PRIME/ME40/IPC 1

GNT No. of Pages: 7 Total Marks: 100 No. of Questions: 7 Time allowed: 3 hrs

Question no 1 is compulsory Answer any five from the remaining six questions

Wherever necessary suitable assumptions should be made by the candidates Working notes should form part of answer

1.

(a) On 01.04.2010 a machine was acquired at ` 4,00,000. The machine was expected to have a useful life of 10 years The residual value was estimated at 10% of the original cost. At the end of the 3rd year, an attachment was made to the machine at a cost of `1,80,000 to enhance its capacity. The attachment was expected to have a useful life of 10 years and zero terminal value. During the same time the original machine was revalued upwards by `90,000 and remaining useful life was reassessed at 9 years and residual value was reassessed at NIL. Find depreciation for the year, if

i) Attachment retains its separate identity. ii) Attachment becomes integral part of the machine (5 Marks)

(b) Futura Ltd. had the following items under the head “Reserves and Surplus” in the

Balance Sheet as on 31st March, 2015: (` in lakhs)

Securities Premium Account 80 Capital Reserve 60 General Reserve 90 The company had an accumulated loss of ` 250 lakhs on the same date, which it has disclosed under the head “Statement of Profit and Loss” as asset in its Balance Sheet. Comment on accuracy of this treatment in line with Schedule III to the Companies Act, 2013. (5 Marks)

(c) The following extract of Balance Sheet of X Ltd. (a non-investment company) was obtained: Balance Sheet (Extract) as on 31st March, 2015

Liabilities `

Authorised Capital

15,000, 14% preference shares of `100 15,00,000

1,50,000 Equity shares of ` 100 each 1,50,00,000

1,65,00,000

Issued and subscribed capital:

15,000, 14% preference shares of `100 each fully paid 15,00,000

1,20,000 Equity shares of Rs 100 each, Rs 80 paid-up 96,00,000

Capital reserves ( Rs 1,50,000 is revaluation reserve) 1,95,000

Securities premium 50,000

15% Debentures 65,00,000

Unsecured loans: Public deposits repayable after one year 3,70,000

Investment in shares, debentures, etc. 75,00,000

Profit and Loss account (debit balance) 15,25,000

You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act, 2013. (5 Marks)

PRIME/ME40/IPC 2

(d) PQ Ltd. gives you the following summarized balance sheets. You are required to prepare Cash Flow

Statement by using indirect method as per AS 3 for the year ended 31.03.2014:

Liabilities 31st March 2013 `

31st March 2014 `

Assets 31st March 2013 `

31st March 2014 `

Capital 50,00,000 50,00,000 Plant & Machinery

27,30,000 40,70,000

Retained Earnings

26,50,000 36,90,000 Less: Depreciation

6,10,000 7,90,000

Debentures 900000 Trade receivable

23,90,000 28,30,000

Current Liabilities

Less: Provision

1,50,000 1,90,000

Trade Payables

8,80,000 8,20,000 22,40,000 26,40,000

Bank Loan 150000 300000 Cash 27,00,000 33,20,000

Liability for expenses

3,30,000 2,70,000 Inventories 20,10,000 19,20,000

Dividend payable

1,50,000 3,00,000 Prepaid Expenses

90,000 1,20,000

91,60,000 1,12,80,000 91,60,000 1,12,80,000

Additional Information: (i) Net profit for the year ended 31st March, 2014, after charging depreciation ` 1,80,000 is

` 22,40,000. (ii) Trade Receivables of ` 2,30,000 were determined to be worthless and were written off

against the provisions for doubtful debts account during the year. (iii) PQ Ltd. declared dividend of ` 12,00,000 for the year 2013-2014. (5 Marks)

2. Laurel and Hardy are partners of the firm LH & Co., from 1.4.2011. Initially both of them contributed

` 1,00,000 each as capital. They did not contribute any capital thereafter. They maintain accounts of the firm on mercantile basis. They were sharing profits and losses in the ratio of 5:4. After the accounts for the year ended 31.3.2015 were finalized, the partners decided to share profits and losses equally with effect from 1.4.2011. It was also discovered that in ascertaining the results in the earlier years certain adjustments, details of which are given below, had not been noted.

Year ended 31 March 2012 `

2013 `

2014 `

2015 `

Profit as per accounts prepared and finalised

1,40,000 2,60,000 3,20,000 3,60,000

Expenses not provided for (as at 31 march)

30,000 20,000 36,000 24,000

Income not taken into account (as at 31st March)

18,000 15,000 12,000 21,000

The partners decided to admit Chaplin as a partner with effect from 1.4.2015. It was decided that Chaplin would be allotted 20% share in the firm and he must bring 20% of the combined capital of Laurel and Hardy.

PRIME/ME40/IPC 3

Following is the Balance sheet of the firm as on 31.3.2015 before admission of Chaplin and before adjustment of revised profits between Laurel and Hardy. Balance sheet of LH&Co as at 31.3.2015

Liabilities ` Assets `

Capital Accounts Plant and Machinery 60,000

Laurel 2,11,500 Cash on hand 10,000

Hardey 1,51,500 Cash at bank 5,000

Trade payables 2,27,000 Stock in trade 3,10,000

Trade receivables 2,05,000

5,90,000 5,90,000

You are required to prepare:

I) Profit and loss adjustment account II) Capital account of partners III) Balance sheet of the firm after the admission of Chaplin (16 Marks)

3. P Ltd. and Q Ltd. were carrying on the business of manufacturing of auto components. Both the

companies decided to amalgamate and a new company PQ Ltd. is to be formed with an Authorized Capital of ` 10,00,000 divided into 1,00,000 equity shares of `10 each. The Balance Sheet of the companies as on 31.03.2014 were as under:

P Limited Balance Sheet as at 31.03.2014

Particulars Amount (`)

1. Equity and Liabilities

Shareholders fund

Share capital 1,40,000

Reserves and Surplus

Profit and loss a/c 30,000

2. Non-current Liabilities

8% secured debentures 1,10,000

3. Current Liabilities

Trade payables 54,000

Total 3,34,000

I. Assets

1. Non-current assets

(a) Fixed assets

Buildings at cost less depreciation 1,00,000

Plant and machinery less depreciation 25,000

2. Current assets

(a) Inventories 1,35,000

(b) Trade receivables 44,000

(c) Cash at bank 30,000

Total 3,34,000

PRIME/ME40/IPC 4

Q Limited Balance sheet as on 31.3.2014

Particulars `

I. Equity and Liabilities

1. Shareholder’s Fund

(a) Share Capital 2,50,000

(b) Reserves & Surplus

General Reserve 1,20,000

Profit & Loss A/c 35,000

3. Current Liabilities

Trade payables 1,40,000

Total 5,45,000

II. Assets

1. Fixed assets

Building at cost less depreciation 1,90,000

Plant & Machinery at cost less depreciation 80,000

Furniture & Fixture at cost less depreciation 25,000

2. Current assets

(a) Inventories 50,000

(b) Trade Receivables 1,42,000

(c) Cash at bank 58,000

5,45,000

The assets and liabilities of the existing companies are to be transferred at book value with the exception of some items detailed below:

(i) Goodwill of P Ltd. was worth ` 50,000 and of Q Ltd. was worth `1,50,000. (ii) Furniture & Fixture of Q Ltd. was valued at `35,000. (iii) The Trade receivables of P Ltd. are realized fully and bank balance of P Ltd. are to be retained

by the liquidator and the trade payables are to be paid out of the proceeds thereof. (iv) The debentures of P Ltd. are to be discharged by issue of 8% 11,000 debentures of PQ Ltd. at

a premium of 10% You are required to:

(i) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders of the existing companies.

(ii) Draw up a Balance Sheet of PQ Ltd. as at 1st April, 2014, the date of completion of amalgamation. (16 Marks)

4.

(a) The Articles of Association of Samson Ltd. provide the following: (i) That 25 % of the net profit of each year shall be transferred to reserve fund. (ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus. (iii) That the balance available for distribution shall be applied:

1) in paying 15% on cumulative preference shares. 2) in paying 20% dividend on equity shares. 3) one-third of the balance available as additional dividend on preference shares and two-

third as additional equity dividend. A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 14% on preference shares after making provision (i), (ii) and (iii) mentioned above. The company has issued 12,000, 15% cumulative participating preference shares of ` 100 each fully paid and 75,000 equity shares of ` 100∗each fully paid up.

PRIME/ME40/IPC 5

The profit for the year 2013-2014, was ` 10,00,000 and balance brought from previous year ` 1,50,000. Provide ` 37,500 for depreciation and ` 1,20,000 for taxation before making other appropriations. (8 Marks) Show net balance of Profit and Loss Account after making above adjustments.

(b) Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons with effect from 1st April, 2013. During the year 2013-14, the total sales were `24,00,000 of which `4,80,000 were for the first six months. The Gross profit of the company `3,90,800. The expenses debited to the Profit & Loss Account included: (i) Director's fees ` 30,000 (ii) Bad debts ` 7,200 (iii) Advertising ` 24,000 (under a contract amounting to ` 2,000 per month) (iv) Salaries and General Expenses ` 1,28,000 (v) Preliminary Expenses written off ` 10,000 (vi) Donation to a political party given by the company ` 10,000. Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st March, 2014. (8 Marks)

5. (a) From the following information in respect of Mr. X, prepare Trading and Profit and Loss

Account for the year ended 31st March, 2015 and a Balance Sheet as at that date:

31.3.2014 31.3.2015

` `

(1) Liabilities and assets

Stock in trade 1,60,000 1,40,000

Debtors for sales 3,20,000 ?

Bills receivable - ?

Creditors for purchases 2,20,000 3,00,000

Furniture at written down value 1,20,000 1,27,000

Expenses outstanding 40,000 36,000

Prepaid expenses 12,000 14,000

Cash on hand 4,000 3,000

Bank balance 20,000 9,500

(2) Receipts and payment during 2014-15

Creditors from debtors

(after allowing 2.5% discount) 11,70,000

Payment to creditors

(after receiving 2% discount) 7,84,000

Proceeds of Bills receivable discounted at 2% 1,22,500

Proprietors drawings 1,40,000

Purchase of furniture on 30.09.2014 20,000

4% Government securities purchased at 96% on 1-10-2014

1,92,000

Expenses 3,50,000

Miscellaneous Income 10,000

(3) Sales are effected so as to realize a gross profit of one third on the sale proceeds. (4) Goods costing ` 18,000, were issued as samples to distributors (5) Purchases and Sales are made only on credit.

PRIME/ME40/IPC 6

(6) During the year, Bills Receivable of ` 2,00,000 were drawn on debtors Of these, Bills amounting to ` 40,000 were endorsed in favour of creditors Out of this latter amount, a Bill for ` 8,000 was dishonored by the debtor. (7) Capital introduced during the year by the proprietor by cheques was omitted to be recorded in the Cash Book, though the bank balance of ` 9,500 on 31st March, 2015 (as shown above), is after taking the same into account.

(10 Marks) (b) On 1st April, 2014, M/s. Power Motors sold on hire purchase basis a truck whose cash Price was `

9,00,000 to M/s. Singh & Singh, a transport firm. The terms of the contract were that the transporters were to pay ` 3,00,000 down and six four-monthly installments of ` 1,00,000 plus interest on outstanding amount of cash price for the intervening four months. The installments were payable on 31st July, 30th November and 31st March in each one of the two accounting years Interest was calculated @ 12% per annum. M/s. Singh & Singh duly paid the installment on 31st July, 2014 but failed to pay the installment on 30th November, 2014. M/s. Power Motors, after legal formalities, repossessed the truck valuing it at ` 7,00,000. M/s. Power Motors spent 80,000 on repairs and repainting of the truck and on 7th January, 2015 sold it for ` 7,50,000 cash. You are required to prepare M/s. Singh & Singh’s A/c and Goods Repossessed Account in the books of M/s. Power Motors (6 Marks)

6. M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the Balance Sheet of the company as on 31st March, 2014 before reconstruction:

Liabilities ` Assets `

Share Capital

50,000 shares of ` 50 each fully paid up

25,00,000 Goodwill 22,00,000

1,00,000 shares of ` 50 each 40 paid up

40,00,000 Land and Building 42,70,000

Capital reserve 5,00,000 Machinery 8,50,000

8% debentures of ` 100 each 4,00,000 Computers 5,20,000

12% debentures of ` 100 each 6,00,000 Stock 3,20,000

Trade creditors 12,40,000 Trade debtors 10,90,000

Outstanding expenses 10,60,000 Cash at bank 2,68,000

P&L a/c 7,82,000

1,03,00,000 1,03,00,000

The following is the interest of Mr. Shiv and Mr. Ganesh in Platinum Ltd. Mr. Shiv Mr. Ganesh 8 % Debentures ` 3,00,000 ` 1,00,000 12 % Debentures ` 4,00,000 ` 2,00,000 The following scheme of internal reconstruction was framed and implemented, as approved by the court and concerned parties: (1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity

Shares of ` 40 each. (2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of ` 40 each for

` 12,50,000. (3) Trade Creditors are given option of either to accept fully paid equity shares of ` 40 each for the

amount due to them or to accept 70% of the amount due to them in cash in full settlement of their claim. Trade Creditors for ` 7,50,000 accept equity shares and rest of them opted for cash towards full and final settlement of their claim.

PRIME/ME40/IPC 7

(4) Mr. Shiv agrees to cancel debenture amounting to ` 2,00,000 out of total debentures due to

him and agree to accept 15% Debentures for the balance amount due. He also agree to subscribe further 15% Debentures in cash amounting to ` 1,00,000.

(5) Mr. Ganesh agrees to cancel debenture amounting to ` 50,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due.

(6) Land & Building to be revalued at ` 51,84,000, Machinery at ` 7,20,000, Computers at ` 4,00,000, Stock at ` 3,50,000 and Trade Debtors at 10% less to as they are appearing in Balance Sheet as above.

(7) Outstanding Expenses are fully paid in cash. (8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c

will be adjusted against Capital Reserve. You are required to pass necessary Journal Entries for all the above transactions and draft the

Company’s Balance Sheet immediately after the reconstruction. (16 Marks)

7.

(a) Intelligent Ltd., a non-financial company has the following entries in its Bank Account. It has sought your advice on the treatment of the same for preparing Cash Flow Statement. (i) Loans and Advances given to the following and interest earned on them:

1) to suppliers 2) to employees 3) to its subsidiaries companies

(ii) Investment made in subsidiary Smart Ltd. and dividend received (iii) Dividend paid for the year (iv) TDS on interest income earned on investments made (v) TDS on interest earned on advance given to suppliers (vi) Insurance claim received against loss of fixed asset by fire Discuss in the context of AS 3 Cash Flow Statement (4 Marks)

(b) What are depreciable assets as per Accounting Standard-6? Explain why AS 6 does not apply to Land. (4 Marks)

(c) What is an Enterprise Resource Planning (ERP) software? What are the factors which you will take into consideration while choosing an ERP software? (4 Marks)

(d) What are the three fundamental accounting assumptions recognized by Accounting Standard (AS) 1? Briefly describe each one of them. (4 Marks)

PRIME/40ME/IPC 1

PRIME ACADEMY 40th SESSION MODEL EXAM - IPC – ACCOUNTING

SUGGESTED ANSWERS 1. (a)

1. Depreciation of original machine

Particulars Amount `

Original cost of machine as on 1.4.2010 4,00,000

Less: Residual value 10% (40,000)

Depreciable value 3,60,000

Useful life 10years

Depreciation per year 36,000

Depreciation for 3 years 1,08,000

WDV at the end of 3 years 31.3.2013 (4,00,000-108000)

292000

Add: Revaluation 90,000

Total book value after revaluation 3,82,000

Reassessed remaining useful life 9 years

Depreciation per year from 2013-14 42,444

2. Depreciation attachment

Particulars Amount `

Original cost of attachment as on 1.4.2013 1,80,000

Useful life 10 years

Depreciation per year from 2013-14 18,000

Depreciation for the year 2013-14

i) If attachment retains it separate identity Depreciation of original machine 42,444 Depreciation of attachment 18,000 Total depreciation for 2013-14 ` 60,444

ii) If attachment becomes integral part of the machine

Total value of the machine as on 1.4.2013 Original value of revalued cost(W.N.1) ` 3,82,000 Cost of attachment ` 1,80,000

----------------- ` 5,62,000 ---------------- Useful years 9 Depreciation for 2013-14 ` 62,444

Note:

1. Since, upward revaluation of the machine and reassessment of remaining useful life had been made at the end of the 3rd year, it is implied that depreciation for the 3rd year has been charged on the basis of old calculation & remaining useful life of 9 years is to be calculated from the beginning of the 4th year onwards.

PRIME/40ME/IPC 2

b. Note 6 (B) given under Part I of Schedule III to the Companies Act, 2013 provides that debit balance of Statement of Profit and Loss (after all allocations and appropriations) shall be shown as a negative figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the negative. In this case, the debit balance of profit and loss i.e. 250 lakhs exceeds the total of all the reserves i.e. ` 230 lakhs. Therefore, balance of ‘Reserves and Surplus’ after adjusting debit balance of profit and loss is negative by 20 lakhs, which should be disclosed on the face of the balance sheet. Thus the treatment done by the company is incorrect.

c. Computation of effective capital:

`

Paid-up share capital-

15,000, 14% Preference shares 15,00,000

1,20,000 Equity shares 96,00,000

Capital reserves (excluding revaluation reserve) 45,000

Securities premium 50,000

15% Debentures 65,00,000

Public Deposits 3,70,000

(A) 1,80,65,000

Investments 75,00,000

Profit and Loss account (Dr. balance) 15,25,000

(B) 90,25,000

Effective capital (A-B) 90,40,000

d. Cash flow Statement of PQ Ltd. for the year ended 31.3.2014

Cash flows from Operating activities ` `

Net Profit 22,40,000

Add :Adjustment for Depreciation ( ` 7,90,000 – ` 6,10,000) 1,80,000

Operating profit before working capital changes 24,20,000

Add: Decrease in Inventories (` 20,10,000 – ` 19,20,000) 90,000

Increase in provision for doubtful debts 2,70,000

(` 4,20,000 – ` 1,50,000)

27,80,000

Less: increase in current assets

Trade receivables 6,70,000

(` 30,60,000 – ` 23,90,000)

Prepaid expenses (` 1,20,000 – ` 90,000) 30,000

Decrease in current liabilities

Trade payable (8,80,000 – 8,20,000) 60,000

Expenses outstanding 60,000

Net cash from operating activities 19,60,000

Cash flows from Investing activities

Purchase of Plant & Equipment 13,40,000

(40,70,000 – 27,30,000)

Net cash from investing activities (13,40,000)

Cash flows from Financing Activities

Bank loan raised (3,00,000 – 1,50,000) 150000

PRIME/40ME/IPC 3

Issue of debentures 900000

Payment of dividend (12,00,000-150000) 1050000

Net cash used in financing activities Nil

Net increase in cash during the year 6,20,000

Add: Cash and cash equivalents as on 1.4.2013 27,00,000

Cash and cash equivalents as on 31.3.2014 33,20,000

Note: Bad debts amounting 2,30,000 were written off against provision for doubtful debts account during the year. In the above solution, Bad debts have been added back 0.in the balances of provision for doubtful debts and debtors as on 31.3.2014.Alternatively, the adjustment of writing off bad debts may be ignored and the solution can be given on the basis of figures of debtors and provision for doubtful debts as appearing in the balance sheet on 31.3.2014

2. i) Profit and Loss adjustment account

Particulars Amount ` Particulars Amount `

To expenses not provided for (years 2012-15)

1,10,000 By income not considered (for years 2012-15)

66,000

By partners capital accounts (loss) Laurel Hardy

22,000 22,000

1,10,000 1,10,000

ii) Partners capital accounts

Particulars Laurel ` Hardy ` Chaplin ` Particulars Laurel ` Hardy ` Chaplin `

To P&L adj 22,000 22,000 By balance c/d

2,11,500 1,51,500

To hardy 60,000 By Laurel 60,000

To balance c/d 1,29,500 1,89,500 63,800 By cash 63,800

2,11,500 2,11500 63,800 2,11,500 2,11500 63,800

iii) Balance sheet of LH and Co as on 1.4.2015 (After admission of Chaplin)

Liabilities Amount ` Assets Amount `

Capital accounts: Laurel Hardy Chaplin

1,29,500 1,89,500

63,800

Plant and machinery 60,000

Trade payables 2,27,000 Trade receivables 2,05,000

Outstanding expenses 1,10,000 Stock in trade 3,10,000

Accrued income 66,000

Cash on hand (10,000+63,800) 73,800

Cash at bank 5,000

7,19,800 7,19,800

Working notes:

PRIME/40ME/IPC 4

1. Computation of profit and loss distributed among partners

`

Profit for the year ended 31.3.2012 1,40,000

Profit for the year ended 31.3.2013 2,60,000

Profit for the year ended 31.3.2014 3,20,000

Profit for the year ended 31.3.2015 3,60,000

10,80,000

Particulars Laurel Hardy Total

` ` `

Profit shared in the ratio 5:4 6,00,000 4,80,000 10,80,000

Profit to be shared as per the new ratio i.e 1:1 5,40,000 5,40,000 10,80,000

Excess share 60,000

Deficit share (60,000)

Laurel to be debited by `60,000and Hardy to be credited by ` 60,000

2. Capital brought in by Chaplin

`

Capital to be brought in by Chaplin must be equal to 20% of the combined capital of Laurel and Hardy

Capital of Laurel (2,11,500-22,000-60,000) 1,29,500

Capital of Laurel (1,51,500-22,000+60,000) 1,89,500

Combined capital 3,19,000

20% of the combined capital brought in by Chaplin (20% of ` 3,19,800)

63,800

3. Calculation of Purchase Consideration

P Ltd ` Q Ltd `

Assets taken over

Goodwill 50,000 1,50,000

Building 1,00,000 1,90,000

Plant & Machinery 25,000 80,000

Furniture & Fixtures 35,000

Inventories 1,35,000 50,000

Trade Receivables 142000

Cash at Bank 58000

3,10,000 7,05,000

Less :Liabilities taken over

8% Debentures (121000)

Trade payables (140000)

Net assets taken over 189000 565000

To be satisfied by issue of shares of PQ Ltd. Of 10 each at par 18900 56500

PRIME/40ME/IPC 5

PQ Limited Balance Sheet as at 1st April, 2014

Particulars Note no Amount (`)

I. Equity and Liabilities

(1) Shareholders funds (a) Share capital

1

7,54,000

(b) Reserve and Surplus 2 11,000

(2) Non-current Liabilities

(a) Long term borrowings 3 1,10,000

(3) Current Liabilities

(a) Trade payables 1,40,000

Total 10,15,000

II. Assets

(1) Non-current assets

Fixed assets

Tangible 4 4,30,000

Intangible 5 2,00,000

(2) Current assets

a) Inventories 1,85,000

b) Trade receivables 1,42,000

c) Cash at Bank 58,000

Total 10,15,000

Notes to Accounts:

`

1 Share capital

Authorised

1,00,000 shares of `10 each 10,00,000

Issued, Subscribed and Paid up

75,400 shares of `10 each (All the above shares are allotted as fully paid up pursuant to scheme of amalgamation without payments being received in cash)

2 Reserves and Surplus

Securities Premium Account 11,000

3 Long term borrowings

8% debentures 1,10,000

4 Tangible Fixed Assets

Building

P Ltd 1,00,000

Q Ltd 1,90,000 2,90,000

Plant & Machinery

P Ltd. 25,000

Q Ltd 80,000 1,05,000

Furniture & Fixture

Q Ltd 35,000

4,30,000

5 Intangible Asset

Goodwill

P Ltd 50,000

Q. Ltd. 1,50,000 2,00,000

PRIME/40ME/IPC 6

Working Note: Computation of Securities Premium Debentures issued by PQ Ltd. to the existing debenture holders of P Ltd. at 10% premium. Securities Premium = 1,10,000 x 10% = 11,000.

4. a. Statement of p & L account for the year ended 31 March 2014

Particulars Amount `

Profit 10,00,000

Expenses : Dep and amortization (37500)

Profit before tax 962500

Provision for tax (120,000)

Profit for the period 8,42,500

Notes to accounts

Particulars Amount `

Profit (Loss) for the period 842500

Balance of Profit and Loss account brought forward 1500000

Total 992500

Appropriations (made in Notes to Accounts)

Transfers to Reserves (210625)

Proposed preference dividend (1,80,000 + 84,023) (264023)

Proposed equity dividend (1,50,000 + 1,68,047) (318047)

Bonus to employees (15,000 + 16,805) (31805)

Total 824000

Balance carried to Balance sheet (9,92,500 – 8,24,500) 168000

Working note

Balance of amount available for Preference and Equity shareholders and Bonus for Employees

Credit side 9,92,500

Less: Dr side(2,10,625 + 1,80,000 + 1,50,000 + 15,000 + 1,68,000 (i.e.12,000x100x14/100= 1,68,000)

(7,23,625)

268875

Suppose remaining balance will be = x Preference shareholders will get share from remaining balance = x*1/3 = 1/3x Equity shareholders will get share from remaining balance = x*2/3 = 2/3x Bonus to Employees = 2/3*10/100 = 2/30x Now 2/3x+1/3x+2/30x= 268875 32 x = 80,66,250 , than x = 2,52,070 Share of Preference Shareholders ` 2,52,070 x 1/3 = ` 84,023 Share of Equity Shareholders ` 2,52,070 x 2/3= ` 1,68,047 Bonus to employees ` 2,52,070 x 2/30 = ` 16,805

PRIME/40ME/IPC 7

Note: Corporate dividend tax on dividend distributed has been ignored. (b) Statement showing the calculation of profits for the pre-incorporation and post-incorporation

periods For the year ended 31 March 2014

Particulars Total amount `

Basis of allocation `

Pre-incorporation `

Post-incorporation `

Gross Profit 3,90,800 Sales 39,080 3,51,720

Less: Directors’ fee 30,000 Post 30,000

Bad debts 7200 Sales 720 6480

Advertising 24000 Time 6000 18000

Sales and general exp 128000 Time 32000 96000

Preliminary exp 10,000 Post 10,000

Donation to Political Party

10,000 Post 10,000

Net Profit 181600 181240

Pre-incorporation profit transfer to Capital Reserve

360

Working Notes:

1. Sales ratio

Particulars `

Sales for period up to 30.06.2013 (4,80,000 * 3/6)

240000

Sales for period from 01.07.2013 to 31.03.2014 (24,00,000 – 2,40,000)

21,60,000

Thus sales ratio = 1:9 2. Time ratio 1stapril 2013 to 30 June 2013 = 1stjuly 2013 to 31 march 2014 = 3 months:9 months = thus time ratio = 1:3

5. (a) Trading and Profit and loss account of Mr. X as on 31st March, 2015

Particulars ` Particulars `

To Opening Stock ToPurchases (W.N.5) 9,12,000 Less: Advertisement (18,000) ToGross profit c/d To Expenses (W.N.7) To Discount allowed (W.N.9) To Advertisement To Depreciation on furniture (W.N.1) To Net profit

1,60,000

8,94,000 4,57,000

15,11,000

3,44,000 32,500 18,000 13,000

79,500

4,87,000

By Sales (W.N. 11) By Closing Stock By Gross profit b/d By Discount received (W.N.10) By Interest on Govt. Securities (W.N.8) By Miscellaneous income

13,71,000

1,40,000

15,11,000

4,57,000

16,000

4,000

10,000

4,87,000

PRIME/40ME/IPC 8

Balance Sheet of Mr. X as on 31st March, 2015

Liabilities ` ` Assets `

Capital (W.N.6) 3,76,000 Furniture 1,27,000

Add: Additional capital (W.N.2)

1,72,000 4% Government Securities

1,92,000

Add: Profit during the year

79,500 Accrued interest on Govt. securities (W.N.8)

4,000

6,27,500 Debtors (W.N.3) 2,99,000

Less: Drawings (1,40,000) 4,87,500 Bills Receivable (W.N.4)

35,000

Creditors 3,00,000 Stock 1,40,000

Outstanding expenses

36,000 Prepaid expenses 14,000

Cash on hand 3,000

Bank balance 9,500

8,23,500 8,23,500

Working Notes: 1. Furniture account

` `

To Balance b/d 1,20,000 By Depreciation (bal.fig.) 13,000

To Bank 20,000 By Balance c/d 1,27,000

1,40,000 1,40,000

2. Cash and Bank account

` `

To Balance b/d Cash

4,000 By Creditors 7,84,000

To Bank 20,000 By Drawings 1,40,000

To Debtors 11,70,000 By Furniture 20,000

To Bill Receivable

1,22,500 By 4% Govt Securities 1,92,000

To Miscellaneous income 10,000 By Expenses 3,50,000

To Additional Capital (bal.fig.)

1,72,000 By Balance c/d Cash

3,000

By Bank 9,500

14,98,500 14,98,500

PRIME/40ME/IPC 9

3. Debtors account

` `

To Balance b/d Cash

320,000 By Cash and Bank 11,70,000

To Creditors Bill Receivable dishonored

8,000 By Discount 30,000

To Sales (W.N.1) 13,71,000 By Bills Receivable 200,000

By Balance c/d (bal. fig) 9,500

16,99,000 16,99,000

4. Bills receivable account

` `

To Debtors 200,000 By Bank 1,22,500

By Discount 2,500

By Creditors 40,000

By Balance c/d (b1,20al. fig)

35,000

200,000 200,000

5. Creditors account

` `

To Bank 7,84,000 By Balance b/d 2,20,000

To Discount 16,000 To Debtors Bill Receivable dishonored

8,000

To Bills receivable 40,000 By Purchases 9,12,000

To Balance c/d 300,000

11,40,000 11,40,000

6. Balance sheet as on 1st April 2014

Liabilities Amount Assets Amount

Creditors 2,20,000 Furniture 1,20,000

Outstanding expenses 40,000 Debtors 3,20,000

Capital (balancing figure) 3,76,000 Stock 1,60,000

Prepaid expenses 12,000

Cash 4,000

Bank balance 20,000

6,36,000 6,36,000

7. Expenses incurred during the year

` `

Expenses paid during the year 3,50,000

Add: Outstanding expenses as on 31.3.2015 36,000

Prepaid expenses as on 31.3.2014 12,000 48,000

3,98,000

Less: Outstanding expenses as on 31.3.2014 40,000

Prepaid expenses as on 31.3.2014 14,000 (54,000)

Expenses incurred during the year 3,44,000

PRIME/40ME/IPC 10

8. Interest on Government securities 192000/96%*4%*6/12 = `4,000 Interest on government securities receivable for 6 months = ` 4000

9. Discount allowed

`

Discount on debtors 1170000/97.5%*2.5% 30,000

Discount on bills receivable 122500/98%*2% 2500

32500

10. Discount received

Discount to creditors 784000/98% *2% 16,000

11. Credit sales

Cost of Goods sold = Opening stock + Net purchases – Closing stock = 1,60,000 + (9,12,000 – 18,000) – 1,40,000 = ` 9,14,000

Sales price = 914000*3/2 = ` 13,71,000

(b) In the books of M/s. Power Motors

M/s. Singh & Singh’s Account

Date Particulars ` Date Particulars `

1.4.2012 To Hire purchase a/c (cash price)

9,00,000 1.4.2012 By bank (down payment)

3,00,000

31.7.2012 To interest a/c (6,00,000*12%*4/12)

24,000 31.07.2012 By bank a/c (1,00,000+24000)

124000

30.11.2012 To interest a/c (5,00,000*12%*4/12)

20,000 30.11.2012 By goods possessed a/c

7,00,000

30.11.2012 To profit and loss account ( bal fig)

1,80,000

11,24,000 11,24,000

Goods repossessed amount

Date Particulars ` Date Particulars `

30.11.2012 To Singh and Singh

7,00,000 7.1.2013 By bank a/c 7,50,000

7.1.2013 To bank a/c (repairs)

80000 7.1.2013 By P&L account 30,000

780000 780000

PRIME/40ME/IPC 11

6.

Particulars ` `

Equity Share final call A/c 10,00,000

To Equity Share Capital A/c 10,00,000

(Being final call made for `10 on 1,00,000 shares)

Bank a/c 10,00,000

To equity share final call 10,00,000

(being money on final call received)

Equity share capital ( ` 50) A/c 75,00,000

To equity share capital a/c 60,00,000

To capital reduction a/c 15,00,000

(Being conversion of equity share capital of ` 50 each into ` 40 each as per reconstruction scheme)

Bank A/c 12,50,000

To Equity Share Capital A/c 12,50,000

(Being new shares allotted at ` 40 each)

Trade Creditors A/c 12,40,000

To Equity Share Capital A/c 7,50,000

To bank a/c 3,43,000

To capital reduction a/c 1,47,000

(Being payment made to creditors in shares or cash to the extent of 70% as per reconstruction scheme)

8% debentures a/c 3,00,000

12% debentures a/c 4,00,000

To 15% debentures a/c 5,00,000

To capital reduction a/c 2,00,000

(being cancellation of 8% and 12% debentures of Shiv, issuance of new 15% debentures and balance transferred to capital reduction account as per reconstruction scheme)

Bank a/c 1,00,000

To 15% debentures 1,00,000

(Being new debentures subscribed by Shiv)

8% Debentures A/c 1,00,000

12% Debentures A/c 2,00,000

To 15% debentures a/c 2,50,000

To Capital Reduction A/c 50,000

(Being cancellation of 8% and 12% debentures of Ganesh, and issuance of new 15% debentures and balance transferred to capital reduction accounts as per reconstruction scheme)

Land and Building (51,84,000-42,70,000) 914,000

Stock 30,000

To Capital Reduction A/c 9,44,000

PRIME/40ME/IPC 12

(Being value of assets appreciated)

Outstanding expenses A/c 10,60,000

To Bank A/c 10,60,000

(Being outstanding expenses paid in cash)

Capital Reduction A/c 33,41,000

To Machinery A/ 1,30,000

To Computers A/c 1,20,000

To Trade Debtors A/c 1,09,000

To Goodwill A/c 22,00,000

To Profit and Loss A/c 7,82,000

(Being amount of Capital Reduction utilized in writing off P & L A/c (Dr.) balance, goodwill and downfall in value of other assets)

Capital Reserve A/c 5,00,000

To Capital reduction A/c 5,00,000

(Being debit balance of capital reduction account adjusted against capital reserve)

Balance Sheet (as reduced) as on 31.3.2012

Liabilities ` Assets `

Share Capital: Land & Building 51,84,000

2,00,000 Equity shares of ` 40 each

80,00,000 Machinery 7,20,000

15% Debentures 8,50,000 Computers 4,00,000

Trade Debtors 9,81,000

Stock 3,50,000

Cash at Bank (W.N.1) 12,15,000

88,50,000 88,50,000

Working Notes:

1. Cash at Bank Account

Particulars ` Particulars `

To Balance b/d 2,68,000 By Trade Creditors A/c 3,43,000

To Equity Share final call A/c 10,00,000 By Outstanding expenses A/c 10,60,000

To Equity Share Capital A/c 12,50,000 By Balance c/d (bal. fig.) 12,15,000

To 15% Debentures A/c 1,00,000

26,18,000 26,18,000

2. Capital Reduction Account

Particulars ` Particulars `

To Machinery A/c 1,30,000 By Equity Share Capital A/c 15,00,000

To Computers A/ 1,20,000 By Trade Creditors A/c 1,47,000

To Trade Debtors A/c 1,09,000 By 8% and 12% Debentures A/c

2,00,000

To Goodwill A/c 22,00,000 By 8% and 12% Debentures A/c

50,000

To Profit and Loss A/c 7,82,000 By Land & Building 9,14,000

PRIME/40ME/IPC 13

By Stock 30,000

By Capital Reserve A/c 5,00,000

33,41,000 33,41,000

7.

a) i) Loans and advances given and interest earned

(1) to suppliers Operating Cash flow (2) to employees Operating Cash flow (3) to its subsidiary companies Investing Cash flow

ii) Investment made in subsidiary company and dividend received Investing Cash flow

iii) Dividend paid for the year Financing Cash Outflow

(iv) TDS on interest income earned on investments made Investing Cash Outflow

b) As per AS 6 ‘Depreciation Accounting’, depreciable assets are the assets which

a. are expected to be used during more than one accounting period; and b. have a limited useful life; and c. are held by an enterprise for use in the production or supply of goods and services, for rental to

others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.

AS 6 does not apply to ‘land’ as land is considered to have unlimited useful life. Therefore, it is not appropriate to charge depreciation on land.

c) An Enterprise Resource Planning (ERP) is an integrated software package that manages the business process across the entire enterprise by integrating informations created by different functional groups of the organization. Choice of ERP software depends upon the following factors:

1) Functional requirement of the organisation: The ERP that matches most of the requirements of an organisation is preferred over the others

2) Reports available in the ERP: The organization visualises the reporting requirements and chooses a vendor which fulfils its reporting requirements.

3) Background of the vendors: The service and deliverable record of a vendor is extremely important in choosing the vendor.

4) Cost comparisons: The budget constraints and fund position of an enterprise often becomes the deciding factor for choosing a particular package.

d) Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions.

These are as follows: i) Going Concern: The financial statements are normally prepared on the assumption that an

enterprise will continue its operations in the foreseeable future and neither there is intention, nor there is need to materially curtail the scale of operations.

ii) Consistency: The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods unless the change is required (i) by a statute, (ii) by an accounting standard or (iii) for more appropriate presentation of financial statements.

iii) Accrual basis of accounting: Under this basis of accounting, transactions are recognized as soon as they occur, whether or not cash or cash equivalent is actually received or paid.

PRIME/ME40/IPC 1

WSN No. of Pages: 2 Total Marks: 100 No of Questions: 7 Time Allowed: 3 Hrs

Qn. No. 1 is compulsory Attempt any five questions from the remaining six questions.

1. (a) A contracted with B to supply him (B) 500 tons of iron-steel @ ` 5,000 per ton, to be delivered at a specified time. Thereafter, A contracts with C for the purchase of 500 tons of iron-steel @

` 4,800 per ton, and at the same time told „C‟ that he did so for the purpose of performing his

contract entered into with B. C failed to perform his contract in due course. Consequently, A could not procure any iron-steel and B rescinded the contract. What would be the amount of damages which A could claim from C in the circumstances? Explain with reference to the provisions of the Indian Contract, 1872. (5 Marks)

(b) Aswani who was an employee of Sun Televisions Limited, retired on 1st January, 2013 after 30 years of continuous service. The company did not pay the amount of gratuity to Aswani till the end of December, 2013. Now, Aswani claims the amount of gratuity along with interest. Decide, under the Payment of Gratuity Act, 1972 whether Aswani will succeed in his claim? (5 Marks)

(c) “The institution of business exists only if it fulfills the society's expectations”. Comment (5 Marks)

(d) Explain the functions of interpersonal communication (5 Marks)

2. (a) A company refuses to register transfer of shares made by X to Y. The company does not even send a notice of refusal to X or Y within the prescribed period. Has the aggrieved party any right(s) against the company for such a refusal? Advise with reference to Companies Act, 2013.

(8 Marks) (b) A 60 years old district judge was appointed by the Central Government as Presiding Officer of

the Employee's Provident Funds Appellate Tribunal for a period of 2 years. After one year, he resigns from his office and ceases to work with immediate effect without handing over the charge to his successor, who was not appointed by the Government till that date. Examine the validity of his action to cease work under the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. (4 Marks)

(c) Draft the Performa of affidavit for not having a Marriage certificate. (4 Marks)

3. (a) Examine the validity of the following with reference to the relevant provisions of the Companies Act, 2013: (i) The Board of Directors of a company refuse to convene the extraordinary general meeting

of the members on the ground that the requisitionists have not given reasons for the resolution proposed to be passed at the meeting.

(ii) The Board of Directors refuse to convene the extraordinary general meeting on the ground that the requisitions have not been signed by the joint holder of the shares.

(iii) Adjournment of extraordinary general meeting called upon the requisition of members on the ground that the quorum was not present at the meeting. (8 Marks)

(b) What kind of pressure are faced by a finance and accounting professional working as a employee in an organization? (8 Marks)

4. (a) A and B are the employees of P Limited. The company decided to forfeit the amount of gratuity

of A and B on account of disorderly conduct and other acts which caused loss to the property belonging to the company. A and B committed the following acts: i. A refused to surrender the occupied land belonging to the company.

ii. B committed theft under law involving offence of moral turpitude. Against the decision of the company, A and B applied to the appropriate authorities for relief. The company contented that the right to gratuity is not a statutory right and the forfeiture of

PRIME/ME40/IPC 2

the amount of gratuity was within the law. Examine the validity of the argument and the decision taken by the company(P) to forfeit the amount of gratuity in the light of the Payment of Gratuity Act, 1972. (8 Marks)

(b) “To maintain social contract between society and business, the trusteeship relations are essential”. Describe the role of business ethics in this reference. (8 Marks)

5. (a) A charge requiring registration with Registrar of Companies was created on 1st February, 2008 by XYZ Limited. The Secretary of the Company realised on 15th March, 2008 that the charge was not filed with the Registrar. State the steps to be taken by the Secretary to get the charge registered with the Registrar. (4 Marks)

(b) J held 100 partly paid up shares of LKM Limited. The company asked him to pay the final call

money on the shares. Due to some unavoidable circumstances he was unable to pay the amount of call money to the company. At a general meeting of the shareholders, the chairman disallowed him to cast his vote on the ground that the articles do not permit a shareholder to vote if he has not paid the calls on the shares held by him. J contested the decision of the Chairman. Referring to the provisions of the Companies Act, 2013 decide whether the contention of J is valid. (4 Marks)

(c) Draft a notice for calling the Board of Directors meeting of M/s. MN Limited where Mr. RS is co-opted as an Additional Director and also to consider buy-back of company’s equity shares to an extent of 10%, of issued share capital. (4 Marks)

(d) A retailer was purchasing goods regularly from XYZ Ltd. for the purpose of resale. There were

defects in the goods in one of the purchase lot and as a result the retailer suffered loss of his share in competition. The retailer sued the said company for this reason. The company contended that the goods were purchased for the purpose of resale and therefore, not bound. Is it a valid contention? Explain clearly the provisions of the Competition Act, 2002 in this regard. (4 Marks)

6. (a) Bharat executed a promissory note in favour of Bhushan for ` 5 crores. The said amount was payable three days after sight. Bhushan, on maturity, presented the promissory note on 1st January, 2008 to Bharat. Bharat made the payments on 4th January, 2008. Bhushan wants to recover interest for one day from Bharat. Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is liable to pay the interest for one day? (4 Marks)

(b) Explain the legal position in respect to the co-sureties in the given situations: i. X, Y, and Z are sureties to D for the sum of ` 3000 lent to R. What if, R makes a default in

payment. ii. X, Y and Z, as sureties for D, enters into a bond, each in different penalty, X in the penalty of

10,000, Y of 20,000 and Z of 40,000, conditioned for D’s duly accounting to R. What if, D makes a default to the extent of ` 40,000. (4 Marks)

(c) Comment on the statement “Business is all green, only philosophy is grey”. (4 Marks) (d) What do you understand by 'Group conflicts'? How shall these be managed effectively? Explain.

(4 Marks) 7. State with reasons whether the statement is correct/incorrect:

(i) Oral acceptance given by drawee is valid in law. (ii) Notary Public is a government servant. (iii) ‘Window-dressing of financial statements will not be useful in the long run’ (iv) Company management has responsibility only towards its shareholders.

(4 x 4 = 16 Marks)

PRIME/40ME/IPC 1

PRIME ACADEMY 40th SESSION MODEL EXAM - IPC – LAW ETHICS AND COMMUNICATION

SUGGESTED ANSWERS

1. (a) The problem in the question is based on the provisions of the Indian Contract Act, 1872 as contained in

section 73. Section 73 provides that when a contract has been broken the party who suffers loss by such

breach is entitled to receive compensation for any loss or damage caused to him thereby which

naturally arose in the usual course of things from such breach or which the parties knew when they

made the contract to be likely to result from the breach of it [Hadley v Baxendale] In the instant case 'A'

had intimated to 'C that he was procuring iron steel from him for the purpose of performing his

contract with 'B' Thus, C had the knowledge of the special circumstance. Therefore, 'A' is entitled to

claim from ‗C‘ ` 1,00,000 (difference between the procuring price of iron steel and contracted selling

price to 'B') being the amount of profit 'A' would have made by the performance of his contract with 'B'.

(b) If the employer fails to pay the gratuity within the prescribed time (i.e., within 30 days of termination of

employment), the controlling authority is empowered to issue a certificate, known as the recovery

certificate to the collector to recover the amount of gratuity. Before issue of such certificate, the

controlling authority shall give the employer a reasonable opportunity of being heard.

The employer shall also be liable to pay compound interest at such rate as may be notified by CG from

time to time. The interest shall be paid starting from the date of expiry of prescribed period for payment

of gratuity and ending with the actual date of payment of gratuity. However, the interest payable shall

not exceed the amount of gratuity payable. The gratuity shall be recovered by the collector in the same

manner as if it were arrears of land revenue. The gratuity so recovered shall be paid to the person

entitled to payment of gratuity. Hence Aswani may follow the above rules for settlement of his claim.

(c) The given statement is Correct. It is the society which bestows upon businesses the authority to own and

use land and natural resources. In return, society has the right to expect the productive organizations,

enhancing the general interest of consumers, employees and community. Society may also expect that

organizations to honour existing rights and limit their activities within the bounds of justice. So, under

this ‘social contract’ between society and business, Business ethics provide the guidance as to regulation

of the behavior of business enterprises and the minimal duties of the business professionals, including

the consequences and complications of their actions. Thus, business ethics is that set of principles or

reasons which should govern the conduct of business – whether at the individual or collective level by

the application of ethical reasoning to specific business situations and activities. Thus, it can be said that

the institution of business exists only if it fulfills the society’s expectations.

(d) 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.

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.

PRIME/40ME/IPC 2

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.

• Affection is the need to develop relationships with people. Groups are an excellent way to make

friends and establish relationships.

2. (a) The problem as asked in the question is governed by Section 58 of the Companies Act, 2013 dealing with

the refusal to register transfer and appeal against refusal. In the present case the company has

committed the wrongful act of not sending the notice of refusal of registering the transfer of shares.

Under section 58 (4) if a public company without sufficient cause refuses to register the transfer of

securities within a period of thirty days from the date on which the instrument of transfer is delivered to

the company, the transferee may, within a period of sixty days of such refusal or where no intimation

has been received from the company, within ninety days of the delivery of the instrument of transfer,

appeal to the Tribunal.

Section 58 (5) further provides that the Tribunal, while dealing with an appeal made under sub-section

(4), may, after hearing the parties, either dismiss the appeal, or by order—

(i) direct that the transfer or transmission shall be registered by the company and the company shall

comply with such order within a period of ten days of the receipt of the order; or

(ii) direct rectification of the register and also direct the company to pay damages, if any, sustained by

any party aggrieved;.

In the present case Mr X can make an appeal before the tribunal and claim damages.

(b) Section 7 F of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 provides that the

Presiding Officer of a Employees’ Provident Funds Appellate Tribunal may by notice in writing under his

hand addressed to the Central Government, resign his office provided that the Presiding Officer shall,

unless he is permitted by the Central Government to relinquish his office sooner, continue to hold office

until the expiry of three months from the date of receipt of such notice or until a person duly appointed

as his successor enters upon his office or until the expiry of his term of office, whichever is the earliest.

Hence, action of district judge is invalid as per above provisions. He should obtain permission from the

Central Government to do so.

(c) I, .................S/o.............R/o..............................do hereby solemnly affirm and declare an oath as under:

“That the marriage between......(name of spouses with details) solemnized with the Hindu rituals

on.......... at-------(Name of place) .That due to inadvertence, I did not register my marriage with the

concerned department and not having marriage certificate.

Date:………………….. Signature

Place:…………………. Deponent

PRIME/40ME/IPC 3

3. (a) As per Section 100 (2) of the Companies Act 2013, the Board of directors must convene a general

meeting upon requisition by the stipulated minimum number of members. Further section 100 (3) the

requisition, made under sub-section (2) for convening an extra ordinary general meeting of members,

shall set out the matters for the consideration of which the meeting is to be called and shall be signed by

the requisitionists and sent to the registered office of the company. The requisitioning members are not

required to give reasons for the resolutions proposed so long as the matters are to be dealt with at the

meeting are disclosed and the statement in terms of section 102 (1), setting out all material facts

relating to each item of business to be transacted is attached to the requisition. This is essential as each

such business transacted will be a special business and will require such statement to be sent along with

the notice for the meeting.

Based on the above provisions of the Companies Act, 2013 the validity of the cases presented in the

question would be as under:

(i) In view of the above law, the board of directors cannot refuse to convene the meeting if the

reasons for the resolution are not given. What is required to be stated is the objects of the

meeting, i.e., the matters for the consideration of which the meeting and resolutions to be passed.

It is also reasonable to assume that the statement of all material facts on the proposed resolution

should also be given by the requisitionists as the Board may not be able to prepare such statement

as it is not proposing the resolution in the first place. The material information regarding the

resolution basically means the justification for the resolution which need not be given.

In given problem (i) the Board of Directors cannot refuse to convene the meeting because reasons

for the resolution is not given.

(ii) Where two or more persons hold any shares or interest in a company jointly, a requisition, or

notice calling a meeting, signed by one or some of them shall, for the purposes of this section, have

the same force and effect as if it had been signed by all of them . On the basis of above section the

Board of Directors has no right to refuse to convene the meeting in the given problem (ii).

(iii) As per Section 103 (2) (b) of the Companies Act, 2013, if the quorum is not present within half an

hour from the appointed time for holding a meeting of the company, the meeting, if called on the

requisition of members, shall stand cancelled. Therefore, the meeting stands cancelled and the

stand taken by the Board of Directors to adjourn it is proper in the given problem (iii).

(b) A finance and accounting professional may be under pressure to act or behave in ways that could

directly or indirectly threaten compliance with the fundamental principles. Such pressure may be explicit

or implicit; it may come from a supervisor, manager, director or another individual within the employing

organization. A finance and accounting professional may face pressure to:

o Act contrary to law or regulation.

o Act contrary to technical or professional standards.

o Facilitate unethical or illegal earnings management strategies.

o Lie to, or otherwise intentionally mislead (including misleading by remaining silent) others, in

particular:

o The auditors of the employing organization; or

o Regulators.

o Issue, or otherwise be associated with, a financial or non-financial report that materially

misrepresents the facts, including statements in connection with, for example:

PRIME/40ME/IPC 4

4. (a) Forfeiture of Gratuity: In accordance with the provisions of Section 4(6) of the Payment of Gratuity Act,

1972, if the services of any employee have been terminated for any act, willful omission, or negligence

causing any damage or loss to or destruction of, property belonging to the employer, the gratuity shall

be forfeited to the extent of the damage or loss so caused; and if the services of such an employee have

been terminated for any act which constitutes an offence involving moral turpitude, provided that such

offence is committed by him in the course of his employment, the gratuity payable to the employee may

be wholly or partially forfeited.

The problem asked in the question is based on the above provisions and the provisions of Section 4(1) of

the Payment of Gratuity Act, 1972. Accordingly, gratuity shall be paid to the employee when he

completes five years of continuous service 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’

continuous service is not essential in case of the termination of the employment of any employee due to

death or disablement. Looking to the provisions of Section 4(1), it is clear that withholding of gratuity is

not permissible under any circumstances, except under those circumstances covered by Section 4(6).

The right to gratuity is a statutory right and none can be deprived of it except as provided by the law.

Therefore, the contention of P Ltd. is wrong, to that extent. The correctness of the decision taken by P

Ltd. regarding forfeiture of the gratuity amount of its employees A and B, may be tested in the light of

Section 4(6) of the Payment of Gratuity Act,1972 as referred above.

(i) Accordingly, the refusal of an employee to surrender the occupied land belonging to the company is

not sufficient ground to withhold gratuity under Section 4(6) of the Payment of Gratuity Act, 1972

[Relevent case law Travancore Plywood Industries Ltd. vs. Regional Joint Labour Commissioner

(1966) II LLJ 85 Ker] Hence, A’s gratuity cannot be withheld.

(ii) The offence of theft committed by B, under law involves moral turpitude and his gratuity stands

wholly forfeited in view of Section 4(6) of the Act [relevant case is Bharat Gold Mines Ltd vs.

Regional Labour Commissioner, 1987, 70 FJR 11 (Karnataka)].

(b) Businesses as trustees: Mahatma Gandhi, the father of the nation, had aptly said that trusteeship

provides a means for transforming the present capitalist order of society into an egalitarian one. A

business man has to act only as a trustee of the society for whatever he has gained from the society.

Everything finally belongs to the society. Society bestows upon business the authority to own and use

land and natural resources. In return the society has the right to expect that productive organizations

will enhance the general interests of consumers, employees and community.

Business ethics is required to implement the laws of land, customs, expectations of community,

principles of morality, etc. The products and services of an organization affect its employees, the

community and society as a whole. Business ethics also sub serve the management discipline. Business

houses may also use their financial and public influence to address social problems like poverty, crime,

equal rights, environmental problems, public health and education. Society at large has also come to

realize that since businessmen are making profits by using the country’s resources, they owe it to the

country to work for its development. Sound workplace ethics ensure that a company’s employees are

highly motivated and identify themselves with their employer. Following ethical business practices

safeguard a company from getting entangled with law enforcement agencies. A reputation for highly

ethical behaviour also ensures increased sales and customer loyalty. Certain eco-friendly practices also

reduce operation costs. Thus, society derives benefits as well as business prospers when businesses are

ethically driven.

PRIME/40ME/IPC 5

5. (a) Registration of Charge: Steps for belated registration (Section 77 of the Companies Act, 2013): A charge

should be registered within 30 days after the date of its creation. In this case the charge was created on

1st Feb, 2008. Hence the particulars of charge are required to be filed with the Registrar on or before

2nd March, 2008 [Section 77 (1)].

The Secretary of the company realised only on 15th March, 2008 that the charge was not filed with the

Registrar. It is, however, open to the Registrar to extend the time for filing of the charge within 300 days

if the company satisfies the Registrar that it had sufficient cause for not filling the particulars within 30

days. [Proviso to Section 77(1)]. The Secretary may take advantage of this provision and immediately file

the particulars of charge with the Registrar giving adequate reasons for the delay. If the Registrar is

satisfied, he may allow registration on payment of additional fee.

(b) Section 106 (1) of the Companies Act, 2013 states that the articles of a company may provide that no

member shall exercise any voting right in respect of any shares registered in his name on which any calls

or other sums presently payable by him have not been paid, or in regard to which the company has

exercised any right of lien. In the present case the articles of the company do not permit a shareholder

to vote if he has not paid the calls on the shares held by him. Therefore, the chairman at the meeting is

well within its right to refuse him the right to vote at the meeting and J’s contention is not valid.

(c) Notice

Notice is hereby given that meeting of the Board of Directors of the company will be held at the

registered office on…….at……a.m./p.m. to transact the following:

Agenda

1. Confirmation of the minutes of the previous Board Meeting held on…….….to…….…

2. Discussion of the progress in business.

3. Co-option of Mr. RS. as an Additional Director of the company.

4. Buy back of 10% of the equity shares of the company.

5. Any other matter with the permission of the chair.

Place:……………………. By Order of the Board of Directors

Date:……………………...

(d) The problem as asked in the question is based on the provisions of Section 2(f) of the Competition Act,

2002. The Section provides that “consumer” means any person who buys any goods for a consideration

which has been paid or promised or partly paid or partly promised or under any system of deferred

payment and includes any user of such goods other than the person who buys such goods for

consideration paid or promised or partly paid or partly promised or under any system of deferred

payment when such use is made with the approval of such person whether such purchase of goods is for

resale or for any commercial purpose or for personal use.

Hence Section 2(f) of the Competition Act, 2002 provides that whether purchase of goods is for resale or

for any commercial purpose or for personal use, the purchaser is a consumer. Thus consumer will also

include a person who purchases goods for re-sale. Therefore the contention of XYZ Ltd. is not valid and

not tenable.

PRIME/40ME/IPC 6

6. (a) Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that where a bill or note is

payable after date or after sight or after happening of a specified event, the time of payment is

determined by excluding the day from which the time begins to run. Therefore, in the given case, Bharat

will succeed in objecting to Bhushan’s claim. Bharat paid rightly “three days after sight”. Since the bill

was presented on 1st January, Bharat was required to pay only on the 4th and not on 3rd January, as

contended by Bharat.

(b) Right against Co-sureties(section 146-147): When 2 or more persons stand as sureties for the same debts

or obligation, they are termed as co-sureties. Position of co-sureties is as follows:

(i) when co-sureties are liable to contribute equally: where there are 2 or more co-sureties either

jointly or severally, under the same or different contracts and with or without knowledge of each

other, there the co- sureties are liable as between themselves to pay each an equal share of the

whole debt or that part of it which remains unpaid by the principal debtor. Thus accordingly in the

given case on the default of the payment by the principal debtor(R), the co-sureties X,Y, and Z are

liable as between themselves, to pay ` 1,000 each.

(ii) Liability of co-sureties bound in different sums: Co-sureties who are bound in different sums, are

liable to pay equally as far as the limits of their respective obligations permit. Thus in the given

instance, on the default of D to the extent of ` 40,000, X is liable to pay ` 10,000, Y and Z both `

15,000 each.

(c) The statement was given by the karl marx commenting on the business objectives said “Business is all

green, only philosophy is grey.” By this line he meant that business is all about profits and comfort for its

rich owners and discomforts for all other sections of the society who are at the receiving end of the

business. Despite such socialist ideology been relegated to the background due to fact that capitalism is

being gradually accepted; business is still painted as essentially exploitative in nature. But one has to

accept that much of the progress in the world would not have been possible without entrepreneurship

and business which involves risk.

(d) Group conflict: Group conflict is an 'express struggle' between two inter-dependent parties who perceive

incompatible goals, scarce resources and interference from the other party in achieving their goals.

There are two aspects in relation to conflict

1. Expression: The two sides must communicate/express about the problem for there to be conflict.

2. Perception: Conflict evolves perceptions in the two sides may only perceive that their goals,

resources, and interference are incompatible with each other's.

Managing conflicts: The climate in which conflict is managed is important. It is essential to plan

communications to foster a supportive climate, marked by emphasis on

(i) Presenting ideas or options

(ii) Problem orientation- focusing attention the task

(iii) Spontaneity - Communicating openly and honestly

(iv) Empathy - understanding another person's thoughts.

(v) Equality- asking for opinion s

(vi) Willing to listen to the ideas of others.

Successfully managed conflicts can be constructive and can strengthen relationships in an organisation.

PRIME/40ME/IPC 7

7. (i) The given statement is incorrect: Acceptance must be given in written by the drawee. He may use any

appropriate word to convey his assent. It may be sufficient acceptance even if just a bare signature is

put without additional words. Thus, an oral acceptance is not valid in law.

(ii) The statement is correct. A Notary public is appointed by the Central or State Government. His functions

are to attest deeds, contracts and other instruments that are to be used abroad and to give a certificate

of due execution of such documents. He enjoys the confidence of the business world, and any certificate

given by him is presumed to be true by a court of law. (i)

(iii) Correct: In window-dressing, efforts are made to show a ‘good balance-sheet’ by manipulating the

entries. This can help companies to boost their market image and obtain further capital from the market

for some time. Window dressing is on the assumption that next year performance will be better and

accounts will be regularized. Window dressing can go on for 2 or 3 years but not more than that.

Eventually, it will lead to the downfall of the company.

(iv) In correct: Company management is responsible not only towards its shareholders but also to other

stake holders i.e. people who have an interest in the conduct of the business of the company. These

include employees, customers, vendors, the local community and even the society as a whole. These

stakeholders have certain rights with regard to how the business operates.

PRIME/40ME/IPC 1

TMT No. of Pages: 5 Total Marks: 100 No of Questions: 7 Times Allowed: 3 Hrs

Question No. 1 is compulsory Answer any five questions from the remaining six questions

Working notes should form part of the answer 1.

a. The cost accountant of Raman Ltd. has computed labour turnover rates for the quarter ended 31st March, 2011 as 10%, 5% and 3% under flux method, replacement method and separation method respectively.

If the number of workers replaced during the quarter is 30, find out the number of — (i) Workers recruited and joined; and (ii) Workers left and discharged.

b. In the course of manufacture of the main product 'A', by–products 'X' and 'Y' also emerge. The joint expenses of manufacture amount to ` 2,39,100. All the three products are processed further after separation and sold as per details given below :

Main Product By–Product

'A' ` 'X' ` 'Y' `

Sales 1,80,000 1,20,000 80,000

Units 12,000 10,000 8,000

Selling price 25 20 15

Total fixed selling expenses are 10% of total cost of sales which are apportioned to the three products in the ratio of 1 : 2 : 2. (i) Prepare a statement showing the apportionment of joint costs to the main product and the

two by–products. (ii) If the by–product 'X' is not subjected to further processing and is sold at the point of

separation for which there is a market at `1,17,000 without incurring any selling expenses, would you advise its disposal at this stage ?

c. Mr Raman has asked for your advice regarding investment in a bond for ` 995 which will make one

payment of ` 1200 five years from today or invest in a local bank account. You are required to compute

i. The internal rate of return on the bonds cash flows? What additional information do you need to make a choice?

ii. Your advice to Mr.Raman if the bank is paying 3.5% per year for five years (compounded annually). PVIF (3%, 5 Yrs. ) = 0.863 and PVIF ( 4 % , 5 yrs. ) = 0.822

d. You are required with the following date relating to our firms

Firm A ` B ` C ` D `

EBIT in ` 2,00,000 3,00,000 5,00,000 6,00,000

Interest in ` 20,000 60,000 2,00,000 2,40,000

Equity Capitalization Rate

12% 16% 15% 18%

Assuming that there are no taxes and rate of debt is 10%, you are required to determine the value of each firm using the Net Income approach. Also determine the Overall cost of capital of each firm.

(4 x 5 = 20 Marks)

PRIME/40ME/IPC 2

2.

a. From the following information relating to Process I of a factory for the month of April 2015, prepare the statement of equivalent production, statement of cost, statement of evaluation and Process Account, using average Cost method; i. Opening work in progress : 500 units `

Materials 27,000

Labour 8,000

Overheads 12,500

47,500

ii. Cost incurred during April 2003: `

Input of materials: 14,000 units 5,74,750 Labour 1,19,300 Overheads 1,78,450

iii. Process loss: Normal loss: 10% Value of scrapped unit: ` 10 each. Actual loss during April 2003: 1,500 units Degree of completion: Materials 100%, Labour and Overheads 60%.

iv. Closing work in progress: 1,000 units Degree of completion: Materials 100%, Labour and Overheads 70%.

Processed units transferred to Process II: 12,000 units during April 2015. (8 Marks)

b. The following information is available regarding Manubhai Chemical Ltd.:

(` in lakhs)

EBIT 75

Interest on debenture @ 8.5% 1.275

Interest on term loan @ 12% 1.92

Income tax @ 40% 28.7

Number of equity shares 15 lakhs

Market price per share (Face Value `10) `20

The company has undistributed reserves and surplus of `40 lakhs. It is in need of `50 lakhs to pay off debentures and to buy new machinery. The company is considering the following two options: (a) Raising the entire amount as term loan @ 12.5%. (b) Issuing ` 1.5 lakh shares at `15 per share and the rest of the amount in the form of term

loan @ 12.5% p.a. As a result of modernisation, the return on capital employed is likely to improve by 3%. In case the total amount is raised in the form of loans, the P/E ratio of the company is likely to decrease by 5%. You are required to: (i) Calculate the market price share under the two options and advise which option is to be

selected. (ii) Find out the indifference level of EBIT. (8 Marks)

PRIME/40ME/IPC 3

3.

a. Following information is made available from the costing records of a factory; The original cost of the machine : ` 1,00,000

Estimated life : 10 years Residual value : ` 5,000 Factory operates for 48 hours per week : 52 weeks in a year. Allow 15% towards machine maintenance down time. 5% (of productive time assuming unproductive) may be allowed as setting–up time.

Electricity used by the machine is 10 units per hour at a cost of 50 paise per unit. Repairs and maintenance cost is ` 500 per month Two operators attend the machine during operations along with two other machines. Their

total wages including fringe benefits, amounting to ` 5,000 per month is paid. Other overheads attributable to the machine are ` 10,431 per year. Using above data, calculate machine hour rate. (8 Marks)

b. A company is faced with the problem of choosing between two mutually exclusive projects.

Project A requires a cash outlay of ` 1,00,000 and cash running expenses of ` 35,000 per year. On the other hand, Project B will cost ` 1,50,000 and require cash running expenses of ` 20,000 per year. Both the machines have an eight–Year life. Project A has a salvage value of ` 4,000 and Project B has a salvage value of ` 14,000. The company’s tax rate is 50% and it has a 10% required rate of return. Assuming depreciation on straight line basis and that there is no funds constraint for the company, ascertain which project should be accepted. Present value of an annuity of ` 1 for 8 years = 5.335 and present value of ` 1 at the end of 8 years = 0.467, both at the discount rate of 10%.

(8 Marks) 4.

a. The Summarised budget and Actual working results of GEMCO LTD. for the year 2014-15 are given below:

Products Products

A B C A B C

` ` ` ` ` ` Selling Price per Unit 12 16 25 13 16 27

Cost per Unit 9 11 20 10 12 21

Sales (units) 40,000 32,000 24,000 42,000 40,000 22,000

Compute Sales variances. (8 Marks)

b. The following accounting information and financial ratios of ZENITH LTD., pertain to the year ended 31.3.2015: `

Paid up Capital 200,000

Plant and Machinery 500,000

Total Sales (Annual) 2,000,000

Sales Return 20% Sales

Annual Credit Sales 80% of Net Sales

Gross Profit Margin 25%

Current Ratio 2

Inventory Turnover Ratio (Cost of Sales) 4

Fixed Assets Turnover (Net Sales) 2

Average Collection Period 73 Days

Bank Credit to Trade Credit 2

Cash to Inventory 1:15

PRIME/40ME/IPC 4

Total Debt to Current Liabilities 3

You are required to prepare Balance Sheet of Zenith Ltd. as on 31.3.2015. Ignore Taxation. (8 Marks)

5. a. Comment:

(i) All direct costs are variable (ii) Sunk costs are irrelevant for decision making

b. Distinguish between

(i) Inventry able costs and period costs (ii) Operating leverage and financial leverage

c. What is the risk return trade off in working capital management? d. Why is the NPV method superior to the IRR method? (4 x 4 = 16 Marks)

6.

a. A company prepares Budget for a production level of 2,00,000 units of a product. The variable cost per unit of the product is ` 15 and Fixed Cost is ` 2. The Company fixes the selling price to fetch a profit of 10% on cost. You are required to calculate:

i. The Break Even Point in unit and Rupees. ii. Profit/volume ratio.

iii. If selling price is reduced by 5% what will be the revised Breakeven point in Rupees and P/V ratio.

iv. If an increase of profit by 10% over the Budget is desired, what should be the sales at reduced price. (8 Marks)

b. MORISON LTD. has given its Balance Sheets as on March 31, 2014 and March 31, 2015 in the following summarized form:

31-Mar-14 31-Mar-15

(` In lakhs of Rupees)

Capital and liabilities Equity Capital 120 120 General Reserve 61.8 68.2 Profit and Loss Account 3 3.6 16% Debentures — 30 Sundry Creditors 6.2 7.4

Total 191 229.2

Properties and Assets: Land and Buildings (Less depreciation) 28.4 35 Plant and Machinery (Less depreciation) 62 75 Furniture and Fixtures (Less depreciation) 16.8 19.6 Investments 1 1.2 Stock 6.8 8.4 Debtors 60 72 Cash and Bank 16 18

Total 191 229.2

Additional information for the year ended March 31, 2015:

(a) Dividend of ` 3,60,000 for the year ended 31.3.2014 was paid during the year 2014-15

PRIME/40ME/IPC 5

(b) Investment Costing ` 20,000 was sold for ` 24,000. (c) Depreciation on Fixed Assets for the year ended 31.3.2015 was charged to Profit and Loss

Account as follows: Land and Buildings — ` 84,000 Plant and Machinery — ` 9,48,000 Furniture and fixtures — ` 3,68,000 (d) Sale of fixed Assets: Machinery : Sale value ` 2,00,000 (WDV ` 4,40,000) Furniture & Fixtures : Sale value ` 60,000 (WDV ` 40,000)

Required: Prepare FUNDS FLOW Statement for the year ended March 31, 2015 (8 Marks)

7. Write short notes on any four of the following: a. Major considerations in Capital structure planning b. Cost control vs Cost reduction c. Tax aspects in Capital budgeting d. ABC analysis e. Miller – Orr cash model (4 x 4 = 16 Marks)

PRIME/40ME/IPC 1

PRIME ACADEMY 40th SESSION MODEL EXAM - IPC - COST ACCOUNTING AND FINANCIAL MANAGEMENT

SUGGESTED ANSWERS 1.

a) Replacement = 5% = No: of replacements / Average no: of employees No: of replacements is 30, so Av employees is 600 Flux method = 10%, Since replacement and separations method is 5% and 3%, Accessions is 2% (10-5-3) Accessions= 2% of 600 i.e 12 and separations = 3% of 600 = 18 (i) Workers recruited and joined = replacement + Accessions = 30+12 = 42 (ii) Workers left and discharged= 18

b) Step 1: Estimated joint cost = ` 2,39,100 Step 2: Method of apportionment: Reverse cost method Step 3: Statement computing Estimated Joint costs

Since total joint costs is same as estimated joint costs, the result can be taken as share of Joint cost of A, X and Y.

c) (i)Calculation of IRR

Year Particulars Cash flow PVIF @ 3% DCF PVIF @ 4% DCF

0 Investment

(995.00)

1.00 (995.00) 1.00

(995.00)

5 Redemption

1,200.00 0.863 1,035.60 0.822

986.40

NPV 40.60

(8.60)

L1 L2 IRR = 3.83 % In order to make a decision Cost of capital is needed. If IRR>COC , investment can be made. If opportunity cost of capital is 3.5%, investment in Bonds can be done as IRR is higher.

Main

Product By–Product

'A'` 'X'` 'Y'` Total`

Sales 180,000 120,000 80,000 380,000

Less: profit 45,000 24,000 12,000 81,000

Cost of sales 135,000 96,000 68,000 299,000

Less: Fixed Selling expenses 11,960.0 11,960.0 5,980.0 29,900

Less: Cost incurred after separation 12,000 10,000 8,000 30,000

Estimated joint costs 111,040.0 74,040.0 54,020.0 239,100

PRIME/40ME/IPC 2

d) Computation of value

Particulars A` B` C` D`

a. EBIT

200,000

300,000

500,000

600,000

b. Less: Interest

20,000

60,000

200,000

240,000

c. Net income

180,000

240,000

300,000

360,000

d. Ke 12% 16% 15% 18%

e. Value of Equity (c/d)

1,500,000

1,500,000

2,000,000

2,000,000

f. Value of Debt (b/10%)

200,000

600,000

2,000,000

2,400,000

Value of firm (e +f)

1,700,000

2,100,000

4,000,000

4,400,000

Overall Cost of Capital = Kex (E/V) + Kdx(D/V)

A B C D

Ko 11.76% 14.29% 12.50% 13.64%

2.

a)

Process a/c

Particulars units Amount ` Particulars units

Amount `

To Opening stock 500 47500 By Closing stock 1000

62,325

To materials 14000

574,750 By Normal loss 1400

14,000

To labour

119,300 By abnormal loss 100

5,983

To Overheads

178,450 By transfer to Process II 12000

837,692

14,500

920,000

14,500

920,000

PRIME/40ME/IPC 3

Working Notes:

Step 1: Input output statement

Opening stock `

500

Add: Input

14,000

Total input

14,500

Less: Closing stock 1,000

Processed production

13,500

less: Normal loss

1,400

Expected output

12,100

Actual output

12,000

Abnormal loss

100

Step 2: Statement of Equivalent units

Item units Materials` Labour&

Overheads

Units transferred 12,000 100% 12,000 100% 12,000 Closing stock 1,000 100% 1,000 70% 700 Normal loss 1,400 0% - 0% - Abnormal loss 100 100% 100 60% 60

14,500

13,100

12,760

Step 3: Cost per equivalent units

Materials Labour & Overheads

Opening stock 27,000 20,500 Cost 574,750 297,750 Less: Normal Loss realisable price (14,000)

Net cost 587,750 318,250 Equivalent units 13,100 12,760 Cost per equivalent units 44.8664 24.9412

Step 5: Statement of valuation

Units transferred =12,000*(44.87+24.94) = 837,692

Closing stock = [1000 x 44.87] + [700*24.94] = 62,325

Normal loss at realisable value = 14,000

Abnormal loss = [100 x 44.87] + [60*24.94] = 5,983

PRIME/40ME/IPC 4

b)

Capital structure Existing Option

100 % Loan Equity + Loan

Equity Share capital 150 150 165 (Existing + 1.5L x10) Reserves 40 40 47.5 (incl premium of 1.5 x5) 8.5% debentures 15 15 15 Interest/rate 12% Term loan 16 16 16 Interest/rate 12.5% loan 0 50 27.5

Capital employed 221 271 271

ROI = EBIT/Capital employed =75/221= 33.94% Increased ROI plus 3% = 36.94% New EBIT = Capital employed x ROI = 271 x 36.94%= 100.10 say 100

( ` In Lakhs)

Particulars Existing `

Loan `

Loan & Equity `

a. EBIT a x b 75 100 100 b. Less: interest

c. Existing (total of interest) 3.195 3.195 3.195 d. 12.5% term loan 6.25 3.4375

e. EBT

71.805 90.555 93.3675 f. Less Tax @ 40% 28.722 36.222 37.347

g. PAT

43.083 54.333 56.0205

h. No: of Equity shares 15 15 16.5 i. EPS

2.87 3.62 3.395

j. PE ratio 20/EPS 6.96 6.62 6.96 k MPS

23.96 23.64

(i x j) (i x j)

Loan option is marginally better. Indifference point: EPS under option 1 for EBIT = X ->0.60(X-9.445)/15 EPS under option 2 for EBIT = X -> 0.60(X-6.6325)/16.5 @ Indifference point both these EPS would be equal Solving we get X =`37.57 Lakhs.

3) a)

Calculation of Machine Hour rate.

`

Annual Working Hours 48 x 52 =

2,496

Less: Machine maintenance and setting up time (15%+5%=20%) =

499

Normal Working Hours per annum

1,997

PRIME/40ME/IPC 5

Standing charges per annum: `

Two operator wages along with two other machine

20,000

=5000*12*1/3

Other overheads

10,431

Total Standing Charges

30,431

Hourly standing charges ` 30431/1997

15,238

Variable expenses per hour

Depreciation = 1,00,000 - 5,000

10 x 1997

4,757

Repairs& Maintenance = 500 x 12

1997

3,004

Power = 10 unit x 50

5,000

Machine Hour Rate

27,999

b. Initial outflow

Year Particulars

Machine A `

Machine B `

0 Cost 100,000 150,000

In between flows

Year Particulars Machine A `

Machine B `

1-8 Running costs 35,000 20,000

Depreciation 12,500 18,750

Running costs net of tax 17,500 10,000

Less: tax shield on depreciation 6,250 9,375

Net outflows after tax 11,250 625

Terminal flows Year Particulars Machine A Machine B

8 Salvage 4,000 14,000

PRIME/40ME/IPC 6

Capital Budgeting analysis statement

Year Particulars

cash flows PVIF/AF DCF

Machine A `

Machine B ` @10%

Machine A `

Machine B `

0 Initial outflow (100,000) (150,000) 1 (100,000) (150,000)

1-8 In between flows (11,250) (625) 5.355 (60,244) (3,346.88)

8 Terminal flows 4,000 14,000 0.467 1,868 6,538

present value of outflows (158,376) (146,809)

4.a.

Products SP SQ ` AP AQ `

A

12

40,000 13 42,000

B

16

32,000 16 40,000

C

25

24,000 27 22,000

Products SP X SQ` SP X AQ ` AP X AQ `

A

480,000 504,000 546,000

B

512,000 640,000 640,000

C

600,000 550,000 594,000

TOTAL

1,592,000 1,694,000 1,780,000

Sales Volume variance = SPAQ- SPSQ = 16.94L - 15.92L 102,000 Favorable

Sales price variance =APAQ-SPAQ = 17.80L - 16.94L 86,000 Favorable

Total sales variance =APAQ-SPSQ = 17.80L -15.92L 188,000 Favorable

b.

Balance sheet (` In Lakhs)

Liabilities WN ` Assets WN ` Share Capital Given 2.00 Plant Given 5.00 Reserves 9 3.12 Other fixed assets 3 3.00 Long term Debt 8 5.76 Stock 4 3.00 Bank credit 7 1.92 Debtors 2 2.56 Trade credit 7 0.96 Cash 5 0.20

13.76

13.76

PRIME/40ME/IPC 7

Working Notes: ` (1) Sales = 20 Lakhs

Less: Returns = 20% i.e. 4Lakhs Net Sales = 16 Lakhs Credit sales = 80% of Net sales = `12.80 Lakhs

(2) Average collection period = 73 days, so Debtors turnover ratio is 365/73 = 5 Debtors = 12.80 / 5 = `2.56 Lakhs

(3) Fixed assets turnover ratio = Net sales / Fixed assets 2 = 16L/ FA, So Fixed assets = `8Lakhs since Plant &machinery is 5 Lakhs, Other Fixed assets is 3Lakhs

(4) Gross margin is 25%. So Cost of goods sold is 75% hence 75% of 16L = `12Lakhs Inventory turnover ratio = Cost of Sales / Inventory 4 = 12/Inv. So Inv = `3 Lakhs

(5) Cash to inventory is 1 : 15 , so Cash = 6Lakhs/15 = `20,000 Current assets = Inventory + Debtors + cash = 5.76Lakhs

(6) Current ratio is 2, So Current liabilities = `2.88 Lakhs (7) Assuming Current liabilities consist of only bank credit and trade credit

2 TC + TC = 2.88 Lakhs (given Bank credit /Trade credit is 2) So trade credit = `96,000 and Bank credit = `1,92,000

(8) Total debt to Current liabilities is 3 . So Total debt is `8.64 Lakhs and Long term loans = Total debt - Current liabilities = `5.76

(9) Total Assets - Total liabilities = Shareholder's funds = Fixed assets + Current assets - 8.64 = `5.12 Lakhs Share capital is 2L so Reserves is `3.12 Lakhs

5. a)

(i) All direct costs are variable A variable cost is a cost that changes in total in direct proportion to changes in the related total activity or volume..Direct cost is a cost which can be identified directly and economically identifiable with the final product.

(ii) Sunk costs are irrelevant for decision making Sunk cost are costs already incurred and hence do not change with the decision. Hence they are irrelevant for decision making.

b) (i) Inventor able costs and period costs

Inventory able costs are costs which are assigned to the product and are included in the valuation of inventory Period costs are expenses of the period in which they are incurred. They do not form a part of inventory valuation. Eg. Administration overheads

(ii) Operating leverage and financial leverage

Operating leverage arises due to presence of fixed costs in the cost structure of company’s product. It is equal to Contribution / EBIT. Financial leverage arises due to presence of fixed costs in company’s capital structure. It is equal to EBIT/EBT.

PRIME/40ME/IPC 8

c)

Return means profit after tax and Risk means risk of insolvency

Return from current assets is low, so high investment in Working capital would mean lower return but risk also would be lower. (Conservative policy)

Return from Fixed assets is higher and hence a lower investment in working capital or higher investment in Fixed assets would mean higher returns and higher risk.(aggressive policy)

d)

NPV is the only technique which considers wealth maximization principle

Re-investment rate assumption of NPV is more realistic (cost of capital) than IRR. 6.

a)

Budgeted units = `200,000

per unit Total `

Variable cost 15 3,000,000

Fixed Costs `2 400,000

Selling Price (2 + 15) + 10% 18.70

Contribution SP - VC =18.70-15

P/V Ratio Contribution/ Sales = 19.7861%

Profit 2L x Cont p.u - Fixed costs 340,000

Item Formula Computation Result

(i) Breakeven point (units) Fixed costs/ Contribution p.u 4L/3.70

108,108.11

BEP (`) FC/ PVR 4L/19.786%

2,021,621.62

(ii) PV ratio : computed above

(iii) Selling price reduced by 5% New selling price

18.70 -5% 17.765

Less: variable costs 15

Contribution- revised 2.765 PV ratio 15.56% BEP (`) 4 Lakhs/ 15.56% 2,569,981.92

(iv) Desired profit 3.40 L + 10% `3.74L Sales at desired profit(Rs) = FC + DP/ PVR= 7.74/15.56% `4,972,915

b)

Statement of changes in working capital ( ` in lakhs)

Item Opening Closing

Stock 6.80 8.40 Debtors 60.00 72.00 Cash and Bank 16.00 18.00 Sundry Creditors (6.20) (7.40)

Working capital 76.60 91.00

Increase

14.40

PRIME/40ME/IPC 9

Funds from operation(P & L a/c)( ` in lakhs)

To Depreciation: By Balance b/d 3.00 -Land &Building 0.84 " Profit on sale : -Plant 9.48 " -Furniture 0.20 -Furniture 3.68 " -Investment 0.04 " Loss on sale of plant 2.40 " FFO (bal fig) 26.76 " Dividends 3.60 " transfer to GR 6.40 " Bal c/d 3.60

30.00 30.00

( ` in lakhs)

Funds Flow statement for the year ended 31st March 2015

Sources Amount ` Application

Amount `

Funds from operation 26.76 Dividend paid 3.6 Plant sold 2 Land bought 7.44 Furniture sold 0.6 Plant bought 26.88 Investment sold 0.24 Furniture bought 6.88 Debentures issued 30 investment bought 0.4 Increase in working capital 14.40

59.60 59.60

7. a. Major considerations in Capital structure planning

Risk Risk may be defined as the variability in the actual return from an investment and the estimated return as forecasted at the time of capital structure planning. While designing the capital structure the firm tries to keep the risk at minimum.

Cost of capital : The cost of capital is the minimum rate of return that a firm must earn on its investment to satisfy its various investor

Control: The decisions relating to capital structure are taken after keeping the control factor in mind. For e.g. when equity shares are issued the company automatically dilutes its controlling.

b. Cost control vs Cost reduction

Cost control is a temporary reduction in costs. It may affect the quality of the product/service Cost reduction is a real or permanent reduction in cost without sacrificing on the quality

c. Tax aspects in Capital budgeting

All cash flows considered are net of tax- tax shield incase of outflows and tax liability in case of inflows

Tax shield on depreciation is considered even though there is no outflow

Tax shield on losses is also considered – enterprise principle

Capital gains on disposal of asset is considered even though chargeability is on Block of assets basis under tax laws.

PRIME/40ME/IPC 10

d. ABC analysis It is a tool of material control. Materials are classified as A, B and C based on consumption value:

Classification Value% Volume %

A 60% 20%

B 30% 30%

C 10% 60%

e. Miller – Orr cash model:

Cash balance is freely allowed to wander between the upper and lower limit

If it reaches the upper limit, investment is made to bring the cash balance to the return point

If it reached the lower limit, investment is sold to bring the cash balance to the return point

PRIME/40ME/IPC 1

NXT No. of Pages: 5 Total Marks: 100 No of Questions: 7 Time Allowed: 3 Hrs

Question No. 1 is compulsory. Attempt any five questions from the remaining six questions.

1. (a) Compute the taxable income and tax liability of Mrs Gayathri for the A.Y. 2015-16 from the following

detail: (i) Smt. Gayathri was born on 01.07.1953. She is a Deputy Manager in a Company in Mumbai. She

is getting a monthly salary and D.A. of `45,000 and ` 12,000 respectively. 50% of DA forms part of pay. She also gets a House Rent Allowance of ` 6,000 per month. She is a member of Recognised P.F. wherein she contributes 15% of her salary of ` 51,000 p.m. (45,000 + 6,000, being 50% of DA). Her employer also contributes an equal amount.

(ii) She is living in the house of her minor son in Mumbai. (iii) During the previous year 2014-15, her minor son has earned an income of `30,000 (computed)

as rent from a House Property, which had been transferred to him by Smt. Gayathri without consideration a few years back.

(iv) During the previous year 2014-15, she sold Government of India Capital Indexed Bonds for ` 1,50,000 on 30.09.2014, which she purchased on 01.07.2001 for ` 80,000 (Cost inflation index – F.Y. 2001-2002: 426 and for the F.Y. 2014-15: 1024)

(v) Her employer gave her an interest free loan of ` 1,50,000 on 01.10.2014 to one of her son’s wife for the purchase of an Alto Maruti Car. Nothing has been repaid to the company towards the loan. The lending rate on SBI for a similar loan is 8% p.a as on 01.04.2014.

(vi) During the previous year 2014-15 she paid ` 15,000 by cheque to GIC towards Medical Insurance Premium of her dependent mother. (10 Marks)

(b) Mr. Saravanan is a service tax assessee. His service tax liability for the quarter April - June was `

35,000. However, on account of a clerical error, he paid ` 3,50,000 as service tax for the said quarter. Now Mr. Saravanan wants to adjust the excess payment of ` 3,15,000 against his service tax liability for the succeeding quarter. Can he do so? What is the condition to be satisfied for it? (3 Marks)

(c) A manufacturer cleared some goods by charging excise duty. The invoice provided the following details:

Particulars `

Price Excise duty @ 10.30% Total

20,000 2,060 22,060

However, he came to know later that actual rate of excise duty is 12.36%. How much differential duty is payable by him, if he is not able to recover any extra amount from the customer? (3 Marks)

(d) Shiva Ltd. of Delhi made a total purchases of input and capital goods of ` 55,00,000 during the month

of January, 2015. The following further information is available: (i) Goods worth ` 9,00,000 were purchased from Orissa on which C.S.T. @ 2% was paid. (ii) The purchases made in January, 2015 include goods purchased from unregistered dealers

amounting to ` 21,50,000. (iii) It purchased capital goods (not eligible for input credit) worth `9,50,000 and those eligible for

input credit for ` 9,00,000.

PRIME/40ME/IPC 2

(iv) Sales made in Delhi during the month of January, 2015 is `10,00,000 on which VAT @ 12.5% is payable.

Assuming that all purchases given are exclusive of tax and VAT @ 4% is paid on them, calculate (i) the amount of input tax credit available for the month of January, 2015 (ii) VAT payable for the month of January, 2015 and (iii) input tax credit carried forward. Note: The input VAT credit on eligible capital goods is available in 36 equal monthly installments. (4 Marks)

2. (a) Diamond Professionals Ltd. is engaged in providing services which became taxable with effect from August 01, 2014. Compute the service tax payable by Diamond Professionals Ltd. on the following amounts (inclusive of service tax wherever applicable) received in the month of March, 2015:-

Particulars Amount (`)

Services performed in July, 2014 (Amount received from the client is full and final) Services by way of renting of residential dwelling for use as Residence Free services rendered to the friends (Value of similar services is ` 60,000) Services rendered to its associated enterprise in USA for which no invoice has been issued Other receipts

5,00,000 1,75,000

5,00,000

7,00,000

(8 Marks)

(b) Compute net VAT liability of Raja from the following information:- ` `

Particulars Raw materials from foreign market (including duty paid on imports @ 20%) Raw material purchased from local market Cost of raw material Add: Excise duty @ 12% Add: VAT @ 4% Raw material purchased from neighbouring State (including CST @ 2%) Storage and transportation cost Manufacturing expenses

2,50,000 30,000 ---------- 2,80,000 11,200 -----------

1,20,000

2,91,200 51,000 10,000 21,000

Raja sold goods to Rajesh and earned profit @ 12% on the cost of production. VAT rate on sale of such goods is 4%. (8 Marks)

3. (a) Mrs Suba paid a sum of 8,500 USD to Mr. Suresh, a management consultant practising in UK, specializing in project financing. The payment was made in UK. Mr. Suresh is a non-resident. The consultancy is related to a project in India with possible Korean collaboration. Is this payment chargeable to tax in India in the hands of Mr. Suresh, since the services were used in India? (4 Marks)

PRIME/40ME/IPC 3

(b) Royal Enterprises imported goods from Bangladesh in a vehicle. Determine the rate of import duty to be considered for computation of import duty from the following information:-

Particulars Date Rate of customs duty

Date of filing of Bill of Entry Date of arrival of vehicle Date on which goods were allowed to be cleared from the land customs station Date of payment for the goods imported

15.10.2014 20.10.2014 28.10.2014 31.10.2014

10% 12% 11% 8%

(4 Marks)

(c) State with reasons the allowability or otherwise of the following items under the Income-tax Act, 1961 while computing income under the head “Profits and gains of business or profession” for the Assessment Year 2015-16: (i) Payment made in cash ` 30,000 to a transporter in a day for carriage of goods. (ii) Expenses incurred in providing freebees to medical practitioner by Medical enterprises, a

pharmaceutical organisation. (iii) Municipal tax relating to office premises `20,000 not paid till 30.10.2015 by Mr. Arun having

turnover of `108 lacs during financial year 2014-15. (iv) Capital expenditure of `15,00,000 on scientific research incurred by ABC Ltd., engaged in

manufacturing of tyres, which includes cost of land `5,00,000. (v) Tax deducted at source on salary paid to employees in India not remitted till the ‘due date’

for filing the return prescribed in section 139. (vi) (vi) An electric generator has been purchased for `50 lakhs by an assessee engaged in the

business of generation of power, on 01.04.2014 and installed on the same day. (8 Marks)

4. (a) Harshit sold his house for a consideration of ` 200 lakhs on 1st January, 2015. However stamp valuation authorities registered it at `220 lakhs, being the sub registrar approved value. He paid 5% of sale value as commission. The house was purchased by Harshit on 1.4.1980 for `10 lakhs. He made some improvements by way of additional construction to the house, incurring expenditure of ` 2 lakhs in January 2005. The market value of the house on 1.4.1981 was `12 lakhs. He invested ` 30 lakhs in eligible bonds issued by Rural Electrification Corporation Ltd. (RECL) on 13.03.2015 and `20 lakhs in eligible bonds issued by National Highways Authority of India (NHAI) on 15.07.2015 (Assume that the NHAI Capital Gains bonds issue were open for subscription during the period from 2.4.2015 to 31.3.2016). Besides, he purchased a small dwelling house on 01.04.2015 for ` 20 lakhs. Compute the capital gain chargeable to tax in the hands of Harshit for the assessment year 2015-16. Cost Inflation Index: F.Y. 1981 – 1982 – 100 , F.Y. 2004 – 2005 – 480, F.Y. 2014 – 2015 – 1024 (8 Marks)

(b) State with reason whether the following statements are true or false: 1. As per white paper, the threshold limit for a dealer to obtain VAT Registration is ` 5,00,000. 2. It is permitted to issue ‘Tax invoice’ inclusive of VAT 3. Service tax return can be revised only if original return is filed within the due date 4. An assessee has not provided services during first half year and no service tax is payable.

Hence, there is no need to file the service tax return for the first half year. (4 x 2 = 8 Marks)

PRIME/40ME/IPC 4

5. (a) What is input tax credit? (2 Marks)

(b) State the circumstances under which VAT registration can be cancelled (4 Marks)

(c) State whether the following are chargeable to tax under the head “Income from other sources” and if

so, what is the amount liable to tax: (i) Mr. Anand received a cash gift of ` 75,000 from Jeevan Charitable Trust (registered under

section 12AA) in January 2015 for meeting his medical expenses. (ii) Prakash & Sons (HUF) received `60,000 in cash from elder son of Prakash. Prakash is the Karta

of the HUF. (iii) Interest on enhanced compensation of ` 1,00,000 was received as per court decree in March,

2015 by Mr. Akash. Out of the said amount, a sum of ` 70,000 relates to preceding financial years

(iv) (iv) Arun took a loan of `18,00,000 from Reliance Power Ltd. in which he is holding 15% of equity shares. On the date of granting the loan, the company had accumulated profit of `75,00,000.

(v) Interest of `5,000 on bank FDRs received by minor son of Sulochana (widow). These FDRs were made by the minor son out of his earnings from application of his painting skills.

(6 Marks) (d) Mr. Bala filed return of loss of ` 5,00,000 representing loss from a business for the assessment year

2014-15 in July, 2014. He filed a revised return enhancing the business loss to ` 8,00,000 in April, 2015. Mr. Bala is not subject to tax audit. Mr. Bala had filed its original return under section 139(3) before the time allowed under section 139(1) i.e. on or before 31st July, 2014. He has also filed his revised return within the time allowed under section 139(5). What is the quantum of loss which is eligible for carry forward and set off against business income of subsequent years? (4 Marks)

6 (a) Mr. Vikram acquired a residential house in Delhi at a cost of `42,00,000 on 01.04.2014, in respect of

which he took a housing loan of `24,00,000 from Canara Bank @12% p.a on the same date. There has been no principal repayment upto 31.03.2015.The house is having two identical units. First unit (area 1200 sq. Ft) of the house is self-occupied by Mr. Vikram and another unit (area 400 sq.ft) is rented for ` 6,000 p.m. from 1st April, 2014. The rented unit was vacant for four months during the year. The particulars of the house for the previous year 2014-15 are as under: Standard Rent ` 2,30,000 p.a. Municipal Valuation `2,67,000 p.a. Fair Rent `2,48,000 p.a. Municipal tax paid by Mr. Vikram 12% of the Municipal Valuation Light and water charges ` 8,000 p.a. Insurance charges ` 7,500 p.a. Painting expenses ` 50,000 p.a. Compute income from house property of Mr. Vikram for the A.Y.2015-16. (8 Marks)

(b) Safe Kitchen is a leading manufacturer of pressure cookers Legal Metrology Act, 2009 requires declaration of retail sale price on the package of pressure cookers and pressure cookers are also notified under section 4A of Central Excise Act, 1944 [Retail Sale Price (RSP) based valuation] with notified rate of abatement of 25%. Calculate excise duty payable on 50 pieces cleared during October, 2014 using the following information furnished by Safe Kitchen assuming the rate of excise duty as 12% plus 2% education cess and 1% secondary and higher education cess:

PRIME/40ME/IPC 5

No. of Pieces sold

Particulars

10 RSPs printed on the package of pressure cooker are ` 4,500 and ` 3,800.

20 RSP printed on the package of 15 pieces sold in Delhi is ` 3,000 per piece. RSP printed on the package of 5 pieces sold in Haryana is ` 2,800 per piece

20 RSP printed on the date of removal of package from factory is ` 3500 per unit. However, after removal from factory RSP is increased to `4,100 per Piece

Would the provisions of section 4A of Central Excise Act, 1944 apply had the goods not been notified by Central Government and manufacturer voluntarily affixed RSP on the products? (8 Marks)

7. (a) Will a charitable trust be forfeited of tax exemption granted to it, if it holds shares in Public Sector Company? Will a charitable trust having business receipt and income of ` 20,00,000 and ` 2,00,000, respectively, be denied the tax exemption? (4 Marks)

(b) Sarvesh is a consulting engineer. He has obtained service tax registration on May 4, 2014. Sarvesh has entered into a contract with Nitesh for provision of consulting services on May 5, 2014. Sarvesh provides the services on May 15, 2014 but Nitesh has communicated that he will be able to pay the consideration only after three months owing to his poor financial condition. Sarvesh has not issued any invoice or bill for the said service as he is not sure of the requirements of an invoice issued by a registered service tax provider. You are required to guide Sarvesh with regard to content and time of issuance of an invoice. (4 Marks)

(c) State with reason whether the following statements are true or false: 1. Authorized representative may sign the income tax return of the Indian company 2. Income tax return filed belatedly cannot be revised 3. All the assessee should pay the advance tax 4. Assessing officer may pass the assessment order u/s 143(3) without enquiring the assessee

(4 x 2 = 8 Marks)

PRIME/40ME/IPC 1

PRIME ACADEMY 40th SESSION MODEL EXAM – IPC -- TAXATION SUGGESTED ANSWERS

1. (a) Computation of taxable income and tax liability of Smt. Gayathri for A.Y. 2015-16

Particulars ` `

Income from salary Basic salary (`45,000 х 12) Dearness Allowance (`12000 х 12) House Rent allowance (fully taxable) Employer’s contribution to recognized provident fund in excess of 12% is taxable as salary income 12% of salary is `73,440. Employer’s contribution is 15% of salary, which is `91,800 Excess contribution is (`91,800 – `73,440) Perquisite in respect of interest free loan (`1,50,000 x 8% x ½) Net Salary Income from house property (See Note below) Long term Capital Gain: Sale consideration of GOI capital indexed bonds Less: Indexed cost of acquisition (`80,000 x 1024/426) Long-term capital loss (to be carried forward) Gross Total Income Deduction under section 80C – in respect of recognized provident fund contribution Deduction under section 80D – Mediclaim Total Income Tax Payable on `7,03,560 Add : Education cess and Secondary and higher education cess @ 3% Total tax payable Total tax payable (rounded off)

1,50,000 1,92,300

---------- 42,300

91,800 15,000

----------

6

5,40,000 1,44,000

72,000

18,360

6,000 ----------- 7,80,360

30,000

------------- 8,10,360

1,06,800 ----------

7,03,560 -----------

65,712

1,971 --------

67,683 --------

67,680

Note: As per section 27, any property transferred to the minor child without adequate consideration would be deemed to be the property of the assessee. Therefore, the income from house property of `30,000 (computed) is to be assessed in the hands of Smt. Gayathri.

PRIME/40ME/IPC 2

(b) Where an assessee has paid to the credit of Central Government any amount in excess of the amount required to be paid towards service tax liability for a month/quarter, the assessee may adjust such excess amount paid by him against his service tax liability for the succeeding month/quarter. Such adjustment is subject to the condition that the excess amount paid is on account of reasons not involving interpretation of law, taxability, valuation or applicability of any exemption notification. Since Mr. Saravanan has paid the excess amount on account of a clerical error, he can adjust the excess payment of ` 3,15,000 against his service tax liability for the succeeding quarter.

(c) Since the manufacturer charged only ` 22,060 and he is not able to recover any extra amount from customer, this amount is required to be treated as price–cum– duty. Hence, differential duty payable by him will be computed as under:

Particulars `

Price-cum-duty Excise duty @ 12.36% [` 22,060 x 12.36/112.36) Excise duty (rounded off) Differential excise duty to be paid [` 2,427 – ` 2,060 (duty already paid)]

22,060 2,426.68

2,427 367

(d) Particulars `

À. Purchases made in January, 2015 55,00,000 Less: (i) Inter-State purchases (input credit not available) 9,00,000 (ii) Purchase from unregistered dealer

(input credit not available) 21,50,000 (iii) Capital goods (not eligible for input credit) 9,50,000 40,00,000 Total purchases eligible for tax credit 15,00,000 B. Input tax credit available VAT credit on input @ 4% 4% of (`15,00,000 – `9,00,000) i.e. 4% of ` 6,00,000 24,000 VAT credit on eligible capital goods (4% of `9,00,000) x 1/36 1,000 Input credit available for January, 2015 25,000 C. VAT on sales @ 12.5% of `10,00,000 1,25,000 Less: Input tax credit 25,000 Net VAT payable 1,00,000 Input tax credit carried forward to February,2015 Nil

2. (a) Computation of service tax payable by Diamond Professionals Ltd.:- Particulars ` Services performed in July, 2014 i.e., before such service became 5,00,000 taxable (Note-1) Services by way of renting of residential dwelling for use as Nil residence (Note-2) Value of free services rendered to the friends (Note-3) Nil Services rendered to its associated enterprise in UK (Note-4) 5,00,000 Other receipts 7,00,000

PRIME/40ME/IPC 3

Total 17,00,000 Less: Exemption available to small service providers (Note-5) 10,00,000 Value of taxable services 7,00,000 Service tax payable = 7,00,000 x12.36 112.60 77,002 Notes:-

1. As per rule 5 of the Point of Taxation Rules, 2011, where a service is taxed for the first time, no tax is payable if the invoice has been issued and the payment also has been received against such invoice before such service became taxable. Therefore, in this case since the payment has been received after the service became taxable; the same will be leviable to service tax.

2. Services by way of renting of residential dwelling for use as residence are included in the negative list of services. Hence, they are not subject to service tax.

3. Service is an activity carried out inter alia for a consideration. Therefore, since no consideration is involved in case of free services, service tax is not payable thereon.

4. Services rendered to associated enterprises are taxable even if an invoice has not been issued. Point of taxation is the date of making the payment [Rule 7 of the Point of Taxation Rules].

5. Since, services provided by Diamond Professional Ltd. became taxable on August 01, 2014, aggregate value of taxable services rendered in preceding financial year 2014-15 is Nil. Hence, Diamond Professional Ltd. is eligible for small service provider’s exemption.

(b) Computation of VAT liability of Raja:-

Particulars ` `

Raw materials purchased from foreign market (including duty paid on imports @ 20%) [Customs duty forms part of cost of production, input tax credit of cusoms duty paid is not available] Raw material purchased from local market:- Cost of raw material Add: Excise duty @ 12% [Input tax credit of excise duty is not available] Raw material purchased from neighbouring State (including CST @ 2%) [Input tax credit of CST is not available] Storage and transportation cost Manufacturing expenses Cost of production Add: Profit @ 12% of cost of production Sale Price VAT @ 4% on `5,39,840 Net VAT liability of Raja:- VAT on sale price (rounded off) Less: Input tax credit

2,50,000 30,000

-------------

Nil Nil

11,200 ---------

1,20,000

2,80,000

51,000

10,000 21,000

---------- 4,82,000

57,840 ----------- 5,39,840 21,593.6

21,594

11,200 --------

PRIME/40ME/IPC 4

Duty paid on imports CST paid on inter-State purchases VAT paid on local purchases Net VAT payable by Raja

10,394

3. (a) A non-resident is chargeable to tax in respect of income received outside India only if such income

accrues or arises or is deemed to accrue or arise to him in India. The income deemed to accrue or arise in India under section 9 comprises, inter alia, income by way of fees for technical services, which includes any consideration for rendering of any managerial, technical or consultancy services. Therefore, payment to a management consultant relating to project financing is covered within the scope of “fees for technical services”. The Explanation below section 9(2) clarifies that income by way of, inter alia, fees for technical services, from services utilized in India would be deemed to accrue or arise in India in case of a non-resident and be included in his total income, whether or not such services were rendered in India or whether or not the non-resident has a residence or place of business or business connection in India. In the instant case, since the services were utilized in India, the payment received by Mr. Suresh, a non-resident, in UK is chargeable to tax in his hands in India, as it is deemed to accrue or arise in India.

(b) With effect from 11.07.2014, section 15 of the Customs Act, 1962 has been amended to provide that in case the goods have been imported in a vehicle, the rate of duty shall be the rate in force on:-

i. the date on which Bill of Entry is presented or ii. the date on which arrival of vehicle takes place

whichever is later. Therefore, the relevant date for determination of the rate of import duty, in the given case, is 20.10.2014. Hence, the rate of import duty applicable in the given case is 12%.

(c) i. The limit for attracting disallowance under section 40A(3) for payment otherwise than by way

of account payee cheque or account payee bank draft is ` 35,000 in case of payment made for plying, hiring or leasing goods carriage. Therefore, in the present case, disallowance under section 40A(3) is not attracted in respect of payment of `30,000 made in cash to a transporter for carriage of goods.

ii. (ii) The Explanation below section 37(1) denies claim of any expenses, if the same has been incurred for a purpose which is either an offence or prohibited by law. The Central Board of Direct Taxes has, through Circular No. 5/2012 dated 1-8-2012, has clarified that such expenditure are not allowable as per section 37(1) after considering the fact that the claim of any expense incurred in providing freebees to medical practitioner is in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. Therefore, the expenditure so incurred shall be inadmissible under section 37(1) of the Income-tax Act, 1961, being an expense prohibited by the law.

iii. As per section 43B, municipal tax is not deductible for A.Y. 2015-16 since it is not paid on or before 30.10.2015, being the due date of filing the return for A.Y. 2015-16.

iv. Weighted deduction @ 200% is available under section 35(2AB) in respect of expenditure incurred by a company on scientific research on in-house research and development facility as approved by the prescribed authority. However, cost of land is not eligible for deduction. Deduction under section 35(2AB) = 200% of ` 10 lakhs = `20,00,000.

PRIME/40ME/IPC 5

Note: It is presumed that the in-house research and development facility is approved by the prescribed authority and is hence, eligible for the weighted deduction @200% under section 35(2AB). It may be noted that the benefit of weighted deduction under section 35(2AB) has been extended to expenditure incurred up to 31.03.2017 by the Finance Act, 2012. Prior to the amendment, the deduction was restricted to expenditure incurred up to 31.03.2012. (v) The salary expenditure is allowable while computing the income of the employer even though

TDS has not been deposited within the due date under section 139(1). The disallowance under section 40(a)(ia) will not apply for non-deduction of tax at source from income chargeable under the head “Salaries”.

(vi) Depreciation under section 32 would be allowed on electric generator purchased @ 15%, which is the rate applicable for plant & machinery as per Income-tax Rules, 1962. Since it was put to use for more than 180 days in the year, full depreciation is allowable for A.Y. 2015-16. Further, as per section 32(1)(ia), additional depreciation is allowable in the case of new plant or machinery acquired and installed after 31.03.2005 by an assessee engaged, inter alia, in generation of power, at the rate of 20% of the actual cost of such plant or machinery.

Therefore, allowable depreciation under section 32 would be – Normal depreciation (` 50 lakhs x 15%) ` 7,50,000 Additional depreciation (`50 lakhs x 20%) ` 10,00,000 ` 17,50,000

4.(a) Computation of Capital Gains Chargeable to tax for A.Y. 2015-16 Particulars ` ` Sale consideration (i.e. Stamp Duty Value) (Note-1) 220,00,000 Less: Commission @ 5% of ` 200 lakhs 10,00,000 210,00,000 Less: Indexed Cost of Acquisition (`12,00,000 × 1024/100) 122,88,000 Indexed Cost of Improvement (`2,00,000 × 1024/480) 4,26,667 127,14,667 82,85,333 Less: Exemption under section 54 (Note-2) 20,00,000 Exemption under section 54EC (Note -3) 30,00,000 50,00,000 Taxable Capital Gains 32,85,333 Notes - 1. As per the provisions of section 50C, in case the stamp duty value adopted by the stamp

valuation authority is higher than the actual sale consideration, the stamp duty value shall be deemed as the full value of consideration.

2. Exemption under section 54 is available if a new residential house is purchased within one year before or two years after the date of transfer. Since the cost of new residential house is less than the capital gain, capital gain to the extent of cost of new house is exempt under section 54.

3. Exemption under section 54EC is available in respect of investment in specified bonds of RECL or NHAI if the investment is made within a period of six months after the date of such transfer. Further, investments made in such bonds by an assessee during any financial year cannot exceed ` 50 lakhs. In this case, although Harshit’s investments do not exceed the prescribed limit, he is not eligible to claim deduction under section 54EC in respect of investment of `20 lakhs made in NHAI bonds, since it was made after six months from the date of transfer. Therefore, he is eligible to claim exemption of `30 lakhs under section 54EC out of total investment of `50 lakhs.

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(b) False: Limit is `10 Lakhs 1. False: Rate & amount of tax should be shown distinctly to claim input tax credit 2. False: Service tax return can be revised, even the original return is filed belatedly 3. False: Even if no services has been provided during a half year and no service tax is payable;

the assessee has to file a Nil return within the prescribed time limit

5.(a) Input tax credit is an aggregate total amount of tax paid by a registered dealer on the total purchases made by him within the State from other registered dealers (for a particular period.); but not eligible in some cases.

1. The input tax credit includes the purchase tax paid under Section 12 of the VAT Act. 2. The input tax credit can be adjusted against the tax payable by the purchasing dealer on his

sales. 3. The dealers are not eligible for input tax credit on all inputs. There are certain restrictions

and conditions on eligibility of input tax credit. They are given in detail under TNVAT Act, 2006.

(b) VAT Registration can be cancelled in the following cases: 1. Discontinuation of business 2. Disposal of business 3. Transfer of business to new location 4. When annual turnover of manufacture or trader dealing in designated goods falls below the

specified limit

(c) i. (i) Not Taxable - The provisions of section 56(2)(vi ) would not apply to any sum of money or

any property received from any trust or institution registered under section 12AA. Therefore, the cash gift of ` 75,000 received from Jeevan Charitable Trust, being a trust registered under section 12AA, for meeting medical expenses would not be chargeable to tax under section 56(2)(vi ) in the hands of Mr. Anand.

ii. (ii) Not taxable - Any sum of money received without consideration by a HUF from its relative is not taxable under section 56(2)(vi ), even if the receipt exceeds `50,000. Since Prakash’s son is the member of the HUF, he is a relative of the HUF. Therefore, the cash received from him is not taxable in the hands of Prakash & Sons (HUF).

iii. (iii) Taxable – ` 50,000 - As per section 56(2)(vi i), interest on enhanced compensation is taxable in the year in which it is received. Deduction of 50% in respect of the said income is al owed under section 57(iv). Therefore, ` 50,000 (i.e., `1,00,000 – ` 50,000) is taxable in the hands of Mr. Akash in the F.Y.2014-15.

iv. (iv)Not Taxable - Since the loan is given by a company in which public are substantial y interested, the provisions of section 2(22)(e) would not get attracted and therefore, the loan would not be taxable as deemed dividend in the hands of Arun.

v. (v) Taxable – `3,500 - Since interest of ` 5,000 on bank FDRs received (` 5,000- by minor son of Sulochana does not arise to him on `1,500) account of his manual work or on account of an activity involving his skill, talent or specialized knowledge or experience, therefore, such interest should be included in income of Sulochana under section 64(1A). However, exemption of `1,500 under section 10(32) would be available in respect of the interest so included in her hands.

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(d) As per section 139(3), if the return is filed under this section, all the provisions of the Act shall apply as if such return has been filed under section 139(1). In other words, a return filed under section 139(3) is deemed to be a return filed under section 139(1). Therefore, a loss return filed under section 139(3) can be revised by filing a revised return under section 139(5) within the time allowed therein. Return filed under section 139(5) substitutes the return original y filed under section 139(1). Therefore, the loss as per the revised return can be carried forward, even though section 80 does not specifically provide for carry-forward of loss which has been determined in pursuance of return filed under section 139(5). Therefore, Mr. Bala can carry forward business loss of ` 8,00,000 to set off against business income of subsequent yea`

6. (a) Computation of Income from house property of Mr. Vikram for A.Y. 2015-16 Particulars ` ` (A) Rented unit (25% of total area) Step I - Computation of Expected Rent Municipal valuation (`2,67,000 x ¼) 66,750 Fair rent (`2,48,000 x ¼) 62,000 Standard rent (` 2,30,000 x ¼) 57,500 Expected Rent is higher of municipal valuation and fair rent, but restricted to standard rent 57,500 Step II - Actual Rent Rent receivable for the whole year (`6,000 x 12) 72,000 Step III – Computation of Gross Annual Value Actual rent received owing to vacancy 48,000 (` 72,000 – ` 24,000) Since, owing to vacancy, the actual rent received is lower than the Expected Rent, the actual rent received is the Gross Annual value Gross Annual Value (GAV) 48,000 Less: Municipal taxes [(12% of `66,750)] 8,010 Net Annual Value (NAV) 39,990 Less : Deductions under section 24 (a) 30% of NAV 11,997 (b) Interest on borrowed capital

(` 2,88,000 x ¼), 72,000 83,997 Taxable income from let out portion (44,007)

(B) Self occupied unit (75% of total area) Annual value Nil Less : Deduction under section 24: - Interest on borrowed capital (` 2,88,000 x ¾), `2,16,000 restricted to `2,00,000 2,00,000 (2,00,000) Income from house property (2,44,007)

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Notes: 1. No deduction will be allowed separately for light and water charges, insurance charges and

painting expenses. 2. Mr. Vikram is eligible for a maximum deduction of ` 2,00,000 under section 24 in respect of

interest on housing loan taken in respect of a self-occupied property, for which he is claiming benefit of “Nil” annual value. Therefore, deduction in respect of the interest of ` 2,16,000 relating to self-occupied portion would be restricted to `2,00,000, which would represent his loss from self-occupied portion.

(b) Since Legal Metrology Act, 2009 requires declaration of retail sale price on the package of pressure

cooker and pressure cookers are also notified under section 4A of Central Excise Act, 1944 (RSP based valuation provisions), excise duty will be payable on the basis of RSP less abatement. Particulars ` ` RSP of 10 pieces (10 × `4,500) (Note-1) 45,000 Less: Abatement @ 25% 11,250 Assessable value (A) 33,750 RSP of 15 pieces sold in Delhi (15 ×`3,000) (Note-2) 45,000 Less: Abatement @ 25% 11,250 Assessable value (B) 33,750 RSP of 5 pieces sold in Haryana (5 × `2,800) (Note 2) 14,000 Less: Abatement @ 25% 3,500 Assessable value (C) 10,500 RSP of 20 pieces (20 ×` 4,100) (Note-3) 82,000 Less: Abatement @ 25% 20,500

Assessable value (D) 61,500 ----------

Total assessable value (A) +(B)+(C)+(D) 1,39,500 Excise duty @ 12% [12% of `1,39,500] 16,740 Education cess @ 2% [2% of `16,740] 335 Secondary and Higher Education Cess @ 1% [1% of `16,740] 167 Total excise duty payable (rounded off) 17,242 Notes:

1. Where more than one RSP is declared on the package of excisable goods, the maximum of such price will be deemed to be the RSP.

2. If different RSPs on different packages are declared for different areas, each such RSP is deemed to be the RSP.

3. If RSP on the package is increased after removal from factory, increased RSP would be deemed to be the RSP.

All goods on which RSP has been declared will not be covered under the provisions of section 4A. Only when the declaration of RSP on the goods is mandatory under the Legal Metrology Act, 2009 or under any other law and such goods have been notified by the Central Government for the purpose of section 4A, then the goods be valued under section 4A. Thus, provisions of section 4A of Central Excise Act, 1944 would not apply if the goods had not been notified by Central Government and manufacturer voluntarily affixed RSP on the products.

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7. (a) i. Since investment or deposit in a public sector company is one of the permitted modes of

investment mentioned in section 11(5), the exemption granted to a charitable trust under section 11 will not be forfeited if it holds shares in a public sector company.

ii. As per section 11(4), “property held under trust” includes a business undertaking so held. If the object of the trust is relief of the poor, education, medical relief etc. (other than advancement of any other object of general public utility) and the trust has a business undertaking, then, the income from such business would also be exempt from tax provided the following conditions, as mentioned in section 11(4A) are satisfied :

(a) such business is incidental to the attainment of the objects of the trust; and (b) separate books of accounts are maintained by such trust in respect of such business. Even if the main object of the charitable trust is “advancement of any other object of general public utility”, tax exemption will not be denied in this case since the aggregate receipts from business have not exceeded `25 lakhs in the year.

(b) In terms of Rule 4A of Service Tax Rules, 1994, Sarvesh has to issue an invoice or a bill, or a challan signed by him or a person authorized by him in respect of taxable service provided by him. The invoice, bill or challan should contain the following details and be serially numbered:

i. Name, address and the registration number of Sarvesh; ii. Name and address of Nitesh (person receiving taxable service); iii. Description of taxable service provided or agreed to be provided; iv. Value of taxable service provided or agreed to be provided and v. Service tax payable thereon.

Such an invoice has to be issued within 30 days from the date of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier. Since Sarvesh will receive the payment for the services only after three months, he should issue the invoice latest by June 15, 2014 i.e., within 30 days from May 15, 2014 (date of completion of such taxable service).

(c) False: Only Managing director and director of the company can sign the return. 1. True: Tax return can be revised, only if the original return is filed within the due date 2. False: Individual & HUF has to pay advance tax only if the tax payable exceeds `10,000 and

all other assesses has to pay the advance tax 3. False: It is not possible for the assessing officer to pass the assessment order u/s 143(3)

without enquiring the assessee.