total (A + B + C + D) 2,37,896
F. Less: Provision for unrealized profits on equipment sold
From C Ltd to B Ltd. (8,000 x 25%) 2,000
From B Ltd. to A Ltd. (4,000 x 25%) 1,000 3,000
G. Minority Interest ( E – F) 2,44,958
6. (a) A company has its share capital divided into shares of if 10 each. On 1st April, 2016 it
granted 10,000 employees' stock options (ESOP) at ` 40, when the market price was
` 130. The options were to be exercised between 16th December, 2016 and 15th
March, 2017. The employees exercised their options for 9,500 shares only; the
remaining options lapsed. The company closes its books on 31st March every year.
Show Journal entries up to the year ended 31.03.2017. 8
(b) Following balances as on 31st March, 2017, are obtained from the account books of
Gunnu Ltd.:
` in Lakhs
200 Lakhs Equity Shares of ` 10 each 2000
10 Lakhs, 10% Preference Shares of ` 100 each 1000
General Reserve 1600
Profit and Loss Account 1400
12% Debentures 1000
Creditors 800
Goodwill 1000
Stock-in-trade 1600
Debtors 400
Cash and Bank 220
Additional information are given below:
(i) Nominal value of investment is ` 500 Lakhs and its market value is ` 520 Lakhs.
(ii) Following assets are revalued:
` in Lakhs
(i) Land and Building 3200
(ii) Plant and Machinery 1800
(iii) Stock-in-trade 1450
(iv) Debtors 360
(iii) Average profit before tax of the company is ` 2400 Lakhs and 12.50% of the profit
is transferred to general reserve, rate of taxation being 30%.
(iv) Normal dividend expected on equity shares is 18% while fair return on closing
(v) Goodwill may be valued at ` 2000 Lakhs.
You are required to ascertain the value of each equity share under the fair value
method. 8
Answer:
(a) Journal Entries

2016 ` `
April. 1 Employee Compensation Expense Dr. 9,00,000
To Employee Stock Option Outstanding A/c Dr. 9,00,000
(Being grant of 10,000 stock options to employees
at ` 40 when market price is ` 130)
Dec, 16 to Bank A/C Dr. 3,80,000
15-Mar-17 Employee Stock Option Outstanding A/c Dr. 8,55,000
To Share Capital A/c 95,000
(Being allotment to employees of 9.500 equity
shares of ` 10 each at a premium of ` 120 per
share in exercise of stock options by employees)
2017
Mar. 16 Employee Stock Option Outstanding A/c Dr. 45,000
To Employee Compensation Expense 45,000
(Being entry for lapse of stock options for 500
shares)
Profit & Loss A/c 8,55,000
To Employee Compensation Expense 8,55,000
(Being transfer of employee compensalion
expense to profit and Ioss account)
(b)
1. Calculation of Net Assets
` in Lakhs
Assets: Goodwill 2000

Investment at market value 520
Stock 1450
Debtors 360
Cash and Bank 220
9550
Less: Liabilities:
Debentures 1000
Creditors 800 1800
7750
Less: Preference Share Capital 1000
Capital Employed 6750
2. Calculation of Profit Available for Equity Shareholders

` in Lakhs
Average Profit before Tax (given) 2400
Less: Income Tax @ 30% 720

Average Actual Profit 1680
Less: Transfer to Reserve @ 12.50% of ` 1680 210
Less: Preference Dividend 100
Profit available to Equity Shareholders 1370
3. Value per share (Based on Intrinsic Value Method)

= `6750 Lakhs/200 Lakhs Shares = ` 33.75
4. Value per share (Based on Yield Method)

Yield on Equity Shank = (Profit for Equity Shareholders/ Equity Share Capital) × 100
= (` 1370/` 2000(/Lakhs) × 100 = 68.50%
Value per share = (68.50/18) × `10 = ` 38.06
5. Value of Equity Share Under Fair Value Method

= (Intrinsic Value + Yield Value)/2
= (` 33.75 + 38.06)/2 = ` 35.905
7. (a) What do you understand by Government Accounting Standards Advisory Board

(GASAB)? State its Responsibilities. 8
(b) Discuss the main features of Government Accounting. 8
Answer:
(a) Government Accounting Standards Advisory Board (GASAB)
The accounting systems, the world over, are being revisited with an emphasis on
transition from rule to principle based standards and migration from cash to accrual
based system of accounting. The GASAB, as a nodal advisory body in India, is taking
similar action to formulate and improve standards of government accounting and
financial reporting and enhance accountability mechanisms.
The Government Accounting Standards Advisory Board (GASAB) was constituted by
the Comptroller and Auditor General of India (C&AG) with the support of Government
of India through a notification dated August 12, 2002. This Board was constituted to
establish and improve the standards of governmental accounting and financial
reporting, and enhance the accountability mechanisms. The decision to set-up GASAB
was taken in the backdrop of the new priorities emerging in the Public Finance
Management and to keep pace with International trends. The new priorities focus on
good governance, fiscal prudence, efficiency & transparency in public spending.
Responsibilities of GASAB
1. To formulate and improve standard of Government accounting and financial
reporting in order-to enhance accountability mechanisms.
2. To formulate and propose standards that improve the usefulness of financial
reports based on the needs of the users.
3. To keep the standards current and reflect change in the Governmental
environment.
(b) Features of Government Accounting
Government Accounting is a unique application area which has certain characteristics

of its own. Some of the main features of Government Accounting are discussed as
under:
1. Specific system of accounting: It is a specific accounting system which is followed
by government in its departments, offices and institutions.
2. Reporting of utilisation of public funds: The government and its institutions are public
institution whose main objective is to provide services to the society and also to
maintain law and order in the country, so the accounting system used by such
institutions has to reveal how public funds and properties have been used for that
purpose. It is to be noted that government accounting is not done for revealing any
profit and loss.
3. Government Regulations: Government accounting is maintained according to
government rules and regulations. The financial policies, rules and regulations as
determined from time to time provide the system of government accounting.
4. Double Entry System: Government accounting is based on the principles and
assumptions of double entry system of book keeping. Accordingly, every financial
transaction entered into by a government/ government office/ institution are
recorded showing their double effects. It implies that for each government financial
transaction one aspect of the transaction is debited and the other aspect is
credited.
5. Budget Heads: All the expenses of government offices are classified into different
budget heads and expenditures are made only on approved budget heads.
6. Budgetary Regulation: Government expenditures are governed by budgetary
regulations, in other words, no government office can make expenditure more than
tine amount allocated in the budget. Thus, in effect, government accounting gets
regulated by the budget.
7. Mode of Transaction: All government transactions are supposed to be performed
through banks.
8. Fund-based Accounting: A peculiar characteristic of governmental accounting is
the employment of separate funds. The government is engaged in an ever-growing
number of operations and activities which are quite unrelated to each other. The
particular sources of revenue or income often are dedicated to use for a particular
phase of the government‟s operations. The accounts must segregate these
specially dedicated resources and isolate them from all other transactions in a
separate “fund.”
9. Auditing: The audit the books of accounts maintained by government departments,
offices or institutions are to be audited by a recognised department of the
government so as to ensure proper governance and also to prevent misuse and
misappropriation of public funds.
(a) Concept of triple bottom line reporting.

(b) Features of XBRL Reporting.
(c) Role of Controller General of Accounts (CGA).
(d) Disclosure requirement as per AS-21.
(e) IFRS-2 : Shear-based payments.
Answer:
(a) Concept of triple bottom line reporting:

Triple bottom line reporting (TBLR) expands the traditional reporting framework to take
into account social and environmental performance in addition to financial
performance. The concept of Triple bottom line reporting states that reporting should
incorporate the social, environmental and financial performance of an organization.
TBL reporting refers to the publication of economic, environmental and social
information in an integrated manner that reflects activities and outcomes across these
three dimensions of a company‟s performance. Triple Bottom Line Reporting requires
that organisations should be reporting on three different „bottom lines‟ that are quite
distinct, but related from one another. They are discussed hereunder:
• The first bottom line happens to be the bottom line of the “income statement”
(which is the traditional measure of operating result).
• The second bottom line is that of anorganisation‟s “people account” (a measure in
some shape or form of how socially responsible an organisation has been
throughout its operations); and
• The third bottom line is that of the organisation‟s “planet account” (which measures
how environmentally responsible the company has been). Thus, only a company
that produces a TBL reports is taking account of the full cost involved in doing
business.
(b) Features of XBRL reporting

1. Clear Definitions
XBRL allows the creation of reusable, authoritative definitions, called taxonomies,
which capture the meaning contained in all of the reporting terms used in a business
report, as well as the relationships between all of the terms. Taxonomies are
developed by regulators, accounting standards setters, government agencies and
other groups that need to clearly define information that needs to be reported upon.
XBRL doesn‟t limit what kind of information is defined: it‟s a language that can be
used and extended as needed.
2. Testable Business Rules
XBRL allows the creation of business rules that constrain what can be reported.
Business rules can be logical or mathematical, or both. These business rules can be
used to:
• Prevent poor quality information being sent to a regulator or third party, by being
run by the preparer while the report is in draft stage.
• Prevent poor quality information being accepted by a regulator or third party, by
being run at the point that the information is being received. Business reports that
fail critical rules can be sent back to the preparer for review and resubmission.
• Identifying or highlighting questionable information, allowing prompt follow up,
correction or explanation.
• Creation of ratios, aggregations and other kinds of value-added information,
based on the fundamental data provided.
3. Multi-lingual Support
XBRL allows concept definitions to be prepared in as many languages as necessary.
Translations of definitions can also be added by third parties. This means that it‟s
possible to display a range of reports in a different language to the one that they
were prepared in, without any additional work. The XBRL community makes extensive
use of this capability as it can automatically open up reports to different
communities.
4. Strong Software Support
XBRL is supported by a very wide range of software from vendors large and small,
allowing a very wide range of stakeholders to work with the standard.
(c) Role of CGA: Consolidating monthly accounts of the Government of India and reporting
on the fiscal deficit is the primary responsibility of the CGA. The monthly accounts are
compiled in the CGA office and a monthly review indicating flow of expenditure,
revenue collection, internal and external borrowing and fiscal deficit is prepared for
Minister of Finance. A summary of the monthly accounts is also placed on the web. He
prepares a critical analysis of expenditures, revenues, borrowings and the deficit for the
Finance Minister every month. He also prepares annual Appropriation Accounts and
Union Finance Accounts for presentation to the parliament. Ministries, Departments
approach the Controller General of Accounts for advice on accounting procedures for
new schemes, programmes or activities undertaken by them. The advice rendered by
the CGA generally covers aspects related to maintenance of accounts, collection of
receipts and it‟s crediting into Government account, release of payment and it‟s
accounting, creation and operation of funds within Government accounts, banking
arrangements for making payments and collecting receipts etc. The advice of the
Controller General of Accounts is binding on the Ministries/Departments.
(d) Disclosure in terms of AS-21

(a) Disclosure should be made in accordance with the format of the parent company‟s
financial statements. Further disclosure under all the mandatory accounting
standards when material and also compliance with General Classifications should
be made in order to ensure comparability for one period to the next.
Supplementary information about the effect of acquisition and disposal of
subsidiaries on the financial position at the reporting date and results for the
reporting period with comparative preceding period amount should be disclosed.
(b) Reasons for exclusion from consolidation of subsidiaries should be disclosed List of all
subsidiaries-name, country of incorporation/residence, proportion of ownership
interest and if different proportion of voting power.
(c) Nature of relationship if the parent does not own directly or indirectly more than 50%
of voting power of the subsidiary.
(d) Names of subsidiary/subsidiaries of which reporting dates are different from that of
the parent and the difference in reporting dates
(e) IFRS 2: Share-based Payment

• IFRS 2 was issued by the International Accounting Standards Board in 2004. The
Standard has been effective since January 1, 2005.
• This standard deals with the recognition of share-based payment transactions of an
entity.
• IFRS 2 requires an entity to recognise share-based payment transactions in its financial
statements, including transactions with employees or other parties to be settled in
cash, other assets, or equity instruments of the entity.
• IFRS 2 recognises three types of share based payments. They are:
1. Equity-settled transactions for goods or services acquired by an entity;
2. Cash-settled but price or value of the goods or services based on the equity
instrument of the entity; and
3. Transactions for goods or services acquired by the entity in which either the entity
can settle or supplier can claim settlement by equity instruments of the entity.
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

DECEMBER - 2017
[Set-2]
All working must form part of your answer.
Whenever necessary, suitable assumption may be made and disclosed by way of a note.
Answer Question No. 1 (carrying 20 marks) in Section-A which is compulsory and
also answer any five questions (carrying 16 marks each) from Section B.

(This Section is compulsory)
(1 mark for answer + 1 marks for explanation)
1. (a) Choose correct option for the following statements: 2×10=20

Statements:
I-Ind AS 101 provides an option to entities to use previous GAAP carrying values of
PPE as on the date of transition as deemed cost.
II-IFRS1 provides an option to entities to use previous GAAP carrying values of PPE as
on the date of transition as deemed cost.
Options:
(i) Statement I is correct and statement II is incorrect.
(ii) Statement I is incorrect and statement II is correct.
(iii) Statement I and II are incorrect.
(iv) Statement I and II are correct.
(b) Choose the correct option for the following statement:
Statement:
As per Ind AS 20, Government Grants related to assets are presented in the financial
statement.
Options:
(i) By showing it as income of the year of the receipt.
(ii) By deducting the grant in arriving at the carrying amount of the asset.
(iii) By setting up the grant as deferred income.
(iv) By setting up the grant as deferred income or by deducting the grant in arriving
at the carrying amount of the asset.
(c) Choose correct option for the following statements:
Statements:
I-Ind AS 105 deals with Share-based payments.
II-Ind AS 104 deals with Insurance Contracts.
Options:
(i) Statement I is correct and statement II is incorrect.
(ii) Statement I is incorrect and statement II is correct.
(iii) Both statement I and II are incorrect.
(iv) Both statement I and II are correct.
(d) Choose correct option for the following statement:
Statement:
Pooling of Interest method is a recognized method of accounting for amalgamations

in India.
Options:
(i) Statement in correct.
(ii) Statement is incorrect.
(iii) Statement is correct as AS 14 recognizes the method in specified cases.
(iv) Statement is correct as both AS 14 and Ind AS 103 recognize the method in
specified cases.
(e) Capital employed is ` 255 Lakhs; Annual average profits are ` 44 Lakhs; Normal rate
of return is 12%. The value of goodwill on the basis of 4 years purchase of super
profits will be
(i) ` 176 Lakhs
(ii) ` 79 Lakhs
(iii) ` 40.70 Lakhs
(iv) ` 53.60 Lakhs
(f) IGAS 9 deals with
(i) Government Loans and Advances
(ii) Foreign Currency Transaction
(iii) Government Invest in Equity
(iv) Public Debt and other Liabilities
(g) Choose correct option for the following statement:
Statement:
Preparation of CFS is not mandatory for companies having subsidiary in India
Options:
(i) Statement is correct as the Companies Act, 2013 does not require preparation
of CFS.
(ii) Statement is correct as AS 21 allows it if financial statement of subsidiary is

attached with the stand-alone financial statements of the holding company.
(iii) Statement is incorrect as the Companies Act, 2013 requires preparation of CFS.
(iv) Statement is incorrect as the Government of India by notification has imposed

the requirement of preparation of CFS.
(h) Which of the following is not a role/duty of C & AG?
(i) To compile accounts of Union and States.
(ii) To give information and render assistance to the Union and States.
(iii) Audit of accounts of certain authorities or bodies.
(iv) Audit of Indian companies.
(i) Reverse merger helps a company to achieve
(i) organic growth
(ii) listing without IPO
(iii) inorganic growth
(iv) listing if IPO is made subsequently
(j) R Ltd. takes over S Ltd. on 31.03.2017.
There is Export Profit Reserve of ` 2,00,000 in the books of S Ltd. which is to be

maintained for two more years. The journal entry will be
(i) Statutory Reserve A/c debit to Amalgamation Adjustment A/c.
(ii) Amalgamation Adjustment A/c debit to Statutory Reserve A/c.
(iii) General Reserve A/c debit to Amalgamation Adjustment A/c.
(iv) None of the above
Answer:
1. (a) (i)
Explanation- Ind AS 101 provides the option to entities to use previous GAAP carrying
values of PPE as on the date of transition as deemed cost. But IFRS 1 does not provide
such option.
(b) (iii)
Explanation- Ind AS 20 (para) on Government Grants gives only one option of setting
the grant] as deferred income. IAS 20 however allows accounting by setting up the
grant as deferred income or by deducting the grant in arriving at the carrying amount
of the asset.
(c) (ii)
Explanation- Ind AS 102 deals with Share-based payments and Ind AS 104 deals with
Insurane Contracts. Hence option (ii) is the correct option.
(d) (iv)
Explanation- AS 14 recognises pooling of interest method for accounting of

amalgamations in the nature of mergers. Also, ind AS 103 recognises the method for
accounting of business combination transactions between entities under common
control. Hence, (iv) is the right choice.
(e) (iv) Super profit = Average profit — (Capital Employed × Normal Rate of Return)
= ` 44 Lakhs - (`255 Lakhs × 12%)
= ` 44 Lakhs - ` 30.60 Lakhs
= ` 13.40 Lakhs
Goodwill - ` 13.4 × 4 = ` 53.60 Lakhs
(f) (iii)
Explanation- IGAS 9 deals with Government Investment in Equity. Hence, option (iii) is
the right option
(g) (iii)
Explanation- Companies Act, 2013. [Section 129(3)] requires preparation of CFS by

company having subsidiary (ies). Other options are correct as those are not based on
relevant accounting standard or notification of the Government of India.
(h) (iv)
(i) (ii)
Explanation- In a reverse merger a private company can become a public company

by joining with a public company with limited assets. Hence, it facilitates listing without
IPO.
(j) (ii)
Explanation- Statutory Reserve A/c shall be credited as it is required to be retained for

two years. Hence Amalgamation Adjustment A/c is to be debited.
SECTION - B (80 Marks)

Answer any five questions (each question carrying 16 marks). 16x5=80
2. (a) State with reference to Accounting Standard (AS 2) how will you value the
inventories in the following cases:
(i) Raw material was purchased at ` 100 per kilo. Price of raw material is on the
decline. The finished goods in which the raw material is incorporated is
expected to be sold at below cost. 10000 kg. of raw material is on stock at the
year end. Replacement cost is ` 80 per kg.
(ii) In a production process, normal waste is 5% of input. 5000 MT of input were put
in process resulting in a wastage of 300 MT. Cost per MT of input is ` 1,000. The
entire quantity of waste is on stock at the year end to be valued.
(iii) Per kg. of finished goods consisted of:
Material cost — ` 100 per kg.
Direct labour cost — ` 20 per kg.
Direct variable production overheads — ` 10 per kg.
Fixed production charges for the year on normal capacity of one lakh kg. are
`10 lakhs. 2000 kg. of finished goods are on stock at the year end.
(b) (i) IB Sugar Limited borrowed an amount of ` 150 crores on 01.04.2016 for
construction of boiler plant @ 11% p.a. The plant is expected to be completed in
4 years. Since the weighted average cost of capital is 13% p.a., the Accountant
of IB Sugar Ltd. capitalized ` 19.50 crores for the accounting period ending on
31.03.2017. Due to surplus fund, out of ` 150 crores, an income of ` 3.50 crores
was earned and credited to profit and loss account. Comment on the above
treatment of Accountant with reference to relevant accounting standard.
(ii) X Limited sold to Y Limited goods having a sales value of ` 25 lakhs during the
financial year ended 31.03.2017. Mr. A, the Managing Director and Chief
Executive of X Limited owns nearly 100 per cent of the capital of Y Limited. The
sales were made of Y Limited at the normal selling price of X Limited. The Chief
Accountant of X Limited does not consider that these sales should be treated
any differently from any other sale made by the company despite being made
to a controlled company, because the sales were made at normal and, that
too, at arms’ length prices.
Discuss the above issue from the view point of AS 18. (3+3+2)+(4+4)=16
Answer:
2. (a)
(i) As per para 24 of AS 2 (Revised) on Valuation of Inventories, materials and other

supplies] held for use in the production of inventories are not written down below cost
if the finished product in which they will be incorporated are expected to be sold at
or above cost. However, when there has been a decline in the price of materials and
it is estimated that the cost of the finished products will exceed net realisable value,
the materials are written down to net] realisable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net
realisable value. Hence, in the given case, the stock of 10,000 kgs of raw material will
be valued at ` 80 per kg. The finished goods, if on stock, should be valued at cost or
net realisable value whichever is lower.
(ii) As per para 13 of AS 2 (Revised), abnormal amounts of waste materials, labour or

other] production costs are excluded from cost of inventories and such costs are
recognised as expenses in the period in which they are incurred. In this case, normal
waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be included in
determining the cost of inventories (finished goods) at the year end. The cost of
abnormal waste amounting to {(1000 × 5000) ÷ 4750} × 50 MT = ` 52,631.50 will be
charged in the profit and loss statement.
(iii) In accordance with paras 8 and 9 of AS-2 (Revised), the cost of conversion include a
systematic allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods. The allocation of fixed production overheads
for the purpose of their inclusion in the costs of conversion is based on the normal
capacity of the production facilities. Thus, cost per kg. of finished goods can be
computed as follows :
`
Material cost 100
Direct labour cost 20
Direct variable production overhead 10
Fixed production overhead 10
140
Thus, the value of 2,000 kgs. of finished goods on stock at the yearend will be
`2,80,000 (2,000 kgs x ` 140).
2. (b)
(i) As per AS 16 Borrowing costs‘ stales, ―to the extent that funds are borrowed
specifically for the purpose of obtaining a qualifying asset, the amount of borrowing
costs eligible for capitalisation on that asset should be determined as the actual
borrowing costs incuned on that borrowing during the period less any income on the
temporary investment of those borrowings.‖ The capitalisation rate should be the
weighted average of the borrowing costs applicable to the borrowings of the
enterprise that are outstanding during the period, other tthan borrowings made
specifically for the purpose of obtaining a qualifying asset. Hence, in ‗the above
case, treatment of accountant of IB Sugar Limited is incorrect. The amount of
borrowing costs capitalized for the financial year 2016-17 should be calculated as
follows:
Actual interest for 2016-17 (11% of ` 150 crores) ` 16.50 crores
Less : Income on temporary investment from specific borrowings ` 3.50 crores
Borrowing costs to be capitalized during year 2016-17 ` 13.00 crores
2. (b)
(ii) Para 3 of AS 18 on Related Party Disclosures describes related party relationship as

follows:
(a) Enterprises that directly, or indirectly through one or more intermediaries, control
or are controlled by, or are under common control with, the reporting enterprise
(this includes holding companies, subsidiaries and fellow subsidiaries);
(b) Associates and joint ventures of the reporting enterprise and the investing party
or venturer in respect of which the reporting enterprise is an associate or a joint
venture;
(c) Individuals owning, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the
enterprise, and relatives of any such individual;
(d) Key management personnel and relatives of such personnel; and
(e) Enterprises over which any person described in (c) or (d) is able to exercise
significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprises that have a member of
key management in common with the reporting enterprise.
In the instant case, Mr. A as a managing director controls operating and financial
actions of X Ltd. He also owns near 100% capital of Y Ltd. thereby exercising control
over it. Hence, Y Ltd. is a related party as per para 3 of AS 18. Hence, the sale of
goods worth ` 25 lakhs falls under AS 18 . Selling of goods at normal course of business
or at arms‘ length prices do not alter the position as any transaction with related party
is considered as related party transaction and requires appropriate disclosure in
accordance with AS 18. Following matters require disclosure:
(i) The name of transacting related party Y Ltd.

(ii) Description of the relationship between Significant influence through
parties ownership by a Director.
(iii) Description of nature of transaction Sale of goods at normal selling price.
(iv) Volume of transaction ` 25 Lakhs
3. (a) Gagan Ltd. acquired a machine on 1st April, 2011 for ` 7 crore that had an estimated
useful life of 7 years. The machine is depreciated on straight line basis and does not
carry any residual value. On 1st April, 2015, the carrying value of the machine was
reassessed at ` 5.10 crore and the surplus arising out of the revaluation being
credited to revaluation reserve. For the year ended 31st March, 2017 conditions
indicating an impairment of the machine existed and the amount recoverable
ascertained to be only ` 79 lakhs. You are required to calculate the loss on
impairment of the machine and show how this loss is to be treated in the books of
Gagan Ltd. The Company had followed the policy of writing down the revaluation
surplus by the increased charge of depreciation resulting from the revaluation.
(b) Write a detailed note on Ind AS 1 : Presentation of Financial Statements. 8+8=16
Answer:
3. (a)
` in ` in
Crore Crore
Carrying amount of the machine as on 1st April 2011 7.00
Depreciation for 4 years i.e. 2011-12 to 2014-15 [` 1 crore × 4 years] 4.00
Add: Upward Revaluation (credited to Revaluation Reserve Account) 2.10
Carrying amount of the machine as on 1st April 2015 (revalued) 5.10
Less: Depreciation for 2 years i.e.2015-16 & 2016-17[(5.1/3)x2 years] 3.40
Less: Recoverable amount 0.79
Impairment loss 0.91
Less: Balance in Revaluation Reserve as on 31.03.2017:
Balance in Revaluation Reserve as on 31.03.2017 2.10
Less: Enhanced depreciation met from Revaluation Reserve
2015-16 & 2016-17 = [(1.70 -1.00) x 2 years] 1.40 0.70
Impairment loss set off against Profit & Loss Statement as per of AS 28 0.21
―Impairment of Assets‖
3. (b)
Ind AS 1 on Presentation of Financial Statements prescribes the basis presenting general

purpose financial statements to ensure comparability both with the entity‘s financial
statements of previous periods and with the financial statements of other entities.
It sets out overall requirements for the presentation of financial statements, guidelines for
their structure and minimum requirements for their content. The scope of the standard relates
to preparation and presentation of general purpose financial statements in accordance
with Indian Accounting Standards (Ind ASs). The standard gives purpose of the financial
statements and also provides the content of complete set of financial statements.
Purpose of financial Statements :
Financial statements are a structured representation of the financial position and financial
performance of an entity. The objective of financial statements is to provide information
about the financial position, financial performance and cash flows of an entity that is useful
to a wide range of users in making economic decisions. Financial statements also show the
results of the management‘s stewardship of the resources entrusted to it. To meet this
objective, financial statements provide information about an entity‘s assets, liabilities, equity,
income and expenses (including gains and losses), Contributions by and distributions to
owners in their capacity as owners, and cash flows. This information, along with other
information in the notes, assists users of financial statements in predicting the entity‘s future
cash flows and, in particular, their timing and certainty.
Complete set of financial statements: A complete set of financial statements comprises:
(a) A balance sheet as at the end of the period (Including statement of changes is equity
which is presented as a part of the Balance Sheet;
(b) A Statement of profit and loss for the period;
(c) Statement of changes in equity;
(d) A Statement of cash flows for the period;
(e) Notes, comprising a summary of significant accounting policies and other explanatory
information; and
(f) Comparative information in respect of the preceding period;
(g) A balance sheet as at the beginning of the earliest comparative period when an entity
applies an accounting policy retrospectively or makes a retrospective restatement of
items in its financial statements, or when it reclassifies items in its financial statements.
4. A Ltd. agreed to take over B Ltd. as on 1st October, 2016. No Balance Sheet of B Ltd. was
prepared on that date.
Summarised Balance Sheets of A Ltd. and B Ltd. as at 31st March, 2016 were as follows:
A Ltd. B Ltd. A Ltd. B Ltd.

(`) (`) (`) (`)
Share Capital: Fixed Assets 12,50,000 8,75,000
Equity shares of ` 10 15,00,000 10,00,000 Current Assets:
each fully paid up Inventory 2,37,500 1,87,500
Reserves and Trade 3,90,000 2,56,000
Surplus: receivables
Reserve 4,15,000 2,56,000 Bank 2,93,750 1,50,000
Profit and Loss 1,62,500 1,37,500
Account
Trade payables 93,750 75,000
21,71,250 14,68,500 21,71,250 14,68,500
Additional information available:
(i) For the six months period from 1st April, 2016, A Ltd. made of profit of ` 4,20,000 after
writing off depreciation at 10% per annum on its fixed assets.
(ii) For the same period, B Ltd. made a net profit of ` 2,04,000 after writing off
depreciation at 10% p.a. on its fixed assets.
(iii) Both the companies paid on 1st August, 2016 equity dividends of 15%. Tax at 10%
on such payments was also paid by each of them.
(iv) Goodwill of B Ltd. was valued at ` 1,20,000 on the date of takeover, inventory of B
Ltd., subject to an abnormal item of ` 7,500 to be fully written off, would be
appreciated by 25% for purpose of take over.
(v) A Ltd. to issue to B Ltd.’s shareholders fully paid equity shares of ` 10 each, on the
basis of the comparative intrinsic values of the shares on the takeover date. Draft
the Balance Sheet of A Ltd. after absorption of B Ltd. All workings are to form part of
your answer. 16
Answer:
4.
A Ltd.
Balance Sheet as at 1st October 2016 (After Absorption)
Particulars Note No. `

(1) Shareholder’s Funds
(b) Reserves and surplus 2 12,80,000
Trade payables 1,68,750
Total 40,08,750
II. Assets
(1) Non-current assets
(a) Fixed assets
i. Tangible assets 3 20,18,750
ii. Intangible assets 4 1,20,000
(2) Current assets
(a) Inventories (` 2,37,500 + ` 2,25,000) 4,62,500
(b) Trade receivables (` 3,90,000+ ` 2,56,000) 6,46,000
(c) Cash and cash equivalents (` 5,28,750 + ` 2,32,750) 7,61,500
Total 40,08,750
Notes of Accounts
1. Share Capital
2,56,000 Equity Shares of ` 10 each fully paid 25,60,000

(1,06,000 shares allotted as fully paid without
payment being received in cash)
2. Reserves and surplus

Securities Premium 5,30,000
Reserves 4,15,000
Profit and Loss Account 3,35,000 12,80,000
3. Tangible Assets
Other Fixed Assets (` 12,50,000 + ` 8,75,000) 21,25,000
Less: Depreciation (1,06,250) 20,18,750
4. Intangible assets
Goodwill 1,20,000
Working Note:
(1) Bank Balance on 1.10.2016
A Ltd. (`) B Ltd. (`)

Add: Net Profit
Depreciation
[12,50,000 x 10% x6/12] 4,20,000 2,04,000
[8,75,000 x 10% x 6/12] 62,500 43,750
7,76,250 3,97,750
Less: Dividend (2,25,000) (1,50,000)
[15,00,000 x 15%]
[10,00,000 x 15 %]
5,51,250 2,47,750
Less: Dividend Tax @ 10% on dividend (22,500) (15,000)
(2) Profit and Loss Account as on 1.10.2016
A Ltd. (`) B Ltd. (`)
Balance as on 31.3.2016 1,62,500 1,37,500
Add: 6 month‘s profit 4,20,000 2,04,000
5,82,500 3,41,500
Less: Dividend (2,25,000) (1,50,000)
Dividend Tax (22,500) (15,000)
Balance 3,35,000 1,76,500
(3) Calculation of Intrinsic Value

Net Fixed Assets (Fixed Assets – Depreciation) 11,87,500 8,31,250
Goodwill 1,20,000
Inventory 2,37,500 2,25,000
(i.e. `1,87,500 –
` 7,500) x 1.25
Bank 5,28,750 2,32,750
Total of Assets 23,43,750 16,65,000
Less: Trade Payables 93,750 75,000
Net Assets 22,50,000 15,90,000
Total Number of Equity Shares 1,50,000 1,00,000
Intrinsic Value of Share
(Net Assets/Total Number of Equity Shares) 15.00 15.90
(4) Calculation of Equity Shares of A Ltd. to be issued to Shareholder of B Ltd. =

1,06,000 shares
5. H Ltd. is a company carrying on the business of beauty products and is having a

subsidiary S Limited. Their Balance Sheets as on 31st March, 2017 were as under:
Equity and Liabilities H Ltd. (`) S Ltd. (`)
1. Shareholders Funds: 25,00,000 5,80,000
(a) Share Capital 2,00,000 1,20,000
(b) Reserves and Surplus: 3,12,500 2,05,000
General reserves 4,55,000 2,35,500
Profit and Loss Account 28,000 83,000
2. Current Liabilities:
Trade Payable
Bills Payable
TOTAL 34,95,500 12,23,500
Assets H Ltd. (`) S Ltd. (`)
1. Non-current Assets: 21,70,000 6,25,000
Fixed Assets
Investment:
4350 shares in S Ltd. 5,10,000 ---
2. Current Assets:
(a) Inventories 4,80,000 3,19,200
(b) Trade Receivable 1,80,000 1,64,000
(c) Bills Receivable 68,000 1,00,000
(d) Cash and Cash equivalents 87,500 15,300
TOTAL 34,95,500 12,23,500
H Limited has also given the following information:
(i) H Ltd. has acquired the share in S Ltd. in two lots on two different dates. The relevant
information at the time of acquisition of shares were as under:
No. of shares acquired Balance of Balance of

General Reserve Profit and Loss Account
(`) (`)
1st acquisition 3730 80,000 25,000
2nd acquisition 620 85,000 1,02,000
(ii) Bills receivable of H Ltd. includes ` 15,000 being acceptance from S Ltd.
(iii) Both the companies have declared dividends of 10% on 31 March, 2017, but it has
not been provided in the books of account.
(iv) S Limited’s inventory includes stock of ` 1,45,000 purchased from H Limited. H

Limited sells goods at mark up of 25% on its cost.
Prepare the Consolidated Balance Sheet of H Ltd. along with Notes to Accounts. 16
Answer:
5.
Consolidated Balance sheet of H Ltd. and its subsidiary S Ltd.

As on 31st March, 2017
(1) Shareholder‘s Funds
Share Capital 1 25,00,000

Reserves and Surplus 2 4,02,250
(2) Minority Interest (W.N.2) 2,11,750
Trade Payable 3 7,86,500

Other Current Liabilities 4 2,64,500
Total 41,65,000
II. Assets
(1) Fixed Assets
Tangible assets (21,70,000 + 6,25,000) 5 27,95,000

Intangible assets
(2) Current assets
Inventories 6 7,70,200
Trade Receivables 7 4,97,000
Cash and cash equivalents (87,500 + 15,300) 8 1,02,800
Total 41,65,000
Notes to Accounts
1 Share Capital
Authorised issued subscribed and pain up
25000 Equity shares of 100 each 25,00,000
2 Reserves and surplus
General Reserves (W.N. 4) 2,29,500
Profit and Loss Account (W.N.4) 1,60,800
Capital Reserve (W.N.3) 11,950 4,02,250
3 Trade payables
Trade payables
HLtd 4,55,000
SLtd 2,35,500 6,90,500
Bills payable
H Ltd 28,000
S Ltd 83,000
Loss: mutual Owings 15,000 68,000 96,000
7,86,500
4 Other current liability
Dividend payable
H Ltd 2,50,000
Minority interest 14,500 2,64,500
5 Tangible assets
H Ltd 21,70,000
S Ltd 6,25,000 27,95,000
6 Inventories 4,80,000
HLtd SLtd 3,19,200
7,70,200
Less Unrealised profit (29,000)
7 Trade Receivables
Trade Receivables:
H Ltd 1,80,000
S Ltd 1,64,000 3,44,000
Bills Receivable:
H Ltd. 68,000
Less: Mutual Owings (15,000) 53,000
S Ltd. 1,00,000 1,53,000
497000
8 Cash and cash equivalents
H Ltd 87,500
S Ltd 15,300 1,02,800
Working Notes:
1. Analysis of Profits
Pre- Post-acquisition
acquisition General Profit & Loss
Profits Reserve Account
(`) (`) (`)
General Reserve 80,000 40,000 —
Profit & Loss Account 25,000 — 1,80,000
For lot 1 (A) 1,05,000 40,000 1,80,000
Pre-acquisition for lot 2
General Reserve (85,000 – 80,000) 5,000
Profit &Loss A/c (1,02,000 – 25,000) 77,000
Post- acquisition for Lot 2 35,000 1,03,000
H Ltd 75% of (A) 78,750 30,000 1,35,000
Adj. of pre-acq. Gen. Res. for Lot 2 (10.69%) 535 (535) (8,231)
Adj. of pre-acq. P. & L. A/c for Lot 2 (10.69%) 8,231
HLtd 87,516 29,465 1,26,769
Minority interest (25%) of A 26,250 10,000 45,000
2. Minority Interest
`
Share Capital (25%) 1,45,000
Add: Share of pre-acquisition profit of S Ltd 26,250
Share of post-acquisition General Reserve Share of post-acquisition 10,000
Profit & Loss Account 45,000
Less: Share of Dividend declared and payable 2,26,250
14,500
2,11,750
3. Cost of Control/Goodwill
`
Cost of investments 5,10,000
Less: Share Capital (75) 4,35,000
Share of pre-acquisition profit 87,516
Capital Reserve 12,716
4. Consolidated General Reserve & Profit and Loss Account

General Profit and Loss
Reserve A/c
` `
HLtd 2,00,000 3,12,500
Less: Dividend declared by H Ltd (2,50,000)
Less: Unrealised profit (29,000)
2,00,000 33,500
Add: Share in post-acquisition item of S Ltd 29,465 1,26,769
2,29,465 1,60,269
6. (a) A Company has its share capital divided into shares of ` 10 each. On 1st April, 2016 it
granted 10000 employees’ stock options (ESOP) at ` 40, when the market price was
` 130. The options were to be exercised between 16th December, 2016 and 15th
March, 2017. The employees exercised their options for 9500 shares only; the
remaining options lapsed. The company closes its books on 31st March every year.
Show Journal Entries.
(b) The capital structure of Voltamed Ltd. is as follows as on 31st March, 2017:
Particulars `
45000, Equity shares of ` 100 each fully paid 45,00,000
12500, 12% Preference Shares of ` 100 each fully paid 12,50,000
12% Secured Debentures 12,50,000
Reserves 12,50,000
Profit before interest and tax during the year 18,00,000
Tax rate 40%
Normally the return on equity shares in this type of industry is 15%.
Find out the value of equity shares subject to the following:
(i) Profit after tax covers fixed interest and fixed dividend at least 4 times.
(ii) Debt equity ratio is at least 2.
(iii) Yield on shares is calculated at 60% of distributed profits and 10% on

undistributed profits.
(iv) The company has been paying regularly an equity dividend of 15%.
(v) Risk premium for dividends is generally assumed at 1%. 6+10=16
Answer:
6. (a)
Journal
2016 ` `
April, 1 Employee Compensation Expense A/c Dr. 9,00,000
To Employee Stock Option Outstanding A/c Dr. 9,00,000
(Being grant of 10,000 stock options to employees at
`40 when market price is ` 130)
Dec, 16 to Bank A/c Dr. 3,80,000
Employee Stock Option Outstanding A/c Dr. 8,55,000
15-Mar-17 To Share Capital A/c 95,000
(Being allotment to employees of 9,500 equity shares of
` 10 each at a premium of ` 120 per share in exercise
of stock options by employees)
Mar, 17 Employee Stock Option Outstanding A/c Dr. 45,000
To Employee Compensation Expense A/c 45,000
(Being entry for lapse of stock options for 500 shares)
Mar, 17 Profit & Loss A/c Dr. 8,55,000
To Employee Compensation Expense A/c 8,55,000
(Being transfer of employee compensation expense to
Profit and Loss Account)
6. (b)
Computation of Profit after Tax (PAT) and Retained Earnings
Particulars `
Profit before interest and tax (PBIT) 18,00,000
Less: Debentures interset (12,50000×12/100) 1,50,000
Profit before tax (PBT) 16,50,000
Less: Tax @ 40% 6,60,000
Profit after Tax 9,90,000
Less: Distributed profit
Preference dividend 1,50,000
Equity Dividend 6,75,000 8,25,000
Retained earnings (undistributed profit) 1,65,000
2. Computation of Interest and Fixed dividend coverage
=(PAT+ Debentures interest)/(Debentures interest Preference dividend)
= 9,90,000+1,50,000/1,50,000+1,50,000 = 3.8
This ratio is less than the prescribed ratio i.e. 4
3. Computation of Debt Equity Ratio
Debt Equity Ratio = Debt (long term loans)/Equity (shareholders‘ funds)
= Debentures/Preference share capital + Equity share capital + Reserves
= 12,50,000/12,50,000+45,00,000+12,50,000 = 0.179
The ratio is less than the prescribed ratio i.e. 2.
4. Computation of Actual Yield on Equity Shares
Yield on equity shares is calculated at 60% of distributed profits and 10% of undistributed
profit as follows:
Amount (`)
60% of distributed profits (60% of ` 6,75,000) 4,05,000
10% of undistributed profits (10% 1,65,000) 16,500
4,21,500
Yield on equity shares = (Yield on shares/Equity share capital) × 100
= (4,21,500/45,00,000) × 100 = 9.37%
5. Calculation of Expected Yield on Equity Shares
Normal return expected 15%

add: Risk premium for low interest and fixed dividend coverage (3.8<4) 1% (Note 1)
Risk adjustment for debt equity ratio not required Nil (Note 2)
16%
Note 1: When interest and fixed dividend coverage is lower than the prescribed norm, the
riskiness of equity investors is high. Thus, they should claim additional risk premium over and
above the normal rate of return.
Note 2: The debt equity ratio is lower than the prescribed ratio that means outside
funds(Debts) are lower as compared to shareholders‘ funds. Thus, the risk is less for equity
shareholders. Therefore, no risk premium is required to be added in such a case.
Value of an equity share
= (Actual yield/Expected Yield) × paid up value of a share = (9.37%/16%) × 100 = ` 58.56
7. (a) Make a detailed comparison between Government Accounting and Commercial

Accounting.
(b) Write a note on disclosure requirements under Indian Government Accounting

Standard (IGAS)- 1 for guarantees given by Governments. 8+8=16
Answer:
7. (a)
Although the basic principles of financial accounting that are applicable in regular
commercial activities apply to the government accounts there are certain features ol
governmental accounting which make it quite different from that of regular commercial
accounting. A detailed comparison between commercial and government accounting
have been presented herewith
(1) Meaning : The accounting system applied in the government departments offices and
institutions is referred to as government accounting. While the system of accounting
applied by non-government organisations (whether profit oriented or non-profit
oriented) is known as commercial accounting.
(2) Objective : Government accounting is maintained by the government offices for
recording and reporting the utilisation and position, of public funds. Commercial
accounting is maintained by business organisations to know the profit or loss for an
accounting period and disclose the financial position of the entity.
(3) Scope: The government accounting happens to be more elaborate than that followed
in commercial accounts.
(4) Budget: Government accounting is directly influenced by the government budgeting
system, while commercial accounting does not follow the government budgeting
system.
(5) Basis: Government accounting is prepared on cash basis .On the other hand,
commercial accounting may be done on cash basis or accrual basis, or sometimes
even on hybrid basis.
(6) Level of accounting : Government accounting has the system of central level and
operating level accounting. Commercial accounting has no provision of central level
and operating level of accounting.
(7) Rules and Provisions: Government accounting is strictly maintained by following the
financial rules and provisions as set by the concerned government .Commercial
accounting is maintained by following the applicable rules and the ‗ Generally
Accepted Accounting Principles‖ (GAAP).
(8) Information: Government accounting provides information to the government about
the receipts, deposit, transfer and utilisation of public funds. Commercial accounting
provides information to the various stakeholders about the operating result and financial
position of business,
(9) Auditing: The audit of the books of accounts maintained by government departments.
offices or institutions are to be audited by a recognised department of the government
(namely, the Auditor General Office) ; while the books of accounts maintained under
commercial accounting is audited by any professional auditor.
7. (b)
IGAS 1 is an Indian Government Accounting Standard that deals with disclosure
requirements relating to guarantees given by the Government. Name of the Standard is
―Guarantees given by the Government: Disclosure Requirements‖.
Regarding disclosure, the standard provides that the Financial Statements of the Union
Government, the State Government and the Union Territory Governments (with legislature)
shall disclose the following:
• Maximum amount for which Guarantees have been given during the year, additions
and deletions (other than invoked during the year) as well as Guarantees outstanding
at the beginning and end of the year;
• Amount of Guarantees invoked and discharged or not discharged during the year;
• Details of Guarantee commission or fee and its realisation; and
• Other material details: The Financial Statements of the Union Government , the State
Governments and the Government of Union Territories (with legislature) shall disclose in
the notes the following details concerning class or sector of Guarantees;
• Limit, if any, fixed within which the Government may give guarantee;
• Whether Guarantee Redemption or Reserve Fund exists and its details including
disclosure of balance available in the Fund at the beginning of the year, any payments
made and balance at the end of the year;
• Details of subsisting external foreign currency guarantees in terms of Indian rupees on the
date of Financial Statements;
• Details concerning Automatic Debit Mechanism and Structured Payment Arrangement, if
any;
• Whether the budget documents of the Government contain details of Guarantees;
• Details of the tracking unit or designated authority for Guarantees in the Government
and
• Other material details
8. Write short notes (any four): 4x4=16
(a) Financial Reporting vs. Triple Bottom Line Reporting
(b) Provisioning against Standard Assets by NBFCs
(c) Accounting treatment of CENVAT Credit
(d) Objective and scope of Ind AS 36: Impairment of Assets
(e) Consolidated vs. Contingency Funds of India
Answer:
8. (a)
Financial Reporting vs. Triple Bottom Line Reporting
A brief comparison between financial reporting and of triple bottom line reporting is
presented hereunder:
Origin: The origination of financial reporting precedes that of triple bottom line reporting,
the) latter being just a few decades old.
Nature: It is mandatory for corporates to prepare and present their financial reports: while
preparation/of TBL repots including social and environmental dimension is voluntary
in nature.
Scope: TBL is broader in scope than financial reporting, as former includes the reporting of
social and environmental performance in addition to the financial performance
of an organization.
Contents: The information contained within a TBL report is of a different nature to that
included in a financial report. Thus, TBL reporting enables disclosure of environmental and
social risks that have the capacity to materially affect long-term financial performance, to
be identified and, therefore, taken into consideration when preparing financial reports.
8. (b)
Provision against Standard Assets by NBFCs (Non-deposit Accepting)
• As per the ―Non-systemically important Non-Banking Financial (Non-Deposit Accepting or
Holding) Companies Prudential Norms (Reserve Bank) Directions,2015‖, every Non-
Banking Financial company shall make provision for standard assets at 0.25 percent of
the outstanding, which shall not be reckoned for arriving at net NPAs.
• As per the ‗Non-systemically important Non-Banking Financial (Non-Deposit Accepting or
Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015‖, every Non-
Banking Financial company shall make provision for standard assets at 0.25 percent by
the end of March 2015; 0.30 percent by the end of March 2016; 0.35 percent by the end
of March 2017 and 0.40 percent by the end of March 2018 and thereafter, of the
outstanding, which shall not be reckoned for arriving at net NPAs. Thus, the provision for
standard assets for NBFC-ND-S1 and for all NBFCs-D has now! been increased to 0.40%
(at present 0.25%). The compliance to revised norm will be phased in as given below: -
– 0.30% by the end of March 2016
• The provision towards standard assets need not be netted from gross advances but shall
be shown separately as ‗Contingent Provisions against Standard Assets‘ in the balance]
sheet.
8. (c)
Accounting treatment of CENVAT Credit:
CENVAT Credit relating to Treatment
(i) Inputs • Debit the specific Raw Material or Purchase A/c, so as to
increase the cost of consumption, & valuation of closing
stocks.
• Apportion the excess credit pro-rata to all purchases/
components, if the specific Raw Material cannot be
dentified.
(ii) Capital Goods /FA • Debit the cost of Specific Fixed Asset.
purchased • Charge depreciation on the revised unamortized
depreciable amount, over the balance useful life,
prospectively.
• If the specific Fixed Asset no longer exists, write off the
excess unutilisable credit to P&L Account.
(iii) Capital Goods on Write off on pro-rata basis to P&L A/c, along with Lease
Lease / HP Rentals.
8. (d) The objective and scope of Ind AS 36 : Impairment of Assets are described below:
Objective
The objective of this Standard is to prescribe the procedures that an entity applies to ensure!
that its assets are carried at no more than their recoverable amount . An asset is carried at
more than its recoverable amount. An asset is carried at more than its recoverable amount if
its carrying amount exceeds the amount to be recovered through use or sale of the asset. If
this is the case, the asset is described as impaired and the Standard requires the entity to
recognize or impairment loss. The standard also specifies when an entity should reverse an
impairment loss and prescribes disclosures.
Scope
This Standard shall be applied in accounting for the impairment of all assets, other than :
(a) inventories (Ind AS 2, Inventories)
(b) contract assets and assets arising from costs to obtain or fulfil a contract thai are
recognized in accordance with Ind AS 15, Revenue from Contract with Customers :
(c) deferred tax assets (Ind AS 12, Income taxes)
(d) assets arising from employee benefits (see Ind AS 19. Employee Benefits)
(e) financial assets that are within the scope of Ind AS 109, Financial Instruments
(f) biological assets related to agricultural activity within the scope of Ind AS 41 Agriculture
that are measured at fair value less costs to sell :
(g) deferred acquisition costs, and intangible assets, arising from an insurer‘s contractual
rights under insurance contracts within the scope of Ind AS 104, Insurance Contracts;
and
(h) non-current assets (or disposal groups) classified as held for sale in accordance with Ind
AS 105, Non-current Assets Held for Sale and Discontinued Operations
8. (e)
Consolidated vs. Contingency Funds of India
Consolidated Funds of India
The consolidated funds are constituted under Article 266(1) of the Constitution of India. All
revenue received by the Government by way of taxes like Income Tax, Central Excise,
Customs and other receipts flowing to the government in connection with the conduct of
Government business i.e. Non-Tax Revenues are credited into the Consolidated Fund.
Similarly, all loans raised by the Government by issue of Public Notification, treasury bills
(Internal debt) and loans obtained from foreign government and international institutions
(external debt) are credited into this fund. All expenditure of the government is incurred from
this fund and no amount can be withdrawn from the fund without authorization from the
parliament. This is largest of all the three funds.
Contingency Funds of India
The Contingency Fund of India set by the Government of India under Article 267 of the
Constitution of India. It records the transactions connected with Contingency. It is held on
behalf of President by the Secretary to the Government of India, Ministry of Finance.
Department of Economic Affairs. The corpus of this fund is ` 500 crores. Advances from the
and are made for the purpose of meeting unforeseen expenditures which are resumed to
‗the fund to the full extent as soon as parliament authorizes additional expenditure. Thus, this
fund acts more or less like an imprest account of Government of India.
Suggested Answer_ Syl2016_June2017_Paper 18
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

JUNE - 2017
Paper-18 : INDIRECT TAX LAWS AND PRACTICE
All questions are compulsory. In Question No. 1, all sub-questions are compulsory.
In Question Numbers 2 to 8, student may answer any 5 questions.
Wherever necessary, you may make suitable assumptions and state them clearly in your answer.
Working notes should form part of the answer.
Section – A
1. Comment on the following questions along with valid reasons: 2x10=20
(a) JK Engineering Co. manufactured a machinery on 20-01-2017, when excise duty was
8%. These were entered in Daily Stock Account on 20-01-2017. These were sold from
factory on 16-02-2017. On that date, rate of excise duty was 12.50%. At what rate
excise duty is payable?
(b) A provider of service did not pay service tax due to ignorance. During audit, the
mistake was pointed out. He paid the service tax along with interest on his own before
receiving any notice from department. What is the penalty that can be imposed on
him?
(c) A manufacturer has head office in Kolkata and factories at Raurkela, Nagpur and
Raipur. He is receiving services at his Kolkata office, on which service tax has been
charged by the service provider. He is not providing any service from Kolkata. Can
he utilize the credit of service tax paid on the various input services received by him
at Kolkata? Advise him.
(d) Service provided from India with respect to immovable property situated abroad is
called export of services.
(e) The directors of a private company in liquidation are jointly and severally liable
personally for any sales liability of the company in liquidation.
(f) A demand of ` 8,50,000 of excise duty plus penalty was confirmed by Joint
Commissioner, Assesse filed appeal and the demand was set aside by Commissioner
(Appeals). Department is of the view that order of Commissioner (Appeals) is not
proper. Advise department on action that can be initiated by them.
(g) Deepak Finance Company is engaged in sale and purchase of foreign exchange. He
received 1,000 US dollars from a foreign tourist on 7-11-2016 and paid him ` 67,600 in
exchange. The RBI reference rate on that day was 1USD = ` 69.40. Calculate value of
service on which service tax is payable and service tax payable if service tax rate is
15%. Ignore cesses.
(h) Subsidy given by Government to manufacturers to compensate cost of production
will form part of sale price.
(i) It is necessary to specify the heading under which the service being provided is
falling.
(j) An importer imported machinery. At the time of imports, he paid following duties—
Basic customs duty, Countervailing duty, Special countervailing duty, Anti dumping
duty and Customs education cess. He sells the imported machinery in India. Is he
eligible to get any refund of import duties if he resales the goods in India?
Answer:
1. (a) The excise duty is payable @ 12.50%. The date on which goods are cleared from
factory is relevant for payment of excise duty.
(b) No penalty can be imposed as matter stands closed if tax with interest is paid before
show cause notice, as per section 73(3) of Finance Act, 1994.
(c) He can utilize the credit. He should register his Kolkata office as Input Service
Distributor. He can take credit of service tax and then transfer the Cenvat credit to his
factories by issuing monthly invoice.
(d) Yes. Service provided from India with respect to immovable property situated abroad
is called export of services.
(e) If a private company is wound up and any tax assessed on the company cannot be
recovered, then every person who was a director of the private company at any
time during the period for which tax is due shall be jointly and severally liable for the
payment of such tax, unless he proves that the non recovery cannot be attributed to
any gross neglect, misfeasance or breach of duty on his part in relation to the affairs
of the company.
(f) Usually the Department can file appeal with Tribunal against the order of
Commissioner (Appeals), if it is of the view that the order is not proper. However, if the
excise duty involved is less than rupees ten lakhs, Department cannot file appeal
before Tribunal against the order of Commissioner (Appeals), as per the litigation
policy of the Government of India.
(g) Value of service = (` 69.40 – ` 67.60) × 1,000 USD = ` 1.80 × 1,000 USD = ` 1,800
Service tax @15% = ` 270.
(h) Government subsidy does not constitute amount payable to the dealer (by his
customer) as consideration for the sale of goods. Hence, it is not includible in sale
price.
(i) Specify the heading under which the service being provided is fallen, is necessarily for
the purpose of classification.
(j) He is entitled to get refund of special CVD of 4% pad by him at the time of imports.
Section – B
Answer any five questions out of seven questions given. Each question carries 16 marks.
2. (a) Mahesh Chemicals Ltd. furnished the following information for the month of October,
2016:
(i) Input chemical Alpha - Invoice dated 12-07-2015- Excise duty paid - ` 4,50,000
(ii) Input chemical Beta —Invoice dated 21-03-2016 - Excise duty paid— ` 3,50,000
(iii) Input Gama—Original excise invoice not available but Xerox copy duly certified
by excise officer available — Excise duty paid— ` 2,30,000
(iv) Security Services—Invoice dated 12-10-2016— Service tax paid— ` 53,200
(v) Machinery falling under chapter heading 84 —Invoice dated 3-07-2014— Excise
duty paid on machinery by supplier— ` 5,00,000
(vi) Invoice of Goods Transport Agency (GTA) for bringing raw materials to the
factory was dated 21-07-2016. Service tax was paid by Mahesh Chemicals Ltd. `
24,000 under reverse charge in the return of September, 2016. However, payment
of freight was made to the Goods Transport Agency till December, 2016.
(vii) Taxi was hired by purchase manager to visit supplier for discussions on price. The
service tax charged by taxi operator was ` 1,200.
(viii) Spare parts for machinery were imported on which duty paid was as follows—
Basic customs duty ` 1,000; Countervailing duty (CVD) ` 1,375; Education cess
47.50; Secondary and Higher Education cess ` 23.75; Special CVD under section
3(5)—500; Anti-dumping duty- ` 300.
Determine the Cenvat credit that can be availed by access during the month of
October 2016. 8
(b) Some articles have been specifically excluded from definition of 'input' in Cenvat
Credit Rules even if they have relation with manufacture. What are those items? 8
Answer:
2. (a) (i) Cenvat credit is not eligible as invoice date is beyond one year.
(ii) Cenvat credit of ` 3,50,000 on input goods available
(iii) Cenvat credit is not available on basis of Xerox copy of invoice.
(iv) Cenvat credit of input service of ` 53,200 is available.
(v) Time limit of one year for taking Cenvat credit is not applicable in respect of
capital goods. Hence, Cenvat credit of 50% of excise duty i.e. 2,50,000 [50% of `
5,00,000] is available.
(vi) Cenvat credit of GTA input service of ` 24,000 available, even if payment of bill
amount is not made to service provider.
(vii) These services are not eligible for Cenvat Credit.
(viii)Cenvat credit of CVD (` 1,375) and special CVD (` 500) is available i.e. total credit
of ` 1,875 is available.
Thus, total Cenvat credit available is as follows - 3,50,000 + 53,200 + 2,50,000 + 24,000 +
1,875 = ` 6,79,075.
(b) Following items have been excluded from definition of input in Cenvat Credit Rules.
(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;
(B) any goods used for - (a) construction or execution of works contract of a building
or a civil structure or a part thereof; or (b) laying of foundation or making of
structures for support of capital goods, - - except for the provision of service
portion in the execution of a works contract or construction service as listed under
clause (b) of section 66E of the Act
(C) Capital goods except when used as parts or components in the manufacture of
a final product and if the value of such capital goods is upto ` 10,000 per piece.
(D) motor vehicles
(E) any goods, such as food items, goods used in a guesthouse, residential colony,
club or a recreation facility and clinical establishment, when such goods are used
primarily for personal use or consumption of any employee; and
(F) any goods which have no relationship whatsoever with the manufacture of a final
product.
3. (a) Calculate the Assessable Value of raw material Zeeta imported from USA by air and
total customs duty payable, on basis of following details:
(i) FOB Value of Zeeta— 5,000 US dollars
(ii) Air freight paid— 1,400 US dollars
(iii) Insurance for transit of machine— not ascertainable
(iv) Commission paid to Indian Local Agent— ` 30,000
(v) Cost of transport of goods from port to godown of importer in India— ` 17,000.
(vi) Exchange rate is One US dollar as notified by CBE&C= ` 68.80. RBI reference rates
= ` 68.70. Exchange rate at which actually payment was made to Bank— ` 69.10.
(vii) Customs duty rate —10%. Excise duty on similar product if manufactured in India—
12.50%. 12
(b) What are the various Scope of FTP? 4
Answer:
3. (a) FOB Value of Zeeta 5,000 US Dollars

Air freight restricted to 20% of FOB value 1,000 US Dollars
Insurance @ 1.125% of FOB value 56.25 US Dollars
Total value 6056.25 US Dollars
Value in Indian Rupees @ ` 68.80 ` 4,16,670
Add - Local Agent's Commission ` 30,000
CIF Value in Rupees ` 4,46,670
Add - Landing charges @ 1% ` 4,467
Assessable value for customs purposes ` 4,51,137
Calculation of Excise duty

Seq. Duty Description Duty % Amount Total Customs Duty
(A) Assessable Value ` 4,51,137
(B) Basic Customs Duty 10 45,113.70 45,113.70
(C) Sub-Total for calculating CVD '(A+B)' 4,96,250.70
(D) CVD 'C x excise duty rate 12.5 62,031.33 62,031.33
(E) Sub-total for edu cess on customs 'B+D’ 1,07,145.03
(F) Edu Cess of Customs - 2% of 'E' 2 2,142.90 2,142.90
(G) SAH Education Cess of Customs -1% of 'E’ 1 1,071.45 1,071.45
(H) Sub-total for Spl CVD 'C+D+F+G' 5,61,496.38
(I) Special CVD under section 3(5) -4% of 'H' 4 22,459.85 22,459.85
(J) Total Customs Duty 1,32,819.23
(K) Total duty rounded to ` 1,32,819
Note: Here, it is assumed that special CVD @4% is payable, as goods are chargeable
to VAT in India.
(b) The following are the various scopes of FTP:

(i) Policy for regulating import and export of goods and services.
(ii) Export Promotional Measures.
(iii) Duty Remission and Duty Exemption Scheme for promotion of exports.
(iv) Export Promotion Capital Goods (EPCG) Scheme.
(v) Export Oriented Undertakings (EOU/EHTP/STP & BTP) Schemes.
(vi) Deemed Exports.
(vii) Quality complaints and Trade Disputes.
4. (a) Okeepa Computer Services Ltd. were liable to pay service tax of ` 3,00,000 for the
month of June, 2016. However, the service tax was deposited on 18-04-2017 on his
own, without department taking any action. Okeepa Computer Services Ltd. has
shown the amount as payable in their return filed on 22-10-2016. The value taxable
service provided by them during the preceding financial year was ` 65 lakhs.
(i) Compute the amount of interest payable by Okeepa Computer Services Ltd.
(ii) Calculate penalty payable.
(iii) What action could have been initiated by department against the assessee?
3+2+3=8
(b) Mahan Construction Ltd. provided following services in December, 2016. All these
services were provided with own material.
(i) Installation of machinery—` 1,50,000
(ii) Plastering of an existing building (finishing services)—` 1,00,000
(iii) Installation of electrical fittings in a building—` 60,000
(iv) Construction of office building of customer- ` 5,00,000. The customer had
provided steel and cement of ` 1,00,000 to Mahan Constructions Ltd.
Compute the value of services and service tax payable. Assume rate of service tax
as 15%. Ignore cesses. 8
Answer:
4. (a) The calculations are as follows-

(A) Due date of payment was 6-7-2016.
Delay is as follows - July - 25, August - 31, September - 30, October - 31, November
- 30, December - 31, January 2017 - 31, February 2017 - 28, March - 31, April - 18.
Total days - 286
The interest payable under section 75 of Finance Act, 1994 is 15% w.e.f. 14-5-2016.
Hence, interest payable is = (286 × 15 × 3,00,000)/(365 × 100) = ` 35,260.27
(B) No penalty is payable as assessee paid service tax with interest on his own as per
section 73(3) of Finance Act, 1994.
(C) Department could have started recovery proceedings under section 73(1B) of
Finance Act, 1994, without issue of any show cause notice. The recovery can be
done by any of mode as specified in section 87 of Finance Act, 1994.
The department could have detained, seized and sold his movable or immovable
property. Department could have initiated garnishee proceedings. Department
could have issued certificate to District Collector to recover the amount as land
revenue.
(b) (i) Service tax is on 40% of ` 1,50,000 i.e. on ` 60,000 @ 15%. Hence, service tax
payable is ` 9,000.
(ii) Service tax is payable on 70% of ` 1,00,000 i.e. on ` 70,000 @ 15%. Hence, service
tax payable is ` 10,500.
(iii) Service tax is payable on 70% of ` 60,000 i.e. on ` 42,000 @ 15%. Hence, service tax
payable is ` 6,300.
(iv) Value of free material supplied has to be added. Hence, service tax is payable
on 40% of ` 6,00,000 i.e. on ` 2,40,000 @ 15%. Hence, service tax payable is `
36,000.
5. (a) Explain concept, purpose of provisions of 'pure agent' in service tax valuations. What
are the conditions for exclusion of payments received by service provider from
service receiver? Define pure agent. Give one illustration explaining the concept.
3+3+2+2=10
(b) Mr. R has received the following amounts from the activities undertaken by him during
the quarter ended on 31st March, 2016:
SI. No. Particulars ` (in Lakhs)

(i) Amount received for trading in Government securities* 8.00
(ii) Amount received for trading in shares* 14.50
(iii) Commission for acting as clearing and forwarding agent 18.25
(iv) Commission earned on sale of goods belonging to others 1.75
(v) Charges for providing auxiliary service relating to commodity futures 7.00
* Represents difference between sale price and purchase price.
Your are required to compute the value of taxable service and services tax liability of
Mr. R for the said quarter.
Note:
(i) Rate of service tax is 14% and Swachh Bharat Cess 0.5% and KKC @ 0.5% is
applicable. All the above amounts are exclusive of service tax.
(ii) Mr. R is not eligible for small service provider's exemption under Notification
No.33/2012-ST, dated 20-06-2012. 6
Answer:
5. (a) In many cases, a service provider incurs some expenditure on behalf of service
receiver and then recovers the amount from him. Such expenditure is not part of
service provided by him to service receiver, but is incurred by him as per business
practice or convenience.
These are not part of service provided and hence are not includible. Rule 5(2)
provides that the expenditure or costs that a service provider incurs, as a pure agent
of the client, shall be excluded from the value if such service provider fulfills
prescribed conditions.
Conditions to be satisfied for exclusion from 'value'
As per rule 5(2) of Service Tax (Determination of Value) Rules, 2006, expenditure or
costs incurred by service provider are not includible in value of service only if all the
following conditions are satisfied:
(i) the service provider acts as a pure agent of the recipient of service when he
makes payment to third party for the goods or services procured;
(ii) the recipient of service receives and uses the goods or services so procured by
the service provider in his capacity as pure agent of the recipient of service;
(iii) the recipient of service is liable to make payment to the third party;
(iv) the recipient of service authorises the service provider to make payment on his
behalf;
(v) the recipient of service knows that the goods and services for which payment has
been made by the service provider shall be provided by the third party;
(vi) the payment made by the service provider on behalf of the recipient of service
has been separately indicated in the invoice issued by the service provider to the
recipient of service;
(vii) the service provider recovers from the recipient of service only such amount as
has been paid by him to the third party; and
(viii) the goods or services procured by the service provider from the third party as a
pure agent of the recipient of service are in addition to the services he provides
on his own account.
Meaning of 'Pure agent'

Explanation 1 to the rule 5 of Service Tax Rules provides that for the purpose of rule
5(2), 'pure agent' means a person who —
(a) enters into a contractual agreement with the recipient of service to act as his
pure agent to incur expenditure or costs in the course of providing taxable
service;
(b) neither intends to hold nor holds any title to the goods or services so procured or
provided as pure agent of the recipient of service;
(c) does not use such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services.
Illustration where payment is not as 'pure agent'

X contracts with Y, a real estate agent to sell his house and thereupon Y gives an
advertisement in television. Y billed X including charges for television advertisement
and paid service tax on the total consideration billed. In such a case, consideration
for the service provided is what X pays to Y. Y does not act as an agent on behalf of
X when obtaining the television advertisement even if the cost of television
advertisement is mentioned separately in the invoice issued by X. Advertising service
is an input service for the estate agent in order to enable or facilitate him to perform
his services as an estate agent.
This illustration clearly shows distinction between payments made as 'pure agent' and
payment made as 'Principal'.
(b)
S. No Particulars ` (in lakhs) Remarks
(i) Amount received for trading in Government Not taxable Treated as Goods
securities
(ii) Amount received for trading in shares* Not taxable Treated as Goods
(iii) Commission for acting as clearing and 18.25 Taxable service
forwarding agent
(iv) Commission earned on sale of goods belonging 1.75 Taxable service
to others
(v) Charges for providing auxiliary service relating 7.00 Taxable service
to commodity futures
Taxable services 27.00
Service Tax @14% on ` 27 lakhs 3.78
Swachh Bharat Cess @ 0.5% on ` 27 lakhs 0.135
Krish Kalyan Cess @ 0.5% on ` 27 lakhs 0.135
Total Service Tax 4.05
6. (a) Nayar Machinery Manufacturers Ltd. sold a special machine to a customer. The
details contract are as follows:
(i) Net price—` 10,00,000
(ii) Packing Charges charged extra— ` 12,000
(iii) Erection and commissioning charged extra by separate debit note, for erection
at the place of customer's factory— ` 60,000
(iv) Charges for designing the special machinery by separate debit note— ` 50,000
(v) Insurance Charges for despatch of machinery from factory to the place
customer at actuals— ` 12,000
(vi) Outward freight of machinery from factory to customer's place charged at actual
— ` 20,000 extra
(vii) CST charged extra at applicable rates against C form.
(viii) Cash discount @2% was allowable on basic price if customer paid total amount
before despatch of goods. The customer had made full advance payment.
Excise duty rate is 12.5% which was charged extra. Calculate:

(A) Assessable Value of the machine
(B) Excise duty payable
(C) CST payable 5+1+4=10
(b) State goods which are eligible for concessional rate of central sales tax and
conditions for the same. 6
Answer:
6. (a) Calculations of excise duty

Excise duty is not payable on the following -
(i) erection and commissioning charges
(ii) Insurance for dispatch of final product
(iii) Outward freight
(iv) CST.
Thus, aggregate sale price in respect of which excise duty' payable is as follows -
(A) Basic price-` 10,00,000
(B) Add - Design charges -` 50,000
(C) Add - Packing charges – ` 12,000
(D) Sub-total - ` 10,62,000
(E) Less - Cash discount allowable as deduction – ` 20,000.
Hence, value = D-E = ` 10,42,000
Excise duty @ 12.5% = ` 1,30,250.
CST is payable on value + Excise duty i.e. on ` 11,72,250.
CST @ 2% = ` 23,445.
Note:
(1) Deduction of design charges is not allowable as it is directly related to supply of
special machinery
(2) Packing charges are not allowed as deduction from the assessable value.
(3) Cash discount is ` 20,000 [2% of ` 10.00,000]. This is allowable as deduction.
(b) All goods purchased by registered dealer are not eligible for concessional rate. Only
those goods for which a dealer is eligible and which are contained in his Registration
Certificate are eligible for concessional rate.
Section 8(3) of the CST Act indicates the goods which a registered dealer can obtain
at concessional rate. Only those items can be incorporated in the registration
certificate issued to him.
Conditions for which Goods can be purchased under concessional rate:

(i) Goods as being intended for re-sale
(ii) For use in the manufacture or processing of goods for sale,
(iii) For use in telecommunication network or in mining or
(iv) For use in generation or distribution of electricity or any other form of power
(v) Container or other materials intended for the packing of goods for sale (i.e.
primary packing materials)
(vi) Container or other materials used for packing of any goods mentioned in point (i)
or (iv) above (i.e. Secondary packing materials).
7. (a) Jimco is a company which issues meal vouchers. Usually, the employer purchases
these coupons and issue them either free or at concessional to employees as
employee perquisite. The employee can go to any of the specified restaurants
affiliated to Jimco. The employee gets food and pays for food through these
vouchers. The sales tax department issued notice to Jimco to pay State Vat on these
coupons at the rate applicable to food items. Advise the company with help of case
law, if any. 8
(b) Yamuna Assemblers are getting various components from customers. These were
assembled by them to make water purification plant. This was done on job work basis
only. Yamuna Assemblers received notice from excise department to pay excise
duty on the plant. Advise the assessee with the help of case law, if any. 8
Answer:
7. (a) The issue is similar to case decided by Supreme Court in Sodexo SVC India P Ltd. v. State
of Maharashtra (2016) 53 GST 293 (SC).
It was observed that the vouchers are not transferable. These are 'pre-paid payment
instruments'. These are 'Paper Based Vouchers' issued with permission of RBI under
Payments and Settlement Systems Act, 2007'.
These are not 'goods', as these cannot be traded and sold separately. These are not
transferable and cannot be traded.
(b) The issue is similar to case decided by Supreme Court in Poonam Spark v. CCE (2015)
51 GST 812 (SC).
In this case, it was held that assembly of various parts to make water purification plant
on job work basis amounts to 'manufacture', as new and identifiable product is
coming into existence.
Hence, excise duty will be payable on full value of goods including the value of
components.
8. Answer any four questions from the following: 4x4=16

(a) Explain Foreign going Vessel or Aircraft
(b) Input Service Distributor (ISD)
(c) Dealer as per VAT
(d) Export Promotion Capital Goods (EPCG) Scheme
(e) Explain SION
Answer:
8. (a) As per section 2(21) of the Customs Act, the foreign going vessel or aircraft means
any vessel or aircraft for the time being in the carriage of goods or passengers
between any port or airport in India and any port or airport outside India, whether
touching any intermediate port or airport in India or not.
The following are also included in the definition:

(i) A foreign naval vessel doing naval exercises in Indian waters
(ii) A vessel engaged in fishing or any other operation (like oil drilling by domestic
vessel or foreign vessel) outside territorial waters
(iii) A vessel going to a place outside India for any purpose whatsoever.
(b) In case of input service distributor registration under Service Tax provisions is
compulsory irrespective of the turnover limit.
Input service distributor means an office managing the business of manufacturer or

producer of final products or provider of output services, which receives invoices
issued under Rule 4A of the Service Tax Rules, 1994 towards purchase of input services
and issues invoice, bill or, as the case may be, challan for the purpose of distributing
the credit of service tax paid under said services to such manufacturer or producer or
provider, as the case may be. [Rule 2(m) of the CENVAT CREDIT RULES, 2004]
w.e.f. 11-7-2014 Manner of distribution of credit by input service distributor has been
revised. The same has been explained under Rule 7 of the Cenvat Credit Rules, 2004.
Note: Swachh Bharat Cess (SBC) not eligible for CENVAT Credit.
W.e.f. 01.04.2016, manner of distribution of credit by input service distributor

furthermore has been revised.
(c) The term dealer includes —

(i) Sole Proprietor
(ii) Partnership
(ii) Private Company
(iii) Public Company
(iv) Government Enterprise
(v) Club, Society or Association
(vi) Hindu undivided family
There are basically two categories of dealers under VAT law,

 VAT dealer, and
 Turnover Tax (TOT) dealer.
VAT dealer means a dealer who is registered for VAT. Input tax is applicable only to
purchasing VAT dealers. Hence it is not applicable to a TOT dealer.
(d) This scheme permits exporter to procure capital goods at concessional rate of
customs duty/zero customs duty in return exporter is under an obligation to fulfill the
export obligation.
Authorization shall be valid for 18 months from the date of issue of Authorization.
Import of capital goods shall be subject to 'Actual User' condition till export obligation
is completed. After export obligation is completed, capital goods can be sold or
transferred.
(e) Standard Input Output Norms or SION in short is standard norms which define the
amount of input/inputs required to manufacture unit of output for export purpose.
Input output norms are applicable for the products such as electronics, engineering,
chemical, food products including fish and marine products, handicraft, plastic and
leather products etc. SION is notified by DGFT in the Handbook, and is approved by
its Boards of Directors. An application for modification of existing Standard Input-
Output norms may be filed by manufacturer exporter and merchant-exporter. The
Directorate General of Foreign Trade (DGFT) from time to time issue notifications for
fixation or addition of SION for different export products. Fixation of Standard Input
Output Norms facilitates issues of Advance License to the exporters of the items
without any need for referring the same to the Headquarter office of DGFT on repeat
basis.
Basics Requirements of Standard Input Output Norms:

For fixation/modification of Standard Input Output Norms (SION) following details are
required:
 Technical Details of the export product
 Chartered Engineer certificate certifying the import requirements of raw materials
 Production and Consumption data of the manufacturer/supporting manufacturer
of the preceding three licensing years as given in serial no 3 of sub section XII, duly
certified by the Chartered Accountant/Cost Accountant/Jurisdictional Excise
Authority.
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

JUNE - 2018
Section – A
Answer Question No. 1 which is compulsory and any four from the rest of this section.
1. Choose the correct answer with justification/workings wherever applicable: 2×7=14
(i) GST is a __________________ based tax.

(a) Territory
(b) Origin
(c) Destination
(d) None of the above
(ii) A new supplier has taxable intra-State sales, exempt intra-State sales and export
sales of goods. He should get himself registered under GST law, where
(a) the aggregate value of taxable intra-State goods exceeds ` 20 lakhs.
(b) the aggregate value of taxable as well as exempt intra-State goods exceeds ` 20
lakhs.
(c) the aggregate value of all the three items exceeds ` 20 lakhs.
(d) the aggregate value of taxable intra-State goods as well as export sales exceeds
` 20 lakhs.
(iii) Following is an intra-State supply:

(a) Goods sent from Delhi to another dealer in Delhi.
(b) Goods sent from Delhi to a SEZ in Noida, Uttar Pradesh.
(c) Goods sent from Delhi to Chandigarh branch (Haryana) of the same supplier.
(iv) A casual taxable person is required to obtain registration where he makes

(a) Taxable inter-State supply.
(b) Taxable inter-State or intra-State supply.
(c) Taxable inter-State or intra-State supply whose proposed value exceeds `20
lakhs.
(d) In none of the above situations.
(v) Subbu, a registered supplier based at Erode coached the staff of a software company
in Hyderabad, which is registered. The classes were held at Erode. The place of supply is:
(a) As mutually agreed upon
(b) As decided by the Department, whichever is more favourable to them.
(c) Erode
(d) Bengaluru
(vi) Advance ruling can be declared to be void by the Authority if it has been obtained
by an applicant/appellant by:
(a) Fraud
(b) Suppression of facts
(c) Misrepresentation of facts
(d) Any one of the above
(vii)For the year 2017-18 due date of filling of annual return is 31.12.2018. The books and
records of 2017-18 must be maintained till
(a) 31.03.2024
(b) 31.12.2024
(c) 31.12.2026
(d) 31.03.2034
Answer:
1.
(i) c Under GST law, the share of GST goes to the State where the destination
lies or
where the movement of goods ends, unlike VAT, where it went to the
State where the movement originated.
(ii) c For the purposes of registration under the GST law, aggregate turnover
has to be considered. All three items given in the problem are included in
the ambit of the term aggregate turnover.
(iii) a For intra-State supply, the origin and destination must be in the same
State or Union Territory.
(iv) b As per section 24 of the CGST Act, 2017, a casual taxable person making
supply of taxable goods is required to obtain registration. It does not
matter whether such supply is intra-State or inter-State.
(v) All four As per sec 12(5) of the IGST Act, PoS for service in relation to training
choices provided to a registered person is the place of recipient of service. Here,
given the software company in Hyderabad is the recipient of service. So, the
are correct answer will be Hyderabad.
incorrect
(vi) d Sec 104 of CGST Act 2017 specifies the three cases - Viz. fraud,
suppression of material facts, mis-representation of facts as reasons for
holding advance ruling to be void.
(vii) b 31.12.2024 - As per section 36 of CGST Act books and records are to be
maintained for 72 months (6 Years) from the date of furnishing the return.
2. (a) What is the difference in tax consequence between intra-State (from HO to branch in
same State) and inter-State stock transfers (from HO to branch in different State) of the
same supplier, which is a private limited company? What kind of GST will be levied? 6
(b) Sakshitha Pvt. Ltd., a registered supplier, furnish the following details relating to
supplies effected during December, 2017: 8
Sale price charged to customers within State (Excluding GST) 10,00,000
Service charges levied in the invoices 11,000
Packing and forwarding expenses incidental to sale 14,200
Weighment charges, shown separately in invoices 7,800
Commission charged to buyers 15,000
Prompt payment discount, indicated in invoice 1%, if payment made
within 1 month.
The rates of taxes for the goods supplied are as under:
Particulars Rate
CGST 6%
SGST 6%
IGST 12%
Additional information: 60% of the customers did not make the payment within one
month from the date of supply. Hence the supplier recovered the prompt payment
discount offered to them.
Answer:
2. (a) GST will be leviable only where the supply is made by an entity having a GST number
to another GST number.
Where a supplier has branch within the same State, only one GST registration and GST
number will be there.
Hence transfer to a branch within the same State will not attract any GST.
Where the company has a branch in another State, separate registration is required
in the said State, hence the GST number in that State will be different.
As a consequence, when the company transfers stock to its branch in different State,
it will be treated as inter-State supply. As a consequence, IGST will be leviable.
Intra-state stock transfer is taxable only when entity has more than one registration in
one state. In that case, CGST plus SGST will be levied.
(b) Determination of GST liability

Sale price charged to customers within State (Excluding GST) 10,00,000
Add: Service charges levied in the invoices [See Note 1] 11,000
Packing and forwarding expenses incidental to sale [See Note 1] 14,200
Weighment charges, shown separately in invoices [See Note 1] 7,800
Commission charged to buyers [See Note 1] 15,000
10,48,000
Less: Prompt payment discount, indicated in invoice 1% [See Note 2] 10,000
Value of taxable supply 10,38,000
SGST payable at 6% 62,280
CGST at 6% 62,280
Notes:
1. As per section 15 of the CGST Act, 2017, all incidental receipts like service
charges, commission, packing & forwarding, weighment charges will form part of
the taxable supply.
2. Prompt payment discount is deductible, since it is known at the time of supply. It is
immaterial that 60% of the customers did not make the payment within the
eligible period of 1 month. When the supplier issues debit note and recovers the
same from buyers, the same will become taxable then.
3. (a) Mr. X a dealer dealing with intra-State supply of goods and services has place of
business in India furnished the following information in the financial year 2017-18:
(i) Sale of taxable goods by Head Office located in Chennai for ` 1,00,000.
(ii) Supply of taxable services by Branch office at Bengaluru for ` 50,000.
(iii) Supply of goods exempted from GST ` 10,000.
(iv) Export of goods and services for ` 2,00,000.
(v) Sale of goods acting as agent on behalf of principal for ` 15,00,000.
Advice Mr. X whether he is required to register himself under GST law. 7
(b) Vimala Transports & Co., a partnership firm based at Chennai, is running a regular
tourist bus service, carrying passengers and goods from Chennai to Bengaluru in
Karnataka State and Trivandrum in Kerala State, with effect from 1st September, 2017.
The firm wants to know whether such inter-State movement of various modes of
conveyance carrying goods or passengers or both, between distinct persons as
specified in section 25(4) of the CGST Act [except in cases where such movement is
for further supply of the same conveyance],is coming under IGST.
You are required to advise the firm suitably. 7
Answer:
3. (a)
Statement showing aggregate turnover in a Financial Year
Particulars Value in (`)
Sale of taxable goods by Head Office located in Chennai 1,00,000
Supply of taxable services by Branch office at Bengaluru 50,000
Supply of goods exempted from GST 10,000
Export of goods and services 2,00,000
Sale of goods acting as agent on behalf of principal 15,00,000
Aggregate turnover 18,60,000
Since, aggregate turnover does not exceeds ` 20 lakhs, Mr. X is not required to
register under GST.
Alternative answer: As per sec. 24(vii) of the CGST Act where it is states that persons
who make taxable supply of goods or services or both on behalf of other taxable
persons whether as an agent or otherwise, have to mandatorily take registration
irrespective of their amount of turnover. As per this provision, threshold limit of ` 20
lakhs (` 10 lakhs in special categories of states) is not applicable for intermediaries.
Further "As per Section 22 of the Central Goods and Service tax Act, “Every supplier
shall be liable to be registered under this Act in the State or Union territory, other than
special category states, from where he makes a taxable supply of goods or services
or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees.”
(b) Case study

The legal provisions in GST laws are as under:
a) As per section 24(1)(i) of the CGST Act, persons making any inter-State
taxable supply shall be required to be registered under this Act. [Persons
making inter- State supplies of taxable services and having an aggregate
turnover upto ` 20 lakh in a financial year have been exempted from
obtaining compulsory registration under section 24(i) of the CGST Act
b) As per section 25(4) of the said Act a person who has obtained or is required
to obtain more than one registration, whether in one State or Union territory
or more than one State or Union territory shall, in respect of each such
registration, be treated as distinct persons for the purposes of this Act.
c) Schedule I to the said Act specifies situations where activities are to be
treated as supply even if made without consideration which also includes
supply of goods or services or both between related persons or between
distinct persons as specified in section 25, when made in the course or
furtherance of business
d) Section 7(2) of the CGST Act envisages that activities or transactions
undertaken by the Central Government, a State Government or any local
authority in which they are engaged as public authorities, as may be notified
by the Government on the recommendations of the Council, shall be
treated neither as a supply of goods nor a supply of services.
Against the above background, the issue of inter-state movement of goods like
movement of various modes of conveyance, between distinct persons as specified in
section 25(4) of the said Act, not involving further supply of such conveyance,
including trucks, buses, etc., (a) carrying goods or passengers or both; or (b) for
repairs and maintenance, [except in cases where such movement is for further
supply of the same conveyance] was discussed in GST Council's meeting held on
11th June, 2017 and the Council recommended that such inter-state movement shall
be treated 'neither as a supply of goods or supply of service' and therefore not be
leviable to IGST.
In view of the above, the inter-state movement of goods like movement of various
modes of conveyance, between distinct persons as specified in section 25(4) of the
CGST Act including the bus services, may not be treated as supply and consequently
IGST will not be payable on such supply. [Circular No. 1/1/2017 IGST dated 07.07.2017]
4. (a) (i) Explain the concept of recovery in installments under Section 80 of CGST Act 2017
giving the circumstances in which such facility can be allowed and will not be
allowed to the defaulter. 5
(ii) Write a brief note on provisional assessment under section 60 of the CGST Act, 2017.
4
(b) Balaji & Co., a partnership firm, intend to start a business in Rajasthan, for supply of
garments, mostly meant for overseas buyers. As regards the classification of the
goods, there some difficulties in determination. Can the firm seek advance ruling from
the Authority for Advance ruling in respect of the issue of classification of goods? Can
the firm also seek ruling on issues involving place of supply of goods? 5
Answer:
4. (a) (i) Recovery in installments (Sections 80 of the CGST Act, 2017)

 Commissioner can allow payment with interest by defaulter in monthly
installments not exceeding 24 installments.
 In case of default in payment of any one installment on its due date, the
whole outstanding balance payable on such date shall become due.
 For seeking installment facility, taxable persons can file application
electronically in form GST DRC-20.
The installment facility will not be allowed if:

 The taxable person has already defaulted on the payment of any amount
under GST law and recovery process is already undergoing;
 The taxable person has not been allowed to make payment in installments in
the preceding financial year under GST law; and
 The amount for which installment facility is sought is less than ` 25,000/-
(ii) Provisional assessment (Section 60 of the CGST Act, 2017):
According to section 60(1) of the CGST Act, 2017 where the taxable person is
unable to determine the value of goods or services or both or determine the rate
of tax applicable thereto, he may request the proper officer in writing giving
reasons for payment of tax on a provisional basis.
The proper officer (i.e. The Asst. Commissioner/Dy. Commissioner of Central Tax)
shall pass an order, within a period not later than 90 days from the date of receipt
of such request, allowing payment of tax on provisional basis at such rate or on
such value as may be specified by him.
The Asst. Commissioner/Dy. Commissioner of Central Tax provisionally determines
the amount of tax payable by the supplier and is subject to final determination.
On provisional assessment, the supplier can pay tax on provisional basis but only
after he executes a bond with security, binding them for payment of the
difference between the amount of tax as may be finally assessed and the
amount of tax provisionally assessed (Section 60(2) of the CGST Act, 2017).
(b) Advance Ruling

Advance ruling under GST can be sought by a registered person or a person desirous
of obtaining registration under GST law [Section 95(c) of the CGST Act, 2017].
Therefore, it is not mandatory for a person seeking advance ruling to be registered.
Section 97(2) of the CGST Act, 2017 enjoins that the questions/matters on which
advance ruling can be sought. It provides that advance ruling can be sought for,
inter alia, determining the classification of any goods or services or both. Therefore,
Balaji & Co. can seek the advance ruling for determining the classification of the
goods proposed to be supplied by him.
Determination of place of supply is not one of the specified questions/matters on

which advance ruling can be sought under section 97(2). Further, section 96 of the
CGST Act, 2017 provides that AAR constituted under the provisions of an SGST
Act/UTGST Act shall be deemed to be the AAR in respect of that State/Union territory
under CGST Act also.
Thus, AAR is constituted under the respective State/Union Territory Act and not the
Central Act. This implies that ruling given by AAR will be applicable only within the
jurisdiction of the concerned State/Union territory.
It is also for this reason that the questions on determination of place of supply cannot
be raised with the AAR. Hence, the applicant cannot seek the advance ruling for
determining the place of supply of the goods proposed to be supplied by the
applicant.
5. (a) Enumerate and Explain the types of Audits envisaged under GST law. 10
(b) Admission to True Theater is ` 90 per ticket for a Tamil Movie as well as for a Hindi
Movie plus entertainment tax 10% on Tamil Movies and 20% on other languages. In
the month of November, True Theater sold 2000 tickets of Tamil Movies and 1500
tickets of Hindi Movies. Find the value of taxable supply of service. Applicable rate of
GST 18% & 28% respectively. Find the GST liability if any? 4
Answer:
5. (a) GST envisages three types of Audit.

1. By a Chartered Accountant or a Cost Accountant.
2. By Tax Authorities
3. Special Audit
1. Audit by Chartered Accountant or a Cost Accountant:
Every registered person whose aggregate turnover during a financial year

exceeds two crore rupees has to get his accounts audited by a Chartered
Accountant or a Cost Accountant and furnish a copy of audited annual
accounts and a reconciliation statement, duly certified, in FORM GSTR-9C.
2. Audit by Tax Authorities (section 65 of the CGST Act, 2017):
The Commissioner or any officer authorised by him, can undertake audit of any
registered person for such period, at such frequency and in such manner as may
be prescribed.
Section 65(3) of the CGST Act, 2017 the registered person shall be informed by
way of a notice not less than fifteen working days prior to the conduct of audit in
such manner as may be prescribed.
Section 65(4) of the CGST Act, 2017 the audit under sub-section (1) shall be
completed within a period of three months from the date of commencement of
the audit:
Provided that where the Commissioner is satisfied that audit in respect of such
registered person cannot be completed within three months, he may, for the
reasons to be recorded in writing, extend the period by a further period not
exceeding six months.
3. Special Audit [Section 66 of the CGST Act, 2017]:

The registered person can be directed to get his records including books of
account examined and audited by a Chartered Accountant or a Cost
Accountant during any stage of scrutiny, inquiry, investigation or any other
proceedings; depending upon the complexity of the case.
Procedure:
During the scrutiny, inquiry, investigation or any other proceedings of a registered
person, the Assistant Commissioner or any officer senior to him, having regard to
the nature and complexity of the case and the interest of revenue, might be of
the opinion that the value has not been correctly declared or the credit availed
is not within the normal limits.
In such cases, with the prior approval of the Commissioner, the Assistant
Commissioner or any officer senior to him can direct the registered person in
FORM GST ADT-03 to get his records including books of account examined and
audited by a specified chartered accountant or a cost accountant. The
chartered accountant or a cost accountant will be nominated by the
Commissioner.
The chartered accountant or cost accountant so nominated has to submit a

report of such audit within the period of ninety days, duly signed and certified by
him to the Assistant Commissioner, extendable by further 90 days. On conclusion
of the special audit, the registered person shall be informed of the findings of the
special audit in FORM GST ADT-04.
Where the special audit results in detection of tax not paid or short paid or
erroneously refunded, or input tax credit wrongly availed or utilised, the process
of demand and recovery will be initiated against the registered person.
(b) Statement showing value of taxable supply of service and GST liability:
Value of taxable services:

Tamil Movie ` 1,98,000 (` 99 × 2000 tickets)
Hindi Movie ` 1,62,000 (` 108 × 1500 tickets)
Particulars 9% CGST 9% SGST 14% CGST 14% SGST

GST liability (`) 17,820 17,820 22,680 22,680
Working note:
Particulars Tamil Movie (`) Hindi Movie (`)
Rate per ticket 90 90
Add: Entertainment tax 9 18

Value of taxable supply 99 108
Applicable GST rate 18% 28%
6. (a) Achutha Motors Pvt. Ltd., have been served a show cause notice (SCN) on 2nd November,
2021 under section 73(1) of the CGST Act, 2017, alleging that the supplier had made
short remittances of GST for the months of September, October and November, 2017.
The department has afforded a personal opportunity of being heard on 15th November,
2021.
The company seeks you expert advice in drafting the written submissions to be
tendered at the time of personal hearing, in respect of the SCN. You are required to
draft the reply on their behalf. You may assume that there is no change in legal position
during November, 2021 and that it remains the same as it is at present. 8
(b) Which are the input goods and services on which a registered dealer cannot claim
Input Tax credit under Section 17(5) of CGST Act, 2017. Give any six points/items. 6
Answer:
6. (a) Reply to SCN received from Department
Against the SCN, the reply to the SCN in the written submissions should incorporate
the following major points:
(i) The SCN issued by the Department under section 73(1) of the CGST Act, 2017,
alleging under payment of GST for the months of September, October and
November, 2017 is not warranted on the facts and circumstances of the case
and is opposed to equity, law and justice.
(ii) The time limit for issue of SCN under section 73(1) of the CGST Act, 2017 is at least
3 months prior to the time limit specified for issuance of order under section 73(10)
of the Act.
The adjudication order under section 73(10) of the Act, has to be issued within 3
years from the due date for furnishing of annual return for the financial year to
which the short-paid tax relates to.
The due date stipulated for furnishing annual return for a financial year is on or
before the 31st day of December following the end of such financial year
[Section 44 of the CGST Act, 2017].
Consequently, SCN under section 73(1) of the Act, can be issued by the
Department within 2 years and 9 months from the due date for furnishing of
annual return for the financial year to which the short-paid tax relates to.
(iii) The SCN has been issued for the period encompassing the months of September,
October and November, 2017, which falls in the financial year (FY) 2017-18.
Due date for furnishing annual return for the F.Y. 2017-18 is 31.12.2018 and 3 years'
period from due date of filing annual return lapses on 31.12.2021.
As a logical corollary, SCN under section 73(1) ought to have been issued latest
by 30.09.2021.
(iv) Since the SCN has been issued after 30.09.2021, the entire proceeding is barred
by limitation and deemed to be concluded under section 75(10) of the Act.
(v) It is therefore prayed that the entire proceedings which are barred by limitation,
may kindly be dropped and justice rendered.
(b) Item on which Input Tax Credit (ITC) is not applicable Goods & Services Sec. 17(5) of
the CGST Act, 2017:
A) Motor vehicle (except few cases)
B) Goods and/or services provided in relation to:
i) Food and beverages, outdoor catering, beauty treatment, health services,
cosmetic and plastic surgery, except under specified circumstances;
ii) Membership of a club, health and fitness center;
iii) Rent-a-cab, life insurance, health insurance except where it is obligatory for
an employer under any law;
iv) Travel benefits extended to employees on vacation such as leave or home
travel concession;
C) Works contract services when supplied for construction of immovable property,
other than plant & machinery, except where it is an input service for further
supply of works contract;
D) Goods or services received by a taxable person for construction of immovable
property on his own account, other than plant & machinery, even when used in
course or furtherance of business;
E) Goods and/ or services on which tax has been paid under composition scheme;
F) Goods or services or both received by a non-resident taxable person except on
goods imported by him;
G) Goods and/or services used for private or personal consumption, to the extent
they are so consumed;
H) Goods lost, stolen, destroyed, written off, gifted, or free sample;
I) Any tax paid due to short payment on account of fraud, suppression, mis-
declaration, seizure, and detention.
7. (a) State the duties and powers of the Ant-profiteering Committee under GST law. 6
(b) Shankar Texmaco P Ltd. (STPL), having its registered office at Salem, Tamil Nadu, is a
manufacturer of dyeing machinery. It manufactures and installs the machinery at the
places opted by the buyers. For each machine manufactured and installed by it, STPL
gets a subsidy of ` 3 lakhs.
Poorni Dyers Ltd. (PDL), having their registered office at Coimbatore, Tamil Nadu have
ordered a machinery from STPL, to be erected at their place of manufacture at Palghat,
Kerala.
The base price of the machine is ` 25 lakhs. For each machinery, there is a separate
handling charge of ` 50,000.
PDL have opted to take an additional warranty for ` 20,000 for an extended service
period of 1 year, in addition to the free warranty provided by STPL. The installation costs
of ` 80,000 charged by STPL, will be met by PDL. STPL offers a cash discount of 2%, where
the payment is made within a month. If the payment is not so made, it not only recovers
the discount earlier offered, but also charges interest at 18% for the period of delay.
A machinery was supplied on 21st November, 2017, the tax invoice also being issued the
same day.
Ascertain the transaction value of the machine sold to MTL and the GST payable
[SGST & CGST or IGST] by STPL. You are further informed that MTL made the actual
payment only on 10th January, 2018.
You are informed that the GST rates applicable for the product as under: 8
SGST 6%
CGST 6%
IGST 12%
Answer:
7. (a) Duties of Anti-profiteering committee-Section 171(3)
The Authority would have the following duties:

(i) to determine whether any reduction in the rate of tax on any supply of goods or
services or the benefit of input tax credit has been passed on to the recipient by
way of commensurate reduction in prices;
(ii) to identify the registered person who has not passed on the benefit of reduction
in the rate of tax on supply of goods or services or the benefit of input tax credit
to the recipient by way of commensurate reduction in prices;
(iii) to order,
• reduction in prices;
• return to the recipient, an amount equivalent to the amount not passed on by
way of commensurate reduction in prices along with interest at the rate of
eighteen percent, from the date of collection of the higher amount till the date
of the return of such amount or recovery of the amount not returned, as the
case may be, in case the eligible person does not claim return of the amount or
is not identifiable, and depositing the same in the Consumer Welfare Fund;
• imposition of penalty; and
• Cancellation of registration.
(b) Computation of transaction value

Amount (`)
Basic price of the machinery 25,00,000
Add: Handling charges met by the buyer 50,000
[All incidental expenses are includible in transaction value]
Additional warranty charges [Includible since transaction value includes 20,000
all items, except those which are specifically excluded]
Installation costs [Any amount charged for anything done by the 80,000
supplier in respect of the supply of goods at the time of, or before
delivery of goods is includible in the value of supply in terms of section
15(2)(c) of CGST Act, 2017]
Subsidy provided by agent of foreign manufacturer 3,00,000
[As per Sec. 15(2)(e) of the CGST Act, subsidies directly linked to the
price excluding subsidies provided by the Central Govt. and State Govt.
is to be added to the price of the machinery]
29,50,000
Less: Cash discount at 2% of 25L 50,000
[Cash discount offered at the time of original supply to be deducted. It
is immaterial that the payment was not made in time. At that time, debit
note can be issued for recovering discount as well as for interest
chargeable]
Transaction value of the machine supplied 29,00,000
IGST at 12% on above 3,48,000
Note:
The place of supply of the machine is the place of installation of the machinery. Thus,
this will be an Inter-state supply and hence IGST is payable.
It is assumed that subsidy is received from agent of foreign manufacturer and hence
is added to the price. In case it is subsidy from Central/State Govt. same will not be
added to the price.
Section – B
(Customs Duty and FTP)
Answer Question No. 8 which is compulsory and any two from the rest of this section.
8. Choose the most appropriate option for the following [Option to be given in capital letters
A, B, C or D] and give brief reason/justification for your choice the correct choice or
conclusion [1 mark for the correct choice and 1 mark for reason] : 2×3=6
(i) For filing an appeal before the Commissioner (Appeals), the amount of pre-deposit
required under the Customs Act, 1962 is
(A) 5% of the demand, subject to a maximum of ` 5 crore
(B) 5% of the demand, subject to a maximum of ` 7.5 crore
(C) 7.5% of the demand, subject to a maximum of ` 7.5 crore
(D) 7.5% of the demand, subject to a maximum of ` 10 crore
(ii) Where a person of Indian origin stays abroad for 36 months and returns to India on 21-
1-2017 for having residence in India, the GFA for used household articles (Baggage) is
(A) ` 1 lakh
(B) ` 3 lakhs
(C) ` 5 lakhs
(iii) Anti-dumping duty payable by a SEZ in respect of an import is

(A) Nil
(B) 5% of the customs duty
(C) 7.5% of the customs duty
(D) 10% of the customs duty
Answer:
8.
(i) D As per Section 129E of the Customs Act, 1962, as amended by Finance (No. 2)
Act, 2014 w.e.f. 6-8-2014, provides that for filing appeal before the Commissioner
(Appeals), a pre-deposit of 7.5%, subject to a maximum of ` 10 crore shall be
made.
(ii) C The GFA is linked to the period for which the person has stayed abroad. If the
same exceeds 2 years, the GFA is ` 5 lakhs for transfer of residence.
(iii) A No anti-dumping duty is payable by a SEZ, as they are exempted from the same.
9. (a) Explain the importance of Inland Container Terminal (ICD) and Container Freight
Station as an infrastructure facility for export or import. Distinguish between the two.
2+4=6
(b) An importer imported some goods for subsequent sale in India at $10,000 on
Assessable value basis. Relevant exchange rate and rate of duty are as follows:
Particulars Date Exchange rate Rate of Basic

declared by the CBEC Customs Duty
Date of submission of bill of 25th February, 2018 ` 58/USD 10%
entry
Date of entry inwards 5th March, 2018 ` 58.75/USD 12%

granted to the vessel
Calculate Assessable value and Customs Duty in Indian rupees? (Education cess is
2% & SAH education cess is 1%) 6
Answer:
9. (a) Inland Container Depot (ICD) and Container Freight Station (CFS)
Generally, an exporter or import placed far way from the gateway port for
clearance of import or export of goods. However, irrespective of distance from the
servicing gateway port, prefers to move cargo by road to CFS (a transit facility where
he stuffs cargo in containers and containers are transported to port for loading on
board the ship). Both ICD and CFS is an infrastructure facility, owned and operated
by public or private authority, especially designed for offering services of handling,
storage and movement of containerized cargo and cargo under Customs
supervision.
Distinction between ICD and CFS

Inland Container Depot (ICD) Container Freight Station (CFS)
It is a place where containers are It is a place where containers are stuffed.
aggregated for onwards movement to Unstuffed and aggregation / segregation
or from the ports. of cargo takes place.
ICD's are located outside the port No site restrictions apply for CFS.
towns.
An ICD may have a CFS attached to it CFS is treated as an extension of a port /
ICD/air-cargo complex.
Movement of shipment by road and rail. Movement of shipment by road.
(b) Relevant rate of duty for the imported goods is 12% (i.e. Date of submission of bill of
entry or Date of entry inwards granted to the vessel whichever is later)
Exchange Rate is ` 58 per USD (i.e. the rate of CBE & C as on the date of submission
of Bill of entry by the importer)
Assessable value = ` 5,80,000 (i.e. USD 10,000 × ` 58)

Basic Customs Duty = ` 69,600 (i.e. ` 5,80,000 × 12%)
2% Education cess = ` 1,392 (i.e. ` 69,600 × 2%)
1% SAH education cess = ` 696 (i.e. ` 69,600 × 1%)
Total Customs Duty = ` 71,688.
10. (a) (i) The assessee imported furnace oil and supplied the same to sister unit for
generation of electricity, which is used by the assessee. The assessee claimed
exemption on import of furnace oil. The assessee also obtained a clarification from
Development Commissioner for claiming exemption. However, irrespective of the
clarification from Development Commissioner, a show cause notice (SCN)
demanding duty was issued on the assessee more than 1 year (i.e. longer limitation)
after he had imported furnace oil on behalf of its sister unit.
Is the issue of the SCN in the extended period of limitation valid in law? 4
(ii) The assessee filed an appeal to Commissioner, but mistakenly gave it to the
adjudicating officer who had passed the original order, who sent it to the
Commissioner after few days delay. The appellate authority rejected the appeal on
the ground that the appeal was not received in time in his office.
Is the rejection of appeal justified? 4
(b) Under Indian FTP, write a brief note on Advance Authorisation. 4
Answer:
10. (a) (i) Validity of SCN using extended period of limitation
Issue
The issue for consideration is whether the issue of SCN under the longer period of
limitation is valid in law.
Analysis
Longer period of limitation is available under section 28 of the Customs Act, 1962,
where the assessee has misstated facts or there has been wilful suppression or
misstatement of facts.
The assessee had shown bona fide conduct by seeking clarification from
Development Commissioner and in a sense had offered its activities to
assessment.
Therefore, mere non-payment of duties could not be equated with collusion or

willful misstatement or suppression of facts. Judgment is given in favour of the
assessee.
Reference may be made to the decision in Uniworth Textiles Ltd. v. CCEx. 2013
(288) ELT161 (SC)
(ii) Rejection of appeal by Commissioner, whether justified

The issue to be decided is whether the appeal can be rejected on the ground
that it was not filed in time.
The appeal had been filed in time, but reached different wing of the same
building. Since, the appeal was received by the adjudicating officer who has
passed the original order, he ought to have sent it to the other wing of the same
building, but he had not done the same.
Therefore, the order passed by the appellate authority cancelling the appeal on
the ground that it was not received in time, could not be accepted.
Hence the appellate authority should entertain the appeal of the assessee and
pass appropriate orders on merits and in accordance with law, after affording
him an opportunity of being heard. The rejection of appeal is not justified.
Reference may be made to the decision in Chakiat Agencies vs. UOI 2015 (37)
STR 712 (Mad.).
(b) Advance Authorization:

(i) Exporters having past export performance (in at least preceding two financial
years) shall be entitled for Advance Authorization for annual requirement.
(ii) Materials imported under advance authorization will 'Actual user condition'. These
imported goods will not be transferable even after completion of export
obligation. However, holder of advance authorization will have an option to
dispose of product manufactured out of duty free inputs once export obligation is
completed.
(iii) Advance authorization is issued for inputs in relation to the resultant product on
the basis of SION (Standard Input Output Norms). If SION for a particular item is
not fixed, Regional Authority (RA) based on self-declaration by applicant except
certain specified products, can issue advance authorization.
(iv) It is necessary to establish that inputs actually used in manufacture of the export
product should only be imported under advance authorization and inputs

actually imported must be used in the export product, for redeeming the
authorization.
11. (a) (i) Mr. Amol owns a sole proprietorship firm, 'Safe and Super Importers'. Mr. Amol has
never been to any place outside India. The firm proposes to import a product. Mr.
Amol is not sure of the correct classification of the product under Customs Tariff.
His Tax Consultant has informed him that the said classification issue has been
decided by the CESTAT in a different case. However, Mr. Amol does not want to
take any chances and is desirous of obtaining a ruling from the Authority for
Advance Ruling under section 28H of the Customs Act, 1962 with respect to the
classification of the product to be imported by it.
In the light of recent amendments, state whether Safe and Super Importers can
seek advance ruling in the present case under the Customs Act, 1962? 3
(ii) Basant, a non-resident intends to provide a taxable service under a joint venture in
collaboration with a non-resident, but has entertained some doubts above its
valuation.
Aarohi, Basant's friend, has obtained an 'Advance Ruling' from the Authority for
Advance Ruling on an identical point. Basant proposes to follow the same ruling in
his case. Basant has sought your advice as his consultant whether he could follow the
ruling given in the case of Aarohi. Explain with reasons. 3
(iii) Explain relevance of Boat Note as per Boat Note Regulations. 2
(b) The Scope of Foreign trade policy 2015-2020 provides direction to promote Indian
Exports. In this context outline the Scope of FTP. 4
Answer:
11. (a) (i) With effect from 01.03.2015, a resident firm can also apply for AAR. The sole
proprietorship will have to satisfy the test of residency as per section 2(42) of the
Income Tax Act, 1961 to be eligible to apply for an advance ruling.
Therefore, Safe and Super Importers, being a resident proprietorship firm, is an

eligible applicant for advance ruling.
Since in the given case, question intended to be raised by Safe and Super
Importers is already decided by the CESTAT. Advance ruling cannot be sought by
it.
(ii) An advance ruling is binding only on the applicant who has sought it. In the given
problem, in view of the aforesaid provision, Basant cannot make use of the
advance ruling pronounced in the identical case of his friend, Aarohi. Basant
should obtain a ruling from the Authority of Advance Ruling by making an
application along with a fee of 2,500.
(iii) Boat Note:

In India we have certain ports where the ship cannot come to the shore for
unloading or loading goods due to depth of the Sea or vessel may not find the
time in having berth in the port. In such cases goods are sent to shore in a small
cargo (i.e. it may be loaded in a small boat and sent to shore). As per the Boat
Note Regulations such a small boat must be accompanied by a Boat Note issued
by the Customs Officer. The boat note must be in duplicate and machine
numbered. Separate forms are prescribed for export cargo, import cargo and
transshipment cargo.
(b) Scope of FTP is as under:

1) Policy for regulating import and export of goods and services.
2) Exports Promotional Measures.
3) Duty Remission and Duty Exemption Scheme for promotion of exports.
4) Export Promotion Capital Goods (EPCG) Scheme.
5) Export Oriented Undertakings (EOU/EHTP/STP & BTP) Schemes.
6) Deemed Exports.
7) Quality complaints and Trade Disputes.
Thus the policy provides direction to promote Indian Exports through export
promotion, duty remission, EOU Schemes and quality improvement
Note: Special Economic Zones covered under separate Act namely Special
Economic Zones Act, 2015 and are not part of FTP.
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)

DECEMBER 2018
Paper- 18: Indirect Tax Laws and Practice
Wherever necessary, you may make suitable assumptions and
state them clearly in your answer.
Working Notes should form part of the answer.
SECTION – A
2×7 = 14
1. Choose the correct answer with justification / workings wherever applicable :
(i) Under GST Act a supply of assortment of sweets, chocolates and firecrackers
packed in a gift hamper is
(a) Joint supply
(b) Composite supply
(c) Mixed supply
(d) Assorted supply
(ii) The due date for filing GSTR – 6 (Return for input Service distributor) is __________ of
the succeeding month.
(a) 10
(b) 13
(c) 18
(d) 20
(iii) Under GST input tax credit cannot be claimed on goods and services used as
inputs if
(a) Goods are purchased on credit.
(b) Goods are received and utilized, the invoice is received after two weeks
from the supplier.
(c) Good are destroyed by fire.
(d) Services are provided by a law firm on which GST has been paid under RCM.
(iv) A person is not liable for registration under GST Act if
(a) Non-resident person making a taxable supply.
(b) An agriculturist selling produce out of cultivation of land.
(c) Dealer engaged in inter-state trade above threshold limit for registration.
(d) Casual taxable person making taxable supply.
(v) It is not mandatory to have the following field in a tax invoice under CGST Rules,
2017 :
(a) Date of its issue.
(b) HSN Code of goods or Accounting Code or Services
(c) Name and Address of the recipient
(d) Date of receipt of goods/services by the recipient.
(vi) Under GST Act the term UIN stands for
(a) User Identification Number
(b) Utility Identification Name
(c) Unique Identification Number
(d) Unique Individual Number
(vii) Following is not a part of the contents of a bill of supply :
(a) Description of Goods or Services or both
(b) Consecutive Serial number
(c) Signature or digital signature if registered of the recipient
(d) Signature or digital signature of the supplier or his authorized representative.
Answer : (1)
(i) (c) Mixed supply
Each of these items can be supplied separately, is not dependant on each other
and not bundled due to natural necessities. (Section 8 of CGST Act).
(ii) (b) Return for input Service distributor has to be filed by 13 th of the next month.
(iii) (c) Goods are destroyed by fire
ITC is not available on goods destroyed u/s. 17(5) of CGST Act.
(iv) (b) An agriculturist selling produce out of cultivation of land.
Income is related to agriculture and hence turnover is exempt from GST and
such agriculturist is not liable for registration under GST.
(v) (d) Date of receipt of goods/services by the recipient.
This is not a field prescribed (RULE 54-Section 31 read with Rule 46 of CGST Rules)
for Tax invoice.
(vi) (c) Unique Identification Number
As per GST Act any notified agency of the United Nations etc. can be granted
this number for claiming GST refund.
(vii) (c) Signature or digital signature if registered of the recipient.
This is not a field required under Section 31 (3) (c) read with Rule 49 of CGST Rules
for Bill of supply.
2. (a) Shankar Pvt. Ltd. was awarded a contract in July 2017 for providing flooring and wall
tiling services in respect of a building located in Delhi by Padmapriya Ltd. As per the
terms of contract, Shankar Pvt. Ltd. was to provide all the required material for
execution of the contract. However, Padmapriya Ltd. also provided a portion of he
material.
Whether the services provided by Shankar Pvt. Ltd. are subject to GST? If yes,
determine the GST liability of Shankar Pvt. Ltd. from the following particulars: 8
Particulars Rs.
(i) Gross amount charged by the Shankar Pvt. Ltd. 6,00,000
(ii) Fair market value of the material supplied by Padmapriya Ltd. 1,00,000
(iii) Amount charged by Padmapriya Ltd. for the material [included 60,000
in (i) above]
Note : CGST 6% and SGST 6%

(b) Explain the concept of supply made in the course or furtherance of business as a
taxable event under GST law. 6
Answer : 2(a)
Works contract is treated as supply of service
Gross amount charged by the Shankar Pvt. Ltd. 6,00,000
Add: Fair market value of the material supplied by Padmapriya Ltd. 1,00,000
Less : Amount charged by Padmapriya Ltd. for the material (60,000)
Total value subject to GST 6,40,000
CGST 6% x 6,40,000 = Rs. 38,400

SGST 6% x 6,40,000 = Rs. 38,400
Total GST liability = Rs. 76,800
Answer : 2(b)
Supply made in the course or furtherance of business:
(a) In the course of business : Every persons carries out certain activities regularly for
running trade or commerce.
(b) Furtherance of business : Every business person use to think how to develop his
business or carrying out new activities. Such activities called as furtherance of
business.
GST is essentially a tax only on commercial transactions. Hence, only those supplies
that are in the course or furtherance of business qualify as supply under GST. Hence,
any supplies made by an individual in his personal capacity do not come under the
ambit of GST unless they fall within the definition of business as defined in the Act.
Sale of goods or service even as avocation is a supply under GST. Therefore, even if
a famous politician paints paintings for charity and sells the paintings even as a one-
time occurrence, the sale would constitute supply.
3. (a) Mrs. Poornima started a business in supply of goods on 12.12.2017 at Salem,
Tamilnadu. During the year ended 31.03.2018, the details of the supplies effected at
her Chennai office are as under :
Supply of taxable goods within State Rs. 16 lakhs
Supply of exempt goods Rs. 5 lakhs
She has not taken any GST registration. Determine the amount of penalty, if any,
which may be imposed by her on 31.03.2018. In respect of taxable goods, SGST is 6%
and CGST is 6%.
Note : Assume that she crossed the Rs.20 lakhs limit on 25.01.2018. 6
(b) Mr. X has cleared goods from his factory on 20 th
May, 2017 for sale to Mr. Y for
Rs. 5,00,000. Effective rate of Excise Duty (ED) @ 12.5%. However ED Rs. 62,500 has
been paid on 6th June, 2017. The consignment received by Mr. Y on 5th July, 2017.
Find the following :
(i) Is Mr. Y eligible for ITC if so, what amount ?
(ii) Time limit within which receipt of inputs should be recorded in the books of
account of Mr. Y.
(iii) Mr. Y recorded receipt of inputs in the books of account on 15.08.2017, if so can
he avail the ITC ? 8
Answer : 3(a)
Penalty for non-registration under GST
Supply of taxable goods within State [SGST @6% and CGST @ 6%] Rs. 16L
Supply of exempt goods Rs. 5L
Aggregate turnover Rs. 21L
Where the aggregate turnover of a supplier making supplies exceeds Rs.20 lakhs in a
financial Year, he is liable to be registered under the act of the concern state or union
territory as the case may be. The said supplier must apply for registration within 30 days on
which he becomes liable for registration.
However, in the given case, Mrs. Poornima became liable to registration on 25.01.2018, she
did not apply for registration within 30 days of becoming liable to registration.
Sec. 122(1)(xi) of the CGST Act, 2017 enjoins that a taxable person who is liable to be
registered under the CGST Act, 2017 but fails to obtain registration shall be liable to pay
penalty of
(a) Rs. 10,000
Or
(b) An amount equivalent to the tax evaded. Whichever is higher
In the given case, (b) is 12% of Rs. 16,00,000 i.e. Rs. 1,92,000.
Hence a sum of Rs. 1,92,000 will be levied a penalty for failure to get himself registered.
Answer : 3(b)
(a) Yes. Mr. Y is eligible to avail the ITC of Rs. 62,500 provided he deals with taxable supplies
being registered person.
(b) Inputs or Input Services recorded in the books of account 30 days from 1-7-2017.
Therefore, Mr. Y should account for by 30th July, 2017.
(c) Since, period of 30 days may, on sufficient cause being shown, be extended by the
Commissioner for a further period not exceeding 30 days.
In the given case Mr. Y can take credit on inputs on 15 th Aug 2017, provided permission
granted by the Commissioner for extension not exceeded 30 days.
4. (a) (i) State the functions of the GSTN, i.e. the role assigned to GSTN. 5
(II) Brahmi Foundation, Noida is registered as a trust under section 12AA of the
Income-tax Act, 1961. With effect from 01.08.2017, it intends to offer its guest
houses to the pilgrims visiting the Noida shrine at Rs. 900 per day and their
marriage hall at Rs. 12,000 per day.
They want to know whether these will attract GST liability. Advise them suitably.
5
(b) In the light of the provisions of GST law as it stands w.e.f. 01.07.2017, briefly explain
as to whether it is taxable service and who is the person responsible for paying GST
in the following situations : 4
(i) Legal service provided by Senior Advocates to business entities.
(ii) Mere Contracts for representation service provided by the Senior Advocates
to any business entity has been entered into through another advocate or
firm of advocates. State the turnover criteria of the previous year which
applies, including the one for special category States.
Answer : 4(a)(i)
Functions of the GSTN (i.e. Role assigned to GSTN):
Creation of common and shared IT infrastructure for functions facing taxpayers has been
assigned to GSTN and these are :
filing of registration application.
filing of return.
creation of challan for tax payment.
settlement of IGST payment (like a clearing house),
generation of business intelligence and analytics etc.
All statutory functions to be performed by tax officials under the GST like approval of
registration, assessment, audit, appeal, enforcement etc. will remain with the respective
tax departments.
Answer : 4(a) (ii)
Renting of precincts of a religious place meant for general public, owned or managed by
an entity registered as a charitable or religious trust under section 12AA of the Income-tax
Act, 1961 is exempt from GST.
However, w.e.f. 1-07-2017, this exemption shall not be applicable to.
1. Renting of rooms where charges are Rs. 1000 or more per day.
2. Renting of premises, community halls, kalyanmandapam or open area, etc where
charges are Rs. 10,000 or more per day.
Thus, the law gives a limited exemption to renting of only religious precincts or a religious
place meant for general public by the entity registered under Section 12AA of the
Income-tax Act or Sec. 10(23C)(v) or Sec.10(23BBA) of the Income-tax Act, 1961.
In the given case, the renting of guest houses is at Rs. 800 per day ; so this will not attract
any GST liability.
However, the marriage halls are rented at Rs. 12,000 per day. Hence this will be reckoned
for GST liability.
If GST is to be avoided, then such renting of marriage hall should be at less than Rs. 10,000
per day.
Brahmi foundation is to be advised accordingly.
Answer : 4(b)
GST payable by whom ?
(i) Where a senior advocate renders representation services for a business entity
whose turnover in the previous year exceeds 20 lakhs, the same is taxable service
in both the situations.
GST will be payable by the Recipient of service, which is the business entity, who is
litigant, applicant or petitioner.
(ii) Recipient of service that is the business entity whose previous year turnover more
than Rs. 20 lakhs, who is the litigant, applicant or petitioner, is liable to pay GST.
In case of special category States is Rs. 10 lakhs.
5. (a) (i) Sarath Pharma Ltd., filed an appeal before the Appellate Tribunal against the order
of the Appellate Authority, wherein the issue was revolving around the place of
supply. The Tribunal decided the issue against the company and in favour of the
Department.
The company is of the strong view that its stand is correct and consequently, there
is need to take the issue to an appellate forum higher than the Appellate Tribunal.
You being the Cost Accountant dealing with indirect tax matters, advise the
company about filing appeal before the suitable forum. 5
(ii) Vaibhav, a registered supplier under GST law, has furnished the following details for
the month of August, 2017 :
Particulars Amounts (Rs.)
Purchase of goods made from outside State 8,00,000
Inter-State supply of goods 10,00,000
Goods taken for personal use in above 20,000
The IGST was paid on 10th October, 2017.

Calculate the interest payable for the delayed payment. 5
You are informed that the IGST rate for all the goods dealt with by Vaibhav is 18%.
(b) Padmaja, a registered supplier, rendered taxable service for Rs. 2 lakhs on
01.12.2017. The tax invoice was raised on 09.12.2017. Payment was received on
22.11.2017.
Determine the time of supply for GST purposes. 4
Answer : 5(a)(i)
Filing of appeal before suitable forum
Where the supplier or the Department is not satisfied with the order passed by the State
Bench or Area Benches of the Appellate Tribunal, appeal can be filed before the High
Court if the High Court is satisfied that such an appeal involves a substantial question of
law [section117(1) of the CGSTAct,2017].
Nevertheless, appeal against orders passed by the National Bench or Regional Benches
of the Tribunal can be filed only before the Supreme Court and not High Court
As per section 109(5) of the Act, only the National Bench or Regional Benches of the
Tribunal can decide appeals where one of the issues involved relates to the place of
supply.
Since the issue involved in the given case relates to place of supply, the appeal in his
case would have been decided by the national bench or regional bench of the tribunal.
Accordingly, Sarath Pharma Ltd., Will have to file an appeal before the supreme court
and not the high court.
Answer : 5(a)(ii)
Computation of interest for belated payment of GST
IGST on Supply of goods made outside State (10,00,000 x 18%) 1,80,000
Less : Inter-State purchases of goods (7,80,000 x 18%) 1,40,400
[ITC is not available for goods taken for personal use]
Balance IGST payable Rs. 39,600
Due date for payment 20-9-2017
Actual date of payment 10-10-2017
Number of days of delay 20
Interest payable at 18% for delay (39, 600x18%x20/365) rounded off Rs. 391
Total marks
Answer : 5(b)
Time of supply in case of Services is the earliest of the following as per Sec 13(2)-
1. The date of issue of invoice by the supplier, if the invoice is issued within the period
prescribed under sub-section (2) of section 31 (30 days from rendering of the service)
2. The date of provision of service, if the invoice is not issued within the period prescribed
under sub-section (2) of section 31
3. Date of receipt of payment
In the instant case even though the invoice has been issued within the time limit prescribed u/s
31(2), it is irrelevant to determine time of supply.
Since the date of receipt of payment (i.e. 22.11.17) is earliest, hence the time of supply shall
be 22.11.17.
6. (a) Explain the accounts and records required to be maintained by registered person
under GST law. 7
(b) M/s. A. Ltd. sold plant and machinery after being used in the manufacture of
taxable goods for Rs. 4,00,000 on 1st November, 2018. GST is payable on
transaction value of plant and machinery 18%. M/s. A. Ltd. had purchased this
machine vide invoice dated 22nd November, 2017 for Rs. 5,50,000 plus GST 18%.
M/s. A Ltd. availed the input tax credit on said plant and machinery. Find the
amount payable by M/s. A. Ltd. under section 18(6) of the CGST Act, 2017 7
Answer : 6(a)
Every registered person is required to self-assess the taxes payable and furnish a return for
each tax period (i.e. the period for which return is required to be filed).
The compliance verification is done by the department through scrutiny of returns, audit
and/or investigation. Thus the compliance verification is to be done through documentary
checks rather than physical controls. This requires certain obligations to be cast on the
taxpayer for keeping and maintaining accounts and records.
As per Section 35(1) of the CGST Act, 2017 :
Every registered person is required maintain a true and correct account of the following:
(a) Production or manufacture of goods.
(b) Inward and outward supply of goods or services, or both
(c) Stock of goods
(d) Input tax credit availed
(e) Output tax payable and paid
(f) Any other particulars deemed necessary
The above records must be maintained at each place of business registered under GST.
In addition, the rules (i.e. Rule 56(1) of the CGST Rules, 2017) also provide that the
registered person shall keep and maintain records of –
(a) Goods or services imported or exported or
(b) Supplies attracting payment of tax on reverse charge along with the relevant
documents, including invoices, bills of supply, delivery challans, credit notes, debit
notes, receipt vouchers, payment vouchers, refund vouchers and e-way bills.
Rule 56(2) of the CGST Rules, 2017 every registered person, other than a person paying tax
under section 10, shall maintain the accounts of stock in respect of goods received and
supplied by him.
It means the above records not required to be maintained by a supplier opting for
composition levy.
Answer : 6(b)
Particulars Amount in Working note
ITC taken on capital goods 99,000 5,50,000 x 18%
Less : 25% reduction (24,750) No. of quarters = 5(5% x 5 = 25% reduction)
Balance ITC 74,250
Tax on Transaction value 72,000 4,00,000 x 18%
Note : M/s. A Ltd. shall pay amount equal to the input tax credit taken on the said
capital goods reduced by 5% per quarter or part thereof from the date of the issue of
the invoice fur such goods or the tax on the transaction value of such capital goods u/s.
15 of the CGST Act, 2017 whichever is higher.
Therefore, M/s. A. Ltd. is liable to pay an amount of Rs. 74,250, being higher than
Rs. 72,000.
7. (a) Under the Service Tax regime, tour operator services were charged at abated rate of
9% whereas in Goods & Services Tax Act, 2017 rate of tax fixed is 5% which resulted
in reduction of tax from 9% to 5%.
You are asked to determine the benefit, if any to be passed by the tour operator to
the recipient of services. 7
(b) Enumerate and Explain the advantages of GST. How has introduction of GST
benefitted the consumers and general public ? 7
Answer : 7(a)
The tax rate reduction benefit to the extent of 4% to be passed on to recipient.
Particulars Service Tax regime GST Remarks
regime
Taxable value 100 100
ST/GST rate (%) 9% 5%
ST/GST (Rs.) 9 5
Reduction of Rs. 4 is benefit to
Total Invoice value 109 105
be passed on to recipient.
Answer : 7(b)
ADVANTAGES OF GST
a) One Nation One Tax.
b) Removal of bundled indirect taxes such as VAT, CST, Service tax, CAD, SAD and
Excise.
c) Removal of cascading effect of taxes; i.e. removes tax on tax.
d) Increased ease of doing business.
e) Lower cost of production, increase in demand will lead to increase in supply.
Hence, this will ultimately lead to rise in the production of goods. Resultantly boost
to make in India initiative.
f) It will boost export and manufacturing activity, generate more employment and
thus increase GDP with gainful, employment leading to substantive economic
growth ;
g) Rationalisation of tax rates, removal of cascading effect will ultimately result in lower
prices benefitting the consumers and general public.
Section- B
Answer Question No. 8 which is compulsory and any two from the rest in this section.
2×3= 6
8. Choose the correct answer with justification/workings wherever applicable.
(i) Under Foreign Trade Policy export and import goods are broadly categorized.
Which of the following statements is correct ?
(A) Free i.e. general goods are allowed to be imported without payment of any
customs duty.
(B) Restricted goods are banned and not allowed to import or export.
(C) Restricted goods are allowed to be imported only if used for re-export.
(D) Restricted goods are allowed to be imported or exported only with
authorization.
(ii) Which of the following is a document not required to be filled for claiming of duty
drawback on re-export ?
(A) Import Invoice
(B) Evidence of payment of duty at the time of import.
(C) Export bill with packing list
(D) Permission from CBEC authorizing re-export of goods
(iii) Derelict are goods that
(A) are abandoned by the owner in an emergency with a hope of recovering it
later.
(B) Owner has no intention to abandon but get sunk and drift to the shore.
(C) Owner has no intention to abandon but float and drift to the shore.
(D) Are abandoned by owner of goods without any hope of recovery.
Answer : 8
(i) (d)
Restricted goods are allowed to be imported or exported only with
authorization as per FTP – 2015 – 2020. Other choices are incorrect.
(ii) (d)
It is not permission from CBEC but from RBI authorizing re-export of goods
which is to be filed where applicable.
(iii) (d)
Derelict goods are those abandoned by owner of goods without any hope
of recovery. Other choices are incorrect.
9. (a) After staying aboard for 16 months, Mr. Vayudev shifted his residence to India from
Sydney to Kolkata on 12.10.2017. At the time of landing at Kolkata, he brought
the following Items :
Sl. No. Particulars Amount (Rs.)
(i) Gold bars 30 grams valued at 90,000
(ii) Alcoholic liquor 4 litres valued at 10,000
(iii) 20 boxes of cigarettes, each box containing 10 nos., 4,000
valued at
(iv) One notebook computer 1,00,000
(v) One PC meant for personal use 40,000
(vi) Hand pistol 83,000
You are required to compute the customs duty payable by him for the baggage.
7
(c) In the context of foreign trade policy, what do you understand by the term “Standard
Input Output Norms (SION)”? What are the basic requirements of SION? 5
Answer : 9(a)
Baggage allowance and duty payable
Sl. No. Particulars Amount (Rs.)
1. Gold bars 30 gram valued at 90,000
[No DFA for gold bars ; only for gold jewellery it is available]
2. Alcoholic liquor 2 litres valued at 5,000
[DFA available for 2 litres]
3. 20 boxes of cigarettes, each box containing 10 nos. valued at 2,000
[DFA available for 100 sticks only]
4 One notebook computer Nil
[Fully covered by DFA]
5. One PC meant for personal use 40,000
[DFA is not allowable for a PC]
5. Hand pistol Nil
[Covered by DFA]
Gross value of baggage 1,37,000
Less : General free allowance 50,000
Customs duty payable for 87,000
Customs duty at 36.05% 31,363
Answer : 9(b)
Standard Input Output Norms :
Standard Input Output Norms or SION in short is standard norms which define the amount
of input/inputs required to manufacture unit of output for export purpose, SION is notified
by DGFT in the Handbook, and is approved by its Boards of Directors.
Input output norms are applicable for the products such as electronics, engineering,
chemical, food products including fish and marine products, handicraft, plastic and
leather products, etc.
An application for modification of existing Standard Input-Output norms may be filed by
manufacturer exporter and merchant-exporter.
The Directorate General of Foreign Trade (DGFT) from time to time issue notifications for
fixation or addition of SION for different export products. Fixation of Standard Input
Output Norms facilitates issues of Advance License to the exporters of the items without
any need for referring the same to the Headquarter office of DGFT on repeat basis.
Basics Requirements of Standard Input Output Norms
For fixation/ medication of Standard Input Output Norms (SION) following details are
required :
Technical Details of the export product as per the details given in Appendix 33.
Chartered Engineer certificate certifying the import requirements of raw materials in
the format given in Appendix 32B.
Production and Consumption data of the manufacturer / supporting manufacturer of
the preceding three licensing years as given in serial no. 3 of sub section XII, duly
certified by the Chartered accountant/Cost Accountant/Jurisdiction Excise Authority.
10. (a) From the particulars given below, find out the assessable value of the imported goods
under the Customs Act, 1962 : 8
US $
(I) Cost of the machine at the factory of the exporting country 10,000
(ii) Transport charges incurred by the exporter from his factory to 500
the port for shipment
(iii) Handling charges paid for loading the machine in the ship 50
(iv) Buying commission paid by the importer 50
(v) Freight charges from exporting country to India 1,000
(vi) Exchange Rate to be considered 1$ - Rs. 65
(b) Under Foreign Trade Policy (FTP), explain what is Board of Trade (BOT) ? 4
Answer : 10(a)
Statement showing assessable value for imported goods :
S. Particulars Value US $ Working
No.
i) Cost of the machine at the factory of the 10,000
exporting country
ii) Transport charges incurred by the 500
exporter from his factory to the port for
shipment
iii) Handling charges paid for loading the 50
machine in the ship.
FOB Value of Exporter 10,550
iv) Buying commission paid by the importer - Not addable into the
assessable value
v) Cost of insurance 118.6875 @1.125% on FOB value
vi) Freight charges from exporting country to 1,000
India
vi) CIF Value 11,668.6875
vii) 1% Unloading charges 116.686875 1% on CIF value
Assessable value (in USD) 11,785.3743
75
viii) Assessable value (in INR) 7,66,049 65 x US $ 11,785.374375
= 7,66,049
Answer : 10(b)
Board of Trade has been constituted to advise Government on Policy measures like :
Improve exports,
Review export performance,
Review policy and procedures for import and exports and
Examine issues relevant for promotion of India’s foreign trade.
Commerce and Industry Minister will be the Chairman of the BOT. Government shall also
nominate up to 25 persons. Board of Trade will meet at least once every quarter.
11. (a) A consignment of 800 metric tonnes of edible oil of Malaysian origin was imported by
a charitable organization in India for free distribution to below poverty line citizens in
a backward area under the scheme designed by the Food and Agricultural
Organisation. This being a special transaction, a nominal price of US $ 10 per metric
tone was charged for the consignment to cover the freight and insurance charges.
The Customs House found out that at or about the time of import of this gift
consignment, there were following imports of edible oil of Malaysian origin :
Sl. No. Quantity imported in metric tones Unit price in US $ (CIF)
(i) 20 260
(ii) 100 220
(iii) 500 200
(iv) 900 175
(v) 400 180
(vi) 780 160
The rate of exchange on the relevant date was 1 US $ = Rs. 63.00 and the rate of
basic customs duty was 15% ad valorem. There is no IGST.
Calculate the amount of duty leviable on the consignment under the Customs Act,
1962 with appropriate assumptions and explanations where required. 6
(b) Examine whether benefit of Service Exports from India Scheme (SEIS) can be availed
with respect to notified services provided by service providers located in India in the
current financial year in the following independent cases : 6
(i) Net Foreign Exchange (NFE) earned by Mr. Raj, a service provider, in the
preceding financial year is USD 4,500.
(ii) X & Co., is a partnership firm, supplier of taxable services, has earned net
foreign exchange to the turn of USD 17,500 in the preceding financial year.
(iii) Mr. Roshan, a service provider, has earned net foreign exchange of USD 13,000
in the preceding financial year. Out of this, USD 4,000 has been paid to Mr.
Roshan through the credit card of the foreign client.
Note: All the above service providers have an active IEC at the time of rendering services.
Answer : 11(a)
Calculation of amount of duty payable : -

Exchange rate of $ 1 = Rs.63
CIF Value (800 metric tonnes x 160 USD x Rs.63) = Rs. 80,64,000
Add : Landing charges 1% on CIF = Rs. 80,640
Assessable Value = Rs. 81,44,640
15% Basic Customs duty on Rs.81,44,640 = Rs. 12,21,696
Add : Education cess @2% on 12,21,696 = Rs. 24,434
Add : Secondary and higher education cess @ 1% 12,21,696 = Rs. 12,217
Total custom duty payable = Rs. 12,58,347
Note : 1) More than one transaction value for identical goods is given, we are to take
the lowest price of the quantity which is nearest to the quantity of import.
2) It is assumed that landing charges are incurred.
Alternative answer of Question no. 11. (a) with assumption.

that landing charges are not incurred:-
Calculation of amount of duty payable:—

exchange rate of $ 1 = Rs. 63
CIF Value (800 metric tonnes x 160 USD x Rs. 63)/Assessable Value = Rs. 80,64,000
15% Basic Customs duty on Rs. 80,64,000 = Rs. 12,09,600
Add: Education cess @ 2% on Rs. 12,09,600 = Rs. 24,192
Add: Secondary and higher education cess @ 1% on Rs. 12,09,600 = Rs. 12,096
Total custom duty payable = Rs. 12,45,888
Notes:
1. More than one transaction value for identical goods are given, we are supposed to take
the lowest price of the quantity which is nearest to the quantity of import.
2. It is assumed that landing charges are not incurred.
Answer : 11(b)
(i) Mr. Raj is not eligible for SEIS Scheme as his net foreign exchange earnings are less
than USD 10,000 (minimum limit for individuals)
(ii) X & Co., being a partnership firm eligible for SEIS Scheme as their net foreign
exchange exceeds the limit of USD 15,000 (minimum limit for firms).
(iii) Foreign exchange earned through credit cards is counted for the purpose of
computing the limit of minimum net foreign exchange required for being eligible to
SEIS Scheme. Thus, Mr. Roshan is eligible for SEIS Scheme.
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

JUNE - 2019
Wherever necessary, you may make suitable assumptions
and state them clearly in your answer.
Section – A
1. Choose the most appropriate option from the following [Option to be given in capital
letters A, B, C or D] and give brief reason/justification for your choice, the correct choice
or conclusion [1 mark for the correct choice and 1 mark for reason]: 2x7=14
(i) The GST return form to be filed by a Composition dealer/supplier is ________________

and the same had to be furnished _____________________.
(A) GSTR-1, Monthly (B) GSTR-1, Quarterly
(C) GSTR-4, Monthly (D) GSTR-4, Quarterly
(ii) Mr. Ram registered in Chennai has supplied goods to Kochi Fisheries Department, for
a total contract value of ` 2,65,000 inclusive of 18% IGST. The tax to be deducted at
source is (TDS on GST)
(A) Nil (B) ` 2,650
(C) ` 5,300 (D) None of these
(iii) In the electronic ledger, the balance in Input tax credit is shown in
(A) Electronic cash ledger (B) Electronic credit ledger
(C) Electronic confirmation ledger (D) Electronic liability ledger
(iv) A registered supplier, who regularly files monthly GST return, has paid GST of Rs.
72,000 pertaining to the month of May, 2018 on 10-07-2018. The interest payable for
delayed remittance of GST is
(A) ` 710 (B) ` 355
(C) `473 (D) None of these
(v) In case of inter-State supply of goods, the tax(es) levied is/are

(A) CGST only (B) IGST only
(C) CGST and IGST (D) SGST and IGST
(vi) Lakshmi became liable to be registered under GST law on 10th November, 2018. She
submitted the application for registration on 18th November, 2018. The registration
certificate is issued on 9th December, 2018. The effective date of registration will be
(A) 10th November, 2018 (B) 18th November, 2018
(C) 9th December, 2018 (D) None of these
(vii)A manufacturer who is a registered person under GST has purchased 10000 kgs of
raw material during February, 2019, on which IGST of ` 1,00,000 has been paid. He
has taken 100 kgs for personal use. 200 kgs were stolen from the factory. Only 80% of
the raw materials were consumed during the month for production. The input tax
credit available to him for February, 2019 is
(A) ` 99,000 (B) ` 97,000
(C) ` 98,000 (D) ` 1,00,000
Answer:
1.
(i) D Under the GST law, in case of a Composition dealer, the prescribed return
form is GSTR_4, which shall be filed on quarterly basis.
(ii) A The liability to deduct tax at source arises where the value of supply, excluding
GST, exceeds ` 2,50,000. Here the same will be below ` 2,50,000 [2,65,000 x
100/118]. Hence the liability is nil.
(iii) B Balance of the ITC is shown in Electronics credit ledger. Electronic cash ledger
shows the GST deposited to the credit of the Govt. The set off of GST and the
balance liability is reflected in Electronic Liability ledger.
(iv) A There has been a delay of 20 days in the remittance.
Interest to be calculated at 18%
Same is (72,000X18%X20/365) r/off= ` 710
(v) B As per IGST Rules, for inter-state movement of goods and services is
concerned. IGST will be levied.
(vi) A As per 10(2) of the CGST Rules, 2017, when a person liable for registration,
applies for registration within 30 days, the effective date of registration is the
date when he became liable for registration.
(vi) B ITC is not available in respect of goods taken for personal use as well as those
stolen from the factory. The quantity of raw materials consumed in production
is irrelevant.
2. (a) Mr. Raghuram is running a consulting firm and also a readymade garment showroom,
registered in same PAN. Turnover of the showroom is ` 60 lakh and receipt of the
consultancy firm is ` 12 lakh in the preceding financial year. You are required to
answer the following:
(i) Is Mr. Raghuram eligible for Composition Scheme?
(ii) Whether it is possible for Mr. Raghuram to opt for composition only for Showroom?
(iii) Rework, if Mr. Raghuram is running a restaurant as well as readymade garment
showroom, whether he is eligible for Composition?
(iv) If the turnover of garment showroom is ` 75 lakh in the preceding financial year
and there is no consulting firm whether he is eligible for Composition? 8
(b) M/s Samson Ltd. being a trader of laptops has two units, one in Chennai and other in
Mumbai.
Place P.Y. Turnover ` in lakhs (Excluding taxes)
Chennai 52
Mumbai 12
You are required to answer the following:

(i) Is M/s Samson Ltd. eligible for composition levy in the current year?
(ii) If so, can M/s Samson Ltd. opt composition scheme for Chennai location and
normal scheme for Mumbai?
(iii) Whether need to give separate intimations for opting composition scheme in
each State? 6
Answer:
2. (a) (i) Mr. Raghuram is providing services in consulting firm hence he is not eligible for
composition scheme.
(ii) If a business is ineligible to opt for composition then all other businesses registered
under the same PAN shall automatically become ineligible for the composition
scheme. So Mr. Raghuram is not eligible for composition scheme only for
showroom.
(iii) Restaurant services and readymade garments show room are eligible for the
composition scheme. Hence Mr. Raghuram is eligible for Composition Scheme,
since, his aggregate turnover is ` 72 lakhs (i.e. less than ` One crore).
(iv) Yes, Mr. Raghuram is eligible for composition scheme as turnover of his firm does
not exceed ` One crore in the preceding financial year
(b) (i) Yes, M/s Samson Ltd. is eligible to avail the composition scheme in both the states
namely Tamil Nadu and Maharashtra. Since, M/s Samson Ltd. has same PAN, and
its aggregate turnover does not exceeds rupees one crore, it is eligible for
composition levy, even though the company has multiple registrations under GST.
(ii) No. M/s Samson Ltd. cannot opt for composition scheme for one location and
normal scheme for another location. Where more than one registered persons
are having the same Permanent Account Number (issued under the Income -tax
Act, 1961), the registered person shall not be eligible to opt for the scheme under
subsection (1) of section 10 of CGST Act, 2017, unless all such registered persons
opt to pay tax under that sub-section.
(iii) Intimation to opt composition scheme in respect of any place of business in any
State or Union Territory shall be deemed to be intimation in respect of all other
places of business registered on the same Permanent Account Number (PAN),
hence there is no need to give separate intimations in each State.
3. (a (i) CMA Mr. Sandesh, an unregistered person under GST, has place of profession in
Bhubaneswar, Odisha, supplies taxable services to Infosys Ltd., a registered
person under GST in Bangalore.
(I) Is it inter-State supply or intra-State supply?
(II) Who is liable to pay GST?
Note: CMA Mr. Sandesh turnover in the P.Y. is ` 18 lakhs. 4
(ii) Mr. Charan of Calicut is trading on his own goods and also acting as an agent of
Mr. Babu of Bengaluru. Mr. Charan turnover in the period 1st July, 2017 to 31st
March, 2018 is ` 12 lakh in his own account and ` 9 lakh on behalf of principal.
Whether Mr. Charan is liable to register compulsorily under GST law? 2
(iii) Mr. Rajesh is a farmer with an annual turnover in relation to agriculture of `
18,00,000. Since this income is agriculture-related, the turnover is exempt from
GST. However, Mr. Rajesh also supplies plastic bags worth of ` 2,50,000
(taxable goods) along with his crop and charges separately for this. Is Mr. Rajesh
required to register under GST? Advise. 2
(b) Mr. Gopal is a taxable person under GST (who is a wholesaler), is having a stock
worth of ` 5,00,000 as on 01-07-2017. Such person has supplied these goods for `
5,60,000 and on which he has paid CGST @ 9% and SGST @9%.
How much ITC is allowed under Sec. 140(3) of GST in the following independent
cases:
(i) If he is in possession of duty paid document for the stock (namely BED is ` 62,500
and VAT ` 28,125).
(ii) If he is not in possession of duty paid document for the stock, but has invoice
evidencing purchase of goods. 6
Answer:
3. (a) (i) Any person making inter-state supply has to compulsorily obtain registration and
therefore in such cases, section 5(4) of IGST will not come into play.
However, service providers providing aggregate supplies including inter-state

services up to ` 20 lakh will be exempted from GST.
(I) It is inter-state supply.
(II) CMA Mr. Sandesh is not liable to pay IGST if he chooses not to register under
GST. Since, registration is not made mandatory to him. Infosys Ltd. will also not
be liable to pay GST under RCM as Section 9(4) has been deferred presently.
(ii) As per explanation 1 in computing the total turnover, both the value of supply on
his own account that is `12 lakh and on behalf of principal ` 9 lakh will be
aggregated. Hence, the aggregate turnover will be ` 21 lakh. Mr. Charan is liable
to register compulsorily under the GST law.
(iii) Mr. Rajesh is required to register under GST because his aggregate turnover is `
20,50,000 which exceeds the threshold limit of ` 20 lakh.
(b) (i) ITC allowed is equal to BED is ` 62,500 as CGST credit and VAT of ` 28,125 as SGST
credit.
(ii) In accordance with the provisions of Transition Rules, he can claim credit to the
extent of 60% of CGST paid, i.e., ` 30,240/- (` 50,400 @60%) as CGST credit.
In accordance with the provisions of Transition Rules, he can claim credit to the
extent of 60% of SGST paid, i.e., ` 30,240/- (` 50,400 @ 60%) as SGST credit.
Note:
CGST payable is 9% of ` 5,60,000 = `50,400
SGST payable is 9% of ` 5,60,000 = ` 50,400
4. (a) (i) Myra Ltd. received a protective demand notice from the department of Assistant
Commissioner of Central Tax on 01-09-2017 under Section 73 of the CGST Act,
2017 where
Amount (`)
CGST & SGST 5,00,000
Interest @ 15% p.a. for no. of days delay
Penalty 10% of tax due or ` 10,000 whichever is higher
The assessee went for appeal and filed the case in the Appellate Authority on 25-
09-2017. This appeal has been taken up for hearing on 6-10-2017.
Case 1: How much has Myra Ltd. to pay as pre-deposit of duty under Section
107(6) of the CGST Act, 2017 and date of pre-deposit of duty by Myra Ltd. to
entertain appeal by the Appellate Authority [i.e. Commissioner (Appeals)].
Case 2: Whether your answer is different if the assessee appeals only part of the
amount say ` 3,00,000 is in dispute arising from the said order. 4
(ii) Considered in the example in 4 (a) (i) above, where Appellate Authority passed
the order against the assessee, if so how much Myra Ltd. has to pay as pre-
deposit of duty under Section 112(8) of the CGST Act, 2017 to entertain appeal
by the Goods and Services Tax Appellate Tribunal (GSTAT)? 4
(b) Mr. Yogesh is working in Infosys Company having office in Bengaluru. Infosys
Company is registered under GST. Mr. Yogesh purchased the ticket from Hyderabad
for transportation as passenger by Air from Hyderabad to Chennai. Mr. Yogesh
discloses the name of the organization and its registration number and the place
where the organization is registered. Supplier of service is located at Hyderabad. Find
the following:
(i) Place of supply of service and GST liability.
(ii) Whether your answer is different if Mr. Yogesh has not disclosed the name of
the organization and its registration number? 6
Answer:
4. (a) (i) Case 1: Pre-deposit is ` 50,000 (5,00,000 * 10%) is to deposit on or before 6th
October 2017.
Case 2: Disputed amount ` 3,00,000:

Pre-deposit is ` 2,00,000 plus ` 30,000 (`3,00,000 * 10%) together is ` 2,30,000. It
should be deposited on or before 6th October 2017
(ii) Case 1: Pre-deposit is ` 1,00,000 (5,00,000*20%). It is in addition to pre-deposit of `

50,000 made at first appeal stage.
Case 2: Disputed amount `3,00,000

Further Pre-deposit is ` 60,000 (`3,00,000 * 20%), This is in addition to pre-deposit of
` 30,000 + payment of undisputed tax of ` 2,00,000 towards the deposit i.e., `
2,30,000/- made at first appeal stage.
(b) (i) POS = Bengaluru (i.e. location of recipient of service)

GST = IGST is liable to pay by Air Travel Operator
(ii) POS =Hyderabad (i.e. Place where the passenger embarks on the continuous
journey)
GST =CGST & SGST is liable to pay by Air Travel Operator
5. (a) (i) What is form GSTR 3B? What are its features? Who is exempt from filing GSTR 3B? 6
(ii) Mr. X, a registered person in Mumbai has made outward supplies of taxable
goods as under:-
Mr. X has become liable for registration on 1st October, 2018. He was granted
registration on 1st January, 2019.
(I) Supplies made from 1st April, 2018 to 30th September, 2018 ` 19,50,000
(II) Supplies made from 1st October, to 31st December, 2018 ` 8,00,000
(III) Supplies made from 1st January, 2019 to 31st January, 2019 ` 2,00,000
The first return furnished by Mr. X is for the month of January, 2019. What is the
taxable turnover to be declared in the return filed for January, 2019? 2
(b) (i) M/s Fotoflash Ltd, is a registered person under GST in Mumbai being a dealer
dealing with second-hand goods. M/s Fotoflash Ltd. supplies a used camera to a
consumer in Chennai for selling price of ` 15,000. The used camera (i.e. second
hand) was purchased for ` 10,000 from a registered dealer in Mumbai, on which
CGST + SGST of ` 1,400 each was charged (i.e. GST rate applicable to cameras is
28%).
M/s Fotoflash Ltd. charged IGST 28% on inter- State supply.
Find the net GST liability in the following independent cases:
(I) If input tax credit is availed.
(II) If input tax credit is not availed. 4
(ii) Cotton Ltd. being a cloth merchant sold gift voucher to customer for ` 2,000 on
10th November to purchase specific cloth from its showroom. Goods actually
purchased by customer on 15th November for ` 2,400. Find the time of supply
and value of supply with regard to gift voucher in the hands of Cotton Ltd. 2
Answer:
5. (a) (i) 1. GSTR-3B is a monthly self-declaration that has to be filed by a registered

dealer from July, 2017 till March, 2018.
The features of GSTR – 3B are given below:
 A separate GSTR – 3B must be filed for each GSTIN
 Tax liability of GSTR – 3B must be paid by the last date of filing GSTR – 3B for
that month
 GSTR-3B cannot be revised
2. Every person who has registered for GST must file the return GSTR-3B including
nil returns. However, the following registrants do not have to file GSTR-3B:
 Input Service Distributors & Composition Dealers
 Suppliers of OIDAR
 Non-resident taxable person
(ii) As per section 40 of the CGST Act, 2017 every registered person who has made
outward supplies in the period between the date on which he become liable to
registration till the date on which registration has been granted shall declare the
same in the first return furnished by him after grant of registration.
Hence taxable turnover to be declared by Mr. X for January 2019 is (` 8,00,000 + `

2,00,000) = ` 10,00,000.
(b) (i) (I) Net GST liability in case of input tax credit availed:
Particulars Value ` 28% IGST `

Output supply 15,000 4,200
Less: ITC 10,000
CGST 14% (1,400)
SGST 14% (1,400)
Net GST liability 1,400
(II) Net GST liability in case of input tax credit not availed:
Particulars Value ` 28% IGST Remarks

`
Output supply 15,000
Less: purchase price 12,800 ITC will form part of cost.
Difference known as 2,200 616 Charge GST on the margin or profit
margin earned on the goods (` 2,200 *
28%)
(ii) Time of supply is at the time issue of voucher i.e. 10th November.
Value of supply = ` 2,000 for gift voucher.
6. (a) Hema Pesticides Pvt. Ltd., a registered person under the GST law, furnishes the
following data for the GST paid by them in the month of November, 2018:
Particulars Amount
(`)
GST on machinery purchased and used in the factory premises 92,000
GST on machinery purchased and sent directly to a job worker working 42,000
for the company
GST on car purchased (Used mostly for business purposes; 25% usage 2,10,000
estimated for personal use of the directors)
GST on raw materials purchased (Goods are received in lots/instalments 2,00,000
and 25% of the materials were received in February, 2018).
In the earlier month, GST has been paid on another lot, for which 90% 1,60,000
delivery had been completed then and in the current month, balance
materials were received. GST paid in the earlier month was
GST on health insurance premium paid for the employees working in the 24,000
factory. Providing this is optional and the company has taken out this
measure to improve the relations with the labourers.
You are required to determine the quantum of input tax credit available to the above
registered supplier for the given month. 7
(b) Write a brief note on Special Audit under Section 66 of the CGST Act, 2017. 7
Answer:
6. (a)
Particulars Amount
(`)
GST on machinery purchased and used in the factory premises 92,000
ITC allowable in full in respect of the same.

GST on machinery purchased and sent directly to a job worker working 42,000
for the company
ITC on capital goods directly sent to job worker's premises under challan
is allowed in terms of section 19(5) of CGST Act, 2017 read with rule 45(1)
of CGST Rules, 2017
GST on car purchased (Used mostly for business purposes; 25% usage Nil
estimated for personal use of the directors)
Car figures in the list of blocked assets for ITC and hence no ITC can be
availed.
GST on raw materials purchased (Goods are received in lots/ Nil
instalments and 25% of the materials were received in February, 2018).
Where the goods against an invoice are received in lots/

instalments, ITC is allowed upon receipt of the last lot/instalment vide first
proviso to section 16(2) of the CGST Act, 2017. ITC can be availed next
month only.
In the earlier month, GST has been paid on another lot, for which 90% 1,60,000
delivery had been completed then and in the current month, balance
materials were received. GST paid in the earlier month can now be
claimed as ITC, as per reverse logic of earlier para
GST on health insurance premium paid for the employees working in the Nil
factory. Providing this is optional and the company has taken out this
ITC of health insurance is blocked in the given case, since said services
are not notified by Government as obligatory for employer to provide to
its employees under any law - in terms of section 17(5)(b)(iii) of the CGST
Act, 2017.
(b) Special Audit [Section 66 of the CGST Act, 2017]:
 Special Audit the registered person can be directed to get his records including
books of account examined and audited by a Chartered Accountant or a Cost
Accountant during any stage of scrutiny, inquiry, investigation or any other

proceedings; depending upon the complexity of the case.
 Procedure: During the scrutiny, inquiry, investigation or any other proceedings of a

registered person, the Assistant Commissioner or any officer senior to him, having
regard to the nature and complexity of the case and the interest of revenue,
might be of the opinion that the value has not been correctly declared or the
credit availed is not within the normal limits.
In such cases, with the prior approval of the Commissioner, the Assistant
Commissioner or any officer senior to him can direct he registered person in FORM
GST ADT-03 to get his records including books of account examined and audited
by a specified chartered accountant or a cost accountant.
 The chartered accountant or a cost accountant will be nominated by the

Commissioner. The chartered accountant or cost accountant so nominated has
to submit a report of such audit within the period of ninety days, duly signed and
certified by him to the Assistant Commissioner.
 On an application made by the registered person or the chartered accountant

or cost accountant or for any material and sufficient reason, the Assistant
Commissioner can extend the said period by a further period of ninety days.
 The provisions of special audit shall have effect even if the accounts of the
registered person have been audited under any other provisions of the GST Act or
any other law for the time being in force.
 The registered person shall be given an opportunity of being heard in respect of

any material gathered on the basis of special audit and which is proposed to be
used in any proceedings against him under this Act or the rules made thereunder.
The expenses of the examination and audit of records, including the
remuneration of such chartered accountant or cost accountant, shall be
determined and paid by the Commissioner.
 On conclusion of the special audit, the registered person shall be informed of the
findings of the special audit in FORM GST ADT-04. Where the special audit results
in detection of tax not paid or short paid or erroneously refunded, or input tax
credit wrongly availed or utilised, the process of demand and recovery will be
initiated against the registered person.
7. (a) Radhakrishna, a registered person under GST, has furnished the following details for
the month of August, 2018:
Supply of goods made outside State 10,00,000
Inter-State purchases of goods 8,10,000
Goods taken for personal use in above 10,000
The IGST was paid on 10th October, 2018. Compute the interest payable for the
delayed payment. 7
Note: The IGST rate for the goods dealt with is 18%.
(b) M/s Xylo Ltd. being a dealer in new cars sold a Petrol Car on which applicable GST
rate is 28% and GST Cess rate is 1%. Transaction value is ` 5,00,000. Find the GST
liability. Can input credit be availed on Cess paid on inward supplies of the car by the
buyer if he is a car dealer? 7
Answer:
7. (a)
Computation of interest payable
Particulars `
IGST on Supply of goods made outside State (10,00,000 x 18%) 1,80,000
Less: Inter-State purchases of goods (8,00,000 x 18%) [ITC is not 1,44,000
available for goods taken for personal use]
Balance IGST payable by Radhakrishna ` 36,000
Due date for payment of IGST 20-09-2018
Actual date of payment 10-10-2018
Number of days of delay in making payment 20
Interest payable at 18% for delay (36,000X18%X20/365) r/off ` 355
(b)
Particulars `
Transaction Value 5,00,000
CGST 14% 70,000
(`5,00,000*14%)
SGST 14% 70,000
(`5,00,000*14%)
Cess 1% 5,000
(`5,00,000*l%)
Invoice price of the car 6,45,000
GST Liability (inclusive of cess = ` 1,45,000)
Yes, input credit can be availed on Cess paid on inward supplies if the buyer in turn is
a car dealer. However, credit of Cess paid can be utilized only towards payment of
Cess liability.
Section – B
(Customs duty and FTP)
8. Choose the most appropriate option from the following [Option to be given in capital
letters A, B C or D] and give brief reason/justification for your choice, the correct choice
or conclusion [1 mark for the correct choice and 1 mark for reason]: 2x3=6
(i) In the context of Indian Customs law, ICEGATE means

(A) Indian Customs Electronic Data Interchange Gateway
(B) Indian Customs Electronic Gateway
(C) Inter Continental Electronic Gateway
(ii) Transit of goods without payment of customs duty is governed by Section ____________
of the Customs Act, 1962.
(A) 51
(B) 52
(C) 53
(D) 55
(iii) The following is not a condition precedent for grant of duty drawback for re-export of
duty paid goods:
(A) The goods must be clearly identifiable.
(B) The goods should have been actually imported earlier and import duty paid
thereon.
(C) The goods are actually re-exported to any place outside India.
(D) Entire lot of goods imported earlier should be re-exported and no portion should
remain.
Answer:
8.
(i) A This term appears in Shipping Bill (Electronic Declaration) Regulations, 2011
and this is what the term means.
(ii) C Section 53 of the Customs Act, 1962 contains the provisions relating to transit of
certain goods without payment of customs duty.
(iii) D Section 74 of the Customs Act, 1962 contains the necessary conditions. (D)
does not figure therein.
9. Product 'Vertigo' was imported by Mr. Mrinal Sen by air from Singapore to Hyderabad.
The details of the import transaction are as under:
Particulars Euro
Price of 'Vertigo' at Singapore exporter's factory 7,500
Freight from factory of the exporter to load airport (Singapore airport) 300
Loading and handling charges at the local airport 200
Air freight from said airport to Hyderabad airport 1,350
Insurance charges 1,400
Purchase commission 200
Even though the bill of entry was presented on 20-9-2018, the aircraft, having been
diverted to another foreign airport due to technical reasons, landed at the Hyderabad
airport only on 21-9-2018.
The other details furnished by the importer are as under:
Particulars 20.09.2018 21.09.2018

Rate of basic customs duty 10% 12%
Exchange rate notified by CBEC per € ` 79 `80
Exchange rate prescribed by RBI per € ` 79.50 ` 80.50
Integrated tax leviable under Section 3(7) of the Customs Tariff 6% 12%
Act, 1975
Based on the above date, you are required to calculate the following:
(I) Assessable value of the product for the purpose of levying customs duty.
(II) Customs duty and tax payable. 12
Answer:
9.
Computation of Assessable Value, Customs Duty and Tax payable
Particulars Amount €
Ex-factory price of the goods at Singapore 7,500
Freight from factory of the exporter to load airport (airport in the 300
country of exporter)
Loading and handling charges at the Singapore airport 200
Freight from said airport to the airport of importation in India 1,350
(Hyderabad)
Total cost of transport, loading and handling charges associated with 1,850
the delivery of the imported goods to the place of importation
Add: Cost of transport, loading, unloading and handling charges 1,600
associated with the delivery of the imported goods to the place of
importation (restricted to 20% of FOB value i.e., 7,500 + 300 + 200 = 8,000 [Note 1]
Purchase commission is not to be included Nil
Insurance (actual) 1,400
[Where the actual insurance figure is known, the same has to be taken]
CIF for customs purpose 10,500
Landing charges at Hyderabad airport not to be added to the CIF value in view Nil
of the amendment in rule 10(2) of the CVR vide Notification No. 91/2017-Cm.
(NT) dated 26.09.2017.
Value for customs purpose 10,500
Exchange rate as per CBEC [Note 2] ` 80 per €
Amount (`)
Assessable value @ ` 80 per Euro 8,40,000
Add: Basic customs duty @ 12% [Note 3] 1,00,800
Add: Social Welfare Surcharge (10% on BCD) 10,080
Total 9,50,880
Add: IGST (12%) [Rounded off] [Note 4] 1,14,106
Value of Imported Goods 10,64,986
Total Custom Duty and Tax payable (` 1,00,800 + 10,080 + 1,14,106) ` 2,24,986
Notes:
1) In the case of goods imported by air, the cost of transport, loading, unloading and
handling charges associated with the delivery of the imported goods to the place of
importation shall not exceed 20% of the FOB value of the goods. [Fifth proviso to rule
10(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007
(CVR)].
2) Rate of exchange determined by CBEC is to be considered [Clause (a) of the explanation
to section 14 of the Customs Act, 1962].

3) Section 15 of the Customs Act, 1962 provides that rate of duty shall be the rate in force on
the date of presentation of bill of entry or the rate in force on the date of arrival of
aircraft, whichever is later.
4) Integrated tax is levied on the sum total of the assessable value of the imported
goods and customs duties [Section 3(8) of the Customs Tariff Act, 1962].
10. (a) Mr. Jayesh, an Indian Entrepreneur, went to China to explore new business
opportunities on 05-04-2017. The following details, regarding imports are submitted by
him with the Customs authorities on return to India on 20-02-2018.
(i) 2 Music systems each worth ` 23,000
(ii) Jewellery brought by Mr. Jayesh worth ` 49,000 (18 Grams)
Write a brief note on his eligibility with regard to duty free baggage allowances as
per the Baggage Rules, 2016. 6
(b) Enumerate what are the eligible projects for the purpose of 'project imports' at
concessional rate of Customs Duty under Customs Tariff. 6
Answer:
10. (a)
Particulars `
Music system 23000*2 46,000
Add: Jewellery 49,000
95,000
Less: GFA 50,000
Dutiable goods 45,000
Total duty payable is `17,325 (i.e. 45,000 * 38.50%)
Note: Since, Mr. Jayesh stay abroad does not exceeds one year, he will not be
eligible for additional jewellery allowance under rule 5 of the Baggage Rules, 2016.
(b) Project Imports:

This concept has been introduced by the Government under the heading 9801 of
the Customs Tariff to cover all machinery, instruments apparatus and appliances,
components or raw materials for initial setting up or expansion of existing units for the
purpose of following eligible projects:
 Industrial plant,
 Irrigation project,
 Power project,
 Mining project,
 Oil & other mineral exploration project
 Other projects as notified by the Central Government. The spare parts of
machinery and raw material etc can be imported upto 10% of value of good.
These above are eligible projects for import at concessional rate of Customs duty.
11. (a) Calculate the amount of duty drawback allowable under Section 74 of the Customs
Act, 1962 in following cases:
(i) Suresh imported a motor car for his personal use and paid ` 5,00,000 as import
duty. The car is re-exported after 6 months and 20 days.
(ii) Nikita imported wearing apparel and paid ` 50,000 as import duty. As she did not
like the apparel, these are re-exported after 20 days.
(iii) High Tech Ltd. imported 10 computer system paying customs duty of ` 50 lakh.
Due to some technical problems, the computer systems were returned to foreign
supplier after 2 months without using them at all. 6
(b) What is meant by High Seas Sales? What are the benefits of High Sea Sales
Transactions? 6
Answer:
11. (a) (i) The amount of duty drawback is ` 4,40,000 (i.e. ` 5,00,000 @ 88%), since these
goods are used in India.
(ii) Duty drawback is ` Nil, assumed that wearing apparels are re-exported after
being used.
(iii) Duty drawback is ` 49,00,000 (i.e. 50,00,000*98%). Since these good are re-
exported without being used.
(b) High Sea Sale Transaction means Sale Transaction done when goods are actually at
High Sea i.e. during sea transit between Port of Loading and Port of Discharge. The
date of transaction (agreement) should be between Bill of lading date and Vessel
arrival date at Port of discharge. High Sea Sale is done mostly by Traders, sole
Indenting Agent (of the Foreign Supplier) who buys in large quantity and then look
out for buyers at Destination Country.
Benefit of High Sea Sale Transaction are like

(i) Goods are available at short time to final buyers,
(ii) Also instead of buying entire shipment small quantities also can be bought for final
buyers and
(iii) First buyer can buy large quantity of goods at cheap/ reasonable price and sell
at best price to final buyers.
Suggested Answers_Syl2016_Deccember2019_Paper 18
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

DECEMBER - 2019
Section – A
1. Choose the correct answer with justification/workings wherever applicable: 2×7=14
(i) The term ‘casual taxable person’ includes

(A) A person occasionally supplying goods or services or both in a State or an Union
Territory where he has no fixed place of business.
(B) A person occasionally supplying goods or services or both in a State or an Union Territory
where he has fixed place of business.
(C) Both (A) and (B)
(ii) Mahesh is employed in Zed Traders a proprietary concern of Kumar having taxable
turnover under GST. Services provided by Mahesh will be taxable if
(A) Mahesh provides them on contract basis to Zed Traders.
(B) Mahesh provides them on regular basis to Zed Traders.
(C) Mahesh provides them to the brother of Kumar, not in the course of employment.
(iii) What would be the tax rate applicable in case of composite supply?
(A) Tax rate as applicable on principal supply.
(B) Tax rate as applicable on ancillary supply.
(C) Tax rate as applicable on respective supply.
(D) Tax rate of the principle supply or ancillary supply whichever is higher
(iv) What are the supplies on which reverse charge mechanism would apply?
(A) Notified categories of goods or services or both under Section 9(3).
(B) Inward supply of goods or services or both from an unregistered dealer under
9(4).
(C) Both of (A) and (B).
(v) Which one of the following is exempted from GST?

(A) Any business exhibition
(B) A business exhibition in India
(C) A business exhibition outside India
(vi) What is date of receipt of payment?

(A) Date of entry in the books
(B) Date of payment credited into bank account
(C) Earlier of (A) and (B)
(D) Date of filing of return
(vii)Time limit to pay the value of supply with taxes to avail the input tax credit is
(A) Three months
(B) Six months
(C) One hundred and eighty days
(D) Till the date of filing annual return or 30th September of following year whichever is
earlier.
Answer:
1.
(i) (A) A person occasionally supplying goods or services or both in a State or an
Union territory where he has no fixed place of business.
(ii) (C) Mahesh provides them to the brother of Kumar, not in the course of
employment. Supply includes services provided by the employees to the
employer, not in the course of employment.
(iii) (A) Tax rate as applicable to principal supply
(iv) (A) Notified categories of goods or services or both under Section 9(3) as section
9(4) has been deferred presently
(v) (C) A business exhibition outside India
(vi) (C) Earlier of (a) and (b)
(vii) (C) One hundred and eighty days from the date of issue of invoice by supplier
2. In the following cases based on information given and the query, give your comments on
the taxability under GST and the rate of GST applicable, if any: 2×7=14
(i) Space Bazar offers a free bucket with detergent purchased. It is composite supply or
mixed supply? Assume rate of GST for detergent @ 28% and bucket @ 18%.
(ii) Mr. A booked a Rajdhani train ticket, which includes meal. It is composite supply or
mixed supply?
(iii) Mr. Ravi being a dealer in laptops, sold a laptop bag along with the laptop to a
customer, for Rs. 55,000. CGST and SGST for laptop @ 18% and for laptop bag @ 28%.
What would be the rate of tax leviable? Also find the GST liability.
(iv) Renting of vacant land to a stud farm for Rs. 1,50,000. Is it a supply of service? Will GST
be leviable?
(v) A contract awarded by Kolkata Municipal Corporation (KMC) for repair of a particular
road to M/s B Ltd., with terms and conditions that the entire work should be
completed within 30 days. However, there is a delay of 10 days to complete the work.
KMC charged liquidated damaged of Rs. 1,20,000 and the same recovered from M/s
B Ltd. Applicable rate of CGST 9% and SGST 9%. Previous year turnover of M/s B Ltd.
Rs. 2 crores.
Find the following:
(a) Who is liable to pay GST on what amount?
(b) Total tax liability if any.
(vi) M/s X Ltd. paid penalty under section 49 of the CGST act, 2017, Rs. 2,00,000 to the
Department in the month of October, 2018. Is it taxable under the GST law?
(vii)M/s M & Co. a sole proprietor, is in the business of selling furniture. Its owner took a set
of furniture of furnish his house permanently. Will the transaction be a supply in terms
of GST Act?
Note : ITC on such furniture not availed.
Answer:
2.
(i) This is a mixed supply. These items can be sold separately. Product which has the
higher rate, will apply on the whole mixed bundle. i.e., 28%.
(ii) It is a bundle of supplies. It is composite supply where the products cannot be
sold separately. The transportation of passenger is, therefore, the principal
supply. Rate of tax applicable to the principal supply will be charged to the
whole composite bundle. Therefore, rate of GST applicable to transportation of
passengers by rail will be charged by IRCTC on the booking of Rajdhani ticket.
(iii) If the laptop bag is supplied along with the laptop in the ordinary course of
business, the principal supply is that of the laptop and the bag is an ancillary.
Therefore, it is a composite supply and the rate of tax would be that at
applicable to the laptop. Hence, applicable rate of GST 18% on Rs. 55,000.CGST
is Rs. 4,950 and SGST is Rs. 4,950.
(iv) It is supply of service. GST is liable to be paid.
(v) In the ordinary course it is a supply of service.
However, non performance of contract by the supplier of service in case of
supplies to Government, local authority is covered under exemption.
The fine or penalty chargeable by Government or local authority imposed for
violation of statute, bye-laws, rules or regulations or contract are not leviable to
GST. Hence no liability to GST and no tax liability.
(vi) Such payment is not a supply of service. The fine or penalty chargeable by
Government or local authority imposed for violation of statute, bye-laws, rules or
regulations are not leviable to GST. The penalty of Rs. 2,00,000 is not taxable
under GST law.
(vii) No, the transfer of the furniture by the owner without consideration is not a
supply of goods, because credit is not allowed in case of personal consumption
of business assets under sec 17(5)(g) of CGST Act, and ITC on such furniture is not
availed.
3. (a) Mr. Lakshminarayanan is a registered supplier in the State of Orissa under the regular
scheme. Following are the details of transaction entered into by him during the half
year ended on 31st March, 2019:
Intra-State supplies of product ‘Sun’ (GST rate 12%) 30,00,000
Intra-State supplies of product ‘Moon’ (GST payable by the recipient 10,00,000
under reverse charge)
Export of product ‘Sun’ with payment of GST 5,00,000
Legal services received from an advocate for Product ‘Sun’ 2,00,000
Common inputs used for supplies of above (GST rate 12%) 25,00,000
You are required to determine the net GST liability for the above tax period.
All amounts given above are excluding GST wherever applicable. GST rate on
services is 18%, all conditions for availing the ITC have been complied with. Turnover
during the earlier financial year was Rs. 35 lakhs. 7
(b) Mr. Muktinath, a service provider registered under GST law under the regular scheme,
at Bengaluru (Karnataka), provided taxable service to one of his clients LMN Co. Ltd.,
registered at Mumbai (Maharashtra). The provision of service was completed on
10.09.2018 and credit for payment received was made in the books of Mr. Muktinath
on 11/09/2018.
With effect from 16.09.2018, applicable GST rate was raised from 5% to 12%. The
payment for the service provided was credited in Mr. Muktinath’s bank account on
18.09.2018, and invoice for the same was raised on 23.09.2018.
Mr. Muktinath is of the view that he is liable to pay IGST @ 5% only. However, the
Department took the view that he is liable to pay IGST @ 12%.
Examine the correctness of the rival contentions.
Will your answer be different in the above case if the payment was credited to the
bank account on 14.09.2018 instead of 17.08.2018?
Note: You may assume that all days are working days 7
Answer:
3. (a)
Computation of GST liability
Particulars Amount
(Rs.)
GST on outward supply (Note 1) 3,60,000
GST payable on legal services under reverse charge (Note 3) 36,000
Common credit relating to exempt supply Nil
Total GST liability 3,96,000
Less: ITC (Note 2) (3,00,000 - 66,667) = 2,33,333 2,33,333
Balance GST liability 1,62,667
Note 1: Computation of GST on outward supply

Particulars Value (Rs.) GST (Rs.)
Intra-State supplies of product “Sun” (GST rate 12%) 30,00,000 3,60,000
Intra-State supplies of product “Moon” (GST payable by 10,00,000 Nil
the recipient under reverse charge)
Export of product “Sun” with payment of GST (export is a 5,00,000 Nil
zero-rated supply)
Total 45,00,000 3,60,000
Note 2: Computation of ITC

Particulars Value (Rs.)
GST on inward supply (Rs. 25,00,000 × 12%) 3,00,000
GST payable on legal services under reverse charge, see note 3 below* Nil
Total ITC as per Electronic credit Ledger 3,00,000
Less: Common credit relating to exempt supply = Rs. 3,00,000 × Rs. 66,667
10,00,000 ÷ Rs. 45,00,000
[Exempt turnover : Rs. 10,00,000; total turnover Rs. 45,00,000]
ITC available 2,33,333
Note 3:
Tax on legal services provided by an advocate to an individual (Mr.
Lakshminarayanan is an individual) is exempted vide entry 45(b) of Notification No.
12/2017. However assuming that the turnover of the entity exceeds the turnover limit
for tax audit, GST under reverse charge would be applicable. In such case the tax
liability on Rs. 200000 will be Rs. 36,000. Same is added to tax liability. The next month
this amount can be claimed as ITC
Alternate answer: If credit for ITC is claimed for GST paid under RCM on advocate
fees of Rs. 36,000 the same will be allowable upto (Rs. 36,000 × 35 lakh / 45 lakhs. = Rs.
28,000. Hence GST net of further ITC of Rs. 28,000 will be Rs. 1,62,667 – Rs. 28,000 = Rs.
1,34,667
(b)
Change in GST rate
As per section 14 of the CGST Act, 2017, in case of change in rate of tax, date of
receipt of payment is earlier of:
(i) Date of entering payment in the books of account of the supplier (11.09.2018),
or
(ii) Date on which the payment is credited to his bank account (18.09.2018).
However, if the payment is credited in the bank account after 4 working days from
the date of change in the rate of tax, the date of receipt of payment will be the
date of credit in the bank account.
In the given case, since the payment has been credited in the bank within 4
working days from the date of change in the rate of tax, the date of receipt of
payment will be 11.09.2018 [i.e., earlier of 11.09.2018 or 18.09.2018].
Section 14 further provides that where goods and /or services have been supplied
before the change in rate of tax (10.09.2018) and the payment has been received
before the change in rate of tax (11.09.2018), but the invoice for the same is issued
after the change in rate of tax (23.09.2018), the time of supply shall be the date of
receipt of payment.
Therefore, in the given case, the time of supply will be 11.09.2018 and the
applicable rate of tax will be rate prevalent at the time of supply, i.e., IGST @ 5%.
Therefore, the contention of Muktinath is correct. Department’s view is not tenable
in law.
Further, if the date on which the payment is credited to bank account of supplier is
14.09.2018, the date of receipt of payment will continue to be 11.09.2018 [i.e.,
earlier of 11.09.2018 or 14.09.2018] since the payment is credited in the bank
account before change in applicable rate of tax.
Consequently, with other things remaining the same, the time of supply and the
applicable rate of tax will remain the same.
4. Mudra Dancers Pvt. Ltd., owned by Mrs. Anjali, a famous Bharata Natyam dancer,
wishes to organize a ‘Anjali Dance Concert’ in Faridabad (Haryana). Mudra Dancers
Pvt. Ltd. is registered in Amritsar, Punjab. It enters into a contract with an event
management company, Saipriya (P) Ltd. (registered in Delhi) for organizing the said
dance concert at an agreed consideration of Rs. 12,00,000.
Saipriya (P) Ltd. books the lawns of Hotel Dream Palace, Faridabad (registered in
Haryana) for holding the dance concert, for a lump sum consideration of Rs. 5,00,000.
Mudra Dancers Pvt. Ltd. fixes the entry fee to the dance vent at Rs. 5,000. 500 tickets
for ‘Anjali Dance Concert’ are sold.
You are required to identify the different supplies which are involved and to
determine the CGST and SGST or IGST liability, as the case may be, in respect of all
the supplies involved in the outlined situation.
Will your answer be different, if the entry ticket is priced at Rs. 475 per person?
Rates may be taken as SGST 9%, CGST 9% and IGST 18%. 14
Answer:
4.
Particulars
In the given problem, three supplies are involved:
(i) Services provided by Mudra Dancers Pvt. Ltd. to audiences by way of admission to
dance event.
(ii) Services provided by Saipriya (p) Ltd. to Mudra Dancers Pvt. Ltd. by way of
organizing the dance event.
(iii) Service provided by Hotel Dream Palace to Saipriya (p) Ltd. by way of
accommodation in the Hotel lawns for organizing the dance concert.
The CGST and SGST or IGST liability in respect of each of the above supplies is
determined as under:
(i) As per the provisions of section 12(6) of the IGST Act, 2017, the place of supply of
services provided by way of admission to, inter alia, a cultural event shall be the
place where the event is actually held.
Therefore, the place of supply of services supplied by Mudra Dancers Pvt. Ltd. to
audiences by way of admission to the dance concert is the location of the Hotel
Dream Palace, i.e. Faridabad, Haryana.
Since the location of the supplier (Amristar, Punjab) and the place of supply
(Faridabad, Haryana) are in different States, IGST will be leviable.
Therefore, IGST leviable will be computed as follows:
Consideration for supply (500 tickets @ Rs. 5,000 per ticket) = Rs. 25,00,000
IGST @ 18% on value of supply = Rs. 25,00,000 × 18% = Rs. 4,50,000
(ii) Section 12(7)(a)(i) of IGST Act, 2017 stipulates that the place of supply of services
provided by way of organization of, inter alia, a cultural event to a registered person is
the location of such person.
Therefore, the place of supply of services supplied by Saipriya (P) Ltd. to Mudra
Dancers Pvt. Ltd. (Amristar, Punjab) by way of organizing the dance concert is the
location of the recipient, i.e., Amristar (Punjab).
Since the location of the supplier (Delhi) and the place of supply (Amristar, Punjab) are
in different States, IGST will be leviable.
Consideration for supply = Rs. 12,00,000.
IGST @ 18% on value of supply = Rs. 12,00,000 × 18% = Rs. 2,16,000
(iii) As per the provisions of section 12(3)(c) of the IGST Act, 2017, the place of supply of
services, by way of accommodation in any immovable property for organizing, inter
alia, any cultural function shall be the location at which the immovable property is
located
Therefore, the place of supply of services supplied by Hotel Dream Palace (Faridabad,
Haryana) to Saipriya (P) Ltd. by way of accommodation in any immovable property
for organizing is located at Faridabad, Haryana.
Since the location of the supplier (Faridabad, Haryana) and the place of supply
(Faridabad, Haryana) are in the same State, CGST and SGST will be leviable
Therefore, CGST and SGST leviable will be computed as follows:
Consideration for supply = Rs. 5,00,000
CGST @ 9% on value of supply = Rs. 5,00,000 × 9% = Rs. 45,000
SGST @ 9% on value of supply = Rs. 5,00,000 × 9% = Rs. 45,000
Where the price per entry ticket is Rs. 475.
If the price for the entry ticket for the dance event is fixed at Rs. 475, answer will
change.
In respect of supply of service provided by way of admission to music concert, as
mentioned in point (i) above, There will be no IGST liability if the consideration for the
ticket is Rs. 475, as the inter-State services by way of right to admission to, inter alia,
musical performance are exempt from IGST vide Notification No. 9/2017 IT (R) dated
28.06.2017, if the consideration for right to admission to the event is not more than Rs.
500 per person.
There will be no change in the answer in respect of other supplies mentioned in points
(ii) and (iii) above.
There will be no change in the answer in respect of other supplies as mentioned in
point (ii) and (iii) above.
5. (a) Specify any three types of returns which are at present required to be filed under GST,
what the returns are for, their frequency and the due date. (not for composition
scheme) 7
(b) Asha Ltd. supplies raw material to a job worker Kareena Ltd. After completing the job-
work, the finished product of 5,000 packets are returned to Asha Ltd. putting the retail
sale price as Rs. 20 on each packet. The product in the packet is covered under MRP
provisions. Determine the transaction value in the hands of Kareena Ltd. under GST
law from the following details: 7
Particulars Value in Rs.
Cost of raw material supplied 30,000
Job worker’s charges including profit 10,000
Transportation charges for sending the raw material to the job worker 3,000
Transportation charges for returning the finished packets to Asha Ltd. 4,500
Asha Ltd. paid certain technology transfer fees to ‘Reena Ltd.’, so that 22,500
‘Kareena Ltd.’ can use the said technology in the given job-work
operation.
Note: Kareena Ltd. offered discount Rs. 2,000, provided full payment is made at the
time of rising invoice and the same is mentioned in the invoice. Asha Ltd. made full
payment at the time of issue of invoice.
Answer:
5. (a) Following table lists the three types of returns currently being filed under GST Law:
Return Particulars Frequency Due Date
Form
GSTR – Details of outward supplies of taxable goods Monthly 10th of the
1 and / or services effected (Section 37 of the next month
CGST Act, 2017).
GSTR – Simple return for Jul 2017 – mar 2018, and Monthly 20th of the
3B thereafter till date next month
GSTR – Annual Return (section 44 of the CGST Act, Annually 31st
9 2017) December of
(a) Who Files: Registered Person other than next financial
an ISD, TDS/TCS Taxpayer, Casual year
Taxable person and Non-resident
Taxpayer.
(b) In this return, the taxpayer needs to
furnish details of expenditure and details
of income for the entire Financial Year.
GSTR – Return for a Non-resident taxable person Monthly 20th of the
5 next month
GSTR – Return for an Input Service Distributor Monthly 13th of the
6 next month
GSTR – Return for authorities deducting tax at Monthly 10th of the
7 source next month
GSTR – Details of supplies effected through e- Monthly 10th of the

8 commerce operator and the amount of tax next month
collected
GSTR – Final Return Once, when Within three
10 GST months of the
Registration is date of
cancelled or cancellation or
surrendered date of
cancellation
order,
whichever is
later.
GSTR- Details of inward supplies to be furnished by Monthly 28the of the
11 a person having UIN and claiming a refund month following
the month for
which
statement is
filed
(b) Statement showing transaction value of Kareena Ltd.

Particulars Value in Rs.
Cost of raw material supplied Exempted
Supply
Job worker’s charges including profit 10,000
Transportation charges for sending the raw material to the job Exempted
worker Supply
Transportation charges for returning the finished packets to Asha 4,500
Ltd. [Sec. 15(2)(b) of the CGST Act, 2017]
Technology fee [Sec. 15(2)(b) of the CGST Act, 2017] 22,500
Sub-total 37,000
Less: Discount [Sec. 15(3) of CGST Act, 2017] (2,000)
Transaction value (i.e., sole consideration) 35,000
Note: It is very clear that principal to job worker and job worker to principal cannot
be treated as supply as per section 143 of the CGST Act, 2017.
6. (a) Best Ltd. is operating in two states Andhra Pradesh and Tamil Nadu. The tax liability for
the month of July, 2018 is as follows:
Sl. No. Tax Liability Andhra Pradesh (Rs.) Tamil Nadu (Rs.)
1. Output CGST Payable 25,000 10,000
2. Output SGST Payable 10,000 5,000
3. Output IGST Payable 3,000 2,500
4. Input CGST 8,000 13,000
5. Input SGST 15,000 1,500
6. Input IGST 12,000 16,000
Calculate the tax payable for the month of July, 2018. 8
(b) (i) M/s Ace Ltd. is a registered person under GST law and purchased 10 cars for Rs.
45 lakhs plus 28% GST. M/s Ace Ltd. sold 8 cars for Rs. 55 lakh plus 28% GST.
Find the GST liability in the following two independent cases:
(A) M/s Ace Ltd. is a dealer of motor vehicles
(B) M/s Ace Ltd. is not a dealer of motor vehicles 3
(ii) M/s Expert Driving School Pvt. Ltd. supplied taxable services in the month of
October, 2017 for Rs. 15 lakh (plus GST 18%) to provide training on driving.
Company purchased two vehicles for this purpose namely passenger vehicle for
Rs. 20 lakh plus GST 28% and goods vehicle for Rs. 33 lakh plus GST 28%. Find the
net GST liability/ITC, of M/s Expert Driving School Pvt. Ltd. 3
Answer:
6. (a) Net tax payable for the month of July 2018 is as follows –
Particulars Andhra Pradesh Tamil Nadu

CGST SGST IGST CGST SGST IGST
Output tax 25,000 10,000 3,000 10,000 5,000 2,500
Input credit available for setoff 8,000 15,000 12,000 13,000 1,500 16,000
Input credit adjusted 8,000 10,000 3,000 10,000 1,500 2,500
Tax payable after setting off ITC 17,000 --- --- --- 3,500 ---
Input Tax available for further --- 5,000 9,000 3,000 --- 13,500
set-off
Inter adjustment of ITC 9,000 --- (9,000) --- 3,500 (3,500)
(Note – 1)
Net Tax payable in cash 8,000 --- --- --- --- ---
Input credit carry forwarded to --- 5,000 --- 3,000 --- 10,000
next month
Notes:
1. IGST Input tax credit can be adjusted against Output tax of liability of IGST, CGST,
SGST, UTGST (set off can be done in same Order)
2. SGST Input tax credit cannot be adjusted against output CGST & Vice-Versa
3. CGST & SGST Input tax credit of one State cannot be adjusted against Output
CGST & SGST of other State (same principle is applicable to IGST credit also)
(b) (i) Statement showing net GST liability of M/s Ace Ltd.
Particulars M/s Ace Ltd. is a M/s Ace Ltd. is not Remarks
dealer in motor a dealer in motor
vehicles Rs. in lakh vehicles Rs. in lakh
GST on Supply of 15.40 15.40 Rs. 55 lakh × 28%
goods
Less: ITC (12.60) Not allowed Rs. 45 lakhs × 28%
Net GST Liability 2.80 15.40
(ii)
GST on output supply Rs. 2,70,000 (Rs. 15,00,000 @ 18%)
Less: ITC
On passenger vehicle Rs. (5,60,000) (Rs. 20,00,000 @ 28%)
On goods vehicle Rs. (9,24,000) (Rs. 33,00,000 @ 28%)
Net Excess ITC c/d Rs. 12,14,000
7. (a) Mr. Shankar is running a fancy stores and is also having a consulting firm, registered
under the same PAN. During the earlier year, the turnover was Rs. 150 lakhs in the
grocery stores and receipts in the consulting firm was Rs. 9 lakh. In the light of these
facts, answer the following (having regard to the legal provision prevailing in April, 2019):
(i) Examine whether Mr. Shankar eligible to opt for Composition Scheme under CGST
Act.
(ii) Can he opt for the Composition Scheme in respect of the grocery store alone,
though he has the consulting firm also, in addition to the store? 2+3=5
(b) Mr. Nakul, a manufacturer of pesticides registered under the GST law, provides to you
the following information pertaining to the GST paid by him in the month of January,
2019:
GST on machinery purchased and sent directly to a job worker 1,20,000
GST on car purchased, exclusively used for business purchases 1,92,000
GST on raw materials purchased (Goods are received in lots/ 5,50,000
installments and 25% of the materials were received in February, 2019)
GST on Medical insurance premium paid for the employees working in 96,000
the factory. Providing this is optional and Mr. Nakul has taken out this
Compute the quantum of input tax credit available to Mr. Nakul for the given month,
adducing detailed note for treatment of each item. 9
Answer:
7. (a)
Eligibility to opt for Composition Scheme
(i) No. Shankar is not eligible for Composition Scheme.
The reason is that the turnover in the earlier year was in excess of Rs. 150 lakhs.
Note: W.e.f. 01.02.2019, other services, with restaurant & catering services, also
eligible vide CGST (Amendment) Act, 2018 for composition scheme, subject to 10%
of turnover in a State or Union Territory in preceding financial year or 5,00,000
whichever is higher.
(ii) No, it is not possible for Mr. Shankar no opt for Composition Scheme, for the
grocery store alone.
All the registrations under the same PAN have to opt for composition scheme in
terms of proviso to section 10(2) of the CGST Act, 2017.
(b) Computation of input tax credit

GST on machinery purchased and sent directly to a job worker 1,20,000
ITC on capital goods directly sent to job worker’s premises under

challan is allowed in terms of section 19(5) of CGST Act, 2017, read
with rule 45(1) of CGST Rules, 2017
GST on car purchased, exclusively used for business purchases Nil
Car figures in the list of blocked assets for ITC and hence no ITC can
be availed.
GST on raw materials purchased (25% of the materials are yet to be Nil
received)
Where the goods against an invoice are received in lots/instalments,

ITC is allowed upon receipt of the last lot/instalment vide first proviso
to section 16(2) of the CGST Act, 2017. ITC can be availed next
month only.
GST on Medical insurance premium paid for the employees working Nil
in the factory
ITC of health insurance is blocked in the given case, since said

services are not notified by Government as obligatory for employer
to provide to its employees under any law – in terms of section
17(5)(b)(iii) of the CGST Act, 2017.
Total ITC available 1,20,000
Section – B
(Customs Duty and FTP)
8. Choose the most appropriate option for the following [Option to be given in capital letters
A, B, C or D] and give brief reason/justification for your choice or conclusion [1 mark for the
correct choice and 1 mark for reason] : 2×3=6
(i) Determine the correct combination:

Sl. No. Event Sl. No. Effect on customs duty
1 Foods damaged 1 Remission of duty
2 Goods pilfered 2 Abatement of duty
3 Goods destroyed 3 Not liable to pay duty
(A) 1 and 2, 2 and 3, 3 and 1

(B) 1 and 3, 2 and 3, 3 and 2
(C) 1 and 2, 2 and 1, 3 and 3
(D) 1 and 1, 2 and 3, 3 and 2
(ii) Two sets of sales were effected by Boomerang Ltd. First set 1000 units at Rs. 190 and
second set 900 units at Rs. 200. In terms of rule 7 (Deductive Value) of the Customs
Valuation (Determination of Value of Imported Goods) Rules, 2007, the unit price in
greatest aggregate quantity determined will be
(A) Rs. 200
(B) Rs. 190
(C) Rs. 195
(D) More data is required
(iii) As per the Customs Tariff Act, 1975, the following is not considered to be a way that
constitute circumvention of antidumping duty imposed on an article which may warrant
action by the Central Government:
(A) Altering the description or name or composition of the article subject to imposition
of such anti-dumping duty
(B) Changing the country of its origin or export
(C) Import of such article in an unassembled or disassembled form
(D) Procuring the goods through an Indian subsidiary which is a SEZ unit.
Answer:
8.
(i) A When imported goods are damaged, there will be abatement of customs duty.
In respect of pilfered goods, customs duty is not payable and when goods are
destroyed, there will be remission of duty.
(ii) B The greatest number of units sold at a particular price is 1,000 units. Therefore,
the unit price in the greatest aggregate quantity is Rs. 190.
(iii) D The first three are specifically covered by section 9A(1A) of the Customs Tariff
Act, 1975. Import by a SEZ unit will not attract any anti-dumping duty.
9. (a) A commodity is imported into India from a country covered by a notification issued
by the Central Government under section 9A of the Customs Tariff Act, 1975.
Following particulars are made available:
CIF value of the consignment: US$ 25,000
Quantity imported: 500 kgs
Exchange rate applicable: Rs. 60 = US $ 1
Basic customs duty: 12%
Social Welfare Surcharge @ 10%
As per the notification, the anti-dumping duty will be equal to the difference between
the cost of commodity calculated @ US $ 70 per kg. and the landed value of the
commodity as imported.
Appraise the liability on account of normal duties, cess and the anti-dumping duty.
Assume that only ‘Basic customs duty” (BCD) and education and secondary and
higher education cess are payable. IGST @ 12% is also applicable.
Calculate the Customs Duty Payable. 8
(b) M/s Globe Ltd. (assessee) imported certain goods at US $ 20 per unit from an exporter
who was holding 30% equity in the share capital of the importer company.
Subsequently, the assessee entered into an agreement with the same exporter to
import the said goods in bulk at US$ 14 per unit. When imports at the reduced price
were effected pursuant to this agreement, the Department rejected the transaction
value stating that the price was influenced by the relationship and completed the
assessment on the basis of transaction value of the earlier imports i.e., at US$ 20 per
unit under rule 4 of the Customs Valuation (Determination of Value of Imported
Goods) Rules, 2007, viz transaction value of identical goods. State briefly, whether the
Department’s action sustainable in law, with reference to decided cases, if any. 4
Answer:
9. (a)
Particulars US $
CIF Value 25,000
Value in Rs.
Assessable value (i.e., 25,000 × Rs. 60) 15,00,000
Add: Customs duty 13.2% on Assessable value (12% + 10% on 12%) 1,98,000
Landed value (or value of imported goods) 16,98,000
Anti-dumping duty (21,00,000 – 16,98,000) 4,02,000
Market value of imported goods (500 kgs × Rs. 60 × US $ 70) = 21,00,000
Open Market Value 21,00,000
Add: IGST @ 12% on Rs. 21,00,000 2,52,000
Total 23,52,000
Total customs duty payable is Rs. 8,52,000 (i.e. 1,98,000 + 4,02,000 + 2,52,000)
Note: In case where imported goods are liable to Anti-Dumping Duty or Safeguard
Duty, calculation of Anti – Dumping Duty or Safeguard duty would be as per the
respective notification issued for levy of such duty. It is also clarified that value for
calculation of IGST as well as Compensation Cess shall also include Anti-Dumping
Duty amount and Safeguard duty amount.
(b) As per Rule 2(2) of the Customs Valuation (Determination of Value of Imported
Goods) Rules, 2007 persons shall be deemed to be related if any person directly or
indirectly owns, controls or holds 5% or more of the outstanding voting stock or shares
or both of them.
In the instant case, the exporter co. held 30% equity share capital of the importer co.
So, it can be said that the two parties are related.
The fact that the assessee had made bulk imports could be a reason for reduction of
import price. But here, as the importer co. has already purchased the same goods
from the exporter co. @ US$ 20 p.u., this price is to be considered as the Assessable
value of the said import.
Therefore, the Department’s action is tenable in law.
10. (a) An importer imported some goods. Entry inwards granted to the vessel on 7 th
February, and the goods were cleared from Chennai port for warehousing on 8 th
February, after assessment. The Bill of Entry was presented on 1 st February for
warehousing. Assessable value was US$ 10,000. Assume that no additional duty is
payable. The goods were warehoused at Chennai and were cleared from Chennai
warehouse on 4th march. What is the duty payable while removing the goods from
Chennai warehouse on 4 th March? Exchange rates and rate of Customs Duties are as
follows: 6
Particulars Date Exchange rate Basic Customs

declared by the CBE&C Duty
Date of submission of bill of 1st Rs. 55/USD 10%
entry for warehousing February
Date of entry inwards 7th Rs. 59/USD 15%
granted to the vessel February
Date of clearance of goods 4th Rs. 60/USD 12%
from warehouse by March
submission of bill of entry
(b) Compare between ‘Rules’ and ‘Regulations’ under the Customs Act, 1962. Bring out the
differences and similarities, if any. 6
Answer:
10. (a) Relevant rate of duty - date of submission of sub-bill of entry
Relevant exchange rate - date of submission of into bond bill of entry
Total customs duty will be

Basic Customs Duty = Rs. 66,000
+ SWS @ 10% on BCD = Rs. 6,000 (Rs. 66,000 × 10%)
Total customs duty = Rs. 72,600
[w.e.f. 02.02.2018, all goods are exempt from EC and SHEC]
The term ‘CBEC’ has been changed as ‘CBIC’
(b) Difference between the Rules and Regulations

Rules Regulations
(1) Issued by the Government of India (1) Issued by the CBIC
(2) Rules have to be approved by the (2) Regulations do not need to be
Parliament approved by the Parliament
(3) Has statutory force (3) Has statutory force
(4) Power to make rules under Section (4) Power to make regulations as per
156 of Customs Act Section 157 of Customs Act
11. (a) X Ltd. exported following goods to USA. Discuss whether any duty drawback is
admissible under section 75 of the Customs Act, 1962. 8
Product FOB Value of Exported goods Market price of goods Duty drawback rate
A 2,50,000 1,80,000 30% of FOB
B 1,00,000 50,000 0.75% of FOB
C 8,00,000 8,50,000 3.50% of FOB
D 2,000 2,100 1.50% of FOB
Note: Imported value of product C is Rs. 9,50,000.
(b) Mr. Gopal, an Indian entrepreneur, went to London to explore new business
opportunities on 01.04.2018. His wife also joined him in London on 01.12.2018. The
following details are submitted by them with the Customs authorities on their return to
India on 30.04.2019.
(i) Used personal effects worth Rs. 95,000
(ii) A music system worth Rs. 34,000
(iii) The jewellery brought by Mr. Gopal for Rs. 44,000 and the jewellery brought by his
wife worth Rs. 25,000.
Determine their eligibility with regard to duty free allowance. 4
Answer:
11. (a) Duty draw back amount for all the products are as follows:
Product A:
Drawback amount = 2,50,000 × 30% = Rs. 75,000 or Rs. 1,80,000 × 1/3 = Rs. 60,000
Allowable duty draw back does not exceed 1/3 of the market value.
Hence, the amount of duty drawback allowed is Rs. 60,000
Product B:
Drawback amount allowed is Rs. 750 (i.e., Rs. 1,00,000 × 0.75%).
Since, the amount is more than Rs. 500 even though the rate is less than 1% it is
allowed.
Product C:
No duty drawback is allowed.
Since the value of export is less than the value of import (i.e., negative sale)
Product D:
No duty drawback is allowed.
Since the duty drawback amount is Rs. 30 (which is less than Rs. 50)
Though rate of duty drawback is more than 1%, no duty drawback is allowed.
(b) As per the Baggage Rules, 2016, in case of passengers other than tourists there is no
customs duty on used personal effects and general free allowance is Rs. 50,000 per
passenger. Thus, their duty liability is nil for the personal effects and a music system.
However, the additional duty free allowance, that is jewellery allowance is

applicable to non-tourist passenger of Indian origin who had stayed abroad for
period exceeding one year. The additional jewellery allowance is as follows:
Gentleman Passenger - Rs. 50,000.
Lady Passenger – Rs. 1,00,000.
Thus, there is no duty liability on the jewellery brought by Mr. Gopal as he had stayed
abroad for period exceeding one year. However, his wife is not eligible for this
additional jewellery allowance as she had stayed abroad for a period less than a
year. Thus, she has to pay customs duty on the amount of jewellery brought by her of
Rs. 25,000.
FINAL EXAMINATION
GROUP – IV
(SYLLABUS 2016)
DECEMBER – 2021
Q.1 Which of the following activity is taxable under GST?
(i) Supply of food by a hospital to patients (not admitted) or their attendants or Visitors.
(ii) Transportation of passengers by non-air-conditioned railways
(iii) Services by a brand ambassador by way of folk-dance performance whereconsideration charged is Rs. 1,40,000.
(iv) Transportation of agriculture produce by air from one place to another place in India
(v) Services by way of loading, unloading, packing, storage or warehousing of rice
(vi) Service provided by GTA where consideration charged for transportation of goodsfor a single carriage is Rs. 900
Ans 1. (i), (v), (vi)
2. (iv), (v)
3. (iii), (iv), (v)
4. (i), (iii), (iv)
Q.2 Mahesh is employed in Zed Traders a proprietary concern of Kumar having taxable turnover under GST. Services
provided by Mahesh will be taxable if
Ans 1. Mahesh provides them on regular basis to Zed Traders.
2. None of these
3. Mahesh provides them to the brother of Kumar, not in the course of employment.
4. Mahesh provides them on contract basis to Zed Traders.
Q.3
Ans 1. Mixed supply, Highest tax rate applicable to split air conditioner, i.e., 28%
2. Supply other than composite and mixed supply, Highest tax rate applicable to split airconditioner i.e., 28%
3. Supply other than composite and mixed supply, respective tax rate applicable toeach item
4. Composite supply, Highest tax rate applicable to split air conditioner, i.e., 28%
Q.4 State whether the following statements are true or false:
1 Zero rated supply means supply of any goods or services or both which attracts nilrate of tax.
2 Exempt supply means export of goods or services or both, or supply of goods or services or both to a Special Economic
Zone developer or a Special Economic Zoneunit.
3 Non-taxable supply means supply of goods or services or both which is not leviable to tax under CGST Act, 2017 but
leviable to tax under the Integrated Goods and Services Tax Act, 2017.
4 ITC may be availed for making zero rated supply of exempt goods.
Ans 1. False, False, False, False
2. False, False, False, True
3. True, True, False, False
4. True, False, False, False
Q.5 Which of the following statements is correct while issuing a tax invoice?
(i) Place of supply in case of inter-State supply is not required to be mentioned

(ii) The power of attorney holder can sign the tax invoice in case the taxpayer or his authorized representative has been
travelling abroad
(iii) Quantity is not required to be mentioned in case of goods when goods are sold on“as is where is basis”
(iv) Description of goods is not required to be given in case of mixed supply of goods
Ans 1. All of the above
2. (ii), (iii)
3. (i), (ii), (iii)
4. None of these
Q.6 Anti-Dumping duly is calculated as

Ans 1. Higher of export price or normal value;
2. Higher of margin of dumping or injury margin;
3. Lower of margin of dumping or injury margin:
4. Lower of export price or normal value
Q.7 What would be the tax rate applicable in case of composite supply?
Ans 1. Tax rate as applicable on respective supply
2. Tax rate of the principal supply or ancillary supply whichever is higher
3. Tax rate as applicable on ancillary supply
4. Tax rate as applicable on principal supply
Q.8 Read the following and choose the correct option:
(i) Indian customs waters extend up to 12 nautical miles:

(ii) Indian customs waters extend up to 24 nautical miles:
(iii) Indian customs waters extend up to exclusive economic zone of India;
(iv) Indian customs waters include territorial waters and extend up to 200 nauticalmiles.
Ans 1. (iii) and (iv)
2. (ii) and (iv)
3. Only (ii)
4. Only (iv)
Q.9 The term „casual taxable person‟ includes

Ans 1. a person occasionally supplying goods or services or both in a State or an Union Territory where-he-has
no fixed place-of-business.
2. None of these
3. a person occasionally supplying goods or services or both in a State or an Union Territory where he has fixed
place of business.
4. Both
Q.10 Mr. A, a sole proprietor, has to appear before the Appellate Authority. He decides to appear by an authorized
representative. Which of the following persons can be appointed as „authorized representative‟ of Mr. A under GST law?
Ans 1. Sohan, his son, who has been dismissed from a government service lately,
2. All of these.
3. Mukul, a practicing High Court advocate.
4. Rohan, a Company Secretary, who has been adjudged insolvent.
Q.11 Sukanya, a registered supplier, failed to pay the GST amounting to Rs. 5,000 for the month of January, 20XX. The
proper officer imposed a penalty on Sukanya for failure to pay tax. Sukanya believes that itis a minor breach and in
accordance with the provisions of section 126 of the CGST Act, 2017, no penalty is imposable for minor breaches of tax
regulations. In this regard, which of the following statements is true?
Ans 1. Penalty is leviable on Sukanya since the breach is considered as a „minor breach‟ only if amount of tax involved is
Nil.
2. Penalty is not leviable on Sukanya since the breach is considered as a „minor breach‟ if amount of tax involved is up to
Rs. 5,000
3. Penalty is leviable on Sukanya since the breach is considered as a 'minor breach‟ only if amount of tax involved is less
than Rs. 5,000
4. None of these.
Q.12 M/s. Raman Plastics is a manufacturer of plastic toys. It is registered person under GST in Shimla, Himachal Pradesh.
It procures its raw materials from Punjab. During the month of April-2019, it purchased material of Rs. 35.00 Lakh and paid
IGST thereon amounting to Rs. 6.30 Lakh. It supplied 30% of its production in the State of Jammu and Kashmir, whereas
the 70% of is production was supplied taxable @ 0.1% to a merchant exporter during the monthof Apr-2019.
The returns for the month of April 2019 were duly filed in time. The last date upto which the taxpayer can claim refund of
input tax credit on account of inverted dutystructure is
Ans 1. 20-Apr-2021
2. 31-Mar-2022
3. 20-May-2021
4. 20-Apr-2020
Q.13 Manu imported some goods in India, but kept the goods in custom bonded warehouse without clearing it for home
consumption. In the meantime, Manu sold these goods to Sirak while they were in warehouse. The transaction is a
Ans 1. Supply of services.
2. Zero rated supply
3. Supply of goods.
4. Neither supply of goods nor supply of services.
Q.14 State which of the following statement is incorrect:

(i) An agent, supplying goods on behalf of principal where invoice is issued in the name of principal, is required to get
compulsorily registered under GST.
(ii) Persons who are required to deduct tax under section 51, whether or not separately registered under this Act are
compulsory required to get registered under GST withoutany threshold.
(iii) Every person supplying online information and database access or retrieval services from a place outside India to a
registered person in India is compulsoryrequired to get registered under GST without any threshold.
(iv) Persons who supply services. other than supplies specified under sub-section (5) of section 9, through such electronic
commerce operator who is required to collect tax all source under section 52 are compulsory required to get registered
under GST without any threshold.
Ans 1. (i), (ii)
2. None of these
3. (iii), (iv)
4. (i), (iii), (iv)
Q.15 Countervailing duty under section 9 of the Customs Tariff Act shall not be leviedunless it is determined that:
(i) Subsidy relates to export performance:
(ii) Subsidy relates to use of domestic goods over imported goods in export article:
(iii) Subsidy is conferred on all persons engaged in the manufacture of export article.
Ans 1. (ii) and (iii)
2. All of above
3. (i) and (ii)
4. Only (iii)
Q.16 M/s. Shahrukh Beedi Company (P) Ltd. is a manufacturer of cigarettes. It has been registered under GST in the State
of West Bengal. The turnover of the company from the period April 2018 to March 2019 is Rs. 90,00,000/-. The Excise duly
paid on the cigarettes removed is Rs. 10,00,000/-. CGST and SGST paid on the cigarettes is Rs. 18,00,000/-.
The company also recovered actual freight of Rs. 5,00,000/- on the supply of cigarettes so made during the financial year
2018-19 and charged CGST/ SGST thereon. The company paid RCM @ 5% while availing the services of GTA of Rs.
5,00,000/-.
Compute the aggregate turnover of M/s, Shahrukh Beedi Company (P) Ltd.,
Ans 1. Rs. 1,18,00,000/-
2. Rs. 1,00,00,000/-
3. Rs. 90,00,000/-
4. Rs. 1,05,00,000/-
Q.17 The taxable event under the Customs Act, 1962 is:
Ans 1. Sale of goods into India/ Sale of goods outside India:
2. Manufacture of goods into India for supply outside India.
3. Import of goods into India/ export of goods from India;
4. Supply of goods into India/ Supply of goods from India to outside India:
Q.18 Which of the following statement(s) is/are correct?

(i) Special exemption under section 25 of the Customs Act is granted by issuing anotification;
(ii) General exemption under section 25 of the Customs Act is granted by issuing anorder:
(iii) Special exemption is required to be published in official gazette:
(iv) General exemption is not required to be published in official gazette.
Ans 1. Both (i) and (ii)
2. All of above
3. None of above
4. (ii) and (iv)
Q.19 Aflatoon Spares (P) Ltd., located and registered in Haryana, supplied spare parts (FOBbasis) to Mr. Laxmi Khurana, an
unregistered person, located in Rajasthan. Mr. Laxmi Khurana booked the courier himself with Black Dart Courier (P) Ltd.,
registered in Delhi for delivery in Rajasthan, Black Dart Courier (P) Ltd. picked up the goods from Haryana and delivered
the courier in Rajasthan while passing through the State of Uttar Pradesh.
Determine the place of supply of service provided by Black Dart Courier (P} Lid. to Mr.Laxmi Khurana:
Ans 1. Delhi
2. Rajasthan
3. Uttar Pradesh
4. Haryana
Q.20 Banke Bihari (Pedewala), is a famous sweets manufacturer, located and registered in Mathura, Uttar Pradesh. He
received an order for 200 Kg. of sweets on 2nd May 2019 from M/s. Ghoomghoom Travels (P) Ltd., located and registered
in same locality of Mathura for a total consideration of Rs. 1,00,000/-. All 200 Kg. sweets were delivered to M/s.
Ghoomghoom Travels (P) Ltd. on 5th May 2019, but without invoice, as accountant of Mr. Banke Bihari was on leave on
that day. However, the invoice was raised for the same on 6th May 2019, when the accountant joined the office after leave.
Payment in full was made on 7th May 2019.
Determine the time of supply of goods in this case.
Ans 1. 5th May 2019
2. 7th May 2019
3. 2nd May 2019
4. 6th May 2019
Q.1 Sheva Charitable trust running a hospital Prana Ltd. by hiring visiting doctors/specialists provides medical services to
patients at a concessional rate charged by hospital for Rs. 3,50,000 and paid to visiting doctors/specialists Rs. 3,00,000.
The tax liability of Prana Ltd. for the retention amount of Rs.50,000 if applicable rate of GST is 18% is .
Answer: Nil
Q.2 can be the Chairperson of the GST council.
Answer: Union Finance Minister
Q.3 Presentation of Bill of entry to the proper officer (is/is not) a taxable event for the purposes of the Customs Act,
1962.
Answer: Is not.
Q.4 Casual taxable person or Non-resident tax payable will get a for making an advance deposit of tax which shall be
credited to his electronic cashledger.
Answer: Temporary Reference Number(TRN)
Q.5 The registration of Sun Associates was cancelled by the proper officer on 1st August 2020, applied for revocation of
cancellation of registration for which revocation order was passed on 31st October 2020. In this case, Sun Associates shall
be required to furnish all the returns for the period from 1st August 2020
to 31st October 2020 within .
Answer: 30th November 2020, [i.e. within a period of 30 days from 31st October 2020].
Q.6 The operator who collects tax shall furnish a statement, electronically Outward supplies of Goods and Services and
Return of goods and services in Form
within the permitted time.
Answer: Form GSTR-8
Q.7 Susan Pvt. Ltd is a distributor of lottery tickets, authorized by the state of Kerala. He sold 1,75,000 lottery tickets to
Vikram Bhat with a guarantee payout @ 80%where the number of tickets proposed is 2,00,000. Find the value of supply ifthe
face value of a lottery ticket is Rs. 250 each and notified price by the state is Rs. 210 each. .
Answer: Rs. 3,67,50,000
Q.8 As per Rule of 50 of CGST Act, 2017 if at the time of receipt of advance the rateof tax is not determinable, the tax may be
paid at .
Answer : 18%
Q.9 In case ship-to State is different from the Bill-to State, the tax components areentered as per the details of the .
Answer: Bill to person (Bill to state)
Q.10 Where imported goods are damaged partially before cleared from the bondedwarehouse, the customs duty payable is
(Nil/partial)
Answer :Nil
Q.11 With reference to the provisions of Foreign Trade Policy 2009-14, discuss, giving reasons, whether the following
statements are true or false:
Waste generated during manufacture in an SEZ Unit can be freely disposed in DTA on payment of applicable customs duty,
without any authorization.
.
Answer: True.
Q.12 In a case where recipient of deemed export supplies claims the refund on suchsupplies, there is no restriction on such
recipient in availing ITC of the tax paidon such supplies is a statement (true/not true)
Answer: True
Q.13 The Municipal corporation of Salem deducts CGST @ 1% from the payment to be made to a notified supplier on 28th
August 2020. The TDS certificate for thetransaction has to be issued on or before .
Answer: 15th of September 2020
Q.14 The applications/ documents/ forms pertaining to refund claims in GST onaccount of shall be filed and
processed manually.
Answer: zero-rated supplies
Q.15 For Assam, the threshold limit for GST registration is .
Answer: Rs. 20 lakhs for services and Rs.40 lakhs for persons engaged exclusively in intra-state supply of goods.
Q.16 Mr. Prem supplied goods to Mr. Janak for Rs. 1,50,000 plus GST 18%, vide Invoice No. 50 dated 23rd December 2020.
Mr.Janak availed the ITC of Rs. 27,000 and confirmed in GSTR-2. However, invoice no. 50 dated 23rd December 2020 was
not reflected in GSTR-1, matching will takes through common portal of GSTN for Mr. Prem on .
Answer: 20th January 2021
Q.17 The Commissioner can allow payment of GST with interest by defaulter in monthly installments not exceeding
installments.
Answer: 24
Q.18 Mr. Rithvik a registered taxable person, was paying tax at composition scheme upto 30th August 2020. However, w.e.f.
31st August, 2020 Mr. Rithvik becomes liable to pay tax under regular scheme. If Input as on 30th August 2020 is Rs.
5,66,400 (inclusive of GST 18% ) and capital goods purchased for Rs. 7,60,000 (invoice date 25th July 2020, GST @12% ), the
eligible ITC to Mr. Rithvik is
.
Q.19 If the amount of pre-deposit becomes refundable to the assessee, he is required to file the refund claim within a period
of .
Answer: 2 Years from the date of receipt of the order
Q.20 E-way bill generation facility of a person paying tax under regular scheme will be blocked if he has not furnished the
returns for a consecutive period of
.
Answer : 2 Tax Periods
Section C
(4X12 = 48 Marks)
One Laq
7 Marks
Q.1 Radhey and Co. is engaged in the supply of engine oil in Maharashtra and it also supplies petroleum in Mizoram. Its
turnover in the current financial year is Rs.33 lakhs in Maharashtra and Rs. 9 lakhs in Mizoram.
(i) Whether Radhey and Co. is liable to registration in Maharashtra andMizoram?
(ii) What would be your answer, keeping all same if Radhey and Co. is engaged in supply of engine oil and the turnover for
current FY is Rs. 11 lakhs in Mizoram?
(iii) If they are liable to be registered, describe the time limit within which properofficer shall approve the grant of registration.
Answer :
(i) In the given case, since the aggregate turnover of Radhey and Co. exceeds the applicable threshold limit of Rs.
40 lakh, it is liable to obtain registration. It will obtain registration in Maharashtra, but it is not required to obtain
registration in Mizoram as he is not making any taxable supplies from that state.
(ii) Since Radhey and Co. is engaged in the supply of engine oil which is a taxable supply from a special category
state as per section 22, the applicable threshold limit for him gets reduced to Rs.10 lakh. Further, Radhey and
Co. is liable to get registered under GST in both Maharashtra and Mizoram on his aggregate turnover crossing
the threshold limit of Rs.10 lakh.
(iii) The time limit for approving the grant of registration to the applicant by the proper officer if the application and
accompanying documents are found to be in order has been increased from 3 working days to 7 working days
from the date of submission of application for registration [Rule 9(1)].
Further, the time limit for grant of registration after physical verification of the place of business of a person who
fails to undergo the Aadhaar authentication/does not opt for Aadhaar authentication has been reduced to 30 days
from 60 days.
5 Marks
Q.2 Vamsi Pvt. Ltd. registered in Banaras, Uttar Pradesh is engaged in the supply of taxable goods and services. In
March 2021, it sold goods worth Rs.9,00,000 to Girish Enterprises and collected tax @18% on the said goods from the
buyer. However, theactual tax applicable in the given case was 12%.
Vamsi Pvt. Ltd. deposited the tax @12% on these to the government on the due date and retaining the remaining tax
collected. Determine the amount of penalty, if any, that may be imposed on Vamsi Pvt. Ltd. in the given case ignoring
interest payable, if any.
Answer:
In the given case, Vamsi Pvt. Ltd. has collected tax at a wrong rate (i.e.18%), but fails to deposit the full tax collected
to the government i.e. it deposits only tax @12% thereby retaining the remaining tax collected, the amount of penalty
that can be iimposed on Vamsi Pvt. Ltd. is as follows:
Rs. 10,000
Or
An amount equivalent to the tax evaded [Rs.54,000(9,00,000*18%) - (9,00,000*12%)]
Whichever is higher, i.e. Rs. 54,000 (only the bolded part is sufficient to give marks)
Two Laq
6 Marks
Q.1 Draco Pvt. Ltd. is a company engaged in refining the crude petroleum into petrol. It also sells crude oil to other similar
companies. On October 2019, it acquired a license for exploration of crude petrol from Punjab by entering into Production
sharing contract (PSC) from government. On March 2020 its research team entered into exploration of crude petroleum and
incurred the following expenses:
Expenses for exploration - Rs. 50 lakhs Expenses incurred for development- Rs. 8 lakhs Expenses incurred for production –
Rs. 70 lakhs Royalty paid – Rs. 15 lakhs
After incurring following expenses, Draco Pvt. Ltd. sold the crude petroleum extracted from Punjab to Marvel Pvt. Ltd of
Delhi for a consideration of Rs. 2 Crores on 1st December 2020. As per PSC, the company is entitled to provide 40% of
“profit petroleum”.
The Board of directors (BOD) of Draco Pvt. Ltd wants to know if GST is payable on “profit petroleum” paid to government.
Compute “profit petroleum” payable paid to government and advice the BOD accordingly.
Answer:
Profit Petroleum = Rs. 57,00,000

Amount payable to government (57,00,000*40%) = Rs. 22,80,000
GST is not payable on share of profit
6 Marks
Q.2 QW imported 2500 units of raw material on 12th August, 2020. Of these, 100 units were damaged whilst in transit in
ship from Colombo, from where they were imported and hence could not be used in the manufacture of final finished
product.
There was an exemption notification which was in force during the time of import., which conferred exemption of specified
raw materials imported from abroad and used in manufacture of final product.
QW seeks your advice whether he can claim the benefit of exemption notification inrespect of the entire 2500 units or only in
respect of the 2400 units of raw materials used in final manufacture?
Advise him suitably.
Answer:
The facts of the case are similar to the case of BPL Display Devices Ltd. v. CCEx., (2004) 174 ELT 5 (SC) wherein the
Supreme Court has held that the benefit of the notifications cannot be denied in respect of goods which are intended for use
for manufacture of the final product but cannot be so used due to shortage or leakage.
The Apex Court has held that no material distinction can be drawn between loss on account of leakage and loss on account
of damage. The benefit of said exemption cannot be denied as inputs were intended for use in the manufacture of final
product but could not be so used due to shortage/leakage/damage. It has been clarified by the Supreme Court that words
“for use” have to be construed to mean “intended for use”.
Therefore, the importer can claim the benefit of the notification in respect of the entire lot of the inputs imported including
those that were damaged in transit.
Three Laq
Q.1 Madesh is a farmer who has harvested 5 tons of wheat and preserved them in his warehouse on 1st March 2021. The
current price of wheat is Rs.30 per kg. Anticipating the wheat price may go down in upcoming days, he entered into a
contract with a Super market owner to sell 5 tons of wheat after 2 months at Rs.30 per Kg on 1st May 2021. The prevailing
market rate as on 1st May 2021 is Rs.25. Thedocumentation charge of Rs.5000 is charged by Madesh. Rate of GST is 5%.
(i) What is amount of GST payable if the wheat is sold for Rs.30 per Kg and the same is paid to Madesh on 1st May 2021 by
actual delivery of goods to supermarket premises?
(ii) What is the amount of GST to be paid if other things being same, what is the implication if the differential amount of Rs.5 per
kg(difference between contract price and prevailing market rate) is paid to Madesh on settlement date without actual
delivery?
6 Marks
Answer:
(i) GST payable = Rs. 7,750
(ii) GST payable = Rs. 250
Q.2 Kiku shopping, an ECO does not provide invoicing solution to its sellers. The invoice is generated by sellers and
received by the buyer without ECO getting to know about it. The payment flows through the ECO. In such cases, on what
value isTCS to be collected? Can TCS be collected on the entire value of the transaction?
3 Marks
Answer:
Section 52(1) of the CGST Act, 2017 mandates that TCS is to be collected on the net taxable value of such supplies in
respect of which the ECO collects the consideration. The amount collected should be duly reported in GSTR-8 and
remitted to the Government. Any such amount collected will be available to the concerned supplier as credit in his
electronic cash ledger.
Q.3 A bill of entry was presented on 30th December, 2020. The vessel carrying goods arrived on 5th January, 2021. Entry
inwards was granted on 10th January, 2021 and the bill of entry was assessed on that date and was also returned to the
importer for payment of duty on that date. The duty amounting to Rs. 3,75,000 was paid by the importer on 21st January,
2021.
Calculate the amount of interest payable under section 47(2) of the Customs Act, 1962, given that there were five holidays
during the period from 11th January, 2021to 20th January, 2021.
3 Marks
Answer:
Interest = Rs.1,079 or Rs. 1,078.76
Four Laq
Q.1 Examine the implications as regards the bailability and the quantum of punishment on prosecution, in respect of the
following cases pertaining to the month of August2021 under CGST Act, 2017
(i) P collects Rs.290 lakh as tax from its clients and deposits Rs. 280 lakh with the Central government. It is found that he had
falsified financial records and has notmaintained proper records.
(ii) R collects Rs. 560 lakh as tax from clients but deposits only Rs. 30 lakh with theCentral government.
(iii) What will be the implications with regard to punishment on prosecution of „P‟ and „R‟ for the offences? What would be the
position, if „P‟ and „R‟ repeat the offences?
7 Marks
Answer:
(i) As per section 132(1)(d)(iii) of the CGST Act, 2017 failure to pay any amount collected as tax beyond 3 months
from the due date of payment is punishable with specified imprisonment and fine provided the amount of tax
evaded exceeds Rs. 100 lakh. Therefore, the failure to deposit Rs.10 lakh collected as tax will not be punishable
with imprisonment.
Further, falsification of financial records by „P‟ is punishable with imprisonment up to 6 months or with a fine or
both vide section 132(1)(f)(iv) of the CGST Act, 2017 assuming that the falsification of records is with an intention
to evade payment of tax due under the CGST Act, 2017.
(ii) Failure to pay any amount collected as tax beyond 3 months from due date is punishable with imprisonment up to
5 years and with fine, if the amount of tax evaded exceeds Rs. 500 lakh in terms of section 132(1)(d)(i) of the
CGST Act, 2017.
Since the amount of tax evaded by „R‟ exceeds Rs. 500 lakh, i.e. Rs.530 lakh(Rs.560-30), „R‟ is liable to
imprisonment upto 5 years and with fine. It has been assumed that amount of Rs. 530 lakh collected as tax is not
paid to the government beyond 3 months from the due date of payment of tax. Further, the imprisonment shall be
minimum of 6 months in the absence of special and adequate reasons to the contrary to be recorded in the
judgement vide Section 132(3) of the CGST Act, 2017. Such offence is non-bailable in terms of section 132(5) of
the CGST Act, 2017.
(iii) If „P‟ and „R‟ repeat the offence, they shall be punishable for second and for every subsequent offence with
imprisonment up to 5 years and with fine in terms of Section 132(2) of the CGST Act, 2017. Such imprisonment
shall also be minimum 6 months in the absence of special and adequate reasons to the contrary to be recorded in
the judgment.
5 Marks
Q.2 State the compliance with the Dynamic QR Code requirements in certain cases:
Case-I: If a supplier provides/ displays Dynamic QR Code, but the customer opts to make payment without using Dynamic
QR Code, and supplier provides the cross reference of such payment made without use of Dynamic QR Code, on the
invoice. (3 Marks)
Case-II: If a supplier makes available to customers an electronic mode of payment, where though Dynamic QR Code is not
displayed, but the details of merchant as well as transaction are displayed/ captured otherwise. (2 Marks)
Answer:
Case1: In cases where the supplier, has digitally displayed the Dynamic QR Code and the customer pays for the invoice: -
using any mode like UPI, credit/ debit card or online banking or cash or combination of various modes of payment, without
using Dynamic QR Code, and the supplier provides a cross reference of the payment (transaction id along with date, time
and amount of payment, mode of payment like UPI, Credit card, Debit card, online banking etc.) on the invoice; or in cash,
without using Dynamic QR Code and the supplier provides a cross reference of the amount paid in cash, along with date of
such payment on the invoice; said invoice shall be deemed to have complied with the requirement of having Dynamic QR
Code
Case2: In such cases, if the cross reference of the payment made using such electronic modes of payment is made on the
invoice, the invoice shall be deemed to comply with the requirement of Dynamic QR Code.
However, if payment is made after generation/ issuance of invoice, the supplier shall provide Dynamic QR Code on the
invoice.
Five Laq
Q.1 The aggregate turnover of Sangri Services Ltd. Delhi exceeded Rs. 20 lakhs on 12% August. He applied for registration
on 3rd September and was granted the registration certificate on 6th September. You are required to advice Sangri
Services Ltd. as to what is the effective date of registration in its case. It has also sought your advice regarding period
for issuance of Revised Tax Invoices.
6 Marks
Answer:
A5 per section 25 read with COST Rules, 2017, where an applicant submits application for registration within 30 days from
the date he becomes liable to registration, effective date of registration is the date on which he becomes liable to
registration. Since, Sangri Services Ltd.‟s turnover exceeded Rs. 20 lakh on 12th August, it became liable to registration on
same day. Further, it applied for registration within 30 days of so becoming liable to registration the effective date of
registration is the date on which he becomes liable to registration, i.e. 12th August.
As per section 31 read with CGST Rules, 2017, every registered person who has been granted registration with effect from
a date earlier than the date of issuance of certificate of registration to him, may issue Revised Tax Invoices. Revised Tax
Invoices shall be issued within 1 month from the date of issuance of certificate of registration. Revised Tax Invoices shall
be issued within 1 month from the date of issuance of registration in respect of taxable supplies effected during the period
starting from the effective date of registration till the date of issuance of certificate of registration.
Therefore, in the given case, Sangri Services Ltd. has to issue the Revised Tax Invoices in respect of taxable supplies
effected during the period starting from the effective date of registration (12th August) tilt the date of issuance of certificate
of registration (6th September) within 1 month from the date of issuance of certificate of registration, i.e. on or before 6th
October.
Q.2 6 Marks
Answer:
Total customs duty payable = Rs. 17,37,600

Six LAQ
(4X3 = 12 Marks)
Q.1 Write short note on the payment of tax under Quarterly Return filing & Monthlypayment of Taxes scheme (QRMP).
Answer: 3 Marks
Registered persons need to pay tax due in each of first two months (by 25th of next month) in the quarter, by selecting
“Monthly payment for quarterly taxpayer” as reason for generating Challan.
Registered persons can either use Fixed Sum Method (pre-filled challan) or Self-Assessment Method (actual tax due), for
monthly payment of tax for first two months, after adjusting ITC.
No deposit is required for the month, if there is nil tax liability. Tax deposited for first 02 months can be used for adjusting
liability for the quarter in Form GSTR-3B and can‟t be used for any other purpose till the filing of return for the quarter.
Q.2 Write short note on the circumstances when the proper officer can authorize „arrest‟of any person under the CGST Act.
Answer: 3 Marks
Section 69 deals with power of arrest when one commits any of the following offences which is punishable under clause (i)
or (ii) of sub-section (1), or under sub-section (2) of sec 132 of CGST Act. The commissioner of CGST can authorize a
CGST officer to arrest a person if he has reasons to believe that the person has committed an offence attracting
punishment prescribed under Section 131(1)(a), (b), (c), (d) or section 132(2). The offences that are punishable under
section 132 are as follows: (a) Supplies any goods or services or both without issue of invoice with the intention to evade
tax
(b) Issues any invoice or bill without supplies leading to wrongful availment or utilisation of input tax credit or refund of tax
(c) Avails input tax credit using invoice or bill referred to in b) above
(d) Collects any amount as tax but fails to pay the same beyond the period of 3 months from the due date
Section 132(1) clause (i) tax evasion above Rs.500 Lakhs attracting imprisonment for a term upto 5 years and fine, or
clause (ii) tax evasion above Rs.200 Lakhs attracting imprisonment upto 3 years and fine or offence orsection 132(2)
[repeated offence – second and subsequent offence attracting imprisonment upto 5 years with fine]
Thus, it means that a person can only be arrested only when there is a tax evasion is more than Rs. 2 crores and the
offences are specified offences as mentioned above. However, such monetary limit shall not be applicable if the offences
are committed again.
Q.3 Write short note on the conditions to be satisfied to take credit under section 140(6)of CGST Act, 2017.
3 Marks
Answer : (i) Such inputs are used or intended to be used for making taxable supplies under this Act;
(ii) The registered person not opted to pay tax under composition levy (Sec 10.)
(iii) The said registered person is eligible for input tax credit on such inputs under this Act;
The said registered person is in possession of invoice evidencing payment of duty under existing law (C.Ex., S.T., CVD, Spl.
CVD., VAT or Entry tax) in respect of inputs; and Such invoice not earlier than 12 months as on 30-6-2017.
Q.4 Write short note on List of items for which special classification is used instead ofHSN system. 3 Marks
Answer: Though most of goods are classified as per the above system of HSN, special classification is used in certain
cases like the following
(i) All goods imported under “project imports-98.01”
(ii) All laboratory chemicals in packs less than 500 gms or 500 ml -98.021
(iii) All baggage of passengers or member of crew-98.03
(iv) Goods for personal use imported by post or air-98.04
(v) Stores on board of vessel or aircraft-98.05
These goods will be classified in these headings, irrespective of actual classification as per the Customs Tariff.
Q.5 Write short note on Licencing of Special Warehousing as per section 2 (43) of TheCustoms Act, 1962.
3 Marks
Answer: Section 58A (1): The Principal Commissioner of Customs or Commissioner of Customs may, subject to such
conditions as may be prescribed, license a special warehouse wherein dutiable goods may be deposited and such
warehouse shall be caused to be locked by the proper officer and no person shall enter the warehouse or remove any
goods therefrom without the permission of the proper officer.
Section 58A (2): The Board may, by notification in the Official Gazette, specify the class of goods which shall be deposited
in the special warehouse licensed under sub-section (1). Consequently, CBEC, vide Notification No. 66/2016 Cus (NT)
dated 14.05.2016 has notified the following class of goods which shall be deposited in a special warehouse:
gold, silver, other precious metals and semi-precious metals and articles thereof;
goods warehoused for the purpose of:
supply to DFS (Duty Free Shops) in a customs area;
supply as stores to vessels/aircrafts under Chapter XI of the Customs Act, 1962;
supply to foreign privileged persons in terms of the Foreign Privileged Persons (Regulation of Customs Privileges) Rules,
1957.
Section : D Case Study Question
Q.1 Mr. Keshav Sai Krishna has a proprietorship firm in the name of Krishna & Sons in Mumbai. The firm, registered under
GST in the State of Maharashtra, manufactures three taxable products „A‟, „B‟ and „C‟. Tax on „B‟ is payable under reverse
charge. The firm also provides taxable consultancy services.
4+4+4 =12 Marks
The firm has provided the following details for a tax period
With the help of the above-mentioned information, compute the:

(i) GST payable on outward supply.
(ii) Computation of ITC available in the Electronic Credit Ledger.
(iii) Net GST liability payable from Electronic Credit Ledger and/or Electronic Cash Ledger of Krishna & Sons, for the tax
period.
Note: Assume that rate of GST on goods and services are 12% and 18% respectively (Ignore CGST, SGST or IGST for the
sake of simplicity). Subject to the information given above, assume that all the other conditions necessary for availing ITC
have been fulfilled. Turnover of Krishna & Sons was Rs. 1,20,00,000 in the previous financial year
Answer:
(i) Total GST payable on outward supply = Rs. 5,01,600
(ii) Net ITC available = Rs. 2,81,695
(iii) Total GST paid from Electronic Cash Ledger = Rs. 3,18,905
Suggested Answers_Syl2016_Dec2017_Paper 18
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

DECEMBER - 2017
All the questions are compulsory in Question No. 1 and 8,
All the sub questions are compulsory.
In Question Nos. 2 to 7, students may answer any four questions.

In Question Nos. 9 to 10, students may answer any one questions.
Wherever necessary, you may make suitable assumptions and

State them clearly in your answer
Working Notes should form part of the answer
Section – A
[All sub-divisions in this Section to be answered.]
1. Give brief reason or justification for the following: 2×8=16

(a) Is recovery of tax from the buyer is an essential condition for levy of indirect taxes?
(b) In case of certain jewellery, are certain persons required to pay excise duty, say in
the month of March, 2016, regarded as ―Manufacturer‖ or producer for the purpose
of central excise levy?
(c) Can a gold jewellery manufacturer with turnover of ` 11.2 crores during the year
ended 31.03.2016, claim Cenvat credit at 100% on capital goods during the FY 2016-
17?
(d) Is a manufacturer desirous of claiming Cenvat credit in November, 2016, required to
attach photocopies of the railway receipts with STTG for getting such credit?
(e) A product manufactured is sold to outsiders at ` 70,000 per unit; few units are also
captively used by the manufacturer himself, in the next process for manufacturing
final product. The cost of production is ` 60,000 per unit. What is the assessable
value, the value adopted for the captively used product?
(f) Are manufacturers required to submit Form ER-1 under Central Excise Law on
quarterly basis?
(g) Can the SSI units make the central excise duty payment on quarterly basis?
(h) Anil, who started new business in August, 2016, wants to import certain articles and as
first stage dealer, wants to pass on Cenvat credit also. Is he required to take two
registrations?
Answer 1.
(a) No. This is not true.
In certain situations like reverse charge in service tax, tax can be levied from the seller or
service provider also.
(b) This is a true statement.
The definition of manufacturer or producer under clause (naa) of rule 2 has been
amended [vide Notification No. 36/2016 CE (NT) dated 26.07.2016]. As per the
amended definition, “manufacturer or producer in relation to articles of jewellery or
parts of articles of jewellery or both, falling under heading 7113 of the First Schedule to
the Excise Tariff Act, includes a person who is liable to pay duty of excise leviable on
such goods under sub-rule (1) of rule 9 of the Articles of Jewellery (Collection of Duty)
Rules, 2016
(c) Yes.
With effect from 01.03.2016, explanation to rule 4(2)(a) had been amended to provide
that a manufacturer of articles of jewellery [excluding silver jewellery, other than
studded with diamonds/ ruby/ emerald/ sapphire] will be allowed to take 100% CENVAT
credit on capital goods in the year of purchase, if his aggregate value of clearances of
all excisable goods for home consumption in the preceding financial year, did not
exceed ` 12 crore.
(d) No.
It is not required. Notification No. 45/2016 CE (NT) dated 20.09.2016 has amended rule
9(1)(fa) to do away with the requirement of enclosing photocopies of the railway
receipts with Service Tax Certificate for Transportation of Goods by Rail (STTG), as a
document for availing CENVAT credit. As per the amended rule 9(1)(fa), Service Tax
Certificate for Transportation of Goods by Rail issued by the Indian Railways will be an
eligible document for availing CENVAT credit.
(e) It has to be valued at 110% of the cost of production. Since the cost of production is `
60,000, the assessable value will be ` 66,000.
(f) No.
The manufacturers are required to submit the ER-1 Form on a monthly basis to the excise
department.
(g) Yes,
SSI units are allowed to make the excise duty payments on a quarterly basis, whilst the
Non-SSI units are required to pay on monthly basis.
(h) Where the importer wants to act as first stage dealer and pass on Cenvat credit, it is not
essential that he should take two registrations. Single registration is sufficient [Vide
Notification No. 30/2016 CE (NT) doted 28.06.2016]
Section-B
[Answer any four questions out of six questions given.
Each question carries 16 Marks. ]
2. (a) Vaibhav Cookwares, a partnership firm, is a leading manufacturer of mixes. Legal

Metrology Act, 2009 requires declaration of Retail Sale Price (RSP) on the package of
pressure cookers and pressure cookers areal so notified under section 4A of Central
Excise Act, 1944 Retail Sale Price (RSP) based valuation with notified date of
abatement of 20%.
From the following information furnished by the assessee, compute the excise duty
payable on 70 pieces cleared during April, 2016 using assuming the rate of excise
duty as 12.5%:
No. of pieces Particulars

20 RSP printed on the package of mixes are ` 5,000 and ` 4,500.
40 RSP printed on the package of 30 pieces sold in Chennai is ` 4,000
per piece.
RSP printed on the package of 10 pieces sold in Pondicherry is `3,800
per piece.
10 RSP printed on the date of removal of package from factory is ` 3,900
per unit. However, after removal from factory RSP is increased to
`4,200.
Would the provisions of section 4A of Central Excise Act, 1944 apply had the goods
not been notified by Central Government and manufacturer voluntarily affixed RSP
on the products? 8
(b) Examine whether central excise duty is leviable in the following situations: 4
(i) Poorni Builder constructed an office building for M/s Shankar & Co.
(ii) Anantha Computer Services Ltd. provided maintenance services for computers
and laptops.
(c) Examine the validity of following statements, with brief reasons: 4
(i) Central Government is empowered to make laws in respect of excise duty
leviable on liquors (meant for human consumption) containing alcohol.
(ii) Taxes on intra-state sale or purchase of goods are covered under Entry 92A of
Union List of the Constitution.
Answer 2.
(a) Computation of excise duty payable: AV based on RSP
Since Legal Metrology Act, 2009 requires declaration of retail sale price on the package of
pressure cooker and pressure cookers are also notified under section 4A of Central Excise
Act, 1944 (RSP based valuation provisions), excise duty will be payable on the basis of RSP
less abatement.
Particulars ` `
RSP of 20 pieces (20 × ` 5,000)(Note-1) 1,00,000
Less: Abatement @ 20% 20,000
Assessable value(A) 80,000
RSP of 30 pieces sold in Chennai (30 × `4,000)(Note-2) 1,20,000
Assessable value(B) 96,000
RSP of 10 pieces sold in Pondicherry (10 × ` 3,800)(Note-2) 38,000
Less: Abatement @ 20% 7.600
Assessable value (C) 30,400
RSP of 10 pieces (10 × ` 4,200)(Note-3) 42,000
Assessable Value(D) 33,600
Total Assessable Value (A)+(B)+(C)+(D) 2,40,000
Excise duty @12.5% [12.5% on the above AV] 30,000
Notes:
1. Where more than one RSP is declared on the package of excisable goods, the
maximum of such price will be deemed to be the RSP.
2. If different RSP on different packages are declared for different areas, each such RSP is
deemed to be the RSP.
3. If RSP on the package is increased after removal from factory, increased RSP would be
deemed to be the RSP.
All goods on which RSP has been declared will not be covered under the provisions of
section 4A. Only when the declaration of RSP on the goods is mandatory under the Legal
Metrology Act, 2009 or under any other law and such goods have been notified by the
Central Government for the purpose of section 4A, then the goods be valued under section
4A. Thus, provisions of section 4A of Central Excise Act, 1944 would not apply if the goods
had not been notified by Central Government and manufacturer voluntarily affixed RSP on
the products.
(b)
(i) Not leviable.
Excise duty is leviable only when manufacture results in goods that are excisable. For
being called goods, item sought to be movable and marketable. Since office building is
marketable but not movable, it is not “goods” but an immovable property. Hence,
excise duty is not leviable on construction of office building.
(ii) Not leviable.
Excise duty is leviable on manufacture of excisable goods. However, activity of

maintenance of computers and laptops is not “manufacture” as it does not result into
emergence of a new article having different name, character or use. Thus, since the
activity is not “manufacture”, excise duty is not leviable on the same.
(c)
(i) Invalid statement.
Duties of excise on alcoholic liquors meant for human consumption are covered
under Entry 51 of State List (List II). Thus, only State Governments are authorized
to make laws in respect of such excise duty.
(ii) Invalid statement.
Taxes on intra-state sale or purchase of goods are covered under Entry 54 of State
List of the Constitution. Entry 92A of Union List of the Constitution covers central
sales tax.
3. (a) Shine Limited imports certain goods from France, at Cochin Port at a cost $150,000
FOB. The following are the other details,
(i) Packing Charges — $10,000
(ii) Transit Insurance — $ 5,000
(iii) Air Freight —$35,000
(iv) Royalty and License Fee — $ 3,000
(v) Exchange Rate notified by CBEC -US$1 = ` 65
Compute the assessable value for puipose of determination of customs duty. 6
(b) A manufacturer has purchased new machinery costing ` 10 lakhs plus 10% excise
duty and installed the same in the premises of a job worker working for him, on
11.02.2017. Can he take Cenvat credit relating to this machinery? Mention the other
aspects, if any, relating to Cenvat credit on such machinery. 4
(c) Two exporters namely, Sunlight Exports Pvt. Ltd. and Moonlight Exports Pvt. Ltd. have
achieved the status of Status Holders (One Star Export House) in the financial year
2016-17. Every year, both the companies have been regularly exporting goods to
approved nations. To achieve such status, what would have been the minimum
export performance of the two exporters?
Both the companies are desirous of establishing export warehouses in accordance
with the applicable guidelines. What should be their minimum export turnover to
enable to establish export warehouses? 6
Answer 3.
(a)
Computation of Assessable Value
Amount in US $
FOB Value 1,50,000
Packing Charges 10,000
Royalty and License Fee 3,000
FOB Value of the Customs 1,63,000
Air Freight [should not exceed 20% of FOB] 32,600
Insurance 5,000
CIF Value 2,00,600
Add: 1% of loading and unloading on CIF 2,006
Assessable Value 2,02,606

Value in `
Assessable Value 1,31,69,390
(b) Cenvat credit on machinery installed at premises of job worker
CENVAT credit in respect of the central excise duty paid on capital

goods can be taken [50% in same FY and balance 50% in subsequent
FY] in the instant case. Thus he will get Cenvat credit of ` 50,000 in
February, 2017.
Immediately on receipt of the same in job worker‟s premises where
manufacturer has directed the goods to be sent directly to the job
worker,
Provided the capital goods are received back by manufacturer within 2
years of their being received by job worker
Manufacturer will have to pay an amount equivalent to the CENVAT
credit attributable to capital goods by debiting the CENVAT credit or
otherwise and can be retaken only when capital goods are received
back in the factory.
(c)
Status Holders are business leaders who have excelled in international trade and have
successfully contributed to country‟s foreign trade. All exporters of goods, services and
Technology having an import-export code (IEC) number shall be eligible for recognition as a
status holder. Status recognition depends upon export performance.
In order to be categorized as One Star Export House, an exporter needs to achieve the
export performance of 3 million US $ [FOB/FOR (as converted)] during current and previous
three financial years. Thus, export performance of the two given companies would have
been at least 3 million US $ [FOB/FOR (as converted)] during current and previous three
financial years.
Further, Two Star Export Houses and above are permitted to establish export warehouses.
Therefore, Sunlight Pvt. Ltd. and Moonlight Pvt. Ltd. can establish export warehouses in India
only if they achieve the status of Two Star Export House and above. In order to achieve said
status, export performance of the exporters during current and previous three financial years
should be as indicated below:
Status Category Export Performance [FOB/FOR

(as converted) value in US $ million]
Two Star Export House 25
Three Star Export House 100
Four Star Export House 500
Five Star Export House 2,000
4. (a) Mr. Ranjit, providing taxable services furnishes the following information and asks
you to find out the service tax liability for the quarter ended 31.03.2017: 8
Particulars `
(i) Advances received from Clients for which no service has been 2,00,000
rendered so far
(ii) Reimbursement of Travelling Expenses received from Clients (as 52,000
per bill)
(iii) Reimbursement of taxes paid on behalf of the Client (as per 70,000
Challan)
(iv) Free Services rendered to Old Age Home [Value of similar Nil
services —`20,000]
(v) Rent received from Commercial Complex 3,00,000
(vi) Rent received from Residential Complex 1,00,000
It may be noted that all figures are exclusive of Service tax@15% and Mr. Ranjit is not
eligible for Small Service Provider’s exemption.
(b) Ms. Poorva is a registered dealer in Patna. She provides the following information to
compute the Taxable Turnover and Central Sales Tax payable by her: 8
Particulars `
(i) Total inter-state sales including CST 88,00,000
(ii) Deposits for returnable containers 1,00,000
(iii) Excise Duty 4,50,000
(iv) Dharmada 70,000
(v) Goods rejected by the customers after six months 2,50,000
(vi) Goods returned by the customers after six months 3,50,000
Items given in point (ii) to (vi) are not included in the inter-state sales of ` 88,00,000.
Buyers have issued C Form for all purchases.
Sales tax rate within the state is 1%.
Answer 4.
(a)
Computation of service tax liability of Mr. Ranjit

for the quarter ended 31.03.2017
Amount in `
Advances received from Client - Liable to tax as per Point of Taxation 2,00,000
Reimbursement of Travelling Expenses - Liable to tax as per Sec 67 52,000
Reimbursement of tax paid - Not taxable being pure agent Nil
Free services rendered - No consideration - Not liable to tax Nil
Rent received from commercial complex - Liable to tax 3,00,000
Rent received from residential complex - Not Liable to tax - Negative List Nil
Value of Taxable Services 5,52,000
Service tax @ 14% 77,280
SBC @ 0.50% 2,760
KKC @ 0.50% 2,760
Total Service Tax Payable 82,800
(b)
Computation of taxable turnover and CST payable
Amount in `
Interstate Sales 88,00,000
Add: Deposit for returnable container - not includible Nil
Add: Excise Duty 4,50,000
Add: Dharmada 70,000
93,20,000
Add: Goods Rejected even after six months eligible for deduction no Nil
adjustment
Add: Goods Returned after six months not eligible for deduction add 3,50,000
to turnover
Turnover including CST 96,70,000
CST Payable [` 96,70,000 ×1/101] 95,742.57
Taxable Turnover 95,74,257
Note: Item (ii) to (vi) are not included in ` 88,00,000/-. Hence only items which are liable
to CST to be added back out of (ii) to (vi), and for those not liable, no adjustment is
required.
CST on transactions covered by Valid C Form is 2% or sales tax rate within the state
whichever is lower. Since in this case sales tax rate is lower than 2% the rate of CST is
taken as 1%.
5. (a) Harivallabh & Co., a Partnership firm, who had provided taxable services of ` 23
lakhs during the FY 2015-16, furnishes the following particulars for the quarter ended
31.12.2016:
SI. No. Particulars Amount
1 Services rendered to charitable trusts registered u/s 12AA of the 3,40,000
Income-tax Act, 1961
2 Advance received on 28.12.2016 60,000
No services were rendered till 31.03.2017; the amount was
refunded on 12.04.2017
3 Reimbursement of expenses:
Travelling and out of pocket expenses 42,000
Received as pure agent for payment on behalf of Clients 1,20,000
4 Free services rendered to friends had been billed to a third 18,000
party, the amount billed would have been
5 Other receipts towards taxable services rendered 6,78,000
All amounts are exclusive of service tax. Ascertain the value of taxable services and
the amount of service tax payable. 7
(b) Vasudevan Consultants Ltd. was liable to make e-payment of service tax of `
8,00,000, which it had collected from its customers, for the month of July, 2016.
However, it electronically paid the tax on 06.11.2016.
Calculate the amount of interest payable by the assessee under section 75 of the
Finance Act, 1994. The value of taxable services provided by Vasudevan
Consultants Ltd. during the financial year 2015-16 was ` 98.30 lakhs and during the
FY 2014-15 was ` 75 lakhs.
Will your answer be the same, if the value of services provided by it during the
financial year 2015-16 was ` 54.80 lakhs? 4
(c) Discuss the prosecution implications under section 89 of the Finance Act, 1994, if
any, in respect of the following cases:
(i) Mr. Keshavji, a service tax assessee, willfully evades payment of service tax of
` 7 crores.
(ii) Mr. Chandanmala taxable service provider, collects ` 5.2 crores as service tax
from its Clients in May, 2016, but deposits only ` 1.2 crores with the Central
Government by January, 2017.
In the above question, what will be the prosecution implications, if Mr. Keshavji and
Mr. Chandanmala reconvicted for subsequent offences? 5
Answer 5.
(a)
Computation of service tax liability of Harivallabh & Co.
SI. No. Particulars Amount (`)

1 Services rendered to charitable trusts registered u/s 12AA of the 3,40,000
Income-tax Act, 1961
[No exemption is provided in respect of such services and they are
chargeable to service tax]
2 Advance received on 28-12-2016 60,000
[Since services agreed to be provided are also chargeable to
service tax in terms of section 66B of the Finance Act, 1994,
advance received is liable to service tax. Further, as per Explanation
to Rule 3 of the Point of Taxation Rules, 2011, the point of taxation for
advance received is the day when it is received.]
It is immaterial that no services were rendered till 31-3-2017; the
amount was refunded on 12-4-2017
3 Reimbursement of expenses:
Travelling and out of pocket expenses 42,000
[Reimbursable expenditure incurred and charged by the service
provider is a part of the consideration for taxable services and
hence includible in the value of taxable service]
Received as pure agent for payment on behalf of clients Nil
[Reimbursable expenditure incurred and charged by the service

provider is assumed as a PURE AGENT and hence NOT includible in
the value of taxable service]
4. Free services rendered to friends, had been billed to a third party, Nil
the amount billed would have been
[Service is an activity carried out, inter alia, for a consideration.
Therefore, in case of free services, no service tax is payable
thereon.]
5. Other receipts towards taxable services rendered 6,78,000
Value of taxable services 11,20,000
Service tax at 15% 1,68,000
(b) Interest for delayed payment of service tax
Due date for payment of service tax for the month of July, 2016 06.08.2016
Date when service tax was actually paid 06.11.2016
Section 75 of Finance Act, 1994 read with Notification No. 13/2016 ST dated 01.03.2016
provides for charging impel interest where any amount has been collected as service tax
but not paid to the credit of the Central Government on or before the date on which such
payment becomes due. The interest is payable @24% p.a. for the period by which such
credit in got tax or any part thereof is delayed. However, in all other cases, 21% simple
interest p.a. is payable.
Since in the given case, the assessee has collected service tax but failed to deposit the
same on/before the due date with Central Government and its turnover was more than ` 60
lakhs in the preceding financial year, interest under section 75 will be payable @ 24% as
follows:
Period Delay Interest (`)

07.08.2016 to 92 days ` 8,00,000 × 24% × 92/365
06.11.2016 = 48,395
However, if the value of taxable services provided by the assessee, in the preceding
financial year is less than ` 60 lakhs, interest payable will be computed at 21% as follows:
Period Delay Interest (`)

07.08.2016 to 92 days ` 8,00,000 × 21% ×92/365
06.11.2016 = 42,345
(c) Prosecution under service tax
As per section 89 (1)
(i) Of Finance Act, 1994, whoever will fully evades payment of service tax would be
punishable with imprisonment for a period of 6 months to 3 years if the amount involved
in the offence exceeds ` 2 crore.
Since in the given case, Mr. Keshavji has willfully evaded payment of service tax of ` 7
crores, which is more than the prescribed limit (` 2 crores), he will be liable for
imprisonment for a period of 6 months to 3 years.
(ii) As per section 89(1)(ii) of Finance Act, 1994, failure to pay the amount collected as
service tax to the credit of Central Government beyond period of six months from the
date on which such payment becomes due, constitutes an offence punishable with
imprisonment for a period of 6 months to 7 years, if the amount exceeds ` 2 crore.
In the given case, the amount collected but not paid is ` 4 crores and the same has not
been paid beyond the period of six months. Therefore, Mr. Chandanmala will be liable for
imprisonment for a period of 6 months to 7 years.
If Mr. Keshavji and Mr. Chandanmala are convicted for subsequent offences, then as per
section 89(2) of the Finance Act, 1994, Mr. Keshavji would be liable for imprisonment for a
period which may extend to 3 years, where as Mr. Chandanmala would be liable for
imprisonment for a period which may extend to 7 years.
6. (a) (i) An assessee claimed depreciation on CENVAT portion as well as claimed CENVAT
credit in Excise returns. Preventive unit of the Excise Department detected double
claim and issued show cause notice. The assessee filed an application for
rectification u/s 154 of the Income-tax Act, 1961 and filed revised return forgoing
depreciation on CENVAT portion.
However, Excise department passed an Order-in Original, directing the recovery
of the CENVAT credit together with interest and penalty for an equivalent amount.
Discuss in light of the decided case law if any, whether the action of the
department is correct. 6
(ii) Mr. Gopal improperly imported gold bars of foreign origin. Commissioner of
Customs (Preventive) had imposed penalty under section 112 of the Customs Act,
1962 on the basis of a clause in the relevant provision that permits a penalty not
exceeding the value of the goods or five thousand rupees, whichever is greater to
be imposed for improperly bringing into the country goods in respect of which any
prohibition is in force under this Act or any other law for the time being in force.
Mr. Gopal argued that penalty imposed on the basis of the value of the smuggled
gold could not have been made as gold is not a prohibited item nor is the import
thereof prohibited by virtue of any notification or order under the Customs Act,
1962.
Discuss in light of the decided case law if any, whether the action of the
department is correct. 6
(b) An order was passed against an assessee, who is a service provider, with penalty
under section 74 and 78 of the Finance Act, 1994. The assessee did not file any
appeal. However, the assistant commissioner issued a notice proposing rectification
of the earlier order for enhancement of the penalty imposed.
The assessee appealed against such rectification enhancing the penalty. Discuss in
light of the decided case law if any, whether the action of the department is correct. 4
Answer 6.
(a)
(i) The assessee was entitled to either claim depreciation on machinery including CENVAT
portion or avail CENVAT credit and forgo depreciation to that extent.
Once Depreciation is claimed on CENVAT portion, CENVAT credit is not allowed.
In the given case, since the assessee claimed both, after detection by the Dept the
assessee had forgone the depreciation claim on CENVAT porion and filed revised
return.
The High Court held that once the mistake is detected and assessee filed revised
returns, deprivation of the benefit of CENVAT credit could only be punitive.
The action of the department is not correct
This issue was reported in S.L. Lumax Ltd. v. Commissioner of Central Excise, Chennai-IV
2016 (337) ELT 368 (MAD).
(ii) Section 112 of the Customs Act, 1962 prescribes penalty for improper import.
For prohibited goods, it is not exceeding the value of prohibited goods or ` 5000
whichever is higher.
For other than prohibited goods, it is not exceeding 10% of the duty sought to be
evaded or ` 5000 whichever is higher.
The Court held that the expression goods in respect of which any prohibition is in force in
the context of Section 112 of the Act would imply goods which are prohibited from
being imported and not goods which have been smuggled into the country in
contravention of the procedure established by law for the import thereof.
This issue was reported in Gopal Saha v. Union of India 2016 (336) ELT 230 (CAL).
(b)
Section 74 of the Finance Act, 1994 provides for the rectification of mistake.
The Court observed that in the guise of rectification of mistake, the entire complexion of the
order cannot be altered under section 74 of the Finance Act.
This issue was reported in CCE & CUS. v. Capt. K.P. Dinakaran 2016 (44) STR 374 (KER-HC).
(a) Advance ruling, when treated as void under the Central Excise Act, 1944.
(b) Payment of interest by the importer in case of provisional assessment under the
Customs Act, 1962.
(c) M/s. XYZ Co. Ltd., a taxable service provider, provides the following information:
Financial Year Aggregate value of Taxable Services rendered in `

2014-15 12,00,000
2015-16 9,50,000
2016-17 15,00,000
From the information given above, you are required to
(i) Determine the eligibility to Small Service Provider’s Exemption if any for the
financial year 2015-16 and 2016-17.
(ii) Value of Taxable Services for the financial year 2015-16 and 2016-17. Your
answers should be supported by reason.
(d) Payment of service tax on quarterly basis by One Person Company
(e) Service tax on bundled services.
Answer 7.
(a) Advance ruling, when treated as void under the Central Excise Act, 1944
Where on an presentation from the Principal Commissioner of Central Excise or

Commissioner of Central Excise or otherwise, it is proved that an advance ruling was
obtained by the concerned applicant by fraud or misrepresentation of facts, the
authority for advance ruling can declare the advance ruling as void ob initio.
Consequently, all the provisions of the Central Excise Act shall apply to the applicant as
if such ruling had never been made. Copy of such order is sent to the applicant and the
Principal Commissioner of Central Excise or Commissioner of Central Excise [Section 23
for the Central Excise Act, 1944].
(b) Payment of interest by the importer in case of provisional assessment under the Customs
Act, 1962
The provisions of the Customs Act, 1962 relating to payment of interest in case of
provisional assessment are as under:
(i) The importer or exporter shall be liable to pay interest, on any amount payable to
the Central Government, consequent to the final assessment order /re-assessment
order under section 18(2).
(ii) The interest shall be payable at the rate prescribed under section 28AA of the
Customs Act, 1962. Presently, the rate of interest has been fixed @ 15% p.a.
(iii) The interest shall be payable from the first day of the month in which the duty is
provisionally assessed till the date of payment thereof.
(c) Section 66B of the Finance Act, 1994 exempts taxable services of aggregate value not
exceeding ` 10 lakhs in any financial year from the whole of the service tax leviable
thereon in case the aggregate value of taxable services rendered by the service
provider from one or more premises, does not exceed ` 10 lakhs in the preceding
financial year.
Since the aggregate value of taxable services rendered in the Previous FY 2014-15
exceed ` 10 Lakhs, no SSP exemption is available for the FY 2015-16.
Hence Value of Taxable Services for the FY 2015-16 - ` 9.50 Lakhs.
Since the aggregate value of taxable services rendered in the Previous FY 2015-16 do
not exceed ` 10 Lakhs, SSP exemption is available for the FY 2016-17.
Hence value of taxable services for the FY 2016-17 = ` 15 Lakhs
Less: SSP Exemption = ` 10 Lakhs
Net Taxable Value of Services for the FY 2016-17 = ` 5 Lakhs
(d) Payment of service tax on quarterly basis by One Person Company
Prior to 01.04.2016, rule 6(1) of the Service Tax Rules, 1994 required a company including
a One Person Company (OPC) and a Hindu Undivided Family (HUF) to pay service tax
on monthly Basis. However, an individual or proprietary firm or partnership firm could pay
service tax on quarterly basis.
With effect from 01.04.2016, proviso to rule 6(1) has been amended to lay down that a
OPC whose aggregate value of taxable services provided from one or more premise sis
` 50 lakhs or less in the previous financial year or an HUF can also pay service tax on
quarterly basis.
Therefore, it has to be understood that every OPC cannot pay service tax on quarterly
basis. Only that OPC is eligible for quarterly payment of service tax whose aggregate
value of taxable services provided from one or more premises is `50 lakhs or less in the
earlier financial year. Where the turnover in the earlier financial year has exceeded ` 50
lakhs, such OPC should pay service tax on monthly basis only.
(e) Bundled service
“Bundled service” means a bundle of provision of various services wherein an element of

provision of one service is combined with an element or elements of provision of any
other service or services.
Each service involves differential treatment as a manner of determination of value of

two services for the purpose of charging service tax is different.
Two Rules have been prescribed for determining the taxability of such services in
clause (3) of section 66F of the Act. These rules are explained below:
1. Services which are naturally bundled in the ordinary course of business
The rule is-‟If various elements of a bundled service are naturally bundled in the
ordinary course of business, it shall be treated as provision of a single service which
gives such bundle its essential character‟.
2. Services which are not naturally bundled in the ordinary course of business
The rule is - „If various elements of a bundled service are not naturally bundled in the
ordinary course of business, it shall be treated as provision of a service which attracts
the highest amount of service tax.‟
Section-C
[Answer Question No. 8 which is compulsory
and any one question from the rest in this Part.]
8. Choose the correct alternative and give brief justification for your answer:
(a) Following is not a tax which has been substituted by GST: 2

(i) Central Excise Duty
(ii) Service tax
(iii) State VAT
(iv) Profession tax
(b) In an intra-state supply, following are levied under GST: 2

(i) SGST and GGST
(ii) Only IGST
(iii) Only CGST
(iv) CGST and IGST
Answer 8.
(a) (iv).
Profession tax is levied by Municipalities, Corporations and local bodies. This tax is not
replaced by GST. All other taxes mentioned in the alternatives are covered by GST.
(b) (i).
In case of supply within the State, both SGST and CGST will be levied at the applicable
rates. IGST is applicable only in case of inter-state supply.
9. (a) Give a brief introduction to GST in India. 5
(b) What is the impact of GST on Centre-State relations and how are they streamlined? 4
(c) How is the concept of ―Consideration‖ understood for levy of GST? 4
(d) State the benefits of GST to the customers. 3
Answer 9.
(a)
Introduction to GST in India
The introduction of Goods and Services Tax (GST) is a very significant step in the field of
indirect tax reforms in India. By amalgamating a large number of Central and State taxes
into a single tax, it has mitigated cascading or double taxation in a major way and paved
the way for a common national market. From the consumer point of view, the biggest
advantage would be in terms of a reduction in the overall tax burden on goods or services,
which was estimated to be around 25%-30%. Introduction of GST would also make Indian
products competitive in the domestic and international markets. Studies show that this would
have a boosting impact on economic growth. Because of its transparent and self-policing
character, GST would be easier to administer.
The idea of moving towards the GST was first mooted by the then Union Finance Minister in
his Budget for 2006-07. Initially, it was proposed that GST would be introduced from 1st April,
2010. The Empowered Committee of State Finance Ministers (EC) which had formulated the
design of State VAT was requested to come up with a roadmap and structure for the GST.
Joint Working Groups of officials having representatives of the States as well as the Centre
were set up to examine various aspects of the GST and draw up reports specifically on
exemptions and thresholds, taxation of services and taxation of inter-state supplies.
Based on discussions within and between it and the Central Government, the EC released its
First Discussion Paper (FDP) on GST in November, 2009. This spells out the features of the
proposed GST and has formed the basis for discussion between the Centre and the States so
far.
The Central Government notified 1st July, 2017 as the date from which the much awaited
indirect tax reform in India, i.e. Goods and Services Tax (GST) will be implemented.
Accordingly, Goods and Services Tax (GST) has been implemented in India w.e.f. 1st July,
2017.
(b)
GST and Centre State relations
Before GST regime, fiscal powers between the Centre and the States were clearly
demarcated in the Constitution/with almost no overlap between the respective domains.
The Centre had the powers to levy tax on the manufacture of goods (except alcoholic liquor
for human consumption, opium, narcotics etc.) while the States had the powers to levy tax
on sale of goods. In case of inter-state sales, the Centre had the power to levy a tax (the
Central Sales Tax) but, the tax was collected and retained entirely by the originating States.
As for services, it was the Centre alone that was empowered to levy service tax. Since the
States were not empowered to levy any tax on the sale or purchase of goods in the course
of their importation into or exportation from India, the Centre levied and collected this tax as
additional duties of customs, which was in addition to the Basic Customs Duty. This additional
duty of customs {commonly known as Counter Veiling Duty (CVD) and Special Additional
Duty (SAD)} counter balances excise duties, sales tax, State VAT and other taxes levied on
the like domestic product. Introduction of GST was requiring amendments in the Constitution
so as to concurrently empower the Centre and the States to levy and collect the GST.
The assignment of concurrent jurisdiction to the Centre and the States for the levy of GST
required a unique institutional mechanism that would have ensured that decisions about the
structure, design and operation of GST are taken jointly by the two. For it to be effective,
such a mechanism also needed to have Constitutional force.
(c) Consideration under GST Act
Consideration in relation to the supply of goods or services or both includes—
(a) Any payment made or to be made, whether in money or otherwise, in respect of, in
response to, or for the inducement of, the supply of goods or services or both, whether
by the recipient or by any other person but shall not include any subsidy given by the
Central Government or a State Government;
(b) the monetary value of any act or forbearance, whether or not voluntary, in respect of,
in response to, or for the inducement of, the supply of goods or services or both,
whether by the recipient or by any other person but shall not include any subsidy given
by the Central Government or a State Government:
Provided that a deposit, whether refundable or not, given in respect of the supply of goods
or services or both shall not be considered as payment made for such supply unless the
supplier applies such deposit as consideration for the said supply;
From the above definition, it is evident that even if the consideration for the supply of goods
or services or both is not received in cash, still it has to be treated as consideration for the
supply.
(d) Benefits of GST to the customers
(i) Final price of goods is expected to be lower due to seamless flow of input tax credit
between the manufacturer, retailer and service supplier;
(ii) It is expected that a relatively large segment of small retailers will be either exempted
from tax or will suffer very low tax rates under a compounding scheme- purchases from
such entities will cost less for the consumers;
(iii) Average tax burden on companies is likely to come down which is expected to reduce
prices and lower prices mean more consumption.
10. (a) Write a brief note on the liability under GST. 5
(b) What is the taxable event under GST? What are the four broad parts under which the
same may be considered? 5
(c) Briefly explain the concepts of composite supply and mixed supply under GST, with
an illustration far each. 6
Answer 10.
(a) Liability under GST
Under the GST regime, liability to pay tax arises when a person crosses the turnover threshold
of `20 lakhs (` 10 lakhs for North Eastern & Special Category States) except in certain
specified cases where the taxable person is liable to pay GST even though he has not
crossed the threshold limit.
The CGST / SGST is payable on all intra- state supply of goods and/or services and IGST is
payable on all inter- state supply of goods and/or services.
A Composition Scheme, which is mainly devised for small taxpayers, provides concessional
rate of tax and filing of quarterly returns instead of monthly return. To be eligible for
registration under composition scheme it is required that the aggregate turnover of a
registered tax payer should not exceed ` 75,00,000/- in the preceding financial year. (The
limit is ` 50,00,000/- for North Eastern & Special Category States)
North Eastern and Special Category States are Assam, Arunachal Pradesh, Manipur,
Meghalaya, Mizoram, Nagaland, Tripura, Sikkim, and Himachal Pradesh.
According to section 2(6) of the CGST Act, 2017, aggregate turnover means the aggregate
value of all taxable supplies(excluding the value of inward supplies on which tax is payable
by a person on reverse charge basis), exempt supplies, exports of goods or services or both
and inter-state supplies of persons having the same Permanent Account Number, to be
computed on all India basis but excludes central tax, state tax, union territory tax, integrated
tax and cess.
(b) Taxable event under GST
Under GST, the taxable event is “supply” of goods or services or both. Supply has been very
subjectively and inclusively defined in the Act and section 7 of the Central Goods and
Services Act, 2017 specifies the scope of supply.
Supply under GST can be divided into following parts;
(a) Supply in the form of sale, transfer, barter, exchange, licence, rental, lease or disposal
made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration (whether or not in the course or furtherance of
business);
(c] the activities specified in Schedule I, (made or agreed to be made without a

consideration);
and
(d] the activities specified in Schedule II (to be treated as supply of goods or supply of
services)
(c)
Composite Supply: This means a supply made by a taxable person to a recipient consisting
of two or more taxable supplies of goods or services or both, or any combination thereof,
which are naturally bundled and supplied in conjunction with each other in the ordinary
course of business, one of which is a principal supply;
Illustration — Where goods are packed and transported with insurance, the supply of goods,
packing materials, transport and insurance is a composite supply and supply of goods is a
principal supply;
Mixed Supply: This means two or more individual supplies of goods or services, or any
combination thereof, made in conjunction with each other by a taxable person for a single
price where such supply does not constitute a composite supply.
Illustration — A supply of a package consisting of canned foods, sweets, chocolates, cakes,

dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply.
Each of these items can be supplied separately and is not dependent on any other. It shall
not be a mixed supply if these items are supplied separately.
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

JUNE - 2017
Paper-19 : COST AND MANAGEMENT AUDIT
Answer Question No. 1 which is compulsory and carries 20 marks and
any five questions from Question Nos. 2 to 8.

1. Choose the correct answer with short justification/working. (1 mark for correct choice, 1
mark for justification/workings. 2x10=20
(i) Part C of the Annexure to the Cost Audit Report in CRA 3 deals with ________.
(a) Manufacturing Sector
(b) Service Sector
(c) Regulated Sector
(d) Unregulated Sector
(ii) Cost Accounting Standard 8 is a Cost Accounting Standard on ___________ .
(a) Employee Cost
(b) Utilities Cost
(c) Pollution Control Cost
(d) Selling and Distribution Cost
(iii) Under the Generally Accepted Cost Accounting Principles, the cost of cane supplied
from own farm to the sugar mill is treated as ___________.
(a) Direct Materials Cost
(b) Indirect Materials Cost
(c) Production Overhead
(d) Administrative Overhead
(iv) Constitution of Audit Committee by the Board of Directors is mandatory for _________.
(a) all companies
(b) all listed companies only
(c) all listed companies and those prescribed under the Companies (Meetings of
Board and its Powers) Rules only
(d) all public companies having turnover of `100 crore or more only
(v) Cost Auditing Standard 102 deals with ______________.
(a) planning an Audit of Cost Statements
(b) Cost Audit Documentation
(c) knowledge of process and business
(d) overall objectives of the Independent Cost Auditor
(vi) As per the Central Excise Valuation Rules 2000, the assessable value of goods used
for captive consumption is __________.
(a) at actual cost of production of such goods
(b) at marginal cost of production of such goods
(c) at 110% of cost of production of such goods
(d) at market price of such goods
(vii)A cotton textile mill had cumulative waste percentage of 8% in Blow Room, 6% in
Carding, 4% in Drawing, 4% in Simplex and 9% in Ring Frame. For an input of 1000 kg.
of cotton in Blow Room, the output at Ring Frame is _________.
(a) 730.27 kg.
(b) 725.27 kg.
(c) 742.27 kg.
(d) 749.97 kg.
(viii)Operational Audit can lead to better management with the focus on ________.
(a) transaction-based analysis for fraud prevention
(b) compliance of rules
(c) risk identification, process improvement
(d) budget monitoring
(ix) A shoe manufacturing company has a plant capacity of producing 700 shoes per
shift. During the year of 300 working days, 3 shifts of 8 hours with half-hour recess per
shift, it produces 35.91 lakh shoes. The Normal Capacity Utilization percentage is ____.
(a) 82%
(b) 76%
(c) 74%
(d) 78%
(x) Propriety Audit in the context of Government Audit seeks to ensure that _______.
(a) public money are not spent for the benefit of a particular person
(b) public officer should exercise same vigilance as in respect of expenditure of
his/her own money
(c) no authority should pass an order which will be directly or indirectly to its own
advantage
(d) All the above
Answer:
1. (i) (B) Service Sector

Reason: Part C of the Annexure to the Cost Audit Report in Form CRA 3
pursuant to the Rule 6(4) of the Companies (Cost Records and Audit) Rules,
2014, gives quantitative information and abridged cost statement for services
in the Service Sector.
(ii) (B) Utilities Cost
Reason: CAS 8 deals with the Cost Accounting Standard on cost of utilities.
(iii) (A) Direct Material Cost
Reason: As per the GACAP, Direct Materials Cost includes cost of
procurement and freight inwards of the materials.
(iv) (C) All listed companies and those prescribed under the Companies (Meetings of
Board and its Powers) Rules only
Reason: The Rule covers all listed companies, public companies having
capital of `10 crore and more, annual turnover of `100 crore and more,
outstanding deposits, loans and borrowings of `50 crore or more.
(v) (B) Cost Audit Documentation
Reason: The Cost Auditing Standard 102 is to provide guidance to the
members in the preparation of audit documentation in the context of the
audit of cost statements, records and other related documents.
(vi) (C) At 110% of cost of production of such goods
Reason: Liability of Excise Duty arises as soon as the goods covered under the
Excise Duty are manufactured but the Excise Duty is collected at the time of
removal or clearance from the place of manufacture even for captive
consumption.
(vii) (B) 725.27 kgs.
Reason: Output at Ring Frame = 1000 × (100-92)% × (100-94)% × (100-96)% ×
(100-96)% × (100-91)% = 725.27 kgs.
(viii) (C) risk identification, process improvement
Reason: The objective is to assist the organization in performing the functions
more effectively and economically with focus on the efficiency and the
effectiveness of the operations, giving an early warning system for the
detection of the potentially-destructive problems.
(ix) (B) 76%
Reason: Available capacity = 300 × (8-0.5) × 3 × 700 = 47.25 lakh units
Actual Capacity Utilization % = 35.91/47.25 = 76%
(x) (D) All the above
Reason: The objective of Propriety Audit is that public money is not spent for
the benefit of a particular person. Public officer should exercise same
vigilance as in respect of expenditure of his/her own money and no authority
should pass an order which will be directly or indirectly to its own advantage.
Section - B (80 marks)
2. (a) What is meant by 'Normal Price' with reference to 'Related Party Transaction' in CRA
1? State the basis adopted to determine 'Normal Price'. 8
(b) Mr. P. Swamy, the Cost Auditor of PQR Ltd. for the FY 2016-17, was offered an
assignment of Investment Consultant of RST Ltd., a subsidiary of PQR Ltd., for the same
year.
(i) Whether the acceptance of the assignment amounts to violation of law and
professional misconduct?
(ii) What are the penal provisions, if any? (Mention the relevant provisions.) 4+4=8
Answer:
2. (a) As per Para 24 (b) of the CRA 1, ―Normal Price‖ means price charged for
comparable and similar products in the ordinary course of trade and commerce
where the price charged is the sole consideration of sale and such sale is not made
to a related party. Normal Price can be construed to be a price at which two
unrelated and non-desperate parties would agree to a transaction and where such
transaction is not clouded due to the proximity of the parties to the transaction and is
free from influence through the parties may have shared interest.
In the context of the basis adopted to determine Normal Price, the methods stated
below are relevant.
(i) Comparable Uncontrolled Price method
(ii) Resale Price method
(iii) Cost-plus method
(iv) Profit Split method
(v) Transactional Net Margin method
(vi) Any other method, to be specified
(b) (i) Any person who is engaged in consulting and providing specialized services to a
company and its subsidiary companies is not eligible to act as Cost Auditor
[Section 141 of the Companies Act, 2013, read with Companies (Audit and
Auditors) Rules, 2014]. The Cost Auditor cannot accept the assignment as long as
he/she remains appointed as the Cost Auditor of the company.
A member of the institute, whether in practice or not, shall be deemed to be guilty

of other misconduct, if— (1) he is held guilty by any civil or criminal court for an
offence which is punishable with imprisonment for a term not exceeding six months;
(2) in the opinion of the Council he brings disrepute to the profession or the institute
as a result of his action whether or not related to his professional work.[Part IV, The
First Schedule]
A member of the Institute, whether in practice or not, shall be deemed to be guilty

of other misconduct, if he is held guilty by any civil or criminal court for an offence
which is punishable with imprisonment for a term exceeding six months.[Part III,
The Second Schedule]
(ii) If an auditor has contravened the provisions of the Companies Act, 2013, he/she
shall be punishable with fine which shall not be less than twenty five thousand
rupees but which may extend up to five lakh rupees. When the auditor has
contravened knowingly or willfully with the intention to deceive the company or
its shareholders or creditors or tax authorities, he/she shall be punishable with
imprisonment for a term which may extend to one year and with fine, which shall
not be less than one lakh rupees but which may extend up to twenty-five lakh
rupees. When the auditor has been convicted as above, he/she shall be liable to
refund the remuneration received and pay for the damages to the company,
statutory body or to any other person for the loss arising out of incorrect statement
made in his/her report [Section 147 of the Act].
A member of the Institute, whether in practice or not, shall be deemed to by

guilty of other misconduct, if he/she is held guilty by any civil or criminal court for
an offence which is punishable with imprisonment for a term exceeding six
months [The Second Schedule, Part III of the Cost and Works Accountants Act,
1959].
3. (a) While commencing Cost Audit of a manufacturing company, how the Auditor would
assess the risk of material misstatement? 8
(b) Autoparts Manufacturing Company Ltd. showed a profit for the year 2016-17 as `
35,46,700. During the course of Cost Audit, the followings transactions were noticed:
(i) an old machine with net value of ` 6,54,000 was sold off for ` 9,30,000,
(ii) dividend income was received amounting to ` 84,500 from investments,
(iii) a sum of ` 58,000 was spent towards CSR commitment,
(iv) the company was engaged in trading activity where purchase of goods was `
13,50,000 and sales was ` 13,42,300, after incurring ` 40,800 as expenditure,
(v) some renovation work was carried out at a cost of ` 7,75,000 and its useful life was
only for five years, and
(vi) the closing inventory of raw material was undervalued ` 29,600 and that of
finished goods was overvalued ` 65,400 in the financial records. Work out the Profit
as per the Cost Accounts. 8
Answer:
3. (a) Cost Audit Standard 101 explains the situation when the Cost Auditor expresses an
inappropriate audit opinion on the cost statements that are materially misstated.
Misstatements are the differences between the actual figures and the desired
amounts, classifications, presentations, or disclosures that, in the Cost Auditor‘s
judgment, are necessary for the cost statements to be presented fairly in all material
respects or to give a true and fair view.
For assessment of the risk, the audit strategy is formulated to obtain an understanding
of the entity and its environment, including the entity‘s internal control, to identify and
assess the risks of material misstatement, whether due to fraud or error, at the overall
cost statement level and at the assertion level including items of cost, cost heads and
disclosures thereof.
In formulating the overall audit strategy, the Cost Auditor shall consider all the
relevant factors stated below.
(a) The cost reporting framework generally prescribed, under the Companies Act
and the Rules on the basis of which the cost information to be audited has been
prepared, including need for reconciliation with the financial reporting framework
(b) Industry regulators‘ requirement as to how costs will be handled
(c) Unique features of an industry that influence audit requirements, such as definition
of product in the newspaper industry
(d) Reliance that can be placed on the work of financial auditors, other cost auditors
appointed by the entity and internal auditors
(e) State of IT (information technology) implementation
(f) Statutory timelines for Cost Reporting
(g) Timelines for Board/Audit Committee meetings, which can set the time limits for
completion of audit work
(h) Resources required and available in terms of manpower, equipment and others
and the assignment of these to specified parts of the work,
The Cost Auditor shall then

(i) develop an audit plan which will include the nature, extent and timing of risk
assessment, audit procedures and other activities,
(ii) shall update the overall audit strategy and the audit plan as required during the
course of audit, and
(iii) shall document the overall audit strategy, the audit plan and any significant
changes made therein during the audit engagements and the reasons for the
changes.
In case of deviations from the prescribed accounting and internal control system, if
the Cost Auditor concludes that the deviations are such that the preliminary
assessment of risk persists, he/she would amend the plan, the timing and the extent of
his/her plan and the substantive procedure. He/she would report the deficiencies to
the management and if no remedial action is taken, report the same in the Report.
(b) Reconciliation of the Cost Accounts and the Financial Accounts of Auto parts
Manufacturing Company Ltd.
` `
Profit as per the Financial Accounts 35,46,700
Add Trading Loss 48,500
Add 4/5th of Renovation Expenses Amortized 6,20,000
6,68,500
Less Profit on Sale of Assets 2,76,000
Income from Investments 84,500
CSR Contribution 58,000
Effect of Undervaluation/Overvaluation of closing Inventory 35,800 4,54,300
Profit as per the Cost Accounts 37,60,900
4. (a) Discuss
(i) the areas of 'Corporate Services' and
(ii) the evaluation criteria used in 'Corporate Services Audit'. 4+4=8
(b) What is Corporate Social Responsibility (CSR) Committee and its role as per the
Companies Act, 2013? Describe the coverage of a CSR Audit Programme. 8
Answer:
4. (a) (i) The areas of the ‗Corporate Services‘ are the support infrastructure of a
company. The activities in such areas are stated below.
 Combine or consolidate certain enterprise-wide needed support services
provided based on specialized knowledge, best practices, and technology
 Serve internal (and sometimes external) customers and business partners
 co-ordinate the diverse organizational units and help them to focus on
organizational goals
 exploit resources and develop core competencies that enable an
organization to keep its edge over its industry competitors
 combining operations with another competitor in the same industry to
increase competitive strengths and lower competition among the industry
rivals
The business world is now becoming increasingly information intensive and

complex and, therefore, companies have begun to incorporate web-based
services into the work place. These include public relations, customer assistance
or call centers, training, engineering, human resources and procurement, etc., to
create new business value and help the company function more effectively by
improving the internal processes, managing the customer relationships and
extending the organization. The benefits of these services extend to core business
areas in form of (a) reduced costs, (b) less inventory, (c) less working capital
requirements, (d) improved procurements and higher profits, and (e) higher
efficiency and productivity of the employees as new technologies can introduce
an array of new possibilities with powerful computers and integration of database
with web technologies.
(ii) The appraisal system of the ‗Corporate Services Audit‘ should consider the level of
contribution a business entity makes to society and its business environment
towards raising the quality of life through better product quality and services
rather than profit maximization. The ‗corporate services audit‘, thus, attempts to
distinguish between the ends (i.e., profits) and means (i.e., services) of business
and provides a new dimension to the concept of audit approach. It is the
fulfillment of the social responsibilities of a business unit. Auditor‘s responsibility lies
in evaluating the company‘s response to the social needs. The focus should be
on:
Target Stakeholder Corporate Service focus

Consumer quality goods in proper price
Employee pay, training, safety, welfare
Shareholders safety of investment, good return
Community public relations, social cost, social benefit
Fellow Business business ethics, fair trade
State compliance of law, fair trade, no evasion of tax
(b) As per the Section 135(1) of the Companies Act, 2013, every company having net
worth of rupees five hundred crore or more, or turnover of rupees one thousand crore
or more or a net profit of rupees five crore or more during any financial year shall
constitute a Corporate Social Responsibility (CSR) Committee of the Board consisting
of three or more directors, out of which, at least, one director shall be an
independent director.
In terms of the Section 135(5) of the Act read with Companies (Corporate Social
Responsibility Policy) Rules, 2014, the company, in pursuance of the
recommendations of the CSR Committee of the Board and as per the declared CSR
Policy of the company, spends, in every financial year, at least, two per cent. of the
average net profits of the company made during the three immediately preceding
financial years subject to the condition that such policy will cover the subjects
enumerated in the Schedule VII of the Act.
In Schedule VII, the following items and entries are illustrative:

(i) eradicating hunger, poverty and malnutrition, safe drinking water,
(ii) promoting education, vocation skills among children, women, elderly persons
(iii) promoting gender equality, empowering women, setting up homes, hostels for
women and orphans, old age homes, day care centers, etc.
(iv) environmental and ecological balance, protection of flora and fauna
(v) protection of national heritage, art and culture, etc.
(vi) measures for the benefit of armed forces veterans, war windows, etc.
Through there is no mandatory requirement for CSR Audit, yet a CSR Audit
programme will form part of the Management Audit and may cover all or any of the
following:
 effectiveness of the operating framework for CSR implementation,
 effectiveness of implementation of specific, large CSR projects,
 adequacy of internal control and review mechanisms,
 reliability of measures of performance, and
 management of risks associated with external factors like regulatory compliance,
management of adverse or potentially adverse NGO attention, etc.
CSR Audit and review will in nutshell look for the following:
 ensuring compliance with the Act,
 evaluating internal control and governance framework,
 assessing the CSR project life cycle, and
 conducting financial review of the project to confirm the utilization of budgets for
achieving desired outcomes.
5. (a) (i) What are the mandatory requirements for appointment of Internal Auditor in a
listed company?
(ii) Who are the persons eligible for appointment as Internal Auditor? 4+4=8
(b) You have been appointed as an Internal Auditor for CENVAT Audit of Kwality Alloy Ltd.
which is a large manufacturing concern. Draft a suitable audit programme for the
above. 8
Answer:
5. (a) (i) Rule 13 of the Companies (Accounts) Rules, 2014, makes it mandatory to appoint
an Internal Auditor for every listed company.
The Board of Directors of every listed company shall appoint an Audit Committee
[Rule 6 of the Companies (Meetings of Board and its Powers) Rules]. It is the
responsibility of the Audit Committee of a listed company to review the
adequacy of the internal audit functions and review the Internal Audit Reports
(Clause 49 of the Listing Agreement).
(ii) In terms of Section 138 of the Companies Act, 2013, read with Rule 13 of the
Companies (Accounts) Rules, 2014,
(a) every listed company;
(b) every unlisted public company having (i) paid up share wealth of fifty crore
rupees or more during the preceding financial year; or (ii) turnover of two
hundred crore rupees or more during the preceding financial year; or (iii)
outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year; or (iv) outstanding deposits of twenty five crore
rupees or more at any point in time during the preceding financial year; and
(c) every private company having (i) turnover of two hundred crore rupees or
more during the preceding financial year; or (ii) outstanding loans or
borrowing from banks or public financial institutions exceeding one hundred
crore rupees
shall appoint (i) an individual or (ii) a firm of Internal Auditors as the Internal
Auditor of the company. Such person or firm shall either be a Chartered
Accountant or a Cost Accountant, or such other professional as may be decided
by the Board to conduct the internal audit of the functions and activities of the
company.
(b) While drafting Audit Programme for CENVAT Audit the Internal Auditor should keep in
mind various factors such as examine the controls and procedures for accounting
and claim in respect of Cenvat on eligible inputs – particularly examine the cases
where Cenvat could not be claimed due to various reasons i.e. non-eligible items, loss
of documents etc.
The following aspects need to be checked during audit:

(i) Type of industry
(ii) Principal raw materials used and the input output ration of the raw materials.
(iii) Percentage of scrap/waste /loss and its comparison with standard and actual.
(iv) Value of input for which the CENVAT credit availed and the value of input
consumed in the product/manufacture.
(v) In case of consumables for which CENVAT has been availed, whether expenses
charged to revenue are gross or net of CENVAT.
(vi) In case of capital goods for which CENVAT has been availed whether
depreciation has been claimed on the element of CENVAT included in the cost
of capital goods. The auditor needs to ensure that cost of the asset is
capitalised in the books net of such CENVAT and depreciation is claimed on the
net amount only.
(vii) Procedure adopted for payment of duty on goods sent to sub-
contractors/other factories of the Assessee.
(viii) Material receipts to be checked to ensure that the material receipt register (at
the gate / stores) contains record reference of CENVAT documents. Also to be
examined the normal time lag between receipt of material and availing of
CENVAT credit.
(ix) Records maintained or prepared by him in terms of sub rule (2) of Central Excise
Rules, 2002.
(x) The cost audit reports, if any, under Section 148 of the Companies Act, 2013
(xi) The Income Tax Audit reports, if any, submitted under Section 44 AB of Income
Tax Act, 1961.
(xi) Excise Reconciliation Statement.
(xii) In certain clients, data in respect of CENVAT not claimed on inputs if not readily
available, which may be a management issue for advising the client in
strengthening the overall control over accounting in respect of CENVAT.
(xiii) Abnormal delays in availing CENVAT credit may be a management issue and
may offer opportunities for advising the client for streamlining the processes.
(xiv) CENVAT records
(i) PLA register
(ii) Amount claimed and claimable against Raw Materials and Capital Goods
(iii) Summary statement of CENVAT Credit
(iv) Vender Invoice, etc.
(v) Review and checking of the documents relating to notices/show causes/
litigation matters in respect of CENVAT Audit
6. (a) The financial position of Hind Automobiles Ltd. for the years 2016-17 and 2015-16 are
given below. From the figures, find (i) Capital Employed, (ii) Debt-Equity Ratio, (iii)
Proprietory Ratio, and (iv) Current Ratio.
(` in '000)
Liabilities 31.03.17 31.03.16 Assets 31.03.17 31.03.16
Capital (Equity) 600 600 Fixed Assets 2400 1800
General Reserves 414 326 Less: Depreciation 840 600
Revaluation Reserve 110 125 Net Fixed Assets 1560 1200
Profit/Loss A/c Balance 122 54 Stock 720 600
Loan-Secured 385 467 Sundry Debtors 410 300
Loan-Unsecured 655 128 Cash & Bank Balances 180 120
Sundry Creditors 560 480 Other Current Assets 40 30
Provision for Tax 64 70
Total 2910 2250 Total 2910 2250
8
(b) Saharanpur Sugar Mill Ltd. has a boiler that uses the unit's own by-product, cane
waste (Bagasse), as fuel which has a market price of ` 750 per ton. The steam
generated is first used for the generation of power and the exhaust steam is used in
the process of sugar manufacture. The exhaust steam (after generation of power)
transferred to the sugar manufacturing process is 84% of the cost of production of
steam. The mill buys restricted amount of power from the grid. The following details
are extracted from the Financial Accounts and Cost Accounting Records of the Sugar
Mill:
Sugar produced 28,70,000 quintals
Steam generated and consumed 17,58,000 ton
Fuel (Bagasse) consumed for production of steam 8,22,000 ton
Conversion Cost of generation of steam ` 10,97,00,000
Steam used for generation of power 7,44,000 ton
Power purchased from the Electricity Board @ ` 5.84/kWh 67,92,000 kWh
Power generated from the Steam Turbine 5,82,30,000 kWh
Conversion Cost of generation of power (excluding cost of steam) ` 5,06,61,500
Find out (i) Gross Cost of Steam per ton of Steam, (ii) Average Cost of Power per kWh
and (iii) Average Cost of Power per ton of Sugar. 8
Answer:
6. (a)
` in’ 000
(A) Capital Employed 31.03.2017 31.03.2016
Gross Block 2,400 1,800
Less Depreciation 840 600
(a) Net Fixed Assets 1,560 1,200
Current Assets: Stock 720 600
Sundry Debtors 410 300
Other Current Assets 40 30
Cash and Bank Balances 180 120
(b) Total Current Assets 1,350 1,050
Current Liabilities :
Sundry Creditors 560 480
Provision for Tax 64 70
(c) Total Current Liabilities 624 550
(d) Working Capital = b-c 726 500
(e) Capital Employed = a+d 2,286 1,700
(B) Debt-Equity Ratio
Debt--Secured 385 467
Debt--Unsecured 655 128
(i)Total Long-term Debt 1,040 595
Equity: Share Capital 600 600
General Reserves 414 326
Profit / Loss Account Balance 122 54
(ii) Total Equity 1,136 980
Debt-Equity Ratio (i) / (ii) 0.915 : 1 0.607 : 1
(C) Proprietory Ratio

(i) Equity Fund 1,136 980
(ii) Total Assets (Fixed Assets + Working Capital) 2,286 1,700
Proprietary Ratio = (i) / (ii) 0.50 :1 0.58 : 1
(D) Current Ratio
(i) Current Assets 1,350 1,050
(ii) Current Liabilities 624 550
Current Ratio: (i) / (ii) 2.16:1 1.91:1
(b)
(i) Gross Cost of Steam `
Cost of fuel consumed for production of Steam (8,22,000 × 750) 61,65,00,000
Conversion cost of generation of Steam 10,97,00,000
72,62,00,000
Gross cost of Steam / ton (72,62,00,000 / 17,58,000) 413.08
(ii) Average Cost of Power per KWh
Steam for Power (7,44,000 × 413.08) 30,73,31,520
Conversion Cost of generation of Power (including cost of Steam) 5,06,61,500
Grid Power Cost (67,92,000 × 5.84) 3,96,65,280
39,76,58,300
Average cost of Power per KWh 6.11575
39,76,58,300 / (67,92,000 + 5,82,30,000) ` 6.12 (approx.)
(iii) Average cost of Power per ton of Sugar ` 138.5568
(39,76,58,300 / 28,70,000) 138.56 (approx.)
7. (a) A Cloth processing unit has two Rotary Printers-P1and P2- running on two shifts, having
normal capacity of 4600 hours. The unit can process two products X and Y which
have the following cost structure:
Per 50 mts. of cloth X Y
Machine Hours required for P1 3 4
Machine Hours required for P2 3 4.5
Processing Fees (`) 480 560
Direct Materials Cost (`) 120 150
Machine P1 Machine P2
Direct Labour/hr. (`) 48 40
Variable overhead/hr. (`) 30 22
In case of breakdown of any one machine, the management has to be selective in

processing of products. Assuming that there is no other constraint of order book or
costs, arrange the products in terms of profit. 8
(b) Goodyear Automotives Ltd., located in a coastal state, had faced interruption in
production during the year 2016-17 due to cyclone and flood. Out of total 303
available working days during the year, the interruptions were: (a) Flood: 4 days, (b)
Cyclone: 3 days, and (c) Damage Restoration: 2 days (these exclude weekly off days
falling in between). The unit declared lay-off during such period on payment of
average 50% wages for direct workers. The damage to the plant and the cost of its
repairs amounted to ` 87 million. Find out the abnormal expenses deductible from the
product cost on the basis of the following expenses incurred in the FY 2016-17:
Amount in millions
Direct Wages & Salaries 1230 Indirect Wages & Salaries 740
Power 820 Depreciation 210
Other Fixed Expenses 490 Finance Charges 115
8
Answer:
7. (a) The contribution per 50 mts. of processing of products X and Y in machines P1 and P2
are analyzed below.
Products X X Y Y
Machines used P1 P2 P1 P2
Processing Income (`) 480 480 560 560
Direct Raw Materials (`) 120 120 150 150
Direct Labour (`) 144 120 192 180
Variable Overheads (`) 90 66 120 99
Total Variable Cost (`) 354 306 462 429
Contribution (`) 126 174 98 131
Ranking for both machines P1 and P2 : X, Y
(b) As per CAS 6, Abnormal Cost is defined as atypical or an unusual cost due to some
abnormal situation in case of production or operation. Any abnormal cost is excluded
from total cost of production. In the present case, the following expenses are
excluded from the total expenses:
1) The Finance Charge is not charged to Cost of Production but is to be shown
under the head ‗Cost of Sales‘ (CAS 17).
2) Power is a direct cost and is excluded from the total expenses.
3) Direct wages and salaries is a variable cost but, in the given situation, the layoff
payment was made and hence is treated as fixed cost.
4) Depreciation is treated as fixed cost by its very nature (number of days of
working).
Accordingly, the abnormal expenses for the year comes to:
` in million
Lay off payment (1230 x 9 / 303 x 0.5) 18.27
Restoration Cost of plant damages & repairs 87.00
Indirect Wages & Salaries 740
Other Fixed Expenses 490
Depreciation 210
1440
The abnormal expenses will be = 1440 x (9/303) 42.77
Total : (Lay-off payment + Restoration Cost of plant 148.04
Damage & repairs + Abnormal Expenses)
8. Answer any four. 4x4=16

(a) How do you define 'Packing Material' as per the Generally Accepted Cost
Accounting Principle? What is the treatment of such cost? 4
(b) Suggest some checklists the Cost Auditor should draw for Profitability Analysis in a
manufacturing organization. 4
(c) What do you understand by 'Energy Audit'? Briefly state the functions of Energy Auditor.
4
(d) ABC Stores is a departmental store, selling goods on retail basis. It makes a gross
profit of 20% on net sales. The following figures for the year-end are available:
Opening Stock `62,000, Purchases `4,46,000, Purchase Returns `12,500, Freight
Inwards `15,000, Gross Sales `5,60,000, Sales Returns `14,000 and Carriage Outwards
`8,000. Calculate the estimated cost of the Inventory on the closing date. 4
(e) During the Energy Audit of Reliable Engineering Ltd., the following figures relating to
usage of power were placed before the Auditor:
2016-17 2015-16 2014-15
Total Power consumed (kWh) 2642720 2744360 2393250
Rate per kWh (`) 6.29 5.42 4.90
Total Production (in million kg.) 422.16 416.36 376.08
Compute the necessary productivity measures and (i) Price Variance and (ii) Volume
Variance of power usage during these years. 4
Answer:
(8) (a) The Cost Accounting Standard on Packing Material Cost (CAS 9) defines Packing
Materials as materials used to hold, identify, describe, store, protect, display,
transport, promote and make the product marketable.
Packing Materials for the purpose of the standard are classified into primary and
secondary packing materials. Primary Packing Material is that packing material which
is essential to hold and preserve the product for its use by the customer. Secondary
Packing Material is that packing material that enables to store, transport, inform the
customer, promote and otherwise make the product marketable. For example, in
‗pharmaceutical industry‘, cartons used for holding strips of tablets and card board
boxes used for holding cartons.
Packing material costs shall be directly traced to a cost object to the extent it is
economically feasible. Where the packing material costs are not directly traceable to
the cost object, these may be assigned on the basis of quantity consumed or similar
measures like technical estimates. The packing material cost of reusable packing
shall be assigned to the cost object taking into account the number of times or the
period over which it is expected to be reused. Cost of primary packing materials shall
form part of the cost of production. Cost of secondary packing materials shall form
part of distribution overheads.
(b) In the analysis of the profitability in a financial year, the Cost Auditor needs to analyze
the effects of change in the selling price and change in the different elements of
cost. In the case of service industry, the Cost Auditor needs be careful as the output
units in such sector are not standard and needs bifurcation of each element of cost
and revenue. The usual checklists an Auditor should draw up for the analysis are
stated below.
 Sale and Production Records – Analysis of past year‘s data to identify variations
 Reconciliation of Sales with CENVAT Records--to see any discrepancy which has
led to wrong accounting, if any
 Pricing and Discount Structure Policy – analyze the variations to see how far the
changes have favoured the profitability and marketability of products
 Product Cost Statements – Cost data analysis will facilitate discovering variable
and fixed cost elements and their impact on total profitability
 Operational Budget – A study of the budget estimates with that of the actuals will
throw light on the deficiencies and will lead to taking corrective measures
(c) Energy Audit consists of activities that seek to identify conservation opportunities
preliminary to the development of an energy saving programmes. In other words, an
Energy Audit is conducted to seek opportunities to reduce the amount of energy
input into the system without negatively affecting the output(s). An Energy Audit also
seeks to prioritize the energy uses according to the maximum to the least cost-
effective opportunities for energy savings. Energy Audit means monitoring the energy
efficiency of different equipment and procesess is in a plant and looking into way by
which the total sum of energy consumed can be cut down without affecting
production or its efficiency.
Energy Auditor seeks to focus on the possible sources for conserving energy.
 Steam Generation
 Steam Distribution
 Steam Utilization
 Electrical Energy Utilization
 Total Energy System
 Diesel Exhaust Recovery
(d) ABC Stores has the following inventory at the end of the year: (figures in ` ‗000)
1 Opening Stock 62,000
2 Purchases 4,46,000
3 Less Returns 12,500
4 Net Purchases 4,33,500
5 Freight Inwards 15,000
6 Cost of Materials Purchased 4,48,500
7 Total Cost of Materials (1)+(6) 5,10,500
8 Sales 5,60,000
9 Less Returns 14,000
10 Net Sales 5,46,000
11 Profit @ 20% 1,09,200
12 Cost of Sales 4,36,800
13 Carriage Outwards 8,000
14 Closing Stock=(7)-(12)-(13) 65,700
(e) The power usage of Reliable Engineering Ltd. is given below along with the
productivity measures and Price Variance and Volume Variance.
2016-17 2015-16 2014-15
1. Power consumed (KWh) 26,42,720 27,44,360 23,93,250
2. Production (in million kg.) 422.16 416.36 376.08
3. Rate per KWh (`) 6.29 5.42 4.90
4. Power Cost (`) [1 x 3] 16,622,709 14,874,431 11,726,925
5. Power Cost/‘000 kg. (`) 39.375 35.725 31.182
6. Price Variance (`) 22,99,166 14,27,067
7. Volume Variance (`) 2,28,375 14,39,003
Workings:
2016-17 2015-16
Price Variance : 26,42,720 x (6.29 – 5.42) 22,99,166
: 27,44,360 x (5.42 – 4.90) 14,27,067
Volume Variance : 39.375 x (422.16 – 416.36) 2,28,375
: 35.725 x (416.36 – 376.08) 14,39,003
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
JUNE - 2018

1. Choose the correct answer with short justification/working. (1mark for correct choice, 1
mark for justification/workings. 2x10=20
(i) In which CRA Form, is the Cost Audit Report of a company filed with the Central
Government?
(a) CRA-4
(b) CRA-3
(c) CRA - 1
(d) CRA-2
(ii) CAS 23 deals with .........................................

(a) Quality Control
(b) Manufacturing Cost
(c) Overburden Removal Cost
(d) Treatment of Revenue in Cost Statements
(iii) As per the Cost Auditing Standard 101, the risk of Material Misstatements has two
components, viz., ……………………………..
(a) Inherent Risk and Control Risk
(b) Detection Risk and Audit Risk
(c) Material Risk and Implicit Risk
(d) Financial Risk and Explicit Risk
(iv) As per Part D, Para 4 of the Companies (Cost Records and Audit) Rules, 2014, Value
Addition and Distribution of Earnings are to be computed based on
(a) Audited Financial Data
(b) Cost Record Data
(c) Unaudited Financial Data
(d) Both (a) and (b)
(v) The audit of data or information, depicting social performance of a business in

contrast to its normal economic performance as measured in financial audit, is
(a) Energy Audit
(b) Efficiency Audit
(c) Social Audit
(d) Propriety Audit
(vi) The figures below are available for Good Luck Limited.
Budgeted Production - 900 units, Standard Hours per unit -10, Actual Production - 720
units and Actual Working - 6000 hours. What is the Efficiency Ratio?
(a) 110%
(b) 120%
(c) 100%
(d) 125%
(vii)Which of the following is not a Professional Misconduct as per the First Schedule of The
CWA Act, 1959, in relation to the Cost Accountants in Practice?
(a) Pays or allows or agrees to pay or allow, directly or indirectly, any share,
commission or brokerage in the fees or profits of his/her professional work, to any
person other than a member of the Institute or a partner or a retired partner or the
legal representative of a deceased partner.
(b) Enters into a partnership, in or outside India, with any person other than a Cost
Accountant in Practice or such other person who is a member of any other
professional body having such qualifications as may be prescribed.
(c) Advertises his/her professional attainments or services or uses any designation or
expression other than Cost Accountant on professional documents, visiting cards,
letter heads or sign boards, unless it is a degree of a University established by law
in India or recognised by the Central Government or a title indicating
membership of The ICAI or any other institution that has been recognised by the
Central Government or may be recognised by the Council.
(d) Expresses his/her opinion on cost or pricing statements of any business or
enterprise in which, he/she, his/her firm or a partner in his/her firm has substantial
interest.
(viii) Remuneration of the Non-Executive Directors is treated as ....................

(a) Employee Costs
(b) Administrative Overheads
(c) Salaries and Wages
(d) Management Expenses
(ix) The process of determining the elements which correspond to the lines and the
columns in a financial statement and the elements which must be created by
extension is called as
(a) Mapping
(b) Name
(c) Concept
(d) Scaling
(x) As per the CAS 23, the activity of Overburden Removal that benefits the identified
component of an ore to be mined by the entity is called as ......
(a) Mining Activity
(b) Overburden Removal
(c) Stripping Activity
(d) Advance Stripping
Answer:
1. (i) (a) Reason: Pursuant to Section 148 (6)of the Companies Act, 2013, and Rule 6
(6)of the Companies (Cost Records and Audit) Rules, 2014, the Cost Audit
Report is to be filed in Form CRA-4 with the Central Government.
(ii) (c) Reason: Cost Accounting Standard (CAS) 23 is issued by the Council of The
Institute of Cost Accountants of India on "Overburden Removal Cost". It is
applicable from 1st April, 2017.
(iii) (a) Reason: As per the Cost Auditing Standard (CAS-101) on Planning an Audit of
Cost Statements, the risk of material misstatement has two components, viz.,
Inherent Risk and Control Risk.
(iv) (a) Reason: As per part D, para 3 of the Companies (Cost Records and Audit)
Rules, 2014, Value Addition and Distribution of Earnings are to be computed
based on Audited Financial Accounts.
(v) (c) Reason: Social Audit is generally defined to be the audit of data or
information depicting social performance of a business in contrast to its
normal economic performance as measured in financial audit. A lot of
research and experimentation have been conducted to devise techniques or
models, which can measure the contribution of an enterprise to the Society.
(vi) (b) Reason: Efficiency ratio=(Standard Hours of actual Production)/(Actual Hours

(720 ×10)
Worked)×100 = ×100 = 120%
6,000
(vii) (d) Reason: As per the Second Schedule Part 1 of the Cost and Works
Accountants Act,1959, a Cost Accountant in Practice shall be deemed to be
guilty of Professional Misconduct, if he/she expresses his/her opinion on cost or
pricing statements of any business or enterprise in which, he/she, his/her firm or
a partner in his/her firm has substantial interest.
All the other options are Professional Misconduct as per the First Schedule of
The Cost and Works Accountants Act, 1959 in relation to the Cost
Accountants in Practice.
(viii) (b) Reason: As per the Generally Accepted Cost Accounting Principles (GACAP),
Remuneration of the non-Executive Directors will not be considered as part of
Employee Costs but will be treated as part of Administrative Overheads.
(ix) (a) Reason: As per the XBRL, Mapping is the process of determining the elements
which correspond to the lines and the columns in a final statement and the
elements which must be created by extension.
(x) (c) Reason: As per the Cost Accounting Standard on Overburden Removal Cost,
the Stripping Activity refers to the activity of overburden removal that benefits
the identified component of an ore to be mined by the entity.
2. (a) (i) A Company meets the threshold limits for both maintenance of Cost Records and
Cost Audit in 2015-16 and, consequently, comes under the purview of the Rules in
the year 2016-17. If the turnover of the company gets reduced to lower than the
prescribed threshold limit in 2016-17, state whether the Rules relating to Cost
Records and Cost Audit will be applicable for the year 2017-18?
(ii) What would be the treatment of cost of consumption of electricity from a captive
generating plant and the applicability of Cost Audit to such captive generating
plants? 4+4=8
(b) Explain whether the following activities amount to Professional Misconduct on the part
of a Cost Accountant:
(i) Mr. Arun, a CMA, is working as Manager-Cost Accounts of PQR Ltd. He accepts
10% of profits from his friend, Mr. Raju, a lawyer and a legal consultant for PQR Ltd.
He is doing the job on retainership basis.
(ii) Mr. S, a CMA in Practice, certifies a cost and pricing statement of manufacturing of
pipes for the supply relating to a contract. The statement is prepared by Mr. T, who
is not a CMA or an employee of Mr. S. 4+4=8
Answer:
2. (a) (i) Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, states that a
company engaged in the production of the goods and/or rendering of the
services as prescribed, having an overall turnover from all its products and/or
services of Rupees thirty five crore or more during the immediately preceding
financial year, shall include cost records for such products and/or services in their
books of account. Since the threshold limit for applicability of maintenance of
Cost Accounting Records is met in 2015-16 (Previous Year), the Cost Records are
required to be maintained from 2016-17. Once the maintenance of Cost Records
becomes applicable, it would be maintained on a continuous basis in the
subsequent years also. Following the same line, Cost Audit will be applicable from
2016-17 and for every year thereafter. So Cost Audit is applicable in 2017-2018
also.
(ii) As per Rule 3(A)(2), of the Companies (Cost Records and Audit) Rules, 2014
amendment dated 14th July, 2016 dealing with generation, transmission,
distribution and supply of electricity, all companies having captive generation of
electricity, whether covered under Audit or not shall be required to maintain Cost
Records. It may be noted that, in case of a company whose product(s)/service(s)
are covered under the Rules and it consumes electricity from the captive
generating plant, determination of cost of generation, transmission, distribution
and supply of electricity as per CRA-I would be mandatory since the cost of
consumption of electricity has to be at Cost. Hence, maintenance Cost Records
for generation, transmission, distribution and supply of electricity would be
applicable. However, Cost Audit will not be applicable to such captive plants,
provided the entire generation is consumed captively and no portion is sold
outside.
(b) (i) As per provisions of Clause 2 of Part II of The First Schedule of The Cost and Works
Accountants Act, 1959, stipulates the Professional Misconduct in relation to Cost
Accountants in Service. As per the provisions of Part II of the First Schedule of the
Act, a Cost Accountant in Service shall be deemed to be guilty of Professional
Misconduct, if he/she "accepts or agrees to accept any part of fees, profits or
gains from a lawyer, a cost accountant or a broker engaged by such a
company, firm or person or agent or customer of such company, firm or person
by way of commission or gratification".
In the given case, Mr. Arun, who is working as a Manager—Cost Accounts of PQR
Ltd., accepts 10% of profits from Mr. Raju, who is a legal consultant of the same
company. This amounts to Professional Misconduct.
(ii) As per provisions of Clause 2 of Part I of The Second Schedule of The Cost and
Works Accountants Act, 1959, stipulates, the Professional Misconduct in relation to
Cost Accountants in Practice. As per the provisions of the Part I of the Second
Schedule of the Act, a Cost Accountant in practice shall be deemed to be guilty
of professional misconduct, if he/she "certifies or submits in his/her name, or in the
name of his/her firm, a report of an examination of cost accounting and related
statements unless the examination of such statements has been made by him/her
or by a partner or an employee in his/her firm or by another Cost Accountant in
Practice".
In the given case, Mr. S. certifies the cost and pricing statement of a company,
which is manufacturing pipes. The statement is to be submitted for a Contract
and is not prepared by him. It is prepared by Mr. T. who is neither a CMA nor an
employee of Mr. S. Hence, this amounts to Professional Misconduct.
3. (a) As the per CAS - 21, explain

(i) Quality Control.
(ii) Treatment of Quality Control Costs. 2+6=8
(b) ABC company is manufacturing Building Bricks and Fire Bricks. Both the products
required two processes: Brick Forming and Heat Treating.
Time requirements for the two bricks Building Bricks Fire Bricks
Forming per 100 bricks 4Hrs. 3Hrs.
Heat Treatment per 100 bricks 3Hrs. 6Hrs.
Total Cost of the two departments in one month

Forming ` 40,000
Heat Treatment ` 90,000
Production during the month

Building Bricks 1,40,000 Nos.
Fire Bricks 80,000 Nos.
Prepare a Statement of Manufacturing Cost for the two varieties of Brick. 8
Answer:
3. (a) (i) Quality Control:

As per CAS 21, Quality Control is a procedure or a set of procedures exclusively
designed to ensure that the manufactured products or performed service(s)
adhere to a defined set of quality criteria or meet requirements of the client or
the customer.
(ii) Treatment of Quality Control Cost:

a) Quality Control Costs incurred in-house shall be the aggregate of the costs of
resources consumed in the Quality Control activities of the entity. The costs
of resources procured from outside shall be determined at invoice or agreed
price, including duties and taxes, and other expenditure directly attributable
thereto, net of discounts (other than cash discounts), taxes and duties
refundable or to be credited by the Tax Authorities. Such costs shall include
Cost of Conformance to Quality: (a) Prevention Cost and (b) Appraisal Cost.
b) Identification of Quality Control Costs shall be based on traceability in an
economically feasible manner.
c) Quality Control Costs, other than those referred to above, shall be
determined on the basis of amount incurred in connection therewith.
d) Finance Costs incurred in connection with the self-generated or procured
resources shall not form part of the Quality Control Costs.
e) Quality Control Costs do not include imputed costs.
f) Any Subsidy/Grant/Incentive or any such payment received/receivable with
respect to any Quality Control Cost shall be deducted for ascertainment of
the cost of the cost object to which such amounts are related.
g) Any abnormal portion of the Quality Control Costs where it is material and
quantifiable shall not form part of the Costs of Quality Control.
h) Penalties and damages paid to statutory authorities or other third parties shall
not form part of the Quality Control Cost.
i) Any change in the cost accounting principles applied for the measurement of
the Quality Control Costs shall be made only if it is required by law or for
compliance with the requirements of a Cost Accounting Standard or the
change would result in a more appropriate preparation or presentation of
cost statements of an organization.
(b) Working Notes:

Brick forming:
(a) Time required for Building Bricks (140000x4)/100 5600 Hrs
(b) Time required for Fire Bricks (80000x3)/100 2400 Hrs.
Total 8000 hrs.
Total Cost for Brick Forming ` 40000
Cost per Hour of Brick Forming (40000/8000) `5
Heat Treatment:
a) Time required for Building Bricks (140000x3)/100 4200 Hrs
b) Time required for Fire Bricks (80000x6)/100 4800 Hrs.
Total 9000 Hrs.
Total Cost for Heart Treatment ` 90,000
Cost per Hour of Heat Treatment (90000/9000) ` 10
Statement Showing Manufacturing Cost of Building Bricks

Units-1,40,000
Process Time for 100 Rate per hour Cost per 100 units Total cost
units (Hrs) (`) (`) (`)
Brick Forming 4 5 20 28000
Heat Treatment 3 10 30 42000
Total 70000
Statement Showing Manufacturing Cost of Fire Bricks

Units-80000
Process Time for 100 Rate per Hr. Cost per 100 units Total cost
units (Hrs.) (`) (`) (`)
Brick Forming 3 5 15 12,000
Heat Treatment 6 10 60 48,000
Total 60,000
4. (a) (i) What do you mean by Key Performance Indicators (KPIs)? What are the Key
Performance Indicators for a company?
(ii) What are the additional references for a Cost Auditor available for Management
Reporting? 4+4=8
(b) Explain Corporate Development Audit. Prepare a checklist for various areas of
Corporate Development, which may be helpful in appraising the structural aspect of
a corporation. 8
Answer:
4. (a) (i) Key performance indicators (KPIs) are simply the variables, independent or
interdependent, in respect of which the goals can be set and performance can
be measured to assess whether these are furthering the enterprise objectives.
Hence, for evaluation of performance, the selection of KPIs must be made
correctly in tune with the objectives.
The KPI measurement should not be a static computation. It always needs to be

compared with a benchmark set.
The key performance indicators for a company could be as below:

a) Quantitative - These can be financial or non-financial
b) Qualitative - These are often lead indicators i.e. these influence future
performance
c) Actionable - Those which can be influenced by enterprise actions or are
controllable.
d) Trending- Those which need to be assessed over a period of time to observe
whether they are improving or not.
(ii) Additional References for a Cost Auditor available for Management Reporting
are enumerated below:
1. Annual Reports of the Company for the current year and the past years.
2. Guidance given by the company to the stock markets.
3. Written policy documents of the company.
4. Company Websites.
5. Website of the industry associations.
6. Macro-economic data from the RBI, Ministry of Finance, Ministry of Commerce
and Industry, etc.
7. Management Accounting Tools and Techniques- references and hand books.
8. Cost Accounting Standards issued by The ICAI.
9. Generally accepted cost accounting principles (GACAP) published by The
ICAI.
10. Stock market information on prices, market capitalisation, market returns.
11. Minutes of the board meetings to the extent relevant.
12. Personal meetings with the CEO/MD of the organisation and members of the
Audit Committee and the Board.
13. The cost accounting policy of the company.
14. The cost accounting system of the Company-costing methods.
15. GST records maintained by the Company.
16. The monthly MIS reports- particularly exceptional reports.
(b) Corporate Development Audit is an independent objective study of an organization's

capabilities. It aims at identifying strengths and weaknesses and moving toward the
state of the art performance. Corporate Development Audit gives a comprehensive
picture of the status of corporate development effectiveness and highlights the
developmental needs.
Checklists in the areas of Corporate Development Audit:
Checklists on various areas of Corporate Development may be helpful in appraising

the structural aspect of a Corporation are stated below:
A. Check list on Corporate Planning:

a) Whether SWOT Analysis has been made?
b) What are the corporate strengths and weaknesses in relation to price, quality,
market share, distribution network, after-sales services, technology
improvement, corporate structure and qualities of members?
c) What are the opportunities and threats in relation to rivalry among the existing
firms, threat of new entrants, threat or opportunity of technical know-how,
and strategy of suppliers?
d) How were the threats overcome and opportunities availed of in the past?
e) Whether the "corporate image} is going to improve in the near future?
f) What specific techniques are applied by the management for corporate
planning (long term and short term)?
g) Whether the corporate objectives and goals are clearly defined?
h) Whether the corporate planning premises and plans have been drawn up
based on adequate information?
B. Check list on Corporate Objectives:

a) Whether the corporate objectives are clear and explicit?
b) Whether the different component of the enterprise have separate objectives?
c) Whether these objectives are clearly defined?
d) Is there sufficient flexibility in the organizational design in the form of the
responsiveness to changes taking place from time to time?
C. Checklist on Delegation of Authority:

a) Whether there are clear lines of authority from top to bottom in the corporate
enterprise?
b) Whether accountability has been properly coupled with corresponding
authority?
c) Whether responsibility and authority in each position are clearly defined in
writings?
d) Whether the number of levels of authority have been kept minimum?
e) Whether the duties assigned to the subordinates are indicative of the exact
activities expected of them?
f) Whether responsibility via Delegation of Authority has been created among
the subordinates to complete the given task?
g) Whether the methods of Delegation of Authority are Compatible with the
organization structure?
D. Checklist of span of Management

a) Whether span of Management has been recognised in the organization?
b) Whether everybody in department reports only to one supervisor?
c) Whether the accountability of the higher authority for the acts of its
subordinate is in accordance with the current practices?
d) Whether the corporate management recognizes the following factors that
affect the span of Management?
(i) Degree of interaction between the units or the personnel being supervised
(ii) The incidence of new problems in any department
(iii) The extent of standard procedures adopted
(iv) The extent of non-managerial responsibilities
e) Whether the different activities and functions are grouped together in order
to:
(i) Obtain the most effective use of men and facilities
(ii) Meet the objective in the optimum way
(iii) Run the operation most economically
f) Whether responsibilities are grouped, wherever possible, so that the overall

control of a function can be established so as to hold the superior manager
accountable?
5. (a) Prepare an Internal Control Questionnaire relating to Inventory. 8
(b) What are the important points to be considered for conducting Audit of a Hospital? 8
Answer:
5. (a) Internal control questionnaire relating to inventory:

1. Is the storage accommodation adequate to provide protection against
- deterioration?
- access by unauthorized persons?
- any other local hazards?
2. Are issues from the stores made only against properly authorized requisition(s)?
3. Who are authorized to sign requisition? Specify name, position, etc.
4. Are bin cards or similar records maintained at the stores location?
5. Are continuous stock records maintained for
- raw materials?
- bought out components?
- consumable stores?
- finished goods?
- stocks held on behalf of third parties?
6. Are these records maintained

- in quantity only?
- in value only?
- in both quantity and value?
7. Are stores records maintained by a person independent of
- the store keepers?
- those responsible for physically counting or checking stocks?
8. Are independently maintained control accounts kept for each category of stock
mentioned in 5?
9. Is the counting system fully integrated with the financial records?
10. If not are totals of various categories of costs (including overheads) regularly
reconciled with the actual costs in the financial records?
11. Are work orders issued
- against specific orders?
- on the basis of pre-determined production targets?
- on some other basis?
12. How are work orders authorized? Specify.
13. On what basis are materials, labour and other direct costs charged to the work-in-
progress accounts? Specify.
14. Are Overheads clearly divided into fixed and variable overheads?
15. What is the basis of allocation of overheads to costs and recovery of overheads ?
Specify.
16. Does the system ensure that excess or abortive costs are written off and not
carried forward in the work in progress?
(b) Audit of Hospitals:

The points stated below are to be considered for conducting audit of a hospital.
(i) Check the letter of appointment to ascertain the scope of responsibilities .
(ii) Study the Charter or Trust Deed under which the hospital has been set up and
take a special note of the provisions affecting the accounts.
(iii) Examine, evaluate and verify the system of internal check and internal control
and determine the nature, timing and extent of the audit procedures.
(iv) Vouch the entries in the Patient's Bill Register with the copies of the bills issued. Test
check the selected bills to see that these have been correctly prepared taking
into consideration the period of stay of each patient as recorded in the
Attendance schedule.
(v) Vouch the collection from patients with the copies of the bills and entries in Bills
Register. Arrears of dues should be properly carried forward. Where these are
deemed to be irrecoverable, these be written off under due authorizations.
(vi) Interest and /or dividend income should be vouched with reference to the
Investment Register and the interest dividend warrants.
(vii)In case of legacies and donations which are received for specific purposes, it
should be ensured that any income therefrom is not utilized for any other
purposes.
(viii)Where receipts of subscription show significant deviations from the budgeted
figures, these should be thoroughly inquired into and the matter should be
brought to the notice of the trustees or the Managing Committee.
(ix) Government grants or grants from local bodies should be verified with reference
to the correspondence with the concerned authorities.
(x) Clear distinction should be made between the capital and revenue items.
(xi) The capital expenditure should be incurred under the proper authorization of a
valid resolution of the trustees or the Managing Committee.
(xii) Verify the system of internal check as regards purchase and issue of stores,
medicine, etc.
(xiii)Examine that the appointment of the staff, payment of salaries etc., are duly -
authorized.
(xiv)Physically verify the investments, fixed assets and inventories.
(xv)Check that adequate depreciation has been provided on all the depreciable
assets.
6. (a) The financial statements of PQR Ltd. contain the information given below for the years
ended on 31st March, 2017 and 31st March, 2018.
Particulars 31.03.17 (`) 31.03.18 (`)

Cash 1,50,000 1,75,000
Sundry Debtors 4,20,000 4,50,000
Short-term Investment 3,35,000 3,75,000
Stock 21,72,000 22,80,000
Prepaid Expenses 15,000 22,000
Total Current Assets 30,92,000 33,02,000
Current Liabilities 10,50,000 12,72,000
10% Debentures 18,00,000 18,00,000
Equity Share Capital 25,00,000 25,00,000
Retained Earnings 9,00,000 10,00,000
Statement of Net Profits for the years ended on 31st March, 2017 and 31 March, 2018.
Particulars 31.03.2017 31.03.2018

Sales (20% cash sales) 48,00,000 51,60,000
Less : Cost of Goods Sold 33,60,000 36,12,000
Profits before Interest and Tax 14,40,000 15,48,000
Less: Interest 1,80,000 1,80,000
Profits before Tax 12,60,000 13,68,000
Less: Tax @ 30% 3,78,000 4,10,400
Profits after Tax 8,82,000 9,57,600
You are required to calculate the following for the years ending 31.03.2017 and
31.03.2018:
(i) Quick Ratio
(ii) Current Ratio
(iii) Debt-Equity Ratio
(iv) Return on Capital Employed
(v) Average Collection period (assuming 360 days a year) 10
(b) The following are the process-wise wastages on inputs in a Spinning Mill in the year
2017-18:
Process % of Wastages on Input
Blow Room 9.13
Carding 7.14
Drawing 1.20
Roving (Simplex) 0.25
Ring Frame (Spinning) 7.11
Reeling and Winding 1.35
From the above, calculate the process-wise Waste Multiplier Factor. 6
Answer:
6. (a) (i) Quick Ratio = Quick Assets/Current Liabilities

Quick Assets = Current Assets - Stock-Prepaid Expenses
31.03.2017 = (30,92,000-21,72,000-15,000)/10,50,000
= 9,05,000/10,50,000 = 0.86:1
31.03.2018 =(33,02,000-22,80,000-22,000)/12,72,000
= 10,00,000/12,72,000 = 0.79:1
(ii) Current Ratio:
= Current Assets/Current Liabilities
31.03.2017 = 30,92,000/10,50,000 = 2.94:1

31.03.2018 = 33,02,000/12,72,000 = 2.60:1
(iii) Debt-Equity Ratio:

= Long Term Debt/Shareholder's Fund
31.03.2017 = 18,00,000/34,00,000 = 0.53:1

31.03.2018 = 18,00,000/35,00,000 = 0.51:1
(iv) Return on Capital Employed = (Profit after tax +Interest)/Capital Employed) x 10
31.03.2017: (882000+180000)/5200000) x 100 = 20.42%

31.03.2018: (957600+180000)/530000) x 100 = 21.46%
Alternative Answer
(iv) Return on Capital employed:

(Profit after Tax+ Interest- Tax Advantage on Interest)/Capital employed × 100
31.03.2017: [(882000+180000-54000)/5200000/ x 100 = 19.38%

(957600+180000-54000)/5300000] x 100 = 20.45%
(v) Average Collection Period:

=(Sundry Debtors/Credit Sales) × 360
31.03.2017 = (4,20,000/38,40,000) × 360 = 39 days

31.03.2018 = (4,50,000/41,28,000) × 360 = 39 days
(b)
Process % of Wastages Net output for 100 Waste multiplier
in input units of input factor
Total 100 1.3122
Blow room 9.13 100 - 9.13 = 90.87 1.1924
Carding 7.14 90.87 - 6.49 = 84.38 1.1072
Drawing 1.20 84.38 – 1.01 = 83.37 1.0940
Roving (Simplex) 0.25 83.37 - 0.21 = 83.16 1.0912
Ring frame (spinning) 7.11 83.16 - 5.91=77.25 1.0136
Reeling and winding 1.35 77.25 - 1.04 =76.21 1.0000
7. (a) ABC Ltd. is engaged in the manufacture of an electronic gadget. It produces 30,000
gadgets per annum. The company also manufactures the component needed for
gadgets - 30,000 units of component.
The departmental expenses per annum are as follows:

Direct Material 39,60,000
Direct Labour 14,48,000
Indirect Labour 8,40,000
Inspection and Testing 4,70,000
Lighting 45,000
Power 4,90,000
Insurance 30,000
Depreciation (fixed) 98,000
Miscellaneous Fixed Expenses 56,000
If the company stops manufacturing the components and buys the same from
market, the saving in the departmental budget will be as under.
Direct Material 20%
Direct Labour 25%
Indirect Labour 20%
Inspection and testing 25%
Power 25%
The purchase price of each component is ` 60.
Required :
(i) State whether the company should make or buy the component.
(ii) The company has received an export order of 15000 units of the electronic
gadget at a price of ` 270 each. If the offer is accepted by the company, the
capacity will be fully utilised and the component will have to be purchased.
Should the company then make or buy the component? 10
(b) The following data are available for Limelight Limited:

Particulars 2015-16 2016-17 2017-18
Installed Capacity (tonnes) 320 320 320
Production (tonnes) 310 300 160
Cost Per tonne (`) 1,000 1,070 1,641
The poor capacity utilisation in 2017-18 was due to abnormal power cut. The
escalation in costs were 5% in 2016-17 and 7% in 2017-18 (based on 2015-16).
Required:
(i) Calculate the abnormal costs due to power cut.
(ii) How would you treat the Abnormal Cost? 6
Answer:
7. (a) (i) Departmental Expenses Budget

Particulars Total (`) Allocation Gadgets Components
Ratio (`) (`) (`)
Direct Material 39,60,000 80:20 31,68,000 7,92,000
Direct Labour 14,48,000 75:25 10,86,000 3,62,000
Indirect Labour 8,40,000 80:20 6,72,000 1,68,000
Inspection and Testing 4,70,000 75:25 3,52,500 1,17,500
Power 4,90,000 75:25 3,67,500 1,22,500
72,08,000 56,46,000 15,62,000
Fixed Costs: `
Lighting 45,000
Insurance 30,000
Depreciation 98,000
Miscellaneous fixed expenses 56,000
2,29,000
Total Cost 74,37,000
Cost per unit = 7437000/30000 = ` 247.90.
Variable Cost per unit:

Gadgets = 56,46,000/30000 = ` 188.20
Components = 15,62,000/30000 = ` 52.07
The variable cost per unit of the component is ` 52.07. The purchase price of the
component is ` 60 per unit. For each unit additional cash out flow will be ` 7.93.
Therefore, the company should take decision to make/manufacture the
component.
(ii) Evaluation of decision for Export:
Inflow `
(i) Additional Profit due to export order [15,000 units × (270 - 247.90)] 3,31,500
(ii) Saving in variable cost of components (30000 × 52.07) 15,62,000
18,93,500
Less: Outflow
Payment to be made to supplier (30,000 × ` 60) 18,00,000
Net Cash inflow (Net profit) 93,500
Hence the export order should be accepted and the components should be
bought/purchased.
(b) Statement showing calculation of abnormal costs due to power cut:

Particulars 2015-16 2016-17 2017-18
Installed capacity (Tonnes) (a) 320 320 320
Production (Tonnes) (b) 310 300 160
Percentage of Capacity utilization (b/a x 100) 97% 94% 50%
Cost per unit (`/tonne) 1000 1070 1641
Escalation Factor 100 105 107
Cost (at base year price) 1000 1019 1534
Total cost of production 310000 305700 245440
Variable cost per Tonne (working note 1) 430 430 430
Fixed cost 570 589 1104
Fixed cost @ 100% utilization 552
Increase in Fixed Cost 552
Note: Hence increase in Fixed Cost/Tonne due to abnormal power cut resulting in
poor capacity utilization in 2017-18 is 1104-552= ` 552. Working note 1: Calculation of
Variable Cost:
Particulars 2016-17 2017-18
Difference in total cost 3,10,000 3,10,000
-3,05,700 -2.45,440
4,300 64,560
Difference in Production 10 150
Variable Cost=difference in cost/difference in production 430 430
(i) Total abnormal costs due to power cut= 160 × 552= ` 88,320/-
(ii) The abnormal costs must be excluded from the computation of Product Cost.
Such abnormal costs are charged directly to Costing Profit and Loss Account.
(a) As per the CAS-12, how should high value spare, when replaced by a new spare and
reconditioned, be treated? 4
(b) What do you mean by Internal Check? Is it different from Internal Audit? Explain. 4
(c) Explain the Adequacy of Budgetary Control System. 4
(d) PQR Ltd. has received an enquiry for supply of 2,50,000 special type of machine parts.
Capacity exists for manufacture of the machine parts but a fixed investment of `
1,20,000 and working capital to the extent of 25% of sales value will be required to
undertake the job.
The cost estimated is as follows:

Raw Materials - 25000 kgs. at ` 3.00 per kg.
Labour Hours - 10000 hrs. of which 1500 would be overtime hours payable at double
the labour rate.
Labour Rate – ` 3 per hour

Factory overheads – ` 3.50 per direct labour hour
Selling and Distribution overheads – ` 32,000
Materials recovered at the end of the operation will be ` 10,000 (estimated).
The company expects a net return of 25% on capital employed.
You are the Management Accountant of the company. The Managing Director
requests you to prepare a cost and price statement, indicating the price which should
be quoted to the customer. 4
(e) The following figures are taken from the accounts of Best Ltd. for the year ended on
31.03.2018:
Gross Fixed Assets 5,600
Cumulative Depreciation 1,300
Investment in Shares and Debentures 650
Inventories 545
Sundry Debtors 347
Advances for Purchase of Capital Equipment 38
Other Loans and Advances 72
Other Current Assets 37
Sundry Creditors 229
Provision for Expenses 34
Net Sales 4,152
Depreciation 54
Interest 704
Profits before Tax 318
Compute the following under the Companies (Cost Records and Audit) Rules:
(i) Profit as a percentage of capital Employed
(ii) Profit as a percentage of Net Sales 4
Answer:
(8) (a) As per CAS-12 on Repairs and Maintenance Cost, high value Spare, when replaced
by a new spare and reconditioned, should be recognised as property, plant and
equipment when they meet the definition of property, plant and equipment and
depreciated accordingly. Otherwise, such items are to be classified as inventory and
recognised in cost as and when they are consumed.
Example: A Company purchased equipment for `10 crore and the insurance spare
was ` 1 crore. If the company is covered under INDAs, such spare is capitalized as
Property,/Plant and/equipment. After use for five years, the equipment broke down
and a part was replaced with the aforesaid insurance spare. After 5 years, the
depreciated value of equipment is `5 crore. As property, plant and equipment are
depreciated when they are available for use, accordingly the depreciated value of
new spare is `50 lakh. The old spare was reconditioned and the cost of reconditioning
is `10 lakh. As per the estimated life of the old spare for future economic benefits, the
current market value of the reconditioned old spare has been estimated at `25 lakh.
The amount to be treated in repairs and maintenance is ` 35 lakh as follows:
(` In Crores)
A. Equipment Cost 10.00
B. Cost of New Spare 1.00
Total Cost 11.00
Depreciation for 5 years 5.50
Depreciated value of equipment and spare 5.50

Reconditioning cost of old spare 0.10
Depreciated value of old spare 0.50
Book value reconditioned spare 0.60
Current market value of reconditioned spare to be restated in
Books of Account 0.25
Amount to be treated in Repairs and Maintenance 0.35
(b) Internal Check is a system of instituting checking of the day-to-day transactions as

part of the routine system, whereby the work of one person is checked independently
or is complimentary to the work of another person i.e. resulting in the prevention and
early detection of errors or fraud. Therefore, the systems are so designed that no
single individual is responsible for all the stages involved in a transaction, i.e. duties are
allocated in such a way that no single individual has an exclusive control over any
one transaction or a group of transactions. Internal Auditing on the other hand is 'an
independent appraisal function established within an organisation to examine and
evaluate its activities as a service to the Organisation. The objective of Internal
Auditing is to assist members of the organisation in the effective discharge of their
responsibilities. Internal auditing furnishes them with analyses, appraisals,
recommendations, counsel and information concerning the activities reviewed.
Internal Check and Internal Audit are two important ingredients of Internal Control.
Internal Checks are procedures in-built in the overall system itself and take place
concurrently with the execution of the transactions, whereas Internal Audit is a distinct
function which is carried out after the transactions have taken place.
(c) Adequacy of Budgetary Control System:

While determining the adequacy of the budgetary control system of an organisation,
it is essential that the Management Auditor should evaluate its coverage and
effectiveness, i.e. whether the system in operation covers all functions rather than an
accounting exercise. For this purpose, he/she should examine whether the system
contributes towards accomplishing the basic task of planning, coordinating and
controlling the activities of the organisation in relation to the product under
Management Audit.
The Management Auditor should examine and appraise the points as stated below:
a) In the area of Planning:

1. Whether it covers all interrelated functions like production, sales, purchasing
and financed
2. Whether it determines the linkage between the budget centres and the
responsibility centres.
3. Whether it establishes definite goals and limits for these functions well in
advance
4. Whether there are imbalances in the fixation of performance levels of
functional budgets in relation to sales budgets.
5. Whether a budget monitoring cell exists for operating the system in the right
perspective
b) In the area of coordination:

1. Whether the budget monitoring cell holds its meeting regularly with a view to
ensuring performance evaluation
2. Whether it helps to prevent waste that results in duplication or cross-purpose
activities.
3. Whether it reveals timeline in the process of preparation and approval of all
the functional budgets and the master budget.
c) In the area of Control:
1. Whether system exists for measuring, comparing and quantifying the results of
all functional areas.
2. Whether the budget incorporates a degree of flexibility with a provision for its
periodical review.
3. Whether the variance reports are prepared and appropriate corrective
actions are taken on the variances.
(d) Statement of Estimate Cost and Price to be quoted:

Product Quantity - 2,50,000
Amount (`)
Materials(25,000×3) 75,000
Less: Estimated Scrap Value 10,000 65,000
Labour: 8,500 hrs × 3 25,500
1,500 hrs × 6 9,000 34,500
Prime Cost 99,500
Add. Factory Overheads (10,000x3.50) 35,000
Factory Cost 1,34,500
Add. Selling and Distribution overheads 32,000
Total Cost 1,66,500
Profit 43,100
Sales 2,09,600
Calculation of Sales:
Let Sales be S
S= Total Cost +25% of Capital Employed
S=1,66,500+0.25x(120000+0.25S)
= l,66,500+30000+0.0625S
Or, S-0.0625S=196500
Or, 0.9375S= 196500
Or S=(196500)/(0.9375)=209600
Sales= ` 2,09,600
Profit = (172400x0.25) = ` 43,100
Working Capital = (0.25x209600)= ` 52,400
(e)
Statement showing Computation of Capital Employed (` in Lakh)
Gross Fixed Assets 5600
Less: Depreciation 1300
Net Fixed Assets (A) 4300
Gross Current Assets:
Inventories 545
Sundry Debtors 347
Advance for Purchase of Capital Equipment 38
Total current assets 1039
Current Liabilities:
Total current liabilities 263
Net Current Assets (B) 776
Total Capital Employed (A+B) 5076
Profit before tax (PBT) 318
Net Sales 4152
(i) Profit as percentage of Capita Employed: = (318/5076)×100 =6.26%

(ii) Profit as percentage of Net Sales: = (318/4152)×100 = 7.66%
Alternative Answer to Question (e):
Statement showing Computation of Capital Employed (` in Lakh)

Gross Fixed Assets 5,600
Less: Depreciation 1,300
Net Fixed Assets (A) 4,300
Gross Current Assets:
Inventories 545
Sundry Debtors 347
Total current assets 1,001
Total current liabilities 263
Net Current Assets (B) 738
Total Capital Employed (A+B) 5,038
Profit before tax (PBT) 318
Net Sales 4,152
Working notes: Capital works in progress, investment outside business and Advance
for purchase of Capital equipment do not enter into the calculation of capital
employed.
(i) Profit as percentage of Capita Employed: = (318/5038)×100 = 6.31%

(ii) Profit as percentage of Net Sales: = (318/4152)×100 = 7.66%
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)

DECEMBER 2018
Paper- 19: Cost and Management Audit

any five questions from Question Nos. 2 to 8
SECTION – A (20 Marks)
1. Choose the correct answer with short justification/workings. (1 mark for correct choice
and 1 mark for justification/working) 2x10= 20
(a) Before submission to the Auditor for Report, the Form CRA 3 should be signed by
__________.
(A) The Secretary and the Chief Finance Officer of the company.
(B) The Secretary and the Cost Accounts Officer of the company.
(C) The Secretary and one Director of the company.
(D) The Chief Finance Officer and the Managing Director of the company.
(b) Cost of self-generation utilities for own consumption shall comprise ___________.
(A) Administrative overheads.
(B) Distribution cost
(C) Factory overheads
(c) The useful life of an intangible asset, like amount paid on technical knowhow, shall
not exceed _________ from the date it is available for use.
(A) 5 years
(B) 8 years
(C) 10 years
(D) 12 years
(d) Product and Profitability Statement (for audited products/services) is shown under
____________ of Annexure to the Cost Audit Report.
(A) Part A
(B) Part B
(C) Part C
(D) Part D
(e) Cost Audit Documentation is dealt in the ____________

(A) Cost Auditing Standard 101
(B) Cost Auditing Standard 102
(C) Cost Auditing Standard 103
(D) Cost Auditing Standard 104
(f) Amember of The ICAI shall be deemed to be guilty of other misconduct, if he/she
is held guilty by any civil or criminal court of an offence which is punishable with
imprisonment ___________.
(A) For a term exceeding 3 years
(B) For a term exceeding 3 months
(C) For a term exceeding 6 months
(D) For a term exceeding 2 years
(g) Costing Taxonomy is best defined as a _________________.
(A) Dictionary
(B) Made Easy
(C) Tax Ready Reckoner
(D) Referencer
(h) The Consumer Service Audit critically examines ______________
(A) Outstanding payment of consumers
(B) The price consumers are ready to pay for a particular product/service.
(C) and appraises management of a business enterprise of responsibility
towards consumers.
(D) Demand of a product by consumers.
(i) Which of the following ratios appears as Profitability Ratio in Part D of Annexure to
the Cost Audit Report ?
(A) Net Profit to Net Sale
(B) Value added to Net Sales
(C) Profit before Tax to Value Added.
(D) Net Profit to Share Capital.
(j) CAS 24 deals with ____________.
(A) Overburden Removal Cost
(B) Interest and Financing Charges.
(C) Royalty and Technical Knowhow Fee.
(D) Treatment of Revenue in Cost Statements
Answer : 1
(a) (C) the Secretary and one Director of the company
Annexure to the Cost Audit Report in CRA 3 shall be approved by the Board of
Directors and by signed by the Company Secretary and a Director authorized by the
Board before submission to the Auditor for Report.
(b) (C) factory overheads
As per CAS 8, the cost of self-generated utilities for own consumption shall comprise
direct material cost, direct employee cost, direct expenses and factory overheads.
(c) (C) 10 years
CAS 16 on depreciation and amortization states that useful life of an intangible asset
shall not exceed 10 years from the date it is available for use.
(d) (D) Part D
This is per Rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014
(e) (B) Cost Auditing Standard 102
CAS 102 deals with Cost Audit Documentation
(f) (C) for a term exceeding 6 months

Part III of the Second Schedule to the Cost & Works Accountants of India Act, 1959
finds a member guilty of other misconduct if he/she is held guilty by a court for
offences punishable with imprisonment for a term exceeding 6 months.
(g) (A) Dictionary
Cost Taxonomy is a Dictionary of all cost elements required in the Cost Audit Report
and Compliance Report.
(h) (C) and appraises management of a business enterprise of responsibility towards

consumers.
Consumer Services Audit is an appraisal on the availability of a company’s products
to consumers in right quantity, right price, right place and right time.
(i) (C) Profit before Tax to Value Added

This is one of the four ratios identified as Profitability Rations in Part D of Annexure to
the Cost Audit Report.
(j) (D) Treatment of Revenue in Cost Statements

Effective from 1st April, 2017, CAS 24 on Treatment of Revenue in Cost Statements has
become applicable.
Section- B (80 marks)
2. (a) (i) While accepting the offer of appointment as Cost Auditor of a company, what
certificate should be submitted by the Cost Auditor to the company ? Is the Cost
Auditor required to give any certificate with respect to his/her/its independence
and ‘arm’s length relationship’ with the appointing company ?
(ii) A company has units in SEZ and in non-SEZ areas. What would be the applicability
of the Companies (Cost Records and Audit) Rules, 2014 on such a company with
respect to maintenance of cost accounting records and Cost Audit ? (3+2)+3=8
(b) (i) Mr. Arunmaya, a practicing Cost Accountant engaged two trainees, undergoing
training under his guidance for audit job. Since the job was voluminous, he
agreed to pay them, in addition to stipend, an amount of 10% of the audit fees.
Does the action of Mr. Arumaya amount to professional misconduct ?
(ii) State the ethical requirements of a Cost Auditor for ensuring the conduct of the
audit of Cost Statements as per the Cost Auditing Standard 103. 4+4=8
Answer : 2(a)(i)
The Cost Auditor appointed shall submit a certificate that –

(a) The individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act (the Cost and Works Accountants Act,
1959) and the rules or regulations made thereunder ;
(b) The individual or the firm, as the case may be satisfies the criteria provided in
Section 141 of the Companies Act, 2013 so far as may be applicable ;
(c) The proposed appointment is within the limits laid down by or under the authority
of the Act ; and
(d) The list of proceedings against The Cost Auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed in
the certificate, is true and correct.
Yes, the Cost Auditor of a company is required to give a certificate to the Audit
Committee in respect of his/her/its independence and arm’s length relationship with the
company. Moreover, according to the Second Schedule, Part I, Clause 4 of the Cost
and Works Accountants Act, 1959, it amounts to professional misconduct when a cost
Auditor expenses his/her/its opinion on cost and pricing statement of any business or
enterprise in which he/she, his/her firm or a partner of his/her firm has substantial interest.
Answer : 2(a)(ii)
Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 is specific and it has
mandated maintenance of cost accounting records for all products/activities listed under
Table- A and Table- B subject to threshold limits. No exemption is available to any
company from maintenance of cost accounting records one it meets the threshold limits.
Hence, the above company would be required to maintain cost accounting records for
all its units including the ones located in the special economic zone.
However, in view of the provisions of Rule 4(3) (ii) of the Companies (Cost Records and
Audit) Rules, 2017, the units located in the special economic zone would be outside the
purview of Cost Audit and the company would not be required to include particulars of
such units in its Cost Audit Report. The other units of the company located outside the
special economic zone would be covered under Cost Audit subject to the prescribed
threshold limits.
Answer : 2(b)(i)
As per Part I of the First Schedule of the Cost and Works Accountants Act, 1959, a Cost
Accountant in practice shall be deemed to be guilty of professional misconduct, if he/she
pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his/her professional work, to any person other than a
member of the Institute or a partner or a retired partner or the legal representative of a
deceased partner.
Under such circumstances, any payment to trainees as a percentage of audit fees is a
professional misconduct. He may, if necessary, pay a lump sum stipend to the trainees.
Answer : 2(b)(ii)
The Application Guidance of Cost Auditing Standard 103 lays down that the Cost Auditor
should comply with relevant ethical requirements as per the code of ethics issued by the
Institute of Cost Accountants of India. This code establishes fundamental principles of
professional ethics relevant to the Cost Auditor while conducting an audit and provides a
conceptual framework for applying these principles. The fundamental principles which
the Cost Auditor is required to comply with are given below.
(a) Independence
(b) Integrity
(c) Objectivity
(d) Professional Competence
(e) Due Care
(f) Confidentiality
(g) Professional Conduct.
3. (a) (i) What items of expenses are to be included as Employee Cost as per the revised
CAS 7 guidelines ?
(ii) What is the basis adopted to determine normal price with respect to related party
transactions ? 4+4= 8
(b) The Financial Profit and Loss Account for the year 2017-18 of a company shows a net
profit of Rs. 56,44,000.
During the course of Cost Audit, it was noticed that :
(i) The company was engaged in trading activity by sale of brads other than its
own through its retail outlets and thus earned a profit of Rs. 2,85,000 during the
year.
(ii) The claim on fire to the extent denied by the insurance company amounted to
Rs. 3,50,000.
(iii) An amount of Rs. 6,00,000 was charged in the Cost Accounts an notional rent
for the plant premises owned by the company.
(iv) Interest received on inter-corporate deposits amounted to Rs. 5,60,000
(v) VRS payment to the extend not amortized in the Financial Accounts amounted
to Rs. 4,50,000.
(vi) Unabsorbed assets value due to scrap of machine Rs. 4,10,000 was charged in
the Financial Accounts and
(vii) Stock valuation of finished and semi-finished goods was as given below.
Financial Accounts Rs. Cost Accounts Rs.
Opening Stock 27,79,000 29,56,200
Closing Stock 40,92,000 45,15,900
Work out the profit as per the Cost Accounts. 8
Answer : 3(a)(i)
The revised CAS 7 Guidelines lay down that the following items of expenses are to be
included in Employee Cost (for all employees whether temporary, part-time or
contractual)
Employee Cost (payable in cash or kind excluding prior period costs)

Salaries, wages, allowances, bonus/incentive
Contribution to provident and other funds
Employee welfare
Other benefits.
Employee Cost (future benefits)
Gratuity
Leave encashment
Other retirement/separation benefits
VRS/other deferred employee cost
Other future benefits.
Benefits generally include
Paid holidays
Leave with pay
Statutory provisions for insurance against accident or health scheme
Statutory provisions for workman’s compensation
Medical benefits to the employees and dependents.
Free or subsidized food
Free or subsidized housing
Free or subsidized education to children
Free or subsidized canteen, crèches and recreational facilities
Free or subsidized conveyance
Leave travel concession
Interest-free or subsidized loans
Any other free or subsidized facility
Cost of employees’ stock option
Answer :3(ii)
As per item 24 of CRA 1, normal price means price charged for comparable and similar
products in the ordinary course of trade and commerce where the price charged in the
sole consideration of sale and such sale is not made to a related party. Normal price can
be construed to be a price at which two unrelated and non-desperate parties would
agree to a transaction and where such transaction is not clouded due to the proximity of
the parties to the transaction and free from influence though the parties may have
shared interest. The basis adopted to determine normal price shall be classified as under :
(i) Comparable uncontrolled price method
(ii) Resale price method
(iii) Cost plus method
(iv) Profit split method
(v) Transactional net margin method
(vi) Any other method, to be specified.
Answer :3(b)
Reconciliation of Profit as per Cost Accounts with Profit as per Financial Accounts for the
year 2017 - 18
Amount Rs. Amount Rs.
Profit as per Financial Accounts 56,44,000
Add :
1) Loss on scrapping of machine 4,10,000
2) Difference in Closing and Opening value of Stock
in Cost Accounts (45,15,900 – 29,56,200) 15,59,700
3) Insurance claim denied 3,50,000
4) VRS expenses not amortized 4,50,000
(+) 27,69,700
Less :
1) Trading Profit not included in Cost Accounts 2,85,000
2) Interest from Inter-corporate Deposits 5,60,000
3) Notional Rent Income provided in Cost Accounts 6,00,000
4) Difference in Closing and Opening value of Stock
in Financial Accounts (40,92,000 – 27,79,000) 13,13,000 (-) 27,58,000
Profit as per Cost Accounts 56,55,700
4. (a) Explain Management Audit and state its uses. 8

(b)(i) You are appointed as the Energy Auditor of a medium-sized manufacturing
company. Suggest some areas for conserving energy at the plant level.
(ii) Briefly discuss the concept of Propriety Audit.4+4= 8
Answer:4(a)
Management Audit is the unique process appraising the performance of directors and
managers or, in other words, appraising the performance of the management. In a
number of organizations, Management Audit is now a regular feature to examine and
improve managerial effectiveness. It is the systematic and dispassionate examination,
analysis and appraisal of management’s overall performance. It is a form of appraisal of
the total performance of the management by means of an objective and
comprehensive examination of the organization structure, its components, its plans and
policies, its processes and controls and its use of physical facilities and human resources.
As per the CIMA, Management Audit is an objective and independent appraisal of the
effectiveness of the managers and effectiveness of the corporate structure in the
achievement of the company objectives and policies. It aim is to identify existing and
potential management weakness within an organization and to recommend ways to
rectify these weaknesses.
Uses of Management Audit
(i) Management Audit is useful in synthesizing accounting, economic or other data
required by the management in constructing the basic policy framework.
(ii) It assists in establishing, reviewing and improving the planning system.
(iii) It makes substantial contribution to the system of goal-setting in the organization.
(iv) It ensures that management is getting adequate information for correct decisions.
(v) It ensures that management property uses the information that it is getting.
(vi) It aids in the design and maintenance of adequate authority structure.
(vii) It helps in improvement in the information system to expedite flow of information
among responsibility centres.
(viii) It substantially contributes for improvement of the entire communication system.
(ix) It helps management in pinpointing key functions or operations in the profit-making
process.
(x) It helps management in establishing better criteria for measuring results.
(Xi) It helps management to avoid wasteful, unnecessary and extravagant use of
resources.
Answer :4(b)(i)
Energy Audit means monitoring the energy efficiency of different equipment and
processes in a plant and looking into ways by which the total sum of energy consumed
can be cut down without affecting production or its efficiency. A few illustrations of
possible sources for conserving energy are given below.
(A) Steam generation & distribution: Selecting boilers to achieve fuel economy,
evaluating the efficiency of steam generation, fixing up the cost of steam generation
and improving the efficiency.
(B) Steam utilization: Proper insulation, reducing hot water wastage, recycling hot air by
economic means, and scheduling of processes/operations to achieve fuel economy.
(C) Electrical energy utilization: Minimize maximum demand by tripping loads, use
standby electric generation equipment for on-peak high load periods.
(D) Installation of energy efficient system: Install (a) automatic control system, (b) thermal
solar system for warm water, (c) temperature effective humidification.
(E) Diesel exhaust recovery: Turning up diesel-generating sets for highest efficiency.
The list is illustrative and leaves scope for many areas for economic use.
Answer :4(b)(ii)
Propriety Audit stands for verification of transactions in the best interests of the public,
commonly accepted customs and standards of conduct. The term ‘propriety’ has been
defined by Kholer as ‘that which meets the tests of public interest, commonly accepted
customs and standards of conduct and particularly as applied to professional
performance, requirements of Government regulations and professional codes’. The tests
boil down to consideration of financial prudence and economy instead of too much
dependence on documents, vouchers, etc. It shifts the emphasis to finding the
appropriateness of expenditure, rather than verifying whether it has been duly authorized
or evidenced by proper vouchers, etc.
In other words, Propriety Audit seeks to ensure that the planned expenditure would yield
the optimum returns and there is no other better alternative available. It seeks to ensure
that the expenditure is not only approp0raite to the circumstances of each case but also
has indeed achieved the objectives for which it has been incurred. The audit of public
sector undertakings as undertaken by the Comptroller and Auditor General of India is an
example of Propriety Audit.
5. (a) Write a note on the provisions relating to Internal Audit under the Companies Act, 2013.
8
(b) State the important steps to be taken in the internal audit of institutions providing
Educational Services. 8
Answer :5(a)
Section 138 of the Companies Act, 2013, deals with the provisions relating to Internal
Audit.
Section 138
(i) Such class or classes of companies as may be prescribed shall be required to appoint
an internal auditor, who shall either be a Chartered Accountant or a Cost
Accountant or such other professional as may be decided by the Board to conduct
internal audit of the functions and activities of the company.
(ii) The Central Government may, by Rules, prescribe the manner and the intervals in
which the internal audit shall be conducted and reported to the Board.
Rule 13 of the Companies (Accounts) Rules, 2014
The following class of companies shall be required to appoint an internal auditor or a firm
of internal auditors, namely,
(a) every listed company ,
(b) every unlisted public company having –
(i) paid up share wealth of rupees fifty crore or more during the preceding
financial year, or
(ii) turnover of rupees two hundred crore or more during the preceding financial
year, or
(iii) outstanding loans or borrowings from banks or public financial institutions
exceeding rupees one hundred crore or more at any point of time during the
preceding financial year, or
(iv) outstanding deposits of rupees twenty-five crore or more at any point of time
during the preceding financial year, and
(c) every private company having –
(i) turnover of rupees two hundred crore or more during the preceding financial
year, or
(ii) outstanding loans or borrowings from banks or public financial institutions
exceeding rupees one hundred crore or more at any point of time during the
preceding financial year.
Provided that an existing company covered under any of the above criteria shall
comply with the requirements of Section 138 and this Rule within six months of
commencement of such section.
Answer :5(b)
The important steps involved in the internal audit of an educational institution are stated
below.
(i) to examine the Trust Deed or Regulations of the educational institution and note
all the provisions affecting accounts.
(ii) to read through the minutes of the meetings of the Managing Committee or the
Governing Body, noting the resolutions affecting accounts to see that those have
been duly complied with
(iii) to check names entered in the Students’ Fees Register and test check the amount
of fees charged and to verify that a system of internal check is in operation.
(iv) to check fees received by comparing counterfoils of receipts granted to confirm
that the revenue from this source has been duly accounted for
(v) to check admission fees, hostel caution money, etc., and confirm that the amount
had been credited to a Capital Fund.
(vi) to see that free studentships and concessions have been granted as per
prescribed Rules.
(vii) toconfirm that hostel expenses were recovered before students’ accounts were
closed and their deposits of caution money refunded.
(viii) to verify rental income from landed property with the rent rolls, etc., vouch income
from endowments and legacies, as well as interest and dividends from investments
and also inspect the securities in respect of investments held.
(ix) to verify any government or local authority grant with the relevant papers of grant;
if any expense has been disallowed for the purposes of grant, ascertain the
reasons and compliance thereof.
(x) to confirm that caution money and other deposits paid by students on admission
have been shown as liability; investments representing endowment funds for prizes
are kept separate and any income in excess of the prizes has been accumulated
and invested along with the corpus.
(xi) to verify that the Provident Fund money of the staff have been deposited with the
appropriate authorities.
(xii) to vouch donations, if any, and ensure that donations for any specific purpose
were utilized for such purpose.
(xiii) to vouch all capital expenditure in the usual way and verify the same with the
sanction of the committee as contained in the minute book.
(xiv) to vouch all establishment expenses and enquire into any unduly heavy
expenditure under any head.
(xv) to verify the inventories of furniture, stationery, clothing, provision and all
equipment, etc.; these should be checked by reference to the Stock Register and
values applied to various items should be test checked.
(xvi) to confirm that the refund of taxes deducted from various incomes have been
claimed and recovered since these institutions are generally exempted from the
payment of income tax.
(xvii) To verify the annual statements of accounts and, while doing so, see that separate
statements of accounts have been prepared as regards specific Funds, viz., Poor
Boys Fund, Games Fund, Hostel Fund, Provident Fund of staff. Etc.
6. (a) In a factory, running single shift, two products M and N, are manufactured.
M N
Man hours/unit 3 7
Production/month (units) 1,500 1,000
Month means 26 working days and 8 hours a day. The company employs 60
workers and the budgeted man-hours are 1,32,000 for the year. You are required to
work out the (i) Capacity Ratio (ii) Activity Ratio and (iii) Efficiency Ratio. 8
(b) A chemical unit generates in-house power to meet its shortfall from grid supply. It has
20% surplus power which it can supply to the adjacent units. From the cost data
given below, how would you compute the cost of power as per CAS 8 is the
following circumstances ?
(i) Power generated for the purpose of inter-unit transfers.
(ii) Power generated for the inter-company transfers.
Power generated 29,76,500 Kwh

Particulars Total Amount (Rs.) (Rs.)/’00 kwh
Coal Consumed less Ash Sale 15,80,000 53.08
Diesel Oil 1,85,000 6.22
Water 16,40,000 55.10
Stores 65,000 2.18
Salaries of Power House Staff 13,94,800 46.86
Repairs & Maintenance 2,96,000 9.94
Deprecation of Plant and Boiler 2,06,000 6.92
Share of Administration 2,05,000 6.89
Overheads
Interest on Asset Purchase 1,40,000 4.70
Distribution Cost 1,80,000 6.05
Total Power House Cost 58,91,800 197.94
8
Answer :6(a)
Budgeted man-hours for the year = 1,32,000
Budgeted man-hours for the month = 1,32,000/12 = 11,000 (maximum possible)
Actual man-hours hours worked = 26 × 8 × 60
= 12,480
Standard man-hours produced = 11,500
For Product P : 1500 × 3 = 4,500
For Product Q : 1000 × 7 = 7,000
(i) Capacity Ratio = Actual man-hours worked / Budgeted man-hours
= 12,480 /11,000 = 113.45%
(ii) Activity Ratio = Actual production in Standard man-hours/ Budgeted man-hours
= 11,500 / 11,000 = 104.54%
(iii) Efficiency Ratio = Actual Production in Standard man-hours /Actual man-hours
= 11,500 / 12,480 = 92.15%
Activity Ratio = Capacity Ratio x Efficiency Ratio = 113.45% × 92.15% = 104.54%
Answer:6(b)
(i) Cost of power generated for the purpose of inter-unit transfers shall comprise direct
material cost, direct employee cost, direct expenses, factory overheads and
distribution cost. Interest on asset purchase and share of administration over heads
will not form part of the cost. This is calculated as below :
Particulars Total Amount (Rs.)
Coal Consumed less Ash Sale 15,80,000
Diesel Oil 1,85,000
Water 16,40,000
Stores 65,000
Salaries of Power House Staff 13,94,800
Repairs & Maintenance 2,96,000
Depreciation of Plant, Boiler 2,06,000
Distribution Cost 1,80,000
Total 55,46,800
Therefore, cost of power generated for the purpose of inter-unit transfers
= 55,46,800 / 29765 = Rs. 186.35 per 100 Kwh
(ii) Cost of power generated for the inter-company transfers shall comprise direct
material cost, direct employee cost, direct expenses, factory overheads, distribution
cost and share of administrative overheads. Interest on asset purchase will not form
part of the cost. This is calculated as below.
Particulars Total Amount

(Rs.)
Coal Consumed less Ash Sale 15,80,000
Diesel Oil 1,85,000
Water 16,40,000
Stores 65,000
Salaries of Power House Staff 13,94,800
Repairs & Maintenance 2,96,000
Depreciation of Plant, Boiler 2,06,000
Share of Administration Overheads 2,05,000
Distribution Cost 1,80,000
Total 57,51,800
Therefore, cost of power generated for the purpose of inter-company transfers

= 57,51,800 / 29765 = Rs. 193.24 per 100 kwh
7. (a) From the following figures extracted from the financial and cost accounting records,
you are required to compute :
(i) Value Added
(ii) Ratio of Operating Profit to Net Sales, and
(iii) Ratio of Operating Profit to Value Added.
Particulars Rs. in lakh

Net sales excluding Excise Duty 50,400
Increase in Stock of Finished Goods 600
Expenses :
Raw Materials Consumed 6,240
Packing Materials Consumed 2,880
Stores and Spares Consumed 1,344
Power and Fuel 11,040
Repairs and Maintenance 480
Insurance 288
Direct Salaries and Wages 1,152
Depreciation 2,124
Interest Paid 3,355
Factory Overheads :
Salaries and Wages 576
Others 600
Selling and Distribution Expenses :
Additional Sales Tax 1,097
Others 4,080
Administration Expenses :
Others 192
10
(b) A unit actually operated 291 days in a year and was stopped for abnormal
circumstances –
(i) 6 days due to power disruption for cyclone and flood, and
(ii) 4 days due to heavy breakdown of core machinery.
The rest of the days were weekly off or holidays. Half wages as lay-off
compensation were paid for the stoppage period. During the year, total
expenses incurred were
(A) Salaries and wages (including lay-off compensation of Rs. 65 lakh) Rs.
3,360 lakh, and
(B) Other fixed costs Rs. 1,050 lakh.
Find Abnormal Costs (in Rs. lakh) 6
Answer :7(a)
(i) Value Added = Rs. 23,856
Computation of Value Added Rs. in lakh Rs. in lakh
Sales + increase in Stock of Finished Goods 51,000
Less
Cost of Materials and Services
Raw materials consumed 6,240
Packing materials consumed 2,880
Stores and spares consumed 1,344
Power and Fuel 11,040
Repairs and maintenance 480
Insurance 288
Other Factory Overheads 600
Other Selling and Distribution Expenses 4,080
Other Administration Expenses 192 27,144
Value Added 23,856
(51,000 – 27,144)
Composition of Value Added
Depreciation 2,124
Interest 3,355
Additional Sales Tax 1,097
Salaries and Wages (1,152+576+288+288) 2,304 8,880
Profit before Tax 14,976
Operating Profit
Profit before Tax 14,976
Interest paid 3,355 18,331
(ii) Ratio of Operating Profit to Net Sales = Operating Profit = 18,331/50,400 = 36.37%
Net Sales
(iii) Ratio of Operating Profit to Value Added = Operating Profit = 18,331/23,856 = 76.84%
Value Added
Answer :7(b)
As per Cost Accounting Standard on Material Cost (CAS- 6), any abnormal cost shall be
excluded from material cost. So cost of abnormal events such as strike, lock out and
other factors are not included in cost. The abnormal cost is estimated as below.
Total Fixed Costs Abnormal Costs
Working days 291+6+4 = 301 6+4 = 10
Salaries and Wages (Rs. in lakh) 3,360 65
Other Fixed cost (Rs. in lakh) 1,050 = 1050 × (10/301)
= 34.88
Total 4,410 99.88
Out of total fixed costs of Rs. 4,410 lakhs, abnormal costs of Rs. 99.88 lakhs will not form
part of cost of production.
8. Answer any four questions.
(a) Write a note on adjustment of cost variances in working out total cost.
(b) How do you assess the adequacy of the Internal Audit function ?
(c) How is the operational efficiency of a unit highlighted in the report by the Cost
Auditor as per the Companies (Cost Records and Audit) Rules, 2014 ?
(d) Fortune Textiles is using water for production and consumption purposes and raises
water from a water body nearby and through recycling process. The water is
treated through two processes and is transferred to the reservoir of the plant to
supply for Boiler. Washroom, Humidification, Weaving, etc. A part of such water is
transferred for human consumption in office, canteen and quarters through a
branded Purifier. The initial water collection cost, inclusive of fees to local
authorities, is. Rs. 1/kl and the other costs, including process waste, are shown
below:
Particulars Process 1 Process 2 Domestic
Water Raised (kl) 26,000 24,700 6,500
Water Transferred (kl) 24,700 23,400 6,500
Cost of Water Raised Rs. 1/kl
(Rs.)
Processing Cost (Rs.) 57,460 39,700 15,000
Calculate the cost of water transferred from source to the Plant and the Domestic
area.
(e) The following figures relate to Walmat Street Ltd. for two years :
31.3.2018 31.3.2017
Gross Profit% 30 25
Average Stock (Rs.) 45,000 60,000
Average Debtors (Rs.) 1,20,000 1,55,000
Stock Turnover (times) 20 25
Income Tax Rate (%) 30 30
Post-tax Income as % of Sales 8 9
Prepare Statement of Profits for two years. 4 × 4 = 16
Answer :8(a)
The guidelines laid down in CRA 1 state that ‘Where the company maintains cost records
on any basis, other than actual, such as Standard Costing, the records shall indicate the
procedure followed by the company in working out the cost of the goods or services
under such system. The cost variances shall be shown against separate heads and
analysed into material, labour and overheads and further segregated into quantity, price
and efficiency variances. The method followed for adjusting the cost variances in
determining the actual cost of the goods or services shall be indicated clearly in the cost
records. The reasons for the variances shall be duly explained in the cost records and
statements.’
Answer :8(b)
Sometimes it is required to assess the adequacy of internal audit function of an
organization. The questionnaire given below will help assess the adequancy of the
internal audit function.
1. What is the organizational set up of the department ?
2. Is the staff employed in the department adequate ?
3. Are the qualifications of the staff adequate ?
4. Is the staff competent ?
5. Is the staff independent ?
6. To whom do they report frequently and with what effect ?
7. Is there any internal audit manual ?
8. Is a programme of internal audit drawn up before the commencement of the
financial year ?
9. Does the programme cover the audit of all the important transactions and records of
the company including statutory cost accounting records ?
10. Is the scope of internal audit wide enough to extend to areas such as, management
audit, operational audit and system analysis ?
11. What is the system of reporting irregularities noticed during internal audit ?
12. Is prompt corrective action taken by the management on the basis of internal audit
reports ?
13. Is there much duplication of work between the statutory audit and internal audit ?
Answer :8(c)
(1) The Cost Auditor has a report, as per CRA 3, whether the Cost Accounting System
followed in a manufacturing unit is adequate for determination of the fair cost of
production.
(2) He/She/It has to report on the financial performance of the company as well as of
the product under Cost Audit, along with various ratios, and offer comments on the
ratios.
(3) He/She/it has to indicate the percentage of production in relation to the installed
capacity expressed in appropriate units of measurement and also to state reasons
for the shortfall in production, bringing out clearly the extent to which those are
controllable both in the short-term and the long-term.
(4) He/she/it has to give observations as regards variations, if any, in the rate of major
raw materials, power and fuel, etc. in terms of rate per unit as compared to the
previous year.
(5) He/she/it has to give details of wages and salaries including direct labour cost per
unit of output and as compared to the previous year.
(6) He/she/it has to indicate the amount of overheads along with reasons for any
significant variations in expenditure incurred against the items of factory,
administration, selling and distribution overheads as compared to the previous two
years.
(7) The cost auditor has also to mention any abnormal features affecting the
production, indicating their effect on the unit cost of production.
Again the Cost Auditor may offer suggestions as regard the following matters for
improvement in performance of the company under audit with reference to :
(a) Rectification of general imbalance in production facilities,
(b) fuller utilization of installed capacity,
(c) concentration on areas offering scope for cost reduction, increased productivity
and key limiting factors causing production bottlenecks, and
(d) suggesting improved inventory policies.
Answer :8(d)
Cost of Water transferred from source to Plant and Domestic area
Particulars Process 1 Process 2 Domestic
A. Water Raised (KI) 26,000 24,700 6,500
B. Water Transferred (KI) 24,700 23,400 6,500
C. Cost of Water Raised (Rs.1/KI) 26,000 83,460 @5.26/KI=34,200
(approx)
D. Processing Cost (Rs.) 57,460 39,700 15,000
E. Total Cost (Rs.) [C+D] 83,460 1,23,160 49,200
F. Unit Cost of Water Transferred (Rs.) 3.38/kl 5.26/kl 7.57/KI
[E÷B]
Answer :8(e)
Statement of Profits of Walmat Steel Ltd.
31.3.2018 31.3.2017
a) Gross Profit % 30 25
b) Average Stock (Rs.) 45,000 60,000
c) Average Debtors (Rs.) 1,20,000 1,55,000
d) Stock Turnover (times) 20 25
e) Income Tax Rate (%) 30 30
f) Post-tax Income as % of Sales 8 9
g) Cost of Goods Sold (bxd)(Rs.) 9,00,000 15,00,000
h) Sales [g × 100 /(100-a)] (Rs.) 12,85,715 20,00,000
i) Net Income after Tax [hxf] (Rs.) 1,02,857 1,80,000
j) Profit before Tax [1 × 100/(100-e)] (Rs.) 1,46,939 2,57,143
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)

JUNE 2019
Paper- 19: COST AND MANAGEMENT AUDIT
All Sections are compulsory. Each Section contains instructions regarding
the number of questions to be answered within the Section.
All working notes must form part of the answers.
Wherever necessary, candidates may make appropriate assumptions

and clearly state them.
Section-A (20 Marks)

Section-A contain question number 1.
All parts of this question are compulsory
1. Choose the correct option from amongst the four alternatives given (1 mark is for the
correct choice and 1 mark is for the justification/workings): 2x10=20
(i) ORS Ltd. is a multi-product company having annual turnover of `103 crore, Table A
items under CARO being `26 crore, Table B items `8 crore and the rest are not
covered in either of the Tables. Cost Audit will be ___________ .
(A) not applicable to the company
(B) applicable for Table A products only
(C) applicable for all products
(D) applicable for Table A and Table B products only
(ii) The wages of employees of contractor engaged in the organization for the past
periodis ___________ Employee Cost.
(A) included in
(B) excluded from
(C) included to the extent of statutory contribution of employer
(D) partly included
(iii) The Cost Accounting Standard 24 is a Cost Accounting Standard on ___________ .
(A) Overburden Removal Cost
(B) Royalty and Technical Know-how Fee
(C) Treatment of Revenue in Cost Statements
(D) Selling and Distributions Overhead Cost
(iv) The figures below are available for Reliable Ltd. Budgeted production - 800 units,
Standard hours per unit 25, Actual production 576 units and actual working— 12000
hours. What is the Efficiency Ratio?
(A) 110%
(B) 120%
(C) 100%
(D) 125%
(v) Machinery used in defense, space and atomic energy sector and fulfilling turnover
criteria is under
(A) regulated sector.
(B) unregulated sector.
(C) exempted by different statute.
(D) not applicable category.
(vi) Cost Auditing Standard 102 deals with ___________ .
(A) knowledge in performing of audit of cost statements, records etc.
(B) ensuring conduct of audit of cost statements
(C) planning on audit of cost statements, records etc.
(D) documentation of audit of cost statements, records etc.
(vii) The abridged cost statement (CRA 3) need not be separate for
(A) each product with separate (CTA) CETA heading
(B) each product having separate industry specific expenses
(C) each product having different unit of measure
(D) self/captive consumption of each product
(viii) The Management Auditor should evaluate MIS of an organization after ___________ .
(A) studying content, quality and source of information
(B) studying flow of information
(C) studying correlation of information in decision areas
(D) studying all the above
(ix) Operational Audit can lead to better management with the focus on
(A) transaction based analysis for fraud prevention.
(B) compliance of Rules.
(C) risk identification, process improvement.
(D) budget monitoring.
(x) The first step in audit of Educational Institutions —
(A) Read through the minutes of the meetings of the Managing Committee or
Governing Body
(B) Check admission fees with admission slips signed by the head of the institution
and confirm that the amount had been credited to a Capital Fund
(C) Verify the annual statement of accounts
(D) To examine the Trust Deed or Regulations
Answer:
(i) (B) (Applicable for Table A products only). Rule 4 to Companies (Cost Audit & Records)
Rules, 2014 states that if the overall turnover of the company is more than ` 100 crore,
only products of Table A will be covered if the sum total of all the products of the
company covered under Table A and Table B is more than `25 crore but less than
`35 crore.
(ii) (B) (Excluded from). CAS 7 on Cost Accounting Standard on Employee Cost excludes
benefits paid or payable for the services rendered by employees of any contractor
engaged in the organization.
(iii) (C) (Treatment of Revenue in Cost Statements). The objective of CAS-24 is to bring
uniformity and consistency in the principles and methods for treatment of revenue in
cost statements with reasonable accuracy.
(iv) (B) (120%) Efficiency Ratio = Actual output (576 units)/ Standard output (12000 hours/25
hours = 480 units); therefore, Efficiency ratio = 576/480 = 1.20 or 120%.
(v) (B) (Unregulated sector). Machinery used in defense, space and atomic energy sector
and fulfilling turnover criteria is under Unregulated sector.
(vi) (D) (Documentation of audit of cost statements, records etc.) The purpose of the Cost
Auditing Standard 102 is to provide guidance to the members in the preparation of
audit documentation in the context of the audit of cost statements, records and
other related documents.
(vii) (D) (Self/Captive consumption of each product). The abridged cost statement need not
be separate for Self/Captive Consumption of each product.
(viii) (D) (Studying all the above). The Management Auditor should evaluate MIS of an
organization after studying content, quality and source of information, studying Flow
of information, studying correlation of information in decision areas.
(ix) (C) Risk identification, process improvement. The objective is to assist the organization in
performing functions more effectively and economically with focus on the
efficiency and effectiveness of operations, giving an early warning system for the
detection of potentially destructive problems.
(x) (D) (To examine the Trust Deed or Regulations). The Trust Deed or Regulation is the basic
document on which the composition of the educational institution is framed.
Section-B (80 Marks)

Answer any five questions from question nos. 2 to 8.
2. (a) (i) During the course of audit as Cost Auditor, you have come across (I) some
material deficiency and (II) significant variation in material consumption over the
previous year. State the provisions of the Companies (Cost Records and Audit)
Rules, 2014 in this regard.
(ii) What is the applicability of Real Estate Development under the Companies (Cost
Records and Audit) Rules, 2014? 4+4=8
(b) (i) ABC Ltd. changed its Stock Valuation Policy from FIFO method to Average Cost
method in the FY 2018-19, as a result of which the profit of the Company was
inflated by ` 25 lakhs. The change in policy and the fact of additional gain were
not disclosed by the Company nor the Cost Auditor in the Audit Report. State
whether the Cost Auditor is deemed to be guilty of professional misconduct.
(ii) In the course of performance of his duties, some fraud against the Auditee
Company gets disclosed to the Cost Auditor.
What is the punishment to Cost Auditor for failing to report to the Authority within
prescribed time? 4+4=8
Answer:
2.(a)(i)
Pursuant to rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014 read with the Cost
Audit Report in form CRA-3, if as a result of the examination of the books of account, the Cost
Auditor desires to point out any material deficiency or give a qualified report, he/she shall
indicate the same against the relevant para (i) to (vii) in the prescribed form of the Cost Audit
Report giving details of discrepancies he/she has come across. The report, suggestions,
observations and conclusions given by the cost auditor under this paragraph shall be based
on verified data, reference to which shall be made here and shall, wherever practicable, be
included after the company has been afforded an opportunity to comment on them.
The prescribed format for Cost Audit Report states that „Wherever, there is any significant
variation in the current year‟s figure over the previous year‟s figure for any item shown under
each para of the annexure to the cost audit Report, reasons thereof shall be given by the cost
auditor. Accordingly, any variation in material consumption during current year over the
previous year shall be clarified in Part B of Annexure to Cost Audit Report.
2.(a)(ii)
Real Estate Development falls under Construction Industry in the Non-Regulated sector (item
21) and has been defined to be corresponding to para no. (5)(a) as specified in Schedule VI
of the Companies Act, 2013. Para (5) of Schedule VI of the Companies Act, 2013 pertains to
“Industrial, commercial and social development and maintenance” and covers “real estate
development, including an industrial park or special economic zone” as per sub-clause (a).
Hence, every construction activity in relation to the above are covered under the Rules. The
rule has been made effective from April 1, 2014 and no CETA Heading is applicable for such
industry.
The Institute (ICAI) has issued Guidance Note on Maintenance of Cost Accounting Records for
Construction Industry including Real Estate and Property Development Activity.
2.(b)(i)
The Second Schedule to the Cost and Works Accountants Act, 1959 stipulates that a Cost
Accountant in practice shall be deemed to be guilty of professional misconduct if he
(Item 5) fails to disclose a material fact known to him in a cost or pricing statement but
disclosure of which is necessary in making such statement;
(Item7) does not exercise due diligence or is grossly negligent in the conduct of his professional
duties;
(Item 9) fails to invite attention to any material departure from the generally accepted
procedure of costing and pricing applicable to the circumstances;
In the given circumstances, the Auditor has failed in his duties and is deemed to be guilty of
professional misconduct.
2.(b)(ii)
According to Section 143(12) of the Companies Act 2013, if an auditor (Cost Auditor is
included) of a company, in the course of the performance of his duties as Auditor, has reason
to believe that an offence involving fraud is being or has been committed against the
company by officers or employees of the company, he shall immediately report the matter to
the Central Government within such time and in such manner as may be prescribed. Sub-
Section 13 specifies that no duty to which an auditor of a company may be subject to shall be
regarded as having been contravened by reason of his reporting the matter referred to in sub-
section (12) if it is done in good faith. According to Sub-Section 15 if any auditor does not
comply with the provisions of sub-section (12), he shall be punishable with fine which shall not
be less than one lakh rupees but which may extend to twenty-five lakh rupees.
3. (a) (i) ‘The Cost Auditor should have adequate knowledge of client’s business, its process
and the business environment’ — Making a reference to relevant Cost Audit
Standard, discuss the areas which the new Auditor is required to understand.
(ii) LMN Textiles Ltd. purchased a ring frame at ` 5 crore and high value spares at ` 1
crore, the whole amount being capitalized.
How should high value spares be treated as per CAS 12 when actual replacement
takes place (I) with or (II) without reconditioning? 4+4=8
(b) The Cost Accountant of BEELON TEXTILES MILLS LTD. has arrived at a profit of ` 22,14,000
based on Financial Accounts for the year ended March 31, 2019.
The Profit as per Cost Accounting records showed a different figure.
As a Cost Auditor, you find the following differences between the Financial Accounts
and Cost Accounts:
(i) Profit on sale of Fixed Assets ` 2,00,000
(ii) Profit on sale of Investments ` 35,600
(iii) Voluntary Retirement Compensation included in
Salary & Wages in F/A ` 60,31,200
(iv) Donation paid ` 80,000
(v) Insurance claim relating to previous year received during the year ` 5,08,000
(vi) Profit from retail trading activity ` 32,05,400
(vii) Interest income from Inter-Corporate Deposits ` 6,10,000
(viii) Goodwill written off in F/A ` 4,00,000
(ix) Increase in value of Closing WIP and Finished goods inventory
as per Financial Accounts ` 360,55,000
as per Cost Accounts ` 390,15,000
You are required to prepare a Reconciliation Statement between Cost and Financial
Accounts and arrive at Profit as per Cost Accounts for the year ended March 31, 2019.
8
Answer:
3.(a)(i)
As per Cost Audit Standard 104 on Knowledge of Business, its Processes and the Business
Environment, the Cost Auditor should obtain an understanding of the following of the client‟s
business which is sufficient to identify and understand the events, transactions and practices
that, in the cost auditor‟s judgment may have a significant effect on the examination of cost
statements or on the preparation of the cost audit report:
• Business processes, major inputs
• Joint & By-Products and Wastages and major outputs etc.
• The entity‟s ownership and governance structure.
• Relevant industry, regulatory, and other external factors including the applicable cost and
financial reporting framework.
• The entity‟s selection and application of cost accounting policies.
• The measurement and review of the entity‟s performance.
• The Entity‟s Internal Control
• The entity‟s risk assessment process
• Cost Information System/ Management Information System
• IT (Information Technology) Environment and Control
• Identify and assess the risks of material misstatement at the cost statement level; and at the
assertion level
• Documentation: The auditor shall document key elements of the understanding obtained
regarding each of the aspects of the entity and its environment specified in paragraph 5.1
& 5.2 of the Standard.
3.(a)(ii)
As per CAS-12 on Repairs and Maintenance Cost, high value Spare, when replaced by a new
spare and reconditioned, should be recognized as property, plant and equipment when they
meet the definition of property, plant and equipment and depreciated accordingly.
Otherwise, such items are to be classified as inventory and recognized in cost as and when
they are consumed.
In the present case, the spares if capitalized, should be depreciated over the years. When
used as replacement, the depreciated value plus conditioning cost, if any, will be treated as
Repair & Maintenance cost, the equivalent value reduced from asset. For example, the spares
of initial value of `1 crore having life or 10 years would have depreciated value of ` 50 lakh.
When it is used as replacement, the said ` 50 lakh will be treated as Repairs and Maintenance
Cost.
3.(b)
STATEMENTSHOWINGTHERECONCILIATIONOFPROFITBETWEENCOSTAND
FINANCIALACCOUNTSANDPROFITASPERCOSTACCOUNTSFORTHEYEARENDEDMARCH31,2019
` `
Profit as per Financial Accounts: 22,14,000
Add: Voluntary Retirement compensation included in salary 60,31,200

and wages in F/A - Not included in cost A/c
Add: Donation paid 80,000
Add: Goodwill written off in F/A- not considered in Cost 4,00,000 65,11,200
Account
87,25,200
Less: Profit on Sale of Fixed Assets-Not considered in cost A/c 2,00,000
Less: Profit on sale of investment- not considered in cost A/c 35,600
Less: Receipts of insurance claim related to previous year-Not 5,08,000

considered in cost A/c
Less: Profit from Retail trading activity- not considered in Cost 32,05,400
A/c
Less: Interest Income from Inter-Corporate deposit- Not 6,10,000 (45,59,000)

considered in Cost A/c
41,66,200
Add: Difference in valuation of stock:
Increase in inventories as per Cost Accounts 390,15,000
Increase in inventories as per Financial Accounts (360,55,000) 29,60,000
ProfitasperCostAccounts 71,26,200
4. (a) ‘The need for Productivity/Efficiency Audit has arisen in order to examine
effectiveness of resource utilization’.— Explain Efficiency Audit.
Mention how Efficiency Audit can be carried out. 2+6=8
(b) MNP Ltd. appoints you as Management Auditor to check internal system in the area
of data processing. List out the areas covered by such study. 8
Answer:
4.(a)
The Efficiency audit is basically an analysis of the productivity of the resources deployed by
any organization. It is generally done to generate information about the status of productivity
in the organization for the purpose of determining the scale of efficiency and effectiveness of
„resource utilization‟. The term „resources‟ here would include not only “money” but also
“men”, “machines”, “materials” and “methods”. In other words, the objectives of productivity
audit is (a) to attain optimum result, and (b) to improve on the benchmarks. Efficiency audit
would generally comprise -
a. comparison of expected returns on utilization of the resources vis-a-vis the actual returns;
b. comparison of optimum returns on utilization of the resources vis-a-vis the actual returns;
c. the steps taken to improve benchmarks of returns and the utilization.
The efficiency audit is actually “productivity of every resource employed”. The tools used for
such audit are -
a. (i) Ratio analysis - Return on capital employed - Return on sales - Turnover ratios of fixed
assets, current assets, inventories, category-wise debtors etc. (ii) Capacity utilization of
plant, machinery and equipment against available capacity.
b. Productivity analysis of man (labor) hours in time and cost.
c. Material consumption against norms and benchmarks.
4.(b)
The study on data processing need emphasize economy, secrecy and prompt reporting. The
questions which be put before the Management relating to present vis a vis an efficient system
are summarized below:
a. What are the level of data processing and e-governance in the organization?
Has the right balance between such methods being achieved over all?
b. Are the job done by people within or is outsourced?
c. Are computer systems used where appropriate, compatible with the software installed.
d. Is the computer installation appropriate in size, workload and staffing?
e. What control is exercised on input to an output from the computer installation, and if by a
control system is this sufficiently independent?
f. What are the hierarchies who have access to the computer installations?
g. How is the amendment/upgradation of such program controlled?
h. Does the systems testing cover operating systems, files management, operation
messages, data management, job control routines and fault detection?
i. Are cloud computing and other sharing of platform are arranged?
j. If so, is the cost justified by the extent of the utilization of the main computer on other data
processing?
k. Is there full documentation of all programs and systems with adequate back up?
I. Is the system security protected by efficient and renowned agencies?
5. (a) (i) The Audit Committee of STR Ltd. has outlined you to cover as Internal Auditor in the
area of asset safeguarding of the Company. How you would proceed?
(ii) State whether a private company is liable to appoint Internal Auditor. Will the
answer differ if the share capital of the company was more than ` 1 crore? 6+2=8
(b) Briefly discuss the Internal Audit program of Non-Government Organization. 8
Answer:
5.(a)(i)
For effectiveness of internal control, the scope of Internal Auditor‟s work is outlined by the Audit
Committee of the Board of Directors. Apart from any direction in general or in case there is no
Audit Committee, the scope of Internal Auditor‟s work must make a review of:
• Internal control system and procedures- if there is no Audit Manual, design the same.
• System regarding custodianship and safeguarding of assets Fixed and Current;
• Compliance with various policies, plan and procedure by the different productive and
service units, at different hierarchies of Management,
• System of collection of data- both monetary and non-monetary, to ensure that the
information given to management is relevant and reliable.
For safeguarding of Assets, a study on asset protection measure be taken to prevent the assets
from theft, burglary, fire, electric and other hazards. This includes obsolete and non-performing
assets which should be removed or replaced. For immovable property, steps be taken to
prevent encroachment or illegal occupation. Proper insurance of the assets be made and the
insurance Matters should cover:
• Examination of Policy Coverages-whether all types of Assets are covered.
• Examination of Adequacy of Policy Coverages; -whether the value covered covers its
costs.
• Insurance Claims & Realization of Insurance Claims;
• Scrutiny of Records pertaining to Insurance Claims;
• Review of Status of outstanding claims.
• Whether guideline issued by the Insurance Authority is followed so that the claim is not
nullified due to lapses on the part of the Company.
5.(a)(ii)
As per sec. 138 of the Companies Act, 2013 read with Rule 13 of Companies (Audit and
Auditors) Rules, 2014, every private company shall be required to appoint Internal Auditor or a
firm of Internal Auditor having
(i) Turnover of two hundred crore of rupees or more during the preceding financial year;
(ii) Outstanding loans or borrowings from Banks or Financial Institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year.
The applicability of appointment of Internal Auditor by a private company is not dependent

on the criteria of equity capital.
5.(b)
While planning the audit of a Non-Governmental Organization (NGO), the auditor may
concentrate on the following;
i. Knowledge of the NGO‟s objective, its mission and vision, areas of operations and
environment in which it operates.
ii. Reviewing the legal form of the organization and its Memorandum and Articles of
Association, rules and Regulations.
iii. Reviewing the NGO‟s Organization chart, Financial and Administrative Manuals, Project
and Program Guidelines, Funding Agencies Requirements and Formats.
iv. Examination of minutes of the Board/Managing Committee/Governing

Body/Management and Committees thereof to ascertain the impact of any decisions on
the financial records.
v. Study the accounting system, procedures, internal controls and verify their applicability.
The audit program should include in a sequential order all assets, liabilities, income and
expenditure ensuring that no material is omitted, details vouched and/ or checked particularly
in the following heads:
(i) Corpus fund
(ii) Reserves
(iii) Ear-marked Funds
(iv) Project/Agency Balances
(v) Loans
(vi) Investments
(vii) Cash in Hand
(viil) Bank Balance
6. (a) The following is the abridged comparative Balance Sheets of PRAVISH LTD, a consumer
products manufacturing company for two years as on March 31, 2019 and 2018:
(Amount in ` Lakh)
2019 2018
Equity & Liabilities
Shareholders’ Fund:
Equity Share Capital 3,500 2,000

Reserves and Surplus 3,800 3,000
Non-Current Liabilities:
Term Loans 3,000 1,500

Debentures 1,500 1,500
Other Long-term Loans 1,200 1,500
Current Liabilities 2,600 1,200

Short-term Provisions 860 652
Total 16,460 11,352
Assets
Non-Current Assets:
Fixed Assets:
Tangible Assets 4,000 3,800

Intangible Assets — —
Capital Work-in-Progress 1,700 —
Non - Current Investments:
Investment in subsidiaries 800 400

Current Assets:

Trade Receivables 4,810 3,258
Cash and Cash equivalents 600 404
Short-term Loans and Advances 620 1,400
Total 16,460 11,352
(` in Lakh)
Year ended March 31 2019 2018
Profit before Tax (PBT) 1,300 1,150
You are required to compute the following as stipulated in PART-D, PARA-4 to the
Annexure of Cost Audit Report under the Companies (Cost Records and Audit) Rules,
2014 for the year ended March 31, 2019:
(i) Capital Employed
(ii) Net Worth
(iii) PBT to Capital Employed
(iv) PBT to Net Worth
(v) Debt-Equity Ratio
(vi) Current Assets to Current Liabilities 8
(b) The bio-gas produced from wash of alcohol in KLM Industrial Alcohol Ltd. is used as a
supplement with fuel oil in generating steam. The steam is used in steam turbine for
production of power and the exhaust of steam turbine is recycled for manufacture of
alcohol. In process, the fall in enthalpy (heat content) value of the steam is 10%. The
following details are extracted from the Cost Accounting records of the Company for
the year ended March 31, 2019:
Boiler (`) Turbine (`)
Cost of Water 6,80,000
Fuel Oil 6,00,00,000
Bio-gas plant expenses 1,68,00,000
Stores and Chemicals 1,80,000
Salaries and Wages 20,00,000 4,80,000

Repairs and Maintenance 44,00,000 1,80,000
Depreciation 12,00,000 4,40,000
Other expenses 26,00,000 80,000
High pressure steam Generated (MT) 24,000
Power Generated (KWH) 18,00,000
Required:
Prepare two Cost Sheets for steam and power as per CAS-8 on cost of utilities for the
yearended March 31, 2019. 8
Answer:
6.(a)
PRAVISHLTD.
(Amount in ` Lakh)
Year ended March 31 2019 2018 2019

(i) CAPITAL EMPLOYED:
Total Assets 16460 11352

Less: Investment in Subsidiaries 800 400
Less: Current Liabilities 3460 1852
Less: Capital work in progress 1700 -
10500 9100
Average capital employed for the year 9800

ended March 31 (10500+9100)/2
(ii) NET WORTH:

Share Capital 3500
Reserves and surplus 3800
7300
(iii) PBT to Capital Employed (1300/9800) 13.27%
(iv) PBT to Net Worth 1300/7300 17.81%
(v) Debt- Equity Ratio 5700/7300 0.78:1
(vi) Current Assets to Current Liabilities 9960/3460 2.88 2.88:1
Working Notes:
(` In lakh)
(i) Debt: `
Term loans 3000 (iii) CurrentLiabilities:
Debentures 1500 Current Liabilities 2600
Other long Term Loan 1200 Short Term Provisions 860
5700 3460
(ii) Current Assets:
Inventories 3930
Trade Receivables 4810
Cash and cash equivalents 600
Short term loans & advance 620
9960
6. (b)
Cost Sheet of Steam

For the year ended March 31, 2019
Generation : 24,000 MT (` 000) Unit cost/MT `
Cost of water 680 28.33
Fuel Oil 60,000 2,500.00
Biogas plant expenses 16,800 700.00
Stores, chemicals 180 7.50
Salaries, wages 2,000 83.33
Repairs, maintenance 4,400 183.33
Depreciation 1,200 50.00
Other expenses 2,600 108.33
Total 87,860 3,660.83
Cost Sheet of Power (generated) from Steam turbine
For the year ended March 31, 2019
Generation : 18,00,000 KwH (` 000) Unit cost/KwH `
Cost of Steam 87,860 48.81
Salaries, wages 480 0.27
Repairs, Maintenance 180 0.10
Depreciation 440 0.24
Other expenses 80 0.04
Total 89,040 49.47
Less: credit for exhaust steam 90% 80,136 44.52
Cost of power used in manufacture 8,904 4.95
7. (a) The following parameters are extracted from the Cost Accounting records of
MAHAWISH LTD., a multiproduct manufacturing Company:
(Amount in ` Million)
Year ended 31st March 2019 2018
Net sales 3,600 2,880
Other Income 225 150
Increase in value of stock of Finished Goods 15 7
Raw materials consumed 1,320 1,080
Direct Wages, Salaries, Bonus, Gratuity etc. 330 264
Power and Fuel 180 144
Stores and Spares 120 105
Local Taxes 90 75
Other manufacturing Overheads 322 278
Administrative Overheads:
Audit fees 27 22
Salaries and Commission to Directors 36 30
Other Overheads 195 165
Selling and Distribution Overheads:
Salaries and Wages 27 23
Packing and Forwarding 15 12
Other Overheads 188 150
Total Depreciation 90 90
Interest Charges:
On Working Capital Loans from Bank 45 37
On Fixed Loans from SBI 68 53
On Debentures 22 22
Provision for Taxes 237 150
Proposed Dividends 315 172
You are required to calculate the following as stipulated PART-D, PARA-3 of the
Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules,
2014 for the year ended March 31, 2019 and March 31, 2018:
(i) Value Addition
(ii) Earnings available for Distribution
(iii) Distribution of Earnings to the different claimants. 10
(b) During the period 16.08.2018 to 29.08.2018 (two weekly off in between), the
manufacturing unit of CDE Ltd. had to be closed down due to a widespread agitation
on job reservation by a community of the State. The workmen demanded full wages
but it was negotiated to (i) they will work on weekly off on three chosen weeks without
overtime and (ii) the rest will be with no wages for direct workers and adjusted against
eligible leave for staff and indirect employees. The normal working of the unit is on all
days except 52 weekly off and 11 statutory Holidays. The details of the expenses
incurred for the year ended March 31, 2019 are as follows:
(Amount in ` Lakh)
Indirect/Fixed Cost Whole Year
Indirect Wages and Salaries 675
Power, Boiler, Security partly used during closure 10
Depreciation 355
Total: 1,578
Required:
Calculate the abnormal cost for exclusion from the Product cost. 6
Answer:
7. (a)
MAHAWISHLTD.
CALCULATIONOFVALUEADDITION
(Amount in ` Million)
Year ended March 31, 2019 2018
VALUE ADDITION:
Net Sales 3600 2880
Add: Export Incentives - -
Add/Less: Adjustment in Finished stocks 15 7
3615 2887
Less: Cost of bought out input:
(i) Cost of Raw materials consumed 1320 1080
(ii) Consumption of stores and spares 120 105
(iii) Power & Fuel 180 144
(iv) Other overheads 792 664

(322+27+195+15+188+45)= 792
(278+22+165+12+150+37)= 664
Total cost bought out input 2412 1993
(i)VALUEADDED 1203 894
Add: Other Income 225 150
Add: Extra Ordinary Income 0.00 0.00
(ii)EarningsAvailablefordistribution 1428 1044
(iii)Distributionofearningsto:
(1) Employees as salaries and wages, bonus,gratuity etc. 357 287
Directors- Salaries and Commission 36 30
(2) Shareholders as dividend 315 172
(3) Company as retained funds (includingdepreciation) 303 255
(4) Government as taxes
Local Taxes: 90 75
Income Taxes 237327 150225
(5) Providers of Capital/Fund as Interest:
Interest on debentures 22 22
Interest on Fixed loans from SBI 6890 5375
Totaldistributionofearnings 1428 1044
7. (b)
Abnormal cost due to closure abnormally is not included in the cost production. In the given
case, CDE Ltd has normal working of (365-52-11=) 302 days. The abnormal stoppage consisted
of (16/8/18- 29/8/18 = 14-2 =) 12 working days less 3 compensatory working days i.e. 9 working
days. The percentage of abnormal loss comes to (9/302 =) 3% approximately.
Amounts ` Lakh
Whole Year Closed period
Indirect Wages & Salaries 675 20
Power etc. used during closure excluded 10
Depreciation 355 11
Other Fixed Expenses 538 16
Total Abnormal Cost during closure 57
8. Answer any four out of the following five questions: 4x4=16
(a) Explain ‘Professional Judgment’ and ‘Professional Skepticism’ as per Cost Audit
Standard 103.
(b) Draw an Internal Audit program on Wage Audit.
(c) What are the Functions of Management Audit?
(d) A company bought a new technology for its auto component unit for two products A
and B. The condition was to pay a lump of `10,00,000 (equally distributable for both
products having a service life of 5 years) and Royalty of `3 per unit produced. The
vendor’s technicians were to be paid travelling expenses for maintenance. The
company incurs cost for software services and interest for borrowing of `1,20,000.
The following information is extracted from the Books of the Company for the year
ended March 31, 2019:
Particulars Product A Product B
Unit produced (Qty.) 30000 25000
Royalty paid on production (`) 3/unit 3/unit
Travelling charges (`) 10,000 10,000
Software services charges (`) 24,000 20,000
Hire charges for special equipment (`) 8,000 —
Interest on Bank borrowing (`) 60,000 60,000
You are required to compute the Direct Expenses — keeping in view of CAS - 10.
(e) NAVITA LTD., a Manufacturing company provides the following extracts of raw
materials from its records for the year ended March 31, 2019:
Opening stock of raw materials (6000 units) 2,16,000
Purchase of raw materials (21000 units) 8,40,000
Closing stock of raw materials (4000 units) —
Freight Inwards 1,02,000
Self-manufactured Packing material for purchased raw materials 70,000
Demurrage charges levied by transporter for delay collection 14,000
Normal loss due to shrinkage 2% of materials —
Abnormal loss due to absorption of moisture before receipt of —

materials — (150 units)
You are required to calculate the value of Closing Stock of raw materials using
Average Cost Method.
Answer:
(a)
Cost Auditing Standard 103 defines „Professional Judgment‟ as the application of relevant
training, knowledge and experience, within the context provided by cost accounting
standards and ethical requirements in making informed decisions about the courses of action
that are appropriate in the circumstances of the audit engagement. The cost auditor shall
have an understanding of the entire text of the Cost Auditing Standard, including its
application and other explanatory material, to understand its objectives and to apply its
requirements properly. In exceptional circumstances, the cost auditor may apply for
Professional Judgment, if necessary, to depart from a relevant requirement in a Cost Auditing
Standard.
As per Cost Auditing Standard 103, the term „Professional Skepticism‟ is an attitude that
includes a questioning mind, being alert to conditions which may indicate possible
misstatements due to error or fraud, and a critical assessment of audit evidence. An attitude of
professional skepticism is necessary throughout the cost audit process for the auditor to reduce
the risk of overlooking unusual circumstances, of over generalizing when drawing conclusions
from cost audit observations, and of using faulty assumptions in determining the nature, timing
and extent of the cost audit procedures and evaluating the results thereof. When making
inquiries and performing other cost audit procedures, the cost auditor should not be satisfied
with less-than-persuasive audit evidence based on a belief that management and those
charged with governance are honest and have integrity.
(b)
An audit program is a detailed plan of the auditing work to be performed, specifying the
procedures to be followed in verification of each item and the financial statements and the
estimated time required. To be more comprehensive, an audit program is written plan
containing exact details with regard to the conduct of a particular audit. It is a description or
memorandum of the work to be done during an audit.
In Wage Audit program, the first step is to define a checklist of records that need to be
verified. The Internal Audit program on Wage Audit should mainly focus on verification of
Wage Audit Staff allotted Time taken
Attendance records
Job card records, engagement letter
Wage agreements, pay scale, increment orders
PF, ESI and Leave records
Overtime, Incentive, Production Bonus calculations
A comparison of total wage bill for previous period
Vouching of sample calculations.
The work may be allocated to audit assistant on suitable basis. The Auditor may devise a
mechanism to record the progress of work done, modify the program where necessary.
Alternative answer:
An audit programme is laying down the path in its required details before conducting such
audit. it is a detailed plan of the auditing work to be performed, specifying the procedures to
be followed in verification of each item and the financial statements and the estimated time
required. To be more comprehensive, an audit programme is written plan containing exact
details with regard to the conduct of a particular audit. It is a description or memorandum of
the work to be done during an audit.
In Wage Audit Programme, the first step is to define a checklist of records that need to be
verified. The Internal Audit programme on Wage Audit should mainly focus on verification of:
 Payroll package is properly updated with employee„s details and it is properly
functioning.
 Take out the list of employees for the purpose of verification that no entry is bogus i.e.,
Ghost Worker.
 Ensure that all wage payments are made through banks.
 Where payment is made in cash, whether it is done in presence of responsible officer.
 Cross verify wage with some employees, so that there will be assurance with system.
 Checking of Daily Attendance Sheet, Absenteeism Statement, Manpower Planning

and Deployment.
 Checking of Employee Signature at the time of payment in case of cash payment

and Attendance Register.
 Checking of Appointment/Retirement records of Employees.
The work may be allocated to audit assistants on suitable basis. The Auditor may devise a
mechanism to record the progress of work done, modify the programme where necessary.
(c)
FUNCTIONSOFTHEMANAGEMENTAUDIT:
The functions of Management Audit extend to audit of the effective functioning of every area
of operations coming under the management purview from the stage of its planning to proper
implementation and execution. Every manufacturing or service organisation could broadly be
identified into the following functional areas:
(i) Marketing, including selling and distribution
(ii) Manufacturing/servicing, including maintenance of supply chain, machinery and

equipment etc.
(iii) Human resource management from selection to recruitment, training, motivating,

retaining, advancement, etc.
(iv) Personnel policies and industrial relations
(v) Finance including maintenance of accounts and providing accounting information to

guide the management of its performance and position.
(vi) Research and Development including application research and basic research, if any.
An understanding of the objectives of each functional area at every level of the organisation
and effectively achieving such objectives shall be the prime responsibility of management.
Checking of such effective achievement is the function of management audit.
(d)
Computation of Direct Expenses (as per CAS-10) (Amount in `)
Product A Product B
Amortized cost for Technical knowhow 1,00,000 1,00,000
Royalty paid on Units Produced 90,000 75,000
Hire charges of equipment used in A 8,000 —
Travelling Expenses 10,000 10,000
Software services 24,000 20,000
Direct Expenses 2,32,000 2,05,000
N.B. Interest on bank borrowing shall not form part of Direct Expenses.
(e)
ComputationofValueofClosingStockofRawMaterials(AverageCostMethod)
Particulars Qty(Units) Amount(`)
Opening stock of Raw Materials 6000 2,16,000
Add Purchase of raw materials 21000 8,40,000
Add Freight inwards 1,02,000
Add Demurrage charges levied by transporter for delay in 14,000

collection
11,72,000
Less Abnormal loss of raw materials (due to absorption of (150) (6,829)

moisture before receipt of materials
=[840000+102000+14000)x150]/21000
Less Normal loss of materials due to shrinkage during transit (420) 0.00
[2% of 21000 units]
Add Costofself-manufactured packing materials for 70,000

purchased raw materials only
Cost of Raw Materials 26430 12,35,171
Less Value of closing stock (1235171)/(6000+21000-420)]x4000 4000 1,85,880
Cost of Raw Materials Consumed 22430 10,49,291
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
DECEMBER- 2019
All Sections are compulsory. Each Section contains instructions regarding
the number of questions to be answered within the Section.
All working notes must form part of the answer
Wherever necessary, candidates may make appropriate assumptions
and clearly state them.
Section-A (20 Marks)

Section-A contains Question Number 1.
All parts of this question are compulsory.
1. (a) Choose the correct option from amongst the four alternatives given (1 mark is for the
correct
choice and 1 mark for justification/workings): 2×10=20
(i) SHYAN LTD. has a machine of productive capacity of 1500 unit per hour. It runs 3
shifts with 1 weekly off and 12 holidays per year, each shift has one hour
stoppage due to lunch, change shift etc. Maintenance is done in running time.
The Normal Capacity of the plant as per CAS-2 will be
(A) 131.40 lakh units
(B) 94.815 lakh units
(C) 108.36 lakh units
(ii) BORS & Co., a firm of Cost Accountants was appointed as Cost Auditor of PANTEX
LTD on 31.07.2018 for auditing the cost records for the FY 2018-19. The Auditor
appointed as such shall continue in such capacity upto
(A) 31.07.2019, on expiry of one year of appointment.
(B) 30.09.2019, on expiry of six months from close of accounts.
(C) 30.08.2019, date of submission date of Cost Audit Report.
(D) 15.09.2019, date of holding of Annual General Meeting of PANTEX LTD.
(iii) Which one of the following KPI (Key Performance Indicator) is used to measure
efficiency of manufacturing performance?
(A) Production per Machine Hour
(B) Operating Cycle of Materials turnover
(C) Material as % of Total Cost
(D) % of idle time to total available time
(iv) The consumer service audit critically examines:
(A) Outstanding payment of consumers.
(B) Price consumers are ready to pay for particular product/service.
(C) And appraise management of business enterprise of responsibility towards

consumers.
(D) Demand of a product by consumers.
(v) “Related Party” with relation to a party means
(A) a Director or his relative.
(B) a Key Managerial Person or his relative.
(C) a firm, in which a Director, Manager or his relative is a partner.
(D) Either or all of the above
(vi) Once the instance document is successfully validated from the tool, the next step
is to
(A) download XBRL validation tool.
(B) pre-scrutinize the validated instance document.
(C) convert to human readable format and verify correctness of the instance
document.
(D) attach instance document to the Form CRA-4.
(vii) The Bureau of Energy Efficiency is formed under
(A) The Electricity Act, 2003
(B) The Energy Conservation Act, 2001
(C) The Electricity (Supply) Act, 1948
(D) The Electricity Regulatory Commission Act, 1998
(viii) The knowledge of Entity’s Internal Control is to be understood by the Cost Auditor
as required by
(A) Cost Auditing Standard 101
(B) Cost Auditing Standard 102
(C) Cost Auditing Standard 103
(D) Cost Auditing Standard 104
(ix) Profit Reconciliation of the company as a whole is dealt in
(A) Part D para 2 of the Annexure to Cost Audit Report.
(B) Part C para 1 of the Annexure to Cost Audit Report.
(C) Form of the Cost Audit Report.
(D) Part A para 1 of the Annexure to Cost Audit Report.
(x) The following details relating to MENG LTD are given:
Royalty paid on Units produced 25,000
Hire charges on Equipment 20,000
Design Charges 18,000
Software Development Charges for Production 22,000
What will be the Direct Expenses of the Company (as per CAS-10)?
(A) ` 60,000
(B) ` 63,000
(C) ` 65,000
(D) ` 85,000
Answer:
(i) (B) 94.815 lakh units. As per CAS 2, normal capacity is maximum productive capacity
reduced by time lost on preventive maintenance, holidays, Set up delays. Here,
Normal capacity = (365-52-12) x (8-1) x 3 x 1500 = 94.815 lakh unit.
(ii) (B) 30.9.2019. As per Rules, 2014, the Cost Auditor, unless removed or resigned from
office, shall continue till expiry of 180 days from closure of financial year or till he
submits the cost audit report. Here his submission of the report did not go beyond
six months from closure of financial year.
(iii) (B) Operating cycle of Materials Turnover. Key Performance indicator of

manufacturing is the Operating cycle of Materia!, WIP, Finished Goods Turnover.
(iv) (C) An appraise management of business enterprise of responsibility towards

consumers. The audit is based on the philosophy that the role of business should be
conducive to raising the quality of life through its contribution in terms of better
product-quality and services by making available the products and services of the
right qualities at the right time, in right quantity, at the right place and right price.
(v) (D) Either or all of the above. This is as per clause 76 section 2 of the Companies Act
2013.
(vi) (B) Pre-scrutinize the validated instance document.
Reason will be: Once the instance document is successfully validated from the
tool, the next step is to pre-scrutinize the validated instance document with the
help of the same tool using a working internet connection. In the Pre-scrutiny, the
server side validations shall be performed, using the MCA21 data base.
(vii) (B) The Energy Conversation Act, 2001. The Bureau is established by merging Energy
Management Centre and controls energy conservation.
Alternative Reason: The Bureau of Energy Efficiency formed under the Energy
Conservation Act 2001. The agency's function is to develop programs which will
increase the conservation and efficient use of energy in India.
(viii) (D) Cost Auditing Standard 104. The Audit Standard 104 deals with knowledge of
Business, its processes and Business Environment, which includes knowledge on the
Entity’s Internal Control.
(ix) (A) Part D para 2 of the Annexure to Cost Audit Report. This is pursuant to Rule 6(4) of
the Companies (Cost Records and Audit) Rules.
(x) (D) 85,000. Direct expenses = Royalty paid on units produced + Hire Charges of
equipment used for production + Design charges + Software development
charges related to production ` 25,000 + ` 20,000 + ` 18,000 + ` 22,000 = ` 85,000.
Answer any five questions from Question Numbers 2 to 8.
2. (a) (i) Healthcare Equipment Limited is engaged mainly in the production of Cardiac
stents, Catheters, Pacemakers and Intraocular lenses.
State below whether maintenance of Cost Records is applicable if the company

fulfils turnover criteria and is
(I) a foreign company having registered office at Mumbai.
(II) a company classified as a micro enterprise.
(III) a foreign company having only liaison offices at Delhi and Mumbai.
(IV) a domestic company whose average turnover of ` 40 crore for last two years
has dropped to ` 24 crore in FY 2018-19. 4
(ii) How the cost of production of goods and provision of services as per CAS-4 read
with CGST Rules are determined:
(I) where the supply of goods or services is for a consideration not wholly in
money.
(II) where goods are intended for further supply as such by the recipient? 4
(b) (i) A firm of Cost Accountants was appointed by a company to evaluate the costs of
the various products manufactured by it for its information system. One of the
partners of the firm was a Non-Executive Director of the company. Is it permissible?
(ii) A Cost Auditor has reported fraud to the company as required under sec. 143 of
the Companies Act, 2013. What disclosures are to be made by the company in its
Board’s Report? 4+4=8
Answer:
2. (a) (i)
(1) Healthcare Services is in non-Regulated sector (item 33 of B: non-Regulated sector) and

any company, domestic or foreign, having annual turnover of ` 35 crore or more from all
its products or services in the previous year shall maintain cost records. Therefore, the
Rule is applicable to a foreign company.
(2) Nothing contained in Companies (Cost Records and Audit) Rules shall apply to a
company, which is classified as a micro enterprise or a small enterprise as per the
turnover criteria under Micro, Small and Medium Enterprises Development Act.
(3) Nothing contained in serial number 33 shall apply to foreign companies having only
liaison offices in India.
(4) Once maintenance of cost records becomes applicable, it would be maintained on a

continuous basis in the subsequent years also even if the turnover of the company in the
previous year falls below threshold limit.
2. (a) (ii)
Cost Accounting Standard 4 (CAS 4) specifies the principles for determination of cost of
production for valuation of goods based on cost. Where the supplier and the recipient are
not related and price is the sole consideration, the value of supply or services shall be
transaction value. CGST Act and Rules 27, 28, 29 of CGST Rules provide methodologies for
determination of value of supply under certain exceptional situations.
(1) Where the supply of goods or services is for a consideration not wholly in money, the
value shall be the (a) open market value or (b) the value of supply of goods or services
or both of like kind and quality for distinct or related person.
(2) Where goods are intended for further supply as such by the recipient, the value shall be
an amount equivalent to 90% of the price charged for the supply of goods of like kind
and quality to his customer not being a related person. If the value is not determinable,
it will be 110% of cost.
2. (b) (i)
Clause 4 of Part-I of the Second Schedule to the Cost and Works Accountants Act, 1959
states that expressing an opinion on cost and pricing of any business or any enterprise in
which the auditor or his firm or a partner in his firm has a substantial interest would constitute
misconduct, unless he discloses the interest also in his report. As per the facts of the case, the
firm has been retained to evaluate the cost of products manufactured by it for its information
system. Therefore, this amounts to Professional misconduct.
2. (b) (ii)
According to Section 143(12) of the Companies Act 2013, if an auditor of a company, in the
course of the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or
employees of the company, he shall immediately report the matter to the Board/ Audit
Committee/ Central Government within such time and in such manner as may be
prescribed.
As per Rule 13 of the Companies (Audit and Auditors) Rules, 2014, following detailed
disclosures of fraud reported to Audit Committee are to be made in Board’s Report:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
3. (a) (i) What are the advantages of Cost Accounting Standards? 4
(ii) Answer the following with reference to Transportation Cost as per Cost Accounting
Standard-5 (CAS-5):
(I) What items of cost shall not be included in Transportation Cost?
(II) For apportionment of outward Transportation Cost, what basis should be

adopted? 2+2=4
(b) The financial Profit and Loss Account of PANWOOD LTD, a manufacturing company for
the year ended 31st March, 2019, was `1,15,71,480. During the course of Cost Audit, it
was noticed the following:
(i) Some discarded assets sold off which fetched a profit of ` 95,000.
(ii) Interest was received amounting to `1,05,000 from outside the business
investment.
(iii) Voluntary Retirement payment of `3,80,000 was not included in the Cost
Accounts.
(iv) Some renovation work was carried out at a cost of `6,20,000 and its useful life was
only for five years.
(v) Donation of `1,28,000 towards CSR commitment was not considered in the Cost
Accounts.
(vi) Insurance claim of ` 18,05,000 relating to previous year received during the year.
(vii) Loss on sale of investments amounts to ` 32,800.
(viii) The closing inventory of raw materials was undervalued `30,600 and that of
finished goods was overvalued `2,30,700 in the financial records.
(ix) Post retirement medical grant to the extent of ` 2,80,000 was not considered in
Cost Accounts.
(x) Profit from Retail trading activity amounting to ` 1,90,000.
You are required to prepare a Reconciliation Statement between two Accounts and
work out the Profit as per Cost Accounts. 8
Answer:
(3) (a) (i)
Cost Accounting Standards are set of standards that are designed to achieve ‘uniformity
and consistency in cost accounting practices.’ The Institute of Cost Accountants of India,
recognizing the need for structured approach to the measurement of cost in manufacture or
service sector and to provide guidance to the user organizations, government bodies,
regulators, research agencies and academic institutions to achieve uniformity and
consistency in classification, measurement and assignment of cost to product and services,
has constituted Cost Accounting Standards Board (CASB) with the objective of formulating
the Cost Accounting Standards. The advantages of Cost Accounting Standards are as
follows:
a. Providing a structured approach to measurement of costs in manufacturing process or

service industry;
b. Integrating, harmonizing, and standardizing cost accounting principles and practices;
c. Providing guidance to users to achieve uniformity and consistency in classification,

measurement, assignment, and allocation of costs to products and services;
d. Arriving at the basis of computing the cost of product, activity, or service where required
by legal or regulatory bodies;
e. Enabling practicing members to make use of Cost Accounting Standards in the

attestation of General Purpose Cost statements; and
f. Assisting in clear and uniform understanding of all the related issues by various user
organizations, government bodies, regulators, research agencies, and academic
institutions.
(3) (a) (ii)
Cost Accounting Standard 5 (CAS-5) on “Determination of Average (Equalized) Cost of

Transportation” deals with the determination of average transportation cost of a product.
(a) Cost of Transportation comprises of the cost of freight, cartage, transit insurance and
cost of operating fleet and other incidental charges whether incurred internally or paid
to an outside agency for transportation of goods. Penalty, detention charges,
demurrage and cost related to break down and expenses abnormal and non-recurring
in nature will not be included in transportation cost.
(b) The following basis may be used, in order of priority, for apportionment of outward
transportation cost depending upon the nature of products, unit of measurement
followed and type of transport used:
(i) Weight
(ii) Volume of goods
(iii) Tonne-Km
(iv) Unit / Equivalent unit
(v) Value of goods
(vi) Percentage of usage of space
Once a basis of apportionment is adopted, the same should be followed consistently
3. (b)
Statement showing the Reconciliation of Profit and Loss between Cost and financial account
for the year ended 31st March, 2019.
Particulars ` `
Profit as per Financial Accounts. 11571480
Add: Expenses/Loss not considered in Cost Accounts
(a) Loss on Sale of Investments 32800
(b) Donation towards CSR Commitment 128000
(c) Post-retirement Medical grant 280000
(d) Voluntary Retirement payment 380000
(e) 4/5 of Renovation Expenses Amortized 496000 1316800
Less: Incomes not considered in Cost Accounts
(a) Profit on Sale of old assets 95000
(b) Interest received from outside investment 105000
(c) Insurance claim for previous year received 1805000
(d) Profit from Retail Trading Activity 190000
(e) Effect of Undervaluation/overvaluation of closing inventory 200100 (2395100)
Profit as per Cost Accounts 10493180
4. (a) You are the Management Accountant of MANGLOW LTD, a large manufacturing
company suffering from Working Capital Crisis. Which areas will you cover to
overcome the Crisis? 8
(b) What is Energy Audit? Briefly state the key-functions of Energy Auditor. 2+6=8
Answer:
4. (a)
Working capital being an indispensable part of operation of business should be evaluated to

point out the inefficiency of either procurement or the application of the working capital. The
analysis of working capital can be done by measuring operational inefficiencies and liquidity
of the company. Furthermore, the cash management in the working capital should be
included in such analysis. Some steps are suggested to establish whether excessive amount is
blocked.
A. Need to make Performance Analysis
To help monitor the variations, a Performance Analysis Report on Working Capital and
Inventory Management is to be made to appraise the management about its current
performance. It would help the organization
(i) to improve profits and profitability,
(ii) to optimize resource allocation,
(iii) to optimize the product and service portfolio.
B. Tools of Measurement
The analysis of working capital components like Current assets and current Liabilities can
be made by various financial ratios like
(a) Receivables Ratio, (Sale/Debtors,)
(b) Inventory Ratios (Raw Materials stock/consumption, Stores & Spares/consumption,

Finished Goods stock/Cost of Sales etc.)
(c) Financial Ratio (Current Ratio, Quick Ratio, Turnover Ratio etc.).
C. Remedial Measure
To avoid misuse of working capital, the policies regarding inventory management
commensurate to the scale of business be reviewed and laid down. This should include
Procurement policy,
Stocking policy,
Inventory valuation method,
Physical verification of inventory policy,
This analysis should be critical for operational inefficiencies and liquidity of the company.
D. Cash Management
The cash management in the working capital should be included in such analysis to
establish whether excessive amount is blocked in the working capital. The cost of working
capital funding should be highlighted especially in their multiple source of working capital
funding. Those costs would include interest paid on cash credits, loans, cost of collection
efforts, cost of inventory carrying etc. The total cost of managing working capital as a
percentage of total working capitalinvested would be a very useful performance
indicator.
In the current situation, the Management Accountant should examine the variations and
identify the blocked capital in slow moving area like Debtors or Inventory. He may
recommend liquidation of slow moving capital and advise measures for preventing
further accumulation.
4. (b)
Energy auditing is an activity that serves the purposes of assessing energy-use, pattern of a
factory or energy consuming equipment and identifying energy saving opportunities. In that
context, energy management involves the basic approaches in reducing avoidable losses,
improving the effectiveness of energy use, and increasing energy use efficiently. The energy
auditor is normally expected to give recommendations on effective improvements leading
to monetary benefits and also advise on energy management issues. Generally, energy
auditor for the industry is an external party. The following are some of the key functions of the
energy auditor?
1. Quantification of energy costs and quantities.
2. To correlate trends of production or activity to energy cost.
3. To devise energy database formats separately by products, departments or energy

consuming departments.
While performing the aforesaid key functions, the energy auditor is required to carry out the
following activities:
1. To analyse the historical energy consumption and cost data.
2. To conduct preliminary energy audit with the objective to identify:
(A) major energy consuming equipment and process.
(B) Obvious inefficiencies and energy wastes.
(C) Priority areas for further detailed investigation.
3. To conduct detailed technical and economic analysis of energy efficiency measures

involving large efficiency measures involving large capital or long pay back periods.
5. (a) (i) For appointment of Internal Auditor by the company under Companies Act, 2013,
state:
(I) Is it mandatory to file documents with ROC on appointment of Internal

Auditors?
(II) Can a Director of a company be appointed as its Internal Auditor? 2+2=4
(ii) Explain briefly the concept of “Adequacy of Internal Control”. 4
(b) You are appointed as Internal Auditor of a Hospital. State your approach for steps to
be taken for conducting the audit. 8
Answer:
5. (a) (i)
(1) The appointment of internal auditor can be done only by means of a resolution passed
at the meeting of the Board as specified under rule 8 of the Companies (Meeting of
Board and its Powers) Rules, 2014 and accordingly, the company is also required to file
Form MGT-14 with the Registrar within 30 days from the date of passing of resolution by
the Board. However, filing of resolutions under section 117 has been exempted for
private companies.
(2) The Internal Auditor shall be either a Chartered Accountant, Cost Accountant, or such
other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company. The Internal Auditor may or may not be an
employee of the Company. Hence, the Director can be appointed as Internal Auditor if
the Board or Audit Committee considers the person as eligible to be appointed as
Internal Auditor. On ethical grounds, a Director who is Key Managerial Person should not
act as Internal Auditor.
5. (a) (ii)
Adequacy of Internal Controls: The auditor should obtain an understanding of the

accounting system sufficient to identify and understand major classes of transactions,
manner of initiation of transactions, significant accounting records, supporting documents
and specific accounts in the financial statements and the accounting and financial
reporting process. Accounting control comprises of the plan of an organisation and the
procedures and records that are concerned with the safeguarding of assets and the
reliability of financial controls. Internal control, as far as financial and accounting aspects are
concerned, aims at the following:
(i) Flow of work through various stages.
(ii) Segregation of personnel duties
(iii) Adequate documentation.
(iv) The transactions are recorded with appropriate amounts and time
(v) The assets should be properly safeguarded
(vi) Properauthorisation.
(vii) Existence of organisational chart
(viii) System to locate the deviations and departures from the prescribed procedures
(ix) Standardized records and formats. It would ensure availability of right information at
right time.
(x) Efficient Management Information System. Etc.
5. (b)
A hospital belongs to Health Services in non-Regulated sector b; per the Companies (Cost
Records and Audit) Rules. 2014 and is required to maintain cost records in addition to
Financial records if its turnover exceeds = ` 35 crore for a product or services during the
previous year.
An Auditor should conduct the following functions in the course of audit of a Hospital-
• Obtain a list of books, documents, register and other re cords as maintained by the
Hospitals.
• Examine the audit report of last year and note down qualifications, if any, therein.
• Examine the system of receiving grants and donations, whether received through
cheque or otherwise
• Examine the scope of responsibilities according to the overall objectives of audit.
• Note down the important clause of Trust Deed or Charter, which may affect the audit
and accounts of hospital.
• Examine the Minutes of Meetings of the Board of Directors/Trustees or the Managing

Committee, and note down the important decisions concerning the financial
transactions relating to fixed assets, investments and financial powers as required by him
during the audit.
• Examine the Internal Control system reg. purchase of fixed assets, medicines, stores,
consumables, clothing etc.
• Examine the Internal Control System for recording of purchases, issue and storage of all
items and physical verification of them.
• Obtain the rate structure for fees, medicine and other services, power to do concession
or waiver of fees.
• Calculate and examine the requisite input-output ratios.
• Examine Financial and Cost Records as maintainable by statute.
• Verify the system of internal check as regards purchase and issue of stores, medicine, etc.
• Examine that the appointment of the staff, payment of salaries etc., are duly - authorized.
• Physically verify the investments, fixed assets and inventories.
• Check that adequate depreciation has been provided on all the depreciable assets.
6. (a) The following are the summarized Balance Sheet and Income Statement of
GREENCON LTD, a cement manufacturing company.
Income Statement for the year ended March 31,2019
Amount
(in ` lakhs)
Sales 4,000
Less: Cost of Goods sold 3,275
Gross Margin 725
Less: Administrative and Selling Expenses PBIT 120
605
Less: Interest Expenses Profit before Tax (PBT) 90
515
Tax paid Profit after Tax 180
335
Balance Sheet as at 31.03.2019
(Amount in ` lakh)
Equity and Liability ` Assets `
(1) Shareholders’ Fund: (1) Non-Current Assets:
(a) Share Capital: Net Fixed Assets 1,600
Paid up Capital 800 (2) Current Assets:
(80,00,000 Shares of ` 10 600 (a) Inventory 400

each fully paid) (b) Trade Receivables 250
(b) Reserve and Surplus: (c) Marketable Securities 350
Retained Earnings
(d) Cash and Cash Equivalents 400
(2) Non-Current Liabilities:
Long-Term Borrowing
7-5%, Debenture 1,200
(3) Current Liabilities:
(a) Trade payables 260
(b) Bills payable 100
(c) Other Current Liabilities 40
3,000 3,000
Earning per Share (EPS) ` 4.19
Market Price per Share ` 75
Their industry average ratios for the year 2018-19 are given below:
Current ratio 2.5
Quick ratio 1.5
Sales to inventory 8
Average collection period 35 days
Times interest earned 6
Profit margin 7%
Price to earning ratio 15
Return on total assets 10%
Required:
(i) Calculate the financial ratios as stated supra (in Additional information)
(ii) Analyse the financial performance of GREENCON LTD for the year ended March
31,2019. 8
(b) GREENTECH LTD, a cement manufacturing company located at Ajmer (Rajasthan), has
set up its own Power Plant to cater its need in manufacturing process for production of
cement.
The following details are extracted from the Financial and Cost Accounting records of
GREENTECH LTD for the year ended March 31, 2019.
Power Generated : 59885900 KWH of which 4% is used by Power Generating Plant.
Material and Utility used:
(i) Coal consumptions : 1800 MT@ ` 30,000 per MT
(ii) Oil: 30 MT @ ` 1,50,000 per MT
(iii) Water (extraction and treatment): 40 lakh litres @ ` 3 per litre
(iv) Stores and other consumptions : ` 1,60,000
(v) Cost of Boiler Plant is ` 60 lakh with no residual values.
(vi) Cost of Power Generating Plant is ` 100 lakh with no residual values.
(vii) Depreciation is charged on Straight Line Method @ 10% [for (v) and (vi)].
(viii) Wages and Salaries for Power Generating Plant:

80 skilled workers @ ` 20,000 and 120 helpers @ ` 12,000 per month.
(ix) Wages and Salaries for Boiler Plant:

50 semi-skilled workers @ ` 15,000 and 80 helpers @ ` 10,000 per month.
(x) Repairs & Maintenance of Generating Power Plant and Boiler Plant is ` 20 lakh.
(xi) Share of Administrative Overhead Expenses — ` 125 lakh.
(xii) Realization from Sale of Ash disposed is ` 9 lakh.
You are required to prepare a Cost Sheet for Electricity Generating Cost and calculate
the Cost of Power per KWH for the year ended March 31, 2019, as per the Companies
(Cost Records and Audit) Rules, 2014. 8
Answer:
6. (a)
GREENCON LTD.
Calculation of Financial Ratios: (` in Lakh)
Ratio Formula used Value of ratio Industry’s Remarks

of average
ratio
(A) Liquid Ratio
(i) Current Ratio Current Assets 1400/400=3.5 2.5 Above

Current Liabilities standard
(ii) Quick Ratio Current Assets-Inventory 1000/400=2.50 1.5 Above

Current Liabilities standard
(iii) inventory Cost of goods sold 3275/400=8.19 8 Above

Turnover ratio Inventory standard
(iv) Average Trade Receivable x 365 days (250/4000)x365 35 days 12 days

Collection period Sale = 23 days lower from
standard
(B) Profitability
Ratio
(i) Profit margin Net Income after Tax × 100 (335/4000)xl00 7% Above
Sales = 8.38% standard
(ii) Price to Market price per share 75/4.19=17.90 15 Above

earning ratio Earning per share standard
(iii) Return on Net Profit after tax (335/3000) = 10% Above

total assets Total assets 11.17% standard
(C) Coverage
ratio
(i) Interest Profit before interest and tax 605/90=6.72 6 Above

Coverage ratio Interest standard
Evaluation of Financial performance of the company:
(1) Liquidity Position: Current Ratio as well as Quick Ratio is higher than the industry’s
average ratio. So it may be thought the liquidity position of the company is sound and
satisfactory. Inventory turnover Ratio is little bit higher than industry’s average ratio.
Average debt collection period is lower than industry’s debt collection period that
indicates very efficient receivable management. Hence, liquidity position of the
company is very sound. More than half of the total assets are financed out of the owned
funds signifying satisfactory level of debt financing.
(2) Profitability position: Profit margin ratio of GREENCON LTD. is better than industry’s
average ratio. Return on total Assets of the company is little bit higher than the industry’s
average. It indicates that the company is more or less efficient in utilizing its assets. Price
earnings Ratio of the company is higher compared with the industry’s average. It
indicates that investors’ evaluation about the prospect of the company is good.
Interest Payment Capacity:
Interest payment capacity of GREENCON LTD. is satisfactory as interest cover ratio is higher
than industry’s coverage ratio.
So, overall financial performance of GREENCON Ltd. is very sound and impressive.
6. (b)
Statement showing Cost of Power Generated by Power Generating Plant for the year ended
March 31, 2019
(Amount in ` lakh)
Power Generated: 59885900 Cost per
Effective Power Generated (Note): 5,74,90,464 KWH (`)
Coal Consumptions: 1800x30000 540.00 531.00 0.92

Less: Sale of ASH (9.00)
Oil (30 Mt x ` 150000) 45.00 45.00 0.08
Water : (40 lakh x 3) 120.00 120.00 0.21
Stores and other consumptions: 1.60 0.01
Wages and salaries for power generating 192.00 172.80 364.80 0.63
plant: (80 x 20000 x 12): (120 x 12000x12):
Wages and salaries for Boiler plant: 90.00 96.00 186.00 0.32
(50 x 15000 x 12)
(80 x 10000 x 12)
Repair and maintenance for PGP & BP 20.00 20.00 0.03
Depreciation: 10.00 6.00 16.00 0.03

Power Generating Plant: 10% of 100 lakh
Boiler plant: 10% of 60 lakh
Administrative overhead expenses 125.00 0.22
Total cost 1409.40 2,45
Note:
As power generating plant consumes 4% of power, Effective power produced for

manufacturing = 0.96 x 59885900 = 5,74,90,464 KWH.
7. (a) The following parameters are extracted from the Cost Accounting Records of
ALCOBOX Ltd. multi products manufacturing company for two years:
(Amount in ` lakh)
Year ended 31st March 2019 2018
Gross Sales including GST 28,560 27,790
GST 4,130 3,920
Other Income — —
Raw materials consumed 15,960 14,840
Direct wages and salaries 490 450
Power and fuel 350 320
Stores and spares consumed 80 70
Repairs and maintenance 70 60
Depreciation charged to production cost centres 220 210
Factory overheads:
Salaries and wages 70 60
Depreciation 30 30
Rates and taxes 15 14
Other overheads 75 66
Administrative overheads:
Rates and taxes 90 90
Other overheads 2,250 2,100
Selling and distribution overheads:
Packing and forwarding 85 85
Depreciation 15 15
Other overheads 1,730 1,640
Interest 1,160 1,030
Bonus and gratuity 200 150
You are required to compute the following RATIOS as stipulated in PART-D, PARA-4 to
the Annexure of Cost Audit Report under the Companies (Cost Records and Audit)
Rules, 2014 for the year ended March 31, 2019 and March 31, 2018.
(i) Profit before Tax (PBT) to Value Added
(ii) Value Added to Net Sales
(iii) Profit before Tax (PBT) to Net Revenue from Operations 8
(b) KASAUTI MOTORS LTD, a manufacturing company of motor vehicles has, in FY 2019-20,
faced abnormal fall in demand of passenger vehicles. A huge inventory compelled
the company to shut down production operations for 15 working days in the 1st part of
September, 2019. But the plant was running at budgeted level of Utilization except the
shut down period.
In this respect, the company has furnished the following information for the year
ended March 31, 2020:
Particulars Budget: FY 2019-20

(` in lakh)
No. of working days 305
Contribution (90% capacity) 2,250
Indirect Wages and Salaries 600
Depreciation 240
Inventory Carrying Cost (Addl.) 15
Required:
(i) Find out expected abnormal loss due to shut down for the 1st six months of the
year 2019-20, from the facts and figures stated supra.
(ii) Write a note to the Management suggesting remedial measures. 4+4=8
Answer:
7. (a)
CALCULATION OF PROFIT BEFORE TAX (PBT) (Amount in ` lakh)
YEAR ENDED 31SI MARCH 2019 2018
Gross Sales inclusive of GST 28560 27790
Less: GST 4130 3920
Net Sales 24430 23870
Net Revenue from Operations 24430 23870
Cost of Sales
Raw material consumed 15960 14840
Direct wages and salaries 490 450
Stores and spares consumed 80 70

Depreciation charged to production centres 220 210
Factory over heads (including depreciation) 190 170
Administration overheads 2480 2320
Selling and distribution overheads (inclusive depreciation) 1930 1820
Interest 1160 1030
Bonus and gratuity 200 150
Total B 23130 21440
Profit before Tax (PBT) (A-B) 1300 2430
CALCULATION OF VALUE ADDED (Amount in ` lakh)
YEAR ENDED 31s1 MARCH 2019 2018
Net Sales (A) 24430 23870
Less: Cost of bought out of inputs:
Direct materials consumed 15960 14840

Stores 8i spares consumed 80 70
Overheads (exclusive salaries, wages,
rates & taxes and depreciation) 4140 3891
Total cost of bought out of inputs (B) 20600 19181
VALUE ADDED (A-B) 3830 4689
(Amount in ` lakh)
YEAR ENDED 31st MARCH 2019 2018
(i) Profit before tax (PBT) to Value Added 1300/3830 2430/4689

As (%) 33.94% 51.82%
(ii) Value Added to Net Sales 3830/24430 4689/23870

As (%) 15.68% 19.64%
(iii) Profit before tax (PBT) to net revenue from 1300/24430 2430/23870
operations 5.32% 10.18%
As (%)
7. (b)
(i) Calculation of Abnormal Cost [` lakh)
Budget FY Suspension of
2019-20* lac work, abnormal
cost
Mo of working days 305 15
Indirect Wages & Salaries 600 29.51
Other Fixed Expenses 350 17.21
Inventory carrying cost (extra) 15.00
Total 1,190 73.52
The estimated abnormal cost is ` 73.52 lakh
(ii) The company in the automotive sector is suffering from slowing demand pattern due to
overall recession across the country and even worldwide. The Management may consider
some of the following steps:
1) Reduction of 5% of workforce by suitable compensation package
2) Change part of product mix to electric cars, Al & Robotics, Commercials.
3) Go for more exports taking advantage of favorable foreign exchange parity.
4) Draw a marketing plan, which is customer friendly and cost effective.
5) Make attractive after sales service addressing common customer issue
6) Brand acquisition to effect synergy.
8. Answer any four out of the following five questions: 4×4=16
(a) Explain “Risk Assessment” with reference to Cost Audit Standard 104 at ‘Cost
Statement’ level.
(b) Write a short note on Internal Audit of Utilization of Resources.
(c) A Corporate Social Responsibility (CSR) audit can identify various management risks.
What are the areas that the audit should cover to mitigate risks?
(d) The following are the process-wise input and output in a Textile Mill:
Department Input (kg) Output (kg)
Blow Room 41,10,169 38,27,662
Carding 38,42,123 35,74,310
Draw Frames 35,48,981 35,07,245
Roving (Simplex) 34,82,360 34,44,054
Ring Frame 35,16,085 32,73,475
Required:
Find the cotton input per 1000 kg of Ring Frame yarn output if initially the cotton under
weight of 0.3% moisture loss from the invoice weight.
(e) From the following figures of Diamond Industrial Components Ltd., a single product
company, Find out Value Addition as defined in the Companies (Cost Records and
Audit) Rules, 2014 for the year ended March 31, 2019.
Year ended 31.03.2019

(` in lakh)
1. Net Sales 4,980
2. Raw Materials 2,990
3. Stores and Spares 21
4. Power and Fuel 105
5. Overheads 377
6. Salaries, Wages 410
7. Bonus, Gratuity 42
8. Packing Forwarding Cost 21
9. Interest 280
10. Depreciation 11
Answer:
(a) As per Cost Auditing Standard 104 on Knowledge of Business, its process and the
Business environment, it is necessary to assess the risks related to material misstatement,
whether due to fraud or error at the overall cost statement and at the assertion level
including items of cost, cost heads and disclosure thereof.
Risks at the cost statement level may derive in particular from a deficient control
environment or adverse economic conditions. The Management’s lack of competence
may have a pervasive effect on the cost statements and may require an overall
response by the Auditor. According to 1SA315, Understanding the Entity and its
Environment and Assessing the Risks of Material Misstatement, “the auditor should
perform risk assessment procedures to obtain an understanding of the entity and its
environment, including its internal control”. The Audit risk has three components:
Inherent Risk, Control Risk and Detection Risk. For identifying and assessing the risk, the
Auditor shall
• Identify risks including relevant controls that relate to misstatement or fraud
• Assess whether the risk is related to recent significant economic, accounting, or

other developments and require specific attention
• Assess risks involving significant transactions with related parties.
• Assess the degree of subjectivity in the measurement of information related to risk.
• Assess the need for revising assessment of risk based on additional evidence.
(b) There is a need over measuring the efficiency of internal resources of the organization.
An internal audit team be entrusted with the task of identifying the weak areas of
resource utilization and suggest remedies for the deficiencies. The auditor should check
whether proper operating standards and norms have been established for measuring
economical and efficient use of resources. They should be detailed enough to be
identifiable with specific operating responsibilities and should be capable of being used
by operating personnel for monitoring and evaluating their performance. The Auditor
should review the methods of establishing the operating standards and norms. He
should carefully examine the assumptions made while setting the standards to ensure
that they are appropriate and necessary. The variances should be examined to
evaluate whether or not the standards and norms are practical. The system of
identification and analysis of deviations from standards should be examined. The auditor
should examine whether analysis of variance is communicated to those concerned in
time. He should also examine whether in communicating the variances, serious matter
are highlighted and communicated more expeditiously than is done in normal course.
As a part of evaluating resource utilization, identifying the facilities, which are under-
utilized, is an important function of the auditor. Such instances may consist of under-
utilized machines, unoccupied storage space, huge cash and bank balances, idle man
power, excess inventory of finished goods, raw materials, stores, work in process, sundry
debtors etc. While commenting on staffing, the auditor may pay special attention to
nonproductive work being performed. Finally, the auditor should review all procedure
with reference to their costs and benefits. One of the factors resulting in inefficiency is
that in many cases, procedure may become hindrance to operations.
(c) Corporate Social Responsibility is a mandatory requirement, and any departure from the
requirements may lead the management into difficulty. A CSR audit program can
identify all or any of the following risks:
• Effectiveness of the operating framework for CSR implementation
• Effectiveness of implementation of specific, large CSR projects
• Adequacy of internal control and review mechanisms
• Reliability of measures of performance
• Management of risks associated with external factors like regulatory compliance,

management of potential adverse NGO attention, etc.
A CSR Audit should cover the following points to find out excellence:
• Maintenance of Human Rights viz: Fundamental Human Rights, Freedom of

association and Collective bargaining, Non-discrimination, Forced labor, Child labor
• Business image: Relations with clients, suppliers and sub-contractors, Prevention of

corruption and anti-competitive practices
• Use of Human Resources with dignity and efficiency : Labor relations, Working
conditions including steps taken for preventing accidents and health hazards,
health and safety measures including compensation in case of any accidents,
career development and training, Remuneration system that motivates the
employees.
• Corporate Governance: Board of Directors, Audit and internal controls, Treatment of

shareholders, Executive remuneration
• Environment: Incorporation of environmental considerations into the manufacturing

and distribution of products, and into their use and disposal effect on pollution,
pollution control measures undertaken,
• Community Involvement: Impacts on local communities, contribution to social and

economic development, General interest causes, creation of socials infrastructure
like roads, schools, hospitals.
(d) Calculation of Department wise waste multiplier:
Department Input Output Input/ Loss% Output (%) Waste
(Kgs) (Kgs) output multiplier
Blow Room 4110169 3827662 0.9313 6.87 93.13 1.18125
Carding 3842123 3574310 0.9303 6.97 86.64 1.09893
Draw Frames 3548981 3507245 0.9882 1.18 85.62 1.08600
Roving 3482360 3444054 0.9890 1.10 84.68 1.07410
(Simplex)Ring 3516085 3273475 0.9310 6.90 78.84 1.00000

frame
The initial Cotton input will be Blow Room Input 1.18125 ×(1/0.997) = 1.18480 (0.3% moisture
loss).
For 1000 kg Ring Frame output cotton requirement will be 1184.80 kgs. based on Invoice
Weight.
Note: Output % = (100 - 6.87) = 93.13, (93.13-93.13 x 6.97%) = 86.64, (86.64-86.64 x 1.18%) =
85.62, (85.62-85.62 x 1.10%) = 84.68 and (84.68-84.68 x 6.90%) = 78.84.
(e) Value Addition:
Year ended 31.03.2019

` lac
1. Net Sales 4,930
2a. Cost of bought out Materials 3,011
2b. Power & Fuel 105
2c. Overheads (including distribution cost) 398
2d. Total cost of bought out materials and services (2a+2b+2c) 3,514
3. Value Addition (1)-(2d)= 1,466
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
DECEMBER- 2021

Q.1 Following Figures are available for Best Ltd.
Budgeted Production - 800 units
Standard Hours per unit – 10
Actual Production - 700 units
Actual Working Hours - 5,600
Activity Ratio will be
Ans 1. 85.8%
2. 87.5%
3. 90%
4. 88.5%
Q.2 Consumer Service Audit critically examines
Ans 1. Appraisal of quality of life through better product quality and after sales services.
2. Higher price as compared to competitor‘s price for similar products
3. Debt -Turnover Ratios
4. Demand pattern of the products
Q.3 Which of the following ratios appear as Profitability Ratio in Part D of Annexure toCost Audit Report?
Ans 1. Profit before Tax to Value Added

2. Value added to Net Profit
3. Net Profit to Share Capital
4. Value added to Net Sales
Q.4 Which of the following is not considered as ―Solvency Ratio‖?
Ans 1. Liquidity Ratio

2. Debt to Assets Ratio
3. Debt-Equity Ratio
4. Interest coverage Ratio
Q.5 The authority for fixing remuneration of Cost Auditors as per sec. 148 of theCompanies Act, 2013 lies with
Ans 1. The Audit Committee

2. The Central Government
3. The Shareholders
4. The Board of Directors
Q.6 Which audit is a comprehensive audit to assist the corporate management in various aspects of development
through a process of systematic review and evaluation of long term strategies of the company?
Ans 1. Corporate Services Audit

2. Corporate Development Audit
3. Corporate Social Responsibility Audit
4. Management Audit
Q.7 This is a compensation/periodic payments for the use of asset (tangible and/or intangible) to the owner for the use
of his asset in the production/manufacture, selling and distribution by an entity.
Ans 1. Royalty
2. Reimbursement
3. Honorarium
4. Compensation
Q.8 Propriety Audit in the context of Government Audit seeks to ensure that
Ans 1. Public money are not spent for the benefit of a particular person
2. Public officer should exercise same vigilance as in respect of expenditure ofhis/her own money
3. All of these
4. No authority should pass an order which will be directly or indirectly to its ownadvantage
Q.9 The Material Cost as per CAS 6 shall not include
Ans 1. Losses due to shrinkage, moisture loss

2. Outsourcing claims for processing by a third party.
3. Demurrage charges levied by transport agencies
4. Self-manufactured materials
Q.10 Operational Audit can lead to better management with the focus on
Ans 1. Transaction based analysis for fraud prevention

2. Budget Monitoring
3. Risk identification, Process improvement
4. Policies and procedure focus
Q.11 For what purpose, Management Accounting tools such as Thorough put accounting, Life cycle costing, Target
costing, Variable or Marginal Costing are used?
Ans 1. Cost computation

2. Pricing and decision making
3. Cost reduction
4. Cost Control
Q.12 Cost Accounting Standard 19 deals with
Ans 1. Overburden Removal Cost

2. Joint Costs
3. Production and Operation Overheads
4. Repairs and Maintenance Cost
Q.13 The Auditor of Cooperative Societies is required to make an unique observation relating to
Ans 1. Overdue debts and classification

2. Valuation of the assets and liabilities of the society
3. Departure from provisions of the Act and the Rules, if any.
4. Award a class to the society on criteria specified by the Registrar of Societies.
Q.14 Related Party transaction under Para D-5 of Annexure to the Cost Audit Report need not
be provided with
Ans 1. Each Product transacted upon

2. Each Related Party
3. Each transaction entered upon
4. Each Service transacted upon
Q.15 Installed capacity is determined based on:
Ans 1. Capacities of individual or inter-related production centres

2. All of these
3. Number of shifts
4. Manufacturer's Technical Specifications
Q.16 Educational Services covered under Companies (CRA) Rules 2014 does not include
Ans 1. Catering service on mid-day meals scheme

2. Housekeeping and security services
3. Missionary/Philanthropic services done
4. Transportation of students, faculty, staff
Q.17 Normal capacity as per CAS 2 means
Ans 1. Installed capacity minus inevitable interruptions

2. Maximum production capacity of a plant
3. Volume of production achieved/achievable on an average over a period under normal circumstances.
4. Difference between installed capacity and actual capacity utilisation
Q.18 Purchase price of material is US $ 35,000, Import duty paid Rs 4,35,000, Freight inward - Rs 2,56,000, Insurance paid
Import by Road -Rs. 58,000. (Payment made to the vendor after a month, on that date, the rate of exchange 1$ = Rs
72.56 but 1$ = Rs 72.38 on date of importation). Compute the loaded cost of material.
Ans 1. Rs.32,88,600
2. Rs.32,58,300
3. Rs.32,84,400
4. Rs.32,82,300
Q.19 Arms and ammunitions and Explosives sector and fulfilling turnover criteria is under
Ans 1. Exempted category

2. Regulated Sector category
3. Not Applicable category
4. Non-regulated Sector category
Q.20 ―Cost of Services provided‖ as per Abridged Cost Statement does not include
Ans 1. Cost of outsourced /contractual services

2. Industry specific operating expenses
3. Research and Development Expenses
4. Technical know-how fee
Q.1 Under which Audit, the following aspects are involved?

Physical verification of Stock (ii) Method of Valuation adopted and (iii) Movementof Stock
Answer: Inventory Audit
Q.2 Does a company appointing multiple Cost Auditor required to file multiple formCRA 2 form or a single one?
Answer: A single Form CRA-2 is required to be filed providing details of the sectors/industries covered under
cost audit and details of Cost Auditor. [Intimation for appointment of cost auditor to Central
Government‘ has replaced the earlier Form 23C (application seeking approval for appointment of cost
auditor)].
Q.3 What are the Defectives which cannot meet the quality standards even after putting in additional resources called
as?
Answer: Rejects
Q.4 Mention at least two items which are included in Cost Accounts but not in Financial Accounts.
Answer: There are some items which are included in cost accounts but not in financial account. These are:
(a) Notional interest on capital;
(b) Notional rent on premises owned.
Q.5 What are these simply variables, independent or interdependent, parameters in respect of which goals can be set
and performance can be measured to assesswhether it is in furtherance of the enterprise objectives ?
Answer: Key Performance Indicators
Q.6 What is Generally accepted cost accounting principles?
Answer: The purpose for a compilation of GACAP is to bring uniformity in cost accounting principles and
standard for Indian industry. [The Companies (Cost Records and Audit) Rules, 2014 require
maintenance of cost records according to GACAP and Cost Accounting Standards.]
Q.7 Find the Direct Expenses as per CAS 10 from the following: Finance charge on lease of Design Rs25,000, Special
Design Charges Rs 28,000, Software Development Charges related to Production Rs 27,000, and Travelling abroad
for Training Rs25,000.
Answer: Rs 28000+Rs 27000+ Rs25000 =Rs 80000 (finance charges will not form part of direct expenses.
Q.8 What is meant by Summary Report to Top Management?
Answer: Summary reports to management usually would have two distinct functions –
(i) They would tell what the internal audit department has accomplished when compared to what
was planned.
(ii) They would show conclusions of the auditors in a summarized form.
Q.9 What is the maximum level of output that a company can sustain to make a productor provide a service ?
Answer: Installed/ Maximum Capacity
Q.10 This is called as Dictionary of all cost elements required in the Cost Audit Report.
Answer: Costing Taxonomy

Q.11 What is the obligation of Cost Auditor to certify its arms‘ length relationship withthe company?
Answer: The Cost Auditor of a company is required to give a certificate to the Audit Committee of
its independence and arm‘s length relationship with the company.
Q.12 Inward transportation cost for procurement shall form part of which category ofcost?
Answer: Inward transportation costs shall form the part of the cost of procurement of materials which are to be
identified for proper allocation/ apportionment to materials / products.
Q.13 What services are included on ‗Health Services‘ as per the CCRA Rules.
Answer: Health services namely functioning of as or running hospitals, diagnostic centres, clinical centres or
test laboratories
Q.14 How would you treat abnormal cost?
Answer: Abnormal Cost is an unusual or a typical cost whose occurrence is usually irregular and unexpected
and/or due to some abnormal situation of the production or operation. It must be excluded from
computation of Cost and appears is Costing Profit/Loss Account
Q.15 What is a detailed plan of the auditing work to be performed, specifying the procedures to be followed, in
verification of each item and the financial statementstime required ?
Answer: Audit Programme
Q.16 Under what conditions a private company is to appoint Internal Auditor?
Answer: A private company having (i) turnover of Rs. 200 crore or more during preceding FY and (ii) outstanding
loans or borrowings from banks or PFIs exceeding Rs. 100 hundred crore or more at any point of time
during the preceding financial year.
Q.17 Explain the term Detection Risk.
Answer: Detection risk is the risk wherein the procedures followed by the cost auditor to reduce audit risk to an
acceptable low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements. It is covered in Audit Standard 103.
Q.18 How would you assign primary and secondary packing materials cost as per CAS9?
Answer: Cost of primary packing materials shall form part of the cost of production and cost of secondary
packing materials shall form part of distribution overheads.
Q.19 What is ‗concurrent audit?
Answer: Indian financial Institutions, banks and Board for Industrial Finance and Reconstruction (BIFR) have
found concurrent audit useful in monitoring sick industrial units and to help the units in their
rehabilitation. [It is a form of Management Audit running concurrent with statutory audit.]
Q.20 What are the Products with relatively low value produced incidentally in the manufacturing are called as?
Answer: By Product
Section : C
(12X4 = 48 Marks)
One LAQ
Q.1
4 Marks
Answer:
The landed value of cost of Materials of PQR Ltd for the FY 20-21 = Rs. 10,15,300
Q.2 How do you assign cost of Indirect Materials?

4 Marks
Answer:
(i) The cost of indirect materials shall be assigned to the various Cost objects based on a suitable
basis such as actual usage or technical norms or a similar identifiable measure.
(ii) The cost of materials like catalysts, dies, tools, moulds, patterns etc., which are relatable to
production over a period of time shall be amortized over the production units benefited by such
cost.
(iii) The cost of indirect material with life exceeding one year shall be included in cost over the
useful life of the material.
Q.3
4 Marks
Answer:
The Employee Cost as per CAS 7 for the period FY 2020-21 = Rs. 1,228 lakh
Two LAQ
Q.1 For audit of cost of electricity generated by DG set, draw a check list. (at least 6 points)
4 Marks
Answer:
Some suggested areas should be remembered to audit the cost of electricity generated by DG set:
•Periodical report of Diesel Generating Set prepared by the head of DG set should be the basis for finding the cost of
electricity generated.
• Ensure that monthly report contains the following information on i) No of hours DG set is operated, Quantity of high
speed diesel used, ii) Total units generated.
• Ensure that employee cost is properly booked and it pertaining to only those employees actually working for DG set.
• Ensure that cost of consumable stores and repairs is properly allocated, pertains to cost actually incurred for DG
set.
• Ensure the correctness of depreciation and insurance, etc.
• Ensure that proper cost center is allocated to DG set
• Generally, CMA Department prepares expense control chart which lists out all the expenses incurred for DG set.
Q.2 You are the Internal Auditor of a Manufacturing company. There is abnormal rise in raw materials costs during the
previous month when there was no significant change in production programme. How will you proceed?
4 Marks
Answer:
It may be considered as abnormal cost and the auditor should proceed to find on the following lines —
1. Variance Analysis: A variance analysis of the actual cost with that of standard or if there is no standard costing
system, proceed with that of previous month. An analysis will highlight
(a) Price Variance
(b) Volume Variance
(c) Usage Variance.
2. Usage basis: Obtain the standard consumption figures, and ascertain the basis of computation of normal usage
figures to find out adverse variation.
3. Abnormal Process Loss due to inferior material quality, machine utilization, rigid inspection, old lot consumption
may be cause of rising cost.
4. Abnormal storage and Handling loss- Find the facts and suggest remedies. These are illustrative in nature and
list may not be exhaustive.
Q.3 What is the Scope of Internal Control?

4 Marks
Answer:
An effective internal control is a critical success factor for any organization in the long term. They are indispensable
tools for the ever increasing risks, exposures and threats to accounting systems, data and assets. It embraces the
whole system of controls, financial, operational or otherwise, established by the management in the functioning of a
business including internal check, internal audit and other forms of control. In fact, internal control has now been
recognized as fundamental and indispensable to modern auditing. Thus internal control has its all embracing nature
and is concerned with the controls operative in every area of corporate activity as well as with the way in which
individual controls interrelate. The scope of internal control extends wells beyond accounting control. Thus, the latest
definition of internal control encompasses operational controls like quality control, work standards, budgetary control,
periodic reporting, policy appraisals, quantitative control, etc., as all parts of the internal control system. In an
independent financial audit or the statutory audit, the auditor is concerned mainly with the financial and accounting
controls. However, in an operational audit(as part of internal controls), the auditor reviews all the controls including
operational functions. The internal controls can be broadly classified into following four main categories:
(i) Administrative Control - Administrative controls include all types of managerial controls related to the decision
making process. An example of administrative controls is the maintenance of records giving details of customers
contacted by the salesmen.
(ii) Operational Control - This is exercised through 'managerial accounting' techniques viz, budgetary control,
standard costing etc.
(iii) Financial and Accounting control: This control refers primarily the management plans, objectives and procedures
that are concerned with the safeguarding of assets, prevention and detection of fraud and error, accuracy and
completeness of accounting records, and timely preparation of reliable financial information.
(iv) Compliance Control: These controls aim at ensuring compliance with applicable laws and regulations. These
controls also help to ensure compliance with laws regarding the system and intellectual property.
Three LAQ
Q.1
4 Marks
Answer:
Value addition in respect of XYZ Co. for the year ended 31.3.2021 as per Part D of CCRA Rules = Rs. 2,944 lakh
Q.2 ABC Ltd showed as on the end of FY 20-21 the following financial fig.(Rs lakh) Share Capital Rs 4500 Reserves & 4 Marks
SurplusRs .1440 Loan Rs.1600 Sundry Creditors Rs 1500 and for same year Profit before tax Rs 2500 Provision
for tax Rs 1000 Proposed Dividend Rs 700. Deferred Rev Expenses Rs 400.
Find the Return/Networth.
Answer:
Return on Net worth = 27.1%
Q.3 The financial Profit and Loss account for the year 2020-21, of a Company shows a Net Profit of Rs.20,00,000.
4 Marks
During the course of audit, it was noticed that:
(i) Some Old Assets sold off, at the end of the year fetching a profit of of Rs.
1,00,000
(ii) A major overhaul of machinery was carried out at a cost of Rs.6,00,000. And thenext
such overhaul will be done only after 3 years.
Work out the profit as per Cost Accounts.
Answer:
Profit as per Cost Accounts = Rs. 23,00,000

Four LAQ
Q.1 What are the benefits from using XBRL?

4 Marks
Answer:
Benefits from using XBRL:
All types of organisations can make use of XBRL to automate their process of data collection and
distribution to various stakeholders. It helps in saving costs and improving the efficiency in managing
business information - financial or cost.
XBRL being extensible and flexible, can be adopted to a wide variety of requirements. All Stakeholders
whether they are preparers, transmitters or users of business data in the financial information supply chain
can benefit from the use of XBRL.
Q.2 What are the objectives of Cost Audit?

4 Marks
Answer:
Objectives of Cost Audit:
(i) To verify cost accounts with a view to ascertaining that these have been properly maintained and
compiled according to the cost accounting system followed by the enterprise.
(ii) To ensure that the prescribed procedures of cost accounting records rules are duly adhered to
(iii) To detect errors and fraud in the Company activities
(iv) To verify the cost of each 'Cost unit' and Cost Center' to ensure that these have been properly
ascertained.
(v) To determine inventory valuation
(vi) To facilitate fixation of prices of goods and services
(vii) To periodically reconcile between Cost accounts and financial accounts
(viii) To ensure optimum utilisation of human, physical and financial resources of the enterprise.
(ix) To detect and make correction of abnormal loss of material and time
(x) To inculcate cost consciousness
(xi) To advise management, on the basis of inter-firm comparison of cost records as regards the areas
where performance calls for improvement.
(xii) To promote corporate governance through various operational disclosures to the directors.
Q.3 According to Cost Auditing Standard-103, Explain: 4 Marks

Audit and Ethics:
Answer:
Audit and Ethics:
The Cost Auditor should comply with relevant ethical requirements as per Code of Ethics issued by the
Institute of Cost Accountants of India. This Code establishes fundamental principles of professional ethics
relevant to the auditor while conducting an audit and provides a conceptual framework for applying these
principles. The fundamental principles with which the auditor is required to comply are Independence,
Integrity, Objectivity Professional Competence and due care, Confidentiality and Professional conduct. In case
of an audit engagement, it is in the public interest that the auditor should be independent of the entity subject
to the audit. The cost auditor's independence from the entity safeguards the cost auditor's ability to form an
opinion without being affected by influences that might compromise that opinion. Independence enhances the
auditor's ability to act with integrity to be objective and to maintain an attitude of professional skepticism.
Five LAQ
Q.1
4+4+4 = 12 Marks
i) Find the Average Capital Employed

ii) Calculate Return on Capital Employed
iii) What is the Return on Net Worth?
Answer:
i) Average Capital Employed = Rs. 5,715 lakh
ii) Return on Capital Employed = 32.2%

The return of 32% after tax is considered good and the unit can go for expansion provided market conditions
permit.
iii) Return on net worth = 32.45% (Based on Opening value of Capital Employed)
Six LAQ
(3X4 = 12 Marks)
Q.1 You are required to write Short Note on Audit Engagement Letter
3 Marks
Answer: Audit Engagement Letter:
Auditors agree with the client's management, in writing, about the scope, terms and conditions of the
audit engagement. This written communication is referred to as an engagement letter. The letter is
usually addressed to Chairman of the audit committee, or, in the case of a corporation, the chair of the
board of directors, with a copy being sent to the audit committee. The purpose of such a letter is to
minimize any possible misunderstanding concerning the scope and terms of the audit engagement.
Q.2 You are required to write Short Note on Internal Control of Cost Information System/Management Information
3 Marks
System as per Cost Auditing Standard – 104
Answer: InternalControl Of Cost Information/Management Information System As Per Cost Auditing Standard -
104:
The cost auditor shall obtain an understanding of the Information System including Management
Information System, relevant to cost reporting, including the following areas:
(i) The classes of transactions and their analysis, that are significant to the cost statements;
(ii) The procedures, by which those transactions and theiranalysis are initiated, recorded, processed,
and reported in the management information systems and cost statements;
(iii) The related cost accounting records, supportinginformation that are used to initiate, record,
process and report transactions; and
(iv) The reporting process used to prepare the entity's cost statements, including significant estimates
and disclosures.
Q.3 You are required to write Short Note on Materials Consumed as per CAS-22
3 Marks
Answer: Materials Consumed as per Cost Accounting Standard - 22:
Materials consumed includes materials directly identified for production of excisable good such as:
(i) indigenous materials
(ii) Imported materials
(iii) Bought out materials
(iv) Self-manufactured items
(v) Process materials and other items
(vi) Materials received free of cost or at concessional value from the buyer
(vii) Accessories, on which cenvat credit is admissible, and which are cleared along with the final
product
(viii) goods used for providing free warranty for excisable goods
Q.4 You are required to write Short Note on Adjustment of Cost Variances as indicated in Companies (Cost Records
3 Marks
and Audit) Rules, 2014.
Answer: Adjustments of Cost Variances as indicated in Companies (Cost Records and Audit)Rules,2014:
Where the company maintains cost records on any basis other than actual such as standard costing,
the records shall indicate the procedure followed by the company in working out the cost of the goods
or services under such system. The cost variances shall be shown against separate heads and
analyzed into material, labour, overheads and further segregated into quantity, price and efficiency
variances. The method followed for adjusting the cost variances in determining the actual cost of the
goods or services shall be indicated clearly in the cost records. The reasons for the variances shall be
duly explained in the cost records and statements.
Q.5 Write briefly what you mean as Audit File.

3 Marks
Answer: As per Cost Auditing Standard 103, Audit file means one or more folders or other storage media, in
physical or electronic form, containing the records that comprise the audit documentation for a
specific Assignment or audit. The Cost Audit Documentation must be assembled as the audit goes on
and the final assembly required. After the assembly of the final audit file has completed, the auditor
should not delete or discard audit documentation of any nature before the end of its retention period.
Q.1
5+4+3 = 12 Marks
From the above-

i) Calculate the cost of Water transferred from source to Plant and Domestic area.
ii) Calculate the total value of abnormal loss of water.
iii) Fill form 2B of Abridged Cost Statement in respect of utilities (Thermal Electricity - CTA Heading 2716)
consuming water in demineralized form.
Answer:
i) Cost of water transferred with treatment cost

Unit 1 Unit 2 Unit 3 Domestic
1.Water received (Kl) 78900 74965 48700 14500
2. –do- Value (Rs.00) 118350 190,695 289,925 94,107
3.Wages, Salaries Rs. 00 48,750 40,625 48,750
Inclusive
4.Chemicals Rs. 00 13,000 40,625 48,750
with unit3
5.Repairs Rs.00 4,880 6,500 8,100
**
6.Insurance Rs. 00 1,815 6,600 8,100
Divided by
7.Depreciation Rs. 00 3,900 4,880 6,550
63,200Kl
8.Total Cost (2) to (7) Rs. 410,175
190,695 289,925 (48700+ 14500)
00 **
(2.417) (3.867)
9.Rate (8)/(1) Rs. 6.49 6.49
2.42 3.87
10.Abnormal Loss Qty(Kl) 3,935 11,765 Xx
11.Abnormal Loss Rs. 9.510.58 45500.80 Xxx
12.Trf to next process (Kl) 74,965 63,200 14,500
Unit 2 output Split to 48,700 & 14,500 at average cost
ii) The value of abnormal loss of water charged to P/L account :
Unit 1 = Rs. 9,510

Unit 2 = Rs. 45,500
iii) Form 2B
Details of Utilities Consumed
Name of Product Thermal Electricity
CTA heading 2716
Previous
Current Year
Year
Rate/ Amount
Description of Material UOM Qty
unit Rs. Rs.
Water (Demineralized) KL 63200 6.49 410175

FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

DECEMBER - 2017
1. Choose the correct answer with short justification /working. (1 mark for correct choice
and 1 mark for justification/working) 2×10=20
(i) The Cost Accounting Standard 15 is a Cost Accounting Standard on _______.
(a) Employee Cost
(b) Utilities Cost
(c) Pollution Control Cost
(d) Selling and Distribution Overheads Cost
(ii) Overall Objectives of the independent Cost Auditor and conduct of an Audit in
accordance with Cost Auditing Standard is dealt in _____________.
(a) Cost Auditing Standard 101
(b) Cost Auditing Standard 102
(c) Cost Auditing Standard 103
(d) Cost Auditing Standard 104
(iii) A company, engaged in construction business, is covered under the Companies

(Cost Records and Audit) Rules, 2014 but does not include _____________.
(a) outsourcing by a sub-contracting company
(b) a company working on BOT (Build, Operate, Transfer) mode
(c) a company working in a Special Economic Zone
(d) a project undertaken as EPC (Eng., Procurement, Constn.) contract
(iv) A manufacturing unit showed, during the Financial Year 2016-17, the following
financial data (in ` lakh): Net Sales 1,250, Export Incentives 85, Other income 106,
Adj. of Finished Stock (+) 95, Materials 634, Salaries 425, Overheads 101.8, and Tax
52.6. The Value Added as per Rules is (in ` lakh) _____________.
(a) 946
(b) 796
(c) 755
(d) 688
(v) Royalty paid on production ` 35,000, Job Charges ` 20,000, Special Design Charges
` 20,000, Software Development Charges related to Production ` 27,000, and
Travelling abroad for Training ` 25,000 The Direct Expenses as per CAS 10 is
` _____________.
(a) 92,000
(b) 1,00,000
(c) 1,02,000
(d) 1,27,000
(vi) Operational Audit can lead to better management with the focus on_____________.
(a) Transaction-based analysis for Fraud Prevention
(b) Compliance of Rules
(c) Risk Identification, Process Improvement
(d) Budget Monitoring
(vii) Penalty paid to PF authorities is _____________ in Employee Cost.
(a) included
(b) excluded
(c) based on individual case
(d) partly included
(viii) Item appearing only in Cost Records is _____________.
(a) Profit on Sale of Assets
(b) Interest Received
(c) Loss on Sale of Assets
(d) Notional Interest on Capital
(ix) _____________ Analysis is evaluation of every resources declared in the industry.
(a) Capacity
(b) Energy
(c) Productivity
(d) Efficiency
(x) Which one of the following is not a professional misconduct in relation to Cost
Accountants in Practice as per the Second Schedule of The CWA Act, 1959?
(a) He/she fails to invite attention to any material departure from the generally
accepted procedure of costing and pricing applicable to the circumstances.
(b) He/she does not exercise due diligence or is grossly negligent in the conduct
of his/her professional duties.
(c) He/she fails to report a material misstatement known to him/her to appear in a

cost or pricing statement with which he/she is concerned in a professional
capacity.
(d) In the opinion of the Council, he/she brings disrepute to the Profession or the
Institute as a result of his/her action whether or not related to his/her
professional work.
Answer 1.
(i) (d) Selling and Distribution Overhead Cost.

CAS 15 deals with the principles and methods of classification, measurement and
assignment of Selling and Distribution Overheads, for determination of the cost of
sales of product or service, and the presentation and disclosure in cost statements.
(ii) (c) Cost Auditing Standard 103.
Cost Auditing Standard 103 deals with the overall objectives of the independent
cost auditor, the nature and scope of a cost audit and independent auditor‟s
overall responsibilities when conducting an audit of cost statements in accordance
with cost auditing standards. It also explains the requirements establishing the
general responsibilities of the independent auditor applicable in all audits, including
the obligation to comply with the cost auditing standards.
(iii) (c) A Company working in Special Economic Zone.

As per Rule 4(3) (ii) of the Companies( Cost Records and Audit) Rules 2014 such units
would be outside the purview of cost audit.
(iv) (b) ` 796 Lakh.
(Sales 1250 + Export Incentive 85 + Adj of Finished stock 95)-(Materials 634) = ` 796
Lakh.
(v) (d) ` 1,27,000

[direct expenses as per CAS 10 = royalty paid on production + Job charges +
Special Design Charges + Software development charges related to production +
Travelling abroad for training = ` (35,000 + 20,000 + 20,000 + 27,000 + 25,000) =
` 1,27,000 ]
(vi) (c) Risk identification, process improvement: The objective is to assist the organization in
performing functions more effectively and economically with focus on efficiency
and effectiveness of operations, giving an early warning system for detection of
potentially destructive problems.
(vii) (b) Excluded
Penalty paid to PF authorities is not normal cost and hence is excluded as per CAS 7
from employee cost.
(viii) (d) Notional interest on capital
This does not involve actual outlay of funds but is included in cost records as an
opportunity cost to determine product cost. The other three items are not related to
actual production and this do not form part of cost records.
(ix) (c) Productivity
The Productivity audit is basically an analysis of the productivity of the resources

deployed by any organization. It is generally done to generate information about
the status of productivity in the organization for the purpose of determining the
scale of efficiency and effectiveness of „resource utilization‟.
(x) (d) Bringing disrepute to the profession or the institute is not considered a misconduct as
per the Second Schedule of the CWA Act 1959. It is a misconduct as per the First
Schedule, Part IV of the Act.
2. (a) (i) What are ‘Books of Accounts’ as per the Companies Act, 2013? Do ‘Cost Records’
become part of Books of Accounts?
(ii) Is maintenance of Cost Accounting Records mandatory for a multi-product

company where all the products are not covered under the Rules, even if the
turnover of the individual products, which are covered under the Rules, is less
than rupees thirty five crore? 4+4=8
(b) (i) Mr. X, the Cost Auditor of a company, contributes articles in various papers or
journals, discussing matters of professional interest. In the course of such
discussion, he mentions various data which include some vital, but unpublished,
data relating to his client company without its tacit approval. State whether there
is punishment, if any, of the Cost Auditor for such contravention.
(ii) A member of the Institute, whether in practice or not, is liable for disciplinary
action if he/she is found guilty of professional and other misconduct. Explain the
term ‘other misconduct.” 4+4=8
Answer 2. (a)
(i) Section 2(13) of Companies Act, 2013 states that: “Books of Accounts” includes records
maintained in respect of-
(i) All sums of money received and expended by a company and matters in relation to
which receipts and expenditure take place;
(ii) All sales and purchases of goods and services by the company
(iii) The assets and liabilities of the company and
(iv) The items of cost as may be prescribed under section 148 in the case of company
which belongs to any class of companies specified under that section.
Section 148 of Companies Act 2013 empowers the “central government to specify audit
of items of costs in respect of certain companies”.
As per Rule 2 (e) of the Companies (Cost Records and Audit ) Rules 2014, “cost records”
means books of accounts relating to utilization of materials, labour and other items of
cost as applicable to the production of goods or provision of services as provided in
Section 148 of the Act and such rules.
(ii) The Rules provide threshold limits for the company as a whole irrespective of whether all
it‟s products are as per the prescribed industry /sector provided under Table A or Table
B. The Rules do not provide any minimum product specific threshold limits for
maintenance of Cost Accounting Records and consequently the company would be
required to maintain Cost Accounting Records for the products covered under table A
or Table B or both , even if the turnover of such products is below rupees thirty five crore.
Answer 2. (b)
(i) Clause (1) of Part I of the Second Schedule to the Cost and Works Accountant‟s Act
1959 deals with the professional misconduct relating to the disclosure of information by a
CMA in practice relating to the business of his /her clients to any person other than
his/her without the consent of the client or otherwise than as required by any law for the
time being in force would amount to breach of confidence .The code of ethic further
clarifies that such duty continues even after completion of the assignment. The CMA
may, however, disclose the information in case it is required as a part of performance of
his/her professional duties. In the given case Mr X has disclosed vital information of his
client‟s business without the consent of the client under the impression that it will help the
profession and the industry at large it is a professional misconduct covered by Clause (1)
of Part (I) of the Second Schedule of the Cost and Work Accountant‟s Act 1959.
(ii) As per Part IV first schedule to the Institute of Cost and Work Accountant‟s Act 1959 a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct if-
1. He /She is held guilty by any civil or criminal court for an offence which is punishable
with imprisonment for a term not exceeding 6 months and
2. In the opinion of the Council he/she brings disrepute to the profession or the Institute
as a result of the action whether or not related to his /her professional work.
3. (a) (i) How would you treat the following as per the CAS 7 related to Employee Cost?
I. Separation Cost due to voluntary retirement, retrenchment termination, etc.
II. Idle Time Cost
(ii) Find the Employee Cost of a company for the year 2016-17 as per the CAS 7 from
the following figures:
Particulars (` lakh)
Salaries, wages, allowances and bonus 950
Wage award arrears for the previous year 85
Contribution to provident and other funds 188
Employee welfare 56
Abnormal Idle Labour cost due to strike 95
Wages of contractual labour 125
VRS payment for the year 66
4+4=8
(b) The following particulars pertaining to production of yarn are extracted from the
records of Balarampur Textiles Ltd. for the year ended March 31, 2017:
Particulars ` ‘000
Direct Material Cost per unit inclusive of Excise Duty ` 280 thousand 2,560
Direct Wages & Salaries 1,540
Direct Expenses 450
Indirect Materials 533
Factory Overheads 897
Administrative Overheads (40% relating to Production activities) 1,250
Quality Control Cost 565
Research and Development Cost 600
Interest on Working Capital 350
Sale of Scrap Realised 460
You are to determine the cost of production for the purpose of captive
consumption in terms of the Rule 8 of the Central Excise Valuation (DPE) Rules 2000
and as per the CAS-4 and the Assessable Value for the purpose of paying Excise
Duty on captive consumption. 6+2=8
Answer 3. (a) (i)

I Separation costs related to voluntary retirement, retrenchment, termination etc, shall be
amortised over the period benefiting from such costs. The amortised separation costs for
the period shall be treated as indirect cost and assigned to the cost objects in an
appropriate manner. However unamortised amount related to discontinued operations,
shall not be treated as Employee Cost but should be charged to Profit and Loss
account.
II Idle Time Cost shall be assigned direct to the cost object or treated as overheads
depending on the economic feasibility and the specific circumstances causing such
idle time. Cost of Idle time for reasons anticipated like normal lunchtime, holidays etc is
normally loaded in the employee cost while arriving at the cost per hour of an
employee/a group of employees whose time is attributed direct to the cost objects.
Answer 3. (a) (ii)

The employee cost for the company for the year 2016-17 is as follows:
(` Lakh)
Salaries, Wages, allowances and bonus 950
Wages of contractual labour 125
Contribution to provident fund and other funds 188
Employee Welfare 56
VRS payment for the year 66
Total 1385
Note : 1. As per CAS 7, arrear not related to the current year should not be included in the
Employee Cost.
2. Abnormal idle time cost is charged to Costing Profit & Loss Account
3. It is assumed that the VRS payment does not relate to closure of any section or
activity of the unit.
Answer 3. (b)
According to the Central Excise Valuation (Determination of price of Excisable Goods) Rules
2000, the assessable Value of goods used for captive consumption is 110% (w.e.f 5-8-2003) of
cost of production of such goods. The manner of determination of cost of production for
captive consumption is laid down in CAS 4.
Particulars ` in ‘000
Direct Material 2560
Direct wages and salaries 1540
Direct expenses 450
Indirect Materials 533
Factory Overheads 897
Administrative Overheads(40% on `.1250) 500
Quality Control Cost 565
R& D Cost 600
Total cost 7645
Less: realisation of scrap 460
Cost of production as per CAS 4 7185
Note : 1. The cost of Working Capital Interest is not chargeable to Cost of Production
2. Assessable value as per Excise Rules is ` 7903500 (110 % × 71,85,000)
4. (a) A company manufacturing various packing ingredients is not covered under the
Companies (Cost Records and Audit) Rules, 2014. The Managing Director of the
company wants to introduce costing system and wants your advice for coverage of
various areas of Management Accounting Control. Discuss. 8
(b) What do you mean by ‘Productivity Audit’? Mention some major ratios which are used
for measuring productive efficiency. 8
Answer 4. (a)
The management Accountant during the course of the study will thoroughly review and
stress upon the areas as follows :
(i) Nature of Industry - Batch, Job, Process etc
(ii) Locate and Fixation of cost centres
(iii) Procedures for accounting of materials and spares etc
(iv) Method of accounting treatment of wastes, rejections and defectives
(v) Systems of recording of wages, salaries and overtime and find out their judicial
allocation
(v) Incentive schemes in Vogue
(vii) Find out an optimum mechanism of allocation / apportionment of utilities
(viii) Method of accounting of depreciation and charging depreciation to the designed cost
centres
(ix) Method of apportionment of service department expenses to production departments
(x) Fix a basis of absorption of overheads to products

(xi) Basis of absorption interest, bonus, gratuity and selling and distribution overheads
(xii) Introduction to budgetary control systems
(xiii) Find whether internal audit system exists or not and if not advise suitably
(xiv) Draw a method of accounting of Production and Sales.
(xv) Advise suitable treatment of Research and Development expenses
Answer 4. (b)
The Productivity audit is basically an analysis of the productivity of the resources deployed by
any organization. It is generally done to generate information about the status of
productivity in the organization for the purpose of determining the scale of efficiency and
effectiveness of „resource utilization‟. The term „resources‟ here would include not only
“money” but also “men”, “machines”, “materials” and “methods”.
In other words, the objectives of productivity audit is - (a) to attain optimum result, and (b) to
improve on the benchmarks. This audit would generally comprise - (a) comparison of
expected returns on utilization of the resources vis-a-vis the actual returns; (b) comparison of
optimum returns on utilization of the resources vis-a-vis the actual returns; and (c) the steps
taken to improve benchmarks of returns and the utilization.
The term „Productivity‟ is normally attributed only to the “productivity of labour” or

“efficiency of labour” alone. But productivity audit is actually “productivity of every resource
employed”. Productivity audit is done by - (a) Ratio analysis - Return on capital employed -
Return on sales -Turnover ratios of fixed assets, current assets, inventories, category-wise
debtors etc. (a) Capacity utilization of plant, machinery and equipment against available
capacity, (b) Productivity analysis of man (labour) hours in time and cost, (c) Material
consumption against norms and benchmarks.
The following ratios are generally used in measuring productive efficiency of the resources
deployed and utilized:
Resources Deployment:
(i) Capital employed per capita
(ii) Capital employed per unit of product
(iii) Gross profit to capital employed
(iv) Net profit to capital employed
(v) Debt equity ratio
(vi) Net worth and long-term debts to gross fixed assets
(vii) Net worth and long-term debts to net fixed assets
(viii) Debts to fixed loans
(ix) Debts to floating loans
(x) Current assets to current liabilities
(xi) Net working capital
(xii) Total inventory to capital employed.
Resource Utilisation:
(i) Capacity utilisation - Installed capacity: Utilised capacity of machines (by units)
(ii) Capacity utilisation - Installed capacity: Utilised capacity of machines (by machine
hours)
(iii) Machine time available : Machine time utilized
(iv) Machine time consumed : Per unit of product (individually)
(v) Machine time consumed : Per capita
(vi) Gross fixed assets : Turnover
(vii) Net fixed assets : Turnover
(viii) Inventories : Turnover (inventory turnover)
(ix) Raw materials : Turnover (No. of days of stock)
(x) Work in process : Turnover (No. of days of stock v. cycle time)
(xi) Finished goods : Turnover (No. of days of stock v. lead time)
(xii) Labour time consumed : Division-wise
(xiii) Labour time consumed : Product-wise
(xiv) Labour time consumed : Product group-wise
(xv) Turnover per capita
(xvi) Value added : per capita
(xvii) Indirect labour: Direct labour number
(xviii) Indirect labourcosts : Direct labour costs
(xix) Levels of management
5. (a) (i) State which one of the following companies is required to appoint Internal
Auditor as per the Companies Act, 2013, and the Rules made thereunder:
Figures are in ` crore and correspond to the previous year.
Name Nature Equity Turnover Loan from Public

Capital Bank/PFI Deposit
LMN Ltd. LISTED 100 190 50 24
PQR Ltd. UNLISTED 60 190 50 24
PUBLIC
XYZ Ltd. UNLISTED 60 190 50 -
PRIVATE
(ii) Can the Chief Cost Accounts Officer of the company be given additional charge
as Internal Auditor? 6+2=8
(b) You are the Internal Auditor of Atlas Manufacturing Ltd. The Audit Committee desires
to enquire into the cause of abnormal rise in raw materials costs during the previous
month when there was no significant change in the production programme. How will
you proceed? 8
Answer 5. (a)
(i) Section 138 of the Companies Act 2013 deals with provisions of Internal Audit. Rule 13 of
the Companies (Accounts) Rules, 2014 requires
(a) Every listed company
(b) Every unlisted company having (i) paid up share wealth of rupees fifty crore or
more during the preceding financial year or (ii) turnover of two hundred crore or
more during the preceding financial year or (iii) outstanding loans or borrowings
from banks or public financial institutions exceeding rupees one hundred crore or
more at any point of time during the preceding financial year or (iv) outstanding
deposits of twenty five crore or more at a point of time during the preceding
financial year and
(c) Every private company having (i) turnover of two hundred crore rupees or more
during the preceding financial year or (ii) outstanding loans or borrowing from
banks or public financial institutions exceeding rupees one hundred crore or more
at any pointy of time during the preceding financial year
Shall be required to appoint an Internal Auditor or Firm of Internal Auditor.
Here, (1) LMN Ltd. Being listed company has to appoint Internal Auditor in either
case.
(2) PQR Ltd. An unlisted company exceeds capital limit of rupees 50 crore
though the minimum turnover, minimum loan and public deposit are not
met. The company has to appoint an Internal Auditor.
(3) XYZ Ltd. An unlisted private company need not appoint Internal Auditor
as the limits of appointment of Internal Auditor are not met.
(ii) Rule 13 of the Companies (Accounts) Rules, 2014 states that Internal Auditor may or may
not be an employee of the company. There is no mandate in the law that the post of
Internal Auditor needs to be full time. The Chief Cost Accountant officer being otherwise
eligible can be appointed as Internal Auditor in addition to his present job, if the Audit
committee or the Board of Directors consider the same. Additional duties given to the
Chief Cost Accountant Officer to act as Internal Auditor of the company is therefore
permissible under Rules.
Answer 5. (b)
The Internal Auditor has a duty to inquire into the cause of financial disorder and report to
the Management. The abnormal rise in raw material costs in the previous month without any
significant change in production programme must raise concern. Hence, it may be
considered as abnormal cost and the auditor should proceed on the following lines:
1. Variable Analysis: A variance analysis of the actual cost with that if the standard or if
there is no Standard Costing System, proceed with that of the previous month. The
analysis will highlight (a) Price Variance (b) Volume Variance (c) Usage.
In case of abnormality in price:
(i) Procure a list of raw materials, showing the names and detailed qualities of each
raw material
(ii) Enquire whether there is any change which will affect material usage e.g changes in
(a) source of supply of raw materials
(b) methods or process
(c) market rates
(d) alternative material cost in substitution of the original.
(iii) Enquire whether any new production line was taken up during the month in respect
of which Standard Input-Output ratio is yet to be set up.
(iv) Purchase of various lots
(v) Identification of each lot with production results.
2. Usage Figures:
(i) Obtain the standard consumption figures and ascertain the basis of computation of
normal usage figures
(ii) Examine whether the basis adopted for usage calculation is the same as that
adopted for the previous months
(iii) See the breakup of normal wastage (a) transit (b) storage (c) handling and (d)
processing
(iv) obtain a statement showing break up of actual material consumption and
(v) Ascertain actual wastage figures for the month under review and compare the
results of the analysis for some of the previous months.
3. Abnormal process loss:
(i) Material Quality: Examine inspection and testing reports to find out if raw materials
purchased are of poor quality or sub-standard. This will be most useful if it is possible
to identify the consumption out of each lot that has been purchased.
(ii) Machine Utilisation: Machine breakdown, power failure etc. may also result in loss of
materials in process. Check machine utilisation statements.
(iii) lnspection: A high rate of rejection in the finished lots may also be responsible for
abnormal wastage. Examine the Inspection Reports for the inspection carried out on
the completion of each stage of work or process.
(iv) Old Lot Consumption: It is possible that the wastage may have occurred because
the particular lot out of which issues were made in was lying in the store for a
longtime.
(v) Previous Period Comparison: Compare the wastage figures of this year with that of
the corresponding period last year and see whether there is any correlation.
4. Abnormal Storage and handling Loss: This can happen due to write-offs on the account
of reconciliation of physical and book stocks. In case of periodical physical stocktaking,
such write offs will be reflected only in the month in which reconciliation takes place.
There can be accidental theft or fire losses in storage. The Auditor should examine such
possibilities.
6. (a) The following are the summarised Balance Sheet and Income Statement of Ambica
Cement Co. Ltd. which is selling Cement & Clinkers. The Management wants to know
how its financial leverage appears vis-a-vis the norm of the industry.
Income Statement for the year ended 31.03.2017 (in ` ‘000) (5)
Sales 9,800
Cost of Goods Sold 7,460
Less: Administrations & Selling Overheads 750
Interest 280
Tax 330
Earnings after Tax 980
Balance Sheet as on 31.03.2017 (in ` ‘000)
Equity & Liabilities Assets

Share Capital 1,500 Net Fixed Assets 6,550
Reserves, Retained Earnings 3,700 Current Assets
Loan from IDBI 1,800 Inventory 1,600
Short-term Loan 1,200 Trade Receivables 1,100
Trade Payables 1,100 Cash 800
Other Current Liabilities 750
10,050 10,050
(b) A unit generates bio-gas out of the waste of industrial alcohol. The unit generates
power from diesel oil and, in addition, the said bio-gas so generated is used as a fuel
in generating steam for power. The high pressure steam is first sent to the STEAM
TURBINE and the exhaust steam is used in the process of manufacturing alcohol. The
following details are extracted from the financial accounts and the cost accounting
records of the unit for the year ending 31.03.2017:
Boiler (`) Steam Turbine (`)

Cost of Water 13,10,000
Fuel Oil 11,50,05,800
Bio-gas Plant expenses 3,20,60,500
Stores and Chemicals 3,10,000 79,200
Salaries and Wages 37,10,000 8,79,600
Repairs and Maintenance 75,15,400 3,09,600
Depreciation 21,56,250 7,80,000
Other expenses 48,95,500 1,45,200
High Pressure Steam generated (mt.) 43,690
Power generated (kWh.) 30,60,500
Note: The fall in the Enthalpy value of the steam is 8%. Prepare two separate cost
sheets for steam and power as per the Companies (Cost Records and Audit) Rules,
2014 for the year ended March 31, 2017. 8
Answer 6. (a)
For assessing financial health of the company, it is preferable to analyse
(i) Current Ratio
(ii) lnventory Turnover Ratio
(iii) Return on Total assets and
(iv) Interest Coverage Ratio
(Figures otherwise not stated are in ` „000)
1. Current Ratio = Current Assets /Current Liabilities 1.15

(1600+1100+800)/(1200+1100+750) = 3500/3050
2. Inventory Turnover Ratio = Cost of Goods Sold /lnventory = 7460/1600 4.66
3. Return on TOTAL ASSETS = Profit after Tax /Total Assets = 980/10050 9.75%
4. Interest Coverage Ratio = Profit before Tax and Interest/Interest 5.68
= (980+330+280)/280
5. Debt Equity Ratio = Long Term Debt/Shareholders Funds 0.35 :1
=1800/(1500+3700)=1800/5200= 0.35:1 (Favourable)
The current Ratio is nearly 1 times which is on an average nearing the industry average in
cement industry. The inventory Turnover ratio is good considering low inventory holding
compared to the level of turnover.
Return on total assets is satisfactory considering high capital base of the company mostly
financed by its own finance. Interest coverage ratio is satisfactory since the interest cost is
low which indicates that the company availed partial limit of working capital loan during the
whole year. The company is financed by its own capital which means financial leverage is
low.
Answer 6. (b)
(i) Cost of Steam Quantity Produced : 43,690 Metric Ton
Total amount (``) Cost/Mt(``)

Water 1310000 29.98
Fuel Oil 115005800 2632.31
Bio -gas Plant expenses 32060500 733.81
Stores and Chemicals 310000 7.1
Salaries and Wages 3710000 84.92
Repairs and Maintenance 7515400 172.02
Other Expenses 4895500 112.05
Total 166963450 3821.55
(ii) Cost of Power generated by Steam Turbine

Power Generated : 30,60,500 KWH
Total amount(``) Cost/Kwh (``)
Steam 166963450 54.55
Stores and chemicals 79200 0.03
Salaries and wages 879600 0.29

Repairs and maintenance 309600 0.1
Other expenses 145200 0.05
Total 169157050 55.27
Less: Credit for exhaust steam(92%) 155624486 50.85
Cost of power used in alchohol manufacture 13532564 4.42
7. (a) Southern Auto Components Ltd. has received an enquiry for supply of 2,50,000
numbers of special type of auto components. The Company can execute the
assignment provided a capital investment of ` 3,00,000 and working capital to the
extent of 3 months’ cost of sales are made available. The costs estimated are as
follows:
Raw Materials - @ ` 3.25 per unit

Direct Labour Hours - 8,000
Labour Rate - ` 4.50 per hour
Factory Overheads - ` 4 per direct labour hour
Selling and Distribution expenses - ` 30,000
Borrowed funds will be available @11.5% on additional capital outlay. The company
expects a net Return of 25% on Sales. The Managing Director wants a Cost and Price
statement, indicating the price which should be quoted to the customer. 8
(b) The following is a summary of the Profit and Loss Account of M/s. Straw Berry
Company Limited for the year ended 31.03.2017 (` in lakh):
Sales 13,540
Cost of Sales: Raw Materials, Stores, Spares 5,600
Excise Duty 830
Salaries, Wages 1,400
Power and Fuel 470
Repairs: Major Breakdown 35
Regular Maintenance 94
Selling and Distribution Cost 1,040
Insurance 56
Rent, Rates and Taxes 97
Printing, Stationery, etc. 437
Travelling 776
Other Administrative expenses 426
Depreciation 391
Interest 1,494
Total expenses 13,146
Profit 394
There was a major breakdown of machinery, resulting in loss of production for 42 days
in June and July, 2016 and there was a labour strike of 97 days from 14.02.2017 to
21.05.2017. The company produced a single product (Steel-Billet) and the production
during the year was 9,42,000 kgs. You are required to compute the amount of
abnormal cost on account of the breakdown and strike and the impact on cost per
unit of output. Where, do these figures find a place in the Cost Audit Report? 8
Answer 7. (a)
Special type Auto Components: 2,50,000 Nos ` in’000 ` in ’000

Materials (250,000 @ ` 3.25) 812,500
Labour 8000 Hrs @ ` 4.50 36,000
Prime Costs 848,500
Factory Over Heads (8000 × 4) 32,000
Factory Cost 8,80,500
Selling and Distribution Cost 30,000
Cost of Sales 9,10,500
Interest @11.5% on 300000 +0.25 × 910,500) 60,677
Total Cost 9,71,177
Profit 323,726
Sales 12,94,903
Working Notes : Calculation of Sales

Sales = Total Cost × (1.00-0.25%)=971177/0.75 = ` 12,94,903
Profit = Sales - Cost = 1294903- 971177 = ` 323726
Quote Per Unit = 12,94,903 /250000 = `5.18
Answer 7. (b)
Loss of working days due to abnormal situation are :
Breakdown 42 days -Salary Paid
Strike 46 Days (up to 31stMarch , 2017) - No Salary Paid
Total 88 Days, ` in Lakh
Income 13,450
Variable Exp : Raw Materials stores 5,600
Excise Duty 830
Power Fuel 470 6,900
Margin 6,640
Fixed Cost (13,146 -6900) 6,246
Salaries amounting to ` 1,400 Lakh is for (365-46) = 319 Days
Abnormal cost comes to
Fixed Cost on PRODUCTION Total(` ) Abnormal (`) Normal (`)

Breakdown Repairs 35 35 00
Salaries Wages (in the ratio 42:319) 1400 184 1216
Interest 1494 00 00
Selling Distribution Cost 1040 00 00
Production Fixed Cost (Balance 2277 549 1728
figure in the ratio 88:365)
Total 6246 768 2944
Production Cost Per Kg : (942000 Variable = Fixed Cost Abnormal Cost
Kg) 6900/9.42 2944/9.42 = 768/9.42
= ` 732.48 = ` 312.52 = ` 81.52
Note :
1. Interest, Selling charges are not included in the Cost of Production.
2. Abnormal Cost is excluded from Cost of Sales and charged to Profit & Loss Account
3. In the Cost Accounting Policy declared in Annexure to Cost Audit Report „A‟, the
treatment of abnormal or non-recurring cost has to be declared
4. The analysis of value addition and distribution of Earnings show Extra ordinary expenses
as post Value Addition.
(a) How to treat Inward Transportation Cost as per the Cost Accounting Standard 5? How
Transportation Cost is to be determined in case the manufacturer is having its own
transport fleet? 4
(b) Write a short note on the role of Internal Auditor of a company to review
Custodianship and Safeguarding of Assets. 4
(c) A company is facing problem in satisfying customers’ orders leading to backlog of

supply position. How to identify the problem by means of Operational Audit? 4
(d) From the following information, find the Economic Value Added (EVA) of a company
for the previous year 2016-17:
Particulars Amount (` ’000)

Value added as per the Annexure to the Cost Audit Report-Part D 30,00,000
Distribution of Earning to Wages 12,50,000
Interest 3,30,000
Dividend @ 12% 3,60,000
Taxes 3,50,000
Capital Employed (as in the Cost Audit Report) 65,00,000
The Dividend at 12% of paid up capital is normal as per the market norms for the
industry.
Taxes and all expenses are considered on cash basis. 4
(e) From the following figures of Systematics Polytex Ltd., compute the landed cost of
Egyptian Cotton for the year 2016-2017:
Particulars Amount
Materials `35,000
Import Duty ` 3,35,000
Freight Inward ` 1,62,000
Insurance of Import by sea ` 48,000
Cash Discount ` 33,000
Bank Interest for Import Credit ` 15,000
CENVAT Credit refundable ` 37,000
Weight Reduction due to Moisture Loss 0.6%
Parity value of US $ :
On the date of Contract ` 64.40
On the date of Import ` 64.60
On the date of Payment ` 65.20 4
Answer 8. (a)
As per the Cost Accounting Standard 5, Inward transportation cost is the transportation
expenses incurred in connection with the materials/goods received at factory or place of
use. Inward transportation costs shall form the part of the cost of procurement of materials
which are to be identified for proper allocation/apportionment to the materials/ products.
In case of a manufacturer having his own transport fleet, proper records shall be maintained
to determine the actual operating cost of vehicles, showing the details of various elements
of cost, such as salaries and wages of driver, cleaners and others, cost of fuel, lubricant,
grease, amortised cost of tyres and battery, repairs and maintenance, depreciation of
vehicles, distance covered and trips made, goods hauled transported to the depot.
Separate records should be maintained as per Appendix 1 to the standard separately for
(i) Inward transportation
(ii) Outward transportation
(iii) Movement for home consumption and export
(iv) Separate for production and trading activities
(v) Separate for transportation other than by road, viz, by air, etc.
Answer 8. (b)
The Internal Auditor should review the control system to ensure that all assets are accounted
for fully. He/ she should review the means used for safe guarding assets against losses viz, fire,
improper or negligent activities, theft, illegal activities etc. He/she should review the control
system for intangible assets, e.g, the procedure relating to credit control. Where a company
uses electronic control equipment, the physical and system control on processing facilities as
well as data storage should be examined and tested. He or she should review
adequacy of the insurance cover for the various risks involved. He/she should also verify the
existence of assets. Para 30 of the Companies(Cost Records And Audit) Rules, 2014 states
that “records of physical verification may be maintained in respect of all items held in the
stock such as raw materials, process materials, packing materials, consumable stores,
machinery spares, chemicals, fuels, finished and then assets etc. Reasons for shortages or
surplus arising out of such verifications and the method followed for adjusting the same in
the cost of the goods or services shall be indicated in the records.”
Answer 8. (c)
The Operational Auditor may use the technique of Work Load Measurement to assess the
situation. He/She may draw up a questionnaire to assess the situation so as to include the
following queries:
• Is there a backlog of work and if so whether the same is due to increased volume or
inadequacy of men, material or machines?
• Is the increase in work volume is temporary or may continue?
• Will the situation likely to ease with additional inputs like personnel, machines etc?
• Is the workload of each employee is justified or needs adjustment through improved

supervision or training?
• Will investment in advanced technology will commensurate with benefits derived from it?
• What control measures exist to assess the work efficiency and what are the remedial
measures?
The operational auditor will proceed to finalise the report and submit to the Management
after collecting and analysing the information received.
Answer 8. (d)
Economic value added (EVA) is a measure of a company‟s financial performance based on

the residual wealth calculated by deducting its cost of capital from its operating profit
adjusted for taxes on a cash basis. EVA can also be referred to a s economic profit.
Particulars `
Value Added as per the Annexure to the Cost Audit Report-Part D 3000000
Less: Distribution of Earnings to Wages 1250000
Operating profit 1750000
Less: Interest 330000
PBT 1420000
Tax 350000
PAT 1070000
Dividend 360000
EVA 710000
Capital Employed(as in the Cost Audit Report) 6500000
EVA as a % of Capital Employed 10.92
Note: Dividend Distribution is not an expense but is considered as a Notional cost of Capital
depending on the nature of Industry, Location, Legal Provisions etc. Here dividend payment
made by the company is considered as an optimum cost of equity capital and is deducted
from the margin to determine Economic profit.
Answer 8. (e)
Landed Cost of Material `
Materials Cost (35,000 × 64.40) 22,54,000

Import Duty 3,35,000
Freight Inwards 1,62,000
Insurance by Sea 48,000
Total 27,99,000
Less: Cash Discount 33,000
Less: Cenvat Credit 37,000
Landed cost of Materials 27,29,000
Unit cost increased by 100/99.4 times (due to weight loss)
Note : 1. Exchange Loss, finance costs are not allowable for inclusion in the Material Cost
2. Weight Loss does not affect the total cost, but the unit cost is enhanced by the
percentage of weight loss.
Suggested Answer_Syl2016_Jun2017_Paper 20
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

JUNE - 2017
Paper-20 : STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
This paper has been divided into two Sections, viz., Section A and Section B.
Answer Question No. 1 which is compulsory and any two from the rest of this Section.
1. Choose the Correct Option from amongst the four alternatives given, with justification/
workings. 1 mark will be for the correct choice and 1 mark will be for the justification/
workings. 2x5=10
(i) Risk Management Strategies are

(a) Avoid Risk, Reduce Risk, Retain Risk, Combine Risk
(b) Transfer Risk, Share Risk and Hedge Risk
(c) Both (a) and (b)
(ii) The necessary condition for equilibrium position of a firm is
(a) MC>MR
(b) MC> Price
(c) MC = MR
(d) MC = AC
(iii) The Cost function of a firm is given by C = x3 - 4x2 + 7x. Find at what level of output the
average cost is minimum and what would be the minimum average cost.
(a) 2,3
(b) 4,5
(c) 1,4
(iv) Which one of the following is not a measure related to Balanced Score Card?
(a) Financial
(b) Customer Satisfaction
(c) Internal Processes
(d) Gap Analysis
(v) Performance will be a product of
(a) Efficiency and Utilization
(b) Utilization and Productivity
(c) Efficiency and Productivity
(d) Efficiency, Utilization and Productivity
Answer:
1. (i) (c) Both (a) and (b), since Risk Management strategies covers all points under both
a and b.
(ii) (c) MC=MR, since this is the right option.
(iii) (a) 2,3
Total Cost = x3-4x2+7x
Average Cost = x2-4x+7
In order that average cost is minimum, dy/dx =0 and the value of d2y/dx2 should
be positive.
dy/dx = 2x-4=0 or x-2 =0 or x=2.(Ans.)
d2y/dx2 =2, which is positive, so that the function will have minimum values.
Minimum:
Average Cost = x2-4x+7= 4-(4x2) +7 =4-8+7 =3(Ans.)
(iv) (d) Gap Analysis, since Balance Scorecard is not concerned with Gap Analysis.
(v) (d) Efficiency, Utilization & Productivity, since this option fully covers all aspects of
Performance.
2. (a) What do you mean by 'Customer Relationship Management' (CRM)? List the
advantages and benefits of 'Customer Relationship Management'. 4+6=10
(b) What is 'Bench Marking'? Describe briefly the different types of 'Bench Marking'.2+8=10
Answer:
2. (a) Customer Relationship Management (CRM): It is a business strategy comprised of

process, organizational and technical change whereby a company seeks to better
manage its enterprise around its customer behaviours. It entails acquiring and
deploying knowledge about customers and using this information across the various
customers touch points to increase revenue and achieve cost reduction through
operational efficiencies.
The adoption of CRM is being fuelled by recognition that long-term relationships with
customers are one of the most important assets of an organization. CRM entails all
aspects of interaction that a company has with its customer, whether it is sales or
service related.
CRM is often thought of as business strategy that enables businesses to:

 Understand the customer
 Retain customers through better customer experience
 Attract new customer
 Win new clients and contracts
 Increase profitability
 Decrease customer management costs.
CRM is an integrated approach to identifying, acquiring and retaining customers. By

enabling organizations to manage and coordinate customer interactions across
multiple channels, departments, lines of business and geographies, CRM helps
organizations maximize the value of every customer interaction and drive superior
corporate performance.
Advantages and benefits of CRM: The following are some of the advantages and
benefits of CRM:
 satisfied customer does not consider leaving
 Product Development can be defined according to current customer needs
 a rapid increase in quality of products and services.
 the ability to sell more products
 optimization of communication costs
 trouble-free run of business processes
 fast and reliable predictions
 increase effectiveness of team work
 increase in staff motivation
 real time access to information
 more time for customers
 better communication between Marketing, Sales and Services.
(b) The practice of setting targets, using external information is known as "Bench
marking". Bench marking is the establishment of targets, with which performance is
sought to be assessed. It is a continuous process of enlisting the best practices in the
world for the process, goals and objectives, leading to world-class levels of
achievement. Bench marking implies that there is 'one-best-way-of doing business and
orients the firm accordingly.
Types of Bench marking: The different types of Bench marking are:

(i) Product Benchmarking/Reverse Engineering
(ii) Competitive Benchmarking
(iii) Process Benchmarking
(iv) Internal Benchmarking
(v) Strategic Benchmarking
(vi) Global Benchmarking
(i) Product Benchmarking (Reverse Engineering'): It is an age old practice of product

oriented reverse engineering. Every organization buys its rival's products and tears
down to find out how the features and performances etc., compare with its
products. This could be the starting point for improvement.
(ii) Competitive Benchmarking: This has moved beyond product-oriented
comparisons to include comparisons of process with those of competitors. In this
type, the process studied may include marketing, finance, HR, R&D etc.
(iii) Process Benchmarking: It is the activity of measuring discrete performance and
functionality against organization through performance in excellent analogous
business process e.g. for supply chain management - the best practice would be
that of Mumbai Dubbawallas.
(iv) Internal Benchmarking: It is an application of process benchmarking, within an
organization by comparing the performance of similar business units or business
process.
(v) Strategic Benchmarking: It differs from operational benchmarking in its scope. It
helps to develop a vision of the changed organizations. It will develop core
competencies that will help sustained competitive advantage.
(vi) Global Benchmarking: It is an extension of Strategic Benchmarking to include
benchmarking partners on a global scale. E.g. Ford Co. of USA benchmarked its
A/c payable functions with that of Mazda in Japan and found to its astonishment
that the entire function, was managed by 5 persons as against 500 in Ford.
1 3
3. (a) The Cost Function of a particular firm is C = ( ) x - 5x2 + 75x + 10.
3
(i) Find at which level the Marginal Cost attains its minimum.
(ii) What is the marginal cost at this level? 4+4=8.
(b) Following is the extract of a Balance Sheet of a company as on 31st March, 2017:
Equity Share Capital (` 100) 4,00,000 Fixed Assets 10,00,000
Reserves & Surplus 2,25,000 Trade Investment 2,00,000
12% Debentures 3,00,000 Stock 1,25,000
10% Bank Loan 2,00,000 Debtors 75,000
Current Liabilities 3,00,000 Preliminary Expenses 25,000
14,25,000 14,25,000
(i) Net Sales for 2016-17 were ` 20,00,000
(ii) Price-Earnings Ratio is ` 10
(iii) Dividend Pay-out Ratio is 50%
(iv) Dividend per Share in 2016-17 is ` 20
(v) Corporate Tax Rate is 50%
Using Altman's Model of Corporate Distress Prediction, calculate the Z-Score of the
company and interpret the result. 12
Answer:
3. (a) C=(1/3)x3-5x2+75x+10
Marginal Cost = dc/dx= (1/3) 3x2-5(2x) +75 = x2-10x+75 (say y)
In order that the MC to be at minimum, its second derivative value must be positive.
dy/dx = 2x-10 or 2x= 10 or x=5. (Ans.)
d2y/dx2 =2, which is positive, so that the function will have minimum values, when x=5.
Therefore, Minimum Marginal Cost = 52-10x5+75= 25-50+75 =50.
(b) As per Altman's Model of Corporate Distress Prediction,

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5, where,
X1 = Working Capital to Total Assets = ( 1,00,000)/14,00,000 = (0.07143)
X2 = Retained Earnings to Total Assets = 2,00,000/14,00,000 = 0.1429
X3 = EBIT to Total Assets = 3,76,000/14,00,000 = 0.2686
X4 = Market Value of Equity and Pref. Shares to Book value of Total debt
= 16,00,000/8,00,000 = 2.00
X5 = Sales to Total Assets = 20,00,000 /14,00,000 = 1.4286 times.
Therefore, Z-Score = [1.2×(-)0.07143]+(1.4×0.1429)+(3.3×0.2686)+(0.6×2)+(1×1.4286)
= -0.0857 +0.2006 + 0.8864 + 1.2 +1.4286 = 3.6299.
Working Notes:
1. Calculation of Working Capital:
Working Capital = Current Assets-Current Liabilities
Here, Working Capital = (Stock+ Debtors) - Current Liabilities
= ` [(1,25,000 + 75,000) - 3,00,000]
= ` (1,00,000).
2. Calculation of Total Assets:
Total Assets = Fixed Assets + Investments + Current Assets
= ` [10,00,000+2,00,000+( 1,25,000+75,000)]
= ` 14,00,000.
3. Calculation of Retained Earnings:
Retained Earnings = Reserves & Surplus - Preliminary Expenses
= ` (2,25,000-25,000)
= ` 2,00,000.
4. Calculation of Earnings before Interest & Tax (EBIT):
Dividend Pay-out Ratio= Dividend per share(DPS) / Earnings per share (EPS)
Here, Dividend Pay-out Ratio =50% and DPS in 2016-17 = `20.
Hence, EPS = DPS / Dividend Pay-out Ratio= 20 / 50% = `40.
Here, number of equity shares = `4,00,000 / `100 = 4,000.
Particulars `
Earnings available to equity shareholders = 4,000 × `40 1,60,000
Add: Corporate tax added back 50/50 × 1,60,000 1,60,000
EBT 3,20,000
Add: Interest on loan added back:
On Debentures(12% on `3,00,000) = `36,000
On Bank Loan(10% on `2,00,000) = `20,000 56,000
Earnings before Interest & Tax(EBIT) 3,76,000
5. Calculation of Market Value of Equity Shares:
Price-Earnings Ratio=Market value per equity shares (MPS)/Earnings per share (EPS)
Here, Price Earnings Ratio = 10 and EPS in 2016-17 = `40.

Hence, Market Value per Equity Share (MPS) = Price-Earnings Ratio × EPS
= 10 × `40 = `400.
Therefore, the Market Value of Equity Shares = 4,000 shares × `400 = ` 16,00,000.
6. Calculation of Book Value of Total Debts:
Book Value of Total Debts = Long-term Debts + Current Liabilities.
Here, Book Value of Total Debts
= 12% Debentures + 10% Bank Loan + Current Liabilities.
= ` (3,00,000 + 2,00,000 + 3,00,000) = ` 8,00,000.
Conclusion: As the calculated value of Z-Score is much more greater than 2.99, it can
be strongly predicted that the company is non-bankrupt company (i.e., non-failed
company).
4. (a) What is the essence of ERM? What is the actual need for implementing ERM? 5+5=10
(b) What is 'OLAP'? Write a brief note on 'OLAP'. 5+5=10
Answer:
4. (a) The Enterprise Risk Management (ERM) is defined as "a process, affected by an
entity's Board of Directors, management and other personnel, applied in strategy
setting and across the enterprise, designed to identify potential events that may
affect the entity and manage risk to be within its risk appetite, to provide reasonable
assurance regarding the achievement of entity objectives". It is a structured and
embedded approach that supports the alignment of strategy, processes, people,
technology, and knowledge with the purpose of evaluating and managing the
uncertainties an organization faces as it creates value. In so doing equip the
organization with quality management information to make decisions more
effectively and with more confidence."
The essence of ERM is built around the pragmatic use of risk management as an
effective management tool and to be a significant driver of value. In today's
economic climate, the demand for a more comprehensive approach to risk
management to ensure that risks and opportunities are systematically identified and
the risk responses are developed has never been more critical.
ERM is about designing and implementing capabilities for managing the risks that
matter. The greater the gaps in the current state and the desired future state of the
organizations risk management capabilities, the greater the need for ERM
infrastructure to facilitate the advancement of risk management capabilities over
time. ERM is about establishing the oversight, control and discipline to drive continuous
improvement of an entity's risk management capabilities in a changing operating
environment.
ERM deals with risk and opportunities affecting value creation or preservation. ERM is
a comprehensive and integrated approach to addressing corporate risk. ERM enables
management to effectively deal with uncertainty and associated risk and opportunity,
enhancing the capacity to build value.
Need for Implementation of ERM:

ERM needs to be implemented for the following reasons:
(a) Reduce unacceptable performance variability.
(b) Align and integrate varying views of risk management.
(c) Build confidence of investment community and stakeholders.
(d) Enhance corporate governance.
(e) Successfully respond to a changing business environment.
(f) Align strategy and corporate culture.
Traditional risk management approaches are focused on protecting the tangible

assets reported on a company’s Balance Sheet and the related contractual rights
and obligations. The emphasis of ERM, however, is on enhancing business strategy.
The scope and application of ERM is much broader than protecting physical and
financial assets. With an ERM approach, the scope of risk management is enterprise-
wide and the application of risk management is targeted to enhancing as well as
protecting the unique combination of tangible and intangible assets comprising the
organization’s business model.
(b) On-line Analytical Processing (OLAP) is a category of software technology that

enables analysts, managers and executives to gain insight into data through fast,
consistent, interactive access to a wide variety of possible views of information that
has been transformed from raw data to reflect the real dimensionality of the
enterprise as understood by the user.
OLAP functionality is characterized by dynamic multi-dimensional analysis of

consolidated enterprise data supporting end user analytical and navigational
activities including:
 Calculations and modeling applied across dimensions, through hierarchies and/
or across members
 Trend analysis over sequential time periods
 Slicing sub-sets for on-screen viewing
 Drill-down to deeper levels of consolidation
 Reach-through to underlying detail data
 Rotation to new dimensional comparisons in the viewing area.
OLAP is implemented in a multi-user client/server mode and offers consistently rapid

response to queries, regardless of database size and complexity. OLAP helps the user
synthesize enterprise information through comparative, personalized viewing, as well
as through analysis of historical and projected data in various "what-if" data model
scenarios. This is achieved through the use of an OLAP server.
An OLAP server is a high-capacity, multi-user data manipulation engine, specifically

designed to support and operate on multi-dimensional data structures. The OLAP
server may either physically stage the processed multidimensional information to
deliver consistent and rapid response times to end users, or it may populate its data
structures in real-time from relational or other databases, or offer a choice of both.
Given the current state of technology and the end user requirement for consistent
and rapid response times, staging the multi-dimensional data in the OLAP Server is
often the preferred method.
The core of any OLAP system is an OLAP cube (also called as hypercube). It consists
of numeric facts called measures which are categorized by dimensions.

workings. 2x5=10
(i) It is assumed that M. Ltd., would realize ` 40 million from the liquidation of its assets. It
pays ` 20 millions to its creditors and Preference Shareholders in full and final
settlement of their claims. If the number of Equity Shares of M. Ltd. is 2 million, the
Liquidation per Share would be:
(a) ` 1 per Share
(b) ` 10 per Share
(c) ` 12 per Share
(d) ` 15 per Share
(ii) Assume that the following details are given for a company:
Sales- ` 1,00,000; Costs- ` 75,000; Depreciation- ` 20,000; Tax- 35%; Change in Net
Working Capital- ` 1,000; Change in Capital Spending- ` 10,000.
The Free Cash Flow to Firm (FCFF) for the given data would be:
(a) ` 10,000
(b) ` 12,250
(c) ` 13,500
(d) ` 15,000
(iii) Shyam Ltd. has announced issue of warrants on 1: 1 basis for its equity share holders.
The Exchange ratio is 1.00. The current market price of the stock is ` 10 and warrants
are convertible at an exercise price of ` 11.71 per share. Warrants are detachable
and are trading at ` 3. What is the minimum price of this warrant?
(a) ` 3.00
(b) Zero
(c) ` 1.71
(d) ` 2.00
(iv) Given: The growth rate in the dividends is expected to be 8%. The Beta of the stock is
1.60 and the return on the market index is 13%.
The required rate of return would be:
(a) 14%
(b) 16%
(c) 18%
(d) 20%
(v) Given: The risk-free rate is 5.5%; the market price of risk=7% and the company's
Beta=1.2.
The Cost of Equity would be
(a) 11%
(b) 13.9%
(c) 15.2%
(d) 16.3%
Answer:
5. (i) (b) ` 10 per share.
Liquidation/share= (` 40 million - `20 million)/2 million =` 10 per share.
(ii) (b) ` 12,250.
Sales-Costs-Depreciation `5,000
Less: Tax `1,750
PAT `3,250
Add: Depreciation `20,000
Less: Change in Net Working Capital ` 1,000
Less: Change in Capital Spending ` 10,000
Free Cash Flow to Firm (FCFF) ` 12,250
(iii) (b) Zero
Minimum Price=(Market Price of Common Stock-Exercise Price)×Exchange Ratio
= (` 10.00 - 11.71) × 1.0 = ` 1.71.
Thus, the minimum price of this warrant is considered to be zero, because
things simply do not sell for negative prices.
(iv) (b) 16%.
Required rate of Return = Rf+β(Rm-Rf) =8%+ 1.60(13%-8%) =8+1.6×5=8+8=16%.
(V) (b) 13.9%
Cost of Equity=5.5% + 7% (1.2) =13.9%
6. (a) P Ltd. is considering buying the business of Q Ltd., the final accounts of which for the
last 3 years ended 31st December is.
(Figures in `)
Particulars 2014 2015 2016
Sales 2,00,000 1,90,000 2,24,000
Material Consumed 1,00,000 95,000 1,12,000
Business Expenses 80,000 80,000 82,000
Depreciation 12,000 13,000 14,000
Net Profit 8,000 2,000 16,000
Balance Sheet as at 31st December

(Figures in `)
Particulars 2013 2014 2015 2016
Fixed Asset (at cost) 1,00,000 1,20,000 1,40,000 1,80,000
Less: Depreciation 70,000 82,000 95,000 1,09,000
30,000 38,000 45,000 71,000
Stock-in-trade 16,000 17,000 18,500 21,000
Sundry Debtors 21,000 24,000 26,000 28,000
Cash in hand and Bank 32,000 11,000 28,000 13,200
Prepaid Expenses 1,000 500 2,000 1,000
Total Assets 1,00,000 90,500 1,19,500 1,34,200
Equity Capital 50,000 50,000 70,000 70,000

Share Premium - - 5000 5,000
General Reserve 16,000 24,000 26,000 42,000
Debentures 20,000 - - -
Sundry Creditors 11,000 13,000 14,000 14,000
Accrued Expenses 3,000 3,500 4,500 3,200
Total Liabilities 1,00,000 90,500 1,19,500 1,34,200
P Ltd. wishes the offer to be based upon trading cash flows rather than book profits.
Trading Cash Flow means Cash received from Debtors less Cash Paid to Creditors and
for Business Expenses excluding Depreciation, together with an allowance for
average annual expenditure on Fixed Assets of ` 15,000 per year.
The actual expenditure on Fixed Assets is to be ignored, as is any cash receipt or
payment out on the issue or redemption of Shares or Debentures. P Ltd. wishes the
Trading Cash Flow to be calculated for each of the years 2014, 2015 and 2016 and for
these to be combined using weights of 25% for 2014, 35% for 2015 and 40% for 2016 to
give an Average Annual Trading Cash Flow. P Ltd. considers that the Average Annual
Cash Flow should show a return of 10% on its investment.
You are required to calculate:
(i) Trading Cash Flow for each of the years 2014, 2015 and 2016
(ii) Weighted Average Annual Trading Cash Flow and
(iii) Value of the business 12
(b) Following is the Profit & Loss Account and Balance Sheet for M/s. X Ltd.
(` in Lakh)
2015 2016
Turnover 652 760
Pre-tax accounting profit 134 168
Taxation 46 58
Profit after tax 88 110
Dividends 30 36
Retained earnings 58 74
Balance Sheet extracts are as follows:

(` in Lakh)
2015 2016
Fixed Assets 240 312
Net Current Assets 260 320
Total 500 632
Equity Shareholders Funds 390 472
Medium and Long-term Bank Loan 110 160
The Company's performance in regard to turnover had increased by 17% along with
increase in pre-tax profit by 25% but shareholders are not satisfied by the Company's
preference in the last 2 years. You are required to calculate the economic value
added, as suggested by M/s. Trump & Co., USA, so that reasons of non-satisfaction
can be evaluated.
You are also given:
Particulars 2015 2016
Pre-tax Cost of Debt 9% 10%
Cost of Equity 15% 17%
Tax rate 35% 35%
Interest Expenses `8 ` 12
8
Answer:
6. (a)
Net Profit as per Profit & Loss A/c 8,000 2,000 16,000
Add: Depreciation 12,000 13,000 14,000
Operating Cash Flows before Working Capital 20,000 15,000 30,000
Changes
Adjustment for Working Capital Changes
(a)Change in Stock (1,000) (1,500) (2,500)
(b) Change in Debtors (3,000) (2,000) (2,000)
(c) Prepaid Expenses 500 (1,500) 1,000
(d) Sundry Creditors 2,000 1,000 -
(e) Accrued Expenses 500 1,000 (1,300)
Cash Generated from operations 19,000 12,000 25,200
Less: Allowance for Expenditure on Fixed Assets (15,000) (15,000) (15,000)
Trading Cash Flow 4,000 (3,000) 10,200
Weights 25% 35% 40%
Weighted Trading Cash Flow 1,000 (1,050) 4,080
Weighted Average Cash Flow 4,030
Capitalization Rate 10%
Value of Business 40,300
(b) Calculation of Return on Operating Capital (ROOC): (` in lakhs)
NOPAT: 2015 2016
PBT 134 168
Add: Interest Expenses 8 12
142 180
Less: Taxes @35% 49.7 63
NOPAT (A) 92.3 117
Operating Capital:
Equity Shareholder's Funds 390 472
Long term Debt 110 160
Operating Capital (B) 500 632
ROOC=(A/B)×100 18.46% 18.51%
Calculation of Weighted Average Cost of Capital (WACC):

Kd 9%(1-0.35)× 110/500 10%(1-0.35)× 160/632
1.287% 1.645%
Ke 15%×(390/500) 17%×(472/632)
11.7% 12.7%
WACC 1.287%+11.7%=12.99% 1.645%+12.7%= 14.34%
EVA:
ROOC 18.46% 18.51%
Less: WACC 12.99% 14.34%
EVA Spread 5.47% 4.17%
EVA= Spread x Operating Capital 5.47%×500 4.17%×632 lakhs=26.3544
lakhs=27.35Lakhs Lakhs.
Since EVA has declined in year 2016 by 0.9956 Lakhs, this can be attributed as reason
for non-satisfaction.
7. (a) The following information is provided related to the acquiring firm, Sun Ltd. and the
target firm Moon Ltd.
Particulars Sun Ltd. Moon Ltd.
Profits after Tax ` 2,000 Lakh ` 4,000 Lakh
Number of Shares outstanding 200 Lakh 1,000 Lakh
P/E Ratio (times) 10 5
Required:
(i) What is the swap ratio based on the current market prices?
(ii) What is the EPS of Sun Ltd., after the acquisition? 10
(b) X Ltd. is considering a takeover of Y Ltd. The particulars of the two companies are
given below:
Particulars X Ltd. Y Ltd.
Earnings after Tax (EAT) in ` 20,00,000 10,00,000
Equity Shares (Nos.) 10,00,000 10,00,000
EPS 2 1
P/E Ratio (times) 10 5
Required:
(i) What is the market value of each company before merger?
(ii) Assuming that the management of X Ltd. estimates that the shareholders of Y Ltd.
will accept an offer of one share of X Ltd. for four shares of Y Ltd. If there are no
synergic effects, what is the market value of the Post-merger X Ltd.? Are the
shareholders of X Ltd. better off than they were before the merger?
(iii) Due to synergic effects, the management of X Ltd. estimates that the earnings will
increase by 20%. What is the new Post-merger EPS and the Price per Share? Will
the shareholders be better-off or worse-off? 10
Answer:
7. (a) EPS before acquisition
Sun Ltd., = ` 2,000 Lakhs/200 lakh = ` 10.
Moon Ltd., = ` 4,000 Lakhs/1,000 lakh = ` 4.
Market Price of shares before acquisition

Sun Ltd., = `10 × 10 = ` 100
Moon Ltd., = `4 × 5 = ` 20
(i) Swap ratio based on current market price:
= `20/` 100 = 0.2 i.e., 1 share of Sun Ltd., for 5 shares of Moon Ltd.,
No. of shares to be issued = 1,000 Lakhs × 0.20 Lakh = 200 Lakhs.
(ii) EPS after acquisitions:
= (` 2,000 Lakhs + ` 4,000 Lakhs)/(` 200 Lakhs + ` 200 Lakhs)
= ` 6,000 Lakhs / ` 400 Lakhs = `15.
(b) (i) Market Value of Companies before merger:

X Ltd., Y Ltd.,
EPS (`) 2 1
P/E Ratio 10 5
Market Price/Share (`) 20 5
Equity Shares 10,00,000 10,00,000
Total Market Value 2,00,00,000 50,00,000
(ii) Post-merger effect on X Ltd.

Post-merger earnings `(20,00,000+10,00,000) ` 30,00,000
Equity Shares (10,00,000+10,00,000×1/4) 12,50,000
[As the exchange ratio is 1:4]
EPS: 30,00,000/12,50,000 ` 2.4
P/E Ratio 10.00
Market Value : 10 × ` 2.4 (P/Ex EPS) `24
Total Value (12,50,000 × ` 24) ` 3,00,00,000
Gains from Merger:

Post merger market value of the firm ` 3,00,00,000
Less: Pre-merger market value
X Ltd., 2,00,00,000
Y Ltd., 50,00,000 ` 2,50,00,000
` 50,00,000
Apportionment of gains between Shareholders:

X Ltd. Y Ltd.
Post-merger market value
10,00,000×` 24 ` 2,40,00,000
2,50,000×` 24 ` 60,00,000
Less: Pre-merger market value ` 2,00,00,000 ` 50,00,000
` 40,00,000 ` 10,00,000
Thus the shareholders of both the companies have gained from the merger.
(iii) Post-merger Earnings:
Increase in earnings by 20%
New earnings: `30,00,000 × 120% = ` 36,00,000
No. of Equity Shares = 12,50,000
EPS = ` 36,00,000/12,50,000 = ` 2.88
P/E Ratio = 10
Market Price/Share =`2.88 × 10 = 28.80
Therefore Shareholders will be better-off.
8. (a) A company has a capital base of ` 3 crores and has earned profits of ` 33 lakhs.
Return on Investment of the particular industry to which the company belongs is
12.5%. If the services of a particular executive are acquired by the company, it is
expected that the profits will increase by ` 7.5 lakhs over and above the target profit.
Determine the amount of maximum bid price for that particular executive and the
maximum salary that could be offered to him.
Particulars `
Capital Base 3,00,00,000
Actual Profit 33,00,000
Target Profit (` 3 crores x 12.5%) 37,50,000
10
(b) R Ltd. is intending to acquire S Ltd. (by merger) and the following information are
available in respect of both the companies:
Particulars R Ltd. S Ltd.
Total Current Earnings (`) 2,50,000 90,000
No. of Outstanding Shares 50,000 30,000
Market Price per Share (`) 21 14
(i) What is the present EPS of both the companies?

(ii) If the proposed merger takes place, what would be the new earnings per share
for R Ltd. (assuming the merger takes place by exchange of Equity Shares and the
Exchange Ratio is based on the Current Market Price)? Assume no synergy
impact. 10
Answer:
8. (a) (i) Maximum Salary Payable:
Particulars ` in Lakhs.
Capital Base 300.00
Target Profits (Capital Base × 12.5%) 37.50
Add: Extra Profits due to induction of the Executive 7.50
Total Profits of the Company(anticipated after induction of the 45.00
Executive)
Less: Current Profits 33.00
Incremental Profit 12.00
Maximum Salary= Incremental Profit due to induction = `12.00 Lakhs per annum
(ii) Maximum Bid Price: Value of Salary payable in perpetuity

= Maximum Salary Payable/Desired Rate of Return on investment
= ` 12 Lakhs/12.5% = `96 Lakhs.
(b) (i) EPS = Total earnings /No. of Equity shares

EPSR Ltd. = ` 2,50,000/50,000 = `5.
EPSS Ltd. = ` 90,000/30,000 = `3.
(ii) No. of shares S Ltd., shareholders will get in R Ltd., based on market prices of shares
is as follows:
Exchange Ratio= 14/21 = 2/3 i.e., for every 3 shares of S Ltd., 2 Shares of R Ltd.,
Total No. of shares of R Ltd., issued= (14/21) × 30,000 = 20,000 shares.
Total number of shares of R Ltd., after merger = 50,000+20,000 = 70,000.
Total earning of R Ltd., after merger = ` 2,50,000 + ` 90,000 = ` 3,40,000 (No synergy
given)
The new EPS of R Ltd., after merger = `3,40,000/70,000 = `4.86.
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

JUNE - 2018
Paper-20 : STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
This paper has been divided into two Sections, viz., Section A and Section B.
Strategic Performance Management
1. Choose the correct option from amongst the four alternatives given: 2x5=10
(i) An Index number is a statistical measure of __________ in a variable arranged in the

form of a series and using a base for making comparison.
(a) productivity
(b) inputs
(c) efficiency
(d) fluctuations
(ii) Benchmarking focuses on

(a) Production
(b) Profit
(c) Best Practices
(d) Best performance
(iii) Project risk does not include

(a) Institutional risk
(b) Turbulence
(c) Completion risk
(d) Uncertainty
(iv) Physical risk arising out of Social, Political, Economic and Legal Environments are
often identified through
(a) the performance of lead indicators
(b) the performance of lag indicators
(c) the performance of lead and lag indicators
(v) Which out of the following financial ratios is not in the Altman Model: Z-Score?
(a) Market Value to Book Value of equity shares
(b) Working Capital to Total Assets
(c) Retained Earnings to Total Assets
(d) EBIT to Total Assets
Answer:
1. (i) (d)
(ii) (c)
(iii) (d)
(iv) (a)
(v) (a)
2. (a) (i) What is Operative Customer Relationship Management?
(ii) Discuss the impact of CRM initiative on an organization, in terms of enhanced risk
that it may face.
(iii) Describe the issues to be considered for analysing customer profitability.3+3+4=10
(b) The following financial data for two years has been extracted from the Annual Report
2016-17 of one of the world's largest generic pharmaceutical companies having a
strong presence in over 170 countries. Though the company's mission is — 'To be a
leading global healthcare company which uses technology and innovation to meet
everyday needs of all patients', yet it also wants to keep its shareholders happy by
giving them a fair rate of return. For gauging return for shareholders, the company is
using Return on Equity (ROE) as one of the metrics of performance evaluation.
Because of intense competition, in recent years, its ROE is under pressure and to
maintain the level of ROE, the company is changing its business model — in that, it is
varying its margins, assets utilization and leverage.
You are required to use suitable DU PONT Analysis using the financial data given
below and show how the ROE of the company is changing due to its margins, assets
utilization and leverage over a period of two years. You are also required to give your
comment on the change on these parameters. 10
(` In Lakh)
Statement of Profit and Loss 2016 2017
Relevant financial data
Total Revenue 7,125.80 8,431.55
Profit before Tax 1,421.46 2,011.86
Profit after Tax 1,123.96 1,507.11
Dividend 160.58 160.58
Tax on Dividend 26.05 27.29
Retained Earnings 937.32 1,319.24
(` In Lakh)
Balance Sheet 2016 2017
ASSETS:
Fixed Assets 3,346.11 3,768.63
Investments (Current and Non-Current) 1,035.15 2,601.82
Other Net Assets (Current and Non-Current) 3,413.67 3,746.08
Total 7,794.93 10,116.53
EQUITY AND LIABILITIES:
Share Capital 160.58 160.58
Reserves and Surplus 7,389.70 8,708.94
Net Worth 7,550.28 8,869.52
Loan Funds (Current and Non-Current) 12.20 965.81
Other Current Liabilities 232.45 281.20
Total 7,794.93 10,116.53
Answer:
2. (a) (i) Ans. Operative CRM mainly supports the actual contact with customers
conducted by front office workers and general automation of business processes
including sales of products, services and marketing. All communication with the
customer is tracked and stored in the database and if necessary it is effectively
provided to users (workers).The advantage of this approach being the possibility
to communicate with various employees using various channels but creating the
feeling that customer is being taken care of by just one person. It can also
minimize the time that the worker has to spend typing the information and
administrating (the data is shared). This allows the company to increase the
efficiency of their employees work and they are then able to serve more
customers.
(ii) A CRM initiative generally has some of the following impacts on an organization:
1. Increased expectations from senior management to increase revenues
reduce costs, increase market share and increase business flexibility may put
tremendous pressure on the organization and may potentially compromise
the internal control structure.
2. Increased complexity of managing multiple channels, technologies, customer
relationships and customer definitions.
3. Vital and confidential customer information may be transmitted and shared
across new networks, systems and platforms
4. Significant changes to the organization, attitudes and beliefs, placing heavy
reliance on the organization's employees for the successful adoption of the
solution.
These factors introduce many risks to the organization, for instance, the potential
disruption of vital operations, violations to customer privacy and confidentiality,
ineffective, inconsistent or inefficient processes, lack of internal business controls,
poor customer service, incorrectly targeted sales and marketing efforts, non
acceptance of new systems and processes and security breaches. Effective risk
management helps in minimizing CRM risks and softens the impact.
(iii) The following issues should be considered when analyzing customer profitability:
 How to develop reliable customer revenue and customer cost information.
 How to recognize future downstream costs of customers.
 How to incorporate a multi-period horizon in the analysis; and
 How to recognize different drivers of customer costs.
This requires a broader examination of the costs associated with customer service.
For example, post-sale customer service costs must be included in any analysis of
customer costs. Some customers require substantially more post sale service than
others. Revenues can vary among customers due to variations in volume levels
and differences in price structures, products and services.
This analysis helps in examining both the revenues and costs related to customer
transactions enabling analysis of customer profitability.
(b)
DU PONT ANALYSIS... 2016 2017
Net Profit Ratio 15.77% 17.87%
Assets Turnover Ratio 0.914 0.833
Assets to Equity Ratio 1.032 1.141
Return on Equity 14.88% 16.98%
The Return on Equity (ROE) has increased in 2017 from 14.88% to 16.98% and the main
reasons for the increase are- margin and leverage which have increased but due to
lower assets utilization ROE has not increased by its full potential. If the Company
concentrates on better utilization of the assets, its ROE will further improve.
3. (a) A firm has a demand function: p = 12 - x2 and the total cost function: C = - (4/3) x3 +
4x2 + 10 where p = Price per unit (` '000) and x = Quantity demanded/produced (units
in thousands). On the basis of the information given, answer the following:
(i) Show that the firm is a monopolist firm.
(ii) Determine the quantity the firm should produce to maximize profit. Also,
determine the amount of profit. 4+8=12
(b) Distinguish between the following:

(i) Risk avoidance and Risk diversification
(ii) Interest Rate Risk and Market Risk 4×2=8
Answer:
3. (a) (i) A monopolist firm is one that is having a negatively sloped or downward moving
demand curve. We also know that a function is said to be having negative slope
when its first derivative is negative. In this problem, dp/dx = -2 x. Since x cannot be
negative, it means that derivative is negative; hence, it shows that the firm is a
monopolist firm.
(ii) Profit Function (π) is Total Revenue -Total Cost and is defined below:
π = p.x – c
4
π = (12x - x3) - (- x3 + 4x2 + 10)
3
dπ
= (12 - 3x2) - (-4x2 + 8x)
dx
Putting the first derivative equal to zero, we get -

(12 - 3x2) - (-4x2 + 8x) = 0
→ 12 - 3x2 + 4x2 - 8x = 0
→ x2 - 8x + 12 = 0
→ x2 – 6x – 2x + 12 = 0
→ (x – 2) (x – 6) = 0
X = 2 or x = 6 (in '000 units)
Second order condition:

2
d π
= 2x - 8
2
dx
A function will be maximum when its second derivative is negative; and for x = 2,
the above second derivative will be negative while for x = 6 it will be positive. The
profit will be maximum when x = 2 (in '000 units). Putting the value of x = 2, in the
profit function, we get Profit = 2/3 = 0.67 (` in '000) = ` 6,70,000.
(b) Distinguish between the following:
(i) Risk Avoidance and Risk Diversification

Risk avoidance is the elimination of threats or exposures that can negatively
affect a desired outcome. While the complete elimination of all risk is rarely
possible, a risk avoidance strategy is designed to deflect as many threats as
possible in order to avoid the costly and disruptive consequences of a damaging

event. On the other hand, risk diversification is a mitigation strategy which is
based on the philosophy of 'don't put all the eggs in one basket. In it, instead of
taking exposure only in one area, exposures are taken in different areas so that
one may not be hurt if something goes wrong in one area.
(ii) Interest Rate Risk and Market Risk

Interest Rate Risk is the risk arising due to changes in the market interest rate and
thereby, affecting the prices of fixed income securities or bonds. It is defined as
how sensitive bond prices are changes in the market interest rate - higher this
sensitivity is, higher the interest rate risk. While the market risk arises due to
changes in demand and supply, expectations of the investors, information flow,
investor's risk perception etc. Variations in prices of a security sparked off due to
real social, political and economic events are referred to as market risk. Interest
rate is one of the market risk as interest rate may change because of changes in
market conditions.
4. (a) Explain RBI guideline on implementation of Basel III Capital Regulation in India. 8
(b) (i) List the main causes of corporate distress. 4
(ii) Define the following: 2x4=8

(a) Financial Distress
(b) Enterprise Risk Management
(c) Risk Retention
(d) Value at Risk
Answer:
4. (a) Reserve Bank of India in May 02, 2012 has released its final guidelines on
implementation of Basel III Capital regulation in India. These guidelines would
become effective from January 1, 2013 in a phased manner. The Basel III capital
ratios will be fully implemented as on March 31, 2018. This entails higher global
minimum capital standards for banks. Implementation of Basel III is essential for
restoring confidence in the regulatory framework for banks and to ensure safe and
stable global banking system.
The Basel III framework sets out the following:

• Higher and better equity capital
• Better risk coverage
• Introduction of leverage ratio
• Measures to promote the build-up of capital for periods of stress
• Introduction of new liquidity standards
A key element of new definition is the greater focus on "common equity" (paid up
equity capital, reserves, retained earnings etc.). In addition to raising the quality of
the capital base, banks need ensure that all material risks are captured in the capital
framework. What counts as core may impact the Indian banking sectors's
competiveness significantly.
As per the RBI’s new Basel III capital regulation, common equity (or core tier I) should
be at least 5.5% (1% higher than the original Basel III rule) & minimum tier I capital
should be at least 7% of total risk weighted assets. There should be predominance of
common equity and tier I regulatory capital. Common equity 78.57% of tier I capital
and total tier I capital should be at least 77.58% of total minimum capital (as per RBI’s
Basel III circular).
Basel III regulation expects that Banks for its survival in future must understand the
importance of people perception about a Bank's liquidity condition (short term as
well as long term) beside internal management of liquidity. It emphasized that bank's
liquid assets should be sufficient enough to cover net cash outflow. Two liquidity
standards/ ratios are proposed.
(i) Liquidity coverage ratio (LCR) which is the ratio of liquid assets to net cash outflow
for short term (30 days) liquidity management. And
(ii) Net stable funding ratio (NSFR) for long term structure liquidity mismatches.
(b) (i) There are multiple causes for corporate distress:

(1) Technological changes
(2) Working capital problems—maintaining liquidity or over liquidity.
(3) Economic distress—economic crisis
(4) Mismanagement
(5) Over expansion and diversification
(6) Fraud by management
(7) Poorly structured board
(8) Financial Distress
(ii) Define the following:
(a) Financial Distress:

Financial distress means a condition of a firm when it is not in a position to
meet or meet with difficulty its commitment to creditors or lenders. If financial
distress cannot be relieved in time, it can lead to bankruptcy. Firms that
become financially distressed are found to be under- performing relative to
the other companies in their industry. Financial distress is rooted in the
management defects, resulting in poor decisions, leading to financial
deterioration and finally collapse.
(b) Enterprise Risk Management:

Enterprise Risk Management is a comprehensive and integrated approach to
addressing corporate risk. It may be defined as "a process, effected by an
entity's board of directors, management and other personnel, applied in
strategy setting and across the enterprise, designed to identify potential
events that may affect the entity, and manage risk to be within its risk
appetite, to provide reasonable assurance regarding the achievement of
entity objectives".
(c) Risk Retention:

Risk Retention denotes acceptance of the loss or benefit arising out of a risk
when it takes place. It may also be termed as self insurance. This strategy is
viable when the risks are small enough to be transferred at a cost that may be
higher than the loss arising out of the risk itself. On the other hand, the risk can
be so big that it cannot be transferred or insured. Such risks will have to be
phased out when the eventuality occurs.
(d) Value at Risk:

Value at Risk (VaR) is one of the widely used methods of measuring financial
risks. VaR is a statistical technique used to measure and quantify the level of
financial risk within a firm or investment portfolio over a specific time frame. It
estimates how much a set of investments might lose, given normal market
conditions, in a set time period. A loss which exceeds VaR threshold is known
as 'VaR break'. In it, the probability level is specified as 1 minus probability of a
VaR Break. Normally VaR parameters are 1 per cent and 5 per cent
probabilities and 1 day and 2 week horizons. While VaR represents loss, a
negative VaR would indicate that a portfolio has a high probability for making
profits.
Business Valuation
workings. 2×5=10
(i) If a company has a P/E ratio of 12 and a Market to Book Value Ratio 2.10, then its
Return on Equity will be
(a) 14.10%
(b) 17.50%
(c) 25.20%
(ii) A firm has PAT of ` 33.6 lakh with extraordinary income of ` 6 lakh. Cost of capital is
20% and the applicable tax rate is 40%. The value of the firm is
(a) ` 250 lakh
(b) ` 150 lakh
(c) ` 180 lakh
(d) ` 168 lakh
(iii) Firms that intend to buy only a small percentage of the outstanding stock can buy
them in the market, in a process called
(a) Repurchase tender offer
(b) Open market purchase
(c) Privately negotiated repurchase
(iv) ______________ is a measure of value of which tells whether a company is able to

generate returns that exceed the costs of capital employed.
(a) Cost of capital
(b) Economic Value Added
(c) Market value added
(d) Financial profit
(v) If the divestiture value is greater than the present value of the expected cash flows,
the value of the divesting firm will
(a) increase on the divestiture.
(b) decrease on the divestiture.
(c) remains same on the divestiture.
Answer:
5. (i) (b) Return on Equity will be 17.5% ( = 2.10/12)
(ii) (b) ` 150 lakh

PAT = ` 33.6 lacs
PBT = ` (33.6/0.6) lacs = ` 56 lacs

Less: extraordinary income = ` 6 lacs
= ` 50 lacs
Less: Tax @ 40% = ` 20 lacs
= ` 30 lacs
Value = ` 30 lacs/ 0.20 = ` 150 lacs
(iii) (b) Open market purchase
(iv) (b) Economic Value Added
(v) (a) Increase on the divestiture

How does a divestiture affect a firm’s value?
To answer this question, need to compare the price received on the divestiture
to the present value of the expected cash flows that the firm would have from
the divested assets.
If the divestiture value is greater than the present value of expected cash flows,
the value of the firm will increase on divestiture.
6. (a) There is a privately held company XYZ Pvt. Ltd. that is operating into the retail space,
and is now scouting for angel investors. The details pertinent to valuing XYZ Pvt. Ltd.
are as follows:
The company has achieved break even this year and has an EBITDA of ` 90 crore. The
beta based on the industry in which it operates is 1.8, and the average debt to equity
ratio is hovering at 40:60. The rate of return provided by liquid bonds is 5%. The EV is to
be taken at a multiple of 5 on EBITDA. The accountant has informed that the EBITDA of
` 90 crore includes an extraordinary gain of ` 10 crore for the year, and a potential
write off of preliminary sales promotion costs of ` 20 crore are still pending. The
internal assessment of rate of market return for the industry is 11%. The FCFs for the
next 3 years are as follows:
(` In Crore)
Y1 Y2 Y3
Future cash flows 100 120 150
The cost of debt will be 12%. Assume a tax regime of 30%.

What is the potential value to be placed on XYZ Pvt. Ltd.? 12
(b) (i) G. Ltd. has announced issue of warrants on 1:1 basis for its equity shareholders. The
current price of the stock ` 10 and warrants are convertible at an exercise price of `
11.71 per share. Warrants are detachable and are trading at ` 3. What is the minimum
price of the warrant? What is the warrant premium?
(ii) Now had the current price been ` 16.375, what is the minimum price and warrant
premium? (Consider warrants are tradable at ` 9.75) 4+4=8
Answer:
6. (a) The beta is 1.8.
The adjusted EBITDA would be 90 -10 - 20 = 60 crore

The EV will be multiple of 5 on the 60 obtained above = 300 crore
The Cost of equity in accordance with CAPM = Rf + β(Rm - Rf)
= 0.05 + 1.8 (0.11 – 0.05) = 0.158 or 15.8%
The WACC = Cost of Equity + Cost of Debt = 15.8 (60/100) +12.0 (1-0.3)(40/100) = 12.84
Finally the future cash flows can be discounted at the WACC obtained above as
under-
` in crore
Y1 Y2 Y3
Future Cash flows 100 120 150
Discount factor 0.89 0.79 0.70
PVs of cash flows 89 95 105
Value of the Firm 289
Discount factor Year 1 = (100/112.84) = 0.89

Year 2 = (100/112.84)2 = 0.79
Year 3 = (100/112.84)3 = 0.70
(b) (i) Minimum price = (Market price of common stock - Exercise price) × (Exercise ratio)
= (` 10.00 - 11.71) × 1.0
= -1.71 (`)
Thus, the minimum price on this warrant is considered to be zero, because things
simply do not sell for negative prices.
Warrant premium = (Market price of warrant - Minimum price of warrant)
=`3–0 = ` 3.
(ii) Minimum price = (Market price of common stock - Exercise price) × (Exercise ratio)
= (` 16.375 -11.71) × 1.0 = ` 4.665
Warrant premium = (Market price of warrant - Minimum price of warrant)

= ` 9.75 - 4.665 = ` 5.085
7. (a) Vodafone Ltd. is considering a merger with Idea Ltd. The data below are in the hands
of both Board of Directors. The issue at hand is how many shares of Vodafone Ltd.
should be exchanged for Idea Ltd. Both boards are considering three possibilities
20000, 25000 and 30000 shares. You are required to construct a table demonstrating
the potential impact of each scheme on each set of shareholders. 10
Vodafone Idea Ltd. Combined Post

Ltd. merger Firm 'A'
1 Current earnings per year (`) 2,00,000 1,00,000 3,50,000
2 Shares outstanding 50000 10000 ?
3 Earnings per share (`) (1÷2) 4 10 ?
4 Price per share (`) 40 100 ?
5 Price-earnings ratio [4÷3] 10 10 10
6 Value of firm (`) 20,00,000 10,00,000 35,00,000
7 Expected annual growth rate in earnings 0 0 0
in foreseeable future
(b) A company has issued a 12% debentures with a maturity of 5 years having face value
of ` 1,000 and it is listed on the stock exchange. After 2 years of the issue of bonds,
the yields in the market have increased to 15%. Someone suggested to the CFO of
the company to buy the debentures from the market as they are trading below par.
(i) Do you think that the CFO should accept the suggestion of the person?
(ii) If yes, then determine the fair value of the debentures at which the company
should buy the debentures from the stock market. 2+8=10
Discount factors:
Year → 1 2 3
Discounting Factor (12%) 0.8929 0.7972 0.7118

Discounting Factor (15%) 0.8696 0.7561 0.6575
Answer:
7. (a) The following table demonstrates the potential impact of the three possible schemes,
on each set of shareholders:
No. of Exchang No. of Fraction of Value of Fraction of Value of
Vodafone e ratio Vodafone Vodafone shares Vodafone shares owned
Ltd's [(1)/ Ltd's shares Ltd. (Post owned by Ltd (Combined by Vodafone
shares 10,000 outstanding merger) Idea Ltd's post merger Ltd's
issued to shares of after owned by share owned by shareholders
share Idea merger Idea Ltd's holders Vodafone [(6)×35,00,000]
holders of Ltd.] [50,000+(1)] shareholders [(4)× Ltd's Share
Idea Ltd. [(1)/(3)] 35,00,000] holders
[50,000/(3)]
(1) (2) (3) (4) (5) (6) (7)
20,000 2 70,000 2/7 10,00,000 5/7 25,00,000
25,000 2.5 75,000 1/3 11,66,667 2/3 23,33,333
30,000 3 80,000 3/8 13,12,500 5/8 21,87,500
The total synergy gain is ` 500000. In the three options both sets of shareholders are
benefitted differently. Thus Idea shareholders benefit maximum if they receive 30000
shares of Vodafone. They do not benefit at all if they receive only 20000 shares. The
deal is likely to be settled at ` 25,000 shares.
(b) (i) The CFO should accept the suggestion of the person as the yields in the market
have gone up as a result the prices of debentures have fallen below the face
value of ` 1,000. Since the company will be redeeming debentures at a lower
value, the company will get benefit from it.
(ii) If it is decided to redeem the debentures after 2 years when the yield is 15%, then
the fair price will be calculated as follows:
Calculation of the Market Price After 2 years
Year Cash Flows of the Debentures Discounting Factor (15%) PV of Cash Flows
1 ` 120.00 0.8696 ` 104.35
2 ` 120.00 0.7561 ` 90.73
3 ` 1,120.00 0.6575 ` 736.40
Price of Debentures after 2 years when the market yield is 15% ` 931.48
8. (a) PS limited furnishes the following information relating to the previous three years and
requests you to compute the value of the brand of the company: 12
(` In Lakh)
Profit before interest and tax 75.00 85.25 150.00
Loss on sale of assets 3.00 nil 18.00
Non-operating income 12.00 7.25 8.00
Inflation was 9% for 2016 and 15% for 2017. If the capitalization factor considering
internal and external value driver to the brand is 14, determine the brand value.
Assume an all inclusive future tax rate of 35%.
(b) Pure Drugs Limited is in the Pharmaceutical Industry and has a business strategy of
growing inorganically. It is contemplating to acquire Solid Drugs Limited which has a
strong hold in cardiac segment. Pure Drugs Limited has 30 crore shares outstanding
which are trading on an average price of ` 300 while Solid Drugs Limited has
outstanding shares 20 crore and are selling at an average price of ` 200 per share.
The EPS are of ` 12 and ` 6 for Pure Drugs Limited and Solid Drugs Limited respectively.
Recently, the management of both the companies had a meeting wherein number of
alternative proposals was considered for exchange of shares. They are —
(i) Exchange Ratio should be in proportion to the relative EPS of two companies.
(ii) Exchange Ratio should be in proportion to the relative share prices of two
companies.
(iii) Exchange Ratio should be 3 shares of Pure Drugs Limited for every 5 shares of Solid
Drugs Limited.
You are required to estimate EPS and Market Price under the three options, assuming
the P/E of Pure Drugs Limited after merger will remain unchanged. Assume that there
will not be any synergy gains due the said merger. 4+4=8
Answer:
8. (a)
(` In Lakhs)
Profits Before Interest and Tax 75.00 85.25 150.00
Add: Loss on Sales of Assets 3.00 — 18.00
Less: Non Operating Income (12.00) (7.25) (8.00)
Branded Earnings 66.00 78.00 160.00
Inflation Adjustment Factor 1.09*1.15=1.25 1.15 1.00
Inflation Adjusted Earnings as at 31.03.2017 82.50 89.70 160.00
Weights 1 2 3
Product 82.50 179.40 480.00
Weighted Average Earnings Before Tax [(82.50+179.40+480)/(1+2+3)] 123.65
Less: Taxes at 35% (43.28)
Weighted Average Brand Earnings After Tax 80.37
Capitalization Factor 14
Brand Value ` 1,125.18 Lakhs
(b)
Pure Drugs Limited Solid Drugs Limited
EPS (`) 12 6
No. of Outstanding Shares (in crores) 30 20
Net Profit (in ` crores) 360 120
Net Profit (in ` crores) after Acquisition 480
Price of Share 300 200
P/E Ratio 25.00 33.33
Alternative-I Alternative-II Alternative-III

(Basis-EPS) (Basis-Prices) (Basis-3 shares
for 5 shares)
Exchange Ratio (No. of Shares of Pure 0.50 0.67 0.60
Drugs Limited for each share of Solid Drugs
Limited)
New Shares to be issued (in Crores) 10 13.40 12
Total No. of Shares after Acquisition (in 40 43.40 42
crores) (30+10) (30+13.40) (30+12)
EPS (in `) after Acquisition Given ` 480 12.00 11.06 11.43
crores of Profit Acquisition
Given the P/E Ratio of 25, the Share Price 300.00 276.50 285.71
of Pure Drugs Limited will be - (in `)
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)

DECEMBER 2018
Paper- 20 : STRATEGIC PERFORMANCE MANAGEMENT

AND BUSINESS VALUATION

This paper has been dividend into Sections. viz, Section A and Section B.
Section – A: Strategic Performance Management

(50 marks)
1. Choose the correct option from amongst the four alternatives given: 2×5=10
(i) ________measures overall productivity and efficiency by considering all inputs and
all outputs in the production process.
(A) Total Factor Productivity
(B) Partial Factor Productivity
(C) Parametric Index Number Approach
(D) Non-parametric Index Number Approach
(ii) The six sigma DMAIC process consists of
(A) Define, Measure, Analyze, Improve, Control
(B) Define, Manage, Analyze, Improve, Control
(C) Define, Measure, Analyze, Improve, Co-ordination
(D) Deliver, Measure, Analyze, Improve, Control
(iii) A firm has total cost function: C =1/9 X3-l/2 X2-18 X +30; C is total cost and X is quantity
produced. One is wondering whether MC (marginal cost) can ever be zero. If you
believe that the firm's MC can be zero, then it will be when X is equal to
(A) 2
(B) 5
(C) 9
(D) None of the above is true
(iv) The supply chain concept originated in what discipline?
(A) Operations
(B) Production
(C) Marketing
(D) Logistics
(v) Which one the following is NOT a type of Benchmarking?
(A) Product Benchmarking
(B) Competitive Benchmarking
(C) Process Benchmarking
(D) Brand Benchmarking
Answer : 1
(i) (a) Total Factor Productivity
(ii) (a) Define, measure, analyze, improve, control
(iii) (c) We know that C = 1/9 x ^3-1/2 x ^2-18 x+30; Then, MC = dC/dx = 1/3 x^2-x-18;
When MC = 0, we get 1/3 x^2-x-18=0↔x^2-3x-54=0↔(x-9)(x+6)=0. Since x can never be

negative, x = 9, to get MC = 0
(iv) (c) Marketing
(v) (d) Brand Benchmarking is not a type of Benchmarking.
2.(a) (i) What are the components of supply chain management ?

(ii) What is operative and collaborative customer relationship management ?
(iii) Describe the benefits and limitations of Balance Score Card. 3+3+4 = 10
(b) (i) What are the steps in developing Balance Score Card ?
(ii) Discuss the information to be required for performance measurement under Balance
Score Card. 5+5 = 10
Answer : 2(a)
(i) There are five basis components of supply chain management.
1. Plan : This is the strategic portion of supply chain management (SCM). You need a
strategy for managing all the resources that go toward meeting the customer
demand for your product and services.
2. Source : Choose the suppliers that will deliver the goods and services you need to
create your product. Develop a set of pricing, delivery and payment processes with
suppliers and create metrics for monitoring and improving the relationships.
3. Make : This is the manufacturing step. Schedule the activities necessary for
production, testing, packaging the preparation for delivery.
4. Deliver : This is the part that many insiders refer to as logistics. Coordinate the receipt
of orders from customers, develop a network of warehouses, prick carriers to get
products to customers and set up an invoicing system to receive payments.
5. Return : The problem part of the supply chain. Create a network for receiving
defective and excess products back from customers and supporting customers who
have problems with delivered products.
(ii) Operative CRM mainly supports the actual contact with customers conducted by front
office workers and general automation of business processes including sales of products,
services and marketing. All communication with the customer is tracked and stored in
the database and if necessary it is effectively provided to users (workers), It can also
minimize the time that the worker has to spend typing the information and administrating
(the data is shared). This allows the company to increase the efficiency of their
employees work and they are then able to serve more customers.
Collaborative CRMenables all companies along the distribution channel, as well as all
departments in a company, to work together and share information about customers,
even speaks about partner relationship management. But sometimes we might see a
rivalry between departments that undermines efforts of CRM to share relevant data
throughout the whole company. The goal of collaborative CRM then is maximum
sharing of relevant information acquired by all departments with the focus on increasing
the quality of services provided to customers.
(iii) Benefits : An organization can derive the following benefits by implementation of BSC :
(a) It avoids management reliance on short term financial measures.
(b) It can successfully communicate corporate strategy to the functional heads and
organization’s subunits and forcing them to develop their own goals.
(c) It can assist stakeholders in evaluating the firm, if measurers are communicated
externally,
(d) It helps in focusing the whole organization on the few key things needed to create
breakthrough performance.
(e) It helps in clarifying and updating budgets.
(f) It helps in identifying and aligning strategic initiatives.
(g) It helps in conduct of periodic performance reviews to learn about and improve
strategy.
Limitations : BSC is subject to following limitations :
a. There is no clear relation between BSC and shareholder value.
b. It does not lead to a single aggregated summary of control.
c. The measure may give conflicting signals and confuse management. It involves
substantial shifts in corporate culture.
Answer : 2(b)
(i) The steps in the process of developing of BSC are :
Identify the key outcomes to the success of the organization.
Identify the process that leads to these outcomes.
Develop key performance indicators for these processes.
Develop reliable data capture and measurement systems.
Develop a mechanism for reporting these to the relevant managers and staff.
Enact improvement programs to ensure that performance improves.
(ii) The main types of information required by the managers to implement the balanced score
card approach to performance measurement are :
Customer perspective- How do customers see us – price, quality, delivery, customer support
etc.
Internal perspective- where we must excel at – efficiency of manufacturing process, sales
penetration, new production introduction, skilled manpower etc.
Learning and growth perspective- can we continue to improve and create value-
Technology leadership, cost leadership, market leadership, research and development,
cost reduction etc. Financial perspective- How do we look to the shareholders- Sales, cost
of sales, return on capital employed, profitability, prosperity etc.
3.(a) The total cost function for a monopolist is given by TC= 900 + 40Q2 . The demand function for
the goods produced by the monopolist is given by 2Q = 48 – 0.08P. What will be the profit
maximizing price ? 8
(b) The following financial data related to the Balance Sheet of XYZ Limited for FY 2017 – 18 has
been extracted from the Annual Report 2017 – 18:
BALANCE SHEET of XYZ Limited as at March, 31
(Rs. In crores)
ASSETS 2018
Non-Current Assets
(a) Property, Plant and Equipment 70,942.90
(b) Capital Work-in-Progress 5,641.50
(c) Intangible Assets 786.18
(d) Financial Assets -
(e) Other Assets 2,140.84
Total Non-Current Assets 79,511.42
Current Assets
(a) Inventories 11,023.41
(b) Financial Assets
(i) Investments 14,640.37
(ii) Trade Receivables 1,875.63
(iii) Cash and Cash Equivalents 4,588.89
(iv) Other Financial Assets 480.62
(c) Other Assets 1,822.94
Total Current Assets 34,431.86
TOTAL ASSETS 1,13,943.28
EQUITY AND LIABILITIES

Equity
(a) Equity Share Capital 1,146.12
(b) Other Equity 60,976.14
Total Equity 62,122.26
Non-Current Liabilities
(a) Financial Liabilities
(i) Borrowings 24,568.95
(ii) Other Financial Liabilities 19.78
(b) Provisions 1,961.21
(c) Other Liabilities 224.71
Total Non-Current Liabilities 26,774.65
Current Liabilities
(i) Borrowings 669.88
(ii) Trade Payables 11,242.75
(iii) Other Financial Liabilities 6,541.40
(b) Provisions 735.28
(c) Other Liabilities 5,857.06
Total Current Liabilities 25,046.37
TOTAL EQUITY AND LIABILITIES 1,13,943.28
Additional Information :
Market Price of XYZ Limited share having a face value of Rs. 10 as on the Balance Sheet
date was Rs. 870.
Operating Profit of the Company for the year was – Rs. 21,640 crores.
Operating Profit Margin of the Company is 16.25%
Using the above information and Altman’s Multiple Discriminant Function, you are required to
calculate Z-score of XYZ Limited as per the revised Z-Score Model of Altman (1983) and
comment on the financial position of the Company. 12
Answer : 3(a)
Demand function is given by
2Q = 48 – 0.08 P
or, 2Q – 48 = -0.08P
or, 48 – 2Q = 0.08P
or, P= 600 - 25Q
TR = PQ
=600Q – 25Q2
TC is given by,
TC = 900 + 40Q2
The first order condition for profit maximization is MR = MC

TR = 600Q – 25Q2
dTR
MR = = 600 – 50Q
dQ
d(TC)
MC = = 80Q
dQ
For maximizing profit
MR = MC
i.e. 600 – 50Q = 80Q
600
Q= = 4.6 units
130
Equilibrium Price =
P = 600 – 25Q = 600 – 25(4.6)
= 600 – 115
= Rs. 485
i.e. profit maximizing price is Rs. 485
Answer : 3(b)
(b) As per the revised Z-score Model of Altman (1983), we have -
Z = 0.717(X1)+0.847(X2)+3.107(X3)+0.420(X4)+0.998(X5)
Where
X1 = Working capital / total assets
X2 = Retained earnings / total assets
X3 = EBIT / total assets
X4 = Market Value of Equity/ Total Debts.
X5 = Sales/total assets
From the information given in the question, we get the following :
Market Price of Rs. 10 (Face Value) Rs. 870.00
Working Capital (Current Assets – Current Liabilities) Rs. 9,385.49
Retained Earnings (Other Equity) Rs. 60,976.14
Total Assets Rs. 1,13,943.28
EBIT (Operating Income) Rs. 21,640.00
Market Value of Equity (Equity Capital/10 * 870) Rs. 99,712.44
Operating Profit Margin 16.25%
Sales (EBIT/Operating Profit margin) Rs. 1,33,169.23
Total Debts (Non-Current Liabilities + Current Rs. 51,821.02
Liabilities)
From the above information, we obtain –

X1 = 0.082
X2 = 0.535
X3 = 0.190
X4 = 1.924
X5 = 1.169
Using the Revised Z-Score Model (as given above), we get the value of Z 3.077. Since Z is more
than 2.99, the firm is Non-failed or non-distressed firm.
4. (a) Define the following : 2 × 4 =8

(i) Shadow Pricing
(ii) Liquidity Coverage Ratio
(iii) Risk Retention
(iv) Unsystematic Risk
(b) (i) Give the statistical methods of Demand Forecasting (any four) :
(ii) A manufacturing company is producing ball bearings. It’s production-line is set to
produce ball bearings with 8 mm diameter. Past records are showing that the
process standard deviation of ball bearing diameter is 0.01 millimetres. Assume
that you are working in the Quality Control Center of a company. On a particular
day 7 samples of size 5(n= 5) are picked up. You are supposed to draw a suitable
control chart with 3-sigma limits and comment whether the process is within
control limits or not :
1 2 3 4 5 6 7
7.995 7.963 8.012 7.981 8.032 7.999 8.012
4+8=12
Answer : 4(a)
(i) Shadow Pricing :
Shadow prices are not prices obtained by observing the real world. Shadow prices ;
they are “imputed values”. The shadow price shows the marginal contribution of the
factors of production employed. These imputed values show the increase in profit
which would result if an additional unit of that scarce factor is used. The imputed value
is the reduction in contribution if that scarce factor is removed.
(ii) Liquidity Coverage Ratio
Liquidity Coverage Ratio (LCR) is the ratio of Liquid Assets to Net Cash Outflow for short
term (30 days) liquidity management. It shows how much of liquid assets can sustain
the cash outflows for operating activities.
(iii) Risk Retention
This denotes acceptance of the loss or benefit arising out of a risk when it takes place.
In short, it is also termed as self insurance. This strategy is viable when the risks are small
enough to be transferred at a cost that may be higher than the loss arising out of the
risk itself.
(iv) Unsystematic Risk
Unsystematic risk refers to that portion of the risk which is caused due to factors unique
or related to a firm or industry. Such a risk is diversifiable and it can be eliminated
through diversification on the part of the investors when they hold a portfolio of shares.
Answer : 4(b)
(i) There are following statistical methods that are to be used in demand forecasting :
- Simple average method
- Moving average method
- Weighted moving average
- Time series
- Linear trend
- Regression analysis (Simple and Multiple)
- Simultaneous equation and
- Barometric method.
(Candidates are to list any four of the above methods).
(ii) Mean diameter of ball bearings is 8 millimeters, and the standard deviation of ring
diameter is 0.01 millimeters.
Standard Error = Standard Deviation / √n = 0.01/√5 = 0.00447
Therefore,
Central Limit Line = 8
Upper Control Line (Limit) = 8 + 3 × 0.00447 = 8.0134
Lower Control Line (Limit) = 8 – 3 × 0.00447 = 7.9866
Drawing the limits and the actual, we get the following process chart :
Process Control Chart

8.040
8.020 UCL
8.000 C
7.980 LCL
7.960
7.940
7.920
1 2 3 4 5 6 7
The control chart shows that the process is out of control as 3 out of 5 samples are
outside the control limits and two are very close to the Upper Control limit, and
therefore, some correction measures are required.
Section – B
Business Valuation
(50 marks)
5. Choose the correct option from amongst the four alternatives given, with
justification/workings. I mark will be for the correct choice and I mark will be for the
justification/workings. 2 × 5=10
(i) If the expected rate of return on a stock exceeds the required rate,
(A) the stock is experiencing super normal growth.
(B) the stock should be sold.
(C) the company is not probably trying to maximize price per share.
(D) the stock is a good buy.
(ii) Which of the following items would not be included in a WACC calculation ?
(A) Proportion or weight of debt.
(B) Proportion or weight of equity
(C) Personal tax rate on interest payments
(D) Cost of equity.
(iii) In calculating Market Value added of the company ________ is/are considered.
(A) Market value of equity
(B) Market value of debt
(C) Both (A) and (B)
(D) Only economic value added
(iv) An investment is risk free when actual returns are always __________ the expected
returns.
(A) Equal to
(B) Less than
(C) More than
(D) Depends upon circumstances
(v) Duration of a bond will __________ when the yield-to-maturity on the bond increases.
(A) Decrease
(B) Increase
(C) not change
(D) all three above are possible
Answer : 5
(i) (d) The stock is a good buy, as the investor will earn higher than required rate.
(ii) (c) Personal tax rate on interest payments is not relevant, it is the corporate tax rate
applicable to the company that may be relevant.
(iii) (c) both a and b, as both market value of equity as well as market value of debt are
required to be considered.
(iv) (a) equal to, as risk free investments give an assured fixed rate of return like
government securities, where interest and principal repayment is guaranteed by the
Central /State Government.
(v) (a) Duration of a bond has a negative or inverse relation with YTM (Yield-to-Maturity).
Higher the YTM, lower will be the duration of a bond hence duration of a bond will
“Decease”.
6. (a) Suvo Ltd. plans to expand its operations and estimates the total cost of the expansion
to be Rs. 24 crores. The same is proposed to be financed by internal accruals of Rs. 9
crores and the balance through the rights issue. The current share capital of the
company is Rs. 2.40 crores. The shares of the company are currently quoting at Rs.
345. The company proposes to price the rights at Rs. 250.
Based on the information
(i) compute the ratio of the rights.
(ii) calculate the value of the rights.
(iii) determine the gain/loss of a shareholder, if he
(A) Exercises his rights in the rights issue
(B) Allows his rights to expire
(C) Sells his rights. 12
(b) Das Ltd. is having a Machine carrying amount of which is Rs. 100 lakhs as on
31.03.2013. Its balance useful life is 5 years and residual value at the end of 5 years is
Rs. 5 lakhs. Estimated future cash flows from the Machine for the next 5 years are :
Years Estimated cash flows (Rs. in lakhs)
2014 52
2015 34
2016 32
2017 28
2018 32
Compute “Value in use” for plant if the discount rate is 15% and also compute the
recoverable amount if net selling price of the machine as on 31.12.2013 is Rs. 55 lakhs.
8
Answer : 6(a)
(i) Total price of the Project = 24 crores
Less : Internal accruals = 9 crores
Size of the proposed right issue = 15 crores
Right issue price = Rs. 250 per share
Number of right shares = 15 Crs. / 250 = 6,00,000
Existing Capital = 24,00,000 shares
Proportion of rights = 6/24 = ¼
Hence the right ratio is 1 rights share for every 4 shares held.
(ii) Computation of the value of rights :
P - SR 345 - 250 ×1
Value of rights = 0 = = ` 19
N+R 4+1
(iii) (A) Gain/Loss to a shareholder

If the invests in the rights issue :
P - SR
The ex-rights price of the share is expected to be = 0
N+R
4 × 345 + 250 ×1
= = Rs. 326
4 +1
Assume X holds 100 shares
Existing wealth = 100 x 345 = Rs. 34,500
Subscription in rights issue = 25 × 250 = 6,250
Total = 40,750
Expected post-rights market value of his portfolio
= 125 @ Rs. 326 = Rs. 40,750
No gain/loss to the shareholder.
(B) Allow the rights to expire :

Existing wealth = Rs. 34,500
Post-rights market value of his holdings = (100 x 326) = Rs. 32,600
Loss in the wealth of shareholder = Rs. 1,900
(C) Sells his rights

Existing wealth = Rs. 34,500
Amount realized by Sale of rights (100 x 19) = 1,900
Post –rights market value of the Holdings (100 × 326) = Rs. 32,600
Gain/Loss is Nil
Answer : 6(b).
Present value of the future cash flow
Year Estimated cash flows (Rs. in Discount @ 15% DCF
lakhs)
2014 52 0.870 45.24
2015 34 0.756 25.704
2016 32 0.658 21.056
2017 28 0.572 16.016
2018 32 0.497 15.904
Total 123.92
Present Value of residual price on 31.03.2018 : Rs. 5 x 0.497 = Rs. 2.485 (Rs. in laksh)
Present Value of estimated cash flow by use of an asset and residual value, which is
called “Value in use”.
Value in use is (Rs. 123.92 + Rs. 2.485) = Rs. 126.405 lakhs

Recoverable Amount = Net Selling Price (Rs. 55 Lakhs) or Value in Use (Rs. 126.405
Lakhs), whichever is higher.
Hence, Recoverable Amount = Value in Use = Rs. 126.405 Lakhs
7. Hard Company Limited is planning to acquire Soft Company Limited and merge it with the
Company. The following financial information has been extracted from the respective
Annual Reports of 2018 of these companies :
(Rs. in crores)
Particulars Hard Company Limited Soft Company Limited
Sales Rs. 1,233.00 Rs. 270.18
Less : Operating Expenses Rs. 678.15 Rs. 148.60
Operating Profit Rs. 554.85 Rs. 121.58
Less : Interest Rs. 75.00 Rs. 75.00
Profit Before Tax Rs. 479.85 Rs. 46.58
Less : Tax @ 30% Rs. 143.96 Rs. 13.97
Profit After Tax Rs. 335.90 Rs. 32.61
Assets
Non-Current Assets Rs. 8,560.00 Rs. 4,750.00
Current Assets Rs. 5,475.00 Rs. 2,560.00
Total Assets Rs. 14,035.00 Rs. 7,310.00
Equity and Liabilities
Equity Capital (Face Value – Rs. Rs. 500.00 Rs. 125.00
10 per share)
Other Equities Rs. 6,780.00 Rs. 3,545.00
Total Equity Rs. 7,280,.00 Rs. 3,670.00
Non-Current Liabilities Rs. 4,750.00 Rs. 2,450.00
Current Liabilities Rs. 2,005.00 Rs. 1,190.00
Total Equity and Liabilities Rs. 14,035.00 Rs. 7,310.00
Ratios :
Net Profit Margin Ratio 27.24% 12.07%
Return on Equity 4.61% 0.89%
Price /Earnings Ratio 14.29 10.35
Required :
(i) What is the market price of each company’s share before merger ?
(ii) Assuming that the management of Hard Company Limited (HCL) estimates that
the shareholders of Soft Company Limited (SCL) will accept an offer of one share
of HCL for four shares of SCL. If there are no synergic effects and post-merger
Price/Earnings Ratio remains unchanged, then what will be the market price of
the post-merger HCL share ?
(iii) Will the shareholders of HCL be better or worse off than they were before the
merger ?
(iv) Due to synergic effects, the management of HCL estimates that the earnings will
increase by 20%. In such a case, what will be the new post-merger EPS and price
per share if the new Price/Earnings Ratio of HCL will be 15? Will the shareholders
be better off or worse off than before the merger ? 20
Answer : 7.
(i)
Particulars Hard Company Limited Soft Company Limited
Price/Earnings Ratio 14.29 10.35
Profit After Tax (PAT) (Rs. in crore) Rs. 335.90 Rs. 32.61
Equity Capital (Face Value – Rs. Rs. 500.00 Rs.125.00
10 per share) (Rs. in crore)
No. of Shares (in crore) 50.00 12.50
EPS (in Rs.) Rs. 6.72 Rs. 2.61
Market Price before Merger Rs. 96.00 Rs. 27.00
(Rounded off to nearest Rs.)
(ii)
Post-Merger Assuming that there is no synergic gains (Hard Company Limited)
Profit After Tax Rs. 368.50
No. of Equity shares to be issued to the shareholder of SCL (one 3.125
share of HCL for four shares of SCL)
Total No. of Shares of HCL after merger 53.13
EPS Rs. 6.94
Price/Earnings Ratio after merger (assuming same) 14.29
Price per share of HCL after merger Rs. 99.17
(iii)
After merger the price of HCL share has increased from Rs. 96.00 to Rs. 99.17. It shows
that the HCL shareholders will be benefited from the merger.
(iv)
Post-Merger Assuming that there are synergic gains. (Hard Company Limited)
Profit After Tax (Without Synergic Gains) Rs. 368.50
Synergic Gains (%) 20%
Synergic Gains (Rs.) Rs. 73.70
Total Profit After Tax considering Synergic Gains Rs. 442.20
Total No. of Shares of HCL after merger 53.13
EPS Rs. 8.32
New Price/Earnings Ratio after merger 15
Price per share of HCL after merger Rs. 124.80
(V)
After merger and having synergic gains, the price of HCL share has increased from Rs.
96.00 to Rs. 124.80. It shows that the HCL shareholders will be benefited from the
merger.
8. (a) Discuss the relationship between economic value added and market value added. 8
(b) You are the Director of Ram & Company. One of the projects you are considering is the
acquisition of Shyam & Company. Shyam, the owner of Shyam & Company, is willing to
consider selling his company to Ram & Company if he is offered an all-cash purchase
price of Rs. 5 million. The project estimate that the purchase of Shyam & Company will
generate the following profit after-tax cash flow :
Year Cash Flow (in Rs. )
1 10,00,000
2 15,00,000
3 20,00,000
4 25,00,000
5 30,00,000
If you decide to go ahead with this acquisition, it will be funded with Ram’s standard
mix of debt and equity at the firm’s weighted average (after-tax) cost of capital of 9
per cent. Ram’s tax rate is 30 per cent. Should you recommend acquiring Shyam &
Company to your CEO ? 12
PVF@ 9 per cent is :
Year 1 2 3 4 5
PVF 0.917 0.842 0.772 0.708 0.650
Answer : 8(a)
The relationship between EVA and MVA is more complicated than the one between EVA
and firm value. The market value of a firm reflects not only the expected EVA of assets in
place but also the expected EVA from future projects. If the actual EVA is smaller than the
expected EVA the market value can decrease even though the EVA is higher. This does
not imply that increasing EVA is bade from a corporate finance stand point. In fact, given
a choice between delivering a below expectation EVA and no EVA at all, the firm should
deliver the below expectation EVA. It does suggest that the correlation between
increasing year to year EVA and market value will be weaker for firms with high anticipated
growth (and excess returns) than for firms with low or no anticipated growth.
Answer : 8(b)
Year Cash Flow (Rs.) PVF (at 9%) PV of cash flow
1 10,00,000 .917 9,17,000
2 15,00,000 .842 12,63,000
3 20,00,000 .772 15,44,000
4 25,00,000 .708 17,70,000
5 30,00,000 .650 19,50,000
Total value of the project Rs. 74,44,000 (total of PV cash flow
Since the value of Shyam & Company is Rs. 74,44,000 a figure greater than minimum
desired amount of Rs. 50 lakhs to be paid to Shyam & Company, Ram & company can
consider buying Shyam & company.
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)

JUNE 2019
Paper- 20: STRATEGIC PERFORMANCE MANAGEMENT AND

BUSINESS VALUATION
This paper has been divided into two Sections, viz, Section A and Section B.
Section-A
(50 Marks)
1. Choose the correct option from amongst the four alternatives given: 2x5=10
(i) Which of the following is a cause for corporate distress?
(A) Fraud by Management
(B) Working capital problems
(C) Mismanagement
(ii) If the average cost function of a firm is given by AC = x2 – 4x + 7, in terms of output x,

what will be its marginal cost?
(A) 2x3 - 4x2 + 7x
(B) 3x2 -8x + 7
(C) x3 - 8x2 + 7x
(iii) Which one of the following strategies is not for managing risk?
(A) Risk-Avoidance Strategy
(B) Risk-Transferring Strategy
(C) Risk-Measurement Strategy
(D) Risk-Acceptance Strategy
(iv) For a monopolist firm, the profit will be maximum when
(A) AR = AC
(B) AR > AC
(C) MR = MC
(D) MR > MC
(v) Which one of the following is NOT true about On-Line Analytical Processing (OLAP)?
(A) OLAP functionality includes trend analysis over sequential time periods.
(B) It provides slicing subsets for on-screen viewing.
(C) It is a category of hardware technology.
(D) It helps the end user to drill-down to deeper levels of consolidation data.
Answer:
(i) (D) : The causes for corporate distress can be-Technological causes, working capital
problems, economic distress, mismanagement, fraud by Management etc.
(ii) (B) : 3x2 – 8x + 7
Total cost (c) = x(x2 – 4x + 7) = x3 – 4x2 + 7x
d
Marginal cost = (x3 – 4x2 + 7x)
dx
= 3x2 – 8x + 7
(iii) (C) : Risk-Measurement Strategy as it is not a strategy of managing risk but a strategy to
quantify risk.
(iv) (C) : MC = MR, as this is the condition for Profit Maximization.
(v) (C) : On-Line Analytical Processing (OLAP) is a category of software technology and not
hardware technology.
2. (a) ‘Performance management and performance appraisal are sometimes used

synonymously but they are different’. Do you agree this statement? Support your
answer by highlighting bases of difference, if any, between them. 10
(b) Write down and elaborate the components of Performance Management. 10
Answer:
2. (a)
The statement performance management and performance appraisal are sometimes

synonymously but they are different, is correct. Performance management is a
comprehensive, continuous and flexible approach to the management of organizations,
teams and individuals which involves the maximum amount of dialogue between those
concerned. Performance appraisal is a more limited approach which involves managers
making top-down assessments and rating the performance of their subordinates at an annual
performance appraisal meeting.
Following few major differences can be identified between these two:
Performance Appraisal Performance Management
It concerns with top-down assessment. It concerns with joint process through

dialogue.
Annual appraisal meeting is held. Continuous review with one or more formal
reviews, it is not an annual process.
It is monolithic system. It is flexible process.
It focuses on quantified objectives. It focuses on values and behaviors as well as

objectives.
Complex paperwork is needed -bureaucratic Documentation kept to a minimum-

approach managerial approach
It is owned by the Human Resource It is owned by line managers.

department.
Involves use of Ratings. Use of ratings less common.
Structured system, not open to change. Flexible system.
It is a part of Performance Management. It includes performance Appraisal, but goes

beyond.
2. (b)
Components of Performance Management:
1. Performance Planning: Performance planning is the first crucial component of any

performance management process which forms the basis of performance appraisals.
Performance planning is jointly done by the appraiser and the reviewer in the beginning of
a performance session. During this period, the employees decide upon the targets and
the key performance areas which can be performed over a year within the performance
budget, which is finalized after a mutual agreement between the reporting officer and the
employee.
2. Performance Appraisal and Reviewing: The appraisals are normally performed twice in a
year in an organization in the form of mid reviews and annual reviews which is held at the
end of the financial year. In this process, the appraisee first offers the self filled up ratings in
the self appraisal form and also describes his/her achievements over a period of time in
quantifiable terms. After the self appraisal, the final ratings are provided by the appraiser
for the quantifiable and measurable achievements of the employee being appraised. The
entire process of review seeks an active participation of both the employee ond the
appraiser for analyzing the causes of loopholes in the performance and how it can be
overcome.
3. Feedback on the Performance followed by personal counseling and performance

facilitation: Feedback and counseling is given a lot of importance in the performance
management process. This is the stage in which the employee acquires awareness from
the appraiser about the areas of improvements and also information on whether the
employee is contributing the expected levels of performance or not. The employee
receives an open and a very transparent feedback and along with this the training and
development needs of the employee is also identified. The appraiser adopts all the
possible steps to ensure that the employee meets the expected outcomes for an
organization through effective personal counseling and guidance, mentoring and
representing the employee in training programs which develop the competencies and
improve the overall productivity.
4. Rewarding good performance: This is a very vital component as it will determine the work
motivation of an employee. During this stage, an employee is publicly recognized for
good performance and is rewarded. This stage is very sensitive for an employee as this
may have a direct influence on the self esteem and achievement orientation. Any
contributions duly recognized by an organization helps an employee in coping up with the
failures successfully and satisfies the need for affection.
5. Performance Improvement Plans: In this stage, fresh set of goals are established for an
employee and new deadline is provided for accomplishing those objectives. The
employee is clearly communicated about the areas in which the employee is expected to
improve and a stipulated deadline is also assigned within which the employee must show
this improvement. This plan is jointly developed by the appraisee and the appraiser and is
mutually approved.
6. Potential Appraisal: Potential appraisal forms a basis for both lateral and vertical
movement of employees. By implementing competency mapping and various assessment
techniques, potential appraisal is performed. Potential appraisal provides crucial inputs for
succession planning and job rotation.
x3
3. (a) The total cost function of a firm, C = – 5x2 + 28x + 10 where C is total cost and ‘x’ is
3
the output. A GST @ `2 per unit of output is imposed and the producer adds it to his
cost. If the demand function is given by D = 2530 – 5x, where ` D is the price per unit of
output.
Find the profit maximizing output and the price at the level. Also obtain maximum
profit. 8+2=10
(b) (i) What do you understand by corporate distress? List down important factors
causing corporate distress. 4
(ii) The following financial information has been taken from the Annual Report 2019 of
Stress Limited.
Balance Sheet of Stress Limited as at March 31, 2019
ASSETS: (` in crores)
Non-Current Assets
Property, Plant and Equipment 1,654.11
Intangible Assets 375.15
Other Non-Current Assets 388.18
2,417.44
Current Assets
Inventories 128.56
Financial Assets excluding Cash and Cash Equivalent 85.36
Cash and Cash Equivalent 6.85
Other Current Assets 568.93
Total Current Assets 789.70
Total Assets 3,207.14

EQUITY AND LIABILITIES:
Equity
Equity Share Capital 362.75
Other Equity (568.94)
Net Worth (206.19)
Non-Current Liability
Financial Liabilities 1,203.00
Provisions 112.63
Other Non-Current Liabilities 46.59
Total Non-Current Liabilities 1,362.22
Current Liabilities
Financial Liabilities 1,721.65
Provisions 95.25
Other Current Liabilities 234.21
Total Current Liabilities 2,051.11
Total Equity and Liabilities 3,207.14
• Depreciation written off — ` 28 crores.
• Preliminary Expenses written off — ` 11.60 crores.
• Net Loss during the FY 2018-19 — ` 58.70 crores.
Using the NCAER Model for Corporate Distress Prediction, you are required to ascertain
the stage of sickness. 6
Answer:
3. (a)
x3
Given (C) = – 5x2 + 28x + 10 + 2x
3
D = 2530 – 5x, where ` D = Price per unit
Revenue = XD = 2530X – 5x2
x3
Profit (P) = 2530x – 5x2 + 5x2 - – 28x – 2x – 10
3
x3
P=  + 2500x –10
3
In order that maximum Profit is attained.
dp
= 0 and
dx
d2p
= Negative
dx 2
Derivative w.r.t. x
dp d  x3 
   3  2500 x  10 = 0
dx dx
= – x2 + 2500 = 0
Or, x2 = 2500
x= 2500 = 50
d2p
= – 2x, which is negative
dx 2
Maximum profit is at x = 50 units
Price = D = 2530 – 5×50 = 2280
x3
Profit (P) = – + 2500x – 10
3
125000
=– + 2500x50 – 10 = ` 83323.33
3
3. (b) (i)
Corporate distress refers situation when a company ceasing operations following its inability to
make profit or bring in enough revenue to cover its expenses. It represents a case when a
company fails to meet its liabilities. It is recognized when a company is having low profitability,
high debt and low liquidity. It may be caused by the following factors:
• Technological Causes
• Working Capital Problems
• Economic Distress
• Mismanagement
• Over-expansion and Diversification
• Fraud by Management
• Poorly Structured board
• Financial Distress
3. (b) (ii)
The NCAER Study on Corporate Distress Prediction prescribed the following three parameters
for predicting the stage of Corporate Sickness:
(i) Cash profit position (a profitability measure)
(ii) Net working capital position (a liquidity measure)
(iii) Net worth position (a solvency measure)
If anyone of the above mentioned parameters becomes negative in case of a firm, it can be
predicted that the firm likely to move towards sickness. If all the three parameters are negative
then it shows that the company is fully under corporate distress. In order to decide in the given
case, the stage of sickness, we have to calculate all the three above mentioned parameters.
• Cash profit position: It means that we have to calculate cash from operating activities. In
the given case, Cash from Operating Activities = Net Profit + Depreciation Written Off +
Preliminary Expenses Written Off = ` [(58.70) + 28.00 + 11.60] crores = ` (19.10) crores which is
negative.
• Net Working Capital: Net Working Capital = Current Assets - Current Liabilities = ` [(128.56 +
85.36 + 6.85 + 568.93) - 2,051.11] crores = ` (1,261.41) crores which is also negative.
• Net Worth: Net Worth = Equity Share Capital + Other Equity = ` (362.75 - 568.94) crores = `
(206.19) crores which is also negative.
Thus, we find that in this case, all the three parameters are negative and hence, we can
conclude that the company is a sick company and its stage of sickness is ‗fully sick‘. Therefore,
immediate necessary drastic revival measures are essentially required for the survival of the
company.
4. (a) Compare and contrast between Basel I and Basel II norm. 10

(b) Define MIS and state the objectives of MIS. 10
Answer:
4. (a)
Comparison between Basel I and Basel II:
Basel – I (1988 and amended in 1996) - Basel - II (to be in place by 2006 in G-10
Based on Methodology for Capital countries and in India in 2008)- Basel II
Adequacy based on 3 pillars
1. Capital adequacy based on Risk 1. Capital adequacy based on Risk

Weighted Assets Weighted Assets
2. Not risk sensitive. Prescriptive. 2. Risk sensitive.
3. All credit exposures carried risk weight of 3. Credit exposures carry risk weights
100 per cent - except for some based on credit qualities.
sovereign exposures and mortgages
4. Risk Capital = Credit exposure × Risk 4. Risk capital: Similar to Basel I. But
Weights × 8 per cent can have lesser efficient Banks can have lesser capital
Capital than others than others
Implications were - Implications are -
• Every bank had to maintain same 8 • Banks with good quality assets have
percent capital. Thus Banks with good incentives because they can manage
quality assets had no incentives. As a with lower capital
result credit quality had to be lowered
• Better quality assets requires lesser
to increase returns
capital
• Low rated exposures were subsidized by
• Risk pricing can be done by banks
high rated exposures
based on credit risk perception
• No provision for economic pricing by
• Provision exists for economic pricing by
banks
banks
4. (b)
Management Information System (MIS):
Management Information System is a systematic process of providing relevant information in
right time in right format to all levels of users in the organization for effective decision making.
MIS is also defined to be system of collection, processing, retrieving and transmission of data to
meet the information requirement of different levels of managers in an organization.
According to CIMA
MIS is a set of procedures designed to provide managers at different levels in the organization
with information for decision making, and for control of those parts of the business for which
they are responsible. MIS comprises of three elements viz., management, information and
system. The concept of MIS is better understood if each element of the term MIS is defined
separately.
Management: A manager may be required to perform following activities in an organisation:
(i) Determination of organisational objectives and developing plans to achieve them.
(ii) Securing and organising human beings and physical resources so as to achieve the laid
down objectives.
(iii) Exercising adequate controls over the functions performed at the lower level.
(iv) Monitoring the results to ensure that accomplishments are proceeding according to
plans.
Information: Information is data that have been organised into a meaningful and useful
context. It has been defined by Davis and Olson - ―Information is data that has been
processed into a form that is meaningful to the recipient and is of real or perceived value in
current or progressive decision‖. For example, data regarding sales by various salesmen can
be merged to provide information regarding total sales through sales personnel. This
information is of vital importance to a marketing manager who is trying to plan for future sales.
System: System may be defined as a composite entity consisting of a number of elements

which are interdependent and interacting, operating together for the accomplishment of an
objective. One can find many examples of a system. Human body is a system, consisting of
various parts such as head, heart, hands, legs and so on. The various body parts are related by
means of connecting networks of blood vessels and nerves. This system has a main goal which
we may call ―living‖. Thus, a system can be described by specifying its parts, the way in which
they are related, and the goals which they are expected to achieve. A business is also a
system where economic resources such as people, money, material, machines, etc. are
transformed by various organisation processes (such as production, marketing, finance, etc.)
into goods and services.
Objectives of MIS:
• To provide the managers at all levels with timely and accurate information for control of
business activities
• To highlight the critical factors in the operation of the business for appropriate decision
making
• To develop a systematic and regular process of communication within the organization on
performance in different functional areas
• To use the tools and techniques available under the system for programmed decision
making
• To provide best services to customers
• To gain competitive advantage
• To provide information support for business planning for future
Section-B
Business Valuation
(50 Marks)
Answer Question No.5 which is compulsory and any two from the rest of this Section.
5. Choose the correct option from amongst the four alternatives given, with justification/
workings. 1 mark will be for the correct choice and 1 mark will be for the
justification/workings. 2x5=10
(i) A bond of a company is trading at a premium at present. It is expected that in future
its price will _________ with the passage of time keeping other factors constant.
(A) decrease
(B) increase
(C) not change
(D) All three above are possible
(ii) Which of the following is a financial liability for a company?
(A) X Ltd. has issued 10 crores of ` 10 each equity shares.
(B) X Ltd. has issued 10 crores of ` 10 each cumulative redeemable preference

shares.
(C) X Ltd. has issued 10 crores of ` 10 each non-cumulative compulsorily convertible

preference shares.
(D) Both (B) and (C)
(iii) A Company based on up-to-date financial statements has determined that the current
Free Cash Flows to Equity (FCFE) per share is ` 1.00. It has outstanding number of
shares 100 crores with a face value of ` 10 each. Its interest expenses are ` 30 crores
and tax rate is 30%. Given this information, The Free Cash Flow to the Firm (FCFF) will be
(A) ` 109 crores
(B) ` 112 crores
(C) ` 121 crores
(D) ` 130 crores
(iv) Estimated fair value of an asset is based on the ________ value of operating cash flows.
(A) current
(B) future
(C) discounted
(v) SBT Ltd. has an issued and paid up Capital of 100000 shares of `100 each. The
company declared a dividend of `25 lakh during the last five years and expects to
maintain the same of level of dividends in the future. If the average dividend yield for
the listed companies in the same line of business is 16%, then value per share of SBT
Ltd. is
(A) ` 150.50
(B) ` 156.25
(C) ` 160.50
(D) Insufficient information
Answer:
5.
(i) (A) : The bond is presently trading at a premium and when it approaches to its maturity,
its price will converge to par value. Hence, its price in future will decrease.
(ii) (B) : The reason is that the cumulative redeemable preference shares are financial
liability of the company because the company is under obligation to pay dividend
and redeem at the maturity.
(iii) (C) : ` 121 crores
Particulars Amount
FCFE (Per Share) ` 1.00

No. of Shares (in crores) 100.00
Total FCFE (in crores) ` 100.00
Plus [Interest × (1 – tax rate)] (in crores) ` 21.00
Therefore, Free Cash Flows to the Firm (in ` 121.00
crores) will be
(iv) (C) : Discounted.
In Discounted Cash Flow (DCF) Valuation, the value of an asset is the present value
of the expected cash flows on the asset.
(v) (B) : ` 156.25
25,00,000
Dividend per share = ` 25
1,00,000
Dividend yield = 16%
25
Value per share = = ` 156.25
0.16
6. (a) Vipul Ventures Limited has entered the phase of maturity in its life cycle and its cash
flows (before interest and taxes) are expected to remain constant at the current level
of ` 550.25 lakh. Presently it is an all equity finance firm.
The cost of equity for Vedika Limited, which resembles Vipul Ventures in terms of its
risk-return characteristics, is 15.75 per cent. You are expected to find out the value of
Vipul Ventures. The tax rate applicable to Vipul Ventures is 38.5% including surcharges
and all Cess, if any.
What will be impact on firms’s cost of equity, weighted average cost of capital and its
valuation if the firm decides to alter its capital structure to have a 25% debt ratio? The
cost of debt for firms with the risk profile similar to Vipul Venture is 10.25 per cent. 10
(b) Hajela Private Limited are negotiating to sell their business to a Public Limited
Company. The following is summarized extract from the balance sheet as at 31 March,
2019 of the Hajela Private Limited:
Capital, 1000 shares of ` 1000 each 10,00,000
Reserve 2,00,000
12,00,000
Fixed assets at depreciated cost 6,40,000
Current assets ` 7,20,000

Less: Current liabilities ` 1,60,000 5,60,000
12,00,000
The profits of Hajela Private Limited for the five years it has been in existence after
eliminating any extraneous or non-recurring debits and credit are `1,90,000; ` 2,30,000;
` 2,15,000; ` 3,40,000 and ` 3,75,000 respectively. A return of 20 per cent per annum on
the capital employed is considered to be reasonable in this particular business and it
is expected that future requirements as to capital will not vary materially from the
capital employed as at 31st, March.
Ignoring any extraneous factors that may affect the position, suggest the amount that
should reasonably be paid to the private company for the goodwill therefore to be
acquired by the purchasing company, giving details of how you work out this amount
by assuming three years of purchase for valuing the goodwill but capital employed be
considered for this purpose. 10
Answer:
6. (a)
Value of the firm= Value of equity holders+ value to debt holders
Particulars ` In Lakhs
Cash flow before interest and taxes 550.25
Interest Nil
Cash flow before taxes 550.25
Taxes @38.5% 211.85
Cash flow after taxes 338.40
Cost of equity for Vipul ventures (r0) = 0.1575 or 15.75%. The value of the firm is computed
at `2148.60 lacs:
338.40/0.1575
= ` 2148.60 lakhs (in case of unlevered firm)
The value of levered firm increases by the amount of tax shield generated by debt. The
amount of tax shield that is available on debt depends on the tax rate, then the value of
Cost of equity in the levered firm is given by
= 0.1575 +1/3 × (1– 0.385) × (0.1575 – 0.1025)
= 0.16878 or 16.88%
WACC of levered firm
R0 = 3/4 × 0.1688 + 1/4(0.615) × 0.1025
= 0.1423 or 14.23%
Value of firm = 338.4/0.1423
= ` 2378 lakhs
6. (b)
(a) Total profit = 1,90,000 + 2,30,000 + 2,15,000 + 3,40,000 + 3,75,000 = 13,50,000
Average profit = 13,50,000/5

` 2,70,000
Reasonable return on capital employed = 12,00,000 × 20 percent
= 2,40,000
Super profits = 2,70,000 – 2,40,000
= ` 30,000
Hence the value of goodwill will be `(30,000 x 3) = ` 90,000
According to capitalized method:
Capitalized value = 2,70,000 × 100/20 = ` 13,50,000
Goodwill = ` 13,50,000 – ` 12,00,000 = `1,50,000
Thus, three years purchase of super profits gives a lower figure as it does not take into
account potential value of ` 90,000. The capitalised value provides a valuation of
`1,50,000. This can be corrected by using weighted average for determining average
profits with higher weights for more recent years, as the profit is showing a rising trend.
Using weights of 1, 2, 3, 4, 5 respectively for the five years —
Weighted average profit = (` 1,90,000 × 1 + ` 2,30,000 ×2 + ` 2,15,000 × 3 + ` 3,40,000 × 4 +

` 3,75,000 × 5) ÷ (1 + 2 + 3 + 4 + 5)
= ` 45,30,000 ÷ 15 = ` 3,02,000
Super profits = ` 3,02,000 – ` 2,40,000 = ` 62,000
Goodwill at 3 years purchase = 3 × ` 62,000 = ` 1,86,000
The price of the goodwill can be negotiated between the range of ` 90,000 and
` 1,86,000 and can approach at maximum the capitalised value of ` 1,50,000.
7. (a) Two firm X and Y operating in the cement industry. Both the firms are planning for a
merger. Firm X is worth ` 200 lakh and Y is worth ` 50 lakh. On merging, the two would
allow cost savings with a present value of ` 25 lakh. Assume that Y is bought by X for a
cash of ` 65 lakh.
Estimate:
(i) The value of the combined firm
(ii) The cost of the merger for firm X
(iii) The NPV to Y’s shareholders
(iv) The NPV to X’s shareholders 10
(b) Deepika Ltd. is a highly successful company and wishes to expand by acquiring other
firms. Its expected high growth in earnings and dividends is reflected in its price-
earning (P/E) ratio of 17. The Board of Directors of Deepika Ltd. has been advised that if
it were to takeover firm with a lower P/E ratio than its own, using a share-for-share
exchange, it could increase its reported earnings per share. Alia Ltd. has been
suggested as a possible target for takeover, which has a P/E ratio of 10 and 10,00,000
shares in issue with a share price of ` 15 each. Deepika Ltd. has 50,00,000 shares in
issue with a share price of ` 12 each.
Calculate the change in earnings per share of Deepika Ltd., if it acquire Alia Ltd.
shares for ` 15 per share, assume that the price of Deepika Ltd. shares remains
constant. 10
Answer:
7. (a)
(i) Let the value of the combined firm be presented as PVXY and the value of the two
separate firms can be represented as PVx and PVY
Gain the difference between the value of the combined firm and the sum of the values
of two individual firms. It given as:
Gain = PVXY  (PVX  PVY)
Px = ` 200 lakhs, Py = ` 50 lakhs and
Gain = ` 25 lakhs
Gain = PVXY  (PVX  PVY)
25 = PVXY  (200  50)
(Value of the combined firm) PVXY = ` 275 lakhs
(ii) Cost of the Merger, for firm X = Cash paid - PVy
= ` (65 – 50) lakhs = ` 15 lakhs
(iii) NPV to Y‘s shareholders = The gain of Y‘s shareholders is the cost firm X i.e. `15 lakhs.
This means, of the ` 25 lakhs gain, firm Y has contributed ` 15 lakhs.
(iv) NPV to X‘s shareholders = Overall gain from the merger less Cost to acquire
Y = ` (25 – 15) lakhs = ` 10 lakhs.
7. (b)
Particulars Deepika Ltd. Alia Ltd.
P/E ratio 17 10
Number of shares 50,00,000 10,00,000
MPS (`) 12 15
EPS = (MPS ÷ P/E)(`) 0.706 1.5
Earnings (`) 35,30,000 15,00,000
Total earnings after takeover = ` 35,30,000 + ` 15,00,000 = ` 50,30,000
Number of shares offered by Deepika Ltd. to Alia Ltd.:
= 10,00,000 × 15/12 = 12,50,000 shares
` 50,30,000
EPS of combined entity = = 0.8048
50,00,000  12,50,000
Increase in earnings per share = 0.8048 – 0.7060 = ` 0.0988.
Note: Current P/E of Deepika Ltd. = 17

Price offered to Alia Ltd. = 15
Implied P/E ratio = Price offered ÷ EPS of Alia Ltd. = 15 ÷ 1.5 = 10
This P/E is less than P/E of Deepika Ltd.
Therefore such a deal would result in a higher EPS after acquisition.
8. (a) The following information is given for three companies that are identical except for
their capital structure:
Orange Red Blue
Total Invested Capital 1,00,000 1,00,000 1,00,000
Debt/Assets Ratio 0.8 0.5 0.2
Shares Outstanding 6,100 8,300 10,000
Pre Tax Cost of Debt 16% 13% 15%
Cost of Equity 26% 22% 20%
Operating Income (EBIT) 25,000 25,000 25,000
Net Income 8,970 12,350 14,950
The tax is uniform 35% in all cases.

(i) Compute the weighted average cost of capital for each company.
(ii) Compute the Economic Value Added (EVA) for each company.
(iii) Based on the EVA, which company would be considered for best investment?
Give reasons.
(iv) If the industry P/E ratio is 11 times, estimate the price for the share of each
company.
(v) Calculate the estimated market capitalization for each of the Companies. 10
(b) Rachna Limited is considering a takeover of Mona Limited. The particulars of two
companies are given below:
Particulars Rachna Limited Mona Limited
Earnings after tax (`) 20,00,000 10,00,000
Equity shares (Number) 10,00,000 10,00,000
Earnings per share 2 1
Price earnings ratio (times) 10 5
You are required to give following:

(i) What is the market value of each company before merger?
(ii) Assuming that the management of Rachna Limited estimates that the
shareholders of Mona Limited will accept an offer of one share of Rachna Limited
for four shares of Mona Limited. What is the market value of the post-merger effect
on Rachna Limited? Are the shareholders of Rachna Limited better or worse off
than they were before the merger?
(iii) Due to synergic effects, the management of Rachna Limited estimates that the
earnings will increase by 25%. What will be the market price per share? 10
Answer:
8. (a)
(i) Orange Red Blue
W/d (Debt/Assets Ratio) 0.8 0.5 0.2
Kd (Cost of Debt) (%)(after tax) 10.4 8.45 9.75
We (Weight of Equity) 0.2 0.5 0.8
Ke (Cost of Equity) % 26 22 20
WACC (Weighted Avg. cost of Capital)% 13.52 15.225 17.95

(ii) Invested Capital 1,00,000 1,00,000 1,00,000
EBIT 25,000 25,000 25,000
NOPAT 16,250 16,250 16,250
EVA (Economic Value Added) 2,730 1,025 -1,700
(NOPAT- WACC x Invested Capital)
(iii) Best Company Orange
Orange company would be considered for best investment since the

EVA/Performance metric of the Company is highest and its weighted Average cost of
capital is the lowest.
Orange Red Blue

(iv)
Shares (Nos.) 6,100 8,300 10,000
Net Income 8,970 12,350 14,950
EPS 1.47 1.49 1.50
Price (P/E = 11) 16.17 16.39 16.50
(v) Market Capitalization (No. of shares x 98,637 1,36,037 1,65,000

price)
8. (b)
(i) Market value of companies before merger
EPS (`) 2 1
P/E ratio 10 5
Market price per share (`) 20 5
Number of equity shares 10,00,000 10,00,000
Total market value (`) 2,00,00,000 50,00,000
(ii) Post merger effect on Rachna limited:
Particulars
Post merger earnings (20 lakhs +10 lakhs) (`) 30,00,000
Equity shares (exchange ratio 1:4) (10 lakhs + 10/4 lakhs) 12,50,000
EPS (`) 2.4
P/E ratio 10
Market price per share (`) (2.4x10) 24
Total market value (`) 3,00,00,000
Gains from merger for Rachna Limited
Particulars `
Post merger market value of the firm 300,00,000
Less: Pre-merger market value
Rachna Limited ` 200,00,000
Mona Limited ` 50,00,000 250,00,000
Gains 50,00,000
Apportionment of gains between shareholders: (`)
Post merger market value
10,00,000 x 24 2,40,00,000
2,50,000 x 24 60,00,000
Less: pre merged market value 2,00,00,000 50,00,000
Gains 40,00,000 10,00,000

Conclusion: Shareholders of Rachna Limited will be better off than before the merger
situation.
(iii) Post merger earnings:
Increase in earnings by 25 percent.
New earnings ` 30,00,000 × 125 percent
= ` 37,50,000
Number of equity shares = 12,50,000
Earnings Per Share (EPS) = ` 37,50,000/12,50,000
=`3
P/E ratio = 10
Market price per share = ` 3 × 10 = ` 30.
Suggested Answers_Syl16_December 2019_Paper 20
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
DECEMBER – 2019
Paper - 20 : STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS

VALUATION
Section-A
(50 Marks)
(i) Performance management creates a direct link between
(A) employee performance and employee’s goal.
(B) organizational performance and employee’s goal.
(C) employee performance and organizational goals.
(D) organizational goals and employee’s goals.
(ii) If productivity growth of an organization is _________ that of its competitors, that firm
performs better and is considered to be more efficient.
(A) higher than
(B) lower than
(C) stable
(D) fluctuating in both higher and lower sides
(iii) The program which encompasses the planning and management of all activities
involved in sourcing procurement, conversion and logistics management activities is
called
(A) Supply Chain Management
(B) Customer Relationship Management
(C) Total Quality Management
(iv) The components of the Shewhart Cycle or PDCA are
(A) Plan-Do-Check-Act
(B) Plan-Deline-Check-Act
(C) Plan-Do-Control-Act
(D) Program-Do-Check-Act
(v) Which out of the following financial ratios is not in the Altman Model: Z-Score?
(A) Market Value to Book Value of equity shares
(B) Working Capital to Total Assets
(C) Retained Earnings to Total Assets
(D) Sales to Total Assets
Answer:
(i) (C) Performance management creates a direct link between employee performance
and organizational goals.
(ii) (A) If productivity growth of an organization is higher than that of its competitors,
that firm performs better and is considered to be more efficient.
(iii) (A) Supply Chain Management encompasses the planning and management of all
activities involved in sourcing, procurement, conversion and logistics management
activities.
(iv) (A) The components of Shewhart Cycle or PDCA or Deming Cycle or Deming wheel
are Plan-Do-Check — Act.
(v) (A) Market Value to Book Value of equity shares is not the financial ratio included in the
Altman Model: Z-Score.
2. (a) (i) What is Customer Relationship Management (CRM)? 3
(ii) State the advantages and benefits of Customer Relationship Management

application. 7
(b) (i) What are the characteristics of enterprise resource planning (ERP)? 4
(ii) What are the reasons for the failure of ERP? 6
Answer:
2. (a) (i)
Customer Relationship Management (CRM) is a business strategy comprised to process,

organizational and technical change whereby a company better manage its enterprise
around its customer behavours. It entails acquiring and deploying knowledge about
customers and using this information across the various customers touch points to increase
revenue and achieve cost reduction through operational efficiencies.
The adoption of CRM is being fuelled by recognition that long-term relationships with
customers are one of the most important assets of an organization. CRM entails all aspects of
interaction that a company has with its customer, whether it is sales or service related.
CRM is often thought of as business strategy that enables business to:
Understand the customer
Retain customers through better customer experience
Attract new customer
Win new clients and contracts
Increase profitability
Decrease customer management costs.
2. (a) (ii)
Advantages and benefits of CRM:
Certainly a benefit for each company is to achieve better economic results thanks to
achieving higher value from every interaction with a customer. Competition is very sharp in
current market. Companies must take care of a customer in every area of their specialization
by using various communication channels. Customer expects perfect services whether he
calls a help line, asks a dealer, browses a web site or personally visits a store. It is necessary to
assure him in a feeling that he communicates with the same company whatever form of
communication, time or place he chooses. According to Matusinska the basic advantages
and benefits of CRM are these:
• satisfied customer does not consider leaving
• product development can be defined according to current customer needs
• a rapid increase in quality of products and services
• the ability to sell more products
• optimization of communication costs
• proper selection of marketing tools (communication)
• trouble-free run of business processes
• greater number of individual contacts with customers
• more time for customer
• differentiation from competition
• real time access to information
• Under estimated levels of change management
• Improper communication
• Insufficient end user training
• Failure in gap analysis
• Failure to identify future business needs
• Technological obsolescence
• Failure to make available user-friendly checklist/guidelines.
• fast and reliable predictions
• communication between marketing, sales and services
• increase in effectiveness of teamwork
• increase in staff motivation
Answer:
2. (b) (i)
The characteristics of Enterprise Resource Planning (ERP) are:
ERP refers top techniques and concepts for integrated management of business as a whole
from the view point of the effective use of management resources to improve the efficiency
of enterprise management. ERP provides integrated business software modules to support
functional units of an enterprise. An ideal ERP system should have following characteristics;
1. Flexibility: An ERP system must be flexible enough to respond fast to the changing needs
of the organization. The client server technology enables ERP to run across various
databases at the back end using open database connectivity.
2. Modular and open: ERP system has the open architecture i.e. any modules can be
interfaced or dethatched without affecting the rest of the modules. It should support
multiple hardware platforms as well as third party add-on solutions.
3. Beyond the company: It is confined to the organizational boundaries rather it is extended

to the external business entities connected to the organization with online connectivity.
4. Best business practice: It has inbuilt best business practices applicable worldwide and
imposes its own strategies and logics over existing culture and processes of organization.
Answer:
2. (b) (ii)
Reasons for failure of ERP:
An organization cannot reap desired benefits from the ERP system under the following
circumstances:
• Lack of effective project management
• Inability to resolve issues and make decisions in timely manner
• Resources not available when needed
• Perceived or real lack of executive support
• Software fails to meet business needs
3. (a) A departmental store of Mumbai conducted a study of the demand for men’s ties. It
found that the average daily demand (D) in terms of price (P) is given by the equation
D=120-5P.
You are required to ascertain—
(i) How many ties per day can the store expect to sell at a price of ` 20 per tie?
(ii) If the store wants to sell 40 ties per day what price should it charge?
(iii) What is the highest price anyone would be willing to pay? 3+3+4=10
(b) The following financial data related to the Balance Sheet of Vedisha Ltd. a public
listed large manufacturing company as at March 31, 2019, has been extracted from
the Annual Report 2018-19:
Assets (Amount in ` lakh)
Non-Current Assets
(a) Property, Plant and Equipment 1,620
(b) Other Assets 140
Total Non-Current Assets 1,760
Current Assets
(a) Inventories 305
(b) Financial Assets
(i) Investment 250
(ii) Trade Receivables 245
(iii) Cash and Cash Equivalents 125
(c) Other Assets 80
Total Current Assets 1,005
Total Assets 2,765
1. Equity And Liabilities

Shareholders Fund:
(a) Equity Share Capital (` 10 each) 500
(b) Reserve and Surplus 1,250
Total Equity 1,750
2. Non-Current Liabilities
- Borrowings 600
(b) Provisions 10
(c) Other liabilities 80
Total Non-Current Liabilities 690
(i) Borrowings —
(ii) Trade Payables 195
(b) Provisions 10
(c) Other liabilities 120
Total Current Liabilities 325
Total Equity and Liabilities 2,765
(i) Net sales for 2018-19 were ` 3,050 lakh.
(ii) Operating profit of the company for the year was ` 585 lakh.
(iii) Market value of each equity share is ` 16 on the stock exchange.
Using the above information provided and discriminant function developed by

Altman, you are required to calculate Z-Score of Vedisha Ltd. and comment on the
financial condition of the company. 10
Answer:
3. (a)
(i) D = 120 - 5P
D = 120 -(5 × 20)
120 -100 = 20 ties are expected to be sold per day at price of ` 20 per tie
(ii) D = 120 - 5P
40 = 120 - 5P
5P = 120 - 40
5P = 80
P = 16 per tie if it wants to sell 40 price per day
(iii) D = 120 - 5P
1 = 120 - 5P
5P = 120 - 1
5P = 119
P = ` 23.80 per tie in the highest price
3. (b)
As per Z-score model of Altman (1968) which is developed for public listed large
manufacturing companies we have
Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5
Here, the five variables are as follows: (` In lakh)
X1 = Working Capital to Total assets = ( 2765

680
) = 0.246
X = Retained earnings to total assets = (
2765 )
1250
2 = 0.452
X = EBIT to Total assets = (

2765 )
585
3 = 0.212
800
X4 = Market Value of Equity to Book Value of Total debts = = 0.788
1050
X5 = Sales to total assets = ( 3050

2765 )
= 1.103 times
Hence, Z Score = (1.2 x 0.246) + (1.40 x 0.452) + (3.3 x 0.212) + (0.6 x 0.788) + (1×1.103)
= 0.2952 + 0.6328 + 0.6996 + 0.4728 + 1.103 = 3.2034
Note:
(Amount in ` Lakh)
1. Working Capital: Current Assets -Current Liabilities (1005-325) = 680
2. Total Assets = (1760 + 1005) = 2765
3. Retained Earnings = 1250
4. EBIT (Operating Income) = 585
5. Market Value of Equity ( 500

10
× 16) = 800
6. Total Debt = (690 + 325) = 1015
7. Sales = 3050
Comment:
As the calculated value of Z- Score (3.2034) is much higher than 2.99, it can be strongly
predicated that the company (Vedisha Ltd.) is a non-bankrupt company (i.e. non-failed
company).
4. (a) (i) Differentiate between systematic risk and unsystematic risk.
(ii) Discuss the need for implementation of enterprise risk management.
(iii) “Do you believe that the Government of India bonds do not have any kind of
risk for the banking sector in India?” Support your answer with suitable
reasoning. 6+3+3=12
(b) “Financial performance analysis can be classified into different categories on the
basis of material used and modus operandi” — Write about the various types of
financial performance analysis in this context. 8
Answer:
4. (a) (i)
Systematic risk refers to that part of total risk which causes the movement in individual stock
price due to changes in general stock market index. Systematic risk arises out of external and
uncontrollable factors. The price of individual security reflects the fluctuations and changes
of general market. It refers to that portion of variation in return caused by factors that affect
the price of all securities. The effect in systematic risk causes the prices of all individual
shares/bonds to move in the same direction. This movement is generally due to the response
to economic, social and political changes. The systematic risk cannot be avoided It relates
to economic trends which affect the whole market. The systematic risk cannot be eliminated
by diversification of portfolio because every share is influenced by the general market trend.
Unsystematic risk is that portion of total risk which results from known and controllable factors.
It refers to that portion of the risk which is caused due to factors unique or related to a firm or
industry. The unsystematic risk is the change in the price of stocks due to the factors which
are particular to the stock. For example, if excise duty or customs duty on raw materials of a
product increases, the price of related industry’s stock declines. The unsystematic risk can be
eliminated or reduced by diversification of portfolio.
4. (a) (ii)
Need for implementation of ERM
• Reduce unacceptable performance variability.
• Align and integrate varying views of risk management
• Build confidence of investment community and stakeholders
• Enhance corporate governance
• Successfully respond to a changing business environment
• Align strategy and corporate culture.
4. (a) (iii)
Government of India bonds do not have credit risk or default risk as the sovereign bonds in
domestic currency do not have any default risk. However, banks trade in government bonds
in the bond market and hence, they face interest rate risk in such bonds. That is to say -
Government of India bonds may not have credit risk but they have interest rate risk as market
interest rate changes in the market and consequently, the prices of bonds changes causing
a risk to the banks. Therefore, it is not correct to say that the Government of India bonds do
not have any kind of risk.
Answer:
4. (b)
Financial performance analysis can be classified into different categories on the basis of
material used and modes operandi as under:
A. Material used: On the basis of material used financial performance can be analyzed in
following two ways:
1. External analysis: This analysis is undertaken by the outsiders of the business namely
investors, credit agencies, government agencies, and other creditors who have no
access to the internal records of the company. They mainly use published financial
statements for the analysis and as it serves limited purposes.
2. Internal analysis: This analysis is undertaken by the persons namely executives and
employees of the organization or by the officers appointed by government or court
who have access to the books of account and other information related to the
business.
B. Modus operandi: On the basis of modus operandi financial performance can be analyze
in the following two ways:
1. Horizontal Analysis: In this type of analysis financial statements for a number of years
are reviewed and analyzed. The current year’s figures are compared with the
standard or base year and changes are shown usually in the form of percentage. This
analysis helps the management to have an insight into levels and areas of strength
and weaknesses. This analysis is also called Dynamic Analysis as it based on data from
various years.
2. Vertical Analysis: In this type of Analysis study is made of quantitative relationship of

the various items of financial statements a particular date. This analysis is useful in
comparing the performance of several companies in the same group, or divisions or
departments in the same company. This analysis is not much helpful in proper analysis
of firm’s financial position because it depends on the data for one period. This analysis
is also called Static Analysis as it based on data from one date or for one accounting
period.
Section-B
Business Valuation
(50 Marks)
justification/workings. 1 mark will be for the correct choice and 1 mark will be for the
justification/workings: 2×5=10
(i) ANINY LTD. earned free cash flow to Equity shareholders during the financial year
ended-2019 at ` 5 lakh. If its cost of equity is 12% and free cash flow to Equity (FCFE)
is expected to grow forever at 10%, what will be value of ANINY LTD. (using FCFE
valuation approach)?
(A) ` 450 lakh
(B) ` 300 lakh
(C) ` 275 lakh
(ii) Smith Ltd. has announced issue of warrants on 1:1 basis for its equity shareholders.
The warrants are convertible at an exercise price of `15. Warrants are detachable
and trading at ` 7. What is the minimum price of the warrant if the current price of the
stock is ` 20?
(A) ` 4
(B) ` 5
(C) `7
(D) ` 15
(iii) The value of Alpha Ltd. and Beta Ltd. are ` 50 lakh and ` 25 lakh respectively. On
merger their combined value ` 94 lakh. If Beta Ltd. receives premium on merger `15
lakh, what will be the synergy gain for merger?
(A) ` 19 lakh
(B) ` 24 lakh
(C) ` 34 lakh
(iv) A company with PAT of ` 60 Crores, Tax Rate 30% plus a cess of 3%, Return on Equity
is 20%, Other Equity ` 225 Crores, PAT of the Company is growing by 8% per year and
equity share with a par value of ` 10 will have EPS of
(A) ` 2
(B) ` 8
(C) ` 10
(D) Insufficient information
(v) A Limited is considering to acquire B Limited through all shares deal. Relevant
information about these companies are given below;
Particulars A Limited B Limited

Present Earnings- (` in crores) ` 7.50 ` 2.50
No. of Equity Shares (in crores) 4 2
Price/Earnings Ratio 10 9
Given the above information, the exchange ratio based on the market price will be
(A) 0.60
(B) 0.67
(C) 0.93
(D) 1.67
Answer:
(i) (C) ` 275 lakh
According to FCFE Valuation Approach:
V0 = (FCFEi)/(Ke-g)
5.5
= (5 x 1.10)/(0.12 - 0.10) = = ` 275 lakh
0.02
(ii) (B) ` 5
Minimum Price Warrant of Smith Ltd.:
(Current Stock Price-Exercise price of Warrant) x (Exercise Ratio):
= ` (20 -15) x 1 = ` 5
(iii) (A) ` 19 lakh
Synergy gain for Merger: Combined Value-Value of Merging Companies
= ` [(94) - (50 + 25)] = `19 lakh
(Premium on merger is irrelevant).
(iv) (B) (` 8)
PAT ` 60
ROE 20%
Total Equity (PAT/ROE) ` 300
Other Equity ` 225
Share Capital (Total Equity-Other Equity) ` 75
No. of Shares (Share Capital/Par Value of the share) 7.5

(crore)
60 `8
EPS = PAT ÷ No. of share = = EPS
7.5
(v) (A)
Particulars A Limited B Limited
Present Earnings (` in crores) ` 7.50 ` 2.50
No. of Equity Shares (in crores) 4 2
Price/Earnings Ratio 10 9
EPS ` 1.875 ` 1.250
Market Price ` 18.75 ` 11.25
Exchange Ratio (11.25/18.75) 0.60
6. (a) ST Ltd. and BE Ltd. are in the same Industry. The former is in negotiation for acquisition
of the latter. Important information about the two companies as per their latest
financial statements is given below:
ST Ltd. BE Ltd.
` 10 equity shares outstanding 12 lakh 6 lakh

Debt:
10% Debentures (` lakhs) 580 -
12.5% Institutional loan (` lakhs) - 240
Earnings before interest, depreciation and tax (EBIDAT) (` lakhs) 400.86 115.71
Market price/share (`) 220.00 110.00
ST Ltd. plans to offer a price for BE Ltd., business as a whole which will be 7 times
EBIDAT reduced by outstanding debt, to be discharged by own shares at market
price.
BE Ltd. is planning to seek one share in ST Ltd. for every 2 shares in BE Ltd. based on the
market prices. Tax rate for the two companies may be assumed as 30%.
Required:
Calculate and show the following under both alternatives — ST Ltd.’s offer and BE Ltd.’s
plan: 12
(i) Net consideration payable
(ii) No. of shares to be issued by ST Ltd.
(iii) EPS of ST Ltd. after acquisition
(iv) Expected market price per share of ST Ltd. after acquisition.
(v) State briefly the advantages to ST Ltd. from the acquisition.
Calculations (except EPS) may be rounded off to 2 decimals in lakhs.
(b) Calculate the value of equity share of Rama & Company Ltd. which is listed on stock
exchange, from the following information: 8
Equity share capital (` 20 each) ` 50,00,000
Reserves and Surplus ` 5,00,000
15% Secured loans ` 25,00,000
12.5% Unsecured loans ` 10,00,000
Fixed Assets ` 30,00,000
Investment ` 5,00,000
Operating Profit ` 25,00,000
Corporate Tax Rate 25% (including all)
Price Earnings Ratio 12.5
Support your answer with complete workings.
Answer:
6. (a)
As per ST Ltd’s offer ` in lakhs
(i) Net Consideration payable:
7 times EBIDAT i.e. 7 x `115.71 lakhs 809.97
Less: Debt 240.00
569.97
(ii) No. of shares to be issued by ST Ltd.:
` 569.97 lakh/ ` 220 (rounded off) (Nos.) 259077
(iii) EPS of ST Ltd. after acquisition:
Total EBIDAT after acquisition
Total EBIDAT (` 400.86 lakh + ` 115.71 lakh) 516.57
Less: Interest (` 58 + 30 lakh) 88.00
428.57
Less: 30% Tax 128.57
Total earnings (NPAT) 300.00
Total No. of shares outstanding 14.59077 lakh
(12 lakh + 2.59077 lakh)
EPS (` 300 lakh/14.59077 lakh) ` 20.56
` in lakhs
(iv) Expected Market Price:
Pre-acquisition multiple:
EBIDTA 400.86
10
Less: Interest (580 × ) 58.00
100
342.86
Less: 30% Tax 102.86
240.00
No. of shares (lakhs) 12.00
EPS (240 ÷ 12) ` 20.00
Hence, PE Multiple (220 ÷ 20) 11
Expected market price after acquisition (`20.56 x 11) ` 226.16
As per BE Ltd.’s Plan:
(i) Net consideration payable: ` in lakhs
3 lakhs shares x ` 220 660
(ii) No. of shares to be issued by ST Ltd.
( `6 lakhs ÷ 2) × 1 3 lakh
(iii) EPS of ST Ltd. after acquisition
NPAT (as per earlier calculations) 300.000
Total no. of shares outstanding (12 lakhs + 3 lakhs) 15 lakh
Earnings per share (EPS) `300 lakh/15 lakh ` 20.000
(iv) Expected Market Price (`20 x 11) ` 220.00
(v) Advantage of Acquisition ST Ltd.
Since the two companies are in the same industry, the following advantage could accrue.
Synergy, cost reduction and operating efficiency
Better market share
Avoidance of competition
6. (b)
In the given situation, the value of the share can be ascertained on the basis of earnings of
the firm and price-earnings multiple as follows:
Value= EPS × P/E ratio
The P/E ratio is given and the EPS may be ascertained as follows:
EBIT (Operating profit) ` 25,00,000
Less: Interest on secured loans (15%) ` 3,75,000
Interest on Unsecured Loans(12.5%) ` 1,25,000 5,00,000
EBT 20,00,000
Less: Tax 25% 5,00,000
EAT 15,00,000
Number of equity shares (` 50 lakh/20)= 2,50,000
EPS = 15,00,000/2,50,000
=`6
Value of share = 6 ×12.5
= ` 75
7. (a) Blooming Company Limited wants to takeover Gloomy Company Limited and their
summarized financial statements are given below:
Balance Sheet as on March 31, 2019
Blooming Gloomy
(` in Crores) Company Company
Limited Limited
Assets:
Non-Current asssets — Property, Plant and 905.62 264.37
Equipment and Financial Assets
Current Assets — Inventories, Receivables and Cash 681.88 623.13
and Cash equivalents
Total Assets 1,587.50 887.50
Equity and Liabilities :
Equity Share Capital - ` 10 each 312.50 218.75

Other Equity 593.75 268.75
Non-Current Liabilities 410.63 236.88
Current Liabilities and Provisions 270.62 163.12
Total Equity and Liabilities 1,587.50 887.50
Statement of Profit and Loss for the year ending on March 31,2019
Blooming Gloomy
(` in Crores) Company Company
Limited Limited
Revenue:
Sales 1,708.86 1,107.59
Other Income 15.82 10.76
Total 1,724.68 1,118.35
Less :
Cost of Goods Sold 768.99 509.49
Administrative and other related expenses 256.33 132.91
Selling and Distribution Expenses 119.62 83.04
1,144.94 725.44
Profit Before Interest and Tax 579.74 392.91
Less: Interest 24.00 32.00
Profit Before Tax 555.74 360.91
Less: Tax 185.25 120.30
Profit After tax 370.49 240.61
Blooming Company Gloomy Company

Limited Limited
(i) Proportion of Floating Shares 75% 80%

in Stock Market
(ii) Market Price Per Share ` 45 ` 40
I. Using the above information, what should be the share exchange ratio to be offered
to the shareholders of Gloomy Company Limited by Blooming Company Limited
based on:
(a) Book Value Per Share
(b) Earnings Per Share (EPS)
(c) Market Price Per Share
II. Assuming that there are no synergy gains, then determine the EPS after merger if the
exchange ratio is one which is the most preferred out of the three as in (I) above by
Gloomy Company Limited. 8+4=12
(b) AB Ltd. and VZ Ltd. are contemplating a merger deal in which AB Ltd. will acquire VZ
Ltd. The relevant information about the companies are given as follows:
AB Ltd. VZ Ltd.
Total earning (E) (in ` millions) 70 28
Number of outstanding shares (S) (in million) 20 10
Earnings Per Share (EPS) (`) 3.50 2.80
Price Earning Ratio (P/E) 12 10
Market Price Per Share (MPS) (`) 42 28
Required:
(i) What is the maximum exchange ratio acceptable to the shareholders of

AB Ltd. if the P/E ratio of the combined firm is 12 and there is no Synergy
Gain?
(ii) What is the minimum exchange ratio acceptable to the shareholders of VZ Ltd. if
the P/E ratio of the combined firm is 11 and there is a Synergy benefit of 5 per
cent? 4+4=8
Answer:
7. (a)
Blooming Gloomy
Company Company
Limited Limited
Calculation of Net Worth:
Equity Share Capital - ` 10 each ` 312.50 ` 218.75
Other Equity ` 93.75 ` 268.75
Total Net Worth ` 906.25 ` 487.50
No. of Shares 31.25 21.875
Book Value per Share ` 29.00 ` 22.29
Exchange Ratio is 22.29:29.00 or 0.7685:1; that is, for one share held in Gloomy Company
Limited, shareholders will get 0.7685 shares of Blooming Company Limited.
Blooming Gloomy
Company Company
Limited Limited
Calculation of EPS:
PAT-Profit After Tax ` 370.49 ` 240.61
No. of Shares 31.25 21.875
EPS ` 11.86 ` 11.00
Exchange Ratio is 11.00:11.86; or 11/ 11.86 = 0.9277; that is, for one share held in Gloomy
Company Limited, shareholders will get 0.9277 shares of Blooming Company Limited.
Blooming Gloomy
Company Company
Limited Limited
Market Price Per Share ` 45.00 ` 40.00
Exchange Ratio is 40:45; that is, for one share held in Gloomy Company Limited, shareholders
will get 0.8889 shares of Blooming Company Limited.
7. (a) (ii)
Since the shareholders of Gloomy Company Limited are getting maximum number of shares
for one share held - 0.9277 when the Exchange Ratio is fixed as per the EPS, Shareholders of
Gloomy Company Limited will prefer fixing of the Exchange Ratio as per EPS.
Total PAT after Merger (370.49 + 240.61) ` 611.10
Total No. of Shares of Blooming Company Limited after merger assuming that 51.5434
Exchange Ratio is determined as per EPS (31.25 + 0.9277 × 21.875)
EPS after Merger will be ` 11.86
7. (b)
(i) Maximum exchange ratio acceptable to the shareholders of AB Ltd.:
MPSA = EPSA+V × P/EA+V
70 + 28 × 12
42 =
20 + 10xER
Or, 42(20 + 10 x ER) = 1176
Or, 840 + 420 ER = 1176
420 ER = 1176 – 840 = 336
Hence, ER = 336/420 = 0.80
Maximum Exchange Ratio = 0.80
No. of Shares= 0.80 ×10 = 8 Millions
(ii) Minimum Exchange ratio acceptable to the Shareholders of VZ Ltd.
MPSV = EPSA+V × P/ExER
(70 + 28) × 1.05

28 = × 11 ER
20 + 10ER
Or, 560 + 280 ER = 1131.9 ER
Or, 851.9 ER = 560
560
Hence, ER = = 0.65735
851.9
Minimum Exchange Ratio = 0.65735
No. of Shares = 10 x 0.6574 = 6.5735 Millions
Alternative
(i) Maximum Exchange Ratio accepted to the Shareholders of AB Ltd.:
SA PEAV (EA+ V )
ERA = − +
SV MPSA SV
20 + 12 × 98 1176
= − = −2 +
10 42 × 10 420
= - 2 + 2.80 = 0.80
Maximum exchange ratio = 0.80
No. of shares = 10 x 0.80 = 8 Millions
(ii) Minimum Exchange Ratio acceptable to the Shareholders of VZ Ltd.
MPSV SA
ERV =
(PEAV )(EAV ) − MPSV SV
28 × 20 560
= 11× (98 × 1.05) − 28 × 10 =
1131.9 − 280
560
= = 0.65735
851.9
Minimum exchange ratio is 0.65735
No. of shares = 10 x 0.65735 = 6.5735 millions
8. (a) The following information has been extracted from the Annual Report 2018-19 of Red
Shine Limited:
Balance Sheet of Red Shine Limited as at March 31,2019 (` in Crores)
Particulars 2019
ASSETS
Non-Current Assets:
Property, Plant and Equipment 250.00

Intangible Assets 25.00
Financial Assets-Investment 75.00
Other Non-Current Assets 5.00
Total Non-Current Assets 355.00
Current Assets:
Inventories 60.00
Financial Assets:
Trade Receivables 85.00
Cash and Cash equivalents 35.00
Other Current Assets 10.00
Total Current Assets 190.00
TOTAL ASSETS 545.00
EQUITY AND LIABILITIES

Equity:
Equity Share Capital (Face Value- ` 10 per share) 50.00

Other Equity 325.00
Total Equity 375.00
Non-Current Liabilities:
12% Redeemable Preference Shares 40.00
Financial Liabilities-Borrowings 75.00
Total Non-Current Liabilities 115.00
Current Liabilities
Financial Liabilities:
Trade Payables 25.00

Other Financial Liabilities 15.00
Provisions 9.00
Other Current Liabilities 6.00
Total Current Liabilities 55.00
TOTAL EQUITY AND LIABILITIES 545.00
Statement of Profit and Loss of Red Shine Limited for the Year ended March 31,2019
(` in Crores)
Particulars 2019
Revenue from Operations 1,890.00

Interest and Dividend Income on Non-Current Financial Investments 250.00
Total Income 2,140.00
Cost of Goods Sold 1,475.00

Other Operating Expenses 175.00
Total Operating Expenses 1,650.00
Profit before Interest, Exceptional Items and Tax 490.00

Less: Interest 9.00
Profit before Exceptional Items and Tax 481.00
Less: Exceptional Items 35.00
Profit Before Tax 446.00
Tax @30% 133.80
Profit After Tax 312.20
From the above information, determine the Economic Value Added (EVA) of Red
Shine
Limited for the FY 2018-19 if its Weighted Average Cost of Capital is 15%. 10
(b) The following information is provided related to the acquiring Firm Mark Limited and
the target Firm Mask Limited:
Firm Mark Ltd. Firm Mask Ltd.
Earnings after tax (`) 2,000 lakhs 400 lakhs
Number of shares outstanding 200 lakhs 100 lakhs
P/E ratio (Times) 10 5
You are required to give the answers of the following: 10
(i) What is the Swap ratio based on current market prices?
(ii) What is the EPS of Mark Ltd. after acquisition?
(iii) What is the expected market price per share of Mark Ltd. after acquisition
assuming P/E ratio of Mark Ltd. remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after
acquisition.
Answer:
8. (a)
CALCULATION OF NOPAT:
Profit before Exceptional Items and Tax ` 481.00
+ Interest ` 9.00
- Non-Operating Income (` 250.00)
Operating EBIT ` 240.00
Less: Tax @ 30% ` 72.00
NOPAT ` 168.00
CALCULATION OF OPERATING CAPITAL: ` in crore
Equity Share Capital ` 50.00
Other Equity ` 325.00
12% Redeemable Preference Shares ` 40.00
Financial Liabilities - Borrowings ` 75.00
Total ` 490.00
Less: Non-Operating Assets
Financial Assets - Investment ` 75.00
Operating Capital ` 415.00
RETURN ON OPERATING CAPITAL EMPLOYED 40.48%
EVA (Return on Operating Capital Employed -

WACC) x Operating Capital ` 105.74
Note: EVA (40.48 – 15)% × 415 = ` 105.74 crore
8. (b)
Mark Ltd. Mask Ltd.
EPS
` 2,000 lakhs/200 lakhs ` 400 lakhs/100 lakhs
` 10 `4
Market price ` 10 x 10 = ` 100 ` 4 x 5 = ` 20
(i) The swap ratio based on current market price is :

` 20/` 100 = 0.2 or 1 share of Mark Ltd for 5 shares of Mask Ltd.
Number of shares to be issued = ` 100 lakh × 0.2 = ` 20 lakhs
(ii) EPS after merger:

` (2000 lakhs + ` 400 lakhs) /(200 lakhs + 20 lakhs)
= ` 10.91
(iii) Expected market price after merger assuming P/E 10 times:

` 10.91 × 10 = ` 109.10
(iv) Market value of merged firm:
= ` 109.10 × 220 lakhs shares
= ` 240.02 crores
(v) Gain/loss from merger:
Difference between post merger market value and pre merger market value:
` 240.02 minus ` 220.00 = ` 20.02 (figures are in crores) Gain from merger.
Appropriation of gains from the merger among shareholders: (in crores)
Mark Ltd. Mask Ltd.
Post merger value 218.20 21.82
Less: Pre merger market value 200.00 20.00
Gain to shareholders ` 18.20 ` 1.82
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
DECEMBER – 2021
Paper - 20 : STRATEGIC PERFORMANCE MANAGEMENT AND BUSINESS VALUATION
Section A MCQ 20X1= 20 Marks
Q.1 Which one of the following is not a perspective of Balanced

Score Card?
Ans 1. Customer
2. Management and Employees

3. Financial
4. Learning and Growth
Q.2 Which one of the following elements/parameters is not prescribed by the

NCAER Study on Corporate Distress Prediction for predicting the stages
of corporate sickness?
Ans 1. Long-Term Debt to Equity Ratio
2. Net working capital position
3. Net worth position
4. Cash profit position
Q.3 The Current Assets and Current liabilities of RT LTD. are Rs.17000 and
12000 respectively. How much can the Company borrow on a short-
term basis without reducing the Current Ratio below 1.25?
Ans
1. Rs. 7000
2. Rs. 8000
3. Rs. 10000
4. Rs. 7500
Q.4 A firm earns Economic profit when total profit

exceeds
Ans 1. Variable Costs
2. Normal Profit
3. Explicit Costs
4. Implicit Costs
Q.5 As per Altman‘s Model (1968) if the value of Z-Score of a firm falls between 1.81 and
2.99 then the firm will be
Ans
1. None of these
2. Non-failed firm
3. Failed firm
4. Mixture of failed and non-failed elements
Q.6 SNT LTD. has announced issue of warrants on 1:1 basis for its equity
shareholders. The warrants are convertible at an exercise price of Rs. 18
per share. Warrants are detachable and trading at Rs.10. What is the
minimum price of the warrant if the current price of the stock is Rs. 25?
Ans 1. Rs.15
2. Rs.7
3. Rs.4
4. Rs.5
Q.7 Which is not a, human capital related intangible

asset?
Ans 1. Design Patent

2. Union Contracts
3. Trained workforce
4. Employment Agreements
Q.8 A firm has Rs.200 crores as capital employed and is earning 10% Return
on Capital Employed. If its weighted average cost of capital is 12%, then
its Economic Value Added (EVA) will be:
Ans 1. Rs. 4 Crores
2. (Rs. 3 Crores)
3. (Rs. 4 Crores)
4. Rs. 3 Crores
Q.9 Which of the following is not a technique of Financial Statement

Analysis?
Ans 1. Trend analysis
2. Ratio analysis
3. Common-size financial analysis
4. Time series analysis
Q.10 The basic goal of a business firm is to .

Ans 1. Maximize Profit
2. Maximize Revenues.
3. Maximize output
4. Maximize welfare of its Employees.
Q.11 Income statement is a summary of a firm‘s revenue and over a
specified period.
Ans 1. expenses
2. net profit
3. current asset
4. fixed assets
Q.12 is a statistical measure of fluctuations in a variable

arranged in the form of a series and using a base for making comparison.
Ans 1. index number
2. standard deviation
3. none of these
4. time series
Q.13 In Business Organizations, benchmarking means

Ans 1. The search for industries best practices that lead to superior performance.
2. The analytical tool to identify high-cost activites based on the ‗Pareto Analysis‘
3. The simulation of cost reduction schemes that help to build
commitment and improvement of actions.
4. The process of marketing and redesigning the way a typical company works.
Q.14 is the present value of expected future cash flows post merger
that will result from the combined operations and additional benefits
expected to accrue.
Ans 1. Purchase Price
2. Value Gap
3. Synergy Value
4. Discount Cash Flow Value
Q.15 Which one out of the following is not a financial liability as per IND AS and
new format of Balance Sheet?
Ans 1. Loans from banks
2. Equity Shares
3. Debentures/Bonds Issued
4. Financial Lease
Q.16 Balance sheet items are expressed as a percentage of assets in

common size ratio.
Ans 1. nominal
2. total
3. fixed
4. current
Q.17 Financial Risks in Risk Management practices do not included .
Ans 1. Inflation Rate Risk
2. Exchange Risk
3. Trade Cycles
4. Interest Rate Risk
Q.18 Financial analysis can be undertaken by

2. management of the firm
3. All of these
4. creditors
Q.19 MRP-II refers to

Ans 1. Manufacturing Resources Planning
2. Material Requisition Programme – II
3. Maximum Retail Price
4. Material Requirement Planning
Q.20 A supply chain is made up of a series of processes that involve an input, a

and an output.
Ans 1. Shipment
2. Supplier
3. Transformation
4. Customer
20X1= 20 Marks
Section: B SAQ
Q.1 is a Comprehensive and integrated approach to addressing

Corporate Risk. Fill in the blank by using the appropriate word/s or
phrase/s.
Answer : Enterprise Risk Management (ERM)
Q.2 Price Policy is the system of charging high prices for new
products to ―Skim the Cream‖ from the market.
Answer : Skimming
Q.3 When a business is able to earn profits at a rate higher than that at which
a similar business earns, the former business is said to possess .
Answer : Goodwill
Q.4 If the risk free rate at present in the economy is 7.00%, the risk premium
on equity of XYZ Ltd. is 8.025% above the risk free rate and the expected
return on the market portfolio is 14.50%, then the Beta of the company will
be .
(Write answer upto Two decimal places)
Answer : 1.07
Q.5 As per Altman (1968), if the Calculated Value of Z-score is greater than ,
it is predicted that the firm belongs to non-bankrupt class.
Fill in the blank by using figure/s or word/s as stated above.
Answer : 2.99
Q.6 Vertical analysis is useful in comparing the performance of several

companies in the group.
Answer : Same
Q.7 P Charts measures of defective in Statistical Process Control

(SPC) Methods.
Answer : Proportion
Q.8 Under perfect competition, profit is maximized when two conditions are
satisfied: One, MR=MC and second, MC curve cuts MR from .
Answer : Below
Q.9 is a tool of Financial Statement Analysis which shows what
are those financial parameters which are driving the profitability of a
company.
Answer : DuPont Analysis
Q.10
Answer : 80
Q.11 Uncertainty is not a part of project risk. Is this statement true or false
Answer : True
Q.12 involves splitting up a large company such as a

conglomerate comprising of different divisions, into separate
companies.
Answer : Demerger
Q.13 The Z-Score model is a quantitative model developed by to

predict bankruptcy or financial distress of a business.
Answer : Edward Altman
Q.14 A company has an issued and paid up capital of 5,00,000 shares of Rs.10
each. The company declared a dividend of Rs.150 lakh during the last five
years and expects to maintain the same level of dividends in the future. If
the average cost of equity for the listed companies in the same line of
business is 15% then value per share of the company will be Rs.
Answer : Rs. 200
Q.15 Performance management creates a direct link between employee

performance and organizational goals. Is this statement true or false?
Answer : True
Q.16 Normal profit is part of implicit cost. Is this statement true or false
Answer : False
Q.17 What will be the Market to Book Value Ratio, if ANZ Ltd. has a P/E ratio
of 25 and a Return on Equity (ROE) of 14% ?
Answer : 3.5 times
Q.18 is a measure of value which tells whether a company is

able to generate returns that exceed its cost of capital employed.
Answer : Economic Value Added
Q.19 Efficiency consists of two main component efficiency and

efficiency
Answer : Technical, Allocative
Q.20 Fair Market Value is a premise of valuation. Is this statement true or false?
Answer : True
Section C
(12X4 = 48 Marks)
One LAQ
Q.1 ―Commercial banks in India are required to invest in the Government of (3 Marks)
India bonds a requirement of the Statutory Liquidity Ratio. Do you believe
that the Government of India bonds do not have any kind of risk for the
banking sector in India?‖ Support your answer with suitable reasoning.
Answer :
Answer: Commercial Banks are supposed to follow SLR of 17% as fixed by the RBI. Most of the
securities for SLR are government securities. GOI securities may not have any default risk but they
do carry interest rate risk and hence, we cannot say that they are risk free.
Further fluctuations of interest rates have an impact on the valuation of these bonds/securities. In
case of rise in interest rates bond valuation may fall, and again rise closer to maturity. These
fluctuations introduce an element of risk and thus pose a risk to the banking sector as well as
holders/investors.
Q. 2 The following financial data related to XYZ Limited for FY 2019-20 and 3+2+2+2 = 9 Marks
FY 2020-21 has been extracted from the Annual Report 2020-21.
Using the information and suitable Du-Pont Analysis you are required to
answer the following:
(i) Calculate the return an equity and changes in it over both year.
(ii) Margin for both years
(iii) Asset utilization for the two years
(iv) Asset leverage for the two years and changes in it

Answer :
(i) RETURN ON EQUITY : 2019-20 : 17.410%

2020-21 : 18.253%
(ii) Margin/Net Profit Ratio : 2019-20 : 18.47%

2020-21 : 20.05%
(iii) Assets Turnover Ratio : 2019-20 : 0.645
2020-21 : 0.602
(iv) Assets to Equity Ratio : 2019-20 : 1.461

2020-21 : 1.511
Two LAQ
Q.1 X Limited wants to takeover Y Limited and their Summarized (7 Marks)

Balance Sheets are given below:
Using the above information, what should be the share exchange ratio to
be offered to the shareholders of Y Limited by X Limited based on:
(i) Net Worth [3]
(ii) Earning Per Share (EPS) [2]
(iii) Market Price [2]
Answer :
(i) Exchange Ratio is 15.00:22.50 or 0.6667:1; that is 5 crores shares (0.6667 x 7.50) of X Limited will
be issued to the shareholders of Y Limited.
(ii) Exchange Ratio is 2.67:4.00; or 2.67/4.00 = 0.6667
It means is (0.6667*7.50=5) crores shares of X Limited will be issued to the shareholders of Y Limited
(iii) Exchange Ratio is 32:25; or 25/32 = 1.28.

It means is (1.28*7.50=9.60) crores shares of X Limited will be issued to the shareholders of Y Limited.
Q.2 X Limited wants to takeover Y Limited and their Summarized Balance (2 Marks)
Sheets are given below:
Assuming that there are no synergy gains, then determine the EPS after
merger if the exchange ratio is based on Net Worth.
Answer : EPS after Merger : Rs. 4.00
Q.3 If a company has a P/E Ratio of 12 and a ROE of 17.5%, then you are
(3 Marks)
required to determine its Market to Book Value ratio.
Answer : Market to Book Value Ratio = P/E Ratio x ROE = 12 x 17.5% = 2.10
Three LAQ
Q.1 PR Ltd. implemented a quality improvement programme and had the (2 Marks)
following results:
(All Rs. In 000‘s)
Determine the cost of prevention and its percentage to sales

Answer :
Classification of quality costs (Rs.‘000)

% of % of
Sales sales
Sales 3000 3000
37.50 1.25 75 2.5

(i) Prevention Costs Quality training
following results:
Determine the cost of appraisal of quality and its percentage to sales

Answer :
% of % of
Sales sales
Sales 3000 3000
Appraisal costs
140 4.67 150 5.00
(product & material Inspections)
following results:
Determine the cost of internal failure and its percentage to sales

Answer :
% of % of
Sales sales
Sales 3000 3000
Internal failure costs (Scrap and rework) 550 18.33 350 11.67
following results:
Determine the cost of external failure and its percentage to sales and
the total quality costs
Answer :
% of % of
Sales sales
Sales 3000 3000
External failure costs

150 5 75 2.5
(Product warranty)
following results:
Compute the amount of increase in profit, if any, due to quality improvement.

Answer :
Cost reduction was effected by 7.58 % (29.25-21.67) of sales which is an increase in profit by Rs. 227.50
(877.50-650)
Q.6 What are the exceptions of Law of Demand? (2 Marks)

Answer :
The exceptions of Law of demand—

i. Giffen Paradox
ii. Prestigious goods
iii. Speculative business
iv. Trade cycles
v. Ignorance of the consumers
Four LAQ
Q.1 M/s ABC, an Acquiring Company is considering the acquisition of Target (3 Marks)
Companyin a stock-for-stock transaction in which target Company
would receive Rs.90 for each share of its common stock.
M/s ABC, the Acquiring company does not expect any change in its
price/earnings ratio multiple after the merger and chooses to value the
target company conservatively by assuming no earnings growth due to
synergy.
(i) The purchase price premium [1]
(ii) The exchange ratio [2]

Answer :
(i) Purchase price premium = Offer price for Target company stock / Target company Market price per
share = 90 / 60 = 1.5
(ii) Exchange ratio = Price per share offered for Target Company / Market Price per share for the
acquiring company = 90 / 50 = 1.8
Acquiring company issues 1.8 shares of stock for each of Target Company‘s stock.
synergy.

(i) The number of new shares issued by the acquiring company [1]
(ii) Post-merger EPS of the combined firms. [2]

Answer :
(i) New shares issued by acquiring company = shares of Target Company x Exchange ratio = 20,000 × 1.8 =
36,000.
(ii) Post-merger EPS of the combined companies = Combined earning / total number of shares.
Combined earnings = (2,50,000 + 72,500) =`. 3,22,500
Total shares outstanding of the new entity
= 1,10,000 + 36,000 = 1,46,000
= Rs.3,22,500 ÷ 1,46,000 = Rs.2.209
synergy.

(i) Pre-merger EPS of the Acquiring company [1]
(ii) Pre-merger P/E ratio [1]

Answer :
(i) Pre-merger EPS of the acquiring company
= Earnings / Number of shares
= 2,50,000 / 1,10,000 = Rs.2.273
(ii) Pre-merger P/E = Pre-merger market price per share / Pre-merger earnings per share
= 50/2.273 = 22.00
synergy.
Calculate the following and Comment on the results:

(i) Post-merger share price. [2]
(ii) Post-merger equity ownership distribution.[2]

Answer :
(i) Post-merger share price = Post-merger EPS x Pre-merger P/E = 2.209 × 22.00 = Rs.48.60
(as compared to Rs.50 Pre-merger)
(ii)Post-merger Equity Ownership Distribution Target Company = Number of new shares / Total number
of shares
= 36,000/ 1,46,000 = 0.2466 or 24.66%
Acquiring company = 100 – 24.66 = 75.34%
Comments: The acquisition results in a Rs.1.40 reduction in the market price of the acquiring company
due to a 0.064 ( 2.273-2.209) decline in the EPS of the combined companies.
Whether the acquisition is a poor decision depends upon what would happen to the earnings in the
absence of the acquisition, as the acquisition may infactcontribute to the market value of the acquiring
company, but the fall may be due to other factors.
Five LAQ
Q.1 State the Significance of Financial Performance Analysis. (4 Marks)

Answer :
Significance of financial performance analysis

Interest of various related groups is affected by the financial performance of a firm. Therefore, these
groups analyse the financial performance of the firm. The type of analysis varies according to the specific
interest of the party involved.
Trade creditors: Interested in the liquidity of the firm (appraisal of firm‘s liquidity)
Bond holders: Interested in the cash-flow ability of the firm (appraisal of firm‘s capital structure, the major
sources and uses of funds, profitability over time, and projection of future profitability).
Investors: Interested in present and expected future earnings as well as stability of these earnings
(appraisal of firm‘s profitability and financial condition).
Management: Interested in internal control, better financial condition and better performance (appraisal of
firm‘s present financial condition, evaluation of opportunities in relation to this current, return on
investment provided by various assets of the company, etc.).
Q.2 The following financial data related to the Balance Sheet of 6+2 = 8 Marks
ADANI LTD. for FY 2020 – 21 has been extracted from the
Annual Report 2020 – 21.
• Market Price of ADANI LTD. share having a face value of Rs 10 as on

the Balance Sheet date was Rs 870.
• Operating Profit of the Company for the year was Rs 8656 lakh.
• Operating Profit Margin of the Company is 16.25%.
(i) Using the above information and Altman‘s Multiple Discriminate

Function, you are required to calculate Z-score of ADANI LTD. as per the
Z-Score Model of Altman (1968).
(ii) Comment on the financial position of ADANI LTD.
Answer :
(i) Z = 3.7985
(ii) Comments: Using the Revised Z-Score Model (as given above), we get the value of Z 3.7985. Since Z is
more than 2.99, the firm is non-failed or non distressed firm.
Six LAQ
(4X3 =12 Marks)
Q.1 Write Short Notes on Risk Mapping (3 Marks)

Answer :
Risk Mapping:
Risk mapping is the process of identifying, quantifying and prioritizing the risks that may interfere with
theachievement of your organizational objectives.
Its aim is to arrive at a clear set of action plans that improve risk management controls, in areas where
these arenecessary and help the management of the organization's direct resources.
Risk mapping should start from processmapping and from identifying critical risks in each process
phase, linked either to key people, to systems, tointerdependencieswith external players, or to any other
resource involved in the process. Subsequently, potentialeffects of errors, failures or improper behavior
should be analyzed. This may also lead to identifying priorities interms of control actions.
Q.2 Write Short Notes on OLAP Server (3 Marks)

Answer :
OLAP (Online Analytical Processing) Server:
OLAP Server is a high capacity, multi-user data manipulation engine specifically designed to support and
operate on multi-dimensional data structures. The design of the server and the structure of the data are
optimized for rapid adhoc information retrieval in any orientation, as well as for fast, flexible calculation
and transformation of raw data based on formulaic relationships. The OLAP Server may either physically
stage the processed multi-dimensional information to deliver consistent and rapid response times to end
users or it may populate its data structures in real time from relational or other databases, or offer a
choice of both
Q.3 Write Short Notes on Difference between fair value and market value (3 Marks)
Answer :
Difference between fair value and fair market value (FMV):
There is no authoritative clarification either under US-GAAP or IFRS about the difference between fair
value and FMV except that these terms are consistent in accounting. This seems to be the reality.
However, a few differences may be traced out as stated below:
• Fair value has a hierarchy of inputs for valuation but FMV does not have it.
• Fair value considers highest and best use of an asset from the perspective of market participants. This
may result in maximising the value as against consensus value under FMV.
• DOLM adjustments may require in certain cases under fair value but adjustment for DOLC is doubtful.
• Fair value disregard blockage discount (a decline in the value resulting from the size of position).
Q.4 Write Short Notes on Market value added (MVA) (3 Marks)
Answer :
Market Value Added (MVA):
Market Value Added (MVA) is the value added to the business by management since the business was
established, over and above the money invested by the owners. Thus, MVA = Market capitalization –
investedequity capital. According to another version, MVA is the difference between a company‘s market
value,(debt plus equity) at any point of time minus the total capital invested in the company, since
inception. Forall practical purposes, MVA may be considered as the accumulated EVA As generated by the
business over time. If a company goes on by creating EVA year after year, then these will add up to give a
high MVA.
Q.5 Write Short Notes on Customer Relationship Management

(3 Marks)
Answer :
Customer Relationship Management:
Customer Relationship Management (CRM) is a business strategy comprised to process, organizational
and technical change whereby a Company seeks to better manage its enterprise around its customer
behaviour. It entails acquiring and deploying knowledge about customers and using this information
across the various customers touch points to increase revenue and achieve cost reduction through
operational efficiencies.
The adoption of CRM is being fuelled by recognition that long-term relationships with customers are one
of the most important assets of an organization. CRM entails all aspects of interaction that a company has
with its customer, whether it is sales or service related.
Q. 1 M/s Shah Ltd had earned a PAT of Rs.48 Lakhs for the year just ended. It (5 Marks)
wants you to ascertain the value of its business, based on the following
information.
(i) Tax Rate for the year just ended was 36%. Future Tax rate is estimated at 34%
(ii) The Company‘s Equity Shares are quoted at Rs.120 at the Balance
Sheet date. The Company had an Equity Capital of Rs.100 Lakhs, divided,
into Shares of Rs.50 each.
(iii) Profits for the year have been calculated after considering the
following in the P & L Account:
• Subsidy Rs.2 Lakhs received from Government towards fulfillment

of certain social obligations.
• The Government has withdrawn this subsidy and hence, this amount
will not be received in future.
• Interest Rs.8 Lakhs on Term Loan. The final installment of this Term Loan
was fullysettled in the last year.
• Managerial Remuneration Rs.15 Lakhs. The Shareholders have
approved an increase of Rs.6 Lakhs in the overall Managerial
Remuneration, from the next year onwards.
• Loss on sale of Fixed Assets and Investments amounting to Rs.8 Lakhs.
Compute the ‗Future Maintainable Profits‘ of M/s Shah Limited.
Answer :
Future Maintainable Profits Rs. 54,78,000 Lakhs.
Q. 2 M/s Shah Ltd had earned a PAT of Rs.48 Lakhs for the year just ended. It
(5 Marks)
information.

Compute the ‗Capitalization rate‘ of Shah Limited.
Answer :
Capitalization Rate 20%

Q. 3 M/s Shah Ltd had earned a PAT of Rs.48 Lakhs for the year just ended. It
(2 Marks)
information.

Compute ‗Value of Business‘ of Shah Limited.

Answer :
Value of Business = Future Maintainable Profits ÷

Rs. 273.90 Lakhs
Capitalization Rate = Rs.
`. 54.78 Lakhs ÷ 20%
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

DECEMBER - 2017
Paper-20 : STRATEGIC PERFORMANCE MANAGEMENT
AND BUSINESS VALUEATION
Section – A : Strategic Performance Management

(50 Marks)
(i) _______is the uncertainty of the purchasing power of the monies to be received, in
the future?
(A) Market risk
(B) Physical risk
(C) Purchasing power risk
(D) Interest rate risk
(ii) Unsystematic risk relates to
(A) Market risk
(B) Inherent risk
(C) Beta;
(D) Interest rate risk
(iii) In which discipline supply chain concept was originated?
(A) Production
(B) Operation
(C) Marketing
(D) Logistics
(iv) Under perfect competition and at the point of equilibrium of firm
(A) MC curve must be falling
(B) MC curve must be rising
(C) MR curve must be falling
(v) Financial risk arises out of ___________
(A) Increased competition
(B) Conduct of business and investment
(C) The nature of financial transaction
(D) Both (B) and (C)
Answer 1.
(i) (C) Purchasing power risk
(ii) (B) Inherent risk
(iii) (C) Marketing
(iv) (B) MC curve must be rising
(v) (D) both (B) and (C)
2. (a) (i) What is Benchmarking?
(ii) Briefly describe any two types of benchmarking.
(iii) Identify difficulties in implementation of benchmarking. 3+4+3=10
(b) (i) What are the characteristics of Enterprise Resource Planning (ERP)?
(ii) What are the reasons for the failure of ERP? 4+6= 10
Answer 2. (a)
(i) Benchmarking: While planning is a feed forward process, control is a feedback process.
Control involves comparison of the actual results with an established standard or target.
The practice of setting targets using external information is known as benchmarking. In
other words, Benchmarking is the establishment through data gathering of targets and
comparatives, with which performance is sought to be assessed.
Alter examining the firm’s present position, benchmarking may provide a basis for
establishing better standards of performance, It focuses on improvement in key areas
and sets targets which are challenging but evidently achievable. Benchmarking implies
that there is one best way of doing business and orients the firm accordingly. It is a
catching - up exercise and depends on the accurate information about the
comparative company - be it inside the group or an outside firm.
Benchmarking is the continuous process of enlisting the best practices in the world for
the process, goals and objectives leading to world class levels of achievement.
(ii) Two types of benchmarking:
(A) Product benchmarking: It is also known as reverse engineering. It is an age old

practice of Product oriented reverse engineering. Every organization buys its rival’s
product and tears down to find out how the features and performances etc.
compare with its own products. This could be the starting point for improvement.
(B) Process benchmarking: It is the activity of measuring discrete performance and

functionality against organization through performance in excellent analogous
business process e.g. for supply chain management, e.g. Mumbai dubba wallas.
[Note: reference may be of other type of benchmarking also e.g. competitive,
internal strategic or global benchmarking.]
(iii) Difficulties in implementation of benchmarking
(1) Time consuming: Benchmarking is time consuming and at times difficult. It has
significant requirement of staff time and company resources. Company may waste
time in benchmarking non-critical functions.
(2) Lack of management support: Benchmarking implementation requires the direct

involvement of all managers. The drive to be best in the industry or world cannot be
delegated.
(3) Resistance from employees: It is likely that there may be resistance from employees
(4) Copy-Paste attitude: The key element in benchmarking is the adaptation of a best
practice to a company’s needs and culture. Without that step, a company merely
adopts another company’s process. This approach condemns benchmarking to
fail leading to a failure of benchmarking goals.
2. (b)
(i) The characteristics of Enterprise Resource Planning (ERP) are :
ERP refers top techniques and concepts for integrated management of business as a
whole from the view point of the effective use of management resources to improve
the efficiency of enterprise management. ERP provides integrated business software
modules to support functional units of an enterprise. An ideal ERP system should have
following characteristics;
1. Flexibility: An ERP system must be flexible enough to respond fast to the changing
needs of the organization. The client server technology enables ERP to run across
various databases at the back end using open database connectivity.
2. Modular and open: ERP system has the open architecture i.e. any modules can be
interfaced or dethatched without affecting the rest of the modules. It should
support multiple hardware platforms as well as third party add-on solutions.
3. Beyond the company: It is confined to the organizational boundaries rather it is

extended to the external business entities connected to the organization with
online connectivity.
4. Best business practice - It has inbuilt best business practices applicable worldwide
and imposes its own strategies and logics over existing culture and processes ol
organization.
(ii) Reasons for failure of ERP:
An organization cannot reap desired benefits from the ERP system under the following
circumstances:
• Lack of effective project management
• Inability to resolve issues and make decisions in timely manner
• Resources not available when needed
• Perceived or real lack of executive support
• Software fails to meet business needs
• Under estimated levels of change management
• Improper communication
• Insufficient end user training
• Failure in gap analysis
• Failure to identify future business needs
• Technological obsolescence
• Failure to make available user-friendly checklist/guidelines.
3. (a) A manufacturer can sell “X” items (X ≥ 0) at a price of (330 – X) each; the cost of
producing „X‟ items is ` (X2 + 10X + 12). How many items should he sell to make the
maximum profit? Also determine the maximum profit. 8
(b) Using Altman‟s Model (1968) of Corporate Distress Prediction, calculate the Z-score
of S & Co. Ltd., whose five accounting ratios are given as below and comment on
its financial position.
The five variables are:
(i) Working Capital to Total Assets = 25%
(ii) Retained Earnings to Total Assets = 30%
(iii) EBIT to Total Assets = 15%
(iv) Market Value of Equity Shares to Book Value of Total Debt =150%
(v) Sales to Total Assets = 2 times. 12
Answer 3.
3. (a)
Given price (p) = 330-x
Cost(c) = x2 +10x + 12
Output = x ≥ 0
Revenue (R) = p x = (330 - x) x = 330 x - x2
Profit = R - C
= (330x - x2) - (x2 +10x +12) = 320X – 2X2 -12 (say y)
In order to achieve maximum profit
dy d2y
= 0 and = positive
dx dx 2
dy
= 320 – 4x = 0
dx
or, x = 80
d2y
= – 4, which is negative. Therefore profit is maximum at x = 80 units.
dx 2
Maximum profit = 320 (80) – 2(80)2 – 12

=25600 – 12800 – 12
=12788
3. (b)
As per Altman’s Model (1968) of Corporate Distress Prediction:
Z = 1.2 x1 + 1.4x2 + 3.3 x3 + 0.6x4 + 1.0 x5
Given 5 variables are:
x1 = Working Capital to Total Assets = 25%
x2 = Retained earnings to total Assets = 30%
x3 = EBIT to Total Assets = 15%
x4 = Market Value of Equity Shares to Book Value of Total Debts = 150%
x5 = Sales to Total Assets = 2 times
Hence, Z -score = (1.2 × 25%) + (1.4 × 30%) + (3.3 ×15%) + (0.6 ×150%) + (1×2)
= 0.30 + 0.42 + 0.495 + 0.90 + 2.00 = 4.115.
Comments on the Financial position: As the calculated value of Z-score is much higher than
2.99, it can be strongly predicted that the company is a non-bankrupt company.
4. (a) Briefly explain the term “Enterprise Risk Management” (ERM). What are the basic
needs for implementation of ERM? 4+6= 10
(b) What is Risk Mapping? Briefly explain. State the benefits of Risk Mapping. 5+5= 10
Answer 4. (a)
Enterprise Risk Management (ERM): ERM is defined as “a process, effected by an entity’s

Board of Directors, Management and other personnel, applied in strategy setting and across
the enterprise, designed to identify potential events that may affect the entity and manage
risk to be within its risk appetite, to provide reasonable assurance regarding the
achievement of entity objectives.”
From the above definition ERM is:
• A process, ongoing and following through an entity
• Effected by people at every level of an organization
• Applied in strategy-setting
• Applied across the enterprise, at every level and unit
• Designed to identity potential events affecting the entity and manage risk within its risk
appetite.
• Able to provide reasonable assurance to an entity’s management and board.
ERM is about designing and implementing capabilities for managing the risks that matter.
ERM deals with risk and opportunities affecting value creation or preservation. ERM is a
comprehensive and integrated approach to addressing corporate risk. ERM enables
management to effectively deal with uncertainty and associated risk and opportunity,
enhancing the capacity to build value.
Basic needs for implementation of ERM:
(i) Reduce unacceptable performance variability.
(ii) Align and integrate varying views of risk management
(iii) Build confidence of investment community and stakeholders
(iv) Enhance corporate governance
(v) Successfully respond to a changing business environment
(vi) Align strategy and corporate culture
4. (b)
Risk Mapping:
Risk Mapping is the first step in operational risk measurement, since it requires identifying all
potential risks to which the bank is exposed and then pointing out those on which attention
and monitoring should be focused given their current or potential future relevance for the
bank. While the risk mapping process is sometimes identified with the usual classification of
operational risks in a simple frequency/severity matrix, what is really needed to map bank’s
internal processes in order to understand what could go wrong, where and why, to set the
basis for assessing potential frequency and severity of potential operational events and to
define a set of indicators that can anticipate problems based on the evolution of the
external and internal environments.
Risk mapping is the process of identifying, quantifying and prioritizing the risks that may
interfere with the achievement of your organizational objectives.
The aim of Risk mapping is to arrive at a clear set of action plans that improve risk
management controls, in areas where these are necessary and help the management of
the organization’s direct resources.
Benefits of Risk Mapping: The following are some of the benefits of Risk Mapping:
• Promotes awareness of significant risks through priority ranking, facilitating the efficient
planning of resources
• Enables the delivery of solutions and services across the entire risk management value
chain.
• Serves as a powerful aid to strategic business planning
• Aids the development of an action plan for the effective management of significant risks
• Assigns clear responsibilities to individuals for the management of particular risk areas
• Provides an opportunity to leverage risk management as a competitive advantage
• Facilitates the development of a strategic approach to insurance programme design
• Supports the design of the client’s financing and insurance programmes, through the
development of effective/optimal retention levels and scope of coverage etc.,
Section - B
Business Valuation
(50 marks)
justification/workings 1 mark will be for the correct choice and 1 mark will be for the
justification/workings. 2x5=10
(i) If a company has a P/E ratio of 20 and a ROE (Return on Equity) of 15%, then the
Market to Book Value Ratio is
(A) 3 times
(B) 3%
(C) cannot be calculated from the given information
(ii) Assume that in a stock market the CAPM is working. A company has presently beta
of 0.84 and its going to finance its new project through debt. This would increase its
debt/equity ratio to 1.56 from the existing 1.26. Due to increased debt/equity ratio,
the company‟s beta would
(A) increase
(B) decrease
(C) remain unchanged
(D) nothing can be concluded
(iii) Identify which of the following is not a financial liability?
(A) X Ltd. has 1 lakh ` 10 ordinary shares issued.
(B) X Ltd. has 1 lakh 8% ` 10 redeemable preference shares issued.
(C) X Ltd. has ` 2,00,000 of 6% bond issued.
(D) Both (A) and (B)
(iv) X Ltd.‟s share beta factor is 1.40. The risk free rate of interest on government
securities is 9%. The expected rate of return on the company equity shares is 16%.
The cost of equity capital based on CAPM is
(A) 15.8%
(B) 16%
(C) 18.8%
(D) 9%
(v) A firm current assets and current liabilities are ` 1,600 and ` 1,000 respectively. How
much can it borrow on a short-term basis without reducing the current ratio below
1.25?
(A) ` 1,000
(B) ` 1,200
(C) ` 1,400
(D) ` 1,600
Answer 5.
(i) (A) 3 times, (Since P/E x ROE = 20 x 0.15)
(ii) (C) Remain unchanged (Because as per CAPM the company specific risk has no
impact on the systematic risk)
(iii) (A) X Ltd. has 1 lakh ` 10 ordinary shares issued
(A share is an indivisible unit of capital, expressing the proprietary relationship

between the company and the shareholder)
(iv) (c) 18.8% [ 9%+1.40(16%-9%)]= 9%+9.8%=18.8%
(v) (b) Amount of borrowing be x [current asset will increase because borrowing will
increase the cash amount]
1600+X divided by 1000+X= current ratio 1.25
X =1400
6. (a) Alpha India Ltd., is trying to buy Beta India Ltd., Beta India Ltd., is a small bio-
technology firm that develops products that are licensed to major pharmaceutical
firms. The development costs are expected to generate negative cash flows of ` 10
lakhs during the first year of the forecast period. Licensing fee is expected to
generate positive cash flows of ` 5 lakhs, ` 10 lakhs, ` 15 lakhs and ` 20 lakhs during
2-5 years respectively. Due to the emergence of competitive products, cash flows
are expected to grow annually at a modest 5% after the fifth year. The discount rate
for the first five years is estimated to be 15% and then drop to 8% beyond the fifth
year. Calculate the value of the firm.
Given: The discount rate @ 15% will be:
Year 1 2 3 4 5
Discount Rate 0.869 0.756 0.6575 0.572 0.497
10
(b) Z Ltd., has an issued and paid-up capital of 50,000 shares of ` 100 each. The
company declared a dividend of ` 12.50 lakhs during the last five years and
expects to maintain the same level of dividends in the future. The control and
ownership of the company is lying in the few hands of Directors and their family
members. The average dividend yield for the listed companies in the same line of
business is 18%.
Calculate the value of 3000 shares in the company. 10
Answer 6. (a)
Year Cash flows (` In lakhs) Discount rate @15% Present Value (` in lakhs)
1 (10) 0.869 (8.69)
2 5 0.756 3.78
3 10 0.6575 6.575
4 15 0.572 8.58
5 20 0.497 9.94
Total sum of present value = 20.185
Terminal Value t = Cash Flowt+1 / r-gstable
Cash flow t+1 = Cash flow (1+g) = 20 (1+0.05) = 21 Lakhs
Terminal Value = 21/(0.08-0.05) = `700 Lakhs.
Present value of terminal value = 700 x 0.497 = ` 347.9
Value of the firm = Total sum of present value + Present value of terminal value
= `20.185 + ` 347.9 = ` 368.085.
6. (b)
Dividend per share = `12,50,000/50,000 = `25
Dividend yield = 18%
Value per share = 25/0.18 = `138.89
Value of 3,000 shares = 3,000 shares x `138.89 = `4,16,670
7. (a) A Ltd., is considering the acquisition of B Ltd., with stock. Relevant financial
information is given below:

Present earnings (`) 7.5 Lakhs 2.5 Lakhs
Equity (no. of shares) 4.0 lakhs 2.0 Lakhs
EPS (`) 1.875 1.25
P/E ratio 10 5
Answer the following questions:
(i) What is the market price of each company?
(ii) What is the market Capitalization of each company?
(iii) If the P/E of A Ltd., changes to 7.5. What is the market price of A Ltd.?
(iv) Does market value of A Ltd., change?
(v) What would be the exchange ratio based on Market Price? (Take the revised
price of A Ltd.) 2x5=10
(b) The shareholders of A Co. Ltd., have voted in favour of a buyout offer from B Co. Ltd.
Information about each firm is given here below. Moreover, A Co. Ltd.‟s
shareholders will receive one share of B Co. Ltd. Stock for every three shares they
hold in A Co. Ltd.
Particulars B Co. Ltd. A Co. Ltd.

Present earnings (in `) 6.75 3.00
EPS (in `). 3.97 5.00
Number of share (Lakhs) 1.70 0.60
P/E ratio 20 5
(i) What will the EPS of B Co. Ltd., will be after the merger? What will the PE ratio if
the NPV of the acquisition is zero?
(ii) What must B Co. Ltd. feel would be the value of the synergy between these
firms? 10
Answer 7. (a)
(i) P/E = Market Price/EPS.
Therefore we have, Market Price = P/E x EPS
A Ltd.’s Market Price = 10 x 1.875 = `18.75.
B Ltd.’s Market Price = 5 x 1.25 = `6.25.
(ii) Market Capitalization (same as market value or in short referred to as market cap)
= Number of outstanding shares x market price
A Ltd.’s Market cap = 4.0 lakhs x `18.75 = `75 Lakhs.
B Ltd.’s Market cap = 2.0 Lakhs x `6.25 = ` 12.5 Lakhs.
(iii) If the P/E of A Ltd., changes to 7.5, then the market price is given by
= 7.5 x `1.875 = `14.0625.
(iv) Yes. The market value decreases, i.e., = A Ltd.’s market value = 4.0 lakhs x `14.0625 =
`56.25 Lakhs.
(v) General Formula for exchange ratio = MPS of Target Firm / MPS of acquiring Firm
= 6.25/14.0625 = 0.44.
Answer to Qn.7 (b)
(i) The EPS of the combined company will be the sum of the earnings of both companies
divided by the shares in the combined company. Since the stock offer is one share of
the acquiring firm for three shares of the target firm, new shares in the acquiring firm will
increase by one-third (Exchange ratio = 1/3)
So, the new EPS will be = (` 3,00,000 + 6,75,000) / [1,70,000 + (1/3)(60,000)]
= (9,75,000/1,90,000) = ` 5.132.
The market price of B Co will remain unchanged if it is a zero NPV acquisition. Using the
P/E ratio, we find the current market price of B. Co stock, which is = P/E x EPS = 20 x (6.75
lakhs / 1.70 lakhs ) = 20 x (3.97) = `79.40
(ii) If the acquisition has a zero NPV, the stock price should remain unchanged.
Therefore, the new P/E will be = P/E= `79.40 / `5.132 = 15.47.
(ii) If the NPV of the acquisition is zero, it would mean that B Co. would pay just the market
value of A Co. i.e., Number of shares x market price of A Co. i.e.,
= 60,000 x 25 (MPS = P/E x EPS = 5 x 5 =25)
The market value received by B Co. = ` 15,00,000.
The cost of the acquisition is the number of shares offered times the share price, so the
cost is = (1/3) (60,000) (`79.40) = ` 15,88,000.
The difference is synergy i.e., `88,000.
8. (a) A company has a capital base of ` 1 crore and has a earned profits to the tune of
`11,00,000. The Return on Investment (ROI) of the particular industry to which the
company belongs is 12.5%. If acquired by a company, it is expected that the profits
will increase by ` 2,50,000 over and above the target profit. Determine the amount
of maximum bid price for that particular executive and the maximum salary that
could be offered to him. 10
(b) Q Ltd. wants to acquire R Ltd. and has offered a swap ratio of 1 : 2 (0.5 shares for
every one share of R Ltd.).
Following information is provided:
Particulars Q Ltd. R Ltd.

Profit after tax (`) 18,00,000 3,60,000
Equity shares outstanding (Nos.) 6,00,000 1,80,000
EPS (`) 3 2
P/E Ratio 10 times 7 times
Market price per share (`) 30 14
Required:
(i) The number of equity shares to be issued by Q Ltd., for acquisition of R Ltd.
(ii) What is the EPS of Q Ltd., after the acquisition?
(iii) Determine the equivalent earnings per share of R Ltd.
(iv) What is the expected market price per share of Q Ltd., after the acquisition,
assuming its P/E multiple remains unchanged?
(v) Determine the market value of the merged firm. 2x5=10
Answer 8. (a)
Capital base = ` 100,00,000
Actual profit = ` 11,00,000
Target profit = `100,00,000 x 12.5% = ` 12,50,000
Expected profit on employing the particular executive = ` 12,50,000 + ` 2,50,000
= ` 15,00,000
Additional profit = Expected profit - Actual profit
= ` 15,00,000- ` 11,00,000
= `4,00,000
Maximum bid price = Additional profit / rate of return
= ` 4,00,000/12.5% = ` 32,00,000
Maximum salary that can be offered = `32,00,000 x 12.5% = ` 4,00,000
8. (b)
(i) The number of shares to be issued by Q Ltd.:
The Exchange ratio is 0.5
So, the new shares = 1,80,000 × 0.5 = 90,000 shares.
(ii) EPS of Q Ltd., after acquisition:
Total Earnings = ` (18,00,000 + 3,60,000) ` 21,60,000

No. of Shares (6,00,000 + 90,000) 6,90,000
EPS (` 21,60,000) / 6,90,000 ` 3.13
(iii) Equivalent EPS of R Ltd.,
No. of new shares 0.5

EPS(`) 3.13
Equivalent (3.13 ×0.5) (`) 1.57
(iv) New Market price of Q Ltd., (P/E remaining unchanged):

Present P/E Ratio of Q Ltd., 10 times
Expected EPS after merger (`) 3.13
Expected Market Price (3.13 × 10) (`) 31.30
(v) Market Value of merged firm:
Total number of Shares 6,90,000

Expected Market Price (`) 31.30
Total Value (6,90,000 x 31.30) (`) 2,15,97,000

4 Solved Papers - Compressed

Uploaded by

Copyright:

Available Formats

4 Solved Papers - Compressed

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

4 Solved Papers - Compressed

Uploaded by

Copyright:

Available Formats

Suggested Answer_Syllabus 2016_Jun2017_Paper 13

SUGGESTED ANSWERS TO QUESTIONS

Time Allowed : 3 Hours Full Marks : 100

2. (a) Explain briefly the purpose of establishing SEBI. 6

(ii) Corporate governance is about stakeholders' satisfaction: The term "Corporate

(ii) Restrictions on loans and advances (Sections 20 & 21)

5. (a) Required minimum contribution of the Companies towards CSR:

Resale price maintenance - It includes any agreement to sell goods on condition

6. (a) Notice of Board meeting

(ii) Insurable Interest

Insurable interest varies depending on the nature of the insurance. The

The existence of insurable interest at the time of happening of the event is

7. (a) (i) XBRL applies to the following companies:

(ii) Advantages of XBRL

8. Write short notes on any four of the following: 4×4=16

8. (a) Producer Companies

(b) Actuarial Valuation/Report (section 13)

(c) Lock-in of specified securities held by promoters.

(d) STR (Suspicious Transaction Reports)

SUGGESTED ANSWERS TO QUESTIONS

Paper-13: Corporate Laws & Compliance

Time Allowed : 3 Hours Full Marks : 100

Multiple choice questions: 2x10=20

(viii)A minor can be nominated as a nominee in Life Insurance Policy by its

(ix) Which of the following is not the type of unfair competition?

In view of the above, Option (A) Turnover of ` 5000 crores

In the given case, CA Innocent was appointed as an auditor of X Ltd. He was

Explanation to Section 2 (54) clarifies that substantial powers of the management

Procedure of appointment of a managing director [Section 196(4)]

(ii) According to section 173 of the Companies Act, 2013,

Provided that a meeting of the Board may be called at shorter notice to

(c) Composition of SFIO [Section 211(2)]

The SFIO shall be:

Where a statement relates to a Government company in liquidation, the Company

If Paramount Limited is a Government Company

In the current scenario, we can understand that the Paramount Limited is a

If Paramount Limited is a Non-Government Company

In the current scenario, the Paramount Limited is a non-government company hence

(c) (i) Types of Penalties

(3) Imprisonment or fine or with both

(ii) Preservation of Books and Papers of Amalgamated Companies (Section 239)

Explanation (ii): A member will be considered to have accounting or related

3. The Chairperson of the Audit Committee shall be an independent director;

4. The Chairperson of the Audit Committee shall be present at Annual General

6. The Company Secretary shall act as the secretary to the committee.

(i) the transfer or vesting of property, rights, liabilities or obligations;

As regards obtaining relief from Tribunal, continuous losses cannot, by itself, be

hypothecation of property or on personal security or otherwise, except loans on

(3) A Company incorporated in India having overseas offices, may acquire

(c) (i) Initiation of corporate insolvency resolution process by financial creditor

Section 7 of Insolvency and Bankruptcy Code deals with initiation of corporate

(2) Form and manner of making application

(3) Enclosures to application

Following documents and information shall be furnished along with the

(4) Duty of Adjudicating Authority to ascertain the existence of a default

The Adjudicating Authority shall, within 14 days of the receipt of the

(5) Admission of application by the Adjudicating Authority

The Adjudicating Authority may, by order, admit such application, if it is