GTCA
No. of Pages: 5
No of Questions: 7
Total Marks: 100
Time Allowed: 3 Hrs
Question No. 1 is compulsory. Answer any five from the rest.
Working notes should form part of the answers
1. E, F and G were partners sharing Profits and Losses in the ratio of 5:3:2 respectively. On 31st March, 2009
Balance Sheet of the firm stood as follows:
`
`
Liabilities.
Assets
Capital A/cs
Buildings
55,000
E
50,000
Furniture
25,000
F
40,000
Stock
42,000
G
28,000
1,18,000 Debtors
20,000
Creditors
33,500 Cash at Bank
11,200
Outstanding Expenses
1,700
1,53,200
1,53,200
On 31st March, 2009, E decided to retire and F and G decided to continue as equal partners.
Other terms of retirement were as follows:
(i) Building be appreciated by 20%.
(ii) Furniture be depreciated by 10%.
(iii) A provision of 5% be created for bad debts on debtors.
(iv) Goodwill be valued at two years’ purchase of profit for the latest accounting year. The firm’s Profit
for the year ended 31st March, 2009 was `25,000. No goodwill account is to be raised in the books
of accounts.
(v) Fresh capital be introduced by F and G to the extent of `10,000 and `35,000 respectively.
(vi) Out of sum payable to retiring partner E, a sum of `45,000 be paid immediately and the balance be
transferred to his loan account bearing interest @ 12% per annum. The loan is to be paid off by 31st
March, 2011.
One month after E’s retirement, F and G agreed to admit E’s son H as a partner with one-forth share in
Profits/Losses. E agreed that the balance in his loan account be converted into H’s Capital. E also agreed
to forgo one month’s interest on his loan.
It was also agreed that H will bring in, his share of goodwill through book adjustment, valued at the price
on the date of E’s retirement. No goodwill account is to be raised in the books. You are requested to pass
necessary Journal Entries to give effect to the above transactions and prepare Partners’ Capital Accounts.
(20 Marks)
2. Rohan formed a private limited company under the name of Rohan Private Limited to take over his
existing business as from April 1, 2008, but the company was not incorporated until July 1, 2008. No
entries relating to transfer of the business were entered in the books, which were carried on without a
break until March 31, 2009.
The following Trial Balance was extracted from the book as on March 31, 2009:PRIME / ME33 / IPCC
1 Particulars
Dr
`
4,300
Stock April 1, 2008
Sales
Purchases
Carriage Outwards
Travellers’ Commission
Office Salaries and Expenses
Rent and Rates
Rohan’s Capital Account, April 1, 2008
Directors’ Fees
Fixed Assets
Current Liabilities
Current Assets (other than Stock)
Preliminary Expenses
Cr
`
27,800
18,900
330
750
2,100
1,200
23,000
1,800
13,400
3,700
11,200
520
54,500
54,500
You are also given the following information:
(a) Stock as on March 31, 2009, `4,400
(b) The purchase consideration was agreed at `30,000 to be satisfied by the issue of 3,000 Equity
Shares of `10 each.
(c) The gross profit margin is constant and the monthly sales in April, 2008 February,2009 and March,
2009 are double the monthly sales for the remaining months of the year.
(d) The preliminary expenses are to be written off.
(e) You are to assume that carriage outwards and travellers’ commission vary in direct proportion to sales.
You are required to prepare Trading and Profit and Loss Account for the year ended March 31, 2009
apportioning the periods before and after incorporation and a Balance Sheet as on that date. Ignore
depreciation.
(16 Marks)
3. (a) From the following information, prepare cash flow statement as at 31st December, 2008 by
using direct method:
Balance Sheets
Liabilities
2007
2008
Assets
2007
2008
`
`
`
`
Share Capital
5,00,000 5,00,000 Assets
8,50,000 10,00,000
Profit & Loss A/c
4,25,000 5,00,000 Stock
3,40,000
3,50,000
Long Term Loans
5,00,000 5,30,000 Debtors
3,60,000
3,30,000
Creditors
1,75,000 2,00,000 Cash
30,000
35,000
Bills Receivable
20,000
15,000
16,00,000 17,30,000
16,00,000 17,30,000
Income Statement for the year ended 31st December, 2008
PRIME / ME33 / IPCC
2 `
20,40,000
13,60,000
6,80,000
Sales
Less: Cost of Sales
Gross Profit
Less: Operating Expenses:
Administrative Expenses
Depreciation
Operating Profit
Add: Non-Operating Incomes (dividend received)
(2,30,000)
(1,10,000)
3,40,000
25,000
3,65,000
(70,000)
2,95,000
(1,30,000)
1,65,000
Less: Interest Paid
Less: Income Tax
Profit after Tax
Statement of Retained Earnings
`
4,25,000
1,65,000
5,90,000
(90,000)
5,00,000
(12 Marks)
Opening Balance
Add: Profit
Less: Dividend paid
Closing Balance
(b) "In business today, the accounts which were earlier maintained in a manual form, are replaced
with computerized accounts". Explain the significance of computerized accounting system in modern
time.
(4 Marks)
4. (a) The abstract of the Balance Sheet of the AXE Ltd. as at 31st March 2011, are as follows:
`
15,00,000
Liabilities
Equity share capital (`100 each)
12% Preference share capital (`100 each)
8,00,000
13% Debentures
3,00,000
On 31st March, 2011, BXE Ltd. agreed to take over AXE Ltd. on the following terms:
(i) For each preference share in AXE Ltd., `10 in cash and one 9% preference share of `100 in BXE
Ltd.
(ii) For each equity share AXE Ltd. `20 in cash and one equity share in BXE Ltd. of `100 each. It
was decided that the share in BXE Ltd. will be issued at market price 140 per share.
(iii) Liquidation expenses of AXE Ltd. are to be reimbursed by BXE Ltd. to the extent of 10,000.
Actual expenses amounted to `12,500.
You are required to compute the amount of purchase consideration.
(6 Marks)
PRIME / ME33 / IPCC
3 (b) On 30th March, 2011 fire occurred in the premises of M/s Suraj Brothers. The concern had
taken an insurance policy of `60,000 which was subject to the average clause. From the books of
accounts, the following particulars are available relating to the period 1st January to 30th March 2011.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Stock as per Balance Sheet at 31st December, 2010, `95,600.
Purchases (including purchase of machinery costing `30,000) `1,70,000
Wages (including wages `3,000 for installation of machinery) `50,000.
Sales (including goods sold on approval basis amounting to `49,500) `2,75,000.
No approval has been received in respect of 2/3rd of the goods sold on approval.
The average rate of gross profit is 20% of sales.
The value of the salvaged goods was `12,300.
(6 Marks)
(c) SAD Enterprises, a partnership firm, had purchased business of SWAD enterprises on
01.04.2008 and paid `50,000 towards goodwill. On 01.04.2009, SAD enterprises decided to admit W
as partner and the goodwill was valued at `1,00,000 for the purpose. Please explain with reasons, at
what price goodwill can be shown in the books of account.
(4 Marks)
5. (a) The following scheme of reconstruction has been approved by Win Limited
(i) Share holders to receive in lieu of present holding of 1,00,000 shares of `10 each , the following
(a) New fully paid of `10 each equity shares equal to 3/5th of their holding
(b) 10% preference shares fully paid up to the extent of 1/5th of the above new equity shares
(c) `40,000 8% debentures
(ii) An issue of `1 lakh 10% debentures were made and allotted, payment for the same being received
in cash
(iii) Goodwill which stood at `1,40,000 to be written off
(iv) Plant and free hold property to be written down by `50,000 each
Required to prepare the journal entries in the books of Win limited
(10 Marks)
(b) Calculate the average due date and interst at 10% pa on the basis of the following details:
`60,000 was given on 1 January 2006 is to be repaid as under:
`
5,500
On
1 January
2007
9,500
On
1 January
2009
20,000
On
1 January
2010
7,000
On
1 January
2012
18,000
On
1 January
2014
(6 Marks )
6. Following is the balance sheet of a listed company Omega Limited for the year ended 31st March 2010
PRIME / ME33 / IPCC
4 Particulars
Amount
`
Authorised capital
40,000 12% preference shares of `10 each
4,00,000 equity shares of `10 each
4,00,000
40,00,000
44,00,000
Issues and subscribed capital
32,000 12% preference shares of `10 each
3,20,000
36,00,000
3,60,000 equity shares of `10 each
Reserves and surplus
Revaluation reserve
80,000
5,00,000
General reserve
3,00,000
Capital reserve
Securities Premium
1,00,000
Profit and loss a/c
7,00,000
20,00,000
12% partly convertible debentures
On 30 April 2010, the Company wishes to capitalize the reserves by way of issue of bonus at the rate of
1:4. Securities premium include 20,000 premium for issue of shares pursuant to amalgamation. Capital
reserves includes `1,60,000 being sale on plant and machinery. 20% of 12% debentures are convertible
to equity shares of `10 each on 30 April 2010
State with reasons
(i) whether revaluation can be capitalized
(ii) How much of Capital reserve can be capitalized
(iii) How much of Securities premium can be capitalized
(iv) Are the convertible debentures entitled for bonus shares
(v) The minimum number of equity shares to be issued as bonus
(vi) What should be minimum authorized capital, if the decision to issue bonus gets implemented
(16 Marks)
7. Answer any four of the following:
(i) Market is full of ready-made accounting softwares. What factors will you consider to choose one of
them for your enterprise?
(ii) As per Accounting Standard-14, what are the conditions which must be satisfied for an amalgamation
in the nature of merger?
(iii) What do you mean by Customised Accounting Software?
(iv) Rose Ltd. had made an investment of `500 lakhs in the equity shares of Nose Ltd. On 10.01.2009.
The realisable value of such investment on 31.03.2009 became `200 lakhs as Nose Ltd. lost a case
of patent rights. Rose Ltd. follows financial year as accounting year. How will you recognize this
reduction in financial statements for the year 2008-09.
(v) A company provided `10,00,000 for dividend payment. Is the Corporate Dividend Tax payable in this
case? If yes, please compute Corporate Dividend Tax assuming rate of 15% plus surcharge of
10%and disclose as it would appear in profit and loss account of the company.
(4×4=16 Marks)
PRIME / ME33 / IPCC
5 33RD
PRIME ACADEMY
SESSION MODEL EXAM - IPCC – ACCOUNTING
SUGGESTED ANSWERS
1. Journal Entries
Particulars
1
2
3
4
5
6
7
8
Building Account Dr.
To Revaluation Account
(Being building appreciated)
Revaluation Account Dr.
To Furniture Account
To Provision for Doubtful Debts Account
(Being furniture depreciated by 10% and Provision for
doubtful debts created @ 5% on Debtors)
Revaluation Account Dr.
To E’s Capital Account
To F’s Capital Account
To G’s Capital Account
(Being profit on revaluation transferred to capital accounts
of partners)
F’s Capital Account Dr.
G’s Capital Account Dr.
To E’s Capital Account
(Being adjustment for E’s share of goodwill)
Bank Account Dr.
To F’s Capital Account
To G’s Capital Account
(Being fresh capital introduced by F and G)
E’s Capital Account Dr.
To Bank Account
To E’s Loan Account
(Being settlement of E’s capital on his retirement)
E’s Loan Account Dr.
To H’s Capital Account
(Transfer of E’s Loan Account to H’s Capital Account)
H’s Capital Account Dr.
PRIME / ME33 / IPCC
6 Dr
`
11,000
Cr
`
11,000
3,500
2,500
1,000
7,500
3,750
2,250
1,500
10,000
15,000
25,000
45,000
10,000
35,000
78,750
45,000
33,750
33,750
33,750
12,500
To F’s Capital Account
To G’s Capital Account
(Being adjustment entry passed for H’s share of goodwill)
6,250
6,250
Partners’ Capital Accounts
Particulars
E
`
To E
(Goodwill)
F
`
G
`
H
`
10,000 15,000
Particulars
Balance b/d
E
`
G
`
H
`
50,000 40,000 28,000
By
3,750
Revaluation
To E’s Loan
By F
33,750
10,000
A/c
(Goodwill)
To Balance
By G
42,250 49,500
15,000
c/d
(Goodwill)
By Bank
(fresh
capital)
78,750 52,250 64,500
78,750
To F (Goodwill)
6,250 By Balance b/d
To G (Goodwill)
6,250 By E’s Loan A/c
To Balance c/d
48,500 55,750 21,250 By H (goodwill)
48,500 55,750 33,750
To Bank
F
`
45,000
2,250
1,500
10,000 35,000
52,250 64,500
42,250 49,500
33,750
6,250 6,250
48,500 55,750 33,750
Working Notes:
1. Calculation of gaining ratio 06F
Partners
New ratio
E
F
1/2
G
1/2
Old ratio
5/10
3/10
2/10
Gain
5/10
1/2 - 3/10 = 2/10
1/2 – 2/10 = 3/10
Hence, ratio of gain between F and G = 2:3
2.
Value of total goodwill of the firm =
E’s share
F will bear
G will bear
3.
H’s share of goodwill
PRIME / ME33 / IPCC
Sacrifice
`25,000 × 2 = `50,000
`50,000 X 5/10 = `25,000
`25,000 X 2/5 =`10 000
`25,000 X 3/5 = `15 000
`50,000 X 1/4 = `12,500
7 F and G share equal profits. Therefore, their sacrificing ratio will also be equal. Hence, each of them will
be credited with `6,250
2.
Rohan Pvt. Ltd.
Trading and Profit & Loss Account for the year ending 31st March, 2009
Particulars
To Opening Stock
To Purchases
To Gross Profit c/d
April – June
July – March
Particulars
To Office Salaries &
Expenses (Time basis)
To Rent & Taxes (Time
basis)
To Carriage outwards
(Sales basis)
To Travellers’
Commission (Sales
basis)
To Preliminary
Expenses
To Directors’ fees
To Capital Profit
transferred to Capital
Reserve
To Balance c/d
2,400 6,600 2,400
6,600
`
`
4,300
18,900
2,400
6,600
Particulars
By Sales
By Closing Stock
`
9,000
32,200
`
27,800
4,400
32,200
AprilJune
`
525
JulyMarch
`
1,575
300
900
88
242
200
550
Particulars
By Gross Profit
b/d
AprilJune
`
2,400
JulyMarch
`
6,600
2,400
6,600
520
1,800
1,287
2,400
1,013
6,600
Rohan Pvt Ltd.Balance Sheet as on 31st March, 2009
Liabilities
Share Capital
Authorised Capital:
PRIME / ME33 / IPCC
`
Assets
Fixed Assets:
Goodwill
8 `
7,000
Shares of `10 each
: Issued & Subscribed Capital
3,000 Equity Shares of ` 10 (All
issued for consideration other than
cash)
Reserves & Surplus
Capital Reserve
Profit & Loss Account
Secured Loans Unsecured Loans Current Liabilities & Provisions
Current Liabilities
30,000
1,287
1,013
Fixed Assets
Investments
Current Assets, Loans &
Advances:
13,400
-
Stock in trade
Other Current Assets
4,400
11,200
3,700
36,000
36,000
Working Notes:
(i)
Ratio for apportioning gross profit:
Suppose sales for the months of April 2008, February, 2009 and March 2009 is 2 and for other
months 1 per month. Then:
Sales for April, May & June
4
Sales for July 2008 to March 2009
11
This gives the ratio of 4:11; this ratio has been used for apportioning gross profit and expenses related
to sales.
(ii) Rent and Rates have been divided on time basis which is 3:9 or 1 : 3.
(iii) Goodwill is the difference between the amount of purchase consideration, `30,000 and the balance of
Rohan’s Capital, `23,000, on 1st April, 2008.
3. (a) Cash Flow Statement for the year ended December 31, 2008
Cash Flows from Operating Activities (direct method)
Received from customers: Sales
20,40,000
Add: Decrease in Debtors
30,000
Decrease in B/R
5,000
Less: Payments to suppliers:
Cost of sales
13,60,000
Add: Increase in stock
10,000
Less: Increase in creditors
(25,000)
Less: Payment for expenses
Tax paid
Cash provided by operating activities
Cash Flows from Investing Activities
Purchase of Fixed Assets (10,00,000 + 1,10,000 – 8,50,000)
Dividend on Investments
Cash used in Investing Activities
Cash Flows from Financing Activities
PRIME / ME33 / IPCC
9 `
`
20,75,000
(13,45,000)
7,30,000
(2,30,000)
(1,30,000)
3,70,000
(2,60,000)
25,000
(2,35,000)
Long term loan taken
Interest paid
Dividend Paid
Income from Financing Activities
Net Increase in cash during the year
Add: Opening cash balance
Closing cash balance
30,000
(70,000)
(90,000)
(1,30,000)
5,000
30,000
35,000
(b) In modern time, computerized accounting systems are used in various areas. The significance
of the computerized accounting system is as follows:
(i) Increase speed, accuracy and security - In computerized accounting system, the speed with
which accounts can be maintained is several fold higher. Besides speed, level of accuracy is
also high in computerized accounting system.
(ii) Reduce errors - In computerized accounting, the possibilities of errors are also very less
unless some mistake is made while recording the data.
(iii) Immediate information - In this system, with an entry of a transaction, corresponding ledger
posting is done automatically. Hence, trial balance will also be automatically tallied and the
user will get the information immediately.
(iv) Avoid duplication of work – Computerized accounting systems also remove the duplication of
the work.
4. (a) Calculation of purchase consideration
I
II
Particulars
Payment made to shareholders of 8,000 preference shares* of AXE Ltd.
Cash @ 10 per share (8,000 preference shares x `10)
`
80,000
9% Preference shares in BXE Ltd. @ `100 each
Payment made to Equity shareholders of 15,000 equity** shares of AXE
Ltd. :
Cash @ 20 per share (15,000 shares x 20)
Equity shares in BXE Ltd. issued at market price `140 each (15,000
shares x 140)
8,00,000
8,80,000
3,00,000
21,00,000
III Total purchase consideration
24,00,000
32,80,000
Note: Re-imbursement of liquidation expenses of AXE Ltd. to the extent of `10,000, will not be
included in the calculation of purchase consideration.
* 8,00,000/100 = 8,000 Preference shares
** 15,00,000/100 = 15,000 equity shares
(b) Computation of claim for loss of stock
PRIME / ME33 / IPCC
`
10 Stock on the date of fire i.e. on 30th March, 2011 (W.N.1)
Less: Value of salvaged stock
62,600
(12,300)
Loss of stock
50,300
Amount of claim = Insured value X Loss of stock / Total cost of stock on the date of fire
=(60,000/62,600) x 50,300
48,211
(approx.)
A claim of `48,211 (approx.) should be lodged by M/s Suraj Brothers to the insurance
Working Notes:
1. Calculation of closing stock as on 30th March, 2011
Memorandum Trading Account for
(from 1st January, 2011 to 30th March, 2011)
Particulars
To Opening stock
To Purchases (1,70,000 30,000)
To Wages (50,000 – 3000)
To gross profit (20% on sales)
Amount
Particulars
(`)
95,600 By Sales (W.N.3)
Amount
(`)
2,42,000
1,40,000 By Goods with customers (for
approval) (W.N.2)
47,000
By Closing stock (Bal. fig.)
48,400
3,31,000
26,400
62,600
3,31,000
2. Calculation of goods with customers
Since no approval for sale has been received for the goods of `33,000 (i.e. 2/3 of `49,500) hence,
these should be valued at cost i.e. `33,000 - 20% of `33,000 =`26,400.
3. Calculation of actual sales
Total sales - Sale of goods on approval = `2,75,000 - `33,000 = `2,42,000.
PRIME / ME33 / IPCC
11 (c) Para 16 of AS 10,’ Accounting for Fixed Assets’ states that goodwill can be recorded in the
books only when some consideration in money or money’s worth has been paid for it. Therefore, only
purchased goodwill should be recorded in the books. In the said case, payment of `50,000 was made
towards purchase of goodwill, hence to this extent goodwill can be recorded in the books. Additional
goodwill of `50,000 is self generated goodwill, which should not be recorded. On admission, death or
retirement of a partner, goodwill adjustments can be carried out through capital accounts.
5. (a) Journal entries in the books of Win Limited
Particulars
Equity shares (old) a/c Dr.
To Equity shares capital (`10) a/c
To 10% Preference share capital
To 8% Debentures
To Reconstruction
(Being new equity shares 10% Preference share capital, 8%
Debentures issued against old equity shares and balance
transferred to reconstruction)
Bank A/c Dr.
To 10% Debentures application and allotment A/c
(Being amount received on debentures)
10% Debentures application and allotment A/c Dr.
To 10% Debentures A/c
(Being debentures allotted)
Reconstruction a/c Dr/
To Goodwill
To Plant
To Free hold property
(Being reconstruction utilized for writing off the goodwill, plant
and free hold property)
Dr
`
10,00,000
1,00,000
1,00,000
2,40,000
(b) Calculation of Average Due Date
Installment
5,500
9,500
20,000
7,000
18,000
60,000
Due date
1 January 2007
1 January 2009
1 January 2010
1 January 2007
1 January 2007
Years since 1
January 2006
1
3
4
6
8
Average Due date = 1 January 2006 + 3,00,000/60,000
= 1 January 2006 + 5 years ie 1 January 2011
Interest = 60,000 x 5 x 10 /100 = `30,000
PRIME / ME33 / IPCC
12 Product `
5,500
28,500
80,000
42,000
144,000
300,000
Cr
`
6,00,000
1,20,000
40,000
2,40,000
1,00,000
1,00,000
1,40,000
50,000
50,000
6. Since this is a listed company, as per SEBI guidelines, revaluation reserve cannot be capitalized
(1) Capital reserve realized in cash can be used for capitalization. Therefore, `1,60,000 from sale of
plant, cash would have been realized. Therefore, this can be used for capitalization. For the balance
due to absence of information, no comments can be given
(2) Securities premium collected in cash can be used for capitalization. Therefore, in this problem.
`80,000 can be capitalized. The balance `20,000 was given for amalgamation , ie non cash
consideration
(3) No company can issue bonus shares to it shareholders without extending similar benefit to convertible
debenture holders. Therefore, pending such conversion, necessary shares should be earmarked for
convertible debenture holders. Therefore, convertible debenture holders are also entitled to bonus
shares in the same ratio as equity share holders
(4) Minimum number of equity shares to be issued as bonus shares
Issue of Bonus shares to existing equity shareholders
Add: Number of bonus shares to be issued after conversion of debentures
(20,00,000x20%)/10 x 1/4
Total bonus issue
In shares
90,000
10,000
1,00,000
(5) Minimum authorized share capital
Shares
Equity share capital
Existing equity shares
Bonus to equity shareholders
20% conversion of 12% debentures
Bonus shares to be issued to debenture holders after
conversion
Authorised equity share capital
Preference share capital
12% Preference shares
Minimum Authorised Capital
`
3,60,000
90,000
40,000
36,00,000
9,00,000
4,00,000
10,000
5,00,000
1,00,000
50,00,000
40,000
4,00,000
54,00,000
7. (1) While choosing the accounting software, the following points should be considered:
(i) Fulfilment of business requirements: Some packages have few functionalities more than the
others. The purchaser may try to match his requirement with the available solutions.
(ii) Completeness of reports: Some packages might provide extra reports or the reports match the
requirement more than the others.
(iii) Ease of use: Some packages could be very detailed and cumbersome compare to the others.
(iv) Cost: The budgetary constraints could be an important deciding factor. A package having more
features cannot be opted because of the prohibitive costs.
PRIME / ME33 / IPCC
13 (v) Reputation of the vendor: Vendor support is essential for any software. A stable vendor with
reputation and good track records will always be preferred.
(vi) Regular updates: Law is changing frequently. A vendor who is prepared to give updates will be
preferred to a vendor unwilling to give updates.
(2) According to AS 14 “Accounting for Amalgamations”, Amalgamation in the nature of merger is
an amalgamation which satisfies all the following conditions:
(i)
(ii)
(iii)
(iv)
(v)
All the assets and liabilities of the transferor company become, after amalgamation, the assets
and liabilities of the transferee company.
Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.
The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
The business of the transferor company is intended to be carried on, after the amalgamation, by
the transferee company.
No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
(3) A customised accounting software is one where the software is developed on the basis of
requirement specifications provided by the organisation. The choice of customized accounting
software could be because of the typical nature of the business or else the functionality desired to be
computerised is not available in any of the pre-packaged accounting software. An organisation
desiring to have an integrated software package covering most of the functional area may have the
financial module as part of the entire customised system.
(4) Recognition of reduction in value of investment would depend upon the nature of investment and
nature of decline as per Accounting Standard 13 “Accounting for Investments”. As per provisions of
the standard, if the investments were acquired for long term and decline is temporary in nature,
reduction in value will not be recognized and investments would be carried at cost. If the decline is of
permanent nature, it will be charged to profit and loss account. If the investments are current
investments, then the reduction should be recognized and charged to Profit and Loss Account as the
current investments are carried at cost or fair value, whichever is less.
(5) Yes, Corporate Dividend Tax (CDT)* is payable by the company which has provided for the payment
of dividend. CDT is payable even if no income tax is payable. This is payable by a domestic company
on distribution of profits to its shareholders. In the given case, Corporate Dividend Tax would be
worked out to `1,65,000 [i.e. (`10,00,000 x 15%) x 110%]. CDT should be accounted for in the same
financial year in which provision for dividend is recognized and made. CDT shall be disclosed in profit
and loss account below the line just after the provision for dividend. Such disclosure would give a
proper picture regarding payments involved with reference to dividends.
PRIME / ME33 / IPCC
14 Disclosure of CDT in the profit and Loss Account will be as follows:
Dividend
Corporate Dividend Tax
XXXX
XXXX
*Corporate Dividend Tax is also known as ‘Dividend Distribution Tax’.
PRIME / ME33 / IPCC
15 XXXX
SCWL
No. of Pages: 4
No of Questions: 7
Total Marks: 100
Time Allowed: 3 Hrs
Question No. 1 is compulsory. Attempt any five from the remaining six questions.
1. (a) Mr. Patel of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area Mr.
Singh bought a house for ` 20 lakhs in the name of a nominee and then purchased it himself for
`24 lakhs. He then sold the same house to Mr. Patel for `26 lakhs. Mr.later comes to know the
mischief of Mr. Singh and tries to recover the excess amount paid to Mr. Singh. Is he entitled to
recover any amount from Mr. Singh? If so, how much explain.
(5 Marks)
(b) (1) State with reasons whether the following statements are correct or incorrect.
(i) Two persons refer to a ship and refer to it in the contract but each of them had a different
ship in mind though of the same name. The contract is valid.
(ii) A Gratuitous bailment may be terminated even before the purpose is accomplished.
(2x1=2 Marks)
(2) Choose the correct answer from the following and give reasons:
(i) A Contract of Life Insurance is
(a) Contract of Indemnity
(b) Contingent contract
(c) Wagering contract
(d) Uncertain agreement
(ii) The basis of quasi contractual obligation is:
(a) Existence of a valid contract between the parties
(b) Existence of voidable contract between the parties
(c) Prevention of unjust enrichment at the expense of others
(d) Provision contained in section 10 of the act
(iii) A Supplies to B, a Lunatic, the necessaries suitable to his conditions in life. In this
case:
(a) B is personally liable to pay
(b) B’s property is liable to pay
(c) B’s parents are personally liable
(d) It B’s property is not sufficient to reimburse, then he is personally liable.
(3x1=3 Marks)
(c) (1) State with reasons whether the following statements are correct or incorrect.
(i) In case of dishonour of bill of exchange or a cheque, the noting is compulsory to recover
the amount from the liable parties.
(ii) Under Payment of Bonus Act, 1965, Salary and wage includes remuneration in respect
of overtime.
(2x1=2 Marks)
PRIME / ME33 / IPCC
1 (2) Choose the correct answer from the following and give reasons:
(i) Even when a charge is not registered, it will be valid against the liquidator and the
creditors of the company, if it is a charge
(a)
(b)
(c)
(d)
On the uncalled share capital of the company
In the form of a pledge on any immovable property of the company
On the book debts of the company
On calls made but not paid.
(ii) For alteration of the objects clause of the memorandum, it is essential to pass
(a) Ordinary resolution
(b) Special resolution
(c) Special resolution and confirmation by Central government
(d) Special resolution and confirmation by Court.
(iii) Endorsement where the endorser excludes his own liability or makes it conditional is:
(a) Facultative endorsement
(b) Sans Frais endorsement
(c) Sans Recourse endorsement
(d) Restrictive endorsement
(3x1=3 Marks)
(d) Mr. Clever obtains fraudulently from J a cheque crossed ‘Not Negotiable’. He later transfers the
cheque to D, who gets the cheque encashed from ABC Bank, which is not the Drawee Bank. J,
OH comics to know about the fraudulent act of Clever, sues ABC Bank for the recovery of
money. Examine with reference to the relevant provisions of the Negotiable Instruments Act,
1881, whether J will be successful in his claim. Would your answer be still the same in case
Clever does not transfer the cheque and gets the cheque encashed from ABC Bank himself?
(5 Marks)
2.
(a) ABC Textiles Ltd. employed 20 full–time and 5 part-time employees who were drawing salary
of less than `10,000 per month. After completing service of 28 days, in an accounting year, 10 fulltime employees submitted their resignations and left the service of the company. The Board of
directors of this company decided not to give the bonus to the employees, who resigned, to the
remaining full-time employees and to the part-time employees. Against the decision, all the
employees applied to the authorities for relief. Decide, stating the provisions of the Payment of
Bonus Act, 1956, whether the employees, who resigned, the remaining full-time employees and
part-time employees will get relief.
(8 Marks)
(b) What is meant by ‘Sustainable Development’? State the special responsibilities of the industries
that are based on natural resources.
(4 Marks)
(c) What is meant by 'Critical thinking'? How shall you develop critical thinking?
(4 marks)
3. (a) E was an employee of Tea Estate Ltd. The whole of the undertaking of Tea Estate Ltd. was
taken over by a new company - Asia Tea Estate Ltd. The services of E remained continuous in
new company. After serving for one year E met with an accident and became permanently
disabled. E applied to the new company for the payment of gratuity. The company refused to pay
gratuity on the ground that E has served only for a year in the company. Examine the validity of the
PRIME / ME33 / IPCC
2 refusal of the directors in the light of the provisions of the Payment of Gratuity Act, 1972.
(8 Marks)
(b) Explain in brief the measures to ensure ethics in the Work place.
(4 Marks)
(c) Prepare a draft of Power of Attorney to be submitted before the Income –Tax Authorities.
(4 Marks)
4. (a) Advise Asiatic Government Security Life insurance Co. Ltd. Whether it can seek an injunction
against ‘The New Asiatic Insurance Co. Ltd.’ Which was subsequently formed restraining it from
having in its name the word ‘Asiatic’ on the ground that it has caused confusion and can deceive
the public.
(4 Marks)
(b) The promoters of your Company, incorporated on 9th April, 1996, had entered into a contract with M
on 8th March, 1996 for supply of goods. After incorporation, your Company does not want to
proceed with the contract Advise the management.
(3 Marks)
(c) The Articles of Association of a public company require the instrument appointing a proxy to be
received by the company 75 hours before the meeting. Is it a valid requirement? If not, what are its
effect?
(3 Marks)
(d) Draft a notice for ABC’s Annual General Meeting with four ordinary business. Explain the provisions
of companies’ act, 1956 relating toperiod within which the AGM shall be held..
(3+3 Marks)
5. (a) A’ signs, as maker, a blank stamped paper and gives it to ‘B’, and authorises him to fill it as a
`2,000, payable to ‘C’, who has in good faith advanced `2,000. Decide, with reasons,
whether ‘C’ is entitled to recover the amount, and if so, up to what extent?
(6 Marks)
(b) State with reasons whether the following statements are correct or incorrect.
(i) Consumer purchases goods and health services for personal purposed only.
(ii) Consumer and Public interest are both synonymous
(iii) Communication which flows through all prescribed channels is informal communication
(iv) Grapevine is an important form of informal communication.
(v) A good environmental practice improves corporate performance.
(5x1=5 Marks)
(c) XYZ Ltd. At a general meeting of members of the company pass an ordinary resolution to buy-back
30% of its Equity Share capital. The articles of the Company empower the Company for buy-back
of shares. The Company further decide the payment for buy-back to be made out of the proceeds
of the Company’s earlier issue of equity shares. Explaining the provisions of the Companies Act,
1956, and stating the sources through which the buy-back of Companies own shares be executed.
Examine.
(i) Whether Company’s proposal is in order?
(ii) Would your answer be still the same in case the company instead of 30% decide to buy-back
only 20% of its Equity Share Capital?
(5 Marks)
6. (a) Examine the validity of the following proxies:
(i) L, a member of a Private company, appoints B and C as proxies, dividing his voting rights
between them. B and C are not members of the company.
PRIME / ME33 / IPCC
3 (ii) X, the director of Y Ltd. is authorized to represent Y Ltd. at the general meeting of ABC Ltd. He
in turn appoints Z as proxy.
(2+2=4 Marks)
(b) Ravi sent a consignment of goods worth `60,000 by railway and got railway receipt. He obtained
an advance of `30,000 from the bank and endorsed and delivered the railway receipt in favour of
the bank by way of security. The railway failed to deliver the goods at the destination. The bank
filed a suit against the railway for `60,000. Decide in the light of provisions of the Indian Contract
Act, 1872, whether the bank would succeed in the said suit?
(4 Marks)
(c) Examine briefly at least four international initiatives/mechanisms for strengthening CSR
(4 Marks)
(d) Explain Characteristics of Group Personality
(4 Marks)
7 (a) Mrs. Rakesh who was an employee of M/s. Backbone Ltd. died in a sudden accident. She had
taken a loan from a bank for purchasing a house and the loan was still outstanding. After her
death her legal representative applied for payment of her P.F dues. The bank lodged a claim with
the authorities for payment of its balance loan amount from the P.F dues. Explain with reference
to the provisions of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952
i) Whether the bank can recover the loan amount from the P.F. dues and
ii) If, Instead of the bank, Mrs. Rakesh had taken any loan from her legal representative what would
have been the answer?
(4 Marks)
(b) Preference shareholders have same voting rights as the equity shareholders. Comment
Or
Interest can be paid on share capital. Comment.
(4 Marks)
(c) What are the key issues that you will consider while evaluating good governance?
Or
Finance and accounting professionals working as employees in an organisation have to face
various threats which make it difficult for them to comply with fundamental principles relating to
ethics. Explain the safeguards in the work environment which may be created by a business
enterprise to overcome such threats.
(4 Marks)
(d) Write short note on any four Ethical Dilemmas in Communication.
Or
What are the functions of interpersonal communication?
PRIME / ME33 / IPCC
4 (4 Marks)
PRIME ACADEMY
33RD SESSION MODEL EXAM - IPCC – LAW ETHICS AND COMMUNICATIONS
SUGGESTED ANSWERS
1. (a) Provision:
Agent is not to deal on his own account. If the agent wants to do deal on his own account, he must
disclose all the material facts to his principal and obtain his consent. The principal can rescind the
contract, if any material facts were dishonestly concealed by the agent or the dealings of the agent
on his own account have been disadvantageous to the principal. Agent cannot make any secret
profit out of the business of agency. If the agent deals on his own account without disclosing it to
the principal, the principal is entitled to claim from the agent any benefit received by him, out of
such transaction.
Solution:
Mr. Patel engages Mr. Singh as his agent for purchase of a house. Mr. Singh purchases a house in
the name of the nominee and then purchases the same house on behalf of Mr. Patel (his principal),
thus making a profit of `4 lakhs. However, he does not disclose these facts to Mr. Patel. Nondisclosure of profit of `4 lakhs made by Mr. Singh amounts to a breach of duty by Mr. Singh.
Therefore, Mr. Patel is entitled to claim the secret profit of `4 lakhs made by Mr. Singh.
(b) (1)
(i) False: The contract is not valid as there is no identity of mind.
(ii) True: A Gratuitous bailment may be terminated by the bailor at any time even though the
bailment was for a fixed period. However, the bailor is required to indemnify the bailee in
case the loss due to premature termination exceeds the benefit actually derived by bailee.
(2)
(i) Contingent contract
(ii) Prevention of unjust enrichment at the expense of others
(iii) B’s property is liable to pay
(c) (1)
(i) True: Noting is a mode of authenticating the fact that a bill has been dishonoured. It must
be made within a reasonable time after dishonour.
(ii) False: All remuneration other than remuneration in respect of overtime work being capable
of expressed in terms of money, if the terms of employment, express or implied. Were
fulfilled, be payable to an employee.
(2)
(i) In the form of a pledge on any immovable property of the company
(ii) Special Resolution
(iii) Sans recourse endorsement
(d) Provision:
PRIME / ME33 / IPCC
5 According to Section 130 of the Negotiable Instrument Act, 1881 a person taking a cheque crossed
generally or specially bearing in either case the words ‘Not Negotiable’ shall not have or shall not
be able to give a better title to the cheque than the title the person from who he took had. In
consequence, if the title of the transferor is defective, the title of the transferee would be vitiated by
the defect.
Solution:
Thus based on the above provisions, it can be concluded that if the holder has a good title, he can
still transfer it with a good title, but if the transferor has a defective title, the transferee is affected by
such defects, and he cannot claim the right of a holder in due course by proving that he purchased
the instrument in good faith and for value. As Mr. Clever in the case in question had obtained the
cheque fraudulently, he had no title to it and could not give to the bank any title to the cheque or
money; and the bank would be liable for the amount of the cheque for encashment. (Great Western
Railway Co. v. London and Country Banking Co). The answer in the second case would not
change and shall remain the same for the reasons given above. Thus J in both the cases shall be
successful in his claim from ABC bank.
2. (a) Provision:
In accordance with the provisions of Section 2(13) of the Payment of Bonus Act, 1965 any person
other than an apprentice employed on a salary or wage not exceeding `10,000 (by notification
dated 15th Nov. 2007) per mensem in any industry to do any skilled or unskilled, manual,
supervisory, managerial, administrative, technical or clerical work for hire or reward whether the
terms of employment be express or implied is eligible for bonus. Further, in accordance with the
provisions of Section 8 of the Payment of Bonus Act, 1965 every employee of an establishment
covered under the Act is entitled to bonus from his employer in an accounting year provided he has
worked in that establishment for not less than thirty working days in the year on a salary less than
`10,000 per month.
Solution:
As regards the employees who resigned : The employees who have resigned are not entitled to
bonus because they have given their services only for 28 days in an accounting year although they
are drawing salary less than `10,000 per mensem.
As regards full time remaining employees: These employees are entitled to get the bonus as they
fulfil both the requirements as stated under Sections 2 (13) and 8 of the Act. Although the
employees in this case have been reduced to 10, once the Act is applicable, it continues to apply
even if number of employees fall below 20.
As regards part time employees: Even a part time employee is also entitled to bonus on the basis
of total number of days worked by him in an accounting year. The Payment of Bonus Act, 1965
does not prohibit such employees as they fulfil all the requirements stated above {Automobile
Karmchari Sangh vs. Industrial Tribunal (1971)}.
(b) SUSTAINABLE DEVELOPMENT:
PRIME / ME33 / IPCC
6 Literally sustainable development refers to maintaining development over time. It may be defined
as development that meets the needs of the present without compromising the ability of future
generations to meet their own needs. A nation or society should satisfy its requirements – social,
economic and others – without jeopardizing the interests of future generations.
Special responsibilities of industries based on natural resources: Industries that are based on
natural resources, like minerals, timber, fibre, and foodstuffs etc. have a special responsibility for:
(i) Adopting practices that have built-in environmental consideration
(ii) Introducing processes that minimize the use of natural resources and energy, reduce
waste, and prevent pollution.
(iii) Making products that are ‘environment-friendly’, with minimum adverse impact on people
and ecosystem.
(c) Critical Thinking:
Critical thinking is the discipline of rigorously and skilfully using information, experience,
observation and reasoning to guide one's decisions, actions and beliefs. Critical thinking refers to
the act of question of every step of the thinking process
e.g.
• Have you considered all the facts?
• Have you tested your assumptions?
• Is your reasoning sound?
• Can you be sure your judgment is unbiased?
• Is your thinking process logical, rational and complete?
Developing Critical thinking: To develop as a critical thinker, one must be motivated to develop
the following attributes:
(i)
(ii)
(iii)
(iv)
(v)
Open-minded: Readiness to accept and explore alternative approaches and ideas.
Well informed: Knowledge of the facts and what is happening on all fronts.
Experimental: Thinking through 'what if scenarios to create probable options and
then test the theories to determine what will work and what will not be acceptable.
Contextual: Keeping in mind the appropriate context in the course of analyses.
Apply factors of analysis is that are relevant or appropriate.
Reserved in making conclusion: Knowledge of when, a conclusion is a 'fact' and
when it is not only true conclusions support decisions.
3. (a) Provision:
According to Section 4 (1) of the Payment of Gratuity Act, 1972, gratuity shall be payable to an
employee on the termination of his employment after he has rendered continuous service for not
less than five years on his superannuation, or, on his retirement or resignation or on his death or
disablement due to accident or disease.
The condition of the completion of five years of continuous service is not essential in case of the
termination of the employment of any employee due to death or disablement for the purpose of this
section. Disablement means such disablement as incapacitates an employee for the work which he
was capable of performing before the accident or disease resulting in such disablement.
PRIME / ME33 / IPCC
7 Solution:
In the given case, all the requirements stated above are fulfilled. Therefore, E is entitled to recover
gratuity after becoming permanently disabled and continuous service of five years is not required in
this case. Hence, the company cannot refuse to pay gratuity on the ground that he has served only
for a year.
(b) The focus on core values and sound ethics, the hallmark of ethical management, is being
recognized as an important way to ensure the long-term effectiveness of governance structures
and procedures and avoid the need for whistle-blowing. Employers, who understand the
importance of work place ethics, provide their workforce with an effective framework and guiding
principles to identify and address ethical issues as they arise. Measures to ensure ethics in the
workplace:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
have a code of conduct and ethics
establish open communication
make ethics decisions in group and make decision public wherever appropriate
Integrate ethics management with other management practices.
use of cross-functional teams when developing and implementing the ethics management
programme
Appointing an ombudsman.
Creating an atmosphere of trust
Regularly updating of policies and procedures
include a grievance policy for employees
Set an example from the top.
(c) Format of Power of Attorney to be submitted before the Income –Tax Authorities.
I/we, ____________________, residing at _______________hereby authorise,_______________
to represent me/my firm/my family in connection with __________________for the year______.
His statement and explanation will be binding on me/us.
IN WITNESS WHEREOF we have signed this authorization at ________on this __th day of __,
2011
Place:
Date:
For and on behalf
________________
(Authorised signatory)
I, ——————— hereby declare that I am duly qualified to represent the abovementioned person.
Place:
Date:
(Address of Power of Attorney holder)
4. (a) The Companies Act, 1956 permits the promoters of a Company to choose any suitable name
for the Company provided the name chosen is not undesirable. A name may be considered
undesirable where it is too similar to the name of an already existing Company. In the present
PRIME / ME33 / IPCC
8 problem since the two Companies are in insurance business, it may lead to a natural inference on
the part of the public that the two are interrelated because of the word ‘Asiatic’ which is quite an
imaginary word and does not mean anything. Mere addition of the word ‘New’ is not likely to give
an otherwise impression. Therefore, on a suit by Asiatic Government Security Life Insurance Co.
Ltd. Court is likely to advise the New Asiatic Insurance Co. Ltd. to change its name.
(b) Pre-incorporation contracts in general are void and hence not binding on the Company.
However, as per the Specific Relief Act, 1963 the party to the contract can enforce the contract
against the Company if:
(i) The Company had adopted the same after incorporation; and
(ii) The contract is warranted by the terms of incorporation. Thus, unless the Company
adopts the contract, the other party cannot enforce the same against the Co. But,
promoters can be held liable.
(c) Provision:
According to Section 176 of the Companies Act, 1956, any provision in the Articles of a public
company or of a private company which is a subsidiary of a public company which requires a
longer period than 48 hours before a meeting of the company for depositing a proxy, shall have
effect as if a period of 48 hours had been specified for such deposit.
Solution:
Since in the given case, the articles requires the instrument appointing a proxy to be received by
the company 75 hours before the meeting. It is not a valid requirement.
(d) (i) AGM Notice
Notice is hereby given that the 15th Annual General Meeting of the members of ABC will be
held on Monday the 15th day of September 2011 at the registered office of the Company
……………… At 10 a.m. to present the following business:
Ordinary Business:
To
1. Receive, consider and adopt the Audited Balance sheet of the company as on 31st March,
2011 and the Profit and Loss account for the year ended on that date and Audit’s and
director’s response thereon.
2. To declare dividend for the year ended 31st March, 2011
3. To appoint a director in place of Mr. ……………………..
4. To appoint Statutory Auditors of the Company.
NOTE: A member entitled to attend and vote is entitled to appoint a proxy to attend and vote
instead of himself and proxy need not be a member of the company.
For and on behalf of the Board of Directors
Registered Office
(ii) Period within which AGM shall be held:
The AGM shall be held, in each calendar year, in addition to any other meeting. The time gap
between two Annual general meetings shall not exceed 15 months and As per Section 210 of
PRIME / ME33 / IPCC
9 the companies act, the time gap between the end of the financial year and the date of AGM
shall not exceed 6 months. A Company shall hold its first AGM within 18 months from the date
of its incorporation. It shall not be necessary for a company to hold any AGM in the year of its
incorporation or in the following year, if it holds AGM within 18 months from the date of its
incorporation. The RoC does not have power to extend the time to hold first AGM.
5. (a) Provision:
Section 20 of the Negotiable Instruments Act, 1881 provides that when one person signs and
delivers to another a paper stamped in accordance with the law relating to negotiable instrument
then in force in India and either wholly blank or having written thereon an incomplete negotiable
instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the
case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding
the amount covered by the stamps. The person so signing shall be liable upon such instrument, in
the capacity in which he signed the same to any holder in due course for such amount. A person
other than holder in due course is not authorised to recover anything in excess of the amount
intends by him to be paid thereunder.
Solution:
The principle contained in section 20 is that a person who gives another possession of his
signature on blank stamped paper prima facie authorises the latter as his agent to fill it up and give
to the world the instrument as accepted by him. The principle is one of estoppel. In the given
problem ‘A’ is stopped from setting up B’s fraud, and ‘C’ is entitled to recover `2,000/- from ‘A’
because ‘C’ has obtained it as a holder in due course. This liability does not stand of a person
other than the holder in due course. ‘C’ as a holder in due course is entitled to enforce payment of
the full amount even though the authority has been exceeded but it is necessary that the sum
ought not to exceed the amount covered by the stamp. [Lloyds Bank vs. Cooke (1907) KB 794]
(b) (i) No. The consumer does not purchase goods and health services for personal purposes
only, because on certain occasions various items are purchased for public welfare and
development of the society as a whole. Further, under the Competition Act, 2002, a consumer
is also one who may purchase goods for commercial purposes also.
(ii) No. Consumer and public interest are not synonymous, because whatever is done in public
interest is to protect the larger interest of the society that may or may not be made up of only
consumers.
(iii) No. A communication which flows through all prescribed channels which all organizational
members desirous of communicating with one another are obliges to follow is Formal
communication
(iv) Yes. Grapevine is an important form of informal communication. The larger the organization,
more active is the rumour mill.
(v) Yes. Environmental considerations has become a part of corporate strategy. In many
industries it has been found that environmental practices have resulted in more saving.
(c) Provision:
As per section 77A of the Companies act,1956, a company may purchase its own shares or other
specified securities out of:
(i) Its free reserves
PRIME / ME33 / IPCC
10 (ii) The securities premium account
(iii) The proceeds of any shares/other specified securities.
However, buyback of any kind of shares or other specified securities CAN NOT be made out of the
proceeds of an earlier issue of the SAME KIND of shares/other specified securities.
Conditions: No Company shall purchase its own shares or other specified securities unless:
(a) Special resolution has been passed in general meeting authorising the buy-back.
(b) BOD. However, a resolution by the B.O.D. (board of directors) is sufficient, instead of a
above, if the buyback of shares is LESS THAN OR EQUAL TO 10% of the total paid
up capital (equity shares and preference shares) and free reserves.
Solution:
(a) The Company’s proposal for buy-back is not in order as it has passed only an ordinary
resolution and the percentage of 30% buy-back is in violation of provisions.
(b) The answer to the second question shall also be the same since there also the resolution
passed by the company is an ordinary resolution and not special resolution, through the
percentage of buy-back i.e. 20% is not violative.
6. (a)
(i) In case of Private Company, only one proxy can be appointed and the proxy need not be a
member.
(ii) By virtue of Section 187, if a company is a member of another company, it may appoint a
representative to vote. A Peron authorized by resolution as aforesaid shall be entitled to
exercise the same rights and powers (including right to vote by proxy) on behalf of the body
corporate. Therefore Proxy Z is valid.
(b) Rights of Bailee
As per Sections 178 and 178A of the Indian Contract Act, 1872 the deposit of title deeds with the
bank as security against an advance constitutes a pledge. As a pledge, a banker’s rights are not
limited to his interest in the goods pledged. In case of injury to the goods or their deprivation by a
third party, the pledgee would have all such remedies that the owner of the goods would have
against them. In Morvi Mercantile Bank Ltd. vs. Union of India, the Supreme Court held that the
bank (pledgee) was entitled to recover not only the amount of the advance due to it, but the full
value of the consignment. However, the amount over and above his interest is to be held by him in
trust for the pledgor. Thus, the bank will succeed in this claim of `60,000 against Railway.
(c) The following are some of the international initiatives in the area of CSR:
(i) The Global Reporting Initiative: is a reporting standard established in 1997 with the mission of
designing global applicable guidelines for preparing enterprise-level sustainability reports including
both social and environmental indicators. GRI accomplishes this vision by developing, continually
improving, and building capacity around the use of its Sustainability Reporting Framework.
(ii) AA1000: Launched in 1999, AA1000, based on John Elkington’s triple bottom line (3BL) reporting
is an accountability standard designed to complement the Global Reporting Initiative’s (GRI)
Reporting Guidelines with the objective to improve accountability and performance by learning
through stakeholder engagement.
PRIME / ME33 / IPCC
11 (iii) United Nations Global Compact: The Global Compact is a voluntary international corporate
citizenship network initiated to support the participation of both the private sector and other social
actors to advance responsible corporate citizenship and universal social and environmental
principles to meet the challenges of globalisation.
(iv) Organisation for Economic Cooperation and Development (OECD) Guidelines for
Multinational enterprises: The guidelines were first published in 1976 and updated most recently
in June 2004. The guidelines are recommendations addressed by government to multinational
(d) Characteristics of Group Personality:
(i) Spirit of Conformity: Individual members soon come to realize that in order to gain recognition,
admiration and respect from others, they have to achieve a spirit of conformity. Our beliefs,
opinions, and actions are influenced more by group opinion than by an individual’s opinion,
even if it is an expert’s opinion. If the members conform to the accepted standards of their
group relationships, they feel happier and better adjusted.
(ii) Respect for group values: Any working group is likely to maintain certain values and ideals
which make it different from others. In order to deal effectively with a group, we must
understand its values, which will guide us in foreseeing its programmes and actions.
(iii) Resistance to change: It has been observed that a group generally does not take kindly to
social changes. On the other hand, the group may bring about its own changes, whether by
dictation of its leader or by consensus. The degree to which a group resists change serves as
an important index of its personality. It helps us in dealing with it efficiently.
(iv) Group prejudice: Just as hardly any individual is free from prejudice, groups have their own
clearly evident prejudices. It is a different matter that the individual members may not admit
their prejudiced attitude to other’s race, religion, nationality etc. But the fact is that the
individual’s prejudices get further intensified while coming in contact with other members of the
group holding similar prejudices.
(v) Collective power: It need not be said that groups are always more powerful than individuals,
how so ever influential the individual may be. That is why individuals may find it difficult to
speak out their minds in groups. There is always the risk of the one-against-many situation
cropping up. All of us are in need of people who adopt a friendly attitude towards us, not really
those who are out to challenge us in a group.
7. (a) As per Sec.10 (2) of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952
any amount standing to the credit of a member in the Fund at the time of his death and payable to
his nominee shall vest on the nominee and shall be free from any debt or other liability incurred by
the deceased or the nominee before death of the member and shall not be liable to attachment by
any decree or order of any court. So,
(i) The bank cannot recover its loan dues from the P.F. dues,
(ii) Answer would be same in case the nominee had paid any loan to Mrs. Rakesh before her
death.
PRIME / ME33 / IPCC
12 (b) False., In general they have voting right only on matters directly relating to rights attached to
preference share capital (E.g.: Resolution for winding up of Company, change in dividend rate).
(Sec.87)
Exception: But they are entitled to vote on every resolution placed before Company at any meeting,
if dividend on such capital in full or in part is remaining unpaid in the case of:
•
•
Cumulative preference shares - If dividends are in arrears for two years preceding the date of
commencement of the meeting.
Non-cumulative preference shares - If dividends are has not been paid for 2 financial years
immediately preceding the meeting or for any 3 years during the period of 6 years ending with
the financial year preceding the meeting.
Or
Sec.208 provides for payment of interest to shareholders, if following conditions are satisfied:
(i)
The AOA shall authorise such payment Or a S.R. shall be passed authorising such
payment.
(ii)
The permission from the C.G. shall be obtained.
(iii)
The rate of interest will be determined by C.G. and it shall not exceed 12%.
(iv) Before permitting the payment, the C.G. may appoint a person for enquiry.
(v)
Time limit: The payment of interest shall be made only for such period as may be
determined by the central government.
(c) Some of the key issues that are considered while evaluating corporate governance are:
1.
Accountability of Board of Directors
Board of Directors (BOD) is the link between managers and shareholders. A Board in many
cases serves as the governance mechanism for problems inherent to many organisations. The
problems could be between the firm’s owner, its shareholders who are unable to control
management directly and the management who in many cases may not be vigilant enough. As
such, the BOD is potentially the most effective instrument of good governance.
2.
Financial Disclosure and Controls
It is desirable that the Corporate structure should include an audit committee composed of
Independent Directors with significant exposure on financial transactions. Ideally, the
committee should have the sole power to hire and fire the company’s auditors and approve
non-audit services from the auditor. Top management compensation should be determined by
measurable performance goals (shareholder return etc.) and, ideally, the compensation rate
should also be set by an independent compensation committee and fully disclosed.
3.
Stock Options
Sometimes Directors, especially Executive Board Directors, grant generous stock options to
top managers. While stock options offer managers an incentive to perform well,
Or
PRIME / ME33 / IPCC
13 Safeguards in the work environment
Safeguards against threats faced by professional shall be to:
(i) Ensure an ethical environment,
(ii) Increase the likelihood of identifying or deterring unethical behaviour and
(iii) Eliminate or reduce threats to acceptable level.
(iv) The following safeguards may be created by a business enterprise in the work
environment:
(v) The employing organisations’ systems or corporate oversight or other oversight structures.
(vi) The employing organisation's ethics and conduct programmes.
(vii) Recruitment procedures in the employing organisation emphasizing the importance of
employing high caliber competent staff
(viii) Strong internal controls
(ix) Appropriate disciplinary process
(x) Leadership that stresses the importance of ethical behaviour and expectation that
employees will act in an ethical manner.
(xi) Policies and procedures to implement and monitor the quality of employee performance.
(xii) Timely communication of the employing organisation's policies and procedures, including
any changes to them, to all employees and appropriate training and education on such
policies and procedures.
(d) Ethical Dilemmas In Communication
(i) Secrecy: Secrets are kept for both honourable and dishonourable reasons; may be used to
guard intimacy or to invade it.
(ii) Whistle-blowing: Any employee who goes public with information about corporate abuses
or negligence is known as a whistle-blower. Corporations and managers legitimately
expect employee loyalty. Greed, jealousy, and revenge motivate some whistle-blowers.
(iii) Leaks: A leak is like anonymous whistle- blowing; one distinction being the propriety of the
leak; namely, that the person who leaks information cannot be cross-examined. This often
casts doubt on the credibility of the claim
(iv) Rumour and gossip: Rumours and gossip seem to be an inevitable part of everyday
corporate life. Even though rumours and gossip often travel through the same networks,
there is a distinction between the terms.
(v) Lying: A lie is a false statement intended to deceive. Of all the ethical dilemmas discussed
thus far, lying would appear to be the least morally perplexing.
(vi) Euphemisms: By definition, a euphemism is using a less offensive expression instead of
one that might cause distress.
(vii) Ambiguity: Ambiguity, like secrecy, can be used for ethical or unethical purposes
.Language itself is made up of various words that carry values.
Or
Functions of Interpersonal Communication
Interpersonal communication is important because of the following functions it achieves:
Gaining Information: One reason, we engage in interpersonal communication, is to gain
knowledge about another individual. We attempt to gain information about others so that we can
interact with them more effectively. We can predict better how will they think, feel, and act if we
PRIME / ME33 / IPCC
14 know who they are. We gain this information passively by observing them; actively, by having
others engage them; or interactively, by engaging them ourselves.
Building Understanding: Interpersonal communication helps us to understand better what
someone says in a given context. Words can mean very different things depending on how they
are said or in what context. Content Messages refer to the surface level meaning of a message.
Relationship Messages refer to how a message is said. The two are sent simultaneously, but each
affects the meaning assigned to the communication and helps us understand each other better.
Establishing Identity: We also engage in interpersonal communication to establish an identity
based on our relationships and the image we present to others.
Interpersonal Needs: We also engage in interpersonal communication to express interpersonal
needs. William Schutz has identified three such needs: inclusion, control,and affection.
• Inclusion is the need to establish identity with others.
• Control is the need to exercise leadership and prove one's abilities. Groups provide
• outlets for this need. Some individuals do not want to be a leader. For them, groups
• provide the necessary control over aspects of their lives.
• Affection is the need to develop relationships with people. Groups are an excellent way
• to make friends and establish relationships.
PRIME / ME33 / IPCC
15 TMFC
No. of Pages: 6
No of Questions: 7
Total Marks: 100
Time Allowed: 3 Hrs
Question No. 1 is compulsory. Answer any 5 from the remaining 6 questions
Working notes should form part of the answers
1 (a) In a unit, 10 men work as a group. When the production for the group exceeds the standard output
of 200 pieces per hour, each man is paid an incentive for the excess production in addition to his
wages at hourly rates. The incentive is at half the percentage, the excess production over the
standard bears to the standard production, Each man is paid an incentive at the rate of this
percentage of a wage rate of `2 per hour. There is no relation between the individual workman’s
hourly rate and the bonus rate. In a week, the hours worked are 500 hours and the total production
is 1,20,000 pieces.
(a) Compute the total amount of the bonus for the week.
(b) Calculate the total earnings of two workers A and B of the group:A worked 44 hours and his basic rate per hour was `2.20. B worked 48 hours and his basic rate
per hour was `1.90.
(5 Marks)
(b) A company has the option to procure a particular material from two sources:
Source I assures that defectives will not be more than 2% of supplied quantity.
Source II does not give any assurance, but on the basis of past experience of supplies received
from it, it is observed that defective percentage is 2.8%. The material is supplied in lots of 1,000
units. Source II supplies the lot at a price, which is lower by `100 as compared to Source I. The
defective units of material can be rectified for use at a cost of `5 per unit. You are required to find
out which of the two sources is more economical
(5 Marks)
(c) Using the following information, complete the Balance Sheet given below:
(i) Total debt to net worth :
1:2
(ii) Total assets turnover :
2
(iii) Gross profit on sales :
30%
(iv) Average collection period :
40 days
(Assume 360 days in a year)
(v) Inventory turnover ratio based on cost of goods
sold and year-end inventory:
3
(vi) Acid test ratio :
0.75
PRIME/ME33/IPCC
1
Balance Sheet as on March 31, 2011
Liabilities
`
Assets
Equity ShareCapital
4,00,000
Plant and Machinery
Reserves and Surplus
6,00,000
Total Debt:
Current Assets:
Current Liabilities
Inventory
Debtors
Cash
`
(5 Marks)
(d) A firm has sales of `75,00,000 variable cost of `42,00,000 and fixed cost of `6,00,000. It has a
debt of `45,00,000 at 9% and equity of `55,00,000.
(i) What is the firm’s ROI?
(ii) Does it have favourable financial leverage?
(iii) If the firm belongs to an industry whose asset turnover is 3, does it have a high or low
asset leverage?
(iv) If the sales drop to `50,00,000, what will be the new EBIT?
(v) At what level the EBT of the firm will be equal to zero?
(5 Marks)
2.(a) Samsung Ltd. currently has an equity share capital of `10,00,000 consisting of 1,00,000 Equity
share of `10 each. The company is going through a major expansion plan requiring to raise funds
to the tune of `6,00,000. To finance the expansion the management has following plans:
Plan-I : Issue 60,000 Equity shares of `10 each.
Plan-II : Issue 40,000 Equity shares of `10 each and the balance through long term borrowing at
12% interest p.a.
Plan-III : Issue 30,000 Equity shares of `10 each and 3,000 `100, 9% Debentures.
Plan-IV : Issue 30,000 Equity shares `10 each and the balance through 6% preference shares.
The EBIT of the company is expected to be `4,00,000 p.a. assume corporate tax rate of 40%.
Required:
(i) Calculate EPS in each of the above plans.
(ii) Ascertain the degree of financial leverage in each plan.
(8 Marks)
(b) ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The variable
production costs are `40 per unit and the variable selling expenses are `12 per sold unit. The
budgeted fixed production expenses were `24,00,000 per annum and the fixed selling expenses
were `16,00,000. During the year ended 31st March, 2011, the company worked at 80% of its
capacity. The operating data for the year are as follows:
PRIME/ME33/IPCC
2
Production
3,20,000 units
Sales @ Rs. 80 per unit
3,10,000 units
Opening stock of finished goods 40,000 units
Fixed production expenses are absorbed on the basis of capacity and fixed selling expenses are
recovered on the basis of period.
You are required to prepare Statements of Cost and Profit for the year ending 31st March, 2011:
(i) On the basis of marginal costing
(ii) On the basis of absorption costing.
(8 Marks)
3.(a) Special Limited undertook a contract for `5,00,000 on 1st July, 2010. On 30th June, 2011 when
the accounts were closed, the following details about the contract were gathered:
`
Materials Purchased
1,00,000
Wages Paid
45,000
General Expenses
10,000
Plant Purchased
50,000
Materials on Hand 30.06.11
25,000
Wages Accrued 30.06.11
5,000
Work Certified
2,00,000
Cash Received
1,50,000
Work Uncertified
15,000
Depreciation of Plant
5,000
The above contract contained an escalator clause which read as follows:
"In the event of prices of materials and rates of wages increase by more than 5% the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages
beyond 5% in each case." It was found that since the date of signing the agreement the prices
of materials and wage rates increased by 25%. The value of the work certified does not take
into account the effect of the above clause.
Prepare the contract account. Workings should form part of the answer.
(8 Marks)
(b) XYZ Co. Ltd. is a pipe manufacturing company. Its production cycle indicates that materials are
introduced in the beginning of the production cycle; wages and overhead accrue evenly throughout
the period of the cycle. Wages are paid in the next month following the month of accrual. Work in
process includes full units of raw materials used in the beginning of the production process and
50% of wages and overheads are supposed to be conversion costs. Details of production process
and the components of working capital are as follows:
PRIME/ME33/IPCC
3
Production of pipes
12,00,000 units
Duration of the production cycle
One month
Raw materials inventory held
One month consumption
Finished goods inventory held for
Two months
Credit allowed by creditors
One month
Credit given to debtors
Two months
Cost price of raw materials
`60 per unit
Direct wages
`10 per unit
Overheads
`20 per unit
Selling price of finished pipes
`100 per unit
Required to calculate:
(i) The amount of working capital required for the company.
(ii) Its maximum permissible bank finance under all the three methods of lending norms as
suggested by the Tondon Committee, assuming the value of core current assets: `1,00,00,00.
(8 Marks)
4.(a) The following figures of Star Ltd. are presented as under:
(`)
Earnings before interest and tax
23,00,000
Less: Debenture interest @ 18%
80,000
Long Term Loan interest @ 11%
2,20,000
3,00,000
20,00,000
Less: Income Tax
10,00,000
Earnings after tax
10,00,000
No. of Equity shares of `10 each
E.P.S.
Market price of share
P/E ratio
5,00,000
`2
`20
10
The company has undistributed reserves and surplus of `20 lakhs. It is in need of `30 lakhs to
pay off debentures and modernise its plants. It seeks your advice on the following alternative
modes of raising finance.
Alternative 1 - Raising entire amount as term loan from banks @ 12%
Alternative 2 - Raising part of the funds by issue of 1,00,000 shares of Rs. 20 each and the rest
by term loan at 12%.
The company expects to improve its rate of return by 2% as a result of modernisation, but P/E
ratio is likely to go down to 8 if the entire amount is raised as term loan.
(i) Advise the company on the financial plan to be selected.
(ii) If it is assumed that there will be no change in the P/E ratio if either of the two alternatives is
adopted, would your advice still hold good?
(8 Marks)
PRIME/ME33/IPCC
4
(b) ABC Limited manufactures a product ‘ZX’ by using the process namely RT. For the month of May,
2007, the following data are available:
Process RT
Material introduced (units)
16,000
Transfer to next process (units)
14,400
Work in process:
At the beginning of the month (units)
4,000
(4/5 completed)
At the end of the month (units)
3,000
(2/3 completed)
Cost records:
Work in process at the beginning of the month
Material
`30,000
Conversion cost
`29,200
Cost during the month: materials
`1,20,000
Conversion cost
`1,60,800
Normal spoiled units are 10% of goods finished output transferred to next process. Defects in
these units are identified in their finished state. Material for the product is put in the process at
the beginning of the cycle of operation, whereas labour and other indirect cost flow evenly over
the year. It has no realizable value for spoiled units.
Required:
(i) Statement of equivalent production (Average cost method);
(ii) Statement of cost and distribution of cost;
(iii) Process accounts.
(8 Marks)
5.(a) A manufacturing company has disclosed a net loss of `2,13,000 as per their cost accounting
records for the year ended March 31, 2011. However, their financial accounting records
disclosed a net loss of `2,58,000 for the same period. A scrutiny of data of both the sets of books
of accounts revealed the following information:
`
(i) Factory overheads under absorbed
5,000
(ii) Administration overheads over absorbed
3,000
(iii) Depreciation charged in financial accounts
70,000
(iv) Depreciation charged in cost accounts
80,000
(v) Interest on investments not included in cost accounts
20,000
(vi) Income tax provided in financial accounts
65,000
(vii) Transfer fees (credit in financial accounts)
2,000
(viii) Preliminary expenses written off
3,000
(ix) Over- valuation of closing stock of finished goods in cost accounts
7,000
Prepare a Memorandum Reconciliation Account.
(8 Marks)
(b) Distinguish between Fund flow statement and Cash Flow Statement.
PRIME/ME33/IPCC
(4 Marks)
5
(c) What is meant by Venture Capital Financing?
(4 Marks)
6.(a) A company wants to invest in a machinery that would cost `50,000 at the beginning of year 1. It is
estimated that the net cash inflows from operations will be `18,000 per annum for 3 years, if the
company opts to service a part of the machine at the end of year 1 at `10,000. In such a case, the
scrap value at the end of year 3 will be `12,500. However, if the company decides not to service
the part, then it will have to be replaced at the end of year 2 at `15,400. But in this case, the
machine will work for the 4th year also and get operational cash inflow of `18,000 for the 4th year.
It will have to be scrapped at the end of year 4 at `9,000.
(i) Assuming cost of capital at 10% and ignoring taxes, will you recommend the purchase of this
machine based on the net present value of its cash flows?
(ii) If the supplier gives a discount of `5,000 for purchase, what would be your decision?
(The present value factors at the end of years 0, 1, 2, 3, 4, 5 and 6 are respectively 1, 0.9091,
0.8264, 0.7513, 0.6830, 0.6209 and 0.5644).
(8 Marks)
(b) What are the features of good time keeping system?
(4 Marks)
(c) A machinery was purchased from a manufacturer who claimed that his machine could produce
36.5 tonnes in a year consisting of 365 days. Holidays, break-down, etc., were normally allowed in
the factory for 65 days. Sales were expected to be 25 tonnes during the year and the plant actually
produced 25.2 tonnes during the year. You are required to state the following figures:
(i) rated capacity
(ii) practical capacity
(iii) normal capacity
(iv) actual capacity
(4 Marks)
7. Answer any four of the following:
a) What are the main responsibilities of a Chief Financial Officer of an organization?
b) What do you mean by Deep Discount Bonds (DDB’s)
c) What is Treasury management? What are its responsibilities?
d) How are by-product costs treated in cost accounts?
e) Distinguish between Product cost and period cost.
(4 x 4 = 16 Marks)
PRIME/ME33/IPCC
6
PRIME ACADEMY
33rd SESSION MODEL EXAM – IPCC - COST ACCOUNTING AND FINANCIAL MANAGEMENT
SUGGESTED ANSWERS
1. (a) Actual production during the week
1,20,000 pieces
Standard production during the week of 500 hours,
@ 200 pieces per hour
1,00,000 pieces
Excess production over standard
20,000 pieces
Percentage of the excess production over the
Standard bears to the standard production
20000÷100000x100 = 20%
Incentive is half of 20% i.e. 10%.
The rate of incentive is at 10% over a wage rate of ` 2.00 per hour. Thus the rate of
incentive per hour is 0.20P.
(a) Total amount of bonus for the week: 500 hours × ` 0.20 = ` 100.
(b) Total Earnings of two workers A & B of the group.
Amount (`)
A’s Wages for 44 hours @ ` 2.20 per hour
Bonus for 44 hours @ Re. 0.20 per hour
Total Earning of A
96.80
8.80
105.60
B’s Wages for 48 hours @ ` 1.90 per hour
Bonus for 48 hours @ 0.20 per hour
Total Earning of B
91.20
9.60
100.80
(b) Comparative Statement of procuring material from two sources
Defective (in %)
Units supplied (in one lot)
Total defective units in a lot
Additional price paid per lot (`) (A)
Rectification cost of defect (`) (B)
Total additional cost per lot (`): [(A)+(B)]
Material source I
2
(Future estimate)
1,000
20
(1,000 units×2%)
100
100
(20 units ` 5)
200
Material source II
2.8
(Past experience)
1,000
28
(1,000 units ×2.8%)
–
140
(28 units × ` 5)
140
Decision: On comparing the total additional cost incurred per lot of 1,000 units, we observe that
it is more economical, if the required material units are procured from material source II.
(c) (i) Networth = Capital + Reserves and surplus
= `4,00,000 + `6,00,000 = ` 10,00,000
‫׵‬Total Debt ÷ Networth = 1/2
Total debt = ` 5,00,000
(ii) Total Liability side = `4,00,000 + `6,00,000 + `5,00,000
PRIME/ME33/IPCC
7
= ` 15,00,000 = Total Assets
Total Assets Turnover =Sales ÷ Total assets
2 =Sales ÷ ` 15,00,000
‫׵‬Sales = ` 30,00,000
(iii) Gross Profit on Sales : 30% i.e. ` 9,00,000
‫ ׵‬COGS = ` 30,00,000 – ` 9,00,000 = ` 21,00,000
(iv) Inventory turnover =COGS ÷ Inventory
3 =`21,00,000 ÷ Inventory
‫ ׵‬Inventory = ` 7,00,000
(v) Average collection period =Average debtors÷(Sales / day)
40 =Debtors÷`30,00,000 / 360
‫ ׵‬Debtors = ` 3,33,333.
(vi) Acid test ratio = (Current Assets - Stock)/ Current liabilities
0.75 =(Current Assets - `7,00,000)/ `5,00,000
‫ ׵‬Current Assets = ` 10,75,000.
(vii) Fixed Assets = Total Assets – Current Assets
= `15,00,000 – `10,75,000 = ` 4,25,000
(viii) Cash and Bank balance = Current Assets – Inventory – Debtors
= `10,75,000 – `7,00,000 – `3,33,333
= ` 41,667.
Balance Sheet as on March 31, 2011
Liabilities
Equity Share Capital
Reserves & Surplus
Total Debt:
Current liabilities
`
4,00,000
6,00,000
5,00,000
Assets
Plant and Machinery
and other Fixed Assets
Current Assets:
Inventory
Debtors
Cash
15,00,000
`
4,25,000
7,00,000
3,33,333
41,667
15,00,000
`
(d)
Sales
Less: Variable cost
Contribution
Less: Fixed costs
EBIT
PRIME/ME33/IPCC
75,00,000
42,00,000
33,00,000
6,00,000
27,00,000
8
Less: 9% interest on ` 45,00,000
EBT
4,05,000
22,95,000
(i) ROI = EBIT/Debt+Equity = `270,0000/` 10,000,0000 = 27%
(ii) Since the return on investment (27%) is higher than the interest payable on debt at 9%, the firm
has a favourable financial leverage.
(iii) Asset Turnover = Net Sales/(Total assets-Total investment)
Firm’s Asset Turnover is = `75,00,000/`1,00,00,000 = 0.75
The industry average is 3. Hence the firm has low asset leverage.
(iv) Operating leverage = Contribution/EBIT=`33,00,000/`27,00,000 = 1.2222
Financial leverage = EBIT/EBT=`27,00,000/`22,95,000 = 1.1764
Combined leverage = Contribution/EBT= `33,00,000/`22,95,000= 1.438
(OR)
Combined leverage = Operating leverage x Financial leverage
= 1.2222 x 1.1764 =1.438
(v) If the sales drop to ` 50,00,000 from ` 75,00,000, the fall is by 33.33% Hence EBIT will drop by
40.73% (%Fall in sales x operating leverage) Hence the new EBIT will be ` 27,00,000 x (140.73%) = ` 16,00,290 or rounded upto ` 16,00,000
(vi) EBT to become zero means 100% reduction in EBT. Since the combined leverage is 1.438,
sales have to drop by 100/1.438 i.e. 69.54%. Hence the new sales will be ` 75,00,000 x (169.54%) = ` 22,84,500 (approx.)
2. (a)
Plan 1
Plan 2
Plan 3
Plan 4
Present Equity shares
100,000
100,000
100,000
100,000
New issue
60,000
40,000
30,000
30,000
Equity Share capital
1,600,000
1,400,000
1,300,000
1,300,000
No. of equity shares
160,000
140,000
130,000
130,000
12% Long term loan (`)
-
200,000
-
-
9% Debentures (`)
-
-
300,000
-
6% Preference shares(`)
-
-
-
300,000
EBIT
400,000
400,000
400,000
400,000
Interest on 12% loan (`)
-
24,000
-
-
PRIME/ME33/IPCC
9
Interest on 9% debentures(`)
-
-
27,000
-
EBT (`)
400,000
376,000
373,000
400,000
Less: Tax 40%
160,000
150,400
149,200
160,000
EAT(`)
240,000
225,600
223,800
240,000
Less:Preference dividends (`)
-
-
-
18,000
(a) Earnings for equity shares (`)
240,000
225,600
223,800
222,000
(b) Number of equity shares
160,000
140,000
130,000
130,000
(c) EPS (a÷b) `
1.50
1.61
1.72
1.71
Degree of financial leverage(EBIT/EBT)
1.00
1.06
1.07
1.00
(b)
Statement of Cost and Profit under Marginal Costing
for the year ending 31st March, 2011
Output = 3,20,000 units
Particulars
(`)
Sales: 3,10,000 units @ ` 80
Less: Marginal cost / variable cost:
Variable cost of production (3,20,000 × ` 40)
1,28,00,000
Add: Opening stock 40,000 units @ ` 40 16,00,000
1,44,00,000
Less: Closing Stock
[(3,20,000 + 40,000 – 3,10,000) @ ` 40
= 50,000 units @ ` 40]
20,00,000
Variable cost of production of 3,10,000 units
1,24,00,000
Add: Variable selling expenses @ ` 12 per unit
37,20,000
Contribution (sales – variable cost)
Less: Fixed production cost
24,00,000
Fixed selling expenses
16,00,000
Actual profit under marginal costing
(`)
2,48,00,000
1,61,20,000
86,80,000
40,00,000
46,80,000
Statement of Cost and Profit under Absorption Costing
for the year ending 31st March, 2011
Output = 3,20,000 units
PRIME/ME33/IPCC
10
Particulars
Sales: 3,10,000 units @ ` 80
Less: Cost of sales:
Variable cost of production
(3,20,000 @ ` 40)
Add: Fixed cost of production absorbed
3,20,000 units @ ` 6
Add: Opening Stock:
40,000 × (`1,47,20,000/ `3,20,000)
(`)
(`)
2,48,00,000
1,28,00,000
19,20,000
1,47,20,000
18,40,000
1,65,60,000
Less: Closing Stock:
50,000 × (1,47,20,000 /3,20,000)
23,00,000
Production cost of 3,10,000 units
1,42,60,000
Selling expenses:
Variable: ` 12 × 3,10,000 units
37,20,000
Fixed
16,00,000
1,95,80,000
Unadjusted profit
52,20,000
Less: Overheads under absorbed:
Fixed production overheads
4,80,000
Actual profit under absorption costing
47,40,000
Workings:
1. Absorption rate for fixed cost of production = ` 24,00,000/4,00,000 units = ` 6 per unit.
2. Fixed production overhead under absorbed = ` (24,00,000 – 19,20,000) = `4,80,000.
3. (a)
Contract Account of Deluxe Limited
(for the year ending 30th June, '87)
`
To Materials
1,00,000 By Work-in Progress
To Wages paid and accrued
50,000 By Work certified
To General expenses
10,000 By Work uncertified
To Plant depreciation
5,000 By Materials on hand
To Profit and Loss A/c
20,000 By Escalation
To Balance c/d
60,000
2,45,000
By Work-in Progress
By Work certified
By Work uncertified
By Materials on hand
By Escalation
PRIME/ME33/IPCC
`
200,000
15,000
25,000
5,000
2,45,000
200,000
15,000
25,000
5,000
245,000
11
Less: Balance c/d
60,000
185,000
Working Note:
Calculation of Escalation:
Total Increase
Materials:(Effect of increase in price)
(` 1,00,000 – ` 20,000) × 25/125
Wages (Effect of increase in wage rates)
`50,000 x 25/125
Total Increase
Upto 5%
Beyond 5%
`
`
`
15,000
3,000
12,000
10,000
2,000
8,000
25,000
5,000
20,000
Increase in Contract price = 25% of Increase in Material and wages beyond 5%
= 25% of ` 20,000 = ` 5,000
(b) (i) Estimate of the Requirement of Working Capital
`
`
A. Current Assets:
Raw material stock
60, 00,000
(12, 00, 000*60*1/12)
Work in progress stock
75, 00,000
(Raw material 60, 00,000
+wages12, 00,000*10*1/2*50%=5,00,000
+overheads10, 00,000*20*1/12*50%=10, 00,000)
Finished goods stock
180, 00,000
(Material 60+labour10+
overheads20=90*12, 00,000*2/12)
Debtors
180, 00,000
(90*12, 00,000*2/12)
495, 00,000
B. Current Liabilities:
Creditors for raw materials
(720, 00,000*1/12)
Creditors for wages
(12, 00,000*10*1/12)
Net Working Capital (A-B)
60, 00,000
10, 00,000
70, 00,000
425, 00,000
(ii) The maximum permissible bank finance as per Tandom Committee Norms
First Method:
Current Assets-Current Liabilities less 25% from long term sources
95, 00,000-70, 00,000=425, 00,000
PRIME/ME33/IPCC
12
Less: 25% from long term sources=106, 25,000=3, 18, 75,000
Second Method:
Working capital less 25% of current assets
425, 00,000-123, 75,000=301, 25,000
Third Method:
Total current assets –core current assets=495, 00,000-100,00,000
=395, 00,000
Real current assets
395, 00,000
Less 25%
98, 75,000
___________
296, 25,000
Less current liabilities
70, 00,000
-----------------MPBF
226, 25,000
------------------
4. (a) Working Notes:
(i) Capital Employed
Equity Capital
Debentures
Term Loan
Reserves and Surplus
Total capital employed
(5,00,000 shares of ` 10 each)
(` 80,000×100/8)
(` 2,20,000x100/11)
`
50,00,000
10,00,000
20,00,000
20,00,000
1,00,00,000
(ii) Rate of return
Earnings before interest and tax
= ` 23,00,000
Rate of return on capital employed
=( ` 23,00,000/ ` 1,00,00,000) x 100
= 23%
(iii) Expected rate of return after modernisation = 23% + 2% = 25%
Alternative 1: Raise entire amount as term loan
Original Capital employed
Less: Debentures
Add: Additional term loan
Revised capital employed
EBIT on revised capital employed (@ 25% on `120 lakhs)
Less: Interest
PRIME/ME33/IPCC
`
1,00,00,000
10,00,000
90,00,000
30,00,000
1,20,00,000
`
30,00,000
13
Existing Term Loan (@11%)
New Term Loan (@12%)
2,20,000
3,60,000
5,80,000
24,20,000
12,10,000
12,10,000
Less: Income Tax (@ 50%)
Earnings after tax (EAT)
Earnings per Share (EPS) =
` 12,10,000/5,00,000 Shares = ` 2.42
P/E Ratio = Market price per share / E P S =
8
8 = Market Price/ `2.42
Market Price = ` 19.36
Alternative 2: Raising part by issue of equity shares and rest by term loan.
`
30,00,000
Earnings before interest and tax (@ 25% on revised
capital employed i.e.,` 120 lakhs)
Less: Interest
Existing Term Loan (@11%)
2,20,000
New Term Loan (@12% on `10,00,000)
1,20,000
26,60,000
Less: Income tax @ 50%
Earnings after tax
3,40,000
13,30,000
13,30,000
EPS = ` 13,30,000 /5,00,000 (existing) 1,00,000 (new) = ` 2.217
P/E ratio = 10
Market price = ` 22.17
Advise:
(i) From the above computations it is observed that the market price of Equity Shares is
maximised under Alternative 2. Hence this alternative should be selected.
(ii) If, under the two alternatives, the P/E ratio remains constant at 10, the market price under
Alternative 1 would be ` 24.20. Then Alternative 1 would be better than Alternative 2.
(b)
Statement of equivalent production of Process RT
Input
units
Details
4000 Opening WIP
Introduced and
completed and
16000 transferred
Normal Spoilage
Abnormal Spoilage
Closing WIP
PRIME/ME33/IPCC
Equivalent production
Output
Conversion
units Material units %
cost
14400
1440
1160
3000
14400
1440
1160
3000
100%
100%
100%
100%
14400
1440
1160
2000
%
100%
100%
100%
66.67%
14
20000
20000
20000
19000
Statement showing cost of each element
Opening
Cost in Process Total Equivalent Units
(`)
(`)
(`)
Materials
30,000
1,20,000
1,50,000
20,000
Conversion cost 29,200
1,60,800
1,90,000
19,000
Units completed
Closing stock
Abnormal stock
Conversion cost
Cost/units
(`)
7.50
10.00
Statement of apportionment of cost
Material
14,400
7.50
Conversion cost
14,400
10.00
Normal spoilage (10%)
Material
3,000
7.50
Conversion cost
2,000
10.00
Material
1,160
7.50
1,160
10.00
Process Account
2,52,000
25,200
42,500
20,300
`
To Opening WIP
To Material
To Conversion cost
5. (a)
`
59,200
1,20,000
1,60,800
3,40,000
By P/L Account (Abnormal)
By Transfer to next process
By Closing WIP
20,300
2,77,200
42,500
3,40,000
Memorandum Reconciliation Account
Particulars
To Net loss as per costing books
To Factory overheads under
Absorbed
To Income tax not provided in
cost books
`
2,13,000
5,000
65,000
Particulars
By Administrative overhead
Over absorbed in costs
10,000
By Interest on investments
not included in cost books
20,000
3,000
By Transfer fees not
considered in cost books
To Over-valuation of Closing
Stock of finished goods in
cost books
7,000
By Net loss as per financial
books
PRIME/ME33/IPCC
3,000
By Depreciation over
charged in cost books
(80,000 – 70,000)
To Preliminary expenses written
off in financial books
2,93,000
`
2,000
2,58,000
2,93,000
15
(b)
Cash flow statement
Funds flow statement
It ascertains the changes in balance of
cash in hand and bank.
It ascertains the changes in financial
position between two accounting
periods.
It analyses the reasons for changes in
balance of cash in hand and bank
It analyses the reasons for change in
financial position between two balance
sheets
It shows the inflows and outflows of
cash.
It reveals the sources and application of
funds.
It is an important tool for short term
analysis.
It helps to test whether working capital
has been effectively used or not.
(c) Venture Capital Financing:
The term venture capital refers to capital investment made in a business or industrial enterprise,
which carries elements of risks and insecurity and the probability of business hazards. Capital
investment may assume the form of either equity or debt or both as a derivative instrument. The
risk associated with the enterprise could be so high as to entail total loss or be so insignificant as
to lead to high gains. The European Venture Capital Association describes venture capital as risk
finance for entrepreneurial growth oriented companies. It is an investment for the medium or long
term seeking to maximise the return.
Venture Capital, thus, implies an investment in the form of equity for high-risk projects with the
expectation of higher profits. The investments are made through private placement with the
expectation of risk of total loss or huge returns. High technology industry is more attractive to
venture capital financing due to the high profit potential. The main object of investing equity is to
get high capital profit at saturation stage.
6. (a) Option I : Purchase Machinery and Service Part at the end of Year 1.
Net Present value of cash flow @ 10% per annum discount rate.
NPV = -50,000 + 18,000/(1.1) +18,000/(1.1)2 +18,000/(1.1)3 -10,000/(1.1)+12,500/(1.1)3
= -50,000 + 18,000 (0.9091 + 0.8264 + 0.7513) – (10,000 x 0.9091) + (12,500 x 0.7513)
= - 50,000 + (18,000 x 2.4868) – 9,091 + 9,391
= - 50,000 + 44,762 – 9,091 + 9,391
NPV = - 4,938
Since, Net Present Value is negative; therefore, this option is not to be considered. If Supplier
gives a discount of ` 5,000 then,
NPV = +5,000 – 4,938 = + 62
PRIME/ME33/IPCC
16
In this case, Net Present Value is positive but very small; therefore, this option may not be
advisable
Option II : Purchase Machinery and Replace Part at the end of Year 2.
NPV = -50,000 + 18,000/(1.1) +18,000/(1.1)2 +18,000/(1.1)3 -15,400/(1.1) 2+27,000/(1.1)4
= - 50,000+ 18,000 (0.9091 + 0.8264 + 0.7513) – (15,400 x 0.8264) + (27,000 x 0.6830)
= - 50,000 + 18,000 (2.4868) – (15,400 x 0.8264) + (27,000 x 0.6830)
= - 50,000 + 44,762 – (15,400 x 0.8264) + (27,000 x 0.6830)
= - 50,000 + 44,762 – 12,727+ 18,441
= - 62,727+ 63,203
= +476
Net Present Value is positive, but very low as compared to the investment. If the Supplier gives
a discount of ` 5,000, then NPV = 5,000 + 476 = 5,476
Decision: Option II is worth investing as the net present value is positive and higher as
compared to Option I.
(b) Features of Good time keeping system:
(i) A good time keeping system must have the following requisites:
(ii) System of time-keeping should be such which should not allow proxy for another worker
under any circumstances.
(iii) There should be a provision of recording of time of piece workers so that regular
attendance is maintained.
(iv) Time of arrival as well as time of departure of workers should be recorded so that total time
of workers may be recorded and wages may be calculated accordingly.
(v) Method of recording time should be mechanical
(vi) The system should be simple, smooth and quick
(vii) A responsible officer should pay frequent visits at the factory gate to see proper method of
recording time is being followed.
(c)
(i) Rated capacity
(Refers to the capacity of a machine or a plant
as indicated by its manufacturer)
(ii) Practical capacity
[Defined as actually utilised capacity of a plant i.e. (365-65) tonnes
(iii) Normal capacity
(It is the capacity of a plant utilized based on sales expectancy)
(iv) Actual capacity
(Refers to the capacity actually achieved)
36.5 tonnes
30 tonnes
25 tonnes
25.2 tonnes
7. (a) Responsibilities of Chief Financial Officer (CFO)
PRIME/ME33/IPCC
17
The chief financial officer of an organisation plays an important role in the company’s goals,
policies, and financial success. His main responsibilities include:
(i) Financial analysis and planning: Determining the proper amount of funds to be employed
in the firm.
(ii) Investment decisions: Efficient allocation of funds to specific assets.
(iii) Financial and capital structure decisions: Raising of funds on favourable terms as
possible, i.e., determining the composition of liabilities.
(iv) Management of financial resources (such as working capital).
(v) Risk Management: Protecting assets.
(b) Deep Discount bonds:
Deep discount bonds is a form of zero-interest bonds. These bonds are sold at a discounted
value and on maturity face value is paid to the investo` In such bonds, there is no interest
payout during the lock-in-period.
(c) Treasury management:
Treasury management is defined as the ‘corporate handling of all financial matters, the
generation of external and internal funds for business, the management of currencies and cash
flows, and the complex strategies, policies, and procedures of corporate finance’.
Treasury management mainly deals with:
• Working capital management; and
• Financial risk management
The key goals are:
• Maximize the return on the available cash;
• Minimize interest cost on borrowings;
• Mobilise as much as possible for corporate ventures and
• Effective dealing in forex, money and commodity markets to reduce risks.
(d) By-Product cost:
(i) When they are of small total value:
• The sales value of the by-products may be credited to the profit and loss account and
no credit be given ion the cost accounts. The credit to the profit and loss account t here
is treated either as miscellaneous income or as additional sales revenue.
• The sale proceeds of the by-product may be treated as deductions from the total costs.
The sale proceeds in fact should be deducted either from the production cost or from
the cost of sales.
(ii) When the by-products are of considerable total value-The joint costs may be divided
over joint products and by-products by using relative market value; physical output method
or ultimate selling price
(iii) Where they require further processing-the net realisable value of the by-product at splitoff point may be arrived at by subtracting the further processing cost from the realisable
value of by-products.
PRIME/ME33/IPCC
18
(e) Product cost and period cost:
Product costs include all the costs that are involved in acquiring or making product. In the case
of manufactured goods, these costs consist of direct materials, direct labour, and
manufacturing overhead. Product costs are viewed as "attaching" to units of product as the
goods are purchased or manufactured and they remain attached as the goods go into inventory
awaiting sale. So initially, product costs are assigned to an inventory account on the balance
sheet. When the goods are sold, the costs are released from inventory as expense (typically
called Cost of Goods Sold) and matched against sales revenue.
Period costs are all the costs that are not included in product costs. These costs are expensed
on the income statement in the period in which they are incurred, using the usual rules of
accrual accounting that we learn in financial accounting. Period costs are not included as part
of the cost of either purchased or manufactured goods. Example: Sales commissions, office
rent, selling and administrative expenses.
PRIME/ME33/IPCC
19
TXTI
No. of Pages: 5
No of Questions: 7
Total Marks: 100
Time Allowed: 3 Hrs
Question No 1 is Compulsory. Attempt any five questions from the remaining six questions
Working notes should form part of the answers
Wherever necessary suitable assumptions may be made by Students
1. (a) Mr. X, a resident, has provided the following particulars of his income for the P.Y.2010-11.
`
(i) Income from salary (computed) 2,40,000
(ii) Income from house property (computed) 2,00,000
(iii) Agricultural income from a land in Jaipur 1,80,000
(iv) Expenses incurred for earning agricultural income 1,20,000
Compute his tax liability assuming his age is (a) 45 years
(b) 70 years
(5 Marks)
(b) The particulars regarding sale, purchase etc. of Shubham Udyog for the last quarter of the year
2009-10 are as under : (1) Purchases of raw material within the state - (i) taxable @ 1% `40,00,000 (ii) taxable @ 4% - ` 60,00,000 (iii) taxable @ 12.5% - ` 10,00,000 (2) Sale of goods
manufactured from raw material purchased @ 4% tax rate (i) Taxable sale within the State (tax
rate 4%) – `20,00,000 (ii) Exempted sale within the state – `10,00,000 (iii) Sale in the course of
Inter-State trade or Commerce (tax rate 4%) – `10,00,000 (3) Sale of raw material purchased @
1% tax rate – ` 44,00,000 (4) Goods manufactured from the raw material purchased @ 12.5% tax
rate were given on lease. The deemed sale Price of such goods is `12,00,000, taxable @ 12.5%. - You may assume that input tax credit of tax on raw material used in manufacture of leased goods
is available immediately. Compute the amount of Value Added Tax (VAT) payable by M/s
Shubham Udyog for the relevant quarter. There was no opening or closing inventory. How can he
utilise the balance of input tax credit available, if any?
(5 Marks)
(c) Compute the invoice value to be charged, Amount of Tax payable under VAT and input tax credit
to be carried forward, if any , from the following information for the month of May’2011.
Particulars
Purchase price of goods (excluding VAT)
Expenses incurred
Profit earned
VAT rate on purchase of Goods
VAT rate on Sale of Goods
PRIME / ME33 / IPCC
1 `1,20,000
` 10,000
` 15,000
12.5%
4%
(5 Marks)
(d) Find out the taxable value of perquisite from the following particulars in case of an employee to
whom the following assets held by the company were sold on 1.8.2010:
Amount in `
Ford Car
Computer
Furniture
Cost of Purchase (July, 2008)
9,13,000
2,05,000
42,000
Sale Price
5,20,000
46,000
21,000
The assets were put to use by the company from the day they were purchased.
(5 Marks)
2. (a) Define Company in which public are substantially interested
(4 Marks)
(b) From the following particulars arrive at the VAT liability for the month of January 2010 and also
determine the amount of input tax credit to be carried forward for the next month: (i) Input tax rate 5%
and output tax rate is 15% in the State. (ii) Inputs purchased in the month from within the State`48,00,000. (iii) Output sold to buyers within the State during the month – `15,00,000. (iv) Output sold
during the month to buyers as interstate sales – `3,00,000. (CST rate 2% against C Form) (v) Inputs
purchased from other States as interstate purchases against C Form @2% - `2,00,000. (Provide
suitable explanations where required with appropriate assumptions if necessary.)
(4 Marks)
(c) The business of a HUF is transacted from Australia and all the policy decisions are taken there. Mr. E,
the karta of the HUF, who was born in Kolkata, visits India during the P.Y.2010-11 after 15 years. He
comes to India on 1.4.2010 and leaves for Australia on 1.12.2010.
Determine the residential status of Mr.E and the HUF for A.Y. 2011-12.
(4 Marks)
(d) Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory.
30% of sugarcane produce is sold for `10 lacs, and the cost of cultivation of such sugarcane is `5 lacs.
The cost of cultivation of the balance sugarcane (70%) is `14 lacs and the market value of the same is
`22 lacs. After incurring `1.5 lacs in the manufacturing process on the balance sugarcane, the sugar
was sold for `25 lacs. Compute B’s business income and agricultural income.
(4 Marks)
3. (a) Determine the taxability of the following incomes in the hands of a resident and ordinarily resident,
resident but not ordinarily resident, and non-resident for the A.Y. 2011-12.
Particulars
Interest on UK Development Bonds, 50% of interest received in India
Income from a business in Chennai (50% is received in India)
Profits on sale of shares of an Indian company received in London
Dividend from British company received in London
Profits on sale of plant at Germany 50% of profits are received in India
Income earned from business in Germany which is controlled from Delhi
(` 40,000 is received in India)
Profits from a business in Delhi but managed entirely from London
PRIME / ME33 / IPCC
2 Amount (`)
10,000
20,000
20,000
5,000
40,000
70,000
15,000
Rent from property in London deposited in a Indian Bank at London, brought
to India
Interest for debentures in an Indian company received in London.
Fees for technical services rendered in India but received in London
Profits from a business in Bombay managed from London
Pension for services rendered in India but received in Burma
Income from property situated in Pakistan received there
Past foreign untaxed income brought to India during the previous year
Income from agricultural land in Nepal received there and then brought to
India
Income from profession in Kenya which was set up in India, received there but
spent in India
Gift received on the occasion of his wedding
Interest on savings bank deposit in State Bank of India
Income from a business in Russia, controlled from Russia
Dividend from Reliance Petroleum Limited, an Indian Company
Agricultural income from a land in Rajasthan
50,000
12,000
8,000
26,000
4,000
16,000
5,000
18,000
5,000
20,000
10,000
20,000
5,000
15,000
(12 Marks)
(b) Compute the net VAT liability of Janak from the under-mentioned information: (i) Raw material purchased from
foreign market (including duty paid on imports @ 20%) - `47,000 (ii) Raw material purchased from local
market (including VAT charged on the material @ 1 %) – `10,100 (iii) Raw material purchased from another
State (excluding CST) – ` 20,000 (iv) Storage, transportation cost and insurance – `3,000 (v) Other
manufacturing expenses incurred – ` 600. Janak sold the goods to Prem adding margin of profit @ 10% on the
selling price. VAT rate on sale of such goods is 10
(4 Marks)
4. (a) Mr. Sagar retired on 1.10.2010 receiving `5,000 p.m. as pension. On 1.2.2011, he commuted 60% of
his pension and received ` 3,00,000 as commuted pension. You are required to compute his taxable
pension assuming:
(i) He is a government employee.
(ii) He is a non-government employee, receiving gratuity of `5,00,000 at the time of retirement.
(iii) He is a non-government employee and is in receipt of no gratuity at the time of retirement.
(4 Marks)
(b) Big Ltd. exports articles and has furnished the following particulars for the P.Y.2010-11.
`
Export sales
60,00,000
Domestic sales
20,00,000
Total sales
80,00,000
Money brought to India in convertible foreign exchange 50,00,000
Profits from business
16,00,000
You are required to compute the exemption available under section 10A for the A.Y.2011-12.
(4 Marks)
(c) What are the conditions for deduction of unrealised rent ?
PRIME / ME33 / IPCC
3 (4 Marks)
(d) If a slump sale is made by a firm to a company in a manner that the benefit of exemption under section
47(xiii) is availed and thereafter the company amalgamates with another company, will there be
forfeiture of exemption though 50% parity of ownership may not continue?
(4 Marks)
5. (a) Explain the Circumstance that call for Multiple Registration under the Service Tax?
(5 Marks)
(b) Explain whether disallowance under Section 40(a)(ia)is attracted in respect of the following payments
made by ABC Limited during the P.Y 2010-11
(i) `50000 paid to Mr.A in December 2010, a resident contractor , for contract work. Tax Deducted at
Source under Section 194 C was deposited on 15.06.2011.
(ii) `40,000 paid to Mr.X, a resident , towards fees for technical Services in March,2011.Tax deducted
at source under section 194J was deposited on 1.10.2011.
(iii) `25000, paid to Mr.P, a resident , towards Fees for Professional Services in February 2011.No tax
has been deducted at source under Section 194 J. No other payment has been made to Mr.P
during the year.
(5 Marks)
(c) A charitable trust derives its income from the business of providing mineral water to various companies
situated in software technology park in Hyderabad. A sum of `12 lakh has been derived as net
income from such business activity, which has been applied for the object of general public utility.
Examine the taxability of application of the income, if the income so derived relates to the previous year
2010-11. Would your answer be different, if the trust runs a school in a backward district and applies
the profits from the business for such school's activity
(6 Marks)
6. (a) Anish owns a residential house which is self-occupied and also a house plot. He sells the house on
28.2.2011 and the house plot on 4.3.2011 for`11 lakh and `9 lakh respectively. The house was
purchased on 17.10.98 for `5 lakh and the plot on 26.12.98 for `3 lakh. Anish has purchased a new
residential house on 3.5.2011 for `5 lakh. Compute the income chargeable under the head “Capital
Gain” for the A.Y. 2011-12. Cost inflation indices for the financial year 1998-99 and 2011-12 are 351
and 711 respectively.
(4 Marks)
(b) You are consulted on the justifiability of the following claims. Your advice is to be framed based on the
provisions of the Income-tax Act, 1961.
(i) A company paid the full consideration for building for its Administrative office and occupied the
same as the possession was taken. The Registration could not take place before the end of the
previous year for some reason or other. Can the depreciation claim be made?.
(ii) Secret commission was paid and debited under Commission Account. Is it allowable expenditure.
(4 Marks)
(c) Discuss about the treatment of transfer of shares received subsequent to De merger
PRIME / ME33 / IPCC
4 (4 Marks)
(d) X Ltd., an Indian company, submits the following information for the previous year 2010-11.
Business income `1,90,000
Long-term capital gain on sale of debentures on September 20, 2010 1,00,000
Winning from lottery on December 20, 2010 (out of which tax 50,000
deducted is `15,000)
Ascertain the minimum amount of advance tax payable by way of different instalments to ensure that
interest liability under section 234C is not attracted.
(4 Marks)
7. (a) State the cases where the benefit of indexation of costs is not available for determination of capital
gains.
(4 Marks)
(b) Explain the Procedure for Issuance of Bill and Maintenance of Records?
(4 Marks)
(c) Compute the taxable value of the perquisite in respect of medical facilities received by Mr. G from his
employer during the P.Y.2010-11:
Medical premium paid for insuring health of Mr. G ` 7,000
Treatment of Mr. G by his family doctor `5,000
Treatment of Mrs. G in a Government hospital ` 25,000
Treatment of Mr. G’s grandfather in a private clinic `12,000
Treatment of Mr. G’s mother (68 years and dependant) by family doctor `8,000
Treatment of Mr. G’s sister (dependant) in a nursing home ` 3,000
Treatment of Mr. G’s brother (independent) `6,000
Treatment of Mr. G’s father (75 years and dependant) abroad `50,000
Expenses of staying abroad of the patient and `30,000
Limit specified by RBI `75,000
Computation of taxable value of perquisite in the hands of Mr. G
(4 Marks)
(d) Procedure for Centralised registration under Service Tax Act
(4 Marks)
PRIME / ME33 / IPCC
5 PRIME ACADEMY
33RD SESSION MODEL EXAM - IPCC – INCOME TAX, SERVICE TAX & VAT
SUGGESTED ANSWERS
1.
(a) Computation of total income of Mr.X for the A.Y.2011-12
Particulars
Income from salary
Income from house property
Net agricultural income [` 1, 80,000 – 1, 20,000]
Less: Exempt under section 10(1) (60,000) Gross Total Income
Less: Deductions under Chapter VI-A Total Income
Amount
(`)
2,40,000
2,00,000
60,000
4,40,000
4,40,000
Computation of tax liability (age 45 years)
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
(1) Net agricultural income exceeds `5,000 p.a., and
(2) Non agricultural income exceeds the basic exemption limit of `1,60,000.
His tax liability is computed in the following manner:
Step 1: `4, 40,000 + `60,000 = `5, 00,000.
Tax on `5, 00,000 = `34,000
Step 2: `60,000 + `1, 60,000 = `2, 20,000.
Tax on `2, 20,000 = `6,000 (i.e. 10% of `60,000)
Step 3: `34,000 – `6,000 = `28,000.
Step 4: Total tax payable =`28,000 + 2% of `28,000 + 1% of `28,000
= `28,840.
Computation of tax liability (age 70 years)
For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.
(1) Net agricultural income exceeds `5,000 p.a., and
(2) Non-agricultural income exceeds the basic exemption limit of `2,40,000.
His tax liability is computed in the following manner:
Step 1: `4,40,000 + `60,000 =`5,00,000.
Tax on `5,00,000 = ` 26,000 (i.e. 10% of `2,60,000)
Step 2: `60,000 + `2,40,000 = `3,00,000.
Tax on `3,00,000 = `6,000 (i.e. 10% of `60,000)
Step 3: `26,000 –`6,000 = `20,000.
Step 4: Total tax payable = ` 20,000 + 2% of `20,000 + 1% of `20,000
PRIME / ME33 / IPCC
6 = `20,600.
(b) A. Output tax (VAT plus CST) payable
(i)
(ii)
(iii)
(iv)
On raw material (1% of`44,00,000) – `44,000
On sale taxable @ 4% (4% of `20,00,000) – `80,000
Vat on lease (12.5% of `12,00,000) – `1,50,000
CST on inter-State sale (4% of `10,00,000) – `40,000. Total tax payable – `3,14,000
B. Input tax credit (ITC)
(i) Taxable @ 1% (1% of `40,00,000) – `40,000
(ii) Taxable @ 4% (Tax paid on `60,00,000 – 2,40,000. Eligible credit 75% as 25% is exempt sale)
– `1,80,000 (iii) Taxable @ 12.5% (12.5% of `10,00,000) – `1,25,000. Total credit –
`3,45,000.
C. Input Credit available is more than tax payable. Hence, no tax is payable by cash. The
excess credit of `31,000 can be carried forward for utilization subsequently. If such excess
credit remains un-utilizable till the time limit as specified in State Vat Act, then it will be
refundable.
(Note: The excess credit is because goods purchases @ 4% were sold at a loss by the dealer,
as purchase price is `60,00,000 and Sale price is `40,00,000. Even then full ITC shall be
available, as Vat provisions do not require one to one relation. Total input credit is a ‘common
pool’ which can be used for payment of Vat on sales. However, it shall be reduced
proportionately to extent of tax exempt sales).
(c) Invoice value to be charged
Purchase price of goods
Add: Expenses
Add: Profit Margin
Amount to be Billed
VAT @12.5%
Total Invoice Value
`
120000
10000
15000
145000
18125
163125
VAT to be paid
Vat Charged in the Invoice
VAT Credit on input(12.5% of 120000)
Balance Payable
18125
15000
3125
(d) Computation of taxable value of perquisite
Sl.No.
PRIME / ME33 / IPCC
Description of asset Value of
7 `
Perquisite
Ford Car
Computer
Furniture
Total
1.
2.
3.
Nature of Asset
Rate of Depreciation
Method of depreciation
Sale Price (B)
Cost of purchase (July, 2008)
Less : Normal wear & tear
Reduced actual cost (July 2009)
Less : Normal wear & tear
Reduced actual cost (July 2010) (A)
Taxable perquisite (A) – (B)
64,320
5,250
12,600
82,170
Ford Car
20%
WDV
`
5,20,000
9,13,000
1,82,600
7,30,400
1,46,080
5,84,320
64,320
Computer
Furniture
50%
10%
WDV
SLM
`
`
46,000
21,000
2,05,000
42,000
1,02,500
4,200
1,02,500
37,800
51,250
4,200
51,250
33,600
5,250
12,600
Note: According to Rule 3(7), the value of perquisite in respect of transfer of a movable asset shall be the
difference between sale price and the actual cost as reduced by the specified rate for normal wear
and tear for each completed year of usage.
2. (a) [Section 2(18)] - The following companies are said to be companies in which the public are
substantially interested:
(i)
A company owned by the Government (either Central or State but not Foreign) or the Reserve
Bank of India (RBI) or in which not less than 40% of the shares are held by the Government or the
RBI or corporation owned by that bank.
(ii) A company which is registered under section 25 of the Companies Act, 1956 (formed for
promoting commerce, arts, science, religion, charity or any other useful object).
(iii) A company having no share capital which is declared by the Board for the specified assessment
years to be a company in which the public are substantially interested.
(iv) A company which is not a private company as defined in the Companies Act, 1956 and which
fulfills any of the following conditions :
• Its equity shares should have, as on the last day of the relevant previous year, been listed in a
recognised stock exchange in India; or
• Its equity shares carrying at least 50% (40% in case of industrial companies) voting power
should have been unconditionally allotted to or acquired by and should have been beneficially
held throughout the relevant previous year by (a) Government or (b) a Statutory Corporation or
(c) a company in which public are substantially interested or (d) any wholly owned subsidiary of
company mentioned in (c).
PRIME / ME33 / IPCC
8 (v) A company which carries on its principal business of accepting deposits from its members and
which is declared by the Central Government under section 620A of the Companies Act to be
Nidhi or a Mutual Benefit Society.
(vi) A company whose equity shares carrying at least 50% of the voting power have been allotted
unconditionally to or acquired unconditionally by and were beneficially held throughout the
relevant previous year by one or more co-operative societies.
(b) Input tax credit – `2,40,000 (5% of `48 lakhs). No credit on inter-state purchases.
Output tax – (a) Sale within State – ` 2,25,000 (15% of `15 lakhs) (b) Inter-state sale –` 6,000 (2% of
` 3 lakhs). Total output tax – ` 2,31,000.
Net Tax payable – Nil as credit available is more than output tax payable. The balance of ` 9,000 will
be carried forward for use in future month/s.
(c) (i) During the P.Y.2010-11, Mr. E has stayed in India for 245 days (i.e. 30+31+30+31+31+
30+31+30+1 days). Therefore, he is resident. However, since he has come to India after 15 years,
he cannot satisfy any of the conditions for being ordinarily resident. Therefore, the residential
status of Mr.E for the P.Y. 2010-11 is resident but not ordinarily resident.
(ii) Since the business of the HUF is transacted from Australia and nothing is mentioned regarding its
control and management, it is assumed that the control and management is also wholly outside
India. Therefore, the HUF is a non-resident for the P.Y. 2010-11.
(d) Income from sale of sugarcane gives rise to agricultural income and from sale of sugar gives rise to
business income.
Business income
= Sales – Market value of 70% of sugarcane produce –
Manufacturing expenses
= ` 25 lacs – ` 22 lacs - ` 1.5 lacs
= ` 1.5 lacs.
Agricultural income = Market value of sugarcane produce – Cost of cultivation
= [` 10 lacs + `22 lacs] – [` 5 lacs + 14 lacs]
= `32 lacs – `19 lacs
= `13 lacs.
3. (a) Computation of total income for the A.Y.2011-12
Particulars
Interest on UK
Development Bonds
50% ofinterest
PRIME / ME33 / IPCC
Resident and
Ordinarily
Resident (`)
10,000
9 Resident but not
Ordinarily Resident
(`)
5,000
Non-Resident
(`)
5,000
received in India
Income from a
business in Chennai
(50% is received in
India)
Profits on sale of
shares of an Indian
company
received in London
Dividend from Indian
company
Received in London
Profits on sale of plant
at Germany 50% of
profits are received in
India
Income earned from
business in Germany
which is controlled
from Delhi, out of
which
` 40,000 is received in
India
Profits from a business
in Delhi but managed
entirely from London
Rent from property in
London
deposited in a Bank at
London,
later on remitted to
India
Interest for debentures
in an Indian
Company received in
London.
Fees for technical
services rendered in
India
but received in London
Profits from a business
in Bombay managed
from London
Pension for services
PRIME / ME33 / IPCC
20,000
20,000
20,000
20.000
20,000
20,000
5,000
-
40,000
20,000
70,000
40,000
20,000
40,000
15,000
15,000
15,000
50,000
-
-
12,00
12,000
12,000
8,000
8,000
8,000
26,000
26,000
26,000
4,000
4,000
4,000
10 rendered in India but
received in Burma
Income from property
situated in Pakistan
received there
foreign untaxed
income brought to
India
during the previous
year
Income from
agricultural land in
Nepal
received there and
then brought to India
Income from
profession in Kenya
which was
set up in India,
received there but
spent in India
Gift received on the
occasion of his
wedding
[not an income]
Interest on savings
bank deposit in State
Bank
of India
Income from a
business in Russia,
controlled
from Russia
Dividend from
Reliance Petroleum
Limited, an
Indian Company [it is
exempt u/s 10(34)]
Agricultural income
from a land in
Rajasthan [it
is exempt u/s 10(1)]
Total
PRIME / ME33 / IPCC
16,000
-
-
-
-
-
18,000
-
-
5,000
5,000
-
-
-
-
10,000
10,000
10,000
20,000
-
-
-
-
-
-
-
-
2,15,000
1,80,000
3,49,000
11 (b) No Vat credit is available on imports and raw material purchased from other State. Vat paid on
local material is ` 100 (1% of ` 10,000). In case of inter-state purchases, assuming that CST rate is
2%, purchase cost is ` 20,400.
Total cost is = 47,000 + 10,000 + 20,400 + 3,000 + 600 = ` 78,000. the margin of profit is 10% of
selling price. If X is selling price, profit is 0.10X. Hence, cost = 0.90X =` 78,000. Hence, selling price is
` 86,666.67 (check that 86,666.67 – 8,666.67 = ` 78,000). Vat @ 10% of ` 86,666.67 is `8,666.67.
The dealer has Vat credit of ` 100. Hence, he has to pay by cash ` 8,566.67.
4.
(a) (i) He is a government employee.
Uncommuted pension received (October – March)
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Commuted pension received
Less: Exempt u/s 10(10A)
` 24,000
` 3,00,000
` 3,00,000
NIL
` 24,000
Taxable pension
(ii) He is a non-government employee, receiving gratuity ` 5,00,000 at the time of retirement.
Uncommuted pension received (October – March)
` 24,000
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Commuted pension received
` 3,00,000
Less; Exemption u/s 10(10A)
` 3,00,000
Taxable Pension
` 24,000
Uncommuted pension received (October – March)
` 24,000
[(` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Commuted pension received
` 3,00,000
Less : Exempt u/s 10(10A)
1/3*(` 3,00,000/60%)*100% ` 1,66,667
`1,33,333
Taxable Pension
`1,57,333
(iii) He is a non-government employee and is not in receipt of gratuity at the time of retirement.
Uncommuted pension received (October – March)
` 24,000
[ (` 5,000 × 4 months) + (40% of ` 5,000 × 2 months)]
Commuted pension received
` 3,00,000
Less:Exempt U/S 10(10A)
1/2*(` 3,00,000/60%*100%) ` 2,50,000
` 50,000
` 74,000
Taxable Pension
(b) The exemption available under section 10A is
Profits from Business* Export turnover of the undertaking of such article
Total turnover of the Business
` 16,00,000*(` 50,00,000/` 80,00,000)
= ` 10,00,000
PRIME / ME33 / IPCC
12 (c) Rule 4 of the Income-tax Rules as substituted by the Income-tax (Eighth Amendment) Rules, 2001
prescribes the conditions as under :
Unrealised rent—For the purposes of the Explanation below sub-section (1) of section 23, the amount
of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a
tenant of the assessee and so proved to be lost and irrecoverable where,—
(i)
(ii)
(iii)
(iv)
The tenancy is bona fide;
The defaulting tenant has vacated, or steps have been taken to compel him to vacate the
property;
The defaulting tenant is not in occupation of any other property of the assessee;
The assessee has taken all reasonable steps to institute legal proceedings for the recovery of
the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
(d) It was once thought that amalgamation could not be transfer in view of the decision of the
Supreme Court in CIT v Rasiklal Maneklal (HUF)’ rendered in the con-text of capital gains tax under the
earlier law in which there was no exemption avail-able for amalgamation. But then the Supreme Court
in its decision in CIT v Grace Collis has held that the later extension of the definition of transfer to
include extinguishment would mean that amalgamation is also transfer, so as to make the shareholder
liable for tax. Even if it falls within the definition of transfer under section 2(1B) of the Act, it may be
argued that it is only for exemption for amalgamating company and its shareholders under section
47(vi) and (vii) respectively. Hence, even if the condition of 50% parity is maintained it may still be
construed as violation of condition under section 47(xiii) of the Act and exemption may be lost.
5. (a) Multiple services:
(i)
(ii)
(iii)
(iv)
(v)
Commencement of services at the same time: The applicant in a single application may be
made mentioning all the taxable services provided by him.
Commencement of services at different points of time: The applicant has already registered for
one service but subsequently becomes liable for another category of service, he should get his
certificate endorsed for the category of service. Changes in existing certification of
Registration:
Change in information provided in ST1:
Intimated in writing to the jurisdictional assistant commissioner within a period of 30 days of
such change
Change of place: A new registration certificate should be applied for, and the previous
registration certificate should be cancelled.
Transfer of business: Where the assessee transfers his business to another person, the
transferee should obtain a fresh certificate of registration.
(b) (i) Since in this case tax has been deposited before the due date of filing 30.09.2010, no
disallowance is attracted.
(ii) ` 40000 amount paid towards fees for Technical Services will be disallowed under section 40 (a)
(ia) as it has been remitted after due date of filing the return.
PRIME / ME33 / IPCC
13 (iii) Since the threshold limit has been increased from ` 20000 to ` 30000 wef 1.7.2010, ` 25000 has
been paid, and, since there are no other payments, there is no necessity to deduct tax.
(c) Section 2(15) defines “charitable purpose” to include relief of the poor, education, medical relief
and the advancement of any other object of general public utility. Section 2(15) was amended by the
Finance Act, 2008 to provide that “advancement of any other object of general public utility” would not
be a charitable purpose, if it is involves the carrying on of any activity in the nature of trade, commerce
or business or, any activity of rendering of any service in relation to any trade, commerce or business,
for a fee or cess or any other consideration, irrespective of the nature of use or application of the
income from such activity or the retention of such income, by the concerned entity.
Based on the above amendment, in the first case, net income from the business of supplying mineral
water to various companies i.e. ` 12 lakh is not eligible for exemption under section 11. This is
because “advancement of any object of general public utility” would not be a charitable purpose if it
involves carrying on of any activity in the nature of trade, commerce or business, for example, supply of
mineral water for a consideration, as in this case. It is immaterial that the net income from such
business is applied for the object of general public utility.
On the other hand, where the trust runs a school in a backward district, this restriction is not applicable.
The reason is that the restriction contained in section 2(15) is applicable only to the fourth limb of the
definition of “charitable purpose” i.e. advancement of object of general public utility. It does not affect
the other three limbs of the definition viz. “relief of the poor”, “education”, and “medical relief”. Section
11(4) clarifies that “property held under trust” includes a business undertaking so held.
As per section 11(4A), exemption can be availed in respect of profits and gains of business, if such
business is incidental to the attainment of the objectives of the trust and separate books of account are
maintained in respect of such business. Therefore, in this case, the profit from the business of
providing mineral water shall be eligible for exemption under section 11, assuming that the said
business is incidental to the attainment of the objects of the trust (i.e., education) and books of account
for such business activity is maintained separately.
6. (a) Computation of Capital Gains of Anish for the A.Y.2011-12
Particulars
Sale of house on 28.2.2011
Sale consideration received
Less: Indexed cost of acquisition 5,00,000 x 711/351
Long term capital gain
Less: Exemption under section 54
(lower of capital gains or amount invested)
Taxable capital gain
Sale of house plot on 4.3.2011
Sale consideration received
Less: Indexed cost of acquisition `3,00,000 x 711/351
Long term capital gain
PRIME / ME33 / IPCC
14 `
11,00,000
10,12,821
87,179
87,179
Nil
9,00,000
6,07,692
2,92,308(a)
Less: Exemption under section 54F
Investment for the purpose of section 54F is ` 4,12,821 (i.e.
` 5,00,000 – ` 87,179), which is less than the net consideration on
sale of plot. Therefore, only proportionate capital gain would be exempt
under section 54F.[Capital gain × Amount invested / Net sale consideration] i.e.,
[`2,92,308 × `4,12,821/`9,00,000]
1,34,079(b)
Taxable capital gain (a)-(b)
1,58,229
_________
(b) (i) One of the conditions for the claim of depreciation under the provisions of section 32 of the
Income-tax Act, 1961 is that the assessee should be the owner of the asset. In the facts of the given
case, the asset is an immovable property, namely, buildings acquired for the administrative office.
Full consideration has been paid. However, the registration could not take place before the end of the
previous year.
The Supreme court had an occasion to consider this issue in the case of Mysore Minerals Ltd v. CIT
(239 ITR775). The Supreme court stated that the very concept of depreciation suggests that tax
benefit on account of depreciation legitimately belongs to one who has invested in the capital asset
and is utilizing the capital asset.
In the facts of the given case, though the document of title was not executed, the full consideration
has been paid and the dominion over the property by taking possession excluded the owner who had
to transfer the asset and therefore the right to use and occupy the property and enjoy it was
exercised by taking possession and the execution of the formal deed of title may take place at any
given point of time.
Following the decision of the Supreme Court, depreciation can be claimed in respect of the building
that is acquired for the administrative office, though registration has not yet taken place.
(ii) Secret commission is one of the forms of commission payment generally made by business
organizations. Secret commission is a payment for obtaining business orders or contracts from
parties and /or customers and paid to employees and / or officials of those parties and / or
customers or companies from whom business orders are obtained by the assessee.
The Explanation to section 37(1) of Income-tax Act, 1961 provides that any expenditure incurred by
an assessee for any purpose which is an offence or which is prohibited by law, shall not be
deemed to have been incurred for the purpose of business and no deduction or allowance shall be
made in respect of such expenditure. In view of the Explanation, any expenditure incurred for a
purpose which is an offence and prohibited by law cannot be allowed as expenditure. Therefore,
secret commission payment, if it could be established as payment for an offence prohibited by law,
the same cannot be allowed deduction.
(c)
As per the provisions of section 47(vid), any transfer or issue of shares by the resulting company to
the shareholders of the demerged company in a scheme of demerger is not regarded as a transfer
for the purposes of capital gains under section 45, if the transfer or issue is made in consideration
of the demerger of the undertaking.
PRIME / ME33 / IPCC
15 As a consequence of the demerger, the existing shareholders of the demerged company will
receive shares in a resulting company. When the shareholder subsequently intends to transfer the
said shares, the cost of such shares will have to be arrived at as per the provisions of section
49(2C). According to the said provision, the cost of acquisition of shares in the resulting company
will be the amount which bears to the cost of acquisition of shares held by the assessee in the
demerged company, the same proportion as the net book value of the assets transferred in a
demerger bears to the net worth of the demerged company immediately before such demerger. As
per the provisions of section 2(42A)(g), for determining the period of holding of such shares, the
period for which the shares of the demerged company were held by the assessee would also be
considered. If the shares are held for more than one year, and transferred through a recognized
stock exchange and securities transaction tax has been paid on such sale, the long-term capital
gain arising there from would be exempt under section 10(38). If the total holding period does not
exceed one year, then the short-term capital gains arising on sale of such shares would be taxable
@15% under section 111A.
(d) First instalment on June 15, 2010 and
second instalment on September 15, 2010:
`
Business income
1,90,000
Tax @ 30%
57,000
Add : Surcharge
Nil
Tax and surcharge
57,000
Add : Education cess
1,140
Add : Secondary and higher education ces
570
Tax payable
58,710
At least 12% of ` 58,710 (i.e., ` 7,050) should be paid on before June 15, 2010 to avoid interest
section 234C. Assume the company pays ` 7,050 as advance tax on June 15, 2010,then the second
instalment shall be determined as follows
`
Tax
58,710
36% of tax
21,136
Less : First instalment
7,050
Second instalment (which is paid on September 15, 2010) (rounded off) 14,090
Third instalment on December 15, 2010
Business income
1,90,000
Long-term capital gain
1,00,000
Net income
2,90,000
Tax (i.e., 30% of ` 1,90,000 + 20% of ` 1,00,000)
77,000
Add : Surcharge
Nil
Tax and surcharge
77,000
Add : Education cess
1,540
Add : Secondary and higher education cess
770
Tax payable
79,310
Minimum amount of advance tax payment to avoid tax under section 234C [i.e., 75% of ` 79310 — `
7,050, being the tax paid on June 15, 2010 — ` 14,090 (being tax paid on September 15,2010)] 38,340
PRIME / ME33 / IPCC
16 Assume that the company pays ` 38,340 as advance tax on December 15, 2010, then the fourth
instalment shall be determined as under —
Fourth instalment on March 15, 2011
`
Business income
1,90,000
Long-term capital gain
1,00,000
Lottery winning
50,000
Net Income
3,40,000
Tax [i.e., 30% of ` 1,90,000 + 20% of ` 1,00,000 + 30% of ` 50,000]
92,000
Add : Surcharge
Nil
Tax and surcharge
92,000
Add : Education cess
1,840
Add : Secondary and higher education cess
920
Tax payable
94,760
Less : Tax deducted at source
15,000
Balance
79,760
Fourth instalment on March 15, 2011 [i.e., ` 79,760 — ` 7,050 — ` 14,090 — ` 38,340)
` 20,280
7. (a) In the following cases, the benefit of indexation is not available for determination of capital gains on
transfer of long-term capital assets –
1.
Transfer of bonds/debentures other than capital indexed bonds issued by the Government
(Proviso 3 to section 48).
2.
Transfer of shares or debentures acquired by a non-resident in foreign currency in an Indian
company (Proviso 1 and 2 to section 48).
3.
Transfer of undertaking or division in a slump sale (Section 50B)
4.
Transfer of units of Unit Trust of India or a Mutual Fund specified under section 10(23D)
purchased in foreign currency by an overseas financial organisation referred to as offshore
funds (Section 115AB)
5.
Transfer of Global Depository Receipt purchased in foreign currency by an individual resident
in India and employee of an Indian company or its subsidiary engaged in specified knowledge
based industry or service (Section 115ACA).
6.
Transfer of securities by Foreign Institutional Investors (Section 115AD).
7.
Transfer of a foreign exchange asset by a non-resident Indian (Section 115D)
Further, indexation benefit is not available on capital gains arising on transfer of a depreciable asset
since such capital gains would always be short-term capital gains.
(b) Procedure for issuance of bill:
(i) Every person providing taxable service shall issue an invoice/bill/challan signed by such person or a
person authorized by him in respect of such taxable service provided or to be provided.
(ii) Time limit for issue of invoice/bill/challan: The invoice/bill challan shall be issued not later than fourteen
days from the date of completion of such taxable service or receipt of any payment towards the value
PRIME / ME33 / IPCC
17 of such taxable service, whichever is earlier. Where any payment towards the value of taxable service
is not received and such taxable service is provided continuously for successive periods of time and
the value of the such taxable service is determined or payable periodically, then, an invoice/bill/challan
shall be issued by a person providing such taxable service, not later than fourteen days from the last
day of the said period.
Note: Point of Service Tax-rules not applicable for the current exam of ICAI.
(c) Treatment of Mrs. G in a Government hospital Treatment of Mr. G’s father (75 years and dependant) abroad
Expenses of staying abroad of the patient and attendant
Less : Exempt up to limit specified by RBI
Medical premium paid for insuring health of Mr. G Treatment of Mr. G by his family doctor
Treatment of Mr. G’s mother (dependant) by family doctor
Treatment of Mr. G’s sister (dependant) in a nursing home
Less: Exempt upto ` 15,000
Add: Treatment of Mr. G’s grandfather in a private clinic
Add: Treatment of Mr. G’s brother (independent)
Taxable value of perquisite
`
50,000
30,000
80,000
75,000
5,000
5,000
8,000
3,000
16,000
15,000
1,000
12,000
6,000
24,000
Note: Grandfather and independent brother are not included within the meaning of family.
(d) Sometimes an assessee provides taxable service from more than one premises. Rule 4(2) of the
Service Tax Rules, 1994 provides that in such cases, the assessee can obtain centralized registration
at his option if:
(i) He has centralized billing or centralized accounting in respect of such service, and
(ii) Such centralized billing or centralized accounting systems are located in one or more offices or
premises.The assessee can register such offices or premises where centralized accounting or
centralized billing systems are located.
PRIME / ME33 / IPCC
18