PAPER – 1: ACCOUNTING

PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

FOR MAY 2019 EXAMINATION

A. Applicable for May, 2019 examination

I. Amendments in Schedule III (Division I) to the Companies Act, 2013
In exercise of the powers conferred by sub-section (1) of section 467 of the
Companies Act, 2013), the Central Government made the following amendments in
Division I of the Schedule III with effect from the date of publication of this notification
in the Official Gazette:
(A) under the heading “II Assets”, under sub-heading “Non-current assets”, for the
words “Fixed assets”, the words “Property, Plant and Equipment” shall be
substituted;
(B) in the “Notes”, under the heading “General Instructions for preparation of
Balance Sheet”, in paragraph 6,-
(I) under the heading “B. Reserves and Surplus”, in item (i), in sub- item (c),
the word “Reserve” shall be omitted;
(II) in clause W., for the words “fixed assets”, the words “Property, Plant and
Equipment” shall be substituted.
II. Amendments in Schedule V to the Companies Act, 2013
In exercise of the powers conferred by sub-sections (1) and (2) of section 467 of the
Companies Act, 2013, the Central Government hereby makes the following
amendments to amend Schedule V.
In PART II, under heading “REMUNERATION”, in Section II - ,
(a) in the heading, the words “without Central Government approval” shall be
omitted;
(b) in the first para, the words “without Central Government approval” shall be
omitted;
(c) in item (A), in the proviso, for the words “Provided that the above limits shall be
doubled” the words “Provided that the remuneration in excess of above limits
may be paid” shall be substituted;
(d) in item (B), for the words “no approval of Central Government is required” the
words “remuneration as per item (A) may be paid” shall be substituted;

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 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(e) in Item (B), in second proviso, for clause (ii), the following shall be substituted,
namely:-
“(ii) the company has not committed any default in payment of dues to any bank
or public financial institution or non-convertible debenture holders or any other
secured creditor, and in case of default, the prior approval of the bank or public
financial institution concerned or the non-convertible debenture holders or other
secured creditor, as the case may be, shall be obtained by the company before
obtaining the approval in the general meeting.";
(f) in item (B), in second proviso, in clause (iii), the words “the limits laid down in”
shall be omitted;
In PART II, under the heading “REMUNERATION”, in Section III, –
(a) in the heading, the words “without Central Government approval” shall be
omitted;
(b) in first para, the words “without the Central Government approval” shall be
omitted;
(c) in clause (b), in the long line, for the words “remuneration up to two times the
amount permissible under Section II” the words “any remuneration to its
managerial persons”, shall be substituted;
III. Notification dated 13th June, 2017 to exempt startup private companies from
preparation of Cash Flow Statement as per Section 462 of the Companies Act 2013
As per the Amendment, under Chapter I, clause (40) of section 2, an exemption has
been provided to a startup private company besides one person company, small
company and dormant company. Accordingly, a startup private company is not
required to include the cash flow statement in the financial statements.
Thus the financial statements, with respect to one person company, small company,
dormant company and private company (if such a private company is a start-up), may
not include the cash flow statement.
IV. Amendments made by MCA in the Companies (Accounting Standards) Rules, 2006
MCA has issued Companies (Accounting Standards) Amendment Rules, 2016 to
amend Companies (Accounting Standards) Rules, 2006 by incorporating the
references of the Companies Act, 2013, wherever applicable. Also, the Accounting
Standard (AS) 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 as specified in these
Rules will substitute the corresponding Accounting Standards with the same number
as specified in Companies (Accounting Standards) Rules, 2006.

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 PAPER – 1 : ACCOUNTING 3

Following table summarises the changes made by the Companies (Accounting

Standards) Amendment Rules, 2016 vis a vis the Companies (Accounting Standards)
Rules, 2006 in the Accounting Standards relevant for Paper 1:
Name of Para As per the As per the Implication
the no. Companies Companies
standard (Accounting (Accounting
Standards) Standards)
Rules, 2006 Amendment Rules,
2016
AS 2 4 (an Inventories do Inventories do not Now,
extract) not include include spare parts, inventories also
machinery servicing equipment do not include
spares which and standby servicing
can be used equipment which equipment and
only in meet the definition of standby
connection with property, plant and equipment
an item of fixed equipment as per AS other than
asset and 10, Property, Plant spare parts if
whose use is and Equipment. they meet the
expected to be Such items are definition of
irregular; such accounted for in property, plant
machinery accordance with and equipment
spares are Accounting Standard as per AS 10,
accounted for (AS) 10, Property, Property, Plant
in accordance Plant and and Equipment.
with Accounting Equipment.
Standard (AS)
10, Accounting
for Fixed
Assets.
27 Common Common Para 27 of AS 2
classifications classifications of requires
of inventories inventories are: disclosure of
are raw (a) Raw materials inventories
materials and and components under different
components, (b) Work-in- classifications.
work in progress One residual
progress, category has
(c) Finished goods
finished goods, been added to
stores and (d) Stock-in-trade the said
(in respect of goods
acquired for trading)

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 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

spares, and (e) Stores and paragraph i.e.

loose tools. spares ‘Others’.
(f) Loose tools
(g) Others (specify
nature)”.
AS 10 All Fixed Assets Property, Plant and Entire standard
Equipment has been
revised with the
title AS 10:
‘Property, Plant
and Equipment’
by replacing the
existing AS 6
and AS 10. The
students are
advised to refer
the explanation
of AS 10
Property, Plant
and equipment
(2016) given in
the Annexure.
The Annexure
is given at the
end of
Accounting
Part II
Suggested
Answers.
AS 13 20 The cost of any An investment Accounting of
shares in a co- property is investment
operative accounted for in property was
society or a accordance with cost not stated in
company, the model as prescribed this para but
holding of in Accounting now
which is directly Standard (AS) 10, incorporated
related to the Property, Plant and i.e. at cost
right to hold the Equipment. The cost model.
investment of any shares in a co-
property, is operative society or a
added to the company, the
carrying holding of which is

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 PAPER – 1 : ACCOUNTING 5

amount of the directly related to the

investment right to hold the
property. investment property,
is added to the
carrying amount of
the investment
property.
30 An enterprise An enterprise holding Accounting of
holding investment investment
investment properties should property shall
properties account for them in now be in
should account accordance with cost accordance
for them as model as prescribed with AS 10 i.e.
long term in AS 10, Property, at cost model
investments. Plant and
Equipment.
AS 14 3(a) Amalgamation Amalgamation Definition of
means an means an Amalgamation
amalgamation amalgamation has been made
pursuant to the pursuant to the broader by
provisions of provisions of the specifically
the Companies Companies Act, including
Act, 1956 or 2013 or any other ‘merger’.
any other statute which may be
statute which applicable to
may be companies and
applicable to includes ‘merger’.
companies.
18 and In such cases In such cases the Corresponding
39 the statutory statutory reserves debit on
reserves are are recorded in the account of
recorded in the financial statements statutory
financial of the transferee reserve in case
statements of company by a of
the transferee corresponding debit amalgamation
company by a to a suitable account in the nature of
corresponding head (e.g., purchase is
debit to a ‘Amalgamation termed as
suitable Adjustment ‘Amalgamation
account head Reserve’) which is Adjustment
(e.g., presented as a Reserve’ and is
‘Amalgamation separate line item. now to be

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 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Adjustment When the identity of presented as a

Account’) which the statutory separate line
is disclosed as reserves is no longer item since there
a part of required to be is not sub-
‘miscellaneous maintained, both the heading like
expenditure’ or reserves and the ‘Miscellaneous
other similar aforesaid account expenditure’ in
category in the are reversed. Schedule III to
balance sheet. the Companies
When the Act, 2013
identity of the
statutory
reserves is no
longer required
to be
maintained,
both the
reserves and
the aforesaid
account are
reversed.
B. Not applicable for May, 2019 examination
Non-Applicability of Ind ASs for May, 2019 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16th February, 2015, for compliance by certain class of companies. T hese
Ind AS are not applicable for May, 2019 Examination.

PART – II: QUESTIONS AND ANSWERS

QUESTIONS

Financial Statements of Companies

1. (a) Shweta Ltd. has the Authorised Capital of ` 15,00,000 consisting of 6,000 6%
Preference shares of ` 100 each and 90,000 equity Shares of `10 each. The following
was the Trial Balance of the Company as on 31 st March, 2018
Particulars Dr. Cr.
Investment in Shares at cost 1,50,000
Purchases 14,71,500

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 PAPER – 1 : ACCOUNTING 7

Selling Expenses 2,37,300

Inventory as at the beginning of the year 4,35,600
Salaries and Wages 1,56,000
Cash on Hand 36,000
Interim Preference dividend for the half year to 30th
18,000
September
Bills Receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on Debentures upto 30th Sep (1st half year) 11,250
Debtors 1,50,300
Trade payables 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of ` 45,000 1,05,000
6% Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on Freehold
4,50,000
properties
Income tax paid in advance for the current year 30,000
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft secured by hypothecation of stocks
4,50,000
and receivables
Technical knowhow fees at cost paid during the year 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,850
You are required to prepare the Profit and Loss Statement for the year ended
31st March, 2018 and the Balance Sheet as on 31st March, 2018 as per Schedule III
of the Companies Act, 2013 after taking into account the following –
1. Closing Stock was valued at ` 4,27,500.
2. Purchases include ` 15,000 worth of goods and articles distributed among
valued customers.
3. Salaries and Wages include ` 6,000 being Wages incurred for installation of
Electrical Fittings which were recorded under "Furniture".

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 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

4. Bills Receivable include ` 4,500 being dishonoured bills. 50% of which had been
considered irrecoverable.
5. Bills Receivable of ` 6,000 maturing after 31st March were discounted.
6. Depreciation on Furniture to be charged at 10% on Written Down Value.
7. Investment in shares is to be treated as non-current investments.
8. Interest on Debentures for the half year ending on 31 st March was due on that
date.
9. Provide Provision for taxation `12,000.
10. Technical Knowhow Fees is to be written off over a period of 10 years.
11. Salaries and Wages include ` 30,000 being Director's Remuneration.
12. Trade receivables include ` 18,000 due for more than six months.
Managerial Remuneration – Effective Capital
(b) The following extract of Balance Sheet of Gaurav Ltd. was obtained:
Balance Sheet (Extract) as on 31 st March, 2018
Liabilities `
Authorised capital:
90,000, 14% preference shares of ` 100 90,00,000
9,00,000 Equity shares of `100 each 9,00,00,000
9,90,00,000
Issued and subscribed capital:
67,500, 14% preference shares of ` 100 each fully paid 67,50,000
5,40,000 Equity shares of ` 100 each, ` 80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (` 6,75,000 is revaluation reserve) 8,77,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:

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 PAPER – 1 : ACCOUNTING 9

Trade Payables 15,52,500

Assets:
Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
Share suspense account represents application money received on shares, the
allotment of which is not yet made. You are required to compute effective capital as
per the provisions of Schedule V. Would your answer differ if Gaurav Ltd.is an
investment company?
(c) State under which head these accounts should be classified in Balance Sheet, as per
Schedule III of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
Cash flow statement
2. Preet Ltd. presents you the following information for the year ended 31 st March, 2019:
(` in lacs)
(i) Net profit before tax provision 72,000
(ii) Dividend paid 20,404
(iii) Income-tax paid 10,200
(iv) Book value of assets sold 444
Loss on sale of asset 96
(v) Depreciation debited to P & L account 48,000
(vi) Capital grant received - amortized to P & L A/c 20
(vii) Book value of investment sold 66,636
Profit on sale of investment 240
(viii) Interest income from investment credited to P & L A/c 6,000
(ix) Interest expenditure debited to P & L A/c 24,000
(x) Interest actually paid (Financing activity) 26,084
(xi) Increase in working capital 1,34,580
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 44,184

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 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(xiii) Expenditure on construction work 83,376

(xiv) Grant received for capital projects 36
(xv) Long term borrowings from banks 1,11,732
(xvi) Provision for Income-tax debited to P & L A/c 12,000
Cash and bank balance on 1.4.2018 12,000
Cash and bank balance on 31.3.2019 16,000
You are required to prepare a cash flow statement as per AS-3 (Revised).
Profit/Loss prior to Incorporation
3. Lotus Ltd. was incorporated on 1 st July, 2017 to acquire a running business of Feel goods
with effect from 1st April, 2017. During the year 2017-18, the total sales were ` 48,00,000
of which ` 9,60,000 were for the first six months. The Gross profit of the company
` 7,81,600. The expenses debited to the Profit & Loss Account included:
(i) Director's fees ` 60,000
(ii) Bad debts ` 14,400
(iii) Advertising ` 48,000 (under a contract amounting to ` 4,000 per month)
(iv) Salaries and General Expenses ` 2,56,000
(v) Preliminary Expenses written off ` 20,000
(vi) Donation to a political party given by the company ` 20,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2018.
Accounting for Bonus Issue
4. Following is the extract of the Balance Sheet of Xeta Ltd. as at 31 st March, 2017
`
Authorised capital:
50,000 12% Preference shares of ` 10 each 5,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000

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 PAPER – 1 : ACCOUNTING 11

Securities premium 1,00,000

Profit and Loss Account 6,00,000
On 1st April, 2017, the Company has made final call @ ` 2 each on 2,70,000 equity shares.
The call money was received by 20 th April, 2017. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the
balance sheet as on 30 th April, 2017 after bonus issue.
Internal Reconstruction of a Company
5. Kishor Limited decided to reconstruct its business as it has accumulated huge losses. The
following is the Balance Sheet of the company as on 31.03.2018 before reconstruction:
Balance Sheet as on 31.03.2018
Particulars ` Particulars `
6,00,000 Equity shares of ` 10 Patents 3,00,000
each fully paid up 60,00,000 Land & building 34,00,000
3,20,000, 6% Preference shares Plant & machinery 4,00,000
of ` 10 each fully paid up 32,00,000 Investments (at cost) 4,40,000
6% Debentures (secured Trade receivables 34,80,000
against
land & building) 30,00,000 Inventory 34,00,000
Bank overdraft 11,60,000 Profit & loss A/c 47,40,000
Trade payables 24,00,000
Provision for income tax 4,00,000
1,61,60,000 1,61,60,000
Following scheme of reconstruction is approved by all interested parties and the Court:
(1) All equity shares are reduced to ` 3 each and preference shares to ` 7 each.
(2) Debentureholders agreed to take over a part of land and building, book value of which
is ` 14,00,000, towards their 50% claim. Rate of interest of balance 50% debentures
will be increased to 9%.
(3) Patent will be written off.
(4) 10% of Trade receivables to be provided for bad debts.
(5) Inventory to be written off by ` 5,20,000.
(6) 50% of balance Land & Building sold for ` 12,00,000 and remaining Land & Building
valued at ` 12,00,000.

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 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(7) Investments to be sold for ` 4,00,000.

(8) The income tax liability of the company is settled at ` 4,50,000. Provision for income
tax will be raised accordingly.
(9) 1/3 of trade payables decided to forgo their claim.
(10) After making all the above adjustments, balance amount available through scheme,
will be utilized to write off the value of plant & machinery to that extent.
You are required to pass the necessary Journal Entries.
Amalgamation of Companies
6. Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to
form a new company named Super Fast Express Ltd. The summarized balance sheets of
both the companies were as under:
Super Express Ltd.
Balance Sheet as at 31st December, 20X1
` `
20,000 Equity shares of `100 each 20,00,000 Buildings 10,00,000
Provident fund 1,00,000 Machinery 4,00,000
Trade Payables 60,000 Inventory 3,00,000
Insurance reserve 1,00,000 Trade receivables 2,40,000
Cash at bank 2,20,000
Cash in hand 1,00,000
22,60,000 22,60,000
Fast Express Ltd.
Balance Sheet as at 31st December, 20X1
` `
10,000 Equity shares of `100 each 10,00,000 Buildings 7,00,000
Trade Payables 40,000 Machinery 5,00,000
Reserve 1,00,000 Inventory 40,000
Surplus 1,60,000 Trade receivables 40,000
Cash at bank 10,000
Cash in hand 10,000
13,00,000 13,00,000
The assets and liabilities of both the companies were taken over by the new company at
their book values. The companies were allotted equity shares of ` 100 each in lieu of

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 PAPER – 1 : ACCOUNTING 13

purchase consideration amounting to ` 30,000 (20,000 for Super Fast Express Ltd and
10,000 for Fast Express Ltd.).
Prepare opening balance sheet of Super Fast Express Ltd considering pooling method.
Average Due Date
7. Harish has the following bills due on different dates. It was agreed to settle the total amount
due by a single cheque payment. Find the date of the cheque.
(i) ` 5,000 due on 5.3.2017
(ii) ` 7,500 due on 7.4.2017
(iii) ` 6,000 due on 17.7.2017
(iv) ` 8,000 due on 14.9.2017
Account Current
8. The following transactions took place between A and B for the three months ending
31st March 2017:
Books of A
Date Particulars `
1.1.2017 B 's Opening balance 1,00,000
10.1.2017 Sold goods to B 2,00,000
15.1.2017 Cash received from B 2,00,000
15.2.2017 Sold goods to B 2,00,000
1.3.2017 Cash received from B 1,00,000
You are required to calculate the amount of interest to be paid by one party to the other at
10% per annum using Epoque Method. Also prepare Account current of Mr. B with Mr. A.
(1 year =365 days)
Self – Balancing Ledgers
9. The following particulars are obtained from books of Prime Ltd. for the year ended
31st March, 2018:
` `
Cash Sales 50,000 Bills Receivable dishonoured 5,000
Credit Purchases 5,60,000 Return Inward 17,000
Collection from Debtors 8,50,000 Payment to creditors 3,24,000
Bills Receivable drawn 40,000 Discount allowed 6,000

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 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Discount Received 5,000 Debtor’s cheque returned 15,000

dishonoured
Cash Purchases 24,000 Credit Sales 9,80,000
Bills Payable Paid 13,000 Bills Receivable Collected 20,000
Recovery of Bad Debts 3,000 Return Outward 7,400
Bills receivable discounted 16,000 Bills Receivable endorsed to 15,800
with Bank Creditors
Interest charged on overdue 2,400 Overpayment refunded by 1,200
customer’s A/c Suppliers
Endorsed Bills Receivable 11,000 Bad debts 2,000
dishonoured (noting Opening Balances:
charges ` 150) Sundry Debtors 1,56,000
Bills payable accepted 32,000 Sundry Creditors 1,70,000
You are required to prepare the Total Debtors Account and Total Creditors Account.
Financial Statements of Not-For-Profit Organizations
10. The Accountant of ‘Retreat & Refresh’ Club furnishes you the following Receipts and
Payment Account for the year ending 31 st March, 2018:
Receipts ` Payments `
Opening Balance: Honoraria to Secretary 19,200
Cash & Bank 33,520 Misc. expenses 6,120
Subscription 42,840 Rates & Taxes 5,040
Sale of Old Magazines 9,600 Ground man’s wages 3,360
Entertainment Fees 17,080 Printing & Stationary 1,880
Bank Interest 920 Payment for bar purchases 23,080
Bar Receipts 29,800 Repairs 1,280
Telephone expenses 9,560
New car (less sale proceeds of old car 50,400
` 12,000) (Old car was sold on
1.4.2017)
Closing Balance:
Cash & Bank 13,840
1,33,760 1,33,760

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Additional Information
1.4.2017 (`) 31.3.2018 (`)
Subscription due (not received) 4,800 3,920
Cheque issued, but not presented (payment of printing 360 120
expenses)
Club premises at cost 1,16,000 -
Depreciation on club premises provided so far 75,200 -
Car at cost 48,760 -
Depreciation on car provided so far 41,160 -
Value of Bar stock 2,840 3,480
Amount unpaid for bar purchases 2,360 1,720
Depreciation is to be provided @ 5% p.a. on written down value of the club premises and
@ 15% p.a. on car for the whole year.
You are required to prepare an Income & Expenditure Account of Retreat & Refresh Club
for the year ending 31 st March, 2018 and Balance Sheet as on that date.
Accounts from Incomplete Records
11. From the following information in respect of Mr. Preet, prepare Trading and Profit and Loss
Account for the year ended 31 st March, 2018 and a Balance Sheet as at that date:
31-03-2017 31-03-2018
(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 1,500
(2) Receipts and Payments during 2017-2018:
Collections from Debtors
(after allowing 2-1/2% discount) 11,70,000
Payments to Creditors
(after receiving 2% discount) 7,84,000

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 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

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

Proprietor’s drawings 1,40,000
Purchase of furniture on 30.09.2017 20,000
12% Government securities purchased on 2,00,000
1-10-2017
Expenses 3,50,000
Miscellaneous Income 10,000
(3) Sales are effected so as to realize a gross profit of 50% on the cost.
(4) Capital introduced during the year by the proprietor by cheques was omitted to
be recorded in the Cash Book, though the bank balance on 31 st March, 2018
(as shown above), is after taking the same into account.
(5) Purchases and Sales are made only on credit.
(6) During the year, Bills Receivable of ` 2,00,000 were drawn on debtors. out of
these, Bills amount to ` 40,000 were endorsed in favour of creditors. Out of
this latter amount, a Bill for ` 8,000 was dishonoured by the debtor.
Hire Purchase Transactions
12. The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car
being ` 2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the
end of the second year. The hire vendor valued the two cars at cash price less 30%
depreciation charged under it diminishing balance method.
(d) The hire vendor spent ` 10,000 on repairs of the cars and then sold them for a total
amount of ` 1,70,000.
You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor.
Investment Accounts
13. A Ltd. purchased on 1 st April, 2018 8% convertible debenture in C Ltd. of face value of
` 2,00,000 @ ` 108. On 1st July, 2018 A Ltd. purchased another ` 1,00,000 debenture
@ ` 112 cum interest.

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On 1st October, 2018 ` 80,000 debenture was sold @ ` 108. On 1st December, 2018, C
Ltd. give option for conversion of 8% convertible debentures into equity share of ` 10 each.
A Ltd. receive 5,000 equity share in C Ltd. in conversion of 25% debenture held on that
date. The market price of debenture and equity share in C Ltd. at the end of year 2018 is
` 110 and ` 15 respectively.
Interest on debenture is payable each year on 31 st March, and 30th September.
The accounting year of A Ltd. is calendar year.
Prepare investment account in the books of A Ltd. on average cost basis.
Insurance Claim for loss of stock or profit
14. A fire engulfed the premises of a business of M/s Preet on the morning of 1 st July 2018.
The building, equipment and stock were destroyed and the salvage recorded the following:
Building – ` 4,000; Equipment – ` 2,500; Stock – ` 20,000. The following other information
was obtained from the records saved for the period from 1 st January to 30th June 2018:
`
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 7,500
Stock in hand on 31st December, 2017 1,50,000
Building (value on 31 st December, 2017) 3,75,000
Equipment (value on 31 st December, 2017) 75,000
Depreciation provision till 31 st December, 2017 on:
Building 1,25,000
Equipment 22,500
No depreciation has been provided since December 31 st 2017. The latest rate of
depreciation is 5% p.a. on building and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales. You are required to prepare the
statement of claim for submission to the Insurance Company.
Issues in Partnership Accounts
15. Ajay, Vijay and Sanjay are partners sharing Profit & Loss in the ratio of 2:3:1. The Balance
Sheet of the firm as on 31.03.2018 is as follows:

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 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Liabilities ` Assets `
Capital A/c: Furniture & Fixture 30,000
Vijay’s Capital 85,000 Office equipment 20,000
Sanjay’s Capital 68,000 Motor Car 60,000
General Reserve A/c 30,000 Stock 40,000
Sundry Creditors 25,000 Sundry Debtors 20,000
Cash at Bank 18,000
Ajay’s Capital 20,000

2,08,000 2,08,000
Kamal is admitted as· a new. partner with effect from 1 st April, 2018 by receiving 1/4 share
in the profit & loss of the firm. The· profit or loss sharing ratios between other partners
remain same as before. It was agreed that Kamal would bring. some private furniture worth
` 3,000 and private stock worth ` 5,000 and balance in cash towards his capital.
The following adjustments are to be made prior to Kamal admission:
1. Goodwill of the firm is to be valued at 2 years purchase of the average profit of last 3
years. The profits for the last 3 years were ` 35,900, ` 38,200 and ` 31,500. However
on checking of the past records it was noticed that on 01.04.14 a new furniture
costing, ` 8,000 was purchased but wrongly debited to revenue and also in year
2015-16, a purchase invoice for ` 4,000 has been omitted in the book. The firm
charged depreciation on furniture @ 10% on original cost. Your calculation of
goodwill is to be made on the basis of correct profits. It is agreed among existing
partners that Sanjay’s interest in the goodwill of the firm is only up to value of
` 42,000.
2. Motor Car is taken over by Vijay at ` 70,000.
3. Office equipment is revalued at ` 25,000.
4. Expenses incurred but not paid of ` 6,500 are provided for. ·
5. Value of the stock is to be reduced by 5%.
6. Kamal is to bring proportionate capital. Capital of Vijay, Ajay and Sanjay are also to
be adjusted in profit sharing ratio.
Assuming the above mentioned adjustments are duly carried out, show the revaluation
account, partner's capital accounts and the Balance Sheet of the firm after Kamal’s
admission.

© The Institute of Chartered Accountants of India

 PAPER – 1 : ACCOUNTING 19

Accounting in Computerized Environment

16. Recently a growing trend has developed for outsourcing the accounting function to a third
party. What are the basis on which choice of such third party made?
Applicability of Accounting Standards
17. (a) XYZ Ltd., (a corporate entity) with a turnover of ` 35 lakhs and borrowings of ` 10
lakhs during any time in the previous year, wants to avail the exemptions available in
adoption of Accounting Standards applicable to companies for the year ended
31.3.2017. Advise the management on the exemptions that are available as per the
Companies (AS) Rules, 2006.
If XYZ is a partnership firm is there any other exemptions additionally available.
AS 1 Disclosure of Accounting Policies
(b) Om Ltd. purchases goods on behalf of its customers for execution of work under a
works contract against which it receives full payment and necessary declaration form
under GST to be passed on to the supplier. The company follows the practice of
treating the same as its purchases and accordingly debits to its Profit and Loss
Account. Give your views on the above.
AS 3 Cash flow Statements
18. (a) Explain the meaning of the terms ‘cash’ and ‘cash equivalent’ for the purpose of Cash
Flow Statement as per AS-3.
Ruby Exports had a bank balance of USD 25,000, stated in books at ` 16,76,250
using the rate of exchange ` 67.05 per USD prevailing on the date of receipt of
dollars. However, on the balance sheet date, the closing rate of exchange was
` 67.80 and the bank balance had to be restated at ` 16,95,000.
Comment on the effect of change in bank balance due to exchange rate fluctuation
and also discuss how it will be disclosed in Cash Flow Statement of Ruby Exports
with reference to AS-3.
(b) Money 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

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 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(iv) TDS on interest income earned on investments made

(v) TDS on interest earned on advance given to suppliers
Discuss in the context of AS 3 Cash Flow Statement.
AS 7 Construction Contracts
19. (a) GTI Ltd. negotiates with Bharat Oil Corporation Ltd. (BOCL), for construction of
“Retail Petrol & Diesel Outlet Stations”. Based on proposals submitted to different
Regional Offices of BOCL, the final approval for one outlet each in Region X, Region
Y, Region Z is awarded to GTI Ltd. A single agreement is entered into between two.
The agreement lays down values for each of the three outlets i.e. ` 102 lacs, ` 150
lacs, ` 130 lacs for Region X, Region Y, Region Z respectively. Agreement also lays
down completion time for each Region.
Comment whether GTI Ltd. will treat it as single contract or three separate contracts
with reference to AS-7?
AS 9 Revenue Recognition
(b) Raj Ltd. entered into an agreement with Heena Ltd. to dispatch goods valuing
` 5,00,000 every month for next 6 months on receipt of entire payment. Heena Ltd.
accordingly made the entire payment of ` 30,00,000 and Raj Ltd. started dispatching
the goods. In fourth month, due to fire in premise of Heena Ltd., Heena Ltd. requested
to Raj Ltd. not to dispatch goods worth ` 15,00,000 ready for dispatch. Raj Ltd.
accounted ` 15,00,000 as sales and transferred the balance to Advance received
against Sales account.
Comment upon the above treatment by Raj Ltd. with reference to the provision of AS-9.
AS 10 Property, Plant and Equipment
20. (a) Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) ` 50,00,000
2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000
4. Consultants used for advice on the acquisition of the plant ` 14,00,000
5. Interest charges paid to supplier of plant for deferred credit ` 4,00,000
6. Estimated dismantling costs to be incurred after 7 years ` 6,00,000
7. Operating losses before commercial production ` 8,00,000
Please advise Preet Ltd. on the costs that can be capitalised in accordance with
AS 10 (Revised).

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 PAPER – 1 : ACCOUNTING 21

AS 13 Accounting for Investments

(b) Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for ` 5
lakhs, which the company want to reclassify as long term investment on 31.3.2018.
The market value of these investments as on date of Balance Sheet was ` 2.5 lakhs.
How will you deal with this as on 31.3.18 with reference to AS-13?

SUGGESTED ANSWERS/HINTS

1. (a) Statement of Profit and Loss of Shweta Ltd. for the year ended 31st March, 2018
Particulars Note `
I Revenue from Operations 20,11,050
II Other income (Divided income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases (14,71,500 – Advertisement
14,56,500
Expenses 15,000)
(b) Changes in Inventories of finished Goods /
8,100
Work in progress (4,35,600 – 4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses [10% of
11,100
(1,05,000 + 6,000)]
(f) Other Expenses 11 3,47,550
Total Expenses 19,95,150
V Profit before exceptional, extraordinary items and
28,650
tax (III-IV)
VI Exceptional items -
VII Profit before extra ordinary items and tax (V-IV) 28,650
VIII Extraordinary items -
IX Profit before tax (VII-VIII) 28,650
X Tax expense:
12,000
Current Tax
XI Profit/Loss for the period (after tax) 16,650

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 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Balance sheet of Shweta Ltd. as on 31 st March, 2018

Particulars as on 31st March Note
I
(1) Shareholders’ funds:
(a) Share capital 1 12,00,000
(b) Reserves and surplus 2 66,150
(2) Non current liabilities:
Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 29,250
Total 24,58,950
II ASSETS
(1) (a) Non-current Assets:
Property, Plant & Equipment
(i) Tangible assets 6 11,49,900
(ii) Intangible assets 7 4,05,000
(b) Non current investments (Shares at cost) 1,50,000
Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents – Cash on hand 36,000
(d) Short term loans and advances –Income tax
18,000
(paid 30,000-Provision 12,000)
Total 24,58,950
Note: There is a Contingent liability for Bills receivable discounted with Bank ` 6,000.
Notes to accounts
(` )
1. Share Capital
Authorized
90,000 Equity Shares of ` 10 each 9,00,000
6,000 6% Preference shares of ` 100 each 6,00,000 15,00,000
Issued, subscribed & called up
60,000, Equity Shares of ` 10 each 6,00,000

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 PAPER – 1 : ACCOUNTING 23

6,000 6% Redeemable Preference Shares of 100

6,00,000 12,00,000
each
2. Reserves and Surplus
Balance as on 1st April, 2017 85,500
Add: Surplus for current year 16,650 1,02,150
Less: Preference Dividend 36,000
Balance as on 31st March, 2018 66,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold
4,50,000
Properties)
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand
Overdraft from Banks (Secured by Hypothecation of 4,50,000
Stocks & Receivables)
5. Other Current liabilities
Interest Accrued and due on Borrowings
11,250
(5% Debentures)
Unpaid Preference Dividends 18,000 29,250
6. Tangible Fixed assets
Furniture
Furniture at Cost Less depreciation ` 45,000 (as given
1,05,000
in Trial Balance)
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly
6,000
included under the heading Salaries and Wages
Total Gross block of Furniture A/c 1,56,000
Accumulated Depreciation Account: Opening
Balance-given in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e. (10% x 1,05,000) 10,500
On additional purchase during the year at 10% i.e.
(10% x 6,000) 600
Less: Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900

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 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

7. Intangible Fixed Assets

Technical knowhow 4,50,000
Less: Written off 45,000 4,05,000
8. Trade Receivables
Sundry Debtors (a) Debt outstanding for more than
18,000
six months
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
9. Employee benefit expenses
Amount as per Trial Balance 1,56,000
Less: Wages incurred for installation of electrical
6,000
fittings to be capitalised
Less: Directors’ Remuneration shown separately 30,000
Balance amount 1,20,000
10. Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500 51,900

11. Other Expenses

Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x50%) 2,250 3,47,550
Working Note:
Calculation of Sundry Debtors-Other Debts
Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% ` 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 months 1,34,550

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 PAPER – 1 : ACCOUNTING 25

(b) Computation of effective capital:

Where Gaurav Ltd.is Where Gaurav Ltd.is
a non-investment is an investment
company company
Paid-up share capital —
67,500, 14% Preference shares 67,50,000 67,50,000
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 2,02,500 2,02,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,12,92,500 8,12,92,500
Investments 3,37,50,000 -
Profit and Loss account (Dr.
68,62,500
balance) 68,62,500
(B) 4,06,12,500 68,62,500
Effective capital (A–B) 4,06,80,000 7,44,30,000
(c) (i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
2. Cash Flow Statement as per AS 3
Cash flows from operating activities: ` in lacs
Net profit before tax provision 72,000
Add: Non cash expenditures:
Depreciation 48,000
Loss on sale of assets 96
Interest expenditure (non-operating activity) 24,000 72,096
1,44,096
Less: Non cash income
Amortisation of capital grant received (20)

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 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Profit on sale of investments (non-operating income) (240)

Interest income from investments (non-operating income) (6,000) 6,260
Operating profit 1,37,836
Less: Increase in working capital (1,34,580)
Cash from operations 3,256
Less: Income tax paid (10,200)
Net cash generated from operating activities (6,944)
Cash flows from investing activities:
Sale of assets (444 – 96) 348
Sale of investments (66,636+240) 66,876
Interest income from investments 6,000
Purchase of fixed assets (44,184)
Expenditure on construction work (83,376)
Net cash used in investing activities (54,336)
Cash flows from financing activities:
Grants for capital projects 36
Long term borrowings 1,11,732
Interest paid (26,084)
Dividend paid (20,404)
Net cash from financing activities 65,280
Net increase in cash 4,000
Add: Cash and bank balance as on 1.4.2018 12,000
Cash and bank balance as on 31.3.2019 16,000
3. Statement showing the calculation of Profits for the pre-incorporation and
post-incorporation periods
For the year ended 31 st March, 2018
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
Gross Profit 7,81,600 Sales 78,160 7,03,440
Less: Directors’ fee 60,000 Post 60,000
Bad debts 14,400 Sales 1,440 12,960
Advertising 48,000 Time 12,000 36,000
Salaries & general expenses 2,56,000 Time 64,000 1,92,000

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 PAPER – 1 : ACCOUNTING 27

Preliminary expenses 20,000 Post 20,000

Donation to Political Party 20,000 Post 20,000
Net Profit 3,63,200 720 3,62,480
Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.2017 (9,60,000 x 3/6) 4,80,000
Sales for period from 01.07.2017 to 31.03.2018 (48,00,000 – 4,80,000) 43,20,000
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2017 to 30 June, 2017: 1 st July, 2017 to 31st March, 2018
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
4. Journal Entries in the books of Xeta Ltd.
` `
1-4-2017 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ` 2 per share on 2,70,000
equity shares due as per Board’s Resolution
dated….)
20-4-2017 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity
shares received)
Securities Premium A/c Dr. 1,00,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c Dr. 2,15,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)

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 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Extract of Balance Sheet as at 30 th April, 2017 (after bonus issue)

`
Authorised Capital
50,000 12% Preference shares of `10 each 5,00,000
4,00,000 Equity shares of `10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of `10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ `10 each were issued by way of bonus)
Reserves and surplus
Profit and Loss Account 3,85,000

5. Journal Entries in the books of Kishor Limited

Dr. (` ) Cr. (` )
1. Equity share capital A/c (` 10) Dr. 60,00,000
To Equity share capital A/c (` 3) 18,00,000
To Capital reduction A/c 42,00,000
(Reduction of equity share of ` 10 each to shares
of ` 3 each as per the reconstruction scheme)
2. 6% Preference share capital A/c (` 10) Dr. 32,00,000
To 6% Preference share capital A/c (` 7) 22,40,000
To Capital reduction A/c 9,60,000
(Reduction of preference share of ` 10 each to
shares of ` 7 each as per the reconstruction
scheme)
3. 6 % Debentures A/c Dr. 30,00,000
To Land & building A/c 14,00,000
To 9% Debentures A/c 15,00,000
To Capital reduction A/c 1,00,000
(50% claim of debentureholders discharged by
transfer of a part of land & building having book
value ` 14,00,000 and rate of interest of balance
50% debentures increased to 9% as per the
reconstruction scheme).
4. Bank A/c Dr. 12,00,000
To Land & building A/c 10,00,000

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 PAPER – 1 : ACCOUNTING 29

To Capital reduction A/c 2,00,000

(50% of balance land & building having book value
` 10,00,000 sold as per the reconstruction scheme)
5. Land & building A/c Dr. 2,00,000
To Capital Reduction A/c 2,00,000
(50% of balance land & building having book value
` 10,00,000, valued at ` 12,00,000, as per the
reconstruction scheme)
6. Bank A/c Dr. 4,00,000
Capital reduction A/c Dr. 40,000
To Investment A/c 4,40,000
(All the investment sold as per the reconstruction
scheme)
7. Trade payables A/c Dr. 8,00,000
To Capital reduction A/c 8,00,000
(1/3 of Trade payables decided to forgo their claim
as per the reconstruction scheme)
8. Capital reduction A/c Dr. 61,58,000
To Patents A/c 3,00,000
To Provision of doubtful debts A/c 3,48,000
To Inventory A/c 5,20,000
To Provision for income tax A/c 50,000
To Profit & loss A/c 47,40,000
To Plant & machinery A/c (Bal. fig.) 2,00,000
(Written off patent, profit & loss, part value of stock,
plant & machinery, and provision made for doubtful
debts, income tax, as per the reconstruction
scheme)
6. Balance Sheet of Super Fast Express Ltd
as at 1st Jan., 20X2
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 30,00,000
b Reserves and Surplus 2 3,60,000
2 Non-current liabilities

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 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

a Long-term provisions 3 1,00,000

3 Current liabilities
a Trade Payables 1,00,000
Total- 35,60,000
Assets
1 Non-current assets
a Property, plant & Equipment
Tangible assets 4 26,00,000
2 Current assets
Inventories 3,40,000
Trade receivables 2,80,000
Cash and cash equivalents 5 3,40,000
Total 35,60,000
Notes to accounts
`
1 Share Capital
Equity share capital
Issued, subscribed and paid up
30,000 Equity shares of ` 100 each 30,00,000
Total 30,00,000
2 Reserves and Surplus
Reserve 1,00,000
Surplus 1,60,000
Insurance reserve 1,00,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000
4 Tangible assets
Buildings 17,00,000
Machinery 9,00,000
Total 26,00,000

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 PAPER – 1 : ACCOUNTING 31

5 Cash and cash equivalents

Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
7. Calculation of number of days from the base date
Due date Amount (` ) No. of days from 5.3.17 Product
5.3.2017 5,000 0 0
7.4.2017 7,500 33 2,47,500
17.7.2017 6,000 134 8,04,000
14.9.2017 8,000 193 15,44,000
26,500 25,95,500
Sum of Product
Average due date = Base date +
Sum of Amount
25,95,500
= 5.3.2017 + = 98 days (round off)
26,500

The date of the cheque will be 98 days from the base date i.e.11.6.2017. So on
11th June, 2017, all bills will be settled by a single cheque payment.

© The Institute of Chartered Accountants of India

 8. Mr. B in Account Current with Mr. A (Books of A - Interest to 31st March 2017 @ 10% p.a.)

32
Date Particulars Due Amt. ` Days Product Date Particulars Due Amt. ` Days Product `
date ` date
01.01.17 To Balance b/d 1,00,000 15.1.17 By Cash A/c 15.1.17 2,00,000 15 30,00,000
10.1.17 To Sales A/c 10.1.17 2,00,000 10 20,00,000 1.3.17 By Cash A/c 1.3.17 1,00,000 60 60,00,000

INTERMEDIATE(IPC) EXAMINATION: MAY, 2019

15.2.17 To Sales A/c 15.2.17 2,00,000 46 92,00,000
31.3.17 To Balance of Products 1,58,00,000
31.3.17 To Interest on Balance 4,329 31.3.17 By Balance 1,80,00,000
for 1 day @ 10% of Products
1,58,00,000  10  [2,00,000 x
1 
  90]
 100  365 
 
 

31.3.17 By Balance 2,04,329

c/d
5,04,329 2,70,00,000 5,04,329 2,70,00,000
Note: While counting the number of days for closing balances, the opening date as well as date
upto which the account is prepared, has been considered.

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 PAPER – 1 : ACCOUNTING 33

9 In the books of Prime Ltd.

Total Debtors Account
` `
To Balance b/d 1,56,000 By Cash 8,50,000
To Bank (Cheque dishonoured) 15,000 By Discount Allowed 6,000
To Bill Receivables (Dishonoured) 5,000 By Bill Receivables 40,000
To Interest 2,400 By Returns Inward 17,000
To Sales 9,80,000 By Bad Debts 2,000
To Sundry Creditors (endorsed bill By Balance c/d 2,54,550
dishonoured with noting
charges) 11,150
11,69,550 11,69,550
Total Creditors Account
` `
To Cash 3,24,000 By Balance b/d 1,70,000
To B/R (endorsed) 15,800 By Purchases 5,60,000
To Discount received 5,000 By Sundry Debtors A/c
To Bills Payable 32,000 (endorsed Bill Receivables 11,150
dishonoured with noting
charges)
To Return outward 7,400 By Cash (over payments 1,200
refunded)
To Balance c/d 3,58,150
7,42,350 7,42,350
Note: Transactions relating to cash sales or purchases; honour of bills receivable or
payable; recovery of bad debts and discount or endorsement of bill will not be entered in
Total Debtors and Total Creditors Accounts.
10. Income and Expenditure Account of Retreat & Refresh Club for the year
ended 31st March, 2018
Expenditure Amount Income Amount
` `
To Honoraria to secretary 19,200 By Subscriptions (W.N.3) 41,960
To Misc. expenses 6,120 By Sale of old magazines 9,600
To Rates and taxes 5,040 By Entertainment fees 17,080

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 34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

To Groundman's wages 3,360 By Bank interest 920

To Printing and stationary 1,880 By Bar receipts 29,800
To Telephone expenses 9,560 By Profit on sale of car 4,400
(W.N.5)
To Bar expenses:
Opening bar stock 2,840
Add: Purchases (W.N.2) 22,440
25,280
Less: Closing bar stock (3,480) 21,800
To Repairs 1,280
To Depreciation
Club premises (W.N.4) 2,040
Car (W.N. 6) 9,360 11,400
To Excess of income over
expenditure transferred
to capital fund 24,120
1,03,760 1,03,760
Balance Sheet of Retreat & Refresh Club as on 31 st March, 2018
Liabilities Amount Assets Amount
` `
Capital fund (W.N. 1) 87,200 Club Premises 38,760
Add: Excess of income Car 53,040
over expenditure 24,120 1,11,320 Bar stock 3,480
Outstanding liabilities Outstanding subscription 3,920
for bar purchases 1,720 Cash and bank 13,840
1,13,040 1,13,040
Working Notes:
1. Balance Sheet of Retreat & Refresh Club as on 1 st April, 2017
Liabilities Amount Assets Amount
` `
Amount due for bar Club premises 1,16,000
purchases 2,360 Less: Depreciation (75,200) 40,800

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Capital fund on 87,200 Car 48,760

1.4.2017 Less: Depreciation (41,160) 7,600
(balancing figure) Bar stock 2,840
Outstanding 4,800
subscription
Cash at bank 33,520
89,560 89,560
2. Calculation of bar purchases for the year
`
Bar payments as per receipts and payments account 23,080
Add: Amount due on 31 March, 2018
st 1,720
24,800
Less: Amount due on 1st April, 2017 (2,360)
22,440
3. Calculation of subscriptions earned during the year
`
Subscriptions received as per receipts and payments account 42,840
Add: Outstanding on 31st March, 2018 3,920
46,760
Less: Outstanding on 1st April, 2017 (4,800)
41,960
4. Depreciation on club premises and its written down value on 31 st March, 2018
`
Written down value on 1 April, 2017 (1,16,000- 75,200)
st 40,800
Less: Depreciation for the year @ 5% p.a. (2,040)
38,760
5. Calculation of profit on sale of car
`
Sale proceeds of old car 12,000
Less: Written down value of old car:
Cost of car on 1st April, 2017 48,760
Less: Depreciation upto 1st April, 2017 (41,160) (7,600)
4,400

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 36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

6. Depreciation on car and its written down value on 31 st March, 2018

`
Cost of new car purchased (50,400 + 12,000) 62,400
Less: Depreciation for the year @ 15% p.a. (9,360)
Written down value on 31 st March, 2018 53,040
Note: The opening and closing balance of cash and bank shown in the Receipts and
Payments Account (given in the question), include the bank balance as per cash book.
Therefore, no adjustment has been made in the above solution on account of cheques
issued, but not presented for payment of printing expenses.
11. Trading and Profit and Loss Account of Mr. Preet
for the year ended 31 st March, 2018
Amount Amount
` `
To Opening stock 1,60,000 By Sales 13,98,000
To Purchases (W.N.5) 9,12,000 By Closing stock 1,40,000
To Gross profit c/d (Bal.fig.) 4,66,000 _______
15,38,000 15,38,000
To Expenses (W.N.7) 3,44,000 By Gross profit b/d 4,66,000
To Discount allowed (W.N.9) 32,500 By Discount received 16,000
(W.N.10)
To Depreciation on furniture 13,000 By Interest on Govt. 12,000
(W.N.1) Securities (W.N.8)
To Net profit 1,14,500 By Miscellaneous income 10,000
5,04,000 5,04,000
Balance Sheet of Mr. Preet as on 31st March, 2018
Amount Amount
Liabilities ` Assets `
Capital (W.N.6) 3,76,000 Furniture 1,27,000
Add: Additional capital 1,72,000 12% Government 2,00,000
(W.N.2) Securities
Accrued interest on Govt.
Add: Profit during the year 1,14,500 securities (W.N.8) 12,000
6,62,500 Debtors (W.N.3) 3,26,000

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Less: Drawings (1,40,000) 5,22,500 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 1,500
8,58,500 8,58,500
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 By Creditors 7,84,000
Cash 4,000 By Drawings 1,40,000
Bank 20,000 By Furniture 20,000
To Debtors 11,70,000 By 12% Govt. securities 2,00,000
To Bill Receivable 1,22,500 By Expenses 3,50,000
To Miscellaneous 10,000 By Balance c/d
income
To Additional Capital 1,72,000 Cash 3,000
(bal.fig.)
_______ Bank 1,500
14,98,500 14,98,500

3. Debtors account
` `
To Balance b/d 3,20,000 By Cash and Bank 11,70,000
To Creditors (Bills 8,000 By Discount 30,000
receivable
dishonoured)
To Sales (W.N.11) 13,98,000 By Bills Receivable 2,00,000
By Balance c/d (bal.fig.) 3,26,000
17,26,000 17,26,000

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 38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

4. Bills Receivable account

` `
To Debtors 2,00,000 By Bank 1,22,500
By Discount 2,500
By Creditors 40,000
By Balance c/d (bal. fig.) 35,000
2,00,000 2,00,000
5. Creditors account
` `
To Bank 7,84,000 By Balance b/d 2,20,000
To Discount 16,000 By Debtors (Bills receivable 8,000
dishonoured)
To Bills receivable 40,000 By Purchases (bal. fig.) 9,12,000
To Balance c/d 3,00,000
11,40,000 11,40,000

6. Balance Sheet as on 1 st April, 2017

Liabilities ` Assets `
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 31.3.2018 36,000
Prepaid expenses as on 31.3.2017 12,000 48,000
3,98,000
Less: Outstanding expenses as on 31.3.2017 40,000
Prepaid expenses as on 31.3.2018 14,000 (54,000)
Expenses incurred during the year 3,44,000

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 PAPER – 1 : ACCOUNTING 39

8. Interest on Government securities

2,00,000 x 12% x 6/12= ` 12,000
Interest on Government securities receivables for 6 months = ` 12,000
9. Discount allowed
`
Discount to Debtors  11,70,000  30,000
 97.5%  2.5% 
 
Discount on Bills Receivable  1,22,500 
 98%  2%  2,500
 
32,500
10. Discount received
`
Discount to Creditors  7,84,000  16,000
 98%  2% 
 

11. Credit sales

Cost of Goods sold = Opening stock + Net purchases – Closing stock
= ` 1,60,000 + ` 9,12,000 – ` 1,40,000
= ` 9,32,000
Sale price = ` 9,32,000 + 50% of 9,32,000 = ` 13,98,000
12.
`
(i) Price of two cars = ` 2,00,000 x 2 4,00,000
Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
30
Less: Depreciation for the second year = ` 2, 80,000 x 84,000
100
Agreed value of two cars taken back by the hire vendor 1,96,000
(ii) Cash purchase price of one car 2,00,000
Less: Depreciation on ` 2,00,000 @20% for the first year 40,000
Written drown value at the end of first year 1,60,000

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 40 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Less: Depreciation on ` 1,60,000 @ 20% for the second year 32,000

Book value of car left with the hire purchaser 1,28,000
(iii) Book value of one car as calculated in working note (ii) above 1,28,000
Book value of Two cars = ` 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in 1,96,000
working note (i) above
Hence, loss on cars taken back = ` 2,56,000 – ` 1,96,000 = ` 60,000
(iv) Sale proceeds of cars repossessed 1,70,000
Less: Value at which cars were taken back ` 1,96,000
Repair ` 10,000 2,06,000
Loss on resale 36,000
13. Investment Account for the year ending on 31 st December, 2018
Scrip : 8% Convertible Debentures in C Ltd.
[Interest Payable on 31 st March and 30th September]
Date Particulars Nominal Interest Cost ` Date Particulars Nominal Interest Cost (`)
v alue ` ` Value (`
(`)
1.4.18 To Bank A/c 2,00,000 - 2,16,000 30.09.18 By Bank A/c - 12,000 -
1.7.18 To Bank A/c 1,00,000 2,000 1,10,000 [`3,00,000 x 8%
(W.N.1) x (6/12]
31.12.18 To P & L A/c - 14,033 - 1.10.18 By Bank A/c 80,000 84,000
[Interest] 1.10.18 By P&L A/c (loss) 2,933
(W.N.1)
1.12.18 By Bank A/c 733
(Accrued
interest)
(` 55,000 x .08 x
2/12)
1.12.18 By Equity shares 55,000 59,767
in C Ltd.
(W.N. 3 and 4)
31.12.18 By Balance c/d
(W.N.5) 1,65,000 3,300 1,79,300
3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000

SCRIP: Equity Shares in C LTD.

Date Particulars Cost (`) Date Particulars Cost (`)
1.12.18 To 8 % debentures 59,767 31.12.18 By balance c/d 59,767

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 PAPER – 1 : ACCOUNTING 41

Working Notes:
(i) Cost of Debenture purchased on 1 st July = `1,12,000 – `2,000 (Interest)
= `1,10,000
(ii) Cost of Debentures sold on 1 st Oct.
= (`2,16,000 + `1,10,000) x 80,000/3,00,000 = ` 86,933
(iii) Loss on sale of Debentures = ` 86,933– `84,000 = `2,933
Nominal value of debentures converted into equity shares =` 55,000
[(` 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (` 2,16,000 + `1,10,000) x 55,000/3,00,000
= ` 59,767
(v) Cost of closing balance of Debentures = (` 2,16,000 + `1,10,000) x
1,65,000 / 3,00,000
= ` 1,79,300
(vii) Closing balance of Debentures has been valued at cost being lower than the market
value i.e. ` 1,81,500 (` 1,65,000 @ ` 110)
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ` 59,767 being lower than the
market value ` 75,000 (` 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been
received at the time of conversion.
14. Memorandum Trading Account for the Period from 1.1.2018 to 30.6.2018
` `
To Opening Stock (1.1.2018) 1,50,000 By Sales 11,50,000
To Purchases 9,50,000 Less: Sales
Less: Returns (12,500) 9,37,500 Returns (40,000) 11,10,000
To Cartage Inwards 17,500 By Closing Stock 2,80,000
To Wages 7,500 (Bal. Fig.)
To Gross Profit 2,77,500
(25% of ` 11,10,000)
13,90,000 13,90,000

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 42 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Stock Destroyed Account

` `
To Trading Account 2,80,000 By Stock Salvaged Account 20,000
By Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000
Statement of Claim
Items Cost Depreciation Salvage Claim
(` ) (` ) (` ) (` )
A B C D (E=B-C-D)
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000 + 9,375 4,000 2,36,625
Equipment 75,000 22,500 + 5,625 2,500 44,375
5,41,000
15. Revaluation Account
` `
To Stock 2,000 By Motor car 10,000
To Expenses 6,500 By Office equipment 5,000
To Purchases Omitted 4,000
To Capital A/c
Ajay 833
Vijay 1,250
Sanjay 417 2,500
15,000 15,000
Partners’ Capital Accounts
Particulars Ajay Vijay Sanjay Kamal Particulars Ajay Vijay Sanjay Kamal
Before admission
To Balance 20,000 - - - By bal b/d - 85,000 68,000 -
b/d
To Motor Car - 70,000 - - By Reserve 10,000 15,000 5,000
To Balance 16,087 69,130 81,127 - By Furniture 1,600 2,400 800
c/d
By Revaluation 833 1,250 417 -
A/c
By Goodwill 23,654 35,480 7,000 -
Total 36,087 1,39,130 81,217 36,087 1,39,130 81,217

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 PAPER – 1 : ACCOUNTING 43

At the time of admission

To Goodwill 17,395 26,094 5,250 17,395 By Balance b/d 16,087 69,130 81,127 -
To Balance - 43,036 75,967 - By assets -- - 8,000
c/d
By bal c/d 1,308 - - 9,395
Total 17,395 69,130 81,217 17,395 17,395 69,130 81,217 17,395
Adjustments to make Capital proportionate
To balance 1,308 - - 9,395 By bal b/d - 43,036 75,967 -
b/d
To Bank - - 56,351 -
(bal. fig.)
To balance 39,232 58,847 19,616 39,232 By Bank 40,540 15,811 - 48,627
c/d (WN 4) (bal. fig.)
Total 40,540 58,847 75,967 48,627 40,540 58,847 75,967 48,627

Balance Sheet of the Firm (after Kamal’s admission)

Equity & Liabilities ` Assets `
Capital Account: Furniture& fixture 37,800
Ajay 39,232 (30,000 +3,000+4,800)
Vijay 58,847 Office equipment 25,000
Sanjay 19,616 Stock (38,000 +5,000) 43,000
Kamal 39,232 Debtors 20,000
Creditors (25,000 +4,000) 29,000 Cash at Bank (W. N. 5) 66,627
Outstanding Expenses 6,500
1,92,427 1,92,427
Working Notes:
1. Computation of New Profit sharing ratio
Since Kamal’s Share= 1/4 th, Balance 3/4th to be shared by Ajay, Vijay and Sanjay in
the ratio 2:3:1
Ajay Vijay Sanjay Kamal Total
New Ratio 2 3 2 3 3 3 1 3 1 1 2 2:3:1:2
      
6 4 8 6 4 8 6 4 8 4 8

2. Computation of Goodwill
Year 1 2 3 Total
Profit 35,900 38,200 31,500
Less: Depreciation (800) (800) (800)

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 44 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Purchase invoice omitted (4,000)

31,100 37,400 30,700 99,200
Average Profit 99,200/3 ` 33,067
Goodwill at 2 years purchase ` 33,067  2 ` 66,134
3. (i) Goodwill to be credited to Ajay, Vijay and Sanjay
Particulars Ajay Vijay Sanjay Total
First – ` 42,000 to be distributed among 14,000 21,000 7,000 42,000
all the Partners in the ratio of 2:3:1
Balance - ` 24,134 to be distributed
between Ajay and Vijay in the ratio 2:3 9,654 14,480 - 24,134
Total 23,654 35,480 7,000 66,134
(ii) Writing off Goodwill
Particulars Ajay Vijay Sanjay Kamal Total
First – ` 42,000 to be debited 10,500 15,750 5,250 10,500 42,000
among all the Partners in the
ratio of 2:3:1:2
Balance- ` 24,134 to be
distributed between
Ajay,Vijay and Kamal in the 6,895 10,344 - 6,895 24,134
ratio 2:3:2
Total 17,395 26,094 5,250 17,395 66,134

4. Computation of proportionate Capital of Partners

`
Combined Capital of Ajay, Vijay, Sanjay (Existing partners) – as per 1,17,695
balance derived in partners’ Capital Account = ` 43,036+ ` 75,967
-1,308= 1,17,695
Share of Ajay, Vijay and Sanjay in the new firm after deducting 3/4th
Kamal’s 1/4th share
Total Capital of the Firm after Kamal’s admission = ` 1,17,695÷ 3/4th 1,56,927

Apportionment of Capital in New Profit Sharing Ratio i.e. Proportionate Capital of

partners

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 PAPER – 1 : ACCOUNTING 45

Partners Ajay Vijay Sanjay Kamal

Ratio 2 3 1 2
Proportionate Capital of partners 39,232 58,847 19,616 39,232
(1,56,927)

5. Cash at Bank
= Given ` 18,000 +40,540+ 15,811+ 48,627– 56,351 = ` 66,627
Note:
1. In the above solution, adjustment of furniture for ` 4,800 has been routed through
Partners’ capital accounts. Alternatively, it may also be routed through Revaluation
A/c.
2. Since goodwill is not a purchased goodwill, it has been written off in the above
solution, in accordance with the AS 10.
3. As per the requirement given in the question, it is agreed among existing partners
that Sanjay’s interest in the goodwill of the firm is only upto the value of ` 42,000. It
has been assumed in the above solution that Sanjay is credited at the time of raising
of goodwill as well as debited only to the extent of ` 42,000 at the time of writing off
of goodwill.
16. Recently a growing trend has developed for outsourcing the accounting function to a third
party. The consideration for doing this is to save cost and to utilise the expertise of the
outsourced party. The third party maintains the accounting software and the client data,
does the processing and hands over the report from time to time.
The choice of outsourcing vendor is made on the basis of the proposals received from
these vendors. The proposals are evaluated and the decision is often taken based on the
following criteria:
1. The type of services provided and whether the same matches with the requirements,
2. The reputation and background of the vendor,
3. The comparative costs of the various propositions,
4. The assurance of quality.
17. (a) The question deals with the issue of Applicability of Accounting Standards for
corporate &non-corporate entities.
The companies can be classified under two categories viz SMCs and Non SMCs
under the Companies (AS) Rules, 2006.
As per the Companies (AS) Rules, 2006, criteria for above classification as SMCs,
are:

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 46 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

“Small and Medium Sized Company” (SMC) means, a company-

(i) whose equity or debt securities are not listed or are not in the process of listing
on any stock exchange, whether in India or outside India;
(ii) which is not a bank, financial institution or an insurance company;
(iii) whose turnover (excluding other income) does not exceed rupees fifty crore in
the immediately preceding accounting year;
(iv) which does not have borrowings (including public deposits) in excess of rupees
ten crore at any time during the immediately preceding accounting year; and
(v) which is not a holding or subsidiary company of a company which is not a small
and medium-sized company.
Since, XYZ Ltd.’s turnover of ` 35 lakhs does not exceed ` 50 crores & borrowings
of ` 10 lakhs is less than ` 10 crores, it is a small and medium sized company
The following relaxations and exemptions are available to XYZ Ltd.
1. AS 3 “Cash Flow Statements” is not mandatory.
2. AS 17 “Segment Reporting” is not mandatory.
3. SMEs are exempt from some paragraphs of AS 19 “Leases”.
4. SMEs are exempt from disclosures of diluted EPS (both including and excluding
extraordinary items).
5. SMEs are allowed to measure the ‘value in use’ on the basis of reasonable
estimate thereof instead of computing the value in use by present value
technique under AS 28 “Impairment of Assets”.
6. SMEs are exempt from certain disclosure requirements of AS 29 (Revised)
“Provisions, Contingent Liabilities and Contingent Assets”.
7. SMEs are exempt from certain requirements of AS 15 “Employee Benefits”.
8. Accounting Standards 21, 23, 27 are not applicable to SMEs.
(b) AS-1 “Disclosures of Accounting Policies”, states that the accounting treatment and
presentation in Financial Statements of transactions should be governed by their
substance and not merely by the legal form. The treatment in the given case would
depend on the terms of the Works Contract and also the substance of the agreement.
Accordingly, there can be two possibilities in the instant case, viz.
Situation 1
The Company acts as the agent of the customer.
Disclosure should be made to this effect that the material purchased belongs to the
customer.

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 PAPER – 1 : ACCOUNTING 47

Where ownership of goods vests with the customers and the company merely
purchases goods on behalf of its customers, it acts in the capacity of an agent for
execution of works under a works contract for which it receives full payment.
Hence, these purchases cannot be treated as the purchases of the Company and so,
the debit to its P&L A/c is not correct
Situation 2
The Company is the owner of the materials purchased in substance and has the right,
(though a restricted one) to use the materials, for all practical purposes.
If the terms of Works Contract provide for factor linked payment by customer and in
substance the materials acquired by the Company belongs to the company only,
irrespective of the legal form of ownership, the Company is justified in debiting its
P&L A/c.
18. (a) Cash flow statement consists of:(a) Cash in hand and deposits repayable on demand
with any bank or other financial institutions and (b) Cash equivalents, which are
short term, highly liquid investments that are readily convertible into known amounts
of cash and are subject to insignificant risk or change in value.
Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash
equivalents. Any transaction, which does not result in cash flow, should not be
reported in the cash flow statement. Movements within cash or cash equivalents are
not cash flows because they do not change cash as defined by AS 3 “Cash Flow
Statements” which is sum of cash, bank and cash equivalents.
In the given case, due to increase in rate of foreign exchange by 75 paise, there is
increase (change) in bank balance. This increase of ` 18,750 (25,000 x 0.75) is not
a cash flow because neither there is any cash inflow nor there is any cash outflow.
Therefore, this change in bank balance amounting ` 18,750 need not be disclosed in
Cash Flow Statement of Ruby exports.
The net increase/decrease in Cash/Cash equivalents in the Cash Flow Statements
are stated exclusive of exchange gains and losses. T he resultant difference between
Cash and Cash Equivalents as per the Cash flow statement and that recognized in
the balance sheet is reconciled in the note on cash flow statements.
(b) Treatment as per AS 3 ‘Cash Flow Statement’
(i) Loans and advances given and interest earned
(1) to suppliers Cash flows from operating activities
(2) to employees Cash flows from operating activities
(3) to its subsidiary companies Cash flows from investing activities
(ii) Investment made in subsidiary company and dividend received
Cash flows from investing activities

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 48 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(iii) Dividend paid for the year

Cash flows from financing activities
(iv) TDS on interest income earned on investments made
Cash flows from investing activities
(v) TDS on interest earned on advance given to suppliers
Cash flows from operating activities
19. (a) As per AS 7 ‘Construction Contracts’, when a contract covers number of assets, the
construction of each asset should be treated as a separate construction contract
when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and
customer have been able to accept or reject that part of the contract relating to
each asset; and
(c) the costs and revenues of each asset can be identified.
In the given case, each outlet is submitted as a separate proposal to different Zonal
Offices, which can be separately negotiated, and costs and revenues thereof can be
separately identified. Hence, each asset will be treated as a “single contract” even if
there is one single agreement for contracts.
Therefore, three separate contract accounts must be recorded and maintained in the
books of GTI Ltd. For each contract, principles of revenue and cost recognition must
be applied separately and net income will be determined for each asset as per AS 7.
(b) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions are
fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred to
the buyer and the seller retains no effective control of the goods transferred to
a degree usually associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that
will be derived from the sale of the goods.
In the given case, transfer of property in goods results in or coincides with the transfer
of significant risks and rewards of ownership to the buyer. Also, the sale price has
been recovered by the seller. Hence, the sale is complete but delivery has been
postponed at buyer’s request. Raj Ltd. should recognize the entire sale of ` 30,00,000
(` 5,00,000 x 6) and no part of the same is to be treated as Advance Received against
Sales.

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 PAPER – 1 : ACCOUNTING 49

20. (a) According to AS 10 (Revised), these costs can be capitalised:

1. Cost of the plant ` 50,00,000
2. Initial delivery and handling costs ` 4,00,000
3. Cost of site preparation ` 12,00,000
4. Consultants’ fees `14,00,000
5. Estimated dismantling costs to be incurred after 7 years ` 6,00,000
` 86,00,000

Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not
a qualifying asset) of ` 4,00,000 and operating losses before commercial production
amounting to ` 8,00,000 are not regarded as directly attributable costs and thus
cannot be capitalised. They should be written off to the Statement of Profit and Loss
in the period they are incurred.
(b) As per AS 13 ‘Accounting for Investments’, where investments are reclassified from
current to long-term, transfers are made at the lower of cost or fair value at the date
of transfer.
In the given case, the market value of the investment (X Ltd. shares) is ` 2.50 lakhs,
which is lower than its cost i.e. ` 5 lakhs. Therefore, the transfer to long term
investments should be made at cost of ` 2.50 lakhs. The loss of ` 2.50 lakhs should
be charged to profit and loss account.

© The Institute of Chartered Accountants of India

 PAPER – 2: BUSINESS LAW, ETHICS & COMMUNICATION

PART – I: ANNOUNCEMENTS STATING APPLICABILITY

FOR MAY, 2019 EXAMINATIONS
Applicability for May, 2019 examinations
The Study Material (July 2015 edition), along with the “Supplementary Study Paper for
May 2019 examination and onwards” is relevant for May 2019 examinations.
Supplementary Study Paper contains the relevant amendments in the subject pertaining to
business law for the period 1st May 2015 to 30th April, 2018. Further, Chapter 6 – The Companies
Act, 2013, has been fully revised as per amendments upto 30 th April, 2018. Hence, the students
are advised that Module-2 (which is comprised of Chapter 6) of this paper is now to be read
from this supplementary study paper.
Further, all relevant amendments/ circulars/ notifications etc. in the Business Law and Company
law part for the period 1 st May 2018 to 31st October, 2018 are mentioned below:
Relevant Legislative amendments from 1 st May 2018 to 31st October, 2018
The Companies Act, 2013/ Corporate Laws
Sl. Amendments Relevant Amendments Page no. #
No. related to
I. Companies Following sections of the Companies Act, 2013
(Amendment) (hereinafter referred to as the principal Act) have
Act, 2017 been amended by the Companies (Amendment)
Act, 2017 via Notifications: S.O. 1833 (E) dated
7th May, 2018; S.O. 2422(E) dated 13 th June,
2018; SO. 3299(E) dated 5 th July, 2018; S.O.
3300(E) dated 5th July, 2018; S.O. 3684(E) dated
27th July, 2018; S.O. 3838(E) dated 31 st July,
2018; S.O. 3921(E) dated 7 th August, 2018 and
S.O. 4907(E) dated 19 th September, 2018.
1. In section 2 of the Companies Act, 2013
(hereinafter referred to as the principal Act)-
(i) in clause (6), for the Explanation, the following Pg 12 of SSP
Explanation shall be substituted, namely:—
'Explanation.—For the purpose of this clause,—
(a) the expression "significant influence" means
control of at least twenty per cent. of total voting
power, or control of or participation in business
decisions under an agreement;

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 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(b) the expression "joint venture" means a joint

arrangement whereby the parties that have joint
control of the arrangement have rights to the net
assets of the arrangement;';

Enforcement Date: 7 th May, 2018

(ii) in clause (87), in sub-clause (ii), for the words Pg 28 of SSP
“total share capital”, the words “total voting
power” shall be substituted;

Enforcement Date: 7 th May, 2018

2. In section 7 of the principal Act, in sub-section Pg 61 of SSP
(1), in item (c), for the words "an affidavit", the
words "a declaration" shall be substituted.
Enforcement Date: 27 th July, 2018
3. In section 12 of the principal Act,— Pg 65 of SSP
(i) in sub-section (1), for the words "on and from
the fifteenth day of its incorporation", the words
"within thirty days of its incorporation" shall be
substituted;
(ii) in sub-section (4), for the words "within fifteen
days", the words "within thirty days" shall be
substituted.

Enforcement Date: 27th July, 2018

4. In section 26 of the principal Act, in sub- Pg 84 of SSP
section (1),—
(i) after the words "signed and shall", the following
shall be inserted, namely:—
"state such information and set out such reports
on financial information as may be specified by
the Securities and Exchange Board in
consultation with the Central Government:

Provided that until the Securities and Exchange

Board specifies the information and reports on
financial information under this sub-section, the
regulations made by the Securities and Exchange
Board under the Securities and Exchange Board
of India Act, 1992, in respect of such financial

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 3

information or reports on financial information

shall apply.";

(ii) clauses (a), (b) and (d) shall be omitted. Pg 84, 85 &
86 of SSP
Enforcement Date: 7 th May, 2018
5. For section 42 of the principal Act, the Pg 107, 108,
following section shall be substituted, namely:— 109, 110 &
'42. (1) A company may, subject to the provisions 111 of SSP
of this section, make a private placement of
securities.
(2) A private placement shall be made only to a
select group of persons who have been identified
by the Board (herein referred to as "identified
persons"), whose number shall not exceed fifty or
such higher number as may be prescribed
[excluding the qualified institutional buyers and
employees of the company being offered
securities under a scheme of employees stock
option in terms of provisions of clause (b) of sub-
section (1) of section 62], in a financial year
subject to such conditions as may be prescribed.
(3) A company making private placement shall
issue private placement offer and application in
such form and manner as may be prescribed to
identified persons, whose names and addresses
are recorded by the company in such manner as
may be prescribed:
Provided that the private placement offer and
application shall not carry any right of
renunciation.
Explanation I.—"private placement" means any
offer or invitation to subscribe or issue of
securities to a select group of persons by a
company (other than by way of public offer)
through private placement offer-cum-application,
which satisfies the conditions specified in this
section.
Explanation II.—"qualified institutional buyer"
means the qualified institutional buyer as defined
in the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements)

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 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Regulations, 2009, as amended from time to time,

made under the Securities and Exchange Board
of India Act, 1992.
Explanation III.—If a company, listed or unlisted,
makes an offer to allot or invites subscription, or
allots, or enters into an agreement to allot,
securities to more than the prescribed number of
persons, whether the payment for the securities
has been received or not or whether the company
intends to list its securities or not on any
recognised stock exchange in or outside India,
the same shall be deemed to be an offer to the
public and shall accordingly be governed by the
provisions of Part I of this Chapter.
(4) Every identified person willing to subscribe to
the private placement issue shall apply in the
private placement and application issued to such
person alongwith subscription money paid either
by cheque or demand draft or other banking
channel and not by cash:
Provided that a company shall not utilise monies
raised through private placement unless
allotment is made and the return of allotment is
filed with the Registrar in accordance with sub-
section (8).
(5) No fresh offer or invitation under this section
shall be made unless the allotments with respect
to any offer or invitation made earlier have been
completed or that offer or invitation has been
withdrawn or abandoned by the company:
Provided that, subject to the maximum number of
identified persons under sub-section (2), a
company may, at any time, make more than one
issue of securities to such class of identified
persons as may be prescribed.
(6) A company making an offer or invitation under
this section shall allot its securities within sixty
days from the date of receipt of the application
money for such securities and if the company is
not able to allot the securities within that period,
it shall repay the application money to the
subscribers within fifteen days from the expiry of

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 5

sixty days and if the company fails to repay the

application money within the aforesaid period, it
shall be liable to repay that money with interest at
the rate of twelve per cent. per annum from the
expiry of the sixtieth day:
Provided that monies received on application
under this section shall be kept in a separate bank
account in a scheduled bank and shall not be
utilised for any purpose other than—
(a) for adjustment against allotment of
securities; or
(b) for the repayment of monies where the
company is unable to allot
securities.
(7) No company issuing securities under this
section shall release any public advertisements or
utilise any media, marketing or distribution
channels or agents to inform the public at large
about such an issue.
(8) A company making any allotment of securities
under this section, shall file with the Registrar a
return of allotment within fifteen days from the
date of the allotment in such manner as may be
prescribed, including a complete list of all
allottees, with their full names, addresses,
number of securities allotted and such other
relevant information as may be prescribed.
(9) If a company defaults in filing the return of
allotment within the period prescribed under sub-
section (8), the company, its promoters and
directors shall be liable to a penalty for each
default of one thousand rupees for each day
during which such default continues but not
exceeding twenty-five lakh rupees.
(10) Subject to sub-section (11), if a company
makes an offer or accepts monies in
contravention of this section, the company, its
promoters and directors shall be liable for a
penalty which may extend to the amount raised
through the private placement or two crore
rupees, whichever is lower, and the company
shall also refund all monies with interest as

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 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

specified in sub-section (6) to subscribers within

a period of thirty days of the order imposing the
penalty.
(11) Notwithstanding anything contained in sub-
section (9) and sub-section (10), any private
placement issue not made in compliance of the
provisions of sub-section (2) shall be deemed to
be a public offer and all the provisions of this Act
and the Securities Contracts (Regulation) Act,
1956 and the Securities and Exchange Board of
India Act, 1992 shall be applicable.’.

Enforcement Date: 7 th August, 2018

6. In section 54, in sub-section (1), clause (c) Pg 123 of
shall be omitted. SSP

Enforcement Date: 7 th May, 2018

7. In section 73 of the principal Act, in sub- Pg 153 of
section (2),— SSP
(i) for clause (c), the following clause shall be
substituted, namely:—
"(c) depositing, on or before the thirtieth day of
April each year, such sum which shall not be less
than twenty per cent. of the amount of its deposits
maturing during the following financial year and
kept in a scheduled bank in a separate bank
account to be called deposit repayment reserve
account;";

(ii) clause (d) shall be omitted;

(iii) in clause (e), for the words "such deposits;",

the following shall be substituted, namely:—
"such deposits and where a default had occurred,
the company made good the default and a period
of five years had lapsed since the date of making
good the default;".

Enforcement Date: 15 th August, 2018

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 7

8. In section 74, in sub-section (1), for clause (b), Pg 160 of

the following clause shall be substituted, SSP
namely:—
"(b) repay within three years from such
commencement or on or before expiry of the
period for which the deposits were accepted,
whichever is earlier:
Provided that renewal of any such deposits shall
be done in accordance with the provisions of
Chapter V and the rules made thereunder.".

Enforcement Date: 15 th August, 2018

9. In section 77 of the principal Act, in sub- Pg 165 of
section (1), after the third proviso, the following SSP
proviso shall be inserted, namely:—
"Provided also that this section shall not apply to
such charges as may be prescribed in
consultation with the Reserve Bank of India.".

Enforcement Date: 7 th May, 2018

10. In section 78 of the principal Act, for the Pg 166 of
words and figures "register the charge within the SSP
period specified in section 77", the words,
brackets and figures "register the charge within
the period of thirty days referred to in sub-section
(1) of section 77" shall be substituted.

Enforcement Date : 7 th May, 2018

11. In section 82 of the principal Act, in sub- Pg 169 of
section (1),— SSP
(i) the words, brackets and figures "and the
provisions of sub-section (1) of section 77 shall,
as far as may be, apply to an intimation given
under this section" shall be omitted;

(ii) the following proviso shall be inserted,

namely:—
"Provided that the Registrar may, on an
application by the company or the charge holder,
allow such intimation of payment or satisfaction to

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 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

be made within a period of three hundred days of

such payment or satisfaction on payment of such
additional fees as may be prescribed.".

Enforcement Date: : 5 th July, 2018

12. In section 89 of the principal Act,— Pg 182 of
(i) in sub-section (6), the words and figures, SSP
"within the time specified under section 403" shall
be omitted;

(ii) in sub-section (7), for the words and figures,

"under the first proviso to sub-section (1) of
section 403", the word "therein", shall be
substituted;

(iii) after sub-section (9), the following sub-

section shall be inserted, namely:—
"(10) For the purposes of this section and section
90, beneficial interest in a share includes, directly
or indirectly, through any contract, arrangement
or otherwise, the right or entitlement of a person
alone or together with any other
person to—
(i) exercise or cause to be exercised any or all of
the rights attached to such share; or
(ii) receive or participate in any dividend or other
distribution in respect of such share.".

Enforcement Date: 7 th May, 2018 [for (i) and

(ii)]
13th June, 2018 [for (iii)]
13. For section 90 of the principal Act, the Pg 183 of
following section shall be substituted, SSP
namely:—
'(1) Every individual, who acting alone or
together, or through one or more persons or trust,
including a trust and persons resident outside
India, holds beneficial interests, of not less than
twenty-five per cent. or such other percentage as
may be prescribed, in shares of a company or the

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 9

right to exercise, or the actual exercising of

significant influence or control as defined in
clause (27) of section 2, over the company (herein
referred to as "significant beneficial owner"), shall
make a declaration to the company, specifying
the nature of his interest and other particulars, in
such manner and within such period of acquisition
of the beneficial interest or rights and any change
thereof, as may be prescribed:
Provided that the Central Government may
prescribe a class or classes of persons who shall
not be required to make declaration under this
sub-section.
(2) Every company shall maintain a register of the
interest declared by individuals under sub-section
(1) and changes therein which shall include the
name of individual, his date of birth, address,
details of ownership in the company and such
other details as may be prescribed.
(3) The register maintained under sub-section (2)
shall be open to inspection by any member of the
company on payment of such fees as may be
prescribed.
(4) Every company shall file a return of significant
beneficial owners of the company and changes
therein with the Registrar containing names,
addresses and other details as may be prescribed
within such time, in such form and manner as may
be prescribed.
(5) A company shall give notice, in the prescribed
manner, to any person (whether or not a member
of the company) whom the company knows or has
reasonable cause to believe—
(a) to be a significant beneficial owner of the
company;
(b) to be having knowledge of the identity of a
significant beneficial owner or another person
likely to have such knowledge; or
(c) to have been a significant beneficial owner of
the company at any time during the three years
immediately preceding the date on which the
notice is issued,

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 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

and who is not registered as a significant

beneficial owner with the company as required
under this section.
(6) The information required by the notice under
sub-section (5) shall be given by the concerned
person within a period not exceeding thirty days
of the date of the notice.
(7) The company shall,—
(a) where that person fails to give the company
the information required by the notice within the
time specified therein; or
(b) where the information given is not
satisfactory,
apply to the Tribunal within a period of fifteen
days of the expiry of the period specified in the
notice, for an order directing that the shares in
question be subject to restrictions with regard to
transfer of interest, suspension of all rights
attached to the shares and such other matters as
may be prescribed.
(8) On any application made under sub-section
(7), the Tribunal may, after giving an opportunity
of being heard to the parties concerned, make
such order restricting the rights attached with the
shares within a period of sixty days of receipt of
application or such other period as may be
prescribed.
(9) The company or the person aggrieved by the
order of the Tribunal may make an application to
the Tribunal for relaxation or lifting of the
restrictions placed under sub-section (8).
(10) If any person fails to make a declaration as
required under sub-section (1), he shall be
punishable with fine which shall not be less than
one lakh rupees but which may extend to ten lakh
rupees and where the failure is a continuing one,
with a further fine which may extend to one
thousand rupees for every day after the first
during which the failure continues.
(11) If a company, required to maintain register
under sub-section (2) and file the information
under sub-section (4), fails to do so or denies

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 11

inspection as provided therein, the company and

every officer of the company who is in default
shall be punishable with fine which shall not be
less than ten lakh rupees but which may extend
to fifty lakh rupees and where the failure is a
continuing one, with a further fine which may
extend to one thousand rupees for every day after
the first during which the failure continues.
(12) If any person wilfully furnishes any false or
incorrect information or suppresses any material
information of which he is aware in the declaration
made under this section, he shall be liable to
action under section 447.'.

Enforcement Date: 13 th June, 2018

14. In section 92 of the principal Act,— Pg 186 of
SSP
(i) in sub-section (4), the words and figures,
"within the time as specified, under section 403"
shall be omitted;

(ii) in sub-section (5), for the words and figures,

"under section 403 with additional fees" the word
"therein" shall be substituted.
Enforcement Date: 7 th May, 2018
15. Section 93 of the principal Act shall be Pg 187 of
omitted. SSP

Enforcement Date: 13 th June, 2018

16. In section 94 of the principal Act,— Pg 188 of
(i) in sub-section (1), in the first proviso, the words SSP
"and the Registrar has been given a copy of the
proposed special resolution in advance" shall be
omitted;

(ii) in sub-section (3), the following proviso shall

be inserted, namely:—
"Provided that such particulars of the register or
index or return as may be prescribed shall not be
available for inspection under sub-section (2) or

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 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

for taking extracts or copies under this sub-

section.".

Enforcement Date: 13 th June, 2018

17. In section 96 of the principal Act, in sub- Pg 227 of
section (2), in the proviso, for the words "Provided SSP
that", the following shall be substituted, namely:—
"Provided that annual general meeting of an
unlisted company may be held at any place in
India if consent is given in writing or by electronic
mode by all the members in advance:
Provided further that".

Enforcement Date: 13 th June, 2018

18. In section 117 of the principal Act,— Pg 220/221
of SSP
(i) in sub-section (1), the words and figures
“within the time specified under section 403” shall
be omitted;

(ii) in sub-section (2),—

(a) for the words and figures “under section 403
with additional fees”, the word “therein” shall be
substituted;
(b) for the words "not be less than five lakh
rupees", the words "not be less than one lakh
rupees" shall be substituted;
(c) for the words "one lakh rupees", the words
"fifty thousand rupees" shall be substituted;

(iii) in sub-section (3),—

(a) clause (e) shall be omitted;
(b) in clause (g), in the proviso, the word “and”
shall be omitted and the following proviso shall be
inserted, namely:—
"Provided further that nothing contained in this
clause shall apply to a banking company in
respect of a resolution passed to grant loans, or
give guarantee or provide security in respect of

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 13

loans under clause (f) of sub-section (3) of section

179 in the ordinary course of its business; and.".

Enforcement Date: 7 th May, 2018

19. In section 121 of the principal Act,— Pg 229 of
SSP
(i) in sub-section (2), the words and figures
“within the time as specified, under section 403”
shall be omitted;

(ii) in sub-section (3), for the words and figures

“under section 403 with additional fees”, the word
“therein” shall be substituted.

Enforcement Date: 7 th May, 2018

II. Notification The Central Government has amended the Pg 28 of SSP
G.S.R. 433(E) Companies (Specification of Definitions Details)
dated 7th May, Rules, 2014, by the Companies (Specification of
2018 Definitions Details) Amendment Rules, 2018. It
shall come into force on 7 th May, 2018.
In the Companies (Specification of Definitions
Details) Rules, 2014, in rule 2, in sub-rule (1),
clause (r) shall be omitted.

Please note: The said clause (r) deals with ‘Total

Share Capital’
III. Notification The Central Government has amended the Pg 124 of
G.S.R. 434(E) Companies (Share Capital and Debentures) SSP
dated 7th May, Rules, 2014, by the Companies (Share Capital
2018 and Debentures) Second Amendment Rules,
2018. It shall come into force on 7 th May, 2018.
In the Companies (Share Capital and
Debentures) Rules, 2014, in the principal rules, in
rule 8, in sub-rule (1), in the Explanation, in
clause (i) in sub-clause (a), the words “for at least
last one year” shall be omitted.
IV. Notification The Central Government has amended the Pg 158 of
G.S.R. 612 (E) Companies (Acceptance of Deposits) Rules, SSP
dated 5th July, 2014, by the Companies (Acceptance of
2018

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 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Deposits) Amendment Rules, 2018. It shall come

into force on 15th August, 2018.
In the Companies (Acceptance of Deposits)
Rules, 2014 in rule 14, in sub-rule (1), clause (k)
shall be omitted;
V. Notification The Central Government has amended the Pg 47 of SSP
G.S.R. 708(E) Companies (Incorporation) Rules, 2014, by the
dated 27th Companies (Incorporation) Third Amendment
July, 2018 Rules, 2018. It shall come into force on 27 th July,
2018.
In the Companies (Incorporation) Rules, 2014._
(a) in rule 3, for Explanation to sub-rule (1), the
following shall be substituted, namely:-
“Explanation I. - For the purposes of this rule,
the term "resident in India" means a person who
has stayed in India for a period of not less than
one hundred and eighty two days during the
immediately preceding financial year.
Explanation II.- For the purposes of this rule,
while counting the number of days of stay of a
director in India for the financial year 2018-2019,
any period of stay between 01.01.2018 till the
date of notification of this rule shall also be
counted”;
The Negotiable Instruments Act, 1881
Amendments The Ministry of Law and Justice has made
to the amendments to the Negotiable Instruments Act,
Negotiable 1881 through the Negotiable Instruments
Instruments (Amendment) Act, 2018. This Amendment Act
Act, 1881 received the assent of the President and
published in the Official Gazette on 2 nd August,
2018.
In the Negotiable Instruments Act, 1881 -
(hereinafter referred to as the principal Act), after (The section
section 143, the following section shall be is newly
inserted, namely:— inserted)
‘‘143A. Power to direct interim compensation.

(1) Notwithstanding anything contained in the

Code of Criminal Procedure, 1973, the Court
trying an offence under section 138 may order the

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 15

drawer of the cheque to pay interim compensation

to the complainant—
(a) in a summary trial or a summons case, where
he pleads not guilty to the accusation made in the
complaint; and
(b) in any other case, upon framing of charge.
(2) The interim compensation under sub-section
(1) shall not exceed twenty per cent. of the
amount of the cheque.
(3) The interim compensation shall be paid within
sixty days from the date of the order under sub-
section (1), or within such further period not
exceeding thirty days as may be directed by the
Court on sufficient cause being shown by the
drawer of the cheque.
(4) If the drawer of the cheque is acquitted, the
Court shall direct the complainant to repay to the
drawer the amount of interim compensation, with
interest at the bank rate as published by the
Reserve Bank of India, prevalent at the beginning
of the relevant financial year, within sixty days
from the date of the order, or within such further
period not exceeding thirty days as may be
directed by the Court on sufficient cause being
shown by the complainant.
(5) The interim compensation payable under this
section may be recovered as if it were a fine under
section 421 of the Code of Criminal Procedure,
1973.
(6) The amount of fine imposed under section 138
or the amount of compensation awarded under
section 357 of the Code of Criminal Procedure,
1973, shall be reduced by the amount paid or
recovered as interim compensation under this
section.’’.
(2) In the principal Act, after section 147, the -
following section shall be inserted, (The section
namely:— is newly
‘‘148. Power of Appellate Court to order inserted)
payment pending appeal against conviction.
(1) Notwithstanding anything contained in the
Code of Criminal Procedure, 1973, in an appeal

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 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

by the drawer against conviction under section

138, the Appellate Court may order the appellant
to deposit such sum which shall be a minimum of
twenty per cent. of the fine or compensation
awarded by the trial Court:
Provided that the amount payable under this sub-
section shall be in addition to any interim
compensation paid by the appellant under section
143A.
(2) The amount referred to in sub-section (1) shall
be deposited within sixty days from the date of the
order, or within such further period not exceeding
thirty days as may be directed by the Court on
sufficient cause being shown by the appellant.
(3) The Appellate Court may direct the release of
the amount deposited by the appellant to the
complainant at any time during the pendency of
the appeal:
Provided that if the appellant is acquitted, the
Court shall direct the complainant to repay to the
appellant the amount so released, with interest at
the bank rate as published by the Reserve Bank
of India, prevalent at the beginning of the relevant
financial year, within sixty days from the date of
the order, or within such further period not
exceeding thirty days as may be directed by the
Court on sufficient cause being shown by the
complainant.’’.

# Page number of the Study material (SM)/ Supplementary study paper (SSP) with
reference of relevant provisions
Please note: The Ministry of Corporate Affairs has replaced Rule 14 of the Companies
(Prospectus and Allotment of Securities) Rule, 2014 through Companies (Prospectus and
Allotment of Securities) Second Rule, 2018. Hence, students are advised not to read the content
related to Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rule, 2014 as
contained on pages 110 and Page 111 of SSP. [For May 2019 examinations the said amended
rule has not been made applicable for the students.]

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 17

PART – II : QUESTIONS AND ANSWERS

QUESTIONS

DIVISION A - MULTIPLE CHOICE QUESTIONS

1. Rajesh has formed a ‘One Person Company (OPC)’ with his wife Roopali as nominee. For
the last two years his wife Roopali is suffering from terminal illness and due to this hard
fact he wants to change her as nominee. He has a trusted and experienced friend
Ramnivas who could be made nominee or his (Rajesh) son Rakshak who is of seventeen
years of age. Whom should he nominate as nominee in place of his wife?
(a) Since blood relation can only be appointed as nominee in case of OPC, Rajesh needs
to appoint his son Rakshak.
(b) Rajesh can appoint his friend Ramnivas as nominee in his OPC
(c) Roopali is not agreeable to the proposal of Rajesh and hence, Rajesh cannot change
her as the nominee
(d) Either Rakshak or Mr. Ramnivas can be appointed as nominee
2. A Company limited by shares can issue equity shares with differential voting rights. Which
of the following is not a necessary condition to be fulfilled before issue of such shares:
(a) The articles of association of the company shall authorize issue of shares with
differential rights;
(b) The issue of shares shall be authorized by an ordinary resolution passed at a general
meeting of the shareholders;
(c) The issue of shares shall be authorized by special resolution passed at a general
meeting of the shareholders;
(d) The company shall have consistent track record of distributable profits for the last
three years;
3. A Ltd. is the holding company of B Ltd. Another company C Ltd. is the subsidiary company
of B Ltd. Is there any relationship between A Ltd. and C Ltd.
(a) There is no relationship between A Ltd. and C Ltd.
(b) C Ltd. is deemed to be the subsidiary of A Ltd.
(c) A Ltd. shall be deemed to be the holding company of C Ltd. provided A Ltd. acquires
at least 10% stake in C Ltd.
(d) C Ltd. shall be deemed to be the subsidiary of A Ltd. if the latter company acquires
minimum 10% stake in the former company within six months after C Ltd. becomes
subsidiary of B Ltd.

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 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

4. Shruti, a common friend of Suchitra and Sukanya, got incorporated OPC sometime before
and during a chit-chat with her friends informed them that there is some limit on the
maximum capital which her OPC can have and she would have to convert her OPC either
into a private or public limited company if such limit exceeded. Suchitra and Sukanya who
are desirous of forming a private limited company for carrying on textile trading business,
are unsure about the maximum capital which a private limited company can have. Advise.
(a) A private limited company can have maximum of ` One crore as share capital.
(b) A private limited company can have maximum of ` Two crores as share capital.
(c) A private limited company can have maximum of ` Five crores as share capital.
(d) A private limited company can have unlimited share capital.
5. Vinay and Sanjay made a name reservation application accompanied by requisite fee to
the Registrar for forming a new private company. The Registrar accorded its approval for
reservation of most preferred name Vinanjay Softwares Private Ltd. on 7 th July, 2018. By
which date necessary documents for incorporation of the company must be submitted to
the Registrar so that the reserved name does not get lapsed.
(a) Latest by 20th July, 2018
(b) Latest by 27th July, 2018
(c) Latest by 4th August, 2018
(d) Latest by 4th September, 2018
6. Aman contracts to indemnify Megha against the consequences of any proceedings which
Chandar may take against Megha in respect of a sum of ` 15000/- advanced by Chandar
to Megha. Now, Megha who is called upon to pay the sum of money to Chandar but she
fails to do so. Now, as per the provisions of the Indian Contract Act, 1872, advise the future
course of action to be taken by Chandar.
(a) Chandar can recover the amount only from Megha
(b) Chandar can recover the full amount from Aman
(c) Chandar cannot recover the amount from Aman
(d) Chandar can recover at least 10% of the total amount from Megha
DIVISION B - DETAILED QUESTIONS
PART – A: BUSINESS LAWS
The Indian Contract Act,1872
1. Mr. Pal, an old man, by a registered deed of gift, granted certain land property to Anisha,
his daughter. By the terms of the deed, it was stipulated that an annuity of ` 20, 000 should
be paid every year to B, who was the brother of Mr. Pal. On the same day Anisha made a
promise to B and executed in his favour an agreement to give effect to the stipulation.

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 19

Anisha failed to pay the stipulated sum. In an action against her by B, she contended that
since B had not furnished any consideration, he has no right of action.
Examining the provisions of the Indian Contract Act, 1872, decide, whether the contention
of Anisha is valid?
2. Prem, aged 16 years, was studying in an engineering college. On 1 st March, 2017 he took a
loan of ` 1 lakh from Salim for the payment of his college fee and agreed to pay by
30th May, 2018. Prem possesses assets worth ` 10 lakhs. On due date Prem fails to pay back
the loan to Salim. Salim now wants to recover the loan from Prem out of his assets. Whether
Salim would succeed? Decide, referring to the provisions of the Indian Contract Act, 1872.
The Negotiable Instruments Act, 1881
3. Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount in
favour of Umesh, for safety of transmission he cuts the note in half and posts one half to
Umesh. He then changes his mind and calls upon Umesh to return the half of the note
which he had sent. Umesh requires Manoj to send the other half of the promissory note.
Decide how a rights of the parties are to be adjusted.
Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881.
The Payment of Bonus Act, 1965
4. Mr. Navin joined as supervisor on monthly salary of ` 13,400 on 1. 02. 2018 and resigned
from his job on 28.02.2018. The company declared a bonus of 20% to all eligible
employees and paid it on time. Mr. Navin knowing the facts made a claim to HRD, which
in turn rejected the claim. Examine the validity in the light of the provisions of the Payment
of Bonus Act, 1965.
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
5. An employee of a limited company filed a claim for provident fund settlement with the
Provident Fund Commissioner. However, he did not get any settlement from the authority
even after six months. Referring to the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952 what course of action an authority should have taken in this respect.
The Payment of Gratuity Act, 1972
6. An employee, working in an establishment which is governed by the Payment of Gratuity
Act, 1972, committed a theft in the course of his employment. And consequently his
services was terminated. State in this connection, whether the gratuity payable to him shall
be wholly or partly forfeited.
The Companies Act, 2013
7. MNO a One Person company (OPC) was incorporated during the year 2015-16 with an
authorised capital of ` 45 lakhs (4.5 lakhs shares of ` 10 each). The capital was fully
subscribed and paid up. Turnover of the company during 2015-16 and 2016-17 was ` 2

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 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

crores and ` 2.5 crores respectively. Promoter of the company seeks your advice in the
following circumstances, whether MNO (OPC) can convert into any other kind of company
during 2017-18. Please, advise with reference to relevant provisions of the Companies Act,
2013 in the below mentioned circumstances:
(i) If promoter increases the paid up capital of the company by ` 10 lakhs during 2017-18
(ii) If turnover of the company during 2017-18 was ` 3 crores.
8. The paid-up share capital of Altar Private Limited is ` 1 crore, consisting of 8 lacs Equity
Shares of ` 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of `10 each,
fully paid-up. New Private Limited and Ultra Private Limited are holding 3 lacs Equity
Shares and 50,000 Equity Shares respectively in Altar Private Limited. New Private Limited
and Ultra Private Limited are the subsidiaries of PQR Private Limited. With reference to
the provisions of the Companies Act, 2013 examine whether Altar Private Limited is a
subsidiary of PQR Private Limited? Would your answer be different if PQR Private Limited
has 8 out of 9 Directors on the Board of Altar Private Limited?
9. Data Limited (listed on Stock Exchange) was incorporated on 1st October, 2018 with a paid-
up share capital of ` 200 crores. Within this small time of 4 months it has earned huge
profits and has topped the charts for its high employee friendly environment. The company
wants to issue sweat equity to its employees. A friend of the CEO of the company has told
him that they cannot issue sweat equity shares as 2 years have not elapsed since the time
company has commenced its business. The CEO of the company has approached you to
advise them about the essential conditions to fulfilled before the issue of sweat equity
shares especially since their company is just a few months old.
PART – B: ETHICS
10. State the objectives of the Central Consumer Protection Council in India.
11. What reasons force a marketing executive to adopt ethical practices in marketing? Explain.
12. Write note on:
(i) Harassment at workplace.
(ii) Ecological ethics
PART – C: COMMUNICATION
13. Explain the functions of interpersonal communication.
14. “Once the process of consensus building has begun, mediators try to assist the parties in
their efforts to generate a creative resolution of differences". State in brief the process
which should be followed by mediators to resolve the differences between the parties.
15. The Board of Safe Gopal Ltd., appoint and authorize Mr. Shah giving powers to sell and
sign transfer deeds for transfer of shares and debentures by executing an instrument of
the "Power of Attorney". Draft such instrument of "Power of Attorney".

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 21

SUGGESTED ANSWERS/HINTS

DIVISION A - ANSWER TO MULTIPLE CHOICE QUESTIONS

Question No. 1 2 3 4 5 6
Correct Option (b) (c) (b) (d) (b) (b)
DIVISION B - ANSWER TO DETAILES QUESTIONS
1. The problem as asked in the question is based on the provisions of the Indian Contract
Act, 1872 as contained in section 2(d) and on the principle ‘privity of consideration’.
Consideration is one of the essential elements to make a contract valid and it can flow from
the promisee or any other person. In view of the clear language used in definition of
‘consideration’ in Section 2(d) “…. the promisee or any other person…..”, it is not necessary
that consideration should be furnished by the promisee only. A promise is enforceable if
there is some consideration for it and it is quite immaterial whether it moves from the
promisee or any other person. The leading authority in the decision of the Chinnaya Vs.
Ramayya, held that the consideration can legitimately move from a third party and it is an
accepted principle of law in India.
In the given problem, Mr. Pal has entered into a contract with Anisha, but Mr. B has not
given any consideration to Anisha but the consideration did flow from Mr. Pal to Anisha
and such consideration from third party is sufficient to the enforce the promise of Anisha,
the daughter, to pay an annuity to B. Further, the deed of gift and the promise made by
Anisha to B to pay the annuity were executed simultaneously and therefore they should be
regarded as one transaction and there was sufficient consideration for it.
Thus, a stranger to the contract cannot enforce the contract but a stranger to the
consideration may enforce it.
2. According to Section 11 of the Indian Contract Act, 1872, a person who is of the age of
majority to the law to which he is subject is competent to enter into any contract. A person
who has completed the age of 18 years is a major and otherwise he will be treated as
minor. Thus, Prem who is a minor is incompetent to contract and any agreement with him
is void [Mohori Bibi Vs Dharmodas Ghose]. Section 68 of the Indian Contract Act, 1872
however, prescribes the liability of a minor for the supply of the things which are the
necessaries of life to him. It says that though minor is not personally liable to pay the price
of necessaries supplied to him or money lent for the purpose, the supplier or lender will be
entitled to claim the money/price of goods or services which are necessaries suited to his
condition of life provided that the minor has a property. The liability of minor is only to the
extent of the minor’s property. This type of contract is called a Quasi-contract and the right
of the supplier/lender is based on the principle of equity. Thus, according to the above
provision, Salim will be entitled to recover the amount of loan given to Prem for payment
of the college fees from the property of the minor.

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 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

3. The question arising in this problem is whether the making of promissory note is complete
when one half of the note was delivered to Umesh. Under Section 46 of the Negotiable
Instruments Act, 1881, the making of a promissory note is completed by delivery, actual or
constructive. Delivery refers to the whole of the instrument and not merely a part of it.
Delivery of half instrument cannot be treated as constructive delivery of the whole. So, the
claim of Umesh to have the other half of the promissory note sent to him is not
maintainable. Manoj is justified in demanding the return of the first half sent by him. He
can change his mind and refuse to send the other half of the promissory note.
4. Under section 8 of the Payment of Bonus Act, 1965 an employee is entitled for bonus in
an accounting year if he has worked in the establishment for not less than thirty working
days in that year. Under section 2 (13), an employee is defined to include an employee
drawing a salary of less than ` 21,000 per month.
In the given case, Mr. Navin was an eligible employee within the meaning of the term under
section 2 (13) but became ineligible to receive bonus as he worked in the accounting year
only for 28 days and hence will not be entitled to receive bonus.
5. The Provident Fund “claims” complete in all respects submitted along with the requisite
documents are required to be settled and the benefit amount paid to the beneficiaries within
30 days from the date of its receipt of the complete “claims” by the Commissioner.
If there is any deficiency in the claim, the same shall be recorded in writing and
communicated to the applicant within 30 days from the date of receipt of such application.
In case the Commissioner fails without sufficient cause to settle a claim complete in all
respects within 30 days, the Commissioner shall be liable for the delay beyond the said
period and penal interest at the rate of 12% per annum may be charged on the benefit
amount and the same may be deducted from the salary of the Commissioner.
6. Reduction and forfeiture of Gratuity: Under Section 4(6)(a) of the Payment of Gratuity
Act, 1972, in the case of damage, loss or destruction of property of employer, due to the
willful omission or negligence of the employee, the amount of gratuity to the extent of loss
or damage shall be forfeited by the employer.
Further, under section 4(6)(b), the gratuity payable to an employee may be wholly or
partially forfeited, where the services of an employee are terminated on the ground of:
(i) riotous or disorderly conduct or act of violence; or
(ii) committing an offence involving moral turpitude in the course of his employment.
Theft is an offence involving moral turpitude and consequently, if the services of an
employee had been terminated for committing theft in the course of his employment, the
gratuity payable to him under the provisions of the Act shall be wholly forfeited in view of
Section 4(6)(b)(ii). [Bharat Gold Mines Ltd. Vs Regional Labour Commissioner (Central),].
7. As per Rule 3 of the Companies (Incorporation) Rules, 2014, One Person Company (OPC)
cannot convert voluntarily into any kind of company unless two years have expired from

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 23

the date of incorporation, except where the paid up share capital is increased beyond fifty
lakh rupees or its average annual turnover during the relevant period exceeds two crore
rupees.
Besides, Section 18 of the Companies Act, 2013 provides that a company of any class
registered under this Act may convert itself as a company of other class under this Act by
alteration of memorandum and articles of the company in accordance with the provisi ons
of the Chapter II of the Act.
According to the above provisions, following are the answers to the given circumstances:
(i) Where, if the promotors increases the paid up capital of the company by ` 10.00 lakh
during 2017-2018 i.e., to ` 55 lakh (45+10= 55), MNO (OPC) may convert itself
voluntarily into any other kind of company due to increase in the paid up share capital
exceeding 50 lakh rupees. This could be done by MNO by alteration of memorandum
and articles of the company in compliance with the Provisions of the Act.
(ii) Where if the turnover of the MNO during 2017-18 was ` 3.00 crore, there will be no
change in the answer, as it meets up the requirement of minimum turnover i.e, ` 2
crore for voluntarily conversion of MNO (OPC) into any other kind of company.
8. In terms of section 2 (87) of the Companies Act 2013 "subsidiary company" or "subsidiary",
in relation to any other company (that is to say the holding company), means a company
in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies:
Explanation.—For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company even
if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary
company of the holding company;
(b) the composition of a company's Board of Directors shall be deemed to be controlled
by another company if that other company by exercise of some power exercisable by
it at its discretion can appoint or remove all or a majority of the directors.
In the present case, New Pvt. Ltd. and Ultra Pvt. Ltd. together hold less than one half of
the total share capital i.e. less than one-half of total voting power. Hence, PQR Private Ltd.
(holding of New Pvt. Ltd. and Ultra Pvt. Ltd) will not be a holding company of Altar Pvt. Ltd.
However, if PQR Pvt. Ltd. has 8 out of 9 Directors on the Board of Altar Pvt. Ltd. i.e.
controls the composition of the Board of Directors; it (PQR Pvt. Ltd.) will be treated as the
holding company of Altar Pvt. Ltd.

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 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

9. Sweat equity shares of a class of shares already issued.

According to section 54 of the Companies Act, 2013, a company may issue sweat equity
shares of a class of shares already issued, if the following conditions are fulfilled, namely—
(i) the issue is authorised by a special resolution passed by the company;
(ii) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to whom
such equity shares are to be issued;
(iii) where the equity shares of the company are listed on a recognised stock exchange,
the sweat equity shares are issued in accordance with the regulations made by the
Securities and Exchange Board in this behalf and if they are not so listed, the sweat
equity shares are issued in accordance with such rules as prescribed under Rule 8 of
the Companies (Share and Debentures) Rules, 2014.
The rights, limitations, restrictions and provisions as are for the time being applicable
to equity shares shall be applicable to the sweat equity shares issued under this section
and the holders of such shares shall rank pari passu with other equity shareholders.
Data Limited can issue Sweat equity shares by following the conditions as mentioned
above. It does not make a difference that the company is just a few months old.
10. The objectives of the Central Consumer Protection Council in India are to promote and
protect the rights of the consumers such as:-
(i) the right to be protected against the marketing of goods and services which are
hazardous to life and property;
(ii) the right to be informed about the quality, quantity, potency, purity, standard and price
of goods/services so as to protect the consumer against unfair trade practices;
(iii) the right to be assured, whichever possible, access to a variety of goods and services
at competitive prices;
(iv) the right to be heard and to be assured that consumers interest will receive due
consideration at appropriate terms;
(v) the right to seek redressal against unfair trade practices;
(vi) the right to consumer education.
11. Pragmatic reasons for maintaining ethical behaviour: Marketing executives should
practice ethical bahaviour because it is morally correct. To maintain ethical behaviour in
marketing, the following positive reasons may be useful to the marketing executives:

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 25

1. To reverse declining public confidence in marketing: Sometime misleading

package labels, false claim in advertisement, phony list prices, infringement of
trademarks pervert the market trends and such behaviour damages the marketers’
reputation. To reverse this situation, business leaders must demonstrate convincingly
that they are aware of their ethical responsibility and will fulfil it. Companies must set
high ethical standards and enforce them. Moreover, it is in management’s interest to be
concerned with the well-being of consumers, since they are the lifeblood of a business.
2. To avoid increase in government regulation: Business apathy, resistance, or token
responses to unethical behaviour increase the probability of more governmental
regulation. The governmental limitations may also result from management’s failure
to live up to its ethical responsibilities. Moreover, once the government control is
introduced, it is rarely removed.
3. To retain power granted by society: Marketing executives wield a great deal of
social power as they influence markets and speak out on economic issues. However,
there is a responsibility tied to that power. If marketers do not use their power in a
socially acceptable manner, that power will be lost in the long run.
4. To protect the image of the organisation: Buyers often form an impression of an
entire organisation based on their contact with one person. That person represents
the marketing function. Sometimes, a single sales clerk may pervert the market
opinion in relation to that company which he represents.
Therefore, the ethical behaviour in marketing may be strengthened only through the
behaviour of the marketing executives.
12. (i) Harassment at workplace: Harassment is “tormenting by subjecting to constant
interference or intimidation”. Law prohibits harassing acts and conduct that “creates
an intimidating hostile or offensive working environment,” which could be a term or
condition of an individual’s employment, either explicitly or implicitly or such conduct
which has the purpose or effect of unreasonably interfering with an individual’s work
performance or creating an intimidating, hostile or offensive working environment.
Another type of harassment is sexual harassment – situations in which an employee
is coerced into giving in to another employee’s sexual demands by the threat of losing
some significant job benefit, such as a promotion, raise or even the job. Sexual
harassment is prohibited and an employer is held responsible for all sexual
harassment engaged in by employees, “regardless of whether the employer knew or
should have known” the harassment was occurring and regardless of whether it was
“forbidden by the employer.”

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 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(ii) Ecological Ethics: The problem of pollution and other environmental issues can best
be framed in terms of our duty to recognize and preserve the ecological system s
within which we live. An ecological system is an interrelated and interdependent set
of organisms and environments, such as a lake, in which the fish depend on small
aquatic organisms, which in turn live off decaying plant and fish waste products.
Since, the various parts of an ecological system are interrelated, the activities of one
of its parts will affect all other parts. Business and all social firms are parts of a larger
ecological system.
Business firms depend on the natural environment for their energy, material
resources, waste disposal and that environment in turn is affected by the commercial
activities of business firms. Thus, they are inter-dependent on each other.
Ecological ethics is based on the idea that the environment should be protected not
only for the sake of human being but also for its own sake. The issue of environmental
ethics goes beyond the problem relating to protection of environment or nature in
terms of pollution, resource utilization or waste disposal. It is the issue of exploitive
human nature and attitudes that should be addressed in a rational way. Problems
like global warming, ozone depletion and disposal of hazardous waste that concern
the entire world. They require international co-operation and have to be tackled at
the global level.
13. 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 attem pt 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.
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.

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 PAPER – 2: BUSINESS LAW, ETHICS AND COMMUNICATION 27

• 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.
14. Process which should be followed by mediators to resolve the differences between
the parties- Efforts which help to generate a creative resolution are:
(i) Problem – solving orientation – It is important to be constructive and maintain a
problem solving orientation, even in the face of strong differences and personal
antagonism. It is in every participant’s best interest to behave in a fashion, they would
like others to follow. Concerns or disagreement should be expressed in an
unconditionally constructive manner.
(ii) Engage in active listening – Participants in every consensus building process
should be encouraged (indeed, instructed, if necessary) to engage in what is known
as active listening.
(iii) Disagree without being disagreeable – Participants in every consensus building
process should be instructed to ‘disagree without being disagreeable’.
(iv) Strive for the greatest degree of transparency possible – To the greatest extent
possible, consensus building process should be transparent. That is, the group’s
mandate, its agenda and ground rules, the list of participants and the groups or
interests they are representing, the proposals they are considering, the decision rules
they have adopted, their finances and their final report should, at an appropriate time,
be open to scrutiny by anyone affected by the group’s recommendations.
(v) Strive to invent options for mutual gain – The goals of a consensus building
process ought to be to create as much value as possible and to ensure that whatever
value is created be divided in ways that take account of all relevant considerations.
The key to creating value is to invent options for mutual gain.
15. Power of Attorney to execute a deed for the transfer of shares & debentures:-
BY THIS POWER OF ATTORNEY, Gopal Ltd. (full details), the company hereby appoints
Mr. Shah (full details) as Attorney of the company, to act in his name and on his behalf and
to do or execute all or any of the acts or things relating to transfer of shares and
debentures, that is to say:
1. To receive from………(Full details), the transferee the sum of `……….(Rupees….…..
only) being the price agreed to be paid to the company by the said transferee for the
purchase of (full description of shares and debentures) under an agreement
dated…………and to give proper receipt and discharge for the same.

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 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

2. To execute a transfer deed of the said shares and debentures

3. To present the said transfer deed for registration before the proper registration
authority, to admit the execution thereof, to do all acts, deeds and things which may
be necessary for registering the said transfer deed.
4. To execute or to do all acts, things or deeds or assurance for the completion of the
transfer of the said shares and debentures.
AND, the company DO HEREBY AGREE to ratify all acts, things, deeds or proceedings
lawfully done by the said Attorney on behalf of the company and in the name of the
company by virtue of this power of attorney and the same shall be binding on company in
full force or effect.
IN WITNESS WHEREOF the company have executed this power at ……this……..day
of……20……….
Witness:
1 _______ Signature
2 _______

© The Institute of Chartered Accountants of India

 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT
PART-I: COST ACCOUNTING
QUESTIONS
Material
1. Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of
Exe, 2 kg of Dee is required. As per the sales forecast conducted by the company, it will
able to sale 10,000 units of Exe in the coming year. The following is the information
regarding the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work.
From the above information find out the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
Labour
2. A Company is undecided as to what kind of wage scheme should be introduced. The
following particulars have been compiled in respect of three workers. Which are under
consideration of the management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in `) 40 50 60
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350

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 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

- Product C 460 250 -

Standard time allowed per unit of each product is:
A B C
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at ` 1/-
You are required to calculate the wages of each worker under:
(i) Guaranteed hourly rate basis
(ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly
rate if his earnings are less than 50% of basic pay.)
(iii) Premium bonus basis where the worker received bonus based on Rowan scheme.
Overheads
3. The Unibion Ltd. has the following account balances and distribution of direct charges on
31st March, 2019.
Production Depts. Service Depts.
Total
Machine Shop Packing General Plant Stores
Allocated Overheads: (`) (`) (`) (`) (`)
Indirect labour 29,000 8,000 6,000 4,000 11,000
Maintenance Material 9,900 3,400 1,600 2,100 2,800
Misc. supplies 5,900 1,500 2,900 900 600
Supervisor’s salary 16,000 -- -- 16,000 --
Cost & payroll salary 80,000 -- -- 80,000 --
Overheads to be apportioned:
Power 78,000
Rent 72,000
Fuel and Heat 60,000
Insurance 12,000
Taxes 8,400
Depreciation 1,20,000
The following data were compiled by means of the factory survey made in the previous
year:
Floor Space Radiator No. of Investment H.P.
Section employees hours
Machine Shop 2,000 Sq. ft. 45 20 8,00,000 3,500

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 3

Packing 800 Sq. ft. 90 12 2,40,000 500

General Plant 400 Sq. ft. 30 4 80,000 -
Stores & 1,600 Sq. ft. 60 8 1,60,000 1,000
maintenance
Expenses charged to the stores departments are to be distributed to the other departments
by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%;
General Plant overheads is distributed on the basis of number of employees.
(a) Prepare an overhead distribution statement with supporting schedules to show
computations and basis of distribution.
(b) Determine the service department distribution by simultaneous equation method.
Non-integrated Accounting
4. The following is the summarised Trading and Profit and Loss Account of XYZ Ltd. for the
year ended 31 st March 2019:
Particulars Amount (`) Particulars Amount
(`)
Direct Material 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000 Finished stock (2,000 units) 1,67,500
Works overheads 4,26,000 Work-in-progress:
Administration overheads 1,50,000 - Materials 34,000
Selling and distribution 1,65,000 - Wages 16,000
overheads
Net profit for the year 3,22,500 - Works overhead 4,000 54,000
32,21,500 32,21,500
The company’s cost records show that in course of manufacturing a standard unit (i) works
overheads have been charged @ 20% on prime cost, (ii) administration overheads are
related with production activities and are recovered at `5 per finished unit, and (iii) selling
and distribution overheads are recovered at `6 per unit sold.
You are required to prepare:
(i) Costing Profit and Loss Account indicating the net profits,
(ii) A Statement showing reconciliation between profit as disclosed by the Cost Accounts
and Financial Accounts.

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 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Contract Costing
5. Dream house (P) Ltd. is engaged in building two residential housing projects in the city.
Particulars related to two housing projects are as below:
HP-1 (`) HP-2 (`)
Work in Progress on 1 st April 2018 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,000
Brokerage and registration fee paid on the above purchase - 60,000
Wages paid 85,000 62,000
Wages outstanding as on 31 st March, 2019 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting from 72,000 57,000
1st April 2018
Value of materials at site as on 31st March, 2019 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st April 2018 for `8,20,000 and used for 180
days in HP-1 and for 100 days in HP-2. Depreciation is provided @ 15% p.a. (this machine
can be used for any other projects)
As per the contract agreement contractee shall retain 20% of work certified as retention
money.
Prepare contract account for the two housing projects showing the profit or loss on each
project for the year ended 31st March, 2019.
Operating Costing
6. P Ltd. distributes its goods to dealers using a delivery van. The dealers’ premises are 40
kilometre away from the company’s office. The van has a capacity of 10 tonnes and makes
the journey twice a day fully loaded on the outward journeys and empty on return journey.
The following information is available for a four weekly period during the year 20X9:
Diesel consumption 10 kilometre per litre
Diesel cost `48 per litre
Lubricant oil `600 per week
Drivers salary `12,000 per month

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 5

Repairs & Maintenance `1,800 per month

Garage rent `4,800 per months
Cost of van (excluding tyres) `16,00,000
Life of van 3,80,000 kilometres
Insurance `5,400 per annum
Cost of tyres `22,000
Life of tyres 80,000 kilometres
Estimated sale value of van at end of its life `2,40,000
Vehicle permit fee `3,600 per annum
Other overhead cost `66,000 per annum
The van operates five-day a week.
Required:
(i) A statement to show the total monthly cost of operating the vehicle.
(ii) Calculate the operating cost per kilometre and per tonne kilometre
Process Costing
7. Following information is available regarding process A for the month of February, 20X9:
Production Record:
Units in process as on 01.02.20X9 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28.02.20X9 6,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 01.02.20X9 (`)
Materials 6,00,000
Labour 1,00,000
Overhead 1,00,000
8,00,000
Cost during the month
Materials 25,60,000

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 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Labour 15,00,000
Overhead 15,00,000
55,60,000
Presuming that average method of inventory is used, prepare:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element.
(iii) Statement of Apportionment of cost.
(iv) Process Cost Account for Process A.
Joint Product and By Product
8. A company processes a raw material in its Department 1 to produce three products, viz.
A, B and X at the same split-off stage. During a period 1,80,000 kgs of raw materials were
processed in Department 1 at a total cost of ` 12,88,000 and the resultant output of A, B
and X were 18,000 kgs, 10,000 kgs and 54,000 kgs respectively. A and B were further
processed in Department 2 at a cost of `1,80,000 and `1,50,000 respectively.
X was further processed in Department 3 at a cost of `1,08,000. There is no waste in
further processing. The details of sales affected during the period were as under:
A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (`) 12,24,000 2,50,000 7,92,000
There were no opening stocks. If these products were sold at split-off stage, the selling
prices of A, B and X would have been ` 50, ` 40 and ` 10 per kg respectively.
Required:
(i) Prepare a statement showing the apportionment of joint costs to A, B and X.
(ii) Present a statement showing the cost per kg of each product indicating joint cost and
further processing cost and total cost separately.
(iii) Prepare a statement showing the product wise and total profit for the period.
(iv) State with supporting calculations as to whether any or all the products should be
further processed or not
Standard Costing
9. XYZ Ltd. produces a product X by using two raw materials A and B. The following standards
have been set for the production:
Material Standard Mix Standard Price (`)
A 40% 40 per kg.
B 60% 30 per kg.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 7

The standard loss in processing is 15%.

During July, 2018 the company produced 2,000 kg. of finished output.
The positions of stock and purchases for the month of July, 2018 are as under:
Material Stock on 1 st July 2018 Stock on 31st July 2018 Purchases during July 2018
Quantity Amount (`)
A 40 kg. 10 kg. 900 kg. 42.50
B 50 kg. 60 kg. 1,400 kg. 25.00
Calculate the following variances:
(i) Material Price Variance; (ii) Material Usage Variance;
(iii) Material Mix Variance; (iv) Material Yield Variance;
(v) Total Material Cost Variance.
The company follows FIFO method of stock valuation.
Marginal Costing
10. MNP Ltd sold 2,75,000 units of its product at ` 375 per unit. Variable costs are ` 175 per
unit (manufacturing costs of `140 and selling cost ` 35 per unit). Fixed costs are incurred
uniformly throughout the year and amount to ` 3,50,00,000 (including depreciation of
` 1,50,00,000). there are no beginning or ending inventories.
Required:
(i) Compute breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Compute the P/V ratio.
(iii) Compute the number of units that must be sold to earn an income (EBIT) of
` 25,00,000.
(iv) Compute the sales level achieve an after-tax income (PAT) of ` 25,00,000. Assume
40% corporate Income Tax rate.
Budget and Budgetary Control
11. Aditya Ltd. manufactures two products K and H. The sales director has anticipated to sale
8,000 units of Product K and 4,200 units of Product H. The Standard cost data for the
products for next year are as follows:
Product- K Product- H
Per unit Per unit
Direct materials:
- Material X @ ` 15 per kg. 12 kg. 15 kg.
- Material Y@ ` 16 per kg. 15 kg. 6 kg.

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 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

- Material Z @ ` 5 per ltr. 8 ltr. 14 ltr.

Direct wages:
- Unskilled @ ` 40 per hour 12 hour 10 hour
- Skilled @ ` 75 per hour 8 hour 5 hour
Budgeted stocks for next year are as follows:
Product- K Product- H
(Units) (Units)
1st April, 2018 800 1,600
31st March, 2019 1,000 2,100
Material-X Material-Y Material-Z
(kg) (kg) (ltr)
1st April, 2018 25,000 30,000 14,000
31st March, 2019 30,000 18,000 7,500
Prepare the following budgets for next year:
(a) Production budget, in units;
(b) Material purchase budget, in quantity and in value;
(c) Direct labour budget, in hours and in value.
Miscellaneous
12. (a) Distinguish between Cost Control and Cost Reduction.
(b) Discuss the accounting treatment of Idle time and overtime wages.
(c) Discuss cost classification based on variability and controllability.

SUGGESTED HINTS/ANSWERS

1. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 10,000 units
Less: Opening stock of ‘Exe’ 900 units
Fresh units of ‘Exe’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘Exe’ 18,200 kg.
(9,100 units × 2 kg.)
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual demand for raw material ‘Dee’ 17,200 kg.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 9

(ii) Computation of Economic Order Quantity (EOQ):

2  Annualdemandof 'Dee '  Orderingcos t
EOQ =
Carryingcos t per unit per annum

2 17,200kg. ` 720 2 17,200kg. ` 720

= = = 1,200 kg.
` 125 13.76% ` 17.2
(iii) Re- Order level:
= (Maximum consumption per day × Maximum lead time)
 AnnualConsumptionof 'Dee '  
=   20kg.   8 days 
 364 days  
 18,200kg.  
=   20kg.   8 days  = 560 kg.
 364 days  
(iv) Minimum consumption per day of raw material ‘Dee’:
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be
Min.consumption  Max.consumption
Average Consumption =
2
Min.consumption  70kg.
Or, 50 kg. =
2
Or, Min. consumption = 100 kg – 70 kg. = 30 kg.
(a) Re-order Quantity :
EOQ – 200 kg. = 1,200 kg. – 200 kg. = 1,000 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead
time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days)
= 1,560 kg. – 120 kg. = 1,440 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.

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 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order quantity 1,000 kg. 1,200 kg.
II No. of orders a 17,200kg. 17,200kg.
year 17.2or18orders 14.33or15orders
1,000kg. 1,200kg.
III Ordering Cost 18 orders × ` 720 = 15 orders × ` 720 = `10,800
`12,960
IV Average Inventory 1,000kg. 1,200kg.
 500kg.  600kg.
2 2
V Carrying Cost 500 kg. × ` 17.2 = ` 8,600 600 kg. × ` 17.2 = ` 10,320
VI Total Cost ` 21,560 ` 21,120
Extra Cost incurred due to not ordering EOQ = ` 21,560 - ` 21,120 = `440
2. (i) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours Hourly wage rate Wages (`)
worked (Hours) (`)
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400

(ii) Computation of Wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit
(`) Units Wages Units Wages Units Wages
(`) (`) (`)
A 15 210 3,150 - - 600 9,000
B 20 360 7,200 - - 1,350 27,000
C 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000

Since each worker’s earnings are more than 50% of basic pay. Therefore, worker -I,
II and III will be paid the wages as computed i.e. ` 24,150, ` 7,500 and ` 36,000
respectively.

© The Institute of Chartered Accountants of India

 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 11

Working Notes:
1. Piece rate per unit
Product Standard time per Piece rate each Piece rate per unit
unit in minute minute (`) (`)
A 15 1 15
B 20 1 20
C 30 1 30

2. Time allowed to each worker

Worker Product-A Product-B Product-C Total Time
(H ours)
I 210 units × 15 360 units × 20 460 units × 30 24,150/60
= 3,150 = 7,200 = 13,800 = 402.50
II - - 250 units × 30 7,500/60
= 7,500 = 125
III 600 units × 15 1, 350 units × 20 - 36,000/60
= 9,000 = 27,000 = 600

(iii) Computation of wages of each worker under Premium bonus basis (where each
worker receives bonus based on Rowan Scheme)
Worker Time Time Time Wage Earnings Bonus Total
Allowed Taken saved Rate per (`) (`)* Earning
(Hr.) (Hr.) (Hr.) hour (`) (`)
I 402.5 380 22.5 40 15,200 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640

Time Taken
*  TimeSaved  WageRate
Time Allowed

380
Worker-I =  22.5  40  850
402.5
100
Worker-II =  25  50  1,000
125

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 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

540
Worker-III =  60  60  3,240
600
3. (a) Overhead Distribution Statement
Production Service Departments
Departments
Machine Packing General Stores
Shops Plant
Allocated Overheads: (`) (`) (`) (`)
Indirect labour 8,000 6,000 4,000 11,000
Maintenance Material 3,400 1,600 2,100 2,800
Misc. supplies 1,500 2,900 900 600
Supervisor’s salary -- -- 16,000 --
Cost & payroll salary -- -- 80,000 --
Total allocated overheads 12,900 10,500 1,03,000 14,400
Add: Apportioned Overheads 1,84,350 70,125 22,775 73,150
(As per Schedule below)
1,97,250 80,625 1,25,775 87,550
Schedule of Apportionment of Overheads
Production Service Departments
Departments
Item of Cost Basis
Machine Packing General Stores
Shops (`) (`) Plant (`) (`)
Power HP hours 54,600 7,800 -- 15,600
(7 : 1 : - : 2)
Rent Floor space 30,000 12,000 6,000 24,000
(5 : 2 : 1 : 4)
Fuel & Heat Radiator sec. 12,000 24,000 8,000 16,000
(3 : 6 : 2 : 4)
Insurance Investment 7,500 2,250 750 1,500
(10 : 3 : 1 : 2)
Taxes Investment 5,250 1,575 525 1,050
(10 : 3 : 1 : 2)
Depreciation Investment 75,000 22,500 7,500 15,000
(10 : 3 : 1 : 2)
1,84,350 70,125 22,775 73,150

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 13

(b) Re-distribution of Overheads of Service Departments to Production

Departments:
Let, the total overheads of General Plant = ‘a’ and the total overheads of Stores = ‘b’
a = 1,25,775 + 0.3b ..........................................(i)
b = 87,550 + 0.2a ..........................................(ii)
Putting the value of ‘b’ in equation no. (i)
a = 1,25,775 + 0.3 (87,550 + 0.2a)
Or a = 1,25,775 + 26,265 + 0.06a
Or 0.94a = 1,52,040 Or a = 1,61,745 (appx.)
Putting the value of a = 1,61,745 in equation no. (ii) to get the value of ‘b’
b = 87,550 + 0.2 × 1,61,745 = 1,19,899
Secondary Distribution Summary
Particulars Total (`) Machine Shops (`) Packing (`)
Allocated and Apportioned 2,77,875 1,97,250.00 80,625.00
overheads as per Primary
distribution
- General Plant 1,61,745 80,872.50 48,523.50
5 3
(1,61,745 × ) (1,61,745 × )
10 10
- Stores 1,19,899 59,949.50 23,979.80
(1,19,899 × 50%) (1,19,899 × 20%)
3,38,072.00 1,53,128.30
4. (i) Costing Profit and Loss Account for the year ended 31 st March 2019:
Particulars Amount (`) Particulars Amount (`)
Material consumed 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000
Prime Cost 21,58,000
Works overheads 4,31,600
(20% of Prime cost)
25,89,600
Less: Work in progress (54,000)
Factory cost 25,35,600

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 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Administration overheads 1,60,000

(`5 × 32,000 units)
Cost of production 26,95,600
Less: Finished stock (1,68,475)
Cost of goods sold 25,27,125
Selling and distribution 1,80,000
overheads
(`6 × 30,000 unit)
Cost of sales 27,07,125
Profit (balancing figure) 2,92,875
30,00,000 30,00,000
(ii) Statement reconciling the profit as per costing profit and loss account with the profit
as per financial accounts
Particulars Amount (`) Amount (`)
Profit as per cost records 2,92,875
Add: Overheads over-absorbed:
- Works overheads (` 4,31,600 – ` 4,26,000) 5,600
- Administration OH (` 1,60,000 – ` 1,50,000) 10,000
- Selling and Distribution (` 1,80,000 – ` 1,65,000) 15,000 30,600
Less: Closing stock overvalued (` 1,68,475 – ` 1,67,500) (975)
Profit as per financial accounts 3,22,500
*It is assumed that the number of units Produced
= Number of units sold + Finished stock = 30,000 + 2,000 = 32,000 units.
5. Dr. Contract Account for the year ended 31 st March, 2019 Cr.
Particulars HP-1 (`) HP-2 (`) Particulars HP-1 (`) HP-2 (`)
To Balance b/d: W-I-P 7,80,000 2,80,000 By Closing 47,000 52,000
material at site
To Material purchased 6,20,000 8,10,000 By W-I-P:
To Wages: Value of work 20,50,000 16,10,000
(`85,000+`12,000) 97,000 certified
(`62,000+`8,400) 70,400 Cost of work not
certified 1,90,000 1,40,000
To Donation to local club* 5,000 2,500

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 15

To Plant hire charges:

(`72,000x1/3) 24,000
(`57,000x1/3) 19,000
To Depreciation on
concrete mixture**:
(`8,20,000x15%x180/365) 60,658
(`8,20,000x15%x100/365) 33,699
To Notional profit 7,00,342 5,86,401
(balance c/d)
22,87,000 18,02,000 22,87,000 18,02,000
To Costing P & L A/c 1,86,758 1,56,374 By Notional profit 7,00,342 5,86,401
(WN-2) (balance b/d)
To Costing P& L Reserve 5,13,584 4,30,027
A/c.
7,00,342 5,86,401 7,00,342 5,86,401

* Assuming donation paid to local club was exclusively for the above projects, hence
included in the contract account.
** Depreciation on concrete mixture machine is charged on the basis of number of days
used for the projects, as it is clearly mentioned in the question that this machine can be
used for other projects also.
Working Notes:
1 Computation of Stage of completion of the projects:
Value of work certified
 100
Value of contract
` 20,50,000
HP  1   100  42.71%
` 48,00,000
` 16,10,000
HP  2   100  44.72%
` 36,00,000
2 Computation of profit to be recognized in the Costing profit & loss A/c.
1 Cash Received
 Notional profit 
3 Value of work certified
1
HP  1   ` 7,00,342  80%  `1,86,758
3

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 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

1
HP  2   ` 5,86,401 80%  `1,56,374
3
(Land purchased and brokerage and registration fee paid for this purpose cannot be
charged to contract account, hence not included in the contract account)
6. (i) Workings:
(a) Distance travelled in a month = 40 k.m. × 2 × 2 trips × 5 days × 4 weeks
= 3,200 k.m.
(b) Total Tonne-km. = 10 tonnes × 40 k.m. × 2 trips × 5 days × 4 weeks
= 16,000 tonne-k.m.
(c) Consumption of diesel = 3,200 k.m. ÷ 10 k.m = 320 litre.
(d) Tyre cost = `22,000 ÷ 80,000 k.m. × 3,200 k.m = `880
`16,00,000  `2,40,000
(e) Depreciation of van =  3,200k.m. = `11,453
3,80,000k.m.
Monthly Operating Cost Statement
Particulars Amount (`)
Running costs:
- Cost of diesel (320 ltr × `48) 15,360
- Lubricant oil (`600 × 4 weeks) 2,400
- Repairs & Maintenance 1,800
- Cost of tyres 880
- Depreciation 11,453
Total Running cost (A) 31,893
Fixed Costs:
- Driver’s salary 12,000
- Garage rent 4,800
- Insurance (`5,400 ÷ 12) 450
- Permit fee (`3,600 ÷ 12) 300
- Other overheads (`66,000 ÷ 12) 5,500
Total fixed cost (B) 23,050
Total cost {(A) + (B)} 54,943
`54,943
(ii) Operating Cost per kilometre = = `17.17
3,200km.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 17

`54,943
Cost per tonne-km = = `3.43
16,000tonne  km.
7. (i) Statement of Equivalent Production (Average cost method)
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%*) Units** (%)* Units** (%)* Units**
20,000 Completed 14,000 100 14,000 100 14,000 100 14,000
WIP 6,000 100 6,000 33-1/3 2,000 33-1/3 2,000
20,000 20,000 20,000 16,000 16,000
*Percentage of completion ** Equivalent units
(ii) Statement showing Cost for each element
Particulars Materials Labour Overhead Total
Cost of opening work-in- 6,00,000 1,00,000 1,00,000 8,00,000
progress (`)
Cost incurred during the 25,60,000 15,00,000 15,00,000 55,60,000
month (`)
Total cost (`) : (A) 31,60,000 16,00,000 16,00,000 63,60,000
Equivalent units : (B) 20,000 16,000 16,000
Cost per equivalent unit (`) : 158 100 100 358
C = (A ÷ B)
(iii) Statement of Apportionment of cost
(`) (`)
Value of output transferred: (A) (14,000 units × ` 358) 50,12,000
Value of closing work-in-progress: (B)
Material (6,000 units × `158) 9,48,000
Labour (2,000 units × ` 100) 2,00,000
Overhead (2,000 units × ` 100) 2,00,000 13,48,000
Total cost : (A + B) 63,60,000
(iv) Process- A Account
Particulars Units (`) Particulars Units (`)
To Opening WIP 4,000 8,00,000 By Completed 14,000 50,12,000
units

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 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

To Materials 16,000 25,60,000 By Closing WIP 6,000 13,48,000

To Labour 15,00,000
To Overhead 15,00,000
20,000 63,60,000 20,000 63,60,000
8. (i) Statement showing the apportionment of joint costs to A, B and X
Products A B X Total
Output (kg) 18,000 10,000 54,000
Sales value at 9,00,000 4,00,000 5,40,000 18,40,000
the point of split (` 50 x 18,000) (` 40 x 10,000) (` 10 x 54,000)
off (`)
Joint cost 6,30,000 2,80,000 3,78,000 12,88,000
apportionment  ` 12,88,000   ` 12,88,000   ` 12,88,000 
on the basis of  ` 18,40,000 x ` 9,00,000   x ` 4,00,000   ` 18,40,000 x ` 5,40,000 
   ` 18,40,000   
sales value at
the point of split
off (`)

(ii) Statement showing the cost per kg. of each product

(indicating joint cost; further processing cost and total cost separately)
Products A B X
Joint costs apportioned (`) : (I) 6,30,000 2,80,000 3,78,000
Production (kg) : (II) 18,000 10,000 54,000
Joint cost per kg (`): (I ÷ II) 35 28 7
Further processing Cost per kg. 10 15 2
(`)  ` 1,80,000   ` 1,50,000   ` 1,08,000 
     
 18,000kg   10,000kg   54,000kg 
Total cost per kg (`) 45 43 9
(iii) Statement showing the product wise and total profit for the period
Products A B X Total
Sales value (`) 12,24,000 2,50,000 7,92,000
Add: Closing stock value (`)
(Refer to Working note 2) 45,000 2,15,000 90,000
Value of production (`) 12,69,000 4,65,000 8,82,000 26,16,000
Apportionment of joint cost (`) 6,30,000 2,80,000 3,78,000

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 19

Add: Further processing cost (`) 1,80,000 1,50,000 1,08,000

Total cost (`) 8,10,000 4,30,000 4,86,000 17,26,000
Profit (`) 4,59,000 35,000 3,96,000 8,90,000
Working Notes
1.
Products A B X
Sales value (`) 12,24,000 2,50,000 7,92,000
Quantity sold (Kgs.) 17,000 5,000 44,000
Selling price `/kg 72 50 18
 ` 12,24,000   ` 2,50,000   ` 7,92,000 
     
 17,000kg   5,000kg   44,000kg 

2. Valuation of closing stock:

Since the selling price per kg of products A, B and X is more than their total
costs, therefore closing stock will be valued at cost.
Products A B X Total
Closing stock 1,000 5,000 10,000
(kgs.)
Cost per kg 45 43 9
(`)
Closing stock 45,000 2,15,000 90,000 3,50,000
value (`) (` 45 x 1,000 kg) (` 43 x 5,000 kg) (`9x10,000 kg)

(iv) Calculations for processing decision

Products A B X
Selling price per kg at the point of split off (`) 50 40 10
Selling price per kg after further processing (`) 72 50 18
(Refer to working Note 1)
Incremental selling price per kg (`) 22 10 8
Less: Further processing cost per kg (`) (10) (15) (2)
Incremental profit (loss) per kg (`) 12 (5) 6
Product A and X has an incremental profit per unit after further processing, hence,
these two products may be further processed. However, further processing of product
B is not profitable hence, product B shall be sold at split off point.

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 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

9. Workings:
1. Calculation of Actual Materials Consumed:
Particulars Material A (kg.) Material B (kg.)
Opening stock 40 50
Add: Purchases 900 1,400
Less: Closing Stock (10) (60)
Material Consumed 930 1,390
(i) Material Price Variance:
Actual Quantity (Std. Price – Actual Price) = AQ × SP – AQ × AP
Material A = (930 kg × `40) - {(40 kg × `40) + (890 kg × `42.50)}
= `37,200 – (`1,600 + `37,825) = `2,225 (A)
Material B = (1,390 kg × `30) - {(50 kg × `30) + (1,340 kg × `25)}
= `41,700 – (`1,500 + `33,500) = `6,700 (F)
(ii) Material Usage Variance = Std. Price (Std. Quantity - Actual Quantity)
40% of 2,000
Material A = `40 {( ) - 930 kg}
0.85
= `40 (941.18 kg. – 930 kg) = `447 (F)
60% of 2,000
Material B = `30 {( ) - 1,390 kg}
0.85
= `30 (1,411.76 kg. – 1,390 kg) = `653 (F)
(iii) Material Mix Variance = Std. Price (Revised Std. Quantity – Actual Quantity)
Material A = `40 {(40% of 2,320) - 930 kg} = `80 (A)
Material B = `30 { (60% of 2,320) - 1,390 kg} = `60 (F)
(iv) Material Yield Variance = Std. Price (Std. Quantity – Revised Std. Quantity)
40% of 2,000
Material A = `40 {( ) - (40% of 2,320)}
0.85
= `40 { 941.18 kg. – 928 kg.} = 527 (F)
60% of 2,000
Material B = `30 {( ) - (60% of 2,320)}
0.85

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 21

= `30 {1,411.76 kg. – 1,392 kg.} = 593 (F)

(v) Total Material Cost Variance = Std. Price × Std Qty. – Actual Price × Actual Qty.
40% of 2,000
Material A = [{`40 × ( )} – {(40 kg × `40) + (890 kg × `42.50)}]
0.85
= {`40 × 941.18 kg.} – {`1,600 + `37,825}
= `37,647 – `39,425 = `1,778 (A)
60% of 2,000
Material B = [{`30 × ( )} - {(50 kg × `30) + (1,340 kg × `25)}]
0.85
= {`30 × 1,411.76 kg.} – {`1,500 + `33,500}
= `42,353 – `35,000 = `7,353 (F)
10. (i) Contribution = `375 - `175 = `200 per unit.
Fixed cost
Break even Sales Quantity = = ` 3,50,00,000 = 1,75,000 units
Contribution margin per unit ` 200

Cash Fixed Cost

Cash Break even Sales Qty= = `2,00,00,000 = 1,00,000 units.
Contribution margin per unit `200

Contribution/ unit ` 200

(ii) P/V ratio = 100 =  100 = 53.33%
Selling Pr ice / unit ` 375
(iii) No. of units that must be sold to earn an Income (EBIT) of ` 25,00,000
Fixed cost  Desired EBIT level 3,50,00,000  25,00,000
= = 1,87,500 units
Contribution margin per unit 200
(iv) After Tax Income (PAT) = `25,00,000
Tax rate = 40%
`25,00,000
Desired level of Profit before tax = 100 = `41,66,667
60
FixedCost  DesiredPr ofit
Estimate Sales Level =
P / Vratio

 FixedCost  DesiredPr ofit 

Or,   SellingPr ice per unit 
 Contributionper unit 
`3,50,00,000  ` 41,66,667
= = `7,34,42,091
53.33%

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 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

11. (a) Production Budget (in units)

Product- K Product- H
(units) (units)
Expected sales 8,000 4,200
Add: Closing stock 1,000 2,100
Less: Opening stock (800) (1,600)
Units to be produced 8,200 4,700
(b) Material Purchase Budget
Material-X Material-Y Material-Z
(kg.) (kg.) (ltr.)
Materials required:
- Product-K 98,400 1,23,000 65,600
(8,200 units ×12 kg.) (8,200 units×15 kg.) (8,200 units× 8 ltr.)
- Product- H 70,500 28,200 65,800
(4,700 units ×15 kg.) (4,700 units × 6 kg.) (4,700 units×14ltr.)
Total 1,68,900 1,51,200 1,31,400
Add: Closing stock 30,000 18,000 7,500
Less: Opening stock (25,000) (30,000) (14,000)
Quantity to be 1,73,900 1,39,200 1,24,900
purchased
Rate `15 per kg. `16 per kg. `5 per ltr.
Purchase cost ` 26,08,500 ` 22,27,200 ` 6,24,500
(c) Direct Labour Budget
Unskilled Skilled
(hours) (hours)
For Product K 98,400 65,600
(8,200 units × 12 hours) (8,200 units × 8 hours)
For Product H 47,000 23,500
(4,700 units × 10 hours) (4,700 units × 5 hours)
Labour hours required 1,45,400 89,100
Rate ` 40 per hour ` 75 per hour
Wages to be paid ` 58,16,000 ` 66,82,500

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 23

12. (a) Difference between Cost Control and Cost Reduction

Cost Control Cost Reduction
1. Cost control aims at 1. Cost reduction is concerned with
maintaining the costs in reducing costs. It challenges all
accordance with the standards and endeavours to better
established standards. them continuously
2. Cost control seeks to attain 2. Cost reduction recognises no
lowest possible cost under condition as permanent, since a
existing conditions. change will result in lower cost.
3. In case of cost control, 3. In case of cost reduction, it is on
emphasis is on past and present and future.
present
4. Cost control is a preventive 4. Cost reduction is a corrective
function function. It operates even when an
efficient cost control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.
(b) Accounting treatment of idle time wages & overtime wages in cost accounts:
Normal idle time is treated as a part of the cost of production. Thus, in the case of
direct workers, an allowance for normal idle time is built into the labour cost rates. In
the case of indirect workers, normal idle time is spread over all the products or jobs
through the process of absorption of factory overheads.
Under Cost Accounting, the overtime premium is treated as follows:
➢ If overtime is resorted to at the desire of the customer, then the overtime
premium may be charged to the job directly.
➢ If overtime is required to cope with general production program or for meeting
urgent orders, the overtime premium should be treated as overhead cost of
particular department or cost center which works overtime.
➢ Overtime worked on account of abnormal conditions should be charged to
costing Profit & Loss Account.
➢ If overtime is worked in a department due to the fault of another department the
overtime premium should be charged to the latter department.
(c) Cost classification based on variability
(a) Fixed Costs – These are the costs which are incurred for a period, and which,
within certain output and turnover limits, tend to be unaffected by fluctuations in
the levels of activity (output or turnover). They do not tend to increase or de -
crease with the changes in output. For example, rent, insurance of factory
building etc., remain the same for different levels of production.

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 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(b) Variable Costs – These costs tend to vary with the volume of activity. Any
increase in the activity results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(c) Semi-variable Costs – These costs contain both fixed and variable components
and are thus partly affected by fluctuations in the level of activity. Examples of
semi variable costs are telephone bills, gas and electricity etc.
Cost classification based on controllability
(a) Controllable Costs - Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of
the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the
overheads are generally controllable by the shop level management.
(b) Uncontrollable Costs - Costs which cannot be influenced by the action of a
specified member of an undertaking are known as uncontrollable costs. For
example, expenditure incurred by, say, the tool room is controllable by the
foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine
shop foreman.

© The Institute of Chartered Accountants of India

 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 25

PART-II: FINANCIAL MANAGEMENT

QUESTIONS

Time Value of Money

1. Calculate if `10,00,000 is invested at interest rate of 12% per annum, what is the amount
after 3 years if the compounding of interest is done?
(i) Annually
(ii) Semi-annually
(iii) Quarterly
Ratio Analysis
2. From the following table of financial ratios of R. Textiles Limited, comment on various ratios
given at the end:
Ratios 2017 2018 Average of Textile
Industry
Liquidity Ratios
Current ratio 2.2 2.5 2.5
Quick ratio 1.5 2 1.5
Receivable turnover ratio 6 6 6
Inventory turnover 9 10 6
Receivables collection period 87 days 86 days 85 days
Operating profitability
Operating income –ROI 25% 22% 15%
Operating profit margin 19% 19% 10%
Financing decisions
Debt ratio 49.00% 48.00% 57%
Return
Return on equity 24% 25% 15%
Comment on the following aspect of R. Textiles Limited
(i) Liquidity
(ii) Operating profits
(iii) Financing
(iv) Return to the shareholders

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 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Fund Flow Analysis

3. The following are the Balance Sheets of Gama Limited for the year ending March 31, 20X 8
and March 31, 20X9:
Balance Sheet as at March, 31
20X9 (`) 20X8 (`)
Capital and Liabilities
Share Capital 7,87,500 6,75,000
General Reserves 2,81,250 2,25,000
Capital Reserve (Profit on Sale of investment) 11,250 -
Profit & Loss Account 2,25,000 1,12,500
15% Debentures 2,25,000 3,37,500
Accrued Expenses 13,500 11,250
Creditors 2,81,250 1,80,000
Provision for Dividends 38,250 33,750
Provision for Taxation 85,500 78,750
Total 19,48,500 16,53,750
Assets
Fixed Assets 13,50,000 11,25,000
Less: Accumulated depreciation 2,81,250 2,25,000
Net Fixed Assets 10,68,750 9,00,000
Long-term Investments (at cost) 2,02,500 2,02,500
Stock (at cost) 3,03,750 2,25,000
Debtors (net of provision for doubtful debts of ` 2,75,625 2,53,125
45,000 and ` 56,250 respectively for 20X8 and 20X9
respectively)
Bills receivables 73,125 45,000
Prepaid Expenses 13,500 11,250
Miscellaneous Expenditure 11,250 16,875
19,48,500 16,53,750
Additional Information:
(i) During the year 20X8-X9, fixed assets with a net book value of ` 11,250 (accumulated
depreciation, ` 33,750) was sold for ` 9,000.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 27

(ii) During the year 20X8-X9, Investments costing ` 90,000 were sold, and also
Investments costing ` 90,000 were purchased.
(iii) Debentures were retired at a Premium of 10%.
(iv) Tax of ` 61,875 was paid for 20X7-X8.
(v) During the year 20X8-X9, bad debts of ` 15,750 were written off against the provision
for Doubtful Debt account.
(vi) The proposed dividend for 20X7-X8 was paid in 20X8-X9.
Required:
Prepare a Funds Flow Statement (Statement of changes in Financial Position on working
capital basis) for the year ended March 31, 20X9.
Cost of Capital
4. As a financial analyst of a large electronics company, you are required to determine the
weighted average cost of capital of the company using (a) book value weights and (b)
market value weights. The following information is available for your perusal.
The Company’s present book value capital structure is:
(`)
Debentures (`100 per debenture) 8,00,000
Preference shares (`100 per share) 2,00,000
Equity shares (`10 per share) 10,00,000
20,00,000
All these securities are traded in the capital markets. Recent prices are:
Debentures, `110 per debenture, Preference shares, `120 per share, and Equity shares,
` 22 per share
Anticipated external financing opportunities are:
(i) ` 100 per debenture redeemable at par; 10 year maturity, 11 per cent coupon rate, 4
per cent flotation costs, sale price, ` 100
(ii) ` 100 preference share redeemable at par; 10 year maturity, 12 per cent dividend
rate, 5 per cent flotation costs, sale price, `100.
(iii) Equity shares: ` 2 per share flotation costs, sale price = ` 22.
In addition, the dividend expected on the equity share at the end of the year is ` 2 per
share, the anticipated growth rate in dividends is 7 per cent and the firm has the practice
of paying all its earnings in the form of dividends. The corporate tax rate is 35 per cent.

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 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Capital Structure
5. Akash Limited provides you the following information:
(`)
Profit (EBIT) 2,80,000
Less: Interest on Debenture @ 10% (40,000)
EBT 2,40,000
Less Income Tax @ 50% (1,20,000)
1,20,000
No. of Equity Shares (` 10 each) 30,000
Earnings per share (EPS) 4
Price /EPS (PE) Ratio 10
The company has reserves and surplus of ` 7,00,000 and required ` 4,00,000 further for
modernisation. Return on Capital Employed (ROCE) is constant. Debt (Debt/ Debt +
Equity) Ratio higher than 40% will bring the P/E Ratio down to 8 and increase the interest
rate on additional debts to 12%. You are required to ascertain the probable price of the
share.
(i) If the additional capital are raised as debt; and
(ii) If the amount is raised by issuing equity shares at ruling market price.
Leverage
6. A Company had the following Balance Sheet as on March 31, 2019:
Equity and Liabilities (` in crore) Assets (` in crore)
Equity Share Capital Fixed Assets (Net) 250
(10 crore shares of ` 10 each) 100
Reserves and Surplus 20 Current Assets 150
15% Debentures 200
Current Liabilities 80
400 400
The additional information given is as under:
Fixed Costs per annum (excluding interest) ` 80 crores
Variable operating costs ratio 65%
Total Assets turnover ratio 2.5
Income-tax rate 40%

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 29

Required:
Calculate the following and comment:
(i) Earnings per share
(ii) Operating Leverage
(iii) Financial Leverage
(iv) Combined Leverage.
Capital Budgeting
7. BT Pathology Lab Ltd. is using an X-ray machines which reached at the end of their useful
lives. Following new X-ray machines are of two different brands with same features are
available for the purchase.
Maintenance Cost
Cost of Life of Rate of
Brand Year Year Year
Machine Machine Depreciation
1-5 6-10 11-15
XYZ `6,00,000 15 years ` 20,000 ` 28,000 ` 39,000 4%
ABC `4,50,000 10 years ` 31,000 ` 53,000 -- 6%
Residual Value of both of above machines shall be dropped by 1/3 of Purchase price in
the first year and thereafter shall be depreciated at the rate mentioned above.
Alternatively, the machine of Brand ABC can also be taken on rent to be returned back to
the owner after use on the following terms and conditions:
• Annual Rent shall be paid in the beginning of each year and for first year it shall be
` 1,02,000.
• Annual Rent for the subsequent 4 years shall be ` 1,02,500.
• Annual Rent for the final 5 years shall be ` 1,09,950.
• The Rent Agreement can be terminated by BT Labs by making a payment of
` 1,00,000 as penalty. This penalty would be reduced by ` 10,000 each year of the
period of rental agreement.
You are required to:
(a) Advise which brand of X-ray machine should be acquired assuming that the use of
machine shall be continued for a period of 20 years.
(b) State which of the option is most economical if machine is likely to be used for a
period of 5 years?
The cost of capital of BT Labs is 12%.

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 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Working Capital Management

8. A company is considering its working capital investment and financial policies for the next
year. Estimated fixed assets and current liabilities for the next year are ` 2.60 crores and
` 2.34 crores respectively. Estimated Sales and EBIT depend on current assets
investment, particularly inventories and book-debts. The Financial Controller of the
company is examining the following alternative Working Capital Policies:
(` in crore)
Working Capital Policy Investment in Current Assets Estimated Sales EBIT
Conservative 4.50 12.30 1.23
Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00
After evaluating the working capital policy, the Financial Controller has advised the
adoption of the moderate working capital policy. The company is now examining the use
of long-term and short-term borrowings for financing its assets. The company will use
` 2.50 crores of the equity funds. The corporate tax rate is 35%. The company is
considering the following debt alternatives.
(` in crore)
Financing Policy Short-term Debt Long-term Debt
Conservative 0.54 1.12
Moderate 1.00 0.66
Aggressive 1.50 0.16
Interest rate-Average 12% 16%

You are required to calculate the following:

(i) Working Capital Investment for each policy:
(a) Net Working Capital position
(b) Rate of Return
(c) Current ratio
(ii) Financing for each policy:
(a) Net Working Capital position.
(b) Rate of Return on Shareholders’ equity.
(c) Current ratio.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 31

Management of Working Capital

9. A proforma cost sheet of a company provides the following particulars:
Amount per unit (`)
Raw materials cost 100.00
Direct labour cost 37.50
Overheads cost 75.00
Total cost 212.50
Profit 37.50
Selling Price 250.00
The Company keeps raw material in stock, on an average for one month; work-in-progress,
on an average for one week; and finished goods in stock, on an average for two weeks.
The credit allowed by suppliers is three weeks and company allows four weeks credit to its
debtors. The lag in payment of wages is one week and lag in payment of overhead
expenses is two weeks.
The Company sells one-fifth of the output against cash and maintains cash-in-hand and at
bank put together at `37,500.
Required:
Prepare a statement showing estimate of Working Capital needed to finance an activity
level of 1,30,000 units of production. Assume that production is carried on evenly
throughout the year, and wages and overheads accrue similarly. Work-in-progress stock
is 80% complete in all respects.
Miscellaneous
10. Write short notes on the following:
(a) Functions of Finance Manager.
(b) Inter relationship between investment, financing and dividend decisions.
(c) Debt securitisation

SUGGESTED HINTS/ANSWERS

1. Computation of future value

Principal (P0) = ` 10,00,000
Rate of interest (i) = 12% p.a.
Time period (n) = 3 years

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 32 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Amount if compounding is done:

(i) Annually
Future Value = P(1+i)n
= `10,00,000 (1 + 0.12) 3
= `10,00,000 × 1.404928
= ` 14,04,928
(ii) Semi Annually
32
 12 
Future Value = `10,00,000  1  
 100  2 
= `10,00,000 (1 + 0.06) 6
= `10,00,000 × 1.418519
= ` 14,18,519
(iii) Quarterly
34
 12 
Future Value = `10,00,000  1  
 100  2 
= `10,00,000 (1 + 0.03) 12
= `10,00,000 × 1.425761
= `14,25,761
2.
Ratios Comment
Liquidity Current ratio has improved from last year and matching the
industry average.
Quick ratio also improved than last year and above the
industry average. This may happen due to reduction in
receivable collection period and quick inventory turnover.
However, this also indicates idleness of funds.
Overall it is reasonably good. All the liquidity ratios are
either better or same in both the year compare to the
Industry Average.
Operating Profits Operating Income-ROI reduced from last year but
Operating Profit Margin has been maintained. This may
happen due to variability of cost on turnover. However,
both the ratio are still higher than the industry average.

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 33

Financing The company has reduced its debt capital by 1% and

saved operating profit for equity shareholders. It also
signifies that dependency on debt compared to other
industry players (57%) is low.
Return to the R’s ROE is 24 per cent in 2017 and 25 per cent in 2018
shareholders compared to an industry average of 15 per cent. The ROE
is stable and improved over the last year.

3. Fund Flow Statement as at 31st March 20X9

(`)
A. Sources of Funds:
(i) Fund from Business Operations (W.N. 1) 3,16,125
(ii) Sale of Fixed Assets 9,000
(iii) Sale of Investments (` 90,000 + ` 11,250) 1,01,250
(iv) Issue of Shares (` 7,87,500 - ` 6,75,000) 1,12,500
Total sources 5,38,875
B. Application of Funds:
(i) Purchase of Fixed Assets 2,70,000
(ii) Purchase of Investments 90,000
(iii) Payment to Debenture holders {(` 3,37,500 – ` 2,25,000) × 110%} 1,23,750
(iv) Payment of Dividends 33,750
Total uses 5,17,500
Increase in Working Capital (A - B) 21,375
Working Notes (W.N.):
1. Computation of Funds from Business Operation
(`)
Profit and loss as on March 31, 20X9 2,25,000
Add: Depreciation 90,000
Loss on Sale of Asset 2,250
Misc. Expenditure written off 5,625
Transfer to Reserves 56,250
Premium on Redemption of debentures 11,250
Provision for Dividend 38,250

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 34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

4,28,625
Less: Profit and loss as on March 31, 20X7 1,12,500
Fund from Operations 3,16,125
2. Accumulated Depreciation A/c
To Fixed Asset A/c 33,750 By Balance b/d 2,25,000
To Balance c/d 2,81,250 By P/L A/c (Prov. for 90,000
depreciation) (Bal. Fig.)
3,15,000 3,15,000
3. Fixed Assets A/c
To Balance b/d 11,25,000 By Acc. Depreciation A/c 33,750
To Bank (Purchase of Fixed Asset) (Bal. 2,70,000 By Cash 9,000
fig.)
By P/L (Loss on sale) 2,250
By Balance c/d 13,50,000
13,95,000 13,95,000
4. Statement of Changes in Working Capital
Change in Working
March 31, March 31, Capital
20X8 20X9
Increase Decrease
Current Assets
Stock 2,25,000 3,03,750 78,750 --
Debtors 2,53,125 2,75,625 22,500 --
Bills Receivables 45,000 73,125 28,125 --
Prepaid Expenses 11,250 13,500 2,250 --
5,34,375 6,66,000 -- --
Current Liabilities
Accrued Expenses 11,250 13,500 -- 2,250
Creditors 1,80,000 2,81,250 -- 1,01,250
Provision for Taxation 78,750 85,500 -- 6,750
2,70,000 3,80,250 -- --
Working Capital 2,64,375 2,85,750 -- --
Increase in Working Capital 21,375 - - 21,375
2,85,750 2,85,750 1,31,625 1,31,625

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 35

4. Determination of specific costs:

(RV  NP) (`100  `96)
Interest (1  t)  `11(1  0.35) 
N 10 years
(i) Cost Debt (Kd) = =
(RV  NP) (`100  `96)
2 2
` 7.15  ` 0.4
= = 0.077 or 7.70%
` 98

(RV  NP) (`100  `95)

PD  `12 
N 10 years
(ii) Cost of Preference Shares (K ) = =
p (RV  NP) (`100  `95)
2 2
` 12  ` 0.5
= = 0.1282 or 12.82%
` 97.5
D1 `2
(iii) Cost of Equity shares (K ) = G =  0.07 = 0.17 or 17%
e P0 ` 22  ` 2

I – Interest, t – Tax, RV- Redeemable value, NP- Net proceeds, N- No. of years, PD-
Preference dividend, D 1- Expected Dividend, P0- Price of share (net)

Using these specific costs, we can calculate WACC on the basis of book value and
market value weights as follows:
(a) Weighted Average Cost of Capital (K0) based on Book value weights

Source of capital Book value Weights Specific WACC (%)

(`) cost (%)
Debentures 8,00,000 0.40 7.70 3.08
Preferences 2,00,000 0.10 12.82 1.28
shares
Equity shares 10,00,000 0.50 17.00 8.50
20,00,000 1.00 12.86
(b) Weighted Average Cost of Capital (K0) based on market value weights:

Source of capital Market Weights Specific WACC

value (`) cost (%) (%)
Debentures 8,80,000 0.265 7.70 2.04

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 36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

 `8,00,000 
  `110 
 `100 
Preferences shares 2,40,000 0.072 12.82 0.92
 `2,00,000 
  `120 
 `100 
Equity shares 22,00,000 0.663 17.00 11.27
 `10,00,000 
  `22 
 `10 
33,20,000 1.000 14.23
5. Ascertainment of probable price of shares of Akash limited
Plan-I Plan-II
If ` 4,00,000 If ` 4,00,000
Particulars is raised as is raised by
debt (`) issuing
equity shares
(`)
Earnings Before Interest and Tax (EBIT)
{20% of new capital i.e. 20% of (`14,00,000 + `4,00,000)} 3,60,000 3,60,000
(Refer working note1)
Less: Interest on old debentures
(40,000) (40,000)
(10% of `4,00,000)
Less: Interest on new debt
(48,000) --
(12% of `4,00,000)
Earnings Before Tax (EBT) 2,72,000 3,20,000
Less: Tax @ 50% (1,36,000) (1,60,000)
Earnings for equity shareholders (EAT) 1,36,000 1,60,000
No. of Equity Shares (refer working note 2) 30,000 40,000
Earnings per Share (EPS) ` 4.53 ` 4.00
Price/ Earnings (P/E) Ratio (refer working note 3) 8 10
Probable Price Per Share (PE Ratio × EPS) ` 36.24 ` 40
Working Notes:
1. Calculation of existing Return of Capital Employed (ROCE):
(`)

Equity Share capital (30,000 shares × `10) 3,00,000

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 37

 100 
10% Debentures  `40,000   4,00,000
 10 
Reserves and Surplus 7,00,000
Total Capital Employed 14,00,000
Earnings before interest and tax (EBIT) (given) 2,80,000
`2,80,000
ROCE =  100 20%
`14,00,000

2. Number of Equity Shares to be issued in Plan-II:

` 4,00,000
=  10,000shares
` 40
Thus, after the issue total number of shares = 30,000+ 10,000 = 40,000 shares
3. Debt/Equity Ratio if ` 4,00,000 is raised as debt:
`8,00,000
=  100 = 44.44%
`18,00,000
As the debt equity ratio is more than 40% the P/E ratio will be brought down to
8 in Plan-I
6. Total Assets = ` 400 crores
Asset Turnover Ratio = 2.5
Hence, Total Sales = 400  2.5 = ` 1,000 crores
Computation of Profits after Tax (PAT)
(` in crore)
Sales 1,000
Less: Variable operating cost (65% of `1,000 crore) (650)
Contribution 350
Less: Fixed cost (other than Interest) (80)
EBIT 270
Less: Interest on debentures (15%  `200 crore) (30)
EBT 240
Less: Tax 40% (96)
EAT (earnings available to equity share holders) 144

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 38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(i) Earnings per share (EPS)

` 144 crores
 EPS  = ` 14.40
10 crore equity shares
(ii) Operating Leverage
Contribution 350
Operating leverage =  = 1.296
EBIT 270
It indicates sensitivity of earnings before interest and tax (EBIT) to change in sales at
a particular level.
(iii) Financial Leverage
EBIT 270
Financial Leverage = = = 1.125
EBT 240
The financial leverage is very comfortable since the debt service obligation is small
vis-à-vis EBIT.
(iv) Combined Leverage
Contribution EBIT
Combined Leverage = 
EBIT EBT
Or, Operating Leverage × Financial Leverage = 1.296  1.125 = 1.458
The combined leverage studies the choice of fixed cost in cost structure and choice
of debt in capital structure. It studies how sensitive the change in EPS is vis -à-vis
change in sales.
7. Since the life span of each machine is different and time span exceeds the useful lives of
each model, we shall use Equivalent Annual Cost method to decide which brand should
be chosen.
(i) If machine is used for 20 years
Present Value (PV) of cost if machine of Brand XYZ is purchased
Period Cash Outflow (`) PVF@12% Present Value
0 6,00,000 1.000 6,00,000
1-5 20,000 3.605 72,100
6-10 28,000 2.045 57,260
11-15 39,000 1.161 45,279
15 (64,000) 0.183 (11,712)
7,62,927

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 39

PVAF for 1-15 years 6.811

`7,62,927
Equivalent Annual Cost = = ` 1,12,014
6.811
Present Value (PV) of cost if machine of Brand ABC is purchased
Period Cash Outflow (`) PVF@12% Present Value
0 4,50,000 1.000 4,50,000
1-5 31,000 3.605 1,11,755
6 -10 53,000 2.045 1,08,385
10 (57,000) 0.322 (18,354)
6,51,786
PVAF for 1-10 years 5.65
`6,51,786
Equivalent Annual Cost = = ` 1,15,360
5.65
Present Value (PV) of cost if machine of Brand ABC is taken on Rent
Period Cash Outflow (`) PVF@12% Present Value
0 1,02,000 1.000 1,02,000
1-4 1,02,500 3.037 3,11,293
5-9 1,09,950 2.291 2,51,895
6,65,188
PVAF for 1-10 years 5.65
`6,65,188
Equivalent Annual Cost = = ` 1,17,732
5.65
Decision: Since Equivalent Annual Cash Outflow is least in case of purchase of
Machine of brand XYZ the same should be purchased.
(ii) If machine is used for 5 years
(a) Scrap Value of Machine of Brand XYZ
= ` 6,00,000 – ` 2,00,000 – ` 6,00,000 × 0.04 × 4 = ` 3,04,000
(b) Scrap Value of Machine of Brand ABC
= ` 4,50,000 – ` 1,50,000 – ` 4,50,000 × 0.06 × 4 = ` 1,92,000

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 40 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Present Value (PV) of cost if machine of Brand XYZ is purchased

Period Cash Outflow (`) PVF@12% Present Value
0 6,00,000 1.000 6,00,000
1-5 20,000 3.605 72,100
5 (3,04,000) 0.567 (1,72,368)
4,99,732
Present Value (PV) of cost if machine of Brand ABC is purchased
Period Cash Outflow (`) PVF@12% Present Value
0 4,50,000 1.000 4,50,000
1-5 31,000 3.605 1,11,755
5 (1,92,000) 0.567 (1,08,864)
4,52,891
Present Value (PV) of cost if machine of Brand ABC is taken on Rent
Period Cash Outflow (`) PVF@12% Present Value
0 1,02,000 1.000 1,02,000
1-4 1,02,500 3.037 3,11,293
5 50,000 0.567 28,350
4,41,643
Decision: Since Cash Outflow is least in case of lease of Machine of brand ABC the
same should be taken on rent.
8. (i) Statement showing Working Capital Investment for each policy
(` in crore)
Working Capital Policy
Conservative Moderate Aggressive
Current Assets: (i) 4.50 3.90 2.60
Fixed Assets: (ii) 2.60 2.60 2.60
Total Assets: (iii) 7.10 6.50 5.20
Current liabilities: (iv) 2.34 2.34 2.34
Net Worth: (v) = (iii) - (iv) 4.76 4.16 2.86
Total liabilities: (iv) + (v) 7.10 6.50 5.20
Estimated Sales: (vi) 12.30 11.50 10.00

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 41

EBIT: (vii) 1.23 1.15 1.00

(a) Net working capital position: (i) - (iv) 2.16 1.56 0.26
(b) Rate of return: (vii) /(iii) 17.32% 17.69% 19.23%
(c) Current ratio: (i)/ (iv) 1.92 1.67 1.11
(ii) Statement Showing Effect of Alternative Financing Policy
(` in crore)
Financing Policy Conservative Moderate Aggressive
Current Assets (i) 3.90 3.90 3.90
Fixed Assets (ii) 2.60 2.60 2.60
Total Assets (iii) 6.50 6.50 6.50
Current Liabilities (iv) 2.34 2.34 2.34
Short term Debt (v) 0.54 1.00 1.50
Total current liabilities
2.88 3.34 3.84
(vi) = (iv) + (v)
Long term Debt (vii) 1.12 0.66 0.16
Equity Capital (viii) 2.50 2.50 2.50
Total liabilities (ix) = (vi)+(vii)+(viii) 6.50 6.50 6.50
Forecasted Sales 11.50 11.50 11.50
EBIT (x) 1.15 1.15 1.15
Less: Interest on short-term debt 0.06 0.12 0.18
(12% of `0.54) (12% of ` 1) (12% of ` 1.5)
Interest on long term debt 0.18 0.11 0.03
(16% of `1.12) (16% of `0.66) (16% of `0.16)
Earnings before tax (EBT) (xi) 0.91 0.92 0.94
Taxes @ 35% (xii) 0.32 0.32 0.33
Earnings after tax: (xiii) = (xi) – (xii) 0.59 0.60 0.61
(a) Net Working Capital
Position: (i) - [(iv) + (v)] 1.02 0.56 0.06
(b) Rate of return on
shareholders Equity capital: 23.6% 24.0% 24.4%
(xiii)/ (viii)
(c) Current Ratio (i) / (vi) 1.35 1.17 1.02

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 42 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

9. Statement showing Estimate of Working Capital Needs

(Amount in `) (Amount in `)
A. Current Assets
(i) Inventories:
Raw material (1 month or 4 weeks)
 1,30,000units  `100 
  4 weeks 
 52 weeks  10,00,000
WIP Inventory (1 week)
 1,30,000units  `212.50 
  1week  × 0.8 4,25,000
 52 weeks 
Finished goods inventory (2 weeks)
 1,30,000units  `212.50  24,87,500
  2 weeks  10,62,500
 52 weeks 
(ii) Receivables (Debtors) (4 weeks)
 1,30,000units  `212.50  4
  4 weeks   17,00,000
 52 weeks  5th
(iii) Cash and bank balance 37,500
Total Current Assets 42,25,000
B. Current Liabilities:
(i) Payables (Creditors) for materials (3 weeks)
 1,30,000units  `100  7,50,000
  3 weeks 
 52 weeks 
(ii) Outstanding wages (1 week)
 1,30,000units  `37.50  93,750
  1week 
 52 weeks 
(iii) Outstanding overheads (2 weeks)
 1,30,000units  `75 
  2 weeks 
 52 weeks  3,75,000

Total Current Liabilities 12,18,750

Net Working Capital Needs (A – B) 30,06,250

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 PAPER – 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 43

10. (a) Functions of Finance Manager

The Finance Manager’s main objective is to manage funds in such a way so as to
ensure their optimum utilisation and their procurement in a manner that the risk, cost
and control considerations are properly balanced in a given situation. To achieve
these objectives the Finance Manager performs the following functions:
(i) Estimating the requirement of Funds: Both for long-term purposes i.e.
investment in fixed assets and for short-term i.e. for working capital. Forecasting
the requirements of funds involves the use of techniques of budgetary control
and long-range planning.
(ii) Decision regarding Capital Structure: Once the requirement of funds has been
estimated, a decision regarding various sources from which these funds would
be raised has to be taken. A proper balance has to be made between the loan
funds and own funds. He has to ensure that he raises sufficient long term funds
to finance fixed assets and other long term investments and to provide for the
needs of working capital.
(iii) Investment Decision: The investment of funds, in a project has to be made after
careful assessment of various projects through capital budgeting. Assets
management policies are to be laid down regarding various items of current
assets. For e.g. receivable in coordination with sales manager, inventory in
coordination with production manager.
(iv) Dividend decision: The finance manager is concerned with the decision as to
how much to retain and what portion to pay as dividend depending on the
company’s policy. Trend of earnings, trend of share market prices, requirement
of funds for future growth, cash flow situation etc., are to be considered.
(v) Evaluating financial performance: A finance manager has to constantly review
the financial performance of the various units of organisation generally in terms
of ROI Such a review helps the management in seeing how the funds have been
utilised in various divisions and what can be done to improve it.
(vi) Financial negotiation: The finance manager plays a very important role in
carrying out negotiations with the financial institutions, banks and public
depositors for raising of funds on favourable terms.
(vii) Cash management: The finance manager lays down the cash management and
cash disbursement policies with a view to supply adequate funds to all units of
organisation and to ensure that there is no excessive cash.
(viii) Keeping touch with stock exchange: Finance manager is required to analyse
major trends in stock market and their impact on the price of the company share.

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 44 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(b) Inter-relationship between Investment, Financing and Dividend Decisions

The finance functions are divided into three major decisions, viz., investment,
financing and dividend decisions. It is correct to say that these decisions are inter -
related because the underlying objective of these three decisions is the same, i.e.
maximisation of shareholders’ wealth. Since investment, financing and dividend
decisions are all interrelated, one has to consider the joint impact of these decisions
on the market price of the company’s shares and these decisions should also be
solved jointly. The decision to invest in a new project needs the finance for the
investment. The financing decision, in turn, is influenced by and influences dividend
decision because retained earnings used in internal financing deprive shareholders
of their dividends. An efficient financial management can ensure optimal joint
decisions. This is possible by evaluating each decision in relation to its effect on the
shareholders’ wealth.
The above three decisions are briefly examined below in the light of their inter -
relationship and to see how they can help in maximising the shareholders’ wealth i.e.
market price of the company’s shares.
Investment decision: The investment of long term funds is made after a careful
assessment of the various projects through capital budgeting and uncertainty
analysis. However, only that investment proposal is to be accepted which is expected
to yield at least so much return as is adequate to meet its cost of financing. This have
an influence on the profitability of the company and ultimately on its wealth.
Financing decision: Funds can be raised from various sources. Each source of funds
involves different issues. The finance manager has to maintain a proper balance
between long-term and short-term funds. With the total volume of long-term funds, he
has to ensure a proper mix of loan funds and owner’s funds. The optimum financing
mix will increase return to equity shareholders and thus maximise their wealth.
Dividend decision: The finance manager is also concerned with the decision to pay
or declare dividend. He assists the top management in deciding as to what portion of
the profit should be paid to the shareholders by way of dividends and what portion
should be retained in the business. An optimal dividend pay-out ratio maximises
shareholders’ wealth.
The above discussion makes it clear that investment, financing and dividend
decisions are interrelated and are to be taken jointly keeping in view their joint effect
on the shareholders’ wealth.
(c) Debt Securitisation: It is a method of recycling of funds. It is especially beneficial to
financial intermediaries to support the lending volumes. Assets generating steady
cash flows are packaged together and against this asset pool, market securities can
be issued, e.g. housing finance, auto loans, and credit card receivables.

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Process of Debt Securitisation

(i) The origination function – A borrower seeks a loan from a finance company,
bank. The credit worthiness of borrower is evaluated and contract is entered into
with repayment schedule structured over the life of the loan.
(ii) The pooling function – Similar loans on receivables are clubbed together to
create an underlying pool of assets. The pool is transferred in favour of Special
purpose Vehicle (SPV), which acts as a trustee for investors.
(iii) The securitisation function – SPV will structure and issue securities on the basis
of asset pool. The securities carry a coupon and expected maturity which can
be asset-based/mortgage based. These are generally sold to investors through
merchant bankers. Investors are – pension funds, mutual funds, insurance
funds.

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 PAPER 4: TAXATION

SECTION A: INCOME TAX

PART I: STATUTORY UPDATE

The Income-tax law, as amended by the Finance Act, 2018, including significant notifications/
circulars issued upto 31 st October, 2018 are applicable for May, 2019 examination. The
relevant assessment year for May, 2019 examination is A.Y.2019-20. The July 2018 edition of
the Study Material is based on the provisions of income-tax law as amended by the Finance
Act, 2018 and significant notifications/circulars issued upto 30 th April, 2018.
The significant notifications/circulars made between 1.4.2018 and 31.10.2018 which are
relevant for May, 2019 examination are given hereunder.
Chapter 3: Incomes which do not form part of Total Income

Computation of admissible deduction u/s 10AA of the Income-tax Act, 1961 [Circular No.
4/2018, Dated 14-8-2018]
As per the provisions of section 10AA(7), the profits derived from export of articles or things or
services (including computer software) shall be the amount which bears to the profits of the
business of the undertaking, being the Unit, the same proportion as the export turnover in
respect of such articles or things or services bears to the total turnover of the business carried
on by the undertaking.
Further as per clause (i) to Explanation 1 to section 10AA, "export turnover" means the
consideration in respect of export by the undertaking, being the Unit of articles or things or
services received in, or brought into, India by the assessee, but does not include freight,
telecommunication charges or insurance attributable to the delivery of the articles or things
outside India or expenses, if any, incurred in foreign exchange in rendering of services
(including computer software) outside India.
The issue of whether freight, telecommunication charges and insurance expenses are to be
excluded from both "export turnover"' and "total turnover' while working out deduction
admissible under section 10AA on the ground that they are attributable to delivery of articles
or things outside India has been highly contentious. Similarly, the issue whether charges for
rendering services outside India are to be excluded both from "export turnover" and "total
turnover" while computing deduction admissible under section 10AA on the ground that such
charges are relatable towards expenses incurred in convertible foreign exchange in rendering
services outside India has also been highly contentious.
The controversy has been finally settled by the Hon'ble Supreme Court vide its judgment
dated 24.4.2018 in the case of Commissioner of Income Tax, Central-III Vs. M/s HCL
Technologies Ltd. (CA No. 8489-8490 of 2013, NJRS Citation 2018-LL-0424-40), in relation to
section 10A.

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 2 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

The issue had been examined by CBDT and it is clarified, in line with the above decision of
the Supreme Court, that freight, telecommunication charges and insurance expenses are
to be excluded both from "export turnover" and "total turnover', while working out
deduction admissible under section 10AA to the extent they are attributable to the
delivery of articles or things outside India.
Similarly, expenses incurred in foreign exchange for rendering services outside India are
to be excluded from both "export turnover" and "total turnover" while computing
deduction admissible under section 10AA.
Note: Though this CBDT Circular is issued in relation to erstwhile section 10A, the same is
also relevant in the context of section 10AA. Accordingly, the reference to section 10A in the
Circular and the relevant sub-section and Explanation number thereto have been modified and
given with reference to section 10AA and the corresponding sub-sections, Explanation number
and clause of Explanation.

Chapter 9: Advance Tax and Tax Deduction at Source

No tax is required to be deducted at source on interest payable on “Power Finance

Corporation Limited 54EC Capital Gains Bond” and “Indian Railway Finance
Corporation Limited 54EC Capital Gains Bond” – [Notification No. 27 & 28/2018, dated
18-06-2018]
Section 193 (Interest on securities) provides that the person responsible for paying to a
resident any income by way of interest on securities shall, at the time of credit of such income
to the account of the payee or at the time of payment thereof in cash or by issue of a cheque
or draft or by any other mode, whichever is earlier, deduct income-tax @ 10%, being the rates
in force on the amount of the interest payable.
As per clause (iib) of the proviso to section 193, no tax is required to be deducted at source
from any interest payable on such debentures, issued by any institution or authority, or any
public sector company, or any co-operative society (including a co-operative land mortgage
bank or a co-operative land development bank), as the Central Government may, by
notification in the Official Gazette, specify in this behalf.
Accordingly, the Central Government has, vide this notification, specified -
(i) “Power Finance Corporation Limited 54EC Capital Gains Bond” issued by Power Finance
Corporation Limited {PFCL} and
(ii) “Indian Railway Finance Corporation Limited 54EC Capital Gains Bond” issued by Indian
Railway Finance Corporation Limited {IRFCL}

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The benefit of this exemption would, however, be admissible in the case of transfer of such
bonds by endorsement or delivery, only if the transferee informs PFCL/IRFCL by registered
post within a period of sixty days of such transfer.
PART II: QUESTIONS AND ANSWERS
OBJECTIVE TYPE QUESTIONS

I. Mr. Sumit is an Indian citizen and a member of the crew of an America bound Indian ship
engaged in carriage of freight in international traffic departing from Kochi on 25 th April,
2018. From the following details for the P.Y. 2018-19, determine the residential status of
Mr. Sumit for A.Y. 2019-20, assuming that his stay in India in the last 4 previous years
preceding P.Y. 2018-19 is 365 days and last seven previous years preceding P.Y.
2018-19 is 730 days:
Date entered in the Continuous Discharge Certificate in respect of joining the ship by Mr.
Sumit: 25th April, 2018
Date entered in the Continuous Discharge Certificate in respect of signing off the ship by
Mr. Sumit: 24th October, 2018
Mr. Sumit has been filing his income tax return in India as a Resident for previous 2
years.
What is his residential status for A.Y. 2019-20:
(a) Resident and ordinarily resident
(b) Resident but not-ordinarily resident
(c) Non-resident
(d) Non-resident till 24.10.2018 and resident till 31.03.2019
II. Aashish earns the following income during the P.Y. 2018-19:
• Interest on U.K. Development Bonds (1/4th being received in India): `4,00,000
• Capital gain on sale of a building in India but received in Holland: ` 6,00,000
If Aashish is a resident but not ordinarily resident in India, then what will be amount of
income chargeable to tax in India for A.Y. 2019-20?
(a) ` 7,00,000
(b) ` 10,00,000
(c) ` 6,00,000
(d) ` 1,00,000

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 4 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

III. Mr. Anay (aged 25) has agricultural income of ` 2,10,000 and business income of
` 2,35,000. Which of the following statement is correct?
(a) Agricultural income always has to be aggregated with business income for rate
purposes
(b) No aggregation is required since business income which constitutes his total
income, is less than basic exemption limit
(c) No aggregation is required since agricultural income is less than basic exemption
limit
(d) Agricultural income is exempt under section 10(1) but the same has to be
aggregated with business income, since it exceeds ` 5,000
IV. Miss Riya has started working in a reputed company. This is her first job. She earned
total income of `8 Lakhs in P.Y. 2018-19. While filing her return of income she had a
doubt with respect to deduction of transport allowance. Her father advised her that she
cannot claim deduction of transport allowance while her friend told that maximum
deduction of `1600 p.m. in respect of the said allowance can be claimed. According to
you, what is the correct treatment for the same?
(a) Transport allowance upto a maximum `1600 per month can be claimed.
(b) Transport allowance upto a maximum `800 per month can be claimed.
(c) No separate deduction for transport allowance is allowed. However, a standard
deduction of ` 40,000 is allowed to salaried assessees.
(d) Deduction of transport allowance is allowed without any monetary limit.
V. In respect of loss from house property, which of the following statements are correct?
(a) While computing income from any house property, the maximum interest deduction
allowable under section 24 is ` 2 lakhs
(b) Loss from house property relating to a particular year can be set-off against income
under any other head during that year only to the extent of ` 2 lakhs
(c) The loss in excess of ` 2 lakh, which is not set-off during the year, can be carried
forward for set-off against any head of income in the succeeding year(s)
(d) All the above
VI. M/s ABC, an eligible assessee, following mercantile system of accounting, carrying on
eligible business under section 44AD provides the following details:
♦ Total turnover for the financial year 2018-19 is ` 130 lakh
♦ Out of the above:
• ` 25 lakh received by A/c payee cheque during the financial year 2018-19;
• ` 50 lakh received by cash during the financial year 2018-19;

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 PAPER – 4: TAXATION 5

• ` 25 lakh received by A/c payee bank draft before the due date of filing of
return;
• ` 30 lakh not received till due date of filing of return.
Compute the amount of deemed profits of M/s ABC under section 44AD(1) for A.Y.
2019-20.
(a) ` 10.4 lakh
(b) ` 7.0 lakh
(c) ` 5.5 lakh
(d) ` 9.4 lakh
VII. Ram owns 500, 15% debentures of Reliance Industries Ltd. of ` 500 each. Annual
interest of ` 37,500 was declared on these debentures for P.Y. 2018-19. He transfers
interest income to his friend Shyam, without transferring the ownership of these
debentures. While filing return of income for A.Y. 2019-20, Shyam showed ` 37,500 as
his income from debentures. As tax advisor of Shyam, do you agree with the tax
treatment done by Shyam in his return of income?
(a) Yes, since interest income was transferred to Shyam therefore, after transfer it
becomes his income.
(b) No, since Ram has not transferred debentures to Shyam, interest income on the
debentures is not taxable income of Shyam.
(c) Yes, if debentures are not transferred, interest income on debentures can be
declared by anyone, Ram or Shyam, as taxable income depending upon their
discretion.
(d) No, since Shyam should have shown the income as interest income received from
Mr. Ram and not as interest income earned on debentures.
VIII. Mr. Rajan incurred loss of ` 5.3 lakh in the P.Y.2018-19 in toy business. Against which
of the following income earned during the same year, can he set-off such loss?
(a) profit of ` 2 lakh from wholesale cloth business
(b) speculative business income of ` 80,000
(c) long-term capital gains of ` 1.20 lakhs on sale of land
(d) All of the above
IX. Mr. Ajay is a recently qualified doctor. He joined a reputed hospital in Delhi on
01.01.2019. He earned total income of ` 3,40,000 till 31.03.2019. His employer advised
him to claim rebate u/s 87A while filing return of income for A.Y. 2019-20. He approached
his father to enquire regarding what is rebate u/s 87A of the Act. His father told him:

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 6 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(i) An individual who is resident in India and whose total income does not exceed
` 3,50,000 is entitled to claim rebate under section 87A.
(ii) An individual who is resident in India and whose total income does not exceed
` 5,00,000 is entitled to claim rebate under section 87A.
(iii) Maximum rebate allowable under section 87A is ` 5,000.
(iv) Rebate under section 87A is available in the form of exemption from total income.
(v) Maximum rebate allowable under section 87A is ` 2,500.
(vi) Rebate under section 87A is available in the form of deduction from tax liability.
As a tax expert, do you agree with the explanation given by Mr. Ajay’s father? Choose
the correct option from the following:
(a) (ii), (iii), (vi)
(b) (i), (v), (vi)
(c) (ii), (iii), (iv)
(d) (i), (iv), (v)
X. Mr. P is a professional who is responsible for paying a sum of ` 2,00,000 as rent for use
of building to Mr. Harshit for the month of February, 2019. The gross receipts of Mr. P are
as under:
From 01.04.2017 to 31.03.2018: ` 55,00,000
From 01.04.2018 to 28.02.2019: ` 45,00,000
Find out whether Mr. P is responsible for deducting any tax at source from the rent of
` 2,00,000 payable to Mr. Harshit.
(a) Tax at source is required to be deducted u/s 194-I at the rate of 10%.
(b) Tax at source is required to be deducted u/s 194-IB at the rate of 5%.
(c) Tax at source is required to be deducted u/s 194-IB at the rate of 10%.
(d) No tax is required to be deducted at source.

DESCRIPTIVE QUESTIONS
1. Determine the residential status of Ms. Nicole Kidman, an Australian actress, for the A.Y.
2019-20, from the following information about her stay in India contained in her passport.
F.Y. From To F.Y. From To
2018-19 May 3 rd August 12th 2013-14 May 3 rd August 12th
2017-18 July 23rd August 11h 2012-13 May 3rd August 12th

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 PAPER – 4: TAXATION 7

2016-17 February 9th March 26th 2011-12 May 3rd August 12th
2015-16 September 8th March 26th 2010-11 May 3rd August 12th
2014-15 May 17th September 30th - - -

2. Mr. Rana, a resident and ordinarily resident aged 42 years, manufactures rubber from the
latex processed from rubber plants grown in Kerala. Thereafter, he sold the rubber for
` 47 lakhs. The cost of growing rubber plants was ` 25 lakhs and the cost of
manufacturing rubber was ` 7 lakhs. He has no other income during the previous year
2018-19. Compute his tax liability for the Assessment Year 2019-20.
3. Ms. Aarohi is the HR manager in Shipra limited. She gives you the following particulars:
Basic Salary ` 70,000 p.m.
Dearness Allowance ` 24,000 p.m. (30% of which forms part of retirement benefits)
Bonus ` 21,000 p.m.
Her employer has provided her with an accommodation on 1st April 2018 at a
concessional rent. The house was taken on lease by Shipra Ltd. for ` 12,000 p.m.
Ms. Aarohi occupied the house from 1 st November, 2018, ` 4,800 p.m. is recovered from
the salary of Ms. Aarohi.
The employer gave her a gift voucher of ` 10,000 on her birthday. She contributes 18%
of her salary (Basic Pay plus DA) towards recognised provident fund and the company
contributes the same amount.
The company pays medical insurance premium to effect insurance on the health of
Ms. Aarohi ` 20,000.
Motor car owned by the employer (cubic capacity of engine exceeds 1.6 litres) provided
to Ms. Aarohi from 1 st November, 2018 which is used for both official and personal
purposes. Repair and running expenses of ` 70,000 were fully met by the company. The
motor car was self-driven by the employee.
Compute the income chargeable to tax under the head "Salaries" in the hands of
Ms. Aarohi for the Assessment Year 2019-20.
4. Shraddha has two flats in Mumbai, both of which are self-occupied. The particulars of
these are given below:
(Value in `)
Flat at Flat at Navi
Particulars
Goregaon Mumbai
Municipal Valuation per annum 1,40,000 1,35,000
Fair Rent per annum 1,60,000 1,80,000

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 8 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Standard rent per annum 1,40,000 1,90,000

Date of completion of construction 1-02-2012 24-08-2006
Municipal taxes payable during the year (paid for Flat at 10% 12%
Navi Mumbai only)
Interest on money borrowed for repair of property during - 72,000
current year
Compute Shraddha's income from house property for the Assessment Year 2019-20.
Also, suggest which flat should be opted by Shraddha to be assessed as self-occupied
so that her tax liability is minimum.
5. Mr. Jai Prakash commenced the business of operating goods vehicles on 1.4.2018. He
purchased the following vehicles during the P.Y.2018-19. Compute his income under
section 44AE for A.Y.2019-20.
Gross Vehicle Weight Number Date of purchase
(in kilograms)
(1) 8,500 3 11.05.2018
(2) 9,500 1 16.03.2019
(3) 10,000 1 21.09.2018
(4) 11,500 2 12.01.2019
(5) 15,000 1 21.07.2018
(6) 15,000 2 23.01.2019
Would your answer change if the goods vehicles purchased in January, 2019 were put to
use only in July, 2019?
6. Mr. Pratap, a proprietor has transferred his unit RS to Mr. Raj by way of Slump Sale on
December 7, 2018. The summarised Balance Sheet of Mr. Pratap as on that date is given
below:
Liabilities Amount Assets Amount
(` In lacs) (` In lacs)
Own Capital 1,850 Fixed Assets:
Accumulated P & L balance 870 Unit PT 250
Liabilities: Unit QL 170
Unit PT 190 Unit RS 950
Unit QL 260 Other Assets:
Unit RS 340 Unit PT 790

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 PAPER – 4: TAXATION 9

Unit QL 860
Unit RS 490
Total 3,510 Total 3,510
Other information:
(i) Slump sale consideration on transfer of Unit RS was ` 1540 lacs.
(ii) Fixed Assets of Unit RS includes land which was purchased at ` 90 lacs in the year
2008 and was revalued at ` 180 lacs.
(iii) Other fixed assets are reflected at ` 770 lacs, (i.e., ` 950 lacs less value of land)
which represents written down value of those assets as per books. The written
down value of these assets is ` 630 lacs as per Income-tax Act, 1961.
(iv) Unit RS was set up by Mr. Pratap in December, 2006.
Compute the Capital Gains arising in the hands of Mr. Pratap from slump sale of Unit RS
for Assessment year 2019-20.
Note: Cost Inflation Indices for the financial year 2006-07 and financial year 2018-19 are
122 and 280, respectively.
7. Mr. Suraj sold a house to his friend Mr. Ganesh on 18 th September, 2018 for a
consideration of ` 42,00,000. On the date of registration stamp duty value of the said
property is ` 45,00,000. However, on the date of agreement stamp duty value of the said
property was ` 44,00,000. Mr. Ganesh had paid 10% of the value of the property by way
of A/c payee cheque at the time of agreement. Assume value of land is 70% of the total
value of the property.
What are the tax implications in the hands of Mr. Suraj and Mr. Ganesh for the
assessment year 2019-20? Mr. Suraj had purchased the land on 19 th February, 2013 for
` 9,20,000 and completed the construction of house on 18 th January, 2017 for
` 15,50,000.
Cost Inflation Index: F.Y. 2012-13 – 200; F.Y. 2016-17 – 264; F.Y. 2018-19 - 280.
8. On 10th April, 2018, Mr. Mayur made a gift of ` 4,45,000 to his handicapped son, Master
Tanmay aged 10 years. He deposited such amount in a fixed deposit account in a
Nationalised bank. The bank credited a sum of ` 42,500 as interest on fixed deposit on
31st March, 2019.
Mayur's father gifted 10,000 unlisted equity shares of an Indian company to Master
Tejas, another son of Mr. Mayur (Date of birth 19th June, 2011) in September 2011 which

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 10 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

were purchased by him on 18th December, 2004 for ` 95,000. Tejas received a dividend
of ` 10,000 on these shares in October 2018. He sold these shares on 1st December,
2018 for ` 4,80,000 and deposited ` 3,10,000 in a company at 14% interest per annum.
Cost Inflation Index
Financial Year Cost Inflation Index
2004-05 113
2011-12 184
2018-19 280
Mr. Mayur has a taxable income of ` 4,50,000 from his profession during the financial
year 2018-19. Compute his Gross Total Income for the A.Y. 2019-20.
9. Compute the gross total income of Mr. Avinash and show the items eligible for carry
forward and the assessment years upto which such losses can be carry forward from the
following information furnished by him for the year ended 31-03-2019:
Particulars Amount (`)
Loss from speculative business MNO 12,000
Income from speculative business BPO 25,000
Loss from specified business covered under section 35AD 45,000
Income from salary (computed) 4,18,000
Loss from house property 2,20,000
Income from trading business 2,80,000
Income from owning and maintaining race horses 8,000
Long-term capital gain from sale of urban land 2,05,000
Long-term capital loss on sale of equity shares (STT not paid) 85,000
Long-term capital loss on sale of listed equity shares in recognized 1,10,000
stock exchange (STT paid at the time of acquisition and sale of
shares)
Following are the brought forward losses:
(1) Losses from owning and maintaining of race horses pertaining to A.Y. 2017-18
` 12,000.
(2) Brought forward loss from speculative business MNO 18,000 relating to A.Y. 2016-17.
(3) Brought forward loss from trading business of ` 12,000 relating to A.Y. 2015-16.
Assume Mr. Avinash has furnished his return of income on or before the due date
specified under section 139(1) in all the above previous years.

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 PAPER – 4: TAXATION 11

10. Mr. Darshan aged 61 years, working with G Ltd., submits the following particulars of
investments and payments made by him during the previous year 2018-19:
- Deposit of ` 1,50,000 in public provident fund
- Payment of life insurance premium of ` 62,000 on the policy taken on 01.4.2017 to
insure his life (Sum assured – ` 3,00,000).
- Deposit of ` 55,000 in a five year term deposit with bank.
- Contributed ` 1,95,000, being 15% of his salary (basic salary plus dearness
allowance, which forms part of retirement benefits) to the NPS of the Central
Government. A matching contribution was made by G Ltd.
- On 1.4.2018, mediclaim premium of ` 1,08,000 and ` 80,000 paid as lumpsum to
insure his and his wife (aged 58 years) health, respectively for four years medical
insurance and incurred ` 46,000 towards medical expenditure of his father, aged 90
years, not dependent on him. No insurance policy taken for his father.
- He spent ` 6,000 for the preventive health-check up of his wife.
- He has incurred an expenditure of ` 90,000 for the medical treatment of his mother,
being a person with severe disability.
His income comprises of income from salary of ` 18,50,000 and interest on fixed
deposits of ` 75,000.
Compute the deduction available to Mr. Darshan under Chapter VI-A for A.Y.2019-20.
Would your answer be different, if Mr. Darshan contributed ` 1,30,000 (being, 10% of his
salary) towards NPS of the Central Government?
11. Mr. Krishan, aged 58 years, a resident individual and practicing Chartered Accountant,
furnishes you the receipts and payments account for the financial year 2018-19.
Receipts and Payments Account
Receipts ` Payments `
Opening Balance Staff salary, bonus and stipend 17,50,000
(01-04-2018) to articled clerks
Cash & Bank 80,000 Other general and administrative 22,00,000
expenses
Fee from professional 49,60,000 Office rent 1,48,000
services
Motor car loan from ICICI 5,00,000 Life Insurance Premium (Sum 49,000
@12% interest per annum Assured ` 5,00,000]

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 12 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Sale receipts of 5,800 listed 5,95,000 Motor car (Acquired in January 9,50,000
equity shares (sold on 31 st 2019 by way of online payment)
January 2019)
Books bought by way of A/c 80,000
payee cheque in the month of
May, June and September 2018
(annual publications)
Computer acquired on 1-11- 52,000
2018 for professional use
(payment made by A/c payee
cheque)
Domestic drawings 6,23,000
Motor car maintenance 72,000
Public Provident Fund 1,50,000
subscription
Closing balances (31-03-2019)
Cash & Bank 61,000
61,35,000 61,35,000

Other information:
(i) Listed equity shares on which STT was paid were acquired in August 2016 for
` 1,21,800. The fair market value of such shares as on 31 st January 2018 and on
1st April 2018 was ` 75 per share and ` 85 per share, respectively.
(ii) Motor car was put to use for both official and personal purposes.1/5th of the motor
car is for personal purpose. No interest on car loan was paid during the previous
year 2018-19.
(ii) Mr. Krishan purchased a flat in Gwalior for ` 35,00,000 in July 2012 cost of which
was partly financed by a loan from Punjab National Housing Finance Limited of
` 25,00,000, his own-savings ` 1,00,000 and a deposit from Canara Bank for
` 9,00,000. The flat was given to Canara Bank on lease for 10 years @ ` 35,000
per month. The following particulars are relevant:
(a) Municipal taxes paid by Mr. Krishan ` 8,200 per annum
(b) House insurance ` 11,000
As per interest certificate issued by Punjab National Housing Finance Limited for the
financial year 2018-19, he paid ` 1,80,000 towards principal and ` 2,01,500 as interest.
(iii) He earned ` 1,20,000 in share speculation business and lost ` 1,80,000 in
commodity speculation business.

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 PAPER – 4: TAXATION 13

(iv) Mr. Krishan received a gift of ` 21,000 each from four of his family friends.
(v) He contributed ` 1,21,000 to Prime Minister's Drought Relief Fund by way of bank
draft.
(vi) He donated to a registered political party ` 3,50,000 by way of cheque.
(vii) He follows cash system of accounting.
(viii) Cost Inflation Index : F.Y. 2016-17 – 264; F.Y. 2018-19 - 280
Compute the total income of Mr. Krishan and the tax payable for the Assessment year 2019-20.
12. (a) Mr. Narayan is engaged in the retail business of groceries. During the previous year
2018-19 his turnover was ` 1.65 crores. Out of this, receipt of ` 1.30 crore
represents online transactions and ` 35 lakhs cash transactions. He opted for
paying tax as per presumptive taxation scheme laid down in section 44AD. He has
no other income during the previous year.
Is he liable to pay advance tax and if so, what is the minimum amount of advance
tax to be paid and the due date for payment of such advance tax?
(b) Mr. Shivpal, a very senior citizen, has reported a Total Income ` 4,90,000 and the
deductions eligible under Chapter VI-A amounting to ` 1,70,000 for the previous
year 2018-19. Is he liable to file his return of income under section 139(1) for the
Assessment year 2019-20? If so why?

SUGGESTED ANSWERS

OBJECTIVE TYPE QUESTIONS

I. (a)
II. (a)
III. (b)
IV. (c)
V. (b)
VI. (d)
VII. (b)
VIII. (d)
IX. (b)
X. (a)

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 14 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

DESCRIPTIVE QUESTIONS
1. The residential status of Ms. Nicole Kidman, a foreign national, would be determined in
the following manner -
Previous 2018-19 2017-18 2016-17 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11
Year
No. of
days of 102 20 46 201 137 102 102 102 102
stay in
India
Ms. Nicole Kidman is said to be resident if she satisfies any one of the following basic
conditions:
(i) Has been in India during the previous year for a total period of 182 days or more
(or)
(ii) Has been in India during the 4 years immediately preceding the previous year for a
total period of 365 days or more and has been in India for at least 60 days during
the previous year.
Ms. Nicole Kidman’s stay in India during the P.Y.2018-19 is less than 182 days. However,
her stay in India during the P.Y.2018-19 is 102 days, which exceeds 60 days; and her stay
in India during the four previous years prior to P.Y.2018-19 is 404 days
[20 + 46 + 201 + 137], which exceeds 365 days. Hence, she is a resident for P.Y.2018-19.
Further, Ms. Nicole Kidman would be “Resident but not ordinarily resident” in India in
during the previous year 2018-19, if she:
(a) has been a non-resident in 9 out of 10 previous years preceding the relevant
previous year; or
(b) has during the 7 previous years immediately preceding the relevant previous year
been in India for less than 730 days.
If she does not satisfy both of these conditions, she would be a resident and ordinarily
resident.
In the present case, her stay in India in the last seven previous years prior to P.Y.2018-
19 is 710 days [20 +46 +201+137 +102 +102 +102], which is less than 730 days.
Therefore, she is resident but not ordinarily resident for the P.Y.2018-19 even if she is
resident in the two assessment years i.e., A.Y.2016-17 and A.Y.2015-16 as per the
information given in the question.
2. In cases where the assessee himself grows rubber plants and manufactures rubber
processed from latex obtained from rubber plants in India, then, as per Rule 7A, 35% of
profit on sale of rubber is taxable as business income under the head “Profits and gains

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 PAPER – 4: TAXATION 15

from business or profession”, and the balance 65% is agricultural income, which is
exempt from tax.
Profits from manufacture and sale of rubber processed from latex = ` 47 lakhs – ` 25
lakhs – ` 7 lakhs = ` 15 lakhs
Agricultural Income = 65% of ` 15 lakhs = ` 9.75 lakhs
Business Income = 35% of ` 15 lakhs = ` 5.25 lakhs.
The tax liability of Mr. Rana has to be computed applying the concept of partial
integration, since his total income comprises of both agricultural income and non-
agricultural income and his agricultural income exceeds ` 5,000 p.a and his non-
agricultural income exceeds the basic exemption limit i.e., ` 2,50,000 (applicable, in his
case).
Accordingly, his tax liability would be computed in the following manner:
Computation of tax liability of Mr. Rana for the A.Y. 2019-20
Particulars `
Tax on total income of ` 15,00,000, being agricultural income and 2,62,500
non-agricultural income
Less: Tax on agricultural income and basic exemption limit i.e.,
` 12,25,000 [` 9,75,000 plus ` 2,50,000] 1,80,000
82,500
Add: Health and Education cess@4% 3,300
Total Tax liability 85,800

3. Computation of income chargeable to tax under the head “Salaries” in the hands of
Ms. Aarohi for A.Y.2019-20
Particulars `
Basic Salary [` 70,000 x 12] 8,40,000
Dearness allowance [` 24,000 x 12] 2,88,000
Bonus [` 21,000 x 12] 2,52,000
Perquisite value in respect of concessional rent [See Working Note 36,000
below]
Gift voucher given by employer on Ms. Aarohi’s birthday (entire
amount is taxable since the perquisite value exceeds `5,000) [See 10,000
Note for Alternative view]
Employer’s contribution to recognized provident fund in excess of
12% of salary 91,872

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 16 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

= 18% x [(` 70,000 + ` 24,000) x 12] – 12% x {[` 70,000 + ` 7,200

(being 30% of ` 24,000)] x 12} = 2,03,040 – 1,11,168
[Salary = Basic Salary + Dearness allowance, to the extent it forms
part of pay for retirement benefits]
Medical insurance premium of ` 20,000 paid by the employer to effect -
an insurance on the health of an employee is an exempt perquisite
Provision of motor car (engine cubic capacity more than 1.6 litres)
owned by employer to an employee without chauffeur for both official
and personal purpose, where the expenses are fully met by the
employer - the perquisite value would be `2400/- p.m. [`2,400 × 5 12,000
months]
Gross salary 15,29,872
Less: Standard deduction under section 16(ia) 40,000
Salary chargeable to tax 14,89,872
Working Note:
Where the accommodation is taken on lease or rent by the employer, the actual amount
of lease rent paid or payable by the employer or 15% of salary, whichever is lower, in
respect of the period during which the house is occupied by the employee, as
reduced by the rent recoverable from the employee, is the value of the perquisite.
Actual rent paid by the employer from 1.11.2018 to 31.3.2019 = ` 60,000 [ ` 12,000 x 5
months]
15% of salary = ` 73,650 [15% x (` 70,000 + ` 7,200 + ` 21,000) x 5 months]
Salary = Basic Salary + Dearness Allowance, to the extent it forms part of pay for
retirement benefits + Bonus
Lower of the above is ` 60,000 which is to be reduced by the rent recovered from the
employee.
Hence, the perquisite value of concessional rent = ` 60,000 – `24,000 [` 4,800 x 5
months] = ` 36,000
Note: As per Rule 3(7)(iv), the value of any gift or voucher received by the employee or
by member of his household on ceremonial occasions or otherwise from the employer
shall be determined as the sum equal to the amount of such gift. However, the value of
any gift or voucher received by the employee or by member of his household below
` 5,000 in aggregate during the previous year would be exempt as per the proviso to
Rule 3(7)(iv).
In this case, the gift voucher of ` 10,000 was received by Ms. Aarohi from her employer
on the occasion of her birthday. Since the value of the gift voucher exceeds the limit of

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 PAPER – 4: TAXATION 17

` 5,000, the entire amount of ` 10,000 is liable to tax as perquisite. The above solution
has been worked out accordingly.
Alternative view - An alternate view is also possible is that only the sum in excess of
` 5,000 is taxable in view of the language of Circular No.15/2001 dated 12.12.2001,
which states that such gifts upto ` 5,000 in the aggregate per annum would be exempt,
beyond which it would be taxed as a perquisite. As per this view, the value of perquisite
would be ` 5,000. The salary chargeable to tax, in this case, would be ` 14,84,872.
4. In this case, Shraddha has more than one house property for self-occupation. As per
section 23(4), Shraddha can avail the benefit of self-occupation (i.e., benefit of “Nil”
Annual Value) only in respect of one of the house properties, at her option. The other
house property would be treated as “deemed let-out” property, in respect of which the
expected rent would be the gross annual value. Shraddha should, therefore, consider the
most beneficial option while deciding which flat should be treated by her as self-
occupied.
OPTION 1 [Flat at Goregaon – Self-occupied and Flat at Navi Mumbai – Deemed to
be let out]
If Flat at Goregaon is opted to be self-occupied, Shraddha's income from house property
for A.Y.2019-20 would be –
Particulars Amount in `
Flat at Goregaon (Self-occupied) [Annual value is Nil] Nil
Flat at Navi Mumbai (Deemed to be let-out) [See Working Note 42,660
below]
Income from house property 42,660
OPTION 2 [Flat at Goregaon – Deemed to be let out and Flat at Navi Mumbai – Self-
occupied]
If Flat at Navi Mumbai is opted to be self-occupied, Shraddha’s income from house
property for A.Y.2019-20 would be –
Particulars Amount in `
Flat at Goregaon (Deemed to be let-out) [See Working Note below] 98,000
Flat at Navi Mumbai (Self-occupied) [Annual value is Nil, but interest
deduction would be available, subject to a maximum of ` 30,000. In
case of money borrowed for repair of self-occupied property, the (30,000)
interest deduction would be restricted to ` 30,000, irrespective of the
date of borrowal].
Income from house property 68,000

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 18 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Since Option 1 is more beneficial, Shraddha should opt to treat Flat at Goregaon as
Self-occupied and Flat at Navi Mumbai as Deemed to be let out, in which case, her
income from house property would be ` 42,660 for the A.Y. 2019-20.

Working Note:
Computation of income from Flats at Goregaon & Navi Mumbai assuming that both
are deemed to be let out
Particulars Amount in Rupees
Flat at Flat at Navi
Goregaon Mumbai
Gross Annual Value (GAV)
Expected Rent is the GAV of house property
Expected Rent = Higher of Municipal Value and Fair
Rent but restricted to Standard Rent 1,40,000 1,80,000
Less: Municipal taxes (paid by the owner during the Nil 16,200
previous year)
Net Annual Value (NAV) 1,40,000 1,63,800
Less: Deductions under section 24
(a) 30% of NAV 42,000 49,140
(b) Interest on borrowed capital (allowed in
full in case of deemed let out property) - 72,000
Income from deemed to be let-out house property 98,000 42,660
5. Since Mr. Jai Prakash does not own more than 10 vehicles at any time during the
previous year 2018-19, he is eligible to opt for presumptive taxation scheme under
section 44AE. ` 1,000 per ton of gross vehicle weight or unladen weight per month or
part of the month for each heavy goods vehicle and ` 7,500 per month or part of month
for each goods carriage other than heavy goods vehicle, owned by him would be deemed
as his profits and gains from such goods carriage.
Heavy goods vehicle means any goods carriage, the gross vehicle weight of which
exceeds 12,000 kg.
(1) (2) (3) (4)
Number of Date of No. of months for No. of months × No. of
Vehicles purchase which vehicle is vehicles
owned [(1) × (3)]
For Heavy goods vehicle
1 21.07.2018 9 9

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 PAPER – 4: TAXATION 19

2 23.01.2019 3 6
15
For goods vehicle other than heavy goods vehicle
3 11.5.2018 11 33
1 16.3.2019 1 1
1 21.9.2018 7 7
2 12.1.2019 3 6
47
The presumptive income of Mr. Jai Prakash under section 44AE for A.Y.2019-20 would
be ` 5,77,500, i.e., ` 3,52,500 (47 × ` 7,500, being for other than heavy goods vehicle) +
` 2,25,000 (15 x ` 1,000 x 15 ton, being for heavy goods vehicle).
The answer would remain the same even if the two vehicles purchased in January, 2019
were put to use only in July, 2019, since the presumptive income has to be calculated per
month or part of the month for which the vehicle is owned by Mr. Jai Prakash.
6. Computation of capital gain on slump sale of Unit RS for A.Y. 2019-20
Particulars `
Full value of consideration 15,40,00,000
Less: Deemed cost of acquisition (Net worth is deemed to be the
cost of acquisition) [Refer Working Note below] 8,70,00,000
Long-term capital gain [Since the Unit is held for more than 36 6,70,00,000
months]

Working Note: Net worth of Unit-RS

Particulars `
Cost of Land (Revaluation not to be considered) 90,00,000
WDV of other depreciable fixed assets as per the Income-tax Act, 1961 6,30,00,000
Other Assets (book value) 4,90,00,000
12,10,00,000
Less: Liabilities 3,40,00,000
Net worth 8,70,00,000
Notes:
(1) In case of slump sale, net worth of the undertaking transferred shall be deemed to
be the cost of acquisition and cost of improvement as per section 50B.
(2) “Net worth” of the undertaking shall be the aggregate value of total assets of the

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 20 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

undertaking or division as reduced by the value of liabilities of such undertaking or

division as appearing in the books of accounts.
However, any change in the value of assets on account of revaluation shall not be
considered for this purpose.
(3) For calculating aggregate value of total assets of the undertaking or division in case
of slump sale in case of depreciable assets, the written down value of block of
assets determined in accordance with the provisions contained in section 43(6) of
Income-tax Act, 1961 is to be considered and for all other assets, book value is to
be considered.
(4) Since Unit RS is held by the assessee for more than 36 months, the capital gain
arising from slump sale is a long-term capital gain.
(5) Indexation benefit is not available in case of slump sale
7. In the hands of the seller, Mr. Suraj
As per section 50C, where the consideration received or accruing as a result of transfer
of land or building or both, is less than the value adopted or assessed or assessable by
the stamp valuation authority, the value adopted or assessed or assessable by the stamp
valuation authority shall be deemed to be the full value of consideration received or
accruing as a result of transfer.
However, where the date of registration and date of agreem ent are not the same and part
or whole of the consideration is received by way of A/c payee cheque or A/c payee bank
draft or by use of ECS on or before the date of agreement, then stamp duty value on the
date of agreement may be taken to be the full value of consideration.
Further, where the stamp duty value on the date of agreement or registration, as the case
may be, does not exceed 105% of the amount of consideration received or receivable
then the consideration so received would be deemed to be the full value of the
consideration.
In the present case, since Mr. Suraj has received 10% of the consideration by way of A/c
payee cheque on the date of agreement, the stamp duty value of ` 44,00,000 on the date
of agreement would be taken for the purpose of computing full value of consideration.
Further, since the stamp duty of land and building of ` 44,00,000 does not exceed
` 44,10,000 i.e., 105% of ` 42,00,000, the consideration received i.e., ` 42,00,000 in
respect of land and building would be deemed to be the full value of consideration.
In the given problem, land has been held for a period exceeding 24 months and building
for a period less than 24 months immediately preceding the date of transfer. So land is a
long-term capital asset, while building is a short-term capital asset.

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 PAPER – 4: TAXATION 21

Accordingly, capital gains would be determined in the following manner:

Particulars `
Long term capital gain on sale of land
Consideration received or accruing as a result of transfer of land [70% of 29,40,000
` 42,00,000]
Less: Indexed cost of acquisition ` 9,20,000 x 280/200 12,88,000
Long-term capital gain (A) 16,52,000
Short-term capital loss on sale of building
Consideration received or accruing from transfer of building [30% of 12,60,000
` 42,00,000]
Less: Cost of acquisition 15,50,000
Short term capital loss (B) (2,90,000)
As per section 70(2), short-term capital loss can be set-off against long-term capital
gains. Therefore, the net taxable long-term capital gains would be ` 13,62,000 (i.e.,
` 16,52,000 – ` 2,90,000). The same would be taxable @ 20% under section 112, after
adjusting un-exhausted basic exemption limit, if any, against such long term capital gain.
In the hands of the buyer Mr. Ganesh
As per section 56(2)(x), where any person receives from a non-relative, any immovable
property for a consideration which is less than the stamp duty value on the date of
agreement or date of registration as the case may be, and the difference between actual
consideration and stamp duty value so considered is more than the higher of ` 50,000 or
5% of the consideration so received, then the difference between such value and actual
consideration of such property is chargeable to tax as income from other sources.
Where the date of registration and date of agreement are not the same and part or whole
of the consideration is paid by way of A/c payee cheque or A/c payee bank draft or by
use of ECS on or before the date of agreement, then stamp duty value on the date of
agreement may be taken for the purpose of determining income taxable under the head
“Income from other sources”.
Since in the present case, Mr. Ganesh has paid 10% of the consideration by way of A/c
payee cheque, the stamp duty value on the date of agreement has to be taken. Further,
since the difference of ` 2,00,000 is not more than ` 2,10,000 being higher of ` 50,000
and ` 2,10,000 (5% of ` 42,00,000), no income would be chargeable to tax as income
from other sources in the hands of Mr. Ganesh.

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 22 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

8. Computation of Gross Total Income of Mr. Mayur for the A.Y. 2019-20
Particulars ` ` `
Income from profession 4,50,000
Income of minor son Tejas
Capital gains
Full value of consideration 4,80,000
Less: Indexed Cost of Acquisition [` 95,000 x
280/184] 1,44,565 3,35,435
Income from Other Sources
Dividend of ` 10,000 on equity shares [Exempt u/s -
10(34)]
Interest on company deposit
[` 3,10,000 x 14% x 4/12] 14,467 14,467
3,49,902
Less: Exemption u/s 10(32) in respect of income of
minor child 1,500
3,48,402
Gross Total Income 7,98,402
Notes:
(1) As per section 64(1A), in computing the total income of an individual, all such
income accruing or arising to a minor child shall be included. However, income of a
minor child suffering from disability specified under section 80U would not be
included in the income of the parent but would be taxable in the hands of the minor
child. Therefore, in this case, interest income of ` 42,500 arising to handicapped
son, Master Tanmay, would not be clubbed with the income of Mr. Mayur.
(2) Income of the other minor child, Master Tejas, is includible in the hands of
Mr. Mayur, assuming that Mr. Mayur’s income is higher than that of his wife.
(3) In the above solution, the indexed cost of acquisition has been computed by taking
into consideration the first year in which Master Tejas held the asset, i.e., F.Y.2011-
12, as per the definition given in clause (iii) of Explanation below section 48.
However, as per the view expressed by Bombay High Court in CIT v. Manjula J.
Shah 16 Taxman 42, in case the cost of acquisition of the capital asset in the hands
of the assessee is taken to be cost of such asset in the hands of the previous
owner, the indexation benefit would be available from the year in which the capital
asset is acquired by the previous owner. If this view is considered, the indexed cost
of acquisition would have to be calculated by considering the Cost Inflation Index of
F.Y.2004-05. The solution based on alternate view is given as under:

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 PAPER – 4: TAXATION 23

Computation of gross total income of Mr. Mayur for the A.Y. 2019-20
Particulars ` ` `
Income from profession 4,50,000
Income of minor son Tejas
Capital gains
Full value of consideration 4,80,000
Less: Indexed Cost of Acquisition [` 95,000 2,35,398 2,44,602
x 280/113]
Income from Other Sources
Dividend on equity shares [Exempt u/s -
10(34)]
Interest on company deposit [` 3,10,000 x 14,467 14,467
14% x 4/12]
2,59,069
Less: Exemption u/s 10(32) in respect of
income of minor child 1,500
2,57,569
Gross Total Income 7,07,569

9. Computation of Gross total income of Mr. Avinash for the A.Y.2019-20

Particulars ` `
Salaries
Income from Salary 4,18,000
Less: Loss from house property set-off against salary (1,90,000) 2,28,000
[As per section 71(3A), loss from house property to the
extent of ` 2,00,000 can be set-off against any other head
of income. In case of Mr. Avinash, it is more beneficial to
set-off the loss from house property against long-term
capital gains, since LTCG would be taxable @ 20%.
Accordingly, loss to the extent of ` 10,000 is set-off against
LTCG (shown below) and ` 1,90,000 set-off against income
under the head “Salaries”]
Profits and gains of business or profession
Income from trading business 2,80,000

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 24 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Less: Brought forward loss from trading business of A.Y.

2015-16 can be set off against current year income from
trading business as per section 72(1), since the eight-year
time limit as specified under section 72(3), within which set- (12,000) 2,68,000
off is permitted, has not expired.
Income from speculative business BPO 25,000
Less: Loss from speculative business MNO set-off as per (12,000)
section 73(1)
Loss from speculative business MNO brought forward from
A.Y. 2016-17 as per section 73(2), can be set off to the extent (13,000) -
of
Capital Gains
Long term capital gain on sale of urban land 2,05,000
Less: Long term capital loss on sale of shares (STT not
paid) set-off as per section 74(1) (85,000)
Less: Long-term capital loss on sale of listed equity shares
on which STT is paid can also be set-off as per section
74(1), since long-term capital arising on sale of such shares
is taxable under section 112A (1,10,000)
Less: Loss from house property (10,000) -

Income from owning and maintaining race horses 8,000

Less: Set-off of brought forward losses from owning and
maintaining race horses as per section 74A(3) (8,000) -
Gross Total Income 4,96,000
Items eligible for carried forward to A.Y.2020-21
Particulars `
Loss from house property 20,000
As per section 71B, balance loss not set-off can be carried forward to
the next year for set-off against income from house property of that year.
It can be carried forward for a maximum of eight assessment years i.e.,
upto A.Y. 2027-28, in this case.
Loss from speculative business MNO 5,000
Loss from speculative business can be set-off only against profits from
any other speculation business. As per section 73(2), balance loss not
set-off can be carried forward to the next year for set-off against
speculative business income of that year. Such loss can be carried

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 PAPER – 4: TAXATION 25

forward for a maximum of four assessment years i.e., upto A.Y. 2020-21,
in this case, as specified under section 73(4).
Loss from specified business under section 35AD 45,000
Loss from specified business under section 35AD can be set-off only
against profits of any other specified business. If loss cannot be so set-
off, the same has to be carried forward to the subsequent year for set off
against income from specified business, if any, in that year. As per
section 73A(2), such loss can be carried forward indefinitely for set-off
against profits of any specified business .
Loss from the activity of owning and maintaining race horses 4,000
Losses from the activity of owning and maintaining race horses (current
year or brought forward) can be set-off only against income from the
activity of owning and maintaining race horses. If it cannot be so set-off,
it has to be carried forward to the next year for set-off against income
from the activity of owning and maintaining race horses, if any, in that
year. It can be carried forward for a maximum of four assessment years,
i.e., upto A.Y.2021-22, in this case, as specified under section 74A(3).

10. (i) Deduction available to Mr. Darshan under Chapter VI -A for A.Y.2019-20
Section Particulars ` `
80C Deposit in public provident fund 1,50,000
Life insurance premium paid ` 62,000 30,000
(deduction restricted to ` 30,000, being 10% of
` 3,00,000, which is the sum assured, since
the policy was taken on or after 01.04.2012)
Five year term deposit with bank 55,000
2,35,000
Restricted to 1,50,000
80CCD(1) Contribution to NPS of the Central Government,
` 1,45,000 [` 1,95,000 – ` 50,000, being
deduction under section 80CCD(1B)], restricted to
10% of salary [` 1,95,000 x 10/15] [See Note 1]
1,30,000
2,80,000
80CCE Aggregate deduction under section 80C and
80CCD(1), ` 2,80,000, but restricted to 1,50,000
80CCD(1B) ` 50,000 would be eligible for deduction in
respect of contribution to NPS of the Central 50,000
Government

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 26 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

80CCD(2) Employer contribution to NPS, restricted to

10% of salary [See Note 2] 1,30,000
80D (i) (a) Medical insurance premium for self 47,000
and his wife, deduction would be
equal to ` 47,000 (` 27,000 +
` 20,000), being 1/4th of lumpsum
premium, since policies would be in
force for four previous years.
(b) Preventive health check up ` 6,000
for wife restricted to ` 3,000
(` 50,000 - ` 47,000, since maximum
allowable deduction is ` 50,000 in
case assessee or one of the family
member is senior citizen) 3,000
50,000
(ii) Medical Expenditure for his father would be
fully allowed as deduction, since no
insurance policy is taken on his name 46,000
Total of (i) and (ii) 96,000
80DD Deduction of ` 1,25,000 in respect of
expenditure on medical treatment of his 1,25,000
mother, being a person with severe disability
would be allowed irrespective of the fact that
amount of expenditure incurred is ` 90,000
80TTB Interest on fixed deposits with bank of 50,000
` 75,000, deduction restricted to
Deduction under Chapter VI-A 6,01,000
Notes:
(1) The deduction under section 80CCD(1B) would not be subject to overall limit of
` 1.50 lakh under section 80CCE. Therefore, it is more beneficial for
Mr. Darshan to claim deduction under section 80CCD(1B) first in respect of
contribution to NPS. Thereafter, the remaining amount of ` 1,45,000 can be
claimed as deduction under section 80CCD(1), subject to a maximum limit of
10% of salary i.e. ` 1,30,000.
(2) The entire employer’s contribution to notified pension scheme has to be first
included under the head “Salaries” while computing gross total income and
thereafter, deduction under section 80CCD(2) would be allowed, subject to a
maximum of 10% of salary. Deduction under section 80CCD(2) is also not
subject to the overall limit of ` 1,50,000 under section 80CCE

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 PAPER – 4: TAXATION 27

(ii) If the contribution towards NPS is ` 1,30,000, here again, it is beneficial for
Mr. Darshan to first claim deduction of ` 50,000 under section 80CCD(1B) and the
balance of ` 80,000 can be claimed under section 80CCD(1), since the deduction
available under section 80CCD(1B) is over and above the aggregate limit of
` 1,50,000 under section 80CCE. In any case, the aggregate deduction of
` 2,30,000 [i.e., ` 1,50,000 under section 80C and ` 80,000 under section
80CCD(1)] cannot exceed the overall limit of ` 1,50,000 under section 80CCE. The
total deduction under Chapter VIA would remain the same i.e., ` 6,01,000.
11. Computation of total income and tax liability of Mr. Krishan for A.Y. 2019-20
Particulars ` ` `
Income from house property
Gross annual value1 (` 35,000 x 12) 4,20,000
Less: Municipal taxes paid by Mr. Krishan 8,200
Net annual value 4,11,800
Less: Deductions under section 24
(a) 30% of Net Annual Value 1,23,540
(b) Interest on house borrowing
(allowed in full in case of let out 2,01,500
property)
86,760
Profits and gains of business or profession
Income from profession
Fees from professional services 49,60,000
Less: Expenses allowable as deduction
- Staff salary, bonus and stipend 17,50,000
- Other general and administrative 22,00,000
expenses
- Office rent 1,48,000
- Motor car maintenance (` 72,000 x 4/5) 57,600
- Car loan interest – not allowable, since
Mr. Krishan follows cash system of
accounting and no interest is paid during - 41,55,600
the previous year)
8,04,400
Less: Depreciation u/s 32
- Motor car ` 9,50,000 x 15% x 50% x 4/5, 57,000
being put to use for less than 180 days

1 Rent receivable has been taken as the gross annual value in the absence of other information

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 28 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

- Books being annual publications 32,000

[` 80,000 x 40%]
- Computer @40% of ` 52,000 x 50%,
since the same is put to use for less than 10,400 99,400
180 days
For the P.Y. 2018-19, the gross receipts of 7,05,000
Mr. Krishan is ` 49,60,000. Since, it does not
exceed ` 50,00,000, he is eligible to opt for
presumptive tax scheme under section 44ADA
In such case, his professional income would
be ` 24,80,000, being 50% of ` 49,60,000
It is more beneficial for Mr. Krishan to declare
profit of ` 7,05,000 as per books of accounts
which is lower than the profits computed on
presumptive basis under section 44ADA.
However, for declaring lower profits, he has to
maintain books of account under section 44AA
and get the same audited under section 44AB
Income from share speculation business 1,20,000
Less: Loss from commodity speculation
business set off against income from share
speculation business. Balance loss of
` 60,000 from commodity speculation 1,20,000 Nil 7,05,000
business to be carried forward to A.Y. 2020-21
Capital Gains
Long-term capital gains on sale of 5800 listed
shares
Sale consideration 5,95,000
Less: Cost of acquisition is higher of 4,35,000 1,60,000
- Cost of acquisition 1,21,800
- Lower of ` 4,35,000 (` 75 x 5800), 4,35,000
being fair market value as on
31.1.2018 and ` 5,95,000, being full
value of consideration on transfer
Income from other sources
Cash Gift of ` 84,000 i.e., ` 21,000 x 4,
received from his four friends is taxable u/s
56(2)(x), since aggregate amount of cash gifts 84,000
exceeds ` 50,000
Gross Total Income 10,35,760

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 PAPER – 4: TAXATION 29

Less: Deductions under Chapter VI-A

Section 80C
Life insurance premium 49,000
Repayment of housing loan 1,80,000
PPF subscription 1,50,000
3,79,000
Restricted to ` 1,50,000 1,50,000
Section 80G
Contribution to Prime Minister’s Drought Relief 60,500
Fund (50% of ` 1,21,000) by way of bank draft
Section 80GGC
Donation to registered political party made by 3,50,000
way of cheque
5,60,500
Total Income 4,75,260
Tax liability
Tax @ 10% under section 112A on long-term 6,000
capital gains exceeding ` 1,00,000 i.e.,
` 60,000
Tax @5% on ` 65,260 [` 3,15,260 (total
income excluding LTCG u/s 112A) -
` 2,50,000, being basic exemption limit] 3,263
9,263
Add: Health and Education cess@4% 371
Tax liability 9,634
Tax liability (rounded off) 9,630
12. (a) Computation of advance tax liability in the hands of Mr. Narayan opting for
presumptive taxation scheme under section 44AD
Particulars `
As per section 211, an eligible assessee, opting for computation of
profits or gains of business on presumptive basis in respect of an
eligible business referred to in section 44AD, shall be required to
pay advance tax of the whole amount in one instalment on or before
15th March of the financial year. Thus, Mr. Narayan is required to
pay advance tax by 15 th of March 2019.
However, any amount paid by way of advance tax on or before
31st March shall also be treated as advance tax paid during that
financial year on or before 15 th March.

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 30 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

The advance tax liability is computed as follows –

Business Income
8% of ` 35,00,000 2,80,000
6% of ` 1,30,00,000 7,80,000 10,60,000
In respect of the amount of turnover received by
account payee cheque/bank draft or use of ECS
through a bank account, the assessee can declare 6%
(instead of 8%) of such turnover as presumptive
income under section 44AD.
Since Mr. Narayan does not have any other income
during the previous year 2018-19, business income
would be the total income.
Tax liability
Upto `2,50,000 Nil
`2,50,001 to `5,00,000 @5% 12,500
`5,00,001 to `10,00,000 @20% 1,00,000
Above `10,00,001 @30% 18,000 1,30,500
Add: Health and Education cess @ 4% 5,220
Total Tax Payable 1,35,720
Mr. Narayan is required pay ` 1,35,720 as minimum amount of advance tax by
15th March 2019.
(b) As per sixth proviso to section 139(1), every person, being an individual whose total
income without giving effect to the provisions of, inter alia, Chapter VI-A exceeds
the basic exemption limit, is compulsorily required to furnish return of income on or
before the due date.
Therefore, in the present case, Mr. Shivpal, a very senior citizen is required to file
return of income, since his total income of ` 6,60,000 before giving effect to the
deduction of ` 1,70,000 under Chapter VI-A, exceeds the basic exemption limit of
` 5,00,000 applicable in his case.

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 PAPER – 4: TAXATION 31

SECTION B: INDIRECT TAXES

QUESTIONS

(1) All questions should be answered on the basis of the positio n of GST law as
amended up to 31.10.2018.
(2) The GST rates for goods and services mentioned in various questions are
hypothetical and may not necessarily be the actual rates leviable on those goods
and services. Further, GST compensation cess should be ignored in all the
questions, wherever applicable.
1. M/s. Ramchandra Associates has received some taxable services from Mohan Dalal (P)
Ltd. on 12.01.20XX by making a cash payment of ` 5,00,000 on same day. The payment
was entered in the books of account of M/s. Ramchandra Associates on 16.01.20XX and
in the books of account of Mohan Dalal (P) Ltd. on 20.01.20XX. The invoice was issued
by Mohan Dalal (P) Ltd. on 18.01.20XX. Determine the time of supply in the given case.
(a) 12.01.20XX
(b) 16.01.20XX
(c) 18.01.20XX
(d) 20.01.20XX
2. M.H. Husain, a famous painter, Delhi, sends his latest art work to Indian Classic gallery,
Delhi, for exhibition. However, no consideration has flown from Indian Classic gallery to
M. H. Husain when the art work is sent to the gallery for exhibition. M. H. Husain is in
dilemma whether GST is payable on said transfer of art work. What would be your advice
on the same?
(a) GST is payable as the same amounts to taxable supply of goods.
(b) GST is payable as the same amounts to taxable supply of services.
(c) GST is not payable as the same is an exempt supply.
(d) GST is not payable as the same does not amount to supply at all.
3. Kidzee Ltd., a wholesaler of toys registered in Chandigarh, is renowned in the local
market for the varieties of toys and their reasonable prices. Kidzee Ltd. makes supply of
100 pieces of baby’s learning laptops and chat learning phones to Nancy General Store
on 25th September, 20XX by issuing a tax invoice amounting to ` 1,00,000.
However, the said toys were returned by Nancy General Store on 30th September, 20XX.
Which document Kidzee Ltd. is required to issue in such a case?
(a) Debit Note
(b) Refund voucher

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 32 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

(c) Credit note

(d) Payment voucher
4. Which of the following services is exempt from GST?
(a) Bollywood dance performance by a film actor in a film and consideration charged is
` 1,45,000.
(b) Carnatic music performance by a classical singer to promote a brand of readymade
garments and consideration charged is ` 1,30,000.
(c) Carnatic music performance by a classical singer in a music concert and
consideration charged is ` 1,55,000.
(d) Kathak dance performance by a classical dancer in a cultural programme and
consideration charged is ` 1,45,000.
5. Examine whether supply of food and drink in the following independent cases is exempt
from GST :-
(i) “Smart Kids” is a Play School located in Delhi. Smart Kids has outsourced the
catering services for supply of food and drink in the canteen of Play School to BTV
Caterers, Delhi for a consideration of ` 8,00,000 per annum.
(ii) Wellness Hospital, a clinical establishment located in Tirupati, is specialised in
diabetic treatment. The hospital has its own canteen – Tasty Foods. The canteen
serves the food and drink to the in-patients as advised by the doctors/nutritionists of
the hospital. Apart from this, other patients (who are not admitted) or attendants or
visitors of the in-patients also take food and drink from the canteen.
6. Sahil is a supplier of taxable goods in Karnataka. He got registered under GST in the
month of September, 20XX and wishes to pay his IGST liability for the month. Since he’s
making the GST payment for the first time, he is of the view that he needs to mandatorily
have the online banking facility to make payment of GST; offline payment is not permitted
under GST. You are required to apprise Sahil regarding the various modes of deposit in
the electronic cash ledger. Further, advise him with regard to following issues:
(a) Are manual challans allowed under GST?
(b) What is the validity period of the challan?
(c) Is cross utilization among Major and Minor heads of the electronic cash ledger
permitted?
7. M/s Cavenon Enterprises, a registered supplier of designer wedding dresses under
regular scheme, has aggregate annual turnover of ` 30 lakh in the preceding financial
year. It is of the view that in the current financial year, it is permitted to file its monthly
statement of outward supplies – GSTR-1 - on a quarterly basis while its accountant
advises it to file the same on a monthly basis. You are required to advise M/s Cavenon
Enterprises on the same.

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 PAPER – 4: TAXATION 33

During a given tax period in the current financial year, owing to an off-season,
M/s Cavenon Enterprises has not made any taxable supply. Therefore, M/s Cavenon
Enterprises opines that no return under GST is required to be filed for the said period.
You are required to examine the technical veracity of the opinion of M/s Cavenon
Enterprises.
8. Kamal Book Depot, a wholesaler of stationery items, registered in Mumbai, has received
order for supply of stationery items worth ` 2,00,000/- on 12th November, 20XX from
another local registered dealer, Mr. Mehta, Mumbai. Kamal Book Depot charged the
following additional expenses from Mr. Mehta:-
Particulars Amount (`)
(i) Packing charges 5,000
(ii) Freight & Cartage 2,000
(iii) Transit insurance 1,500
(iv) Extra designing charges 6,000
(v) Taxes by Municipal Authority 500
The goods were delivered to Mr. Mehta on 14 th November, 20XX. Since Mr. Mehta was
satisfied with the quality of the goods, he made the payment of goods the same day and
simultaneously placed another order on Kamal Book Depot of stationery items amounting
to ` 10,00,000 to be delivered in the month of December, 20XX**. On receipt of second
order, Kamal Book Depot allowed a discount of ` 20,000 on the first order placed by Mr.
Mehta.
Compute the GST liability of Kamal Book Depot for the month of November, 20XX
assuming the rates of GST on the goods supplied as under:
CGST 9%
SGST 9%
Would your answer be different if expenses (i) to (v) given in above table are already
included in the price of ` 2,00,000?
Note:-
(i) All the amounts given above are exclusive of GST .
(ii) Kamal Book Depot and Mr. Mehta are not related persons and price is the sole
consideration of the supply.
**Payment and invoice for the second order will also be made in the month of December,
20XX only.
9. Mr. Ekaant, a supplier registered in Delhi, is engaged in the business of sale and
purchase of plastic raincoats. He furnishes the following information pertaining to
inward/outward supply made by him for the month of July, 20XX:

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 34 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

Particulars Amount
(` in lakh)
Value of inter-State outward supply to registered persons 30
Value of intra-State outward supply to registered persons 50
Value of intra-State outward supply to unregistered persons 15
Value of intra-State inward supply from registered persons 10
Value of inter-State inward supply from registered persons 5
Value of intra-State inward supply from unregistered persons 2
Following additional information is also provided by Mr. Ekaant:-
Particulars Amount (` in lakh)
IGST credit on capital goods purchased in the month of July 1.5
CGST/ SGST credit on other inward supplies [including c redit of 0.5
` 5,000 (CGST and SGST each) on account of membership of a (CGST and SGST
club] each)
Availed consultancy services from Mr. Sujit, lawyer located in 1
Delhi [Intra-State services]
The amount of ITC brought forward in the month of July, 20XX is as under:-
CGST: ` 2 lakh
SGST: ` 2 lakh
IGST: ` 5 lakh
Calculate the net GST liability (CGST and SGST or IGST, as the case may be) to be paid
in cash for the month of July, 20XX by assuming the rates of GST as under:
CGST 9%
SGST 9%
IGST 18%
Note:
(i) All the amounts given above are exclusive of taxes.
(ii) All the conditions necessary for availing the ITC have been fulfilled.
10. Le Marc Ltd. of Nashik, Maharashtra, a registered supplier, is engaged in manufacturing
taxable goods. It provides the following details of items purchased and services availed
by it from Gujarat, for the month of March, 20XX:

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 PAPER – 4: TAXATION 35

S. Particulars IGST (`)

No.
1 Motor vehicle purchased for employees to be used for personal as 1,50,000
well as business purposes
2 Motor vehicle purchased for transportation of goods within the 2,00,000
factory
3 Food items for consumption of employees. These items were 2,000
supplied free of cost to the employees in lieu of services rendered
by them to the manufacturer in the course of employment.
4 Rent-a-cab facility availed for employees to fulfill a statutory 36,000
obligation in this regard. The Government has notified such
service under section 17(5)(b)(iii)(A) of the CGST Act, 2017.

Calculate the amount of eligible input tax credit for the month of March, 20XX.

SUGGESTED ANSWERS/HINTS

1. (c)
2. (d)
3. (c)
4. (d)
5. (i) Services provided to an educational institution providing services by way of
pre-school education and education up to higher secondary school or equivalent, by
way of catering is exempt from GST vide Notification No. 12/2017 CT (R) dated
28.06.2017 as amended. Thus, in the given case, services provided by BTV
Caterers to Smart Kids are exempt from GST .
(ii) Services by way of health care services provided by a clinical establishment, an
authorised medical practitioner or para-medics are exempt from GST vide
Notification No. 12/2017 CT (R) dated 28.06.2017 as amended.
In this regard, CBIC has clarified that food supplied by the hospital canteen to the
in-patients as advised by the doctor/nutritionists is a part of composite supply of
healthcare services and is not separately taxable. Thus, it is exempt from GST.
However, other supplies of food by a hospital to patients (not admitted) or their
attendants or visitors are taxable.
In view of the same, GST is exempt on the food supplied by Tasty Foods to the in-
patients as advised by doctors/nutritionists while other supplies of food by it to
patients (not admitted) or attendants/visitors of the in-patients is taxable.

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 36 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

6. Section 49(1) of CGST Act, 2017 read with rule 87 of CGST Rules, 2017 provides that
the deposit in electronic cash ledger can be made through any of the following modes,
namely:-
(i) Internet Banking through authorised banks;
(ii) Credit card or Debit card through the authorised bank;
(iii) National Electronic Fund Transfer or Real Time Gross Settlement from any
bank; or
(iv) Over the Counter payment through authorised banks.
Thus, offline mode is also permitted under GST.
(a) Manual or physical Challans are not allowed under the GST regime. It is mandatory
to generate Challans online on the GST Portal.
(b) E-challan is valid for a period of 15 days.
(c) Amount entered under any Minor head (T ax, Interest, Penalty, etc.) and Major Head
(CGST, IGST, SGST/UTGST) of the Electronic Cash Ledger can be utilized only for
that liability. Cross-utilization among Major and Minor heads is not possible.
7. Section 37 of the CGST Act, 2017 stipulates that GSTR-1 for a particular month is
required to be filed on or before the 10 th day of the immediately succeeding month, i.e.
on a monthly basis.
However, presently, as a measure of easing the compliance requirement for small tax
payers, GSTR-1 has been allowed to be filed quarterly by small tax payers with
aggregate annual turnover up to ` 1.5 crore in the preceding financial year or the current
financial year. Tax payers with annual aggregate turnover above ` 1.5 crore will
however continue to file GSTR- 1 on a monthly basis.
In view of the same, M/s Cavenon Enterprises can file its GSTR-1 on quarterly basis as
its aggregate turnover does not excced ` 1.5 crore in the preceding financial year.
Further, GSTR-1 needs to be filed even if there is no business activity in a tax period.
Thus, in the present case, even if no supply has been made by M/s Cavenon Enterprises,
a nil return is required to be filed for the relevant tax period.
8. Computation of value of taxable supply and tax liability
Particulars Amount (` )
Price of the goods [Note-1] 2,00,000
(i) Packing charges [Note-2] 5,000
(ii) Freight & Cartage [Note-3] 2,000
(iii) Transit Insurance [Note-3] 1,500
(iv) Extra Designing charges [Note-4] 6,000

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 PAPER – 4: TAXATION 37

(v) Taxes by Municipal Authority [Note-5] 500

Value of taxable supply 2,15,000
CGST @ 9% 19,350
SGST @ 9% 19,350
Notes:-
1. As per section 15(1) of the CGST Act, 2017, the value of a supply is the transaction
value i.e. the price actually paid or payable for the said supply.
2. All incidental expenses including packing charged by the supplier to the recipient
are includible in the value of supply in terms of section 15(2) of the CGST Act, 2017.
3. The given supply is a composite supply involving supply of goods (stationery items)
and services (transit insurance and freight) where the principal supply is the supply
of goods.
As per section 8(a) of the CGST Act, 2017, a composite supply is treated as a
supply of the principal supply involved therein and charged to tax accordingly.
4. Any amount charged for anything done by the supplier in respect of the supply of
goods or services or both at the time of, or before delivery of goods or supply of
services; is includible in the value of supply vide section 15(2) of the CGST Act,
2017. Thus, extra designing charges are to be included in the value of supply.
5. The taxes by Municipal Authorities are includible in the value of supply in terms of
section 15(2) of the CGST Act, 2017.
6. In the given case, Mr. Mehta is allowed a discount of ` 20,000 on the goods
supplied to him in the month of November, 20XX. Since the said goods have
already been delivered by Kamal Book Depot, this discount will be a post-supply
discount.
Further, value of supply shall not include any discount which is given after the
supply has been effected, if—
(i) such discount is established in terms of an agreement entered into at or before
the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document
issued by the supplier has been reversed by the recipient of the supply
[Section 15(3) of the CGST Act, 2017].
However, in the given case, post-supply discount given to Mr. Mehta will not be
allowed as a deduction from the value of supply since the discount policy was not
known before the time of such supply although the discount can be specifically
linked to relevant invoice (invoice pertaining to stationery items supplied to
Mr. Mehta in November, 20XX).

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 38 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

In case the expenses (i) to (v) given in above table are already included in the price
of ` 2,00,000: Since these expenses are includible in the value of supply by virtue of the
reasons mentioned in explanatory notes above, no further addition will be required.
Resultantly, the value of taxable supply will be ` 2,00,000 and CGST and SGST will be
` 18,000 and ` 18,000 respectively.
9. Computation of net GST liability of Mr. Ekaant
Particulars Value (`) CGST (`) SGST (` ) IGST (`)
Total tax liability
Value of intra-State legal 1,00,000 9,000 9,000 -
consultancy services i.e. inward
supplies liable to reverse charge
mechanism (to be paid in cash) (A)
[Note-1]
Value of inter-State outward 30,00,000 - - 5,40,000
supplies (B1)
Value of intra-State outward 65,00,000 5,85,000 5,85,000 -
supplies to registered as well as
unregistered persons (B2)
(` 50,00,000+ ` 15,00,000)
Total (B) = (B1) +(B2) 5,85,000 5,85,000 5,40,000
Input tax Credit
Brought forward ITC 2,00,000 2,00,000 5,00,000
Value of intra-State inward 10,00,000 90,000 90,000
supplies from registered person
[Note-2]
Value of inter-State inward 5,00,000 - - 90,000
supplies from registered person
[Note-2]
Value of intra-State inward 2,00,000 - - -
supplies from unregistered person
[Note-3]
IGST credit of capital goods [Note- 1,50,000
2]
Credit on other inward supplies 45,000 45,000 -
purchased in the month of July less
credit on membership of a club
[Note-2 & 4]

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 PAPER – 4: TAXATION 39

Credit of legal consultancy services 9,000 9,000 -

[Note-2]
Total (C) 3,44,000 3,44,000 7,40,000
Net liability (B)-(C) 2,41,000 2,41,000 (2,00,000)
Less: Set off from IGST credit 2,00,000 - -
[Note-5]
Liability after set off (D) 41,000 2,41,000 Nil
Net GST liability to be paid in 50,000 2,50,000 Nil
cash (A) + (D)
Notes:-
1. Services supplied by an individual advocate to any business entity located in the
taxable territory by way of legal services, directly or indirectly are taxable under
reverse charge mechanism. Thus, tax is payable by the recipient (Mr. Ekaant) on
said services to the Government.
Further, as per section 49(4) of the CGST Act, 2017, amount available in the
electronic credit ledger [ITC amount] may be used for making payment towards
output tax. However, tax payable under reverse charge is not an output tax in terms
of section 2(82) of the CGST Act, 2017. Therefore, tax payable under reverse
charge cannot be set off against the input tax credit and thus, will have to be paid in
cash.
2. Every registered person is entitled to take credit of input tax charged on any inward
supply of goods and/or services which are used or intended to be used in the
course or furtherance of his business in terms of section 16 of CGST Act, 2017.
Further “input tax” in relation to a registered person includes the tax payable under
reverse charge mechanism in terms of section 2(62) of the CGST Act, 2017.
3. Intra-State supplies received by a registered person from any unregistered supplier,
are exempt from the whole of the central tax leviable thereon under section 9(4) till
30.09.2019 [Notification No.8/2017 CT (R) dated 28.06.2017]. Since no tax has
been paid, so no credit is available.
4. Input tax credit is not allowed in respect of membership of a club in terms of section
17(5) of CGST Act, 2017.
5. Input tax credit of IGST has been used to pay IGST and CGST in that order.

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 40 INTERMEDIATE (IPC) EXAMINATION: MAY, 2019

10. Computation of eligible input tax credit

Particulars Eligible
ITC (`)
Motor vehicle purchased for employees to be used for personal as well -
as business purposes [Note-1]
Motor vehicle purchased for transportation of goods within the factory 2,00,000
[Note-1]
Food items for consumption of employees [Note-2] -
Rent-a-cab facility given to employees [Note-3] 36,000
Total eligible input tax credit 2,36,000
Notes:-
As per section 17(5) of the CGST Act, 2017:
1. ITC on motor vehicles and other conveyances is blocked except when they are
used—
(i) for making the following taxable supplies, namely :—
(A further supply of such vehicles or conveyances; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or
conveyances;
(ii) for transportation of goods.
Thus, in the given case, ITC on motor vehicle purchased for transportation of goods
within the factory will only be allowed
2. ITC in respect of food and beverages is blocked unless the same is used for making
outward taxable supply of the same category or as an element of the taxable
composite or mixed supply. Thus, in the given case, ITC of taxes paid on food for
employees is not allowed.
3. ITC on supply of rent-a cab services is not blocked where the Government notifies
the services which are obligatory for an employer to provide such service to its
employees. Thus, ITC is available on said service.
Note: GST law is in its nascent stage and has been subject to frequent changes.
Although many clarifications are continually being issued by way of FAQs or
otherwise, many issues continue to arise on account of varying interpretations on
several of its provisions. Therefore, alternate answers may be po ssible for the
above questions depending upon the view taken.

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