PAPER – 1 : ACCOUNTING

Question No. 1 is compulsory.

Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumptions may be made and indicated in answer by the
candidates.
Working Notes should form part of the answer.
Question 1
(a) P Ltd., a construction contractor, undertakes the construction of a commercial complex.
This commercial complex consists of three towers. Each tower is subject to separate
negotiation. P Ltd. entered into an agreement for this commercial complex construction.
The agreement lays down the contract revenue for each tower as ` 40 lakhs, ` 50 lakhs
and ` 65 lakhs respectively besides other terms and conditions for each tower.
P Ltd. is of view that since a single agreement has been entered, with a single customer,
the above contract should be treated as a single construction contract. Comment in
context of AS- 7 (Revised).
(b) Following is the Cash Flow abstract of Beta Ltd., for the year ended 31 st March 2020 :
Inflows ` Outflows `
Opening balance : Payment to creditors 1,00,000
Cash 20,000 Salaries and wages 25,000
Bank 90,000 Debentures redeemed 50,000
Collection from Debtors 4,10,000 Bank loan repaid 3,50,000
Sale of Fixed assets 1,15,000 Taxation 60,000
Closing balance:
Cash 10,000
Bank 40,000
6,35,000 6,35,000
Prepare Cash Flow Statement for the year ended 31-03-2020 using direct method is
accordance with AS 3.
(c) (i) A Ltd. purchased an asset on 1st April 2014 for ` 5,00,000 and asset had useful life
of 8 years with NIL residual value.
On 1st April 2019, directors reviewed the estimated life of the asset and decided
that the asset would probably be useful for further 2 years with residual value of 5 of
the original cost.

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 2 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

Calculate the amount of depreciation to be charged for each year as per AS-10, if
the company charges depreciation on straight line basis.
(ii) A company manufactures a machine for its own use. The manufacturing of machine
was completed on November 1st 2019. The machine was finally capable of being
operated as on December 15th 2019, however company started using the machinery
from February 1st 2020. The company charged depreciation from February 1st 2020.
Comment in context of AS-10.
(d) A company purchased 20,000 kg of certain material at ` 140 per kg. Purchase price
includes the GST of ` 1,00,000, in respect of which full input tax credit is admissible. The
company availed full GST input tax credit. Freight inward incurred ` 1,20,000. Unloading
charges ` 32,000. Normal loss during transit is 8%. The enterprise actually received
18,200 kg and consumed 16,500 kg. Compute Cost of inventory as per AS 2 and also
allocate material cost. (4 Parts X5 Marks=20 Marks)
Answer
(a) As per AS 7 ‘Construction Contracts’, when a contract covers a 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
(c) the contractor and customer have been able to accept or reject that part of the
contract relating to each asset; and
(d) the costs and revenues of each asset can be identified.
As per the facts given in the question, P Ltd. is required to treat construction o f each
tower as a separate construction contract and it cannot treat all towers as single
construction contract.
(b) Cash Flow Statement of Beta Ltd. for the year ended 31.3.2020
` `
Cash flow from operating activities
Cash received from debtors 4,10,000
Cash paid to creditors (1,00,000)
Cash paid to employees (salaries and wages) (25,000)
Cash generated from operations 2,85,000
Income tax paid (60,000)
Net cash generated from operating activities 2,25,000
Cash flow from investing activities
Proceeds from sale of fixed assets 1,15,000
Net cash generated from investment activities 1,15,000

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 PAPER – 1 : ACCOUNTING 3

Cash flow from financing activities

Bank loan repaid (3,50,000)
Debentures redeemed (50,000)
Net cash used in financing activities (4,00,000)
Net decrease in cash and cash equivalents (60,000)
Cash and cash equivalents at the beginning of the
year 1,10,000
Cash and cash equivalents at the end of the year 50,000
(c) (i) The entity has charged depreciation using the straight-line method at ` 62,500 per
annum for first five years, i.e (5, 00,000/8 years).
On 1st April, 2019, the asset's net book value is [5,00,000 – (62,500 x 5)] ` 1,
87,500.
The revised remaining useful life is 2 years.
The company should amend the annual provision for depreciation to charge the
unamortized cost over the revised remaining life of two years considering the
revised residual value.
Consequently, it should charge depreciation for the next 2 years at ` 81,250 per
annum
`
Net Book value of the asset as on April 2019
1st 1,87,500
Less: Revised Residual Value – 5% of `5,00,000 (25,000)
Net Book Value of the asset 1,62,500
Depreciation per year = 1,62,500/2 81,250
(ii) The entity should begin charging depreciation from the date the machine is r eady
for use – that is, 15th December, 2019. The fact that the machine was not used for a
period after it was ready to be used is not relevant in considering when to begin
charging depreciation. Depreciation of an asset begins when an asset is available
for use, ie: when it is in location and condition necessary for it to be capable of
operating in the manner intended by the management
(d) Computation of cost of inventory and allocation of material cost as per AS 2 is
shown below:
(Normal cost per Kg.)
`
Purchase price (20,000 X `140) 28,00,000
Less: Input Tax Credit (1,00,000)

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 4 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

27,00,000
Add: Freight and unloading charges 1,52,000
A. Total material cost 28,52,000
B. Number of units normally received =92% of 20,000 Kgs 18,400 Kg
C. Normal cost per Kg. (A/B) ` 155
Allocation of material cost
Kg. ` /Kg. `
Materials consumed 16,500 155 25,57,500
Cost of inventory 1,700 155 2,63,500
Abnormal loss 200 155 31,000
Total material cost 18,400 155 28,52,000
Question 2
The Balance Sheet of Y Ltd. as on March 31st 2020 was as follows:
Particulars Amount ( `)
Equity & Liabilities
Shareholders' funds
(a) 1,28,000, Equity shares of ` 10 each, ` 7.5 each paid up 9,60,000.00
(b) 1,28,000, 8% Cumulative Preference Shares ` 10 each fully paid up 12,80,000.00
(c) Profit & Loss A/c (9,76,000.00)
Non-Current Liabilities
Unsecured Loan from Directors 1,20,000.00
Current Liabilities
Sundry Creditors 8,80,000.00
Bank Overdraft 4,16,000.00
26,80,000.00
Assets
Non-Current Assets
- Freehold land at cost 2,80,000.00
- Plant & Equipment (at cost less depreciation) 4,80,000.00
- Goodwill 1,36,000.00
- Long-term investment in shares in B Ltd (at cost) 6,48,000.00

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 PAPER – 1 : ACCOUNTING 5

Current Assets
Inventories 4,96,000.00
Sundry Debtors 6,40,000.00
26,80,000.00
Note: The arrears of preference dividends amount to ` 1,02,400
A scheme of reconstruction was duly approved with effect from 1st April, 2020 under the
conditions stated below:
(a) The unpaid amount on the equity shares would be called up.
(b) The preference shareholders would forego their arrear dividends. In addition, they would
accept a reduction of ` 2.5 per share. The dividend rate would be enhanced to 10%.
(c) The equity shareholders would accept a reduction of ` 7.5 per share.
(d) Y Ltd. holds 21,600 shares in B Ltd. This represents 15% of the share capital of that
company. B Ltd. is not a listed company. The average net profit (after tax) of the
company is ` 5,00,000. The shares would be valued based on 12% capitalization rate.
(e) A bad debt provision at 2% would be created.
(f) The other assets would be valued as under:
Plant & Equipment ` 2,80,000
Freehold Land ` 7,60,000
Inventories ` 5,00,000
(g) The Profit & Loss A/c negative balance would be eliminated. Goodwill would be written off.
(h) The directors would have to take equity shares at the new face value of ` 2.5 per share
in settlement of their loan.
(i) The equity shareholders including the directors, who would receive equity shares in
settlement of their loans, would subscribe two new equity shares for every one share
held in cash.
(j) The preference shareholders would subscribe one new preference share for every four
preference shares held, in cash.
(k) The new face values of the shares - preference and equity will be maintained at their
reduced levels.
You are required to prepare:
(i) Capital Reduction Account, Equity Share Capital Account, 8% Cumulative Preference Share
Capital Account, 10% Cumulative Preference Share Capital Account and Bank Account.
(ii) Balance Sheet of the company after reconstruction. (16 Marks)

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 6 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

Answer
(i) Capital Reduction Account
` `
To Provision for Bad Debts 12,800 By Equity share capital 9,60,000
To P & L A/c 9,76,000 By 8% Cumulative pref.
To Plant and Equipment 2,00,000 share capital 3,20,000
To Goodwill 1,36,000 By Freehold land 4,80,000
To Long term Investment* 23,000 By Inventories 4,000
To Capital Reserve
(Bal. fig.) 4,16,200
17,64,000 17,64,000
* Investment valued at 5, 00,000/.12 = 41, 66,666.67 X .15 = ` 6, 25,000
Thus Reduction in value of investments = 6, 48,000 less ` 6, 25,000 = `23,000
Equity Share Capital Account
` `
To Capital Reduction 9,60,000 By Balance b/d 9,60,000
Account
To Balance c/d 13,20,000 By Bank (Final call) 3,20,000
By Directors unsecured 1,20,000
loan
By Bank 8,80,000
22,80,000 22,80,000
8% Cumulative Preference Share Capital Account
` `
To Capital Reduction Account 3,20,000 By Balance b/d 12,80,000
To 10% Preference Share Capital 9,60,000
Account
12,80,000 12,80,000
10% Cumulative Preference Share Capital Account
` `
To Balance c/d 12,00,000 By 8% Preference Share 9,60,000
Capital Account

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 PAPER – 1 : ACCOUNTING 7

By Bank 2,40,000
12,00,000 12,00,000
Bank Account
` `
To Equity Share Capital (Final Call) 3,20,000 By balance c/d* 14,40,000
To Equity Share Capital 8,80,000
To 10% cumulative Preference 2,40,000
Share Capital Account
14,40,000 14,40,000
* Overdraft balance not adjusted here, shown separately in the balance sheet after
reconstruction. Alternative answer after adjusting Overdraft balance is also possible.
(ii) Balance Sheet of Y Ltd. (And Reduced) as at 1st April, 2020
Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 25,20,000
B Reserves and Surplus 2 4,16,200
2 Current liabilities
A Trade Payables 8,80,000
B Short term provision 3 12,800
C Short Term Borrowings (Bank Overdraft) 4,16,000
Total 42,45,000
Assets
1 Non-current assets
A Property, plant and equipment 4 10,40,000
B Intangible assets NIL
C Long term Investment 6,25,000
2 Current assets
A Inventories 5,00,000
B Trade receivables 6,40,000
C Cash and cash equivalents 14,40,000
Total 42,45,000

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 8 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

Notes to accounts
`
1 Share Capital
Equity share capital
5,28,000 Equity shares of ` 2.50 each (Out of this, 48,000 shares 13,20,000
have been issued for consideration other than cash)
Preference share capital
1,60,000 10% Preference shares of ` 7.50 each 12,00,000
Total 25,20,000
2 Reserves and Surplus
Capital Reserve 4,16,200
3 Short term provision
Provision for doubtful debts* 12,800
4 Property, plant and equipment
Freehold Land 7,60,000
Plant and Equipment 2,80,000
Net carrying value 10,40,000
* can also be adjusted from the balance of trade receivables and not shown separately .
Question 3
(a) The Balance Sheet of Gamma Ltd. as on March 31st 2020 is as follows:
Particulars Note Amount `
Equity and Liabilities
Shareholders' Funds
(a) Share Capital 1 16,00,000
(b) Reserve and Surplus 2 28,60,000
Non-Current Liabilities
5,000, 9 Debentures of ` 100 each 5,00,000
Current Liabilities
Sundry Creditors 3,40,000
53,00,000
Assets
Non-Current Assets
Property Plant and Equipment 15,60,000

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 PAPER – 1 : ACCOUNTING 9

Long Term Investments (Market Value ` 11,60,000) 9,80,000

Deferred Tax Asset 6,80,000
Current Assets
Cash and Bank Balance 5,60,000
Sundry Debtors 12,40,000
Others - Preliminary expenses 2,80,000
53,00,000
Amount `
Note:
l. Share Capital
Authorised Share Capital
1,00,000, Equity shares of `10 each 10,00,000
20,000, Preference shares of ` 100 each. 20,00,000
30,00,000
Issued, subscribed and paid up
60,000, Equity shares of ` 10 each 6,00,000
10,000, Redeemable 8% Preference shares of ` 100
each 10,00,000
16,00,000
2. Reserve and Surplus
Securities Premium 12,00,000
General Reserve 13,00,000
Profit & Loss A/c 3,60,000
28,60,000
In Annual General Meeting held on 20 th June 2020 the company passed the following
resolutions:
(i) To split equity shares of ` 10 each into five equity shares of ` 2 each from 1st July.
(ii) To redeem 8% preference shares. Capital redemption reserve out of free reserves
to be created for the purpose of redemption of preference shares.
(iii) To redeem 9% debentures by making offer to debenture holders to convert their
holding into equity shares at ` 10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every three
shares held on record date. The company decided that there should be minimum
reduction in free reserves.
(v) Preliminary expenses to be written off on 1st July 2020.

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 10 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

On 10th July, 2020 investments were sold for ` 11,10,000 and preference shares were
redeemed. 40% of debenture holders exercised their option to accept cash and their
claims were settled on 1st August 2020. The company fixed 5th September 2020 as
record date and bonus issue was concluded by 12th September 2020.
You are requested to journalize the above transactions including cash transactions.
(b) EXE had accepted bills payables to Wye as follows:
29th January 2020 ` 8,000 for 3 Months
21st February 2020 ` 6,000 for 3 Months
27th February 2020 ` 4,000 for 4 Months
15th March 2020 ` 5,000 for 4 Months
On 1st May 2020 it was agreed that these bills should be withdrawn and that EXE should
accept on that day two bills, one for ` 14,000 due on 4 months and the other for the
balance amount with interest (as calculated on newly drawn bills), due on 5 months.
Calculate the amount of the second bill taking interest @ 10% p.a. Assume 366 days in
the year. Earliest due date to be taken as base date. Any fraction of day resulting from
calculation to be considered as full day. (8+8= 16 Marks)
Answer
(a) Journal Entries in books of Gamma Limited
2020 Dr. (`) Cr. (`)
July 1 Equity Share Capital A/c (` 10 each) Dr. 6,00,000
(1) To Equity Share Capital A/c (` 2 each) 6,00,000
(Being equity share of ` 10 each split into 5 equity
shares of ` 2 each) {3,00,000 X 2}
Profit and Loss A/c Dr. 2,80,000
(2) To Preliminary Expenses A/c 2,80,000
(Being preliminary expenses written off)
July 10 Cash & Bank A/c Dr. 11,10,000
To Investment A/c 9,80,000
(3) To Profit & Loss A/c 1,30,000
(Being investment sold out and profit on sale
credited to Profit & Loss A/c)
July 10 8% Redeemable Preference Share Capital A/c Dr. 10,00,000
(4) To Preference Shareholders A/c 10,00,000

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 PAPER – 1 : ACCOUNTING 11

(Being amount payable to preference shareholders

on redemption)
July 10 Preference Shareholders A/c Dr. 10,00,000
(5) To Cash & Bank A/c 10,00,000
(Being amount paid to preference shareholders)
July 10 General Reserve A/c Dr. 10,00,000
(6) To Capital Redemption Reserve A/c 10,00,000
(Being amount equal to nominal value of
preference shares transferred to Capital
Redemption Reserve A/c on its redemption as per
the law)
Aug 1 9% Debentures A/c Dr. 5,00,000
(7) Interest on debentures A/c Dr. 15,000
To Debentureholders A/c 5,15,000
(Being amount payable to debenture holders along
with interest payable)
Aug. 1 Debentureholders A/c Dr. 5,15,000
(8) To Cash & Bank A/c (2,00,000 + 15,000) 2,15,000
To Equity Share Capital A/c {30,000 X 2} 60,000
To Securities Premium A/c 2,40,000
(Being claims of debenture holders satisfied)
Sept. 5 Capital Redemption Reserve A/c Dr. 2,20,000
(9) To Bonus to shareholders A/c 2,20,000
(Being balance in capital redemption reserve
capitalized to issue bonus shares)
Sept. 12 Bonus to shareholders A/c Dr. 2,20,000
(10) To Equity Share Capital A/c 2,20,000
(Being 1,10,000 fully paid equity shares of
` 2 each issued as bonus)
Sept. 30 Profit & Loss A/c Dr. 15.000
(11) To Interest on debentures A/c 15,000
(Being interest on debentures transferred to Profit
and Loss Account)

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 12 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

(b) Exe bills payable to Wye (base date 2/5/20)

Amount Months Due Date No. of days Amount
` from base date `
29/1/20 8,000 3 2/5/20 - 0
21/2/20 6,000 3 24/5/20 22 1,32,000
27/2/20 4,000 4 30/6/20 59 2,36,000
15/3/20 5,000 4 18/7/20 77 3,85,000
23,000 7,53,000
Average due date = Base Date + Total of products
Total of amount
Average due date: 7, 53,000/ 23,000 = 33 days from base date= 4th June 2020
` 14,000 due on 4 months from 1 st May 2020, payable on 4 th September, 2020
And Balance due on 5 months from 1 st May 2020, payable on 4 th October 2020
Interest calculation
14,000 X10% for 92 days = ` 352
9,000 X10% for 122 days = ` 300
` 652
Thus second bill be for 9,652 (9,000 + 652)
Question 4
P and Q are in partnership sharing profits & losses in equal ratio. They keep their books by
single entry system. The following balances are available from their books as on 31st March,
2019 and 31st March, 2020 :
31-03-2019 31-03-2020
Land & Building 12,50,000 12,50,000
Tools & Equipments 6,26,000 7,10,000
Furniture 1,50,000 1,50,000
Debtors 10,50,000 11,80,000
Creditors 5,75,000 32,500
Stock ? 4,50,000
Bank Loan 80,000 55,000
Cash 62,000 ?
Outstanding Indirect Expenses 9,000 15,000

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Bills Receivable 5,000 9,500

Bills Payable 7,500 8,500
The transactions during the year ended 31st March, 2020 are as follows:
`
Collection from debtors 13,05,000
Payment to creditors 10,75,000
Indirect expenses paid 65,000
Cash purchases 1,80,000
Cash sales 2,55,000
Drawings by partner (P) 24,000
Sale of old newspapers 2,500
 On 1st April, 2019, some tools & equipments of book value ` 46,000 were sold for
` 49,000. On 31st March, 2020, some equipments were purchased.
 Cash sales are 15 % of total sales
 Credit Purchases are 75 % of total purchases.
 Firm sells goods at @ 20 % profit on sales'
 Opening Capital of P & Q as on 1st April, 2019, was in same proportion as their profit
sharing ratio.
 Bills Receivable drawn during the year ` 10,000 and Bills Payable accepted during the
year ` 7,500.
 Depreciation @ 10% p.a. to be charged on Tools & Equipments and Furniture.
 No Depreciation to be charged on Land & Building.
You are required to prepare Trading & Profit & Loss Account for the year ended 31st March,
2020 and also prepare Balance Sheet as on 31st March, 2020. Working notes will form part of
the answer. (16 Marks)
Answer
Trading and Profit and Loss A/c for the year ended 31.3.2020
. ` `
To Opening Stock (Balancing figure) 10,90,000 By Sales – Cash & 17,00,000
To Purchases – Cash & Credit 7,20,000 Credit
To Gross Profit c/d 3,40,000 By Closing Stock 4,50,000
21,50,000 21,50,000

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 14 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

To Expenses 65,000 By Gross Profit b/d 3,40,000

Less: Outstanding as on By Profit on sale of 3,000
1.04.2019 (9,000) Equipments
Add: Outstanding as on By Sale of old 2,500
31.03.2020 15,000 newspapers
71,000
To Depreciation :
Equipment 58,000
Furniture 15,000
To Net Profit :
P 1,00,750
Q 1,00,750
3,45,500 3,45,500

Balance Sheet as on 31-3-2020

Liabilities ` Assets `
P’s Capital 17,80,750 Land & Building 12,50,000
Less: Drawings (24,000) Tools & Equipment 7,10,000
Add: Net Profit 1,00,750 18,57,500 Less: Depreciation (58,000) 6,52,000
17,80,750 18,81,500 Furniture 1,50,000
Q’s Capital 1,00,750 32,500 Less : Depreciation (15,000) 1,35,000
Add: Net Profit Debtors 11,80,000
Sundry Creditors 55,000
15,000 Bills Receivable 9,500
Bank Loan 8,500 Stock 4,50,000
O/s Expenses Cash 1,73,500
Bills Payable 38,50,000 38,50,000
Working Notes:
1. Cash paid for bills payable
Bills Payable Account
` `
To Bank A/c (Balancing fig) 6,500 By Balance b/d 7,500
To Balance c/d 8,500 By Creditors 7,500
15,000 15,000

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2. Cash collected from Bills receivables

Bills Receivable Account
` `
To Balance b/d 5,000 By Bank (Balancing fig) 5,500
To Debtors 10,000 By Balance c/d 9,500
15,000 15,000
3. Cash Account
` `
To Balance b/d 62,000 By Cash Purchases 1,80,000
To Cash Sales 2,55,000 By Cash paid to Creditors 10,75,000
To Cash received from By Bank Loan repaid 25,000
Debtors 13,05,000 By Expenses paid 65,000
To Equipments sold 49,000 By Equipments
To Sale of old newspapers 2,500 Purchased 1,30,000
To Bills receivable 5,500 By Drawings 24,000
By Bills Payable 6,500
By Balance c/d 1,73,500
16,79,000 16,79,000
4. Tools and Equipment Account
` `
To Balance b/d 6,26,000 By Cash 49,000
To Cash (Balancing figure) 1,30,000 By Balance c/d 7,10,000
To Profit on Sale 3,000
7,59,000 7,59,000

5. Calculation of Capital Accounts of P&Q on 31.3.2019

Balance sheet as on 31.3.2019
Liabilities ` Assets `
Capital Accounts :
P 17,80,750 Land and Building 12,50,000
Q 17,80,750 35,61,500 Tools and Equipment 6,26,000
Furniture 1,50,000
Bank Loan 80,000 Debtors 10,50,000

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 16 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

Creditors 5,75,000 Stock 10,90,000

Outstanding Expenses 9,000 Bills Receivable 5,000
Bills Payable 7,500 Cash Balance 62,000
42,33,000 42,33,000
Question 5
(a) M/s Super Enterprises bought 3 trucks from Kaya Ltd. on 01-04-2017 on the following
terms:
`
Down Payment 6,50,000
3 Instalments to be paid, each at the end of each year:
1st Instalment ` 3,55,000
2nd Instalment ` 3,38,000
3rd Instalment ` 3,30,000
Interest is charged @ 10 % p.a. and included in above instalments.
M/s Super Enterprises provides depreciation @ 20 % on the
diminishing balance of the Trucks

On 31 st March, 2020, M/s Super Enterprises failed to pay the 3 rd Instalment upon which
Kaya Ltd. repossessed 1 truck. Kaya Ltd. agreed to leave 2 trucks with M/s Super
Enterprises and adjusted the value of 1 truck against the amount due.
The truck taken over was valued on the basis, of 30% depreciation annually on written
down value basis.
The balance amount remaining in the Vendor's Account after the above adjustment was
paid by M/s. Super Enterprises after 2 months with interest @ 18 % p.a.
You are required to:
(i) Calculate the Cash Price of the trucks and the amount of Interest paid with each
instalment.
(ii) Prepare Truck Account, Kaya Ltd.'s Account in the books of M/s Super Enterprises
assuming that the books of accounts are closed on 31st March every year.
(b) A fire occurred in the premises of M/s Star & Sons on 21st March 2020. The concern had
taken Insurance Policy of ` 75,000 which was subject to average clause. From the books
of accounts, the following particulars are available relating to the period 1st April 2019 to
March 21st 2020 :
(i) Stock as on April 1st 2019 ` 1,50,500

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(ii) Purchases (including purchase of ` 40,000 for which purchase

invoices had not been received from suppliers, though goods
have been received in godown) ` 3,17,000
(iii) Cost of goods distributed as, samples for advertising
from April 1st 2019 to the date of fire, included in above purchases ` 32,000
(iv) Sales (excluding goods sold on approval basis
having sale value ` 35,000) ` 4,55,000
Approval has been received for goods before the date of fire.
(v) Purchase return ` 15,000
(vi) Wages (including salary of Manager ` 10000) ` 65,000
(vii) Average Rate of Gross Profit @ 20% on sales
(viii) Cost of goods salvaged ` 12,000
You are required to calculate the amount of claim to be lodged to Insurance Company.
(10+ 6= 16 Marks)
Answer
(a) (i) Calculation of Interest and Cash Price
No. of Outstanding Amount due Outstanding Interest Outstandin
instalments balance at at the time of balance at the g balance
the end after instalment end before the at the
the payment payment of beginning
of instalment instalment
[1] [2] [3] [4]= 2 +3 [5]= 4 x [6]= 4-5
10/110
3rd - 3,30,000 3,30,000 30,000 3,00,000
2nd 3,00,000 3,38,000 6,38,000 58,000 5,80,000
1st 5,80,000 3,55,000 9,35,000 85,000 8,50,000
Total cash price = ` 8, 50,000+ 6, 50,000 (down payment) = ` 15, 00,000.
(ii) In the books of M/s Super Enterprises
Trucks Account
Date Particulars `. Date Particulars `
1.4.2017 To Kaya 15,00,000 31.3.2018 By Depreciation A/c 3,00,000
Ltd.A/c
Balance c/d 12,00,000
15,00,000 15,00,000

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 18 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

1.4.2018 To Balance b/d 12,00,000 31.3.2019 By Depreciation A/c 2,40,000

Balance c/d 9,60,000
12,00,000 12,00,000
1.4.2019 To Balance b/d 9,60,000 31.3.2020 By Depreciation A/c 1,92,000
By Kaya Ltd. A/c (Value of 1
truck taken over after
depreciation for 3 years 1,71,500
@30% p.a.) {5,00,000-
(1,50,000+1,05,000+73,500)}
By Loss transferred to Profit 84,500
and Loss a/c on surrender
(Bal. fig.) or (2,56,000-
1,71,500)
By Balance c/d
2/3 (9,60,000 -1,92,000 5,12,000
= 7,68,000)
9,60,000 9,60,000
Kaya Ltd. Account
Date Particulars ` Date Particulars `
1.4.17 To Bank (down 6,50,000 1.4.17 By Trucks a/c 15,00,000
payment) 3,55,000 31.3.18 By Interest a/c 85,000
31.3.18 To Bank (1 st 5,80,000
Instalment)
To Balance c/d
15,85,000 15,85,000
31.3.19 To Bank (2 nd 3,38,000 1.4.18 By Balance b/d 5,80,000
Instalment) 3,00,000 31.3.19 By Interest a/c 58,000
To Balance c/d
6,38,000 6,38,000
31.3.20 To Trucks a/c 1,71,500 1.4.19 By Balance b/d 3,00,000
To Balance c/d (b.f.) 1,58,500 31.3.20 By Interest a/c 30,000
3,30,000 3,30,000
31.5.20 To Bank (Amount 1,63,255 1.4.20 By Balance b/d 1,58,500
settled after 2 months) 31.5.20 By Interest a/c 4,755
(@ 18% on bal.)
(1,58,500x2/12x1
8/100)
1,63,255 1,63,255

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 PAPER – 1 : ACCOUNTING 19

(b) Memorandum Trading Account for the period 1 st April, 2019 to 21 st March, 2020
` `
To Opening Stock 1,50,500 By Sales (4,55,000 + 4,90,000
35,000)
To Purchases 3,17,000
Less: Returns (15,000) By Closing Stock (Bal. fig.) 83,500
Goods distributed as
samples (32,000) 2,70,000
To Wages 55,000
To Gross Profit 98,000
(20% of Sales)
5,73,500 5,73,500
Statement of Insurance Claim
`
Value of stock destroyed by fire 83,500
Less: Salvaged Stock 12,000
Loss of stock 71,500
Note: Since policy amount is less than vale of stock on date of fire, average clause will
apply. Therefore, claim amount will be computed by applying the formula.
Insured value
Claim= ×Loss suffered
Total cost
Claim amount = ` 71,500X 75,000/ 83,500= ` 64,222(rounded off)
Question 6
The Balance Sheet of Amit, Jatin and Rajat, who share Profits and Losses in the ratio 4: 3 : 3
respectively, as on 01-04-2020 is as follows:
Liabilities Amount Assets Amount
( `) ( `)
Capital Accounts: Land & Building 6,50,000
Amit 4,50,000
Jatin 2,75,000
Rajat 2,15,000 9,40,000
General Reserve 1,50,000 Plant & Machinery 2,75,000

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 20 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

Creditors 2,05,000 Furniture, Fixtures 1,45,000

& Fittings
Outstanding 5,000 Stock 1,15,000
liability
Trade Debtors 80,000
Less: Provision for
Doubtful Debts (6,500) 73,500
Cash at Bank 41,500
13,00,000 13,00,000

 Sumit is admitted as a partner on above date i.e. 01-04-2020 for 1/5th share in profits and
losses. Following terms are agreed upon:
 Sumit will bring in Furniture valued at ` 40,000 and ` 3,00,000 in cash as capital but he
is unable to bring the required amount of premium for goodwill.
 Goodwill of the firm be valued at ` 2,00,000. (No Goodwill account to be raised or
maintained). Necessary adjustments regarding Goodwill to be made through the partners'
capital accounts.
 Value of Plant & Machinery be reduced by 10%.
 Value of Stock be appreciated by 5%
 Provision for doubtful debts be made equal to 10% of Trade Debtors.
 Land & Building to be appreciated by 10%.
 A liability of repairs ` 2,000 to be recorded in books of accounts.
 The Outstanding Liability includes ` 1,000 due to Mr. X, which has been paid by Amit.
 Investments amounting ` 10,000 (not mentioned in Balance sheet) to be taken into books
of accounts.
 The entire capital of the newly constituted firm is decided to be ` 15,00,000. Partners
decided to maintain capital in their new profit sharing ratio, i.e. actual cash to be paid off
or brought in by the partners as the case may be.
You are required to prepare Partners' Capital Accounts, Revaluation Account, Cash Account
and Balance Sheet of newly constituted Firm as on date 01/04/2020. (16 Marks)

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 PAPER – 1 : ACCOUNTING 21

Answer
Revaluation Account
` `
To Plant and Machinery 27,500 By Stock 5,750

To Provision for Bad Debts 1,500 By Land and Building 65,000

(8,000 less 6,500)
To Liability for Repairs 2,000 By Investment 10,000
To Profit on revaluation transferred
to Partners’ capital accounts:
Amit 19,900
Jatin 14,925
Rajat 14,925 49,750 _____
80,750 80,750
Capital Accounts of Partners
Particulars Amit Jatin Rajat Sumit Particulars Amit Jatin Rajat Sumit

` ` ` ` ` ` ` `
To Old partners    40,000 By Balance b/d 4,50,000 2,75,000 2,15,000
(Goodwill
adjustment)
-
To Cash 66,900 By General Reserve 60,000 45,000 45,000
To Balance c/d* 4,80,000 3,60,000 3,60,000 3,00,000 By Furniture 40,000
By Cash 3,00,000
By Sumit (goodwill 16,000 12,000 12,000
adjustment)
By Outstanding 1,000
liability
By Revaluation A/c 19,900 14,925 14,925

By Cash A/c 13,075 73,075

5,46,900 3,60,000 3,600,00 3,40,000 5,46,900 3,60,000 3,600,00 3,40,000
Working Notes
1. Calculation of New Firm’s Capital
Combined Capital as given:` 15, 00,000 and old Profit Sharing Ratio: 4:3:3
Sumit’s Share: 1/5; Balance share of profit (after admission) :1-1/5 = 4/5

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 22 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

New Profit Share : 8:6:6:5

Amit’s share of capital in new firm : 15, 00,000 x 8/25 = ` 4,80,000
Jatin’s share of capital in new firm : 15, 00,000 x 6/25 = ` 3,60,000
Rajat’s share of capital in new firm : 15, 00,000 x 6/25 =` 3,60,000
Sumit’s share of capital in new firm : 15, 00,000 x 5/25 = ` 3,00,000
2. Calculation of Goodwill Share and write-off of Goodwill
Share of Sumit :1/5; Old Profit Sharing Ratio: 4:3:3
Balance share of profit (after admission) : 1-1/5 = 4/5
Goodwill of the firm:` 2, 00,000 and Sumit’s share in goodwill:` 2, 00,000 x 1/5=` 40,000
This Goodwill is to be credited to other partners in their sacrificing ratio (adjustment
entry):
Sumit’s Capital Account Dr `40,000
To Amit’s Capital Account (4/10) `16,000
To Jatin’s Capital Account (3/10) `12,000
To Rajat’s Capital Account (3/10) `12,000
Balance Sheet as on 1 st April 2020
Liabilities ` Assets `
Trade creditors 2,05,000 Land and Buildings 7,15,000
Outstanding Liability 6,000 Plant and machinery 2,47,500
Capital Accounts of partners: Furniture 1,85,000
Amit 4,80,000 Stock 1,20,750
Jatin 3,60,000 Debtors 72,000
Rajat 3,60,000 Investment 10,000
Sumit 3,00,000 Cash in hand 3,60,750
15,00,000
17,11,000 17,11,000
Cash Account
` `
To Balance b/d 41,500 By Amit 66,900
To Capital accounts: By balance c/d 3,60,750
Sumit 3,00,000

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 PAPER – 1 : ACCOUNTING 23

Jatin 13,075
Rajat 73,075
4,27,650 4,27,650
Question 7
Answer any four of the following:
(a) The following information is given by Mr. X relating to his holding in 10 State Government
Bonds.
Opening Balance as on 1st April, 2019: Face value ` 5,00,000 (5,000 units @ ` 100
each) and Cost ` 4,50,000.
On 1st June, 2019 Purchased 1,500 units ex interest @ 95 per unit
On 31st January, 2020 Sold 4,500 units, cum interest @ 94.50 per unit - out of the
original holdings.
Interest dates are 30th June and 31st December. Mr. X closes his books on every 31st
March and he follows FIFO method.
Show the Investment Account as on March 31st 2020 as it would appear in his books.
(b) Explain the significance of computerized accounting system in the modern time.
(c) From the following particulars prepare an Account Current, as sent by Mr. S to Mr. R as
on 31 st December 2019 by means of product method charging interest @ 8 % p.a.
(Consider 1 year = 365 days)
2019 Particulars `
1st May Balance due from R 10,000
24th August Cash Received from R 7,500
15 th September Sold goods to R 15,500
15 th October Payment by R by cheque 12,000
12th December Cash Paid by R 3,000
(d) In each of the following companies, operating/cycle and expected settlement of trade
payables is given. State giving reasons whether the Trade Payables of each company
are Current Liabilities or Non-Current Liabilities as per Schedule III of the Companies
Act, 2013:
Company Operating Cycle Period Expected Payment period
1 10 months 12 Months
2 11 months 13 Months
3 18 months 15 Months
4 16 months 17 Months

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 24 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

(e) List some cases where the third parties cannot bind the partnership firm unless all the
partners have agreed. (4 Parts X4 Marks =16 Marks)
Answer
(a) 10% State Government Bonds (Investment) Account in the Books of Mr. X
Date Particulars Face Interest Principal Date Particulars Face Interest Principal
Value Value
` ` ` ` ` `
1.4.19 To Balance 5,00,000 12,500 4,50,000 30.6.19 By Bank 32,500
b/d A/c
1.6.19 To Bank 1,50,000 6,250 1,42,500 31.12.19 By Bank 32,500
A/c A/c
By Bank 4,50,000 3,750 4,21,500
A/c
31.03.20 To Profit & 55.000 16,500 31.01.20
Loss A/c By
2,00,000 5,000 1,87,500
Balance
_______ _______ _______ 31.03.20 _______ ______ _______
c/d
6,50,000 73,750 6,09,000 6,50,000 73,750 6,09,000
Note: all units sold are from the opening balance.
Closing balance consists of 1, 87,500 (4, 50,000 X10/100 + 1, 42,500).
(b) In modern time, computerized accounting systems are used in various areas. The
significance of the computerized accounting system is as follows:
(1) Increase speed, accuracy and security - In computerized accounting system, the
speed with which accounts can be maintained is several fold higher. Besides speed,
level of accuracy is also high in computerized accounting system.
(2) Reduce errors - In computerized accounting, the possibilities of errors are also very
less unless some mistake is made while recording the data.
(3) Immediate information - In this system, with an entry of a transaction, corresponding
ledger posting is done automatically. Hence, trial balance will also be automatically
tallied and the user will get the information immediately.
(4) Avoids duplication of work - Computerized accounting systems also remove the
duplication of the work.
(c) R in Account Current with S as on 31 st Dec. 2019
Dr. Cr.
Days Product ` Days Product `
1.5.19 To Bal. b/d 10,000 245 24,50,000
15.9.19 To Sales 15,500 107 16,58,500 24.8.19 By Cash 7,500 129 9,67,500

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 PAPER – 1 : ACCOUNTING 25

31.12.19 To Interest 473 15.10.19 By Bank 12,000 77 9,24,000

12.12.19 By Cash 3,000 19 57,000
31.12.19 By Bal. _
c/d 3,473 _21,60,000
__
25,973 41,08,500 25,973 41,08,5000
Interest = 8% on` 21, 60,000 divided by 365 days = ` 473
(d) As per Schedule III to the Companies Act, 2013, a liability shall be classified as current
when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability
for at least twelve months after the reporting date. Terms of a liability that could, at
the option of the counterparty, result in its settlement by the issue of equity
instruments do not affect its classification.
All other liabilities shall be classified as non-current.
Company Operating Expected Current or Non-current and reason
Cycle payment thereof
period period
1 10 months 12 months Expected payment period is within 12
months although it is more than the
operating cycle. It will be treated as
Current Liability*
2 11 months 13 months Expected payment period is more
than the operating cycle period and
not within 12 months. Hence it is
Non-Current Liability
3 18 months 15 months Expected payment period is less than
the operating cycle period, although it
is more than 12 months period.
Hence it is Current Liability
4 16 months 17 months Expected payment period is more
than the operating cycle and not
within the 12 month period. Hence it
is Non-Current Liability

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 26 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

Note: The question gives the information about the expected payment period (period in
which the entity is expected to pay) which may differ from the due date. The solution
given above is based on the assumption that the expected payment period is the time in
which the liability will become due considering the third criteria of Schedule III.
* This may be treated as Non-Current as the liability is not expected to be settled in the
company’s normal operating cycle considering the first criteria of Schedule III. For cases
of companies 2 to 4, the classification will remain same but the reasoning may differ as
per the first criteria of Schedule III classification.
(e) Third parties cannot bind the firm unless all the partners have agreed in the following
cases:
(a) Submitting a dispute relating to the firm arbitration;
(b) Opening a bank account on behalf of the firm in the name of a partner;
(c) Compromise or relinquishment of any claim or portion of claim by the firm;
(d) Withdrawal of a suit or proceeding filed on behalf of the firm;
(e) Admission of any liability in a suit or proceedings against the firm;
(f) Acquisition of immovable property belonging to the firm;
(g) Entering into partnership on behalf of the firm.

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 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION
Question No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
Question 1
(a) The paid up share capital of XYZ Limited is ` One crore consisting of 10,00,000 equity
shares of ` 10 each, fully paid up. ABC Limited and DEF Limited are holding 2,50,000
equity shares and 3,00,000 equity shares respectively in XYZ Limited. ABC Limited and
DEF Limited are the subsidiaries of MNP Limited. Examine with the relevant provisions of
the Companies Act, 2013 and advise
(i) Whether XYZ Limited is a subsidiary of MNP Limited ?
(ii) If XYZ Limited holds 5% equity shares of MNP Limited, out of which 2% shares are
held as a legal representative of a deceased member of MNP Limited. Can XYZ
Limited exercise voting rights at AGM of MNP Limited?
(iii) Can MNP Limited allot or transfer some of its share to XYZ Limited? (6 Marks)
(b) "Character and Custom provide two different standards for defining what is right and what
is wrong"? Analyse this statement and differentiate between 'Ethics' and 'Morals' in this
reference. (4 Marks)
(c) "Poor interpersonal communication skills result in low productivity in an organization" -
Explain. (4 Marks)
Answer
(a) According to Sub-Clause (87) of Clause 2 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 company
Explanation—For the purposes of this clause,—
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;
Section 19 of the Companies Act, 2013, provides that no company shall, either by its elf or
through its nominees, hold any shares in its holding company and no holding company
shall allot or transfer its shares to any of its subsidiary companies and any such allotment
or transfer of shares of a company to its subsidiary company shall be void.

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 28 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

However, the subsidiary company shall have a right to vote at a meeting of the holding
company only in respect of the shares held by it as a legal representative or as a trustee.
In the given case, XYZ Limited is having paid up share capital of 10,00,0 00 equity shares.
ABC Limited and DEF Limited are holding 2,50,000 equity shares and 3,00,000 equity
shares respectively in XYZ Limited. Further, ABC Limited and DEF Limited are the
subsidiaries of MNP Limited.
In terms of the above stated facts and provisions of Act, following are the answers:
(i) Yes, XYZ Ltd is a subsidiary of MNP Limited in the light of the explanation to clause
2(87) of the Companies Act. As ABC Limited and DEF Limited are holding together
5,50,000 equity shares in XYZ Limited and hence, controlling more than half of the
total voting power. Further, they are subsidiaries to MNP limited. Here, XYZ Limited
shall be deemed to be subsidiary of the MNP Limited.
(ii) Yes, as per the proviso to the section 19, the subsidiary company shall have a right
to vote at a meeting of the holding company only in respect of the shares held by it
as a legal representative or as a trustee.
(iii) No as per section 19, holding company shall not allot or transfer its shares to any of
its subsidiary companies.
(b) The word “Moral” is defined as relating to principles of right and wrong. Although both
words are broadly defined in contemporary English as having to do with right and wrong
conduct, the root word for ethics is the Greek "ethos," meaning "c haracter", while the root
word for Moral is Latin "mos" meaning "custom." Character and custom, however, provide
two very different standards for defining what is right and what is wrong. Character is a
personal attribute, while custom is defined by a group over time. People have character.
Societies have custom. To violate either can be said to be wrong, within its appropriate
frame of reference.
Another way to look at the distinction is to say that morals are accepted from an authority
(cultural, religious, etc.), while ethics are accepted because they follow from personally
accepted principles. For example, if one accepts the authority of a religion, and that religion
forbids stealing, then stealing would be immoral. An ethical view might be based on an
idea of personal property that should not be taken without social consent (like a court
order). Moral norms can usually be expressed as general rules and statements such as
“always tell the truth” are typically first absorbed as a child from family, friends , school,
religious teachings and other associations. Morals work on a smaller scale than ethics,
more reliably, but by addressing human needs for belonging and emulation, while ethics
has a much wider scope.
(c) Poor interpersonal communication arises due to incongruence in communication elements
like body language, facial expression, body posture, body movements, tone and pitch of
voice etc. due to which message is not properly communicated to the receiver and
unnecessary misunderstanding is created by which productivity is adversely affected.

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Interpersonal communication requires active or effective listening. Effective listening helps

to build strong personal relationship which contributes significantly to enhance the
productivity. Poor interpersonal communication takes place due to ineffective listening
which causes low productivity.
Question 2
(a) (i) SKP Limited is a Public Sector Company in which the Central Government holds 60%
shares. The company has started producing shoes for selling in competition with
some other private sector companies. In addition to shoes manufacturing it has some
other lines of production also. The income from shoe business was 24% of the gross
income of the company for the year ended 31st March, 2020. Mr. X, a director of the
company is of the opinion that provisions of the Payment of Bonus Act, 1965 are
applicable to the company while two other directors are of the opinion that since the
company is an establishment in Public Sector, the Payment of Bonus Act, 1965 is not
applicable.
Referring to and analyzing the applicable provisions of the Payment of Bonus Act,
1965, advise whether the contention of Mr. X is correct? (3 Marks)
(ii) Mr. K is employed in Assam Tea Estate Limited, a seasonal establishment. The
factory was in operation for four months only during financial year 2019-20. Mr. K was
not in continuous service during this period. However, he has worked for only 80 days.
Referring to the provisions of the Payment of Gratuity Act, 1972, decide whether Mr.
K is entitled to gratuity ? (3 Marks)
(b) Explain the concept of work place harassment and work place Ethics with some examples.
(4 Marks)
(c) State with reasons whether the following statements are correct or incorrect.
(i) Rumours and gossips are synonymous.
(ii) Lying breaks down the trust between individuals. (4 Marks)
Answer
(a) (i) Application of the Act to establishments in Public Sector in certain cases
[Section 20 of the Payment of Bonus Act, 1965]
In following two conditions, the Payment of Bonus Act, 1965 will be applied on the
public sector establishments (PSEs)-
(i) If in any accounting year an establishment in public sector sells any goods
produced or manufactured by it or renders any services, in competition with an
establishment in private sector, and
(ii) The income from such sale or services or both is not less than twenty percent
of the gross income of the establishment in public sector for that year,

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 30 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

then, the provisions of this Act shall apply in relation to such establishment in public
sector as they apply in relation to a like establishment in private sector [ Sub-section
(1)].
Following the above provisions, the Payment of Bonus Act, 1965 will be applicable to
SKP Limited as it has fulfilled both the conditions i.e. SKP Limited has started
business in competition with some other private sector companies and the income
from such business exceeds 20% of the gross income of SKP Limited.
Hence, contention of Mr. X is correct.
(ii) Payment of Gratuity to Seasonal Employee: Sub-section 3 of Section 2A of the
Payment of Gratuity Act, 1972 provides that where an employee, employed in a
seasonal establishment, is not in continuous service within the meaning of clause
(1), for any period of one year or six months, he shall be deemed to be in continuous
service under the employer for such period if he has actually worked for not less than
seventy-five percent of the number of days on which the establishment was in
operation during such period.
In the given problem, Mr. K has worked for 80 days in Assam Tea Estate Limited, and
as per the above provision, Mr. K has not worked for more than 75% of number of
days on which the establishment was in operation i.e. 75% of 4 months = 3 months
or 90 days. Therefore, Mr. K shall not be entitled for gratuity.
(b) Workplace Harassment: 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.
Examples: derogatory jokes, racial slurs, personal insults, and expressions of disgust or
intolerance toward a particular race.
Workplace Ethics: Ensuring the presence of sound values and ethics is a vital and
ongoing part of good governance in organizations and an integral part of good
management practices. “Workplace ethics” is how one applies values to work in actual
decision making - a set of right and wrong actions that directly impact the workplace. They
are an extension of the personal standards or lack of them that is intrinsic in the people
who comprise the workplace. It is about making choices that may not always feel good or
seem beneficial but are the “right” choices to make.
Example: Preferred style of dress, avoiding illegal drugs, following instructions of
superiors, being reliable and prompt, maintaining confidentiality, not accepting personal
gifts and so on.

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 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 31

(c) (i) The given statement “Rumour and gossip are synonymous” is incorrect.
Rumours and gossip seem to be an inevitable part of everyday corporate life. Even
though rumours and gossip often travel through the same network, there is a
distinction between the terms. Rumours tend to focus on events and information,
whereas gossip focuses on people. Even though managers usually treat the
information as “yet to be confirmed”, it may cloud judgments about the employee. The
information has a way of creeping into performance evaluations and promotion
decisions, even if unintended.
(ii) The given statement “Lying breaks down the trust between individuals” is correct.
A lie is a false statement intended to deceive. Of all the ethical dilemmas, lying would
appear to be the least morally perplexing. Most would agree that “one ought not to
lie”. Yet lies in business are more common that many would care to admit. Lying break
down the trust between individuals, shaking the foundation of ethical communication.
Question 3
(a) (i) Mention the establishments which are exempted from the operation of Employees'
Provident Funds and Miscellaneous Provisions Act, 1952. (3 Marks)
(ii) Astha Ltd. called its Annual General Meeting (AGM) in order to lay down the financial
statements for Shareholders' approval.
However the meeting was cancelled. The directors were of an idea that the time for
filing of annual return within 60 days from the date of AGM would not apply as the
AGM was cancelled. So, they did not file annual return with the Registrar of
companies. Has the company contravened the provisions of Companies Act, 2013 ?
Explain. (3 Marks)
(b) In today's time, Global Warming is a critical problem. Explain the meaning of Global
Warming, its adverse effects and how can we overcome from this problem? (4 Marks)
(c) Write short notes on:
(a) Influence
(b) Negotiation (4 Marks)
Answer
(a) (i) According to section 16 of Employees’ Provident Fund and Miscellaneous Provisions
Act, 1952, this Act does not apply to the following classes of establishments, namely:
(a) an establishment under the Co-operative Societies Act, 1912 or under any other
law relating to co-operative societies in any State, employing less than 50
persons and working without the aid of power; or
(b) any other establishment belonging to or under the control of the Central
Government or a State Government and whose employees are entitled to the

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 32 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

benefit of contributory provident fund or old age pension in accordance with any
scheme or rule framed by the Central Government or the State Government
governing such benefits; or
(c) to any other establishment set up under any Central, Provincial or State Act and
whose employees are entitled to the benefits of contributory provident fund or
old age pension in accordance with any scheme or rule framed under the Act
governing pension in accordance with any scheme or rule framed under that Act
governing such benefits; or
(d) any other class of establishment, which the Central Government has by
notification in the Official Gazette, that it is expedient to do so on the basis of
the financial position, subject to such conditions and for such period as may be
prescribed by the Central Government.
(ii) According to section 92(4) of the Companies Act, 2013, every company shall file with
the Registrar a copy of the annual return, within sixty days from the date on which the
annual general meeting is held or where no annual general meeting is held in any
year within sixty days from the date on which the annual general meeting should have
been held together with the statement specifying the reasons for not holding the
annual general meeting, with such fees or additional fees.
Hence, taking into account the above provisions, Astha Ltd. has contravened the
provisions of the Companies Act, 2013 by not filing the annual return with the
Registrar of Companies within 60 days from the date on which the annual general
meeting should have been held together with the statement specifying the reasons
for not holding the annual general meeting.
(b) Meaning of Global Warming: Greenhouse gases like carbon dioxide, nitrous oxide,
methane, and chlorofluorocarbons, occur naturally in the atmosphere to absorb and hold
heat from the sun, preventing it from escaping back into space, to keep the earth's
temperature about 33°C warmer than it would otherwise be, so that life can evolve and
flourish. However, industrial, and other human activities during the last 50 years have
released substantially more greenhouse gases into the atmosphere, particularly by the
burning of fossil fuels such as oil and coal rising the levels of greenhouse gases and
resulting in increasing amounts of heat, raising temperatures around the globe.
Adverse effects of Global warming: Due to Global warming, average global
temperatures are now at least 1°C higher than in 1900 and are expected to rise by upto
4.5°C during this century. This rising heat will expand the world's deserts; melt the polar
ice caps, causing sea levels to rise; make several species of plants and animals extinct;
disrupt farming; and increase the distribution and severity of diseases. Bodies of water
such as lakes and oceans will warm, and this will dramatically shift the geographical
distribution of fish and other marine species and increase the frequency and magnitude of
droughts.

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How to overcome from global warming: By reducing current emissions of greenhouse

gases by 60 to 70 percent, the level of greenhouse gases can be reduced to control global
warming.
(c) (a) Influence: Influence is much wider in depth and dimension. It is:
1. A process not an action
2. Set of skills-including body language, listening, building rapport, planning,
probing and explaining
3. A set of attitudes–including confidence, trust, patience and belief in win-win
outcomes
4. It is getting people to do things because they want to.
5. It requires one to be other focused rather than self focused
6. It enables proactive leadership.
(b) Negotiation: Negotiation occurs when two or more parties - either individuals or
groups, discuss specific proposals in order to find a mutually acceptable agreement.
Whether it is with an employer, family member or business associate, we all negotiate
for things each day like higher salary, better service or solving a dispute with a co -
worker or family member. Negotiation is a common way of settling conflicts in
business. When handled skillfully, negotiation can improve the position of one or even
both but when poorly handled; it can leave a problem still unsolved and perhaps worse
than before.
Question 4
(a) (i) Mr. A had given on rent his house situated at Bhopal to Mr. B for ` 22,000 per month.
A sum of ` 2 lacs, the property tax payable by Mr. A to the Municipal Corporation
being in arrears, his house is advertised for sale by the corporation. Mr. B pays to the
Corporation, the sum due from Mr. A to avoid legal consequences. Referring to the
provision of the Indian Contract Act, 1872, decide whether Mr. B is entitled to get the
reimbursement of the said amount from Mr. A. (3 Marks)
(ii) Calculate the date of maturity of the bill of exchange drawn on 1-6-2019, payable 120
days after date, considering the relevant provisions of the Negotiable Instrument Act,
1881. (3 Marks)
(b) "Safeguards created by finance and accounting profession, legislation or regulation may
eliminate or reduce the threats relating to unethical behaviour in the organization." Explai n.
(4 Marks)
(c) Mr. J had 250 shares ( ` 10 each) of LMN Ltd. Mr. J died on 15-4-2019. Mr. K is the legal
heir of Mr. J and he wants to get the shares transferred in his name. He has to submit an
Affidavit for this purpose. Draft an Affidavit for the transmission of shares. (4 Marks)

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 34 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Answer
(a) (i) Section 69 of the Indian Contract Act, 1872 provides that “A person who is interested
in the payment of money which another is bound by law to pay, and who therefore
pays it, is entitled to be reimbursed by the other”.
In the given problem Mr. B has made the payment of lawful dues of Mr. A in which
Mr. B had an interest. Therefore, Mr. B is entitled to get the reimbursement from
Mr. A.
(ii) Date of maturity of the bill of exchange: In this case the day of presentment for
sight is to be excluded i.e. 1st June, 2019. The period of 120 days ends on 29th
September, 2019 (June 29 days + July 31 days + August 31 Days + September 29
days = 120 days). Three days of grace are to be added. It falls due on 2nd October,
2019, which happens to be a public holiday. As such it will fall due on 1st October,
2019 i.e., the next preceding Business Day.
(b) “Safeguards created by finance and accounting profession, legislation or regulation
may eliminate or reduce the threats relating to unethical behaviour in the
organization”
It is important to have safeguards which may increase the likelihood of identifying or
deterring unethical behavior. Such safeguards, which may be created by the finance and
accounting profession, legislation, regulation or an employing organization, shall ensure
an ethical environment. Safeguards that may eliminate or reduce the abovementioned
threats to an acceptable level fall into two broad categories:
(a) Some of the safeguards created by the profession, legislation or regulation are as
follows
 Educational, training and experience requirements for entry into the profession.
 Continuing professional development requirements.
 Corporate governance regulations.
 Professional standards.
 Professional or regulatory monitoring and disciplinary procedures.
 External review by a legally empowered third party of the reports, returns,
communications or information produced by concerned professionals.
(b) Safeguards in the work environment are as follows.
 The employing organization’s systems of corporate oversight or other oversight
structures.
 The employing organisation’s ethics and conduct programs.
 Recruitment procedures in the employing organisation emphasizing the
importance of employing high caliber competent staff.

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 Strong internal controls.

 Appropriate disciplinary processes.
 Leadership that stresses the importance of ethical behavior and the expectation
that employees will act in an ethical manner.
 Policies and procedures to implement and monitor the quality of employee
performance.
 Timely communication of the employing organisation’s policies and procedures,
including any changes to them, to all employees and appropriate training and
education on such policies and procedures.
 Policies and procedures to empower and encourage employees to communicate
to senior levels within the employing organization any ethical issues that concern
them without fear of retribution.
(c) Affidavit for transmission of shares
I, Mr. K the legal heir of Mr. J aged___, residing at______________, do hereby solemnly
affirm and declare as under:
1. That Mr. J, the deceased, was holding 250 shares in LMN Limited covered under
Folio No. _______ and Share Certificate No(s) ________.
2. Mr. J, expired on 15.4.2019 at________ leaving Mr. K behind.
3. The abovementioned shares were the separate and self acquired property of the
deceased. The person mentioned hereinabove is the only heir of the deceased. He is
entitled to inherit solely the aforesaid shares held by the deceased.
4. I have already executed indemnity bond for transmitting the aforesaid shares held by
the deceased in my name.
5. I request the LMN Limited to transmit the shares in my name in the books of the
Company and to arrange for payment of the unclaimed dividend, if any, for last 7
years covered under folio_________.
I am executing this declaration to be submitted to the concerned authorities of the
Company.
(Declarant)
VERIFICATION
I hereby state that whatever is stated herein above is true to the best of my knowledge.
Solemnly affirmed at ________ On this ____ day of ______ 20_____.
Deponent

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 36 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Question 5
(a) A, the Secretary of Chanderia Steels Ltd. forged the signatures of two dir ectors required
under the articles on a share certificate and issued the same without authority. Anurag, the
plaintiff, who was the transferee of the share certificate contended that whether the
signatures were genuine or forged was something pertaining to internal management of
the company and therefore, the company should be stopped from denying the genuiness
of the certificate. Decide whether the company is bound for the forgeries committed by its
Secretary ? Submit your answer in the light of the provisions of the Companies Act, 2013.
(6 Marks)
(b) Explain the meaning of Stakeholders. Give the list of such stakeholders who are being
affected by or can affect the organization. (4 Marks)
(c) Describe the characteristics of Emotional Intelligence. (4 Marks)
Answer
(a) Doctrine of Indoor Management
According to this doctrine, persons dealing with the company need not inquire whether
internal proceedings relating to the contract are followed correctly, once they are satisfied
that the transaction is in accordance with the memorandum and articles of association.
The doctrine helps to protect external members from the company and states that the
people are entitled to presume that internal proceedings are as per documents submitted
with the Registrar of Companies.
Exception: The said doctrine does not apply where a person relies upon a document that
turns out to be forged since nothing can validate forgery.
Accordingly, in the given case, in the light of the exception of forgery to the doctrine of
indoor management, Anurag’s contention on the signatures on the share certificate were
genuine or forged was pertaining to internal management, is not valid. Therefore, the
company, Chanderia Steels Ltd. can never be held bound for forgeries committed by A,
the Secretary of the Company.
(b) Meaning of Stakeholders: The traditional governance model positions, management as
accountable solely to investors or shareholders. But an increasing number of corporations
accept that constituents other than shareholders are affected by corporate activity, and
that the corporation must therefore be answerable and accountable to them.
The word stakeholders describe such constituents of an organization – the individuals,
groups or other organization(s) which are affected by, or can affect the organization in
pursuit of its goals.

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A typical list of stakeholders of an organization would be:

employees, trade unions, customers, shareholders and investors, suppliers, local
communities, government and competitors.
(c) Following are the characteristics of emotional intelligence:
1. Self-Awareness through the way of self confidence, self management, Adaptability,
optimism, etc.
2. Social Awareness by empathy, Organizational awareness, and by providing services
to clients or as per customer needs.
3. Relationship Management: by team work and collaboration, building bonds, conflict
management influence etc.
Question 6
(a) (i) Board of Directors of Shine Ltd. gives you the following information extracted from
the company's financial statements as at 31st March, 2020.
`
Authorised equity share capital 10 crores
(1 crore shares of ` 10 each)
Paid up equity share capital 5 crores
General Reserve 3 crores
Debenture redemption reserve 1 crore
Board of Directors, by a resolution passed at its meeting, decides to go for buy -back
of shares to the extent of 20% of the company's paid-up share capital and free
reserves. Examine the validity of Board's resolution with reference to the provisions
of the Companies Act, 2013. (3 Marks)
(ii) Param appoints Deepak as his agent to recover money from various traders to whom
Param sold his merchandise, on a monthly remuneration of ` 20,000. Deepak during
a month recovers ` 30,000 from traders on account of Param and gave back ` 10,000
to Param after deducting his salary.
Examine with reference to relevant provisions of the Indian Contract Act, 1872,
whether act of Deepak is valid. (3 Marks)
(b) State the objects of the Central Consumer Protection Council established in India.
(4 Marks)
(c) ABC Limited has achieved extraordinary performance during the financial year 2019-20 in
the field of 'Healthcare' by winning an export promotion award for exceeding the target of
exports by 15%, launched 10 new drugs for Diabetes and increase in net profit by 20%.
Draft a 'Press Release' incorporating all these details.

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 38 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

OR
State the contents which are required for drafting an Annual Report of a Company.
(4 Marks)
Answer
(a) (i) Section 68 of the Companies Act, 2013 deals with the power of a company to
purchase its own securities subject to certain conditions.
Section 68(2) provides that a company shall not purchase its own shares or o ther
specified securities, unless—
(a) the buy-back is authorised by its articles;
(b) a special resolution has been passed at a general meeting of the company
authorising the buy-back:
Provided that nothing contained in this clause shall apply to a case where—
(i) the buy-back is, ten per cent or less of the total paid-up equity capital and free
reserves of the company; and
(ii) such buy-back has been authorised by the Board by means of a resolution
passed at its meeting;
In the given instance, Board of Directors of Shine Ltd. have paid up equity share
capital and general reserve in aggregate of ` 8 crores. By resolution, Board of
Directors passed at its meeting, buy back of shares to the extent of 20% of the paid -
up share capital and free reserves which is ` 1.6 crores which is more than 10% of
the total paid-up equity capital and free reserves i.e. ` 0.8 crores of the company.
Therefore, special resolution is required to be passed at a general meeting of Shine
Ltd., authorising the buy-back. So, in the given case, Board resolution passed by the
Board of Directors, is invalid.
(ii) The given problem is based on the provision related to ‘agency coupled with interest’.
According to Section 202 of the Indian Contract Act, 1872, an agency becomes
irrevocable where the agent has himself an interest in the property which forms the
subject-matter of the agency, and such an agency cannot, in the absence of an
express provision in the contract, be terminated to the prejudice of such inte rest.
In the given instance, Param appointed Deepak as his agent to recover money from
various traders to whom Param sold his merchandise, on a monthly remuneration of
` 20,000. Deepak during a month recovers ` 30,000 from traders on account of
Param. Deepak after deducting his salary give the rest amount to Param. In the said
case, interest was created in favour of Deepak and the said agency is not revocable,
therefore, the act of Deepak is valid.

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 PAPER – 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 39

(b) 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.
(c) Press Release of ABC Limited, winning Award for extraordinary performance for the
Financial Year 2019-2020
ABC Limited was presented with the prestigious Export Promotion Award on -------- in the
field of healthcare for outstanding achievement for exceeding the target of exports by 15%,
and launching 10 new drugs for Diabetes and increase in net profit by 20% for the Financial
Year 2019-2020.
OR
The following are the main contents are required for drafting an annual report of a
company.
1. Leadership team: including top Management.
2. Directors report
3. Financial Statements - Balance Sheet and Profit and Loss Account including Auditors
report
4. Corporate social responsibility
5. Graphs

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 PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
Question No. 1 is compulsory.
Attempt any five questions out of the remaining six questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer.
Question 1
Answer the following:
(a) Calculate the machine hour rate from the following:
Amount `
Cost of machine 1,50,000
Cost of Installation 10,000
Scrap value after 10 years 16,000
Rates & rent for a quarter for the shop 1,200
General lighting 500 p.m.
Shop supervisor's salary 30,000 per quarter
Insurance premium for a machine 1,200 p.a.
Estimated repair 1,400 p.a.
Power: 2 units per hour @ 750 per 100 units
Estimated working hours p.a. 2000 hours.
The machine occupies 1/3rd of the total area of the shop. The supervisor is expected to
devote 1/6th of his time for supervising the machine. General lighting expenses are to be
apportioned on the basis of floor area.
(b) The following figures are related to KRB Limited for the year ended 31st March, 2020:
 Sales 43,200 units @ ` 150 per unit
 P/V ratio is 20% and
 Break-even point is 25% of Sales
Calculate:
(i) Fixed cost for the year
(ii) Profit earned for the year
(iii) Margin of safety (in units) for the year

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 PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 41

(iv) No. of units to be sold to earn a profit of ` 12,00,000 for the year.
(c) XYZ Steel Ltd.'s transactions for the year ended March 31, 2020 include the following:
(1) Purchased real estate for ` 5,00,000 which was borrowed from a bank.
(2) Sold investment securities worth ` 6,00,000
(3) Paid dividends of ` 3,00,000
(4) Issued 500 equity shares for ` 3,50,000
(5) Purchased machinery and equipment for ` 1,75,000
(6) Paid ` 7,50,000 towards a bank loan
(7) Accounts Receivable outstanding of ` 1,00,000 were realised
(8) Accounts Payable were increased by ` 1,90,000
Calculate the 'Net Cash Flow' from:
(i) Investing activities and
(ii) Financing activities.
(d) The total credit sales of a company are ` 12,80,000. It has a gross profit margin of 15%
and a current ratio of 1.75.
Other informations are as follows:
Current liabilities ` 1,92,000
Closing Inventories ` 96,000
Cash balance ` 32,000
Inventory turnover 4 times
Opening debtors ` 4,32,000
You are required to calculate:
(i) The average inventory to be carried by the company.
(ii) Average collection period.
(Assume a 360 day year) (4 x 5 = 20 Marks)
Answer
(a) Calculation of Machine Hour Rate:
Particulars Amount (`)
 ` 1,50,000  ` 10,000  ` 16,000 
Depreciation  
 10  14,400

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 42 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Rates and Rent {(` 1,200 x 4) x 1/3} 1,600

General Lighting {(` 500 x 12) x 1/3} 2,000
Shop supervisor salary {(` 30,000 x 4) x 1/6} 20,000
Insurance Premium 1,200
Repairs 1,400
Power {(2000 x 2) x ` 750/100} 30,000
Total (A) 70,600
Machine Hours (B) 2,000
Machine Hour Rate {(A)/(B)} 35.30
(b) (i) Fixed cost for the year
Total Sales(43,200 units x ` 150 per unit)= ` 64,80,000
Break Even Sales = ` 64,80,000 x 25% = ` 16,20,000
Fixed cost = Break Even Sales x P/V ratio
= ` 16,20,000 x 20% = ` 3,24,000
(ii) Profit earned for the year
Profit = (Total Sales x P/V ratio) - Fixed cost
= (` 64,80,000 x 20%) - ` 3,24,000
= ` 9,72,000
(iii) Margin of Safety in units
Profit
Margin of Safety (units) =
Cont. per unit
` 9,72,000
= = 32,400 units
` 30
(iv) No of units to be sold to earn a profit of ` 12,00,000
Fixed Cost + Desired Profit
Desired Sales =
Cont. per unit
` 3,24,000 ` 12,00,000
=
` 30
= 50,800 Units

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 PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 43

(c) (i) Net Cash Flow from Investing activity:

Particulars Amount (`)
Purchase of real estate (5,00,000)
Sold investment securities 6,00,000
Purchase of Machinery and equipment (1,75,000)
Net Cash Flow (75,000)
(ii) Net Cash Flow from Financing activity:
Particulars Amount (`)
Loan taken for purchase of real estate 5,00,000
Dividend paid (3,00,000)
Issue of shares 3,50,000
Loan repaid (7,50,000)
Net Cash Flow (2,00,000)

(d) (i) Calculation of average inventory to be carried by the company

Cost of goods sold
Inventory Turnover =
Average Inventory
Since gross profit margin is 15 per cent, the cost of goods sold should be 85 per
cent of the sales.
Cost of goods sold = 0.85 × ` 12,80,000 = ` 10,88,000
` 10,88,000
Thus, 4 =
Average Inventory
` 10,88,000
Average inventory = = ` 2,72,000
4
(ii) Calculation of average collection period
Average Receivables
Average collection period = ×360days
Credit Sales

Average Receivables = (Opening Receivables+ClosingReceivables)

2
Closing balance of receivables is found as follows:
(`) (`)
Current assets (1.75 of current liabilities) 3,36,000

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 44 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Less: Inventories 96,000

Cash 32,000 (1,28,000)
Receivables 2,08,000
` 2,08,000  ` 4,32,000
Average Receivables =
2
= ` 3,20,000
` 3,20,000
Average collection period = x 360 = 90 days
` 12,80,000
Question 2
(a) A manufacturing company process a product which passes through three processes
named as Process A, Process B and Process C. Following information relating to
Process 'B' is available:
Opening Stock - Nil
Units transferred from Process A - 75,000 Units valued at ` 3,09,000
Cost incurred in Process B:
Consumables ` 2,43,600
Labour ` 1,38,000
Overhead ` 1,03,500
Units transferred to Process C 68,000 Units
Closing work in progress 3,000 Units (Degree of completion):
Consumables 70%
Labour 50%
Overhead 50%
Normal loss is 6% of units introduced. Units scrapped as normal loss were sold @ ` 6
per unit.
You are required to:
(i) Prepare a Statement of Equivalent Production
(ii) Calculate Cost per unit
(iii) Calculate the value of work in progress and value of units transferred to Process 'C' .
(8 Marks)

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 PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 45

(b) KT Limited is considering to buy any one of the two mutually exclusive machines X and
Y. The details are as under:
Machine X Machine Y
Cost of Machine ` 7,00,000 ` 10,50,000
Expected life 5 years 6 years
Annual Income before tax and depreciation ` 2,41,500 ` 3,18,500
The cost of capital is 13% and the corporate tax rate is 30%.
Depreciation is to be charged on straight line basis.
You are required to:
(i) Calculate the discounted pay-back period and internal rate of return for each
machine.
(ii) Advise the management of KT Limited as to which machine it should buy.
The present value factors of Re. 1 are as under:
YEAR 12% 13% 14% 15% 16%
1 0.893 0.885 0.877 0.870 0.862
2 0.797 0.783 0.769 0.756 0.743
3 0.712 0.693 0.675 0.658 0.641
4 0.636 0.613 0.592 0.572 0.552
5 0.567 0.543 0.519 0.497 0.476
6 0.507 0.480 0.456 0.432 0.410
(8 Marks)
Answer
(a) (i) Statement of Equivalent Production
Input Details Units Output Units Equivalent Production
Particulars Material- A Consumables Labour &
Overheads
% Units % Units % Units
Units 75,000 Units transferred 68,000 100 68,000 100 68,000 100 68,000
transferred to Process-C
from Process-A
Normal loss (6% 4,500 - - - - - -
of 75,000 units)

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 46 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Closing W-I-P 3,000 100 3,000 70 2,100 50 1,500

Abnormal Gain (500) 100 (500) 100 (500) 100 (500)
75,000 75,000 70,500 69,600 69,000

(ii) Calculation of Cost per Unit

Particulars Amount Units Per Unit
(`) (`)
(i) Direct Material:
Value of units transferred from Process-A 3,09,000
Less: Value of normal loss
(4,500 units × ` 6) (27,000)
2,82,000 70,500 4.00
(ii) Consumables added in Process-B 2,43,600 69,600 3.50
(iii) Labour 1,38,000 69,000 2.00
(iii) Overhead 1,03,500 69,000 1.50
Total Cost per equivalent unit 11.00
(iii) Calculation of value of Work-in-Process and units transferred to Process-C
Particulars Units Rate Amount
(`) (`)
Value of Closing W-I-P:
Material from Process-A 3,000 4.00 12,000
Consumables 2,100 3.50 7,350
Labour 1,500 2.00 3,000
Overhead 1,500 1.50 2,250
24,600
Value of units transferred to Process-C 68,000 11.00 7,48,000
(b) Workings:
1. Depreciation per annum:
` 7,00,000
Machine-X = = ` 1,40,000
5 years

` 10,50,000
Machine-Y = = ` 1,75,000
6 years

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2. Annual cash inflow:

Particulars Machine-X (`) Machine-Y (`)
Earnings before Depreciation and Tax 2,41,500 3,18,500
Less: Depreciation (1,40,000) (1,75,000)
Earnings before Tax 1,01,500 1,43,500
Less: Tax @ 30% (30,450) (43,050)
Earnings after Tax 71,050 1,00,450
Add: Depreciation 1,40,000 1,75,000
Cash Inflow 2,11,050 2,75,450
3. Calculation of PV of cash flows
Machine-X (`) Machine-Y (`)
Year PV factor Cash PV of Cumulative Cash PV of Cumulative
at 13% flow Cash flow PV of Cash flow Cash flow PV of Cash
flow flow
1 0.885 2,11,050 1,86,779 1,86,779 2,75,450 2,43,773 2,43,773
2 0.783 2,11,050 1,65,252 3,52,031 2,75,450 2,15,677 4,59,450
3 0.693 2,11,050 1,46,258 4,98,289 2,75,450 1,90,887 6,50,337
4 0.613 2,11,050 1,29,374 6,27,663 2,75,450 1,68,851 8,19,188
5 0.543 2,11,050 1,14,600 7,42,263 2,75,450 1,49,569 9,68,757
6 0.480 -- -- -- 2,75,450 1,32,216 11,00,973

(i) Calculation of discounted Pay-back period:

` 7,00,000  ` 6,27,663
Machine-X = 4 years + = 4.63 years
` 1,14,600
` 10,50,000  ` 9,68,757
Machine-Y = 5 years + = 5.61 years
` 1,32,216
Calculation of Internal Rate of Return (IRR):
Machine-X:
At 13% discount rate, PV of cash inflows:
= ` 2,11,050 × PVIAF (13%, 5 years)
= ` 2,11,050 × 3.517 = ` 7,42,263

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 48 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

At 16% discount rate, PV of cash inflows:

= ` 2,11,050 × PVIAF (16%, 5 years)
= ` 2,11,050 × 3.274 = ` 6,90,978
PV at LR  CapitalInvestment
IRR = LR   (HR  LR)
PV at LR  PV at HR
` 7,42,263 ` 7,00,000
IRR of Machine X = 13   (16  13)
` 7,42,263 ` 6,90,978
` 42,263
= 13  3
` 51,285
IRR of Machine X = 15.47% (approx.)
Machine-Y:
At 13% discount rate, PV of cash inflows:
= ` 2,75,450 × PVIAF (13%, 6 years)
= ` 2,75,450 × 3.997 = ` 11,00,974
At 16% discount rate, PV of cash inflows:
= ` 2,75,450 × PVIAF (16%, 6 years)
= ` 2,75,450 × 3.684 = ` 10,14,758
` 11,00,974 ` 10,50,000
IRR of Machine Y = 13   (16  13)
` 11,00,974 ` 10,14,758
` 50,974
= 13  3
` 86,216
IRR of Machine Y = 14.77% (approx.)
(ii) The Management should consider to buy Machine X for the following reasons:
(a) The Payback period is 4.63 years as compared to 5.61 years for Machine-Y.
(b) The IRR is 15.47% as compared to 14.77% for Machine-Y.
Question 3
(a) (i) The following information is furnished by ABC Ltd.:
Re-order quantity 6,750 units
Minimum stock level to allow for emergencies 5 weeks
Average Delivery time from suppliers 4 weeks

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Maximum stock level allowed by Management 20 weeks

Average rate of consumption per week 625 units
Minimum consumption in 4 weeks 1,250 units
Calculate:
(a) Re-order Level
(b) Maximum Stock Level
(c) Minimum Stock Level (4 Marks)
(ii)
Material A ( `) Material B ( `)
Standard price per unit 12 15
Actual price per unit 15 20
Standard Input (kg) 50 ??
Actual Input (kg) 40 70
Material usage variance ?? 300(A)
Calculate:
(a) Material cost variance
(b) Material price variance
(c) Material usage variance of material A (4 Marks)
(b) The data of SM Limited for the year ended 31 st March 2020 is given below:
Fixed Cost (Excluding Interest) ` 2.25 Lakhs
Sales ` 45 Lakhs
Equity Share Capital of ` 10 each ` 38.50 Lakhs
12% Debentures of ` 500 each ` 20 Lakhs
Operating Leverage 1.2
Combined Leverage 4.8
Income tax rate 30%
Required:
(i) Calculate P/V ratio, Earning per share, Financial leverage and Assets turnover.
(ii) If asset turnover of an industry is 1.1, then comment on adequacy of assets
turnover of SM Limited.

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(iii) At what level of sales the Earning before tax (EBT) of SM Limited will be equal to
zero? (8 Marks)
Answer
(a) (i) (a) Re-order level
= Minimum stock + (Average consumption × Average delivery time)
= 1,250 units + [625 units × 4 weeks] = 3,750 units
(b) Maximum Stock Level
= Re-order level + Re-order quantity – (Min. consumption × Min. re order
period)
= 3,750 units + 6,750 units – 1250 units
= 9,250 units
(c) Minimum Stock Level
= Re-order level – (Average consumption × Average delivery time)
= 3,750 units – (625 units × 4 weeks) = 1,250 units
(Note: It has been assumed that average delivery time and minimum delivery time is
same i.e. 4 weeks)
(ii) Workings:
Calculation of standard input of Material B
Material Usage Variance (B) = 300 (A)
Material Usage Variance = (SQ – AQ) × SP
Therefore:
= (SQ – 70) x ` 15 = 300 (A)
= SQ (B) = 50 kg
(a) Material Cost Variance
Material Cost Variance = (SQ x SP) – (AQ x AP)
Material A = (50 x ` 12) – (40 x ` 15) =0
Material B = (50 x ` 15) – (70 x ` 20) = ` 650 (A)
= ` 650 (A)
(b) Material Price Variance
Material Price Variance = (SP – AP) × AQ
Material A = (` 12 – ` 15) × 40 = ` 120 (A)

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Material B = (` 15 – ` 20) × 70 = ` 350 (A)

= ` 470 (A)
(c) Material Usage Variance Material A
Material Usage Variance (A) = (SQ – AQ) x SP
= (50 – 40) × ` 12
= ` 120 (F)
(b) (i) Calculation of P/V ratio, EPS, Financial Leverage and Asset Turnover
Contribution (C)
Operating leverage = × 100
C - Fixed Cost (FC)

C
1.2 =
C - 2,25,000
Or, 1.2 (C – 2,25,000) = C
Or, 1.2 C – 2,70,000 = C
` 2,70,000
Or, C = = ` 13,50,000
0.2
Contribution (C) ` 13,50,000
Now, P/V ratio = × 100 = × 100 = 30 %
Sales (S) ` 45,00,000

Therefore, P/V Ratio = 30 %

Profit after tax
EPS =
No. of equityshares
EBT = Contribution – FC – Interest
= `13,50,000 – ` 2,25.000 – ` 2,40,000
= ` 8,85,000
PAT = EBT – Tax
= ` 8,85,000 – ` 2,65,500 = ` 6,19,500
` 6,19,500
EPS = = ` 1.61
` 3,85,000
Combined Leverage = Operating Leverage (OL)  Financial Leverage (FL)
4.8 = 1.2  FL
Or, FL =4

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 52 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Financial Leverage = 4
Sales ` 45,00,000
Assets turnover =   0.769
Total Assets ` 58,50,000
(ii) 0.769 < 1.1. It means lower than industry turnover.
(iii) EBT zero means Contribution = Fixed cost + Interest
Hence Contribution = ` 2,25,000 + ` 2,40,000 = ` 4,65,000
Sales = Contribution/P/V ratio = ` 4,65,000/30% = ` 15,50,000
Therefore, at ` 15,50,000 level of sales, the Earnings before Tax of the company
will be equal to zero.
(Note: Question may also be solved in alternative ways.)
Question 4
(a) TK Ltd. has estimated the following figures for its two products 'X' and 'Y' for the coming
year :
Product X ( `) Product Y ( `)
Sales Units 2,000 2,500
Raw material cost per unit 30 40
Direct Labour Cost per unit 20 14
Variable overhead per unit 15 10
Fixed overhead 50,000 60,000
Selling price per unit 140 200
Company has received a proposal that if an additional fixed expenditure of ` 16,000 on
Product X and ` 17,000 on Product Y is incurred, the sales for both the products can be
increased by 10% but for this purpose, variable overheads shall also be increased by
20% for Product X and 10% for Product Y.
(i) You are required to prepare 'flexible budget' for both the products :
(a) Before new proposal and
(b) After new proposal
(ii) Advise the company whether the proposal should be accepted or not:
(a) if both the products are independent and
(b) if both the products are not independent. (8 Marks)

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(b) ABC Ltd., a profit-making company, is engaged in the business of car manufacturing. In
order to be independent in terms of its electricity needs, the company's management has
proposed to put up a Solar Power Plant to generate the electricity. The details of the
proposal are as follows:
(1) Cost of the power plant ` 280 lakhs
(2) Cost of land ` 30 lakhs
(3) Subsidy of ` 25 lakhs from state government to be received at the end of first year
of installation.
(4) Sale of electricity to State Electricity Board will be at ` 2.25 per unit in year 1. This
will increase by ` 0.25 per unit every year till year 7. After that it will increase by
` 0.50 per unit every year.
(5) Maintenance cost will be ` 4 lakhs in year 1 and the same will increase by ` 2 lakhs
every year.
(6) Estimated life is 10 years.
(7) Cost of capital 15%.
(8) Residual value of power plant is nil. However, land value will go up to ` 90 lakhs at
the end of year 10.
(9) Depreciation will be 100% of the cost of the power plant in year 1 (entire ` 280
lakhs is to be depreciated in year 1 without considering subsidy) and the same will
be allowed for tax purposes.
(10) Gross electricity generated will be 25 lakhs units per annum. 4% of this electricity
generated will be committed free to the State Electricity Board as per the
agreement.
(11) Tax rate is 50%.
You are required to suggest the viability of the proposal by calculating the 'Net Present
Value' while ignoring the tax on capital profit. Assume that the tax savings, if any, are
utilized in the year of their occurrence.
Present value (PV) factor @ 15% for the year 1 to year 10 are as given below and should
be used for calculating present value of various cash flows.
Year 1 2 3 4 5 6 7 8 9 10
PV Factor 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247
(8 Marks)

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 54 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Answer
(a) (i) Statement of Flexible Budget for the both the products:
Particulars Product-X (`) Product-Y (`)
Before After new Before After new
new proposal new proposal
proposal proposal
Sales unit 2,000 2,200 2,500 2,750
(110% of 2,000) (110% of 2,500)
Sales price per unit 140 140 200 200
Sales value (A) 2,80,000 3,08,000 5,00,000 5,50,000
Variable cost:
- Raw Material 60,000 66,000 1,00,000 1,10,000
(30×2,000) (30×2,200) (40×2,500) (40×2,750)
- Direct labour 40,000 44,000 35,000 38,500
(20×2,000) (20×2,200) (14×2,500) (14×2,750)
- Variable overhead 30,000 39,600 25,000 30,250
(15×2,000) (15×120%×2,200) (10×2,500) (10×110%×2,750)
Total Variable cost (B) 1,30,000 1,49,600 1,60,000 1,78,750
Fixed cost (C) 50,000 66,000 60,000 77,000
Profit {A – (B+C)} 1,00,000 92,400 2,80,000 2,94,250
(ii) Advise:
(a) If both the products are independent then proposal for Product-Y is
accepted as the profit for the Product-Y is increased to ` 2,94,250 from
` 2,80,000.
(b) If both the products are not independent then proposal for both the products
is accepted as profit for both the products will increase to ` 3,86,650 from
` 3,80,000.
(b) Gross electricity generated = 25 lakhs unit p.a.
Free commitment (4%) = 1 lakh unit p.a.
Net chargeable electricity generated = 24 lakhs unit p.a.

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 PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 55

Computation of Annual Cash Flow

Period Rate Per Revenue Maintenance Profit Before Tax @ Profit after
Unit (`) (`) Cost (`) Tax (`) 50% (`) Tax (`)
(A) (B) (C)= (A) – (B) (D) (C) – (D)
1 2.25 54,00,000 4,00,000 50,00,000 25,00,000 25,00,000
2 2.50 60,00,000 6,00,000 54,00,000 27,00,000 27,00,000
3 2.75 66,00,000 8,00,000 58,00,000 29,00,000 29,00,000
4 3.00 72,00,000 10,00,000 62,00,000 31,00,000 31,00,000
5 3.25 78,00,000 12,00,000 66,00,000 33,00,000 33,00,000
6 3.50 84,00,000 14,00,000 70,00,000 35,00,000 35,00,000
7 3.75 90,00,000 16,00,000 74,00,000 37,00,000 37,00,000
8 4.25 102,00,000 18,00,000 84,00,000 42,00,000 42,00,000
9 4.75 114,00,000 20,00,000 94,00,000 47,00,000 47,00,000
10 5.25 126,00,000 22,00,000 104,00,000 52,00,000 52,00,000
Computation of Net Present Value

Period Annual Subsidy Tax Benefit Sale of Total Cash PVF PV

Cash on Machine Land Inflow @15%
Flow Depreciation
(`) (`) (`) (`) (`) (`)
1 25,00,000 25,00,000 140,00,000 - 1,90,00,000 0.87 165,30,000
2 27,00,000 - - - 27,00,000 0.756 20,41,200
3 29,00,000 - - - 29,00,000 0.658 19,08,200
4 31,00,000 - - - 31,00,000 0.572 17,73,200
5 33,00,000 - - - 33,00,000 0.497 16,40,100
6 35,00,000 - - - 35,00,000 0.432 15,12,000
7 37,00,000 - - - 37,00,000 0.376 13,91,200
8 42,00,000 - - - 42,00,000 0.327 13,73,400
9 47,00,000 - - - 47,00,000 0.284 13,34,800
10 52,00,000 - - 90,00,000 142,00,000 0.247 35,07,400
Total Present Value of Cash Inflows 3,30,11,500
Less: Initial Outlay 3,10,00,000
Net Present Value 20,11,500
The proposed project has NPV of ` 20,11,500 and is viable to undertake.

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 56 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Question 5
(a) What is a Cost Driver? Give two examples of cost drivers for each of the following
business functions :
(i) Procurement
(ii) Research and Development
(iii) Customer Service
(b) Explain the following :
(i) Notional profit in Contract Costing.
(ii) Retention Money in Contract Costing.
(c) Differentiate between Deep Discount Bonds and Zero Coupon Bonds.
(d) Write short notes on the following:
(i) Cash Credit
(ii) Bills Discounting (4 x 4 =16 Marks)
Answer
(a) Cost Driver: A cost driver is a factor or variable which effect the level of cost. In other
words, it is an activity which is responsible for cost incurrence. In the context of Activity
Based Costing (ABC) a cost driver denotes the factor which links activity resource
consumption to the product output.
Examples of cost drivers in the business functions in the value chain are:
(i) Procurement: Number of Purchase Order, Number of Suppliers, Number of items
procured and volume of purchases (in quantitative terms)
(ii) Research and development: Number of research projects, personnel hours on a
project, technical complexities of the projects.
(iii) Customer service: Number of service calls, number of products serviced, hours
spent in servicing of products.
(b) (i) Notional profit in Contract costing: It represents the difference between the value
of work certified and cost of work certified.
Notional Profit = Value of work certified – (Cost of works to date – Cost of work not
yet certified)
(ii) Retention Money in Contract Costing: A contractor does not receive the full
payment of the work certified by the surveyor. Contractee retains some amount to
be paid after some time, when it is ensured that there is no default in the work done
by the contractor. If any deficiency or defect is noticed, it is to be rectified by the

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contractor before the release of the retention money. Thus, the retention money
provides a safeguard against the default risk in the contracts.
(c) Deep Discount Bonds vs. Zero Coupon Bonds: Deep Discount Bonds (DDBs) are in
the form of zero interest bonds. These bonds are sold at a discounted value and on
maturity face value is paid to the investors. In such bonds, there is no interest pay-out
during lock-in period.
IDBI was first to issue a Deep Discount Bonds (DDBs) in India in January 1992. T he
bond of a face value of ` 1 lakh was sold for ` 2,700 with a maturity period of 25 years.
A zero-coupon bond (ZCB) does not carry any interest, but it is sold by the issuing
company at a discount. The difference between discounted value and maturing or face
value represents the interest to be earned by the investor on such bonds.
(d) (i) Cash Credit: Cash Credit is an arrangement under which a customer is allowed an
advance up to certain limit against credit granted by bank. Under this arrangement,
a customer need not borrow the entire amount of advance at one time; he can only
draw to the extent of his requirements and deposit his surplus funds in his account.
Interest is not charged on the full amount of the advance but on the amount actually
availed of by him.
(ii) Bills Discounting: These advances are allowed against the security of bills which
may be clean or documentary. Bills are sometimes purchased from approved
customers in whose favour limits are sanctioned. Before granting a limit, th e banker
satisfies himself as to the credit worthiness of the drawer. Although the term 'bills
purchased' gives the impression that the bank becomes the owner or purchaser of
such bills, in actual practice the bank holds the bills only as security for the
advance. The bank, in addition to the rights against the parties liable on the bills,
can also exercise a pledge’s rights over the goods covered by the documents.
Question 6
(a) The standard time allowed for a certain piece of work is 300 hours. Normal wages is ` 60
per hour.
The bonus system applicable to the work is as follows:
Percentage of time saved to time allowed (slab rate) Bonus
(i) Up to the first 20% of time allowed 25% of the corresponding
saving in time.
(ii) For and within the next 30% of time allowed 40% of the corresponding
saving in time.
(iii) For and within the next 30% of time allowed 30% of the corresponding
saving in time.
(iv) For and within the next 20% of time allowed 10% of the corresponding
saving in time.

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 58 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Calculate the total earnings of a worker over the piece of work and his earnings per hour
when he takes.
(a) 320 hours,
(b) 150 hours, and
(c) 30 hours respectively. (8 Marks)
(b) RB Limited is working as market leader and there is no competitor of the company in the
market. The following information is provided by the RB Limited for the year ended on
31st March, 2020 :
Raw Material storage period 30 days
Work in progress conversion period 15 days
Finished goods storage period 18 days
Debt Collection period 30 days
Creditor's payment period 45 days
Annual operating cost ` 20,00,000
(Including depreciation ` 2,00,000)
You are required to calculate:
(i) Operating cycle period
(ii) Number of operating cycle period
(iii) Amount of working capital required for the company on a cash cost basis.
(iv) Amount of reduction/addition in working capital requirement if:
(a) All purchases are made on cash basis only.
(b) All sales are made on a cash basis only.
(Assume 360 days in a year) (8 Marks)
Answer
(a) Calculation of total earnings and earnings per hour:
Particulars (a) Time (b) Time (c) Time
taken is 320 taken is taken is
hours 150 hours 30 hours
A. Time Allowed 300 hours 300 hours 300 hours
B. Time taken 320 hours 150 hours 30 hours
C. Time Saved (A-B) Nil 150 hours 270 hours

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D. Bonus hours Nil 51 hours 81 hours

(Refer the workings)
E. Hours to be paid (B+D) 320 hours 201 hours 111 hours
F. Wages rate per hour ` 60 ` 60 ` 60
G. Total earnings (E×F) ` 19,200 ` 12,060 ` 6,660
H. Earnings per hour (G÷B) ` 60 ` 80.40 ` 222
Workings:
Calculation of bonus hours:

Time saved 150 Time saved 270

hours hours
For first 20% of time allowed i.e. 60 hours 15 15
(25% of 60 hours) (25% of 60 hours)
For next 30% of time allowed i..e. 90 hours 36 36
(40% of 90 hours) (40% of 90 hours)
For next 30% of time allowed i..e. 90 hours - 27
(30% of 90 hours)
For next 20% of time allowed i..e. 60 hours - 3
(10% of 30 hours)
Bonus hours 51 81
(b) (i) Calculation of Operating Cycle Period:
Operating Cycle Period = R + W + F + D – C
= 30 + 15 + 18 + 30 – 45 = 48 days
(ii) Number of Operating Cycle in a Year
360 360
= = = 7.5 times
Operating Cycle Period 48
(iii) Amount of Working Capital Required
Annual Operating Cost ` 20,00,000  ` 2,00,000
= =
Number of Operating Cycle 7.5
` 18,00,000
= = ` 2,40,000
7.5

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(iv) (a) Addition in Working Capital requirement (when all purchases are made
on cash basis only)
Operating Cycle Period = R + W + F + D
= 30 + 15 + 18 + 30 = 93 days
` 18,00,000
Amount of Working Capital Required =  93 = ` 4,65,000
360
Addition in Working Capital requirement = ` 4,65,000 – ` 2,40,000
= ` 2,25,000
(b) Reduction in Working Capital requirement (when all sales are made on
cash basis only)
Operating Cycle Period = R + W + F – C
= 30 + 15 + 18 – 45 = 18 days
` 18,00,000
Amount of Working Capital Required =  18 = ` 90,000
360
Reduction in Working Capital requirement = ` 2,40,000 – ` 90,000
= ` 1,50,000
Question 7
Answer any four of the following :
(a) State the four causes due to which "differences arise in the profits computed as per cost
and financial accounts".
(b) Discuss two ways for the treatment of by-product cost in cost accounting
(c) Explain :
(i) Time value of money
(ii) Sinking Fund
(d) Explain the limitations of profit maximization objective of Financial Management.
(e) (i) Give the 'Cost unit' and 'Costing method' for each of the following industries :
(a) Construction contract
(b) Automobiles
(ii) Explain the term - Retained Earnings. (4 x 4 =16 Marks)

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Answer
(a) Reasons/ Causes for disagreement of profits as per cost and financial accounts:
The various reasons for disagreement of profits shown by the two sets of books viz., cost
and financial may be listed as below:
1. Items appearing only in financial accounts: The following items of income and
expenditure are normally included in financial accounts and not in cost accounts.
Their inclusion in cost accounts might lead to unwise managerial decisions. These
items are:
(i) Income:
(a) Profit on sale of assets
(b) Interest received
(c) Dividend received
(d) Rent receivable
(e) Share Transfer fees
(ii) Expenditure
(a) Loss on sale of assets
(b) Uninsured destruction of assets
(c) Loss due to scrapping of plan and machinery
(d) Preliminary expenses written off
(e) Goodwill written off
(f) Underwriting commission and debenture discount written off
(g) Interest on mortgage and loans
(h) Fines and penalties
(iii) Appropriation
(a) Dividends
(b) Reserves
(c) Dividend equalization fund, Sinking fund etc.

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2. Items appearing only in cost accounts: There are some items which are included
in cost accounts but not in financial account. These are:
(a) Notional interest on capital;
(b) Notional rent on premises owned.
3. Under or over-absorption of overhead: In cost accounts overheads are charged
to production at pre-determined rates where in financial accounts actual amount of
overhead is charged, the difference gives rise under or over-absorption; causing a
difference in profits.
4. Different bases of stock valuation: In financial books, stocks are valued at cost or
market price, whichever is lower. In cost books, however, stock of materials may be
valued on FIFO or LIFO basis and work-in-progress may be valued at prime cost or
works cost. Differences in store valuation may thus cause a difference between the two
profits.
5. Depreciation: The amount of depreciation charge may be different in the two sets of
books either because of the different methods of calculating depreciation or the rates
adopted. In company accounts, for instance, the straight line method may be adopted
whereas in financial accounts it may be the diminishing balance method.
(b) Treatment of by-product cost in Cost Accounting:
(i) When they are of small total value, the amount realized from their sale may be
dealt as follows:
 Sales value of the by-product may be credited to Costing Profit & Loss Account
and no credit be given in Cost Accounting. The credit to Costing Profit & Loss
Account here is treated either as a miscellaneous income or as additional sales
revenue.
 The sale proceeds of the by-product may be treated as deduction from the total
costs. The sales proceeds should be deducted either from production cost or cost
of sales.
(ii) When they require further processing:
In this case, the net realizable value of the by-product at the split-off point may be
arrived at by subtracting the further processing cost from realizable value of by-
products. If the value is small, it may be treated as discussed in (i) above .

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(c) (i) Time Value of Money: It means money has time value. A rupee today is more
valuable than a rupee a year hence. We use rate of interest to express the time
value of money.
(ii) Sinking Fund: It is the fund created for a specified purpose by way of sequence of
periodic payments over a time period at a specified interest rate.
(d) Limitations of Profit Maximisation objective of financial management:
(i) Time factor is ignored.
(ii) It is vague because it is not cleared whether the term relates to economics profit,
accounting profit, profit after tax or before tax.
(iii) The term maximisation is also ambiguous
(iv) It ignores the risk factor.
(e) (i)
S. No. Industry Cost Unit Costing Method
(a) Construction contract For each contract Contract Costing
(b) Automobiles Number Multiple Costing

(ii) Retained Earnings: Long-term funds may also be provided by accumulating the
profits (retained earnings) of the company and by ploughing them back into
business. Such funds belong to the ordinary shareholders and increase the net
worth of the company. A public limited company must plough back a reasonable
amount of profit every year keeping in view the legal requirements in this regard and
its own expansion plans. Such funds also entail almost no risk. Further, control of
present owners is also not diluted by retaining profits.

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 PAPER – 4 : TAXATION
SECTION A : INCOME TAX
Question No.1 is compulsory.
Candidates are also required to attempt any three questions from the rest.
Working notes should form part of the respective answers.
All questions pertaining to income-tax relate to Assessment Year 2020-21, unless stated
otherwise in the questions.
Question 1
Given below are the details provided to you by Mr. Rayan, a resident individual aged 54 years,
engaged in the manufacture of specified article, in respect of his income earned during the year
2019-20:
(i) Net profit from business ` 75,21,000 (as per profit and loss account)
(ii) On 1.4.2019, Mr. Rayan took Plant and machinery on hire purchase and put that to use on
the same day. Cost of the asset was ` 12,00,000 which was to be payable in 24 equal
monthly instalment of ` 50,000 each. Date of payment of first instalment was 31.7.2019. It
is decided between the parties that, out of the monthly payment of instalments, Rayan will
pay ` 45,000 through account payee cheque and balance ` 5,000 in cash. The instalments
are paid on the last day of each month.
(iii) During the year Mr. Rayan purchased one more plant and machinery for ` 55 lakhs for
which he took loan from a scheduled bank. (Date of loan 1.4.2019 and rate of interest
11% p.a.). The asset was acquired on 1.5.2019 and put to use on 1.9.2019. Interest
amount is debited to P/L A/c.
(iv) On 1.4.2019, the production manager working in the factory of Mr. Rayan took voluntary
retirement from the services. Mr. Rayan paid him ` 9,00,000 as compensation for his
services under the Voluntary Retirement Scheme. This amount has been debited to the
profit and loss account under salary head.
(v) As per the agreement between Rayan and Mr. Das (Chief Executive Officer), apart from
salary, Mr. Das will also be eligible for a share of profit @ 5% of net profit as per books of
account. He was paid salary of ` 14,25,000·and bonus of ` 3,76,050 during the year, which
is debited to the profit and loss account under the salary head.
(vi) WDV (as per Income-tax Act) of different assets as on 1.4.2019:
- Plant and machinery ` 9,00,000; Factory Building ` 5,45,000
- Depreciation debited to profit and loss account ` 17,50,000
The Suggested Answers for Paper 4A: Income-tax are based on the provisions of income-tax
law as amended by the Finance Act, 2019 and Finance (No.2) Act, 2019, which are relevant for
January, 2021. The relevant assessment year is A.Y.2020-21.

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 PAPER – 4 : TAXATION 65

(vii) He received ` 14,850 as Income-tax refund out of which ` 4,850 is interest on refund. The
entire amount is credited to profit and loss account.
(viii) He paid ` 50,000 as life insurance premium taken on the life of his father who is dependent
on him. The sum assured is ` 80,00,000 and the policy was taken on 1.4.2015.
(ix) He also paid ` 45,000 as life insurance premium taken on the life of his married daughter
who is not dependent on him. The sum assured is ` 5,00,000 and the policy was taken on
1.4.2015.
(x) On 1.10.2019, he withdrew ` 2 crores in cash from two current accounts maintained by
him with SGT Bank of India. There are no other withdrawals during the year.
You are required to compute the total income of Mr. Rayan and also the tax payable by him for
the A.Y. 2020-21. (14 Marks)
Answer
Computation of total income of Mr. Rayan for A.Y. 2020-21
Particulars ` ` `
I Income from business or profession
Net profit as per profit and loss account 75,21,000
Add: Items of expenditure not allowable while
computing business income
(i) Depreciation as per books of accounts
17,50,000
(ii) Interest on loan taken for purchase of
plant & machinery 2,52,083
[Interest from the date on which capital
was borrowed till the date on which
asset as first put to use not allowable as
deduction. Accordingly, interest of
` 2,52,083 [` 55,00,000 x 11% x 5/12]
has to be added back, since the same is
debited to the profit and loss account]
(iii) Bonus paid as share of profit is not
allowable under section 36(1)(ii), as the 3,76,050
same is debited to profit and loss
account, it has to be added back
(iv) Compensation on voluntary retirement
7,20,000
[only 1/5 th of the compensation paid is
allowable in the current year. The
remaining are allowable in the four
succeeding years in equal installments.

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 66 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Hence, 4/5th of ` 9 lakh debited to profit

and loss account has to be added back] 30,98,133
1,06,19,133
Less: Items of income to be treated separately
under the respective head of income
Income-tax refund including interest on refund 14,850
of ` 4,850
1,06,04,283
Less : Allowable expenditure
Depreciation on
(i) Opening WDV
- Factory Building ` 5,45,000 @10% 54,500
- Plant & Machinery ` 9,00,000 @15% 1,35,000
(ii) Plant & Machinery acquired on 1.4.2019 for
` 12,00,000
- Normal depreciation @ 15% 1,80,000
- Additional depreciation @20% 2,40,000
[Since payment made in cash in a day to
a person does not exceed ` 10,000, the
actual cost incurred on plant & machinery
by Mr. Rayan i.e., ` 12,00,0002, is eligible
for depreciation.
He is also eligible for additional
deprecation, since Mr. Rayan is engaged in
manufacturing business]
(iii) Plant & Machinery acquired on 1.5.2019 for
` 57,52,083 [` 55,00,000 plus
` 2,52,083, being the amount of interest on
loan taken for purchase of this plant and
machinery from the date on which capital
was borrowed till the date on which asset
as first put to use shall be capitalized]
Normal depreciation @15% 8,62,812
Additional depreciation @20% 11,50,417
Since plant & machinery put to use for 180 days
or more, it is eligible for 100% of the rate of 26,22,729
depreciation

2 It is assumed that Mr. Rayan is following mercantile system of accounting.

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 PAPER – 4 : TAXATION 67

79,81,554
II Income from Other Sources
Interest on income-tax refund 4,850
Gross Total Income 79,86,404
Less: Deduction under Chapter VI-A
- Deduction under section 80C –
Life insurance premium of his father
[Not allowable as deduction, since not covered NIL
within the meaning of term “person” in case of
an individual, though he is dependent on him]
Life insurance premium for married daughter 45,000 45,000
[Allowable as deduction though she is not
dependent, since child of an individual whether
Dependent or not falls within the meaning of
term “Person”. Accordingly, whole of the
amount of ` 45,000 is allowable as it does not
exceed 10% of the ` 5, 00,000, being the sum
assured]
Total Income 79,41,404
Total Income (rounded off) 79,41,400

Computation of tax liability of Mr. Rayan for A.Y. 2020-21

Particulars ` `
Tax on total income of 79,41,400
Upto ` 2,50,000 Nil
` 2,50,001 – ` 5,00,000 [@5% of ` 2.50 lakh] 12,500
` 5,00,001 – ` 10,00,000 [@20% of ` 5,00,000] 1,00,000
` 10,00,001- ` 79,41,400 [@30% of ` 69,41,400] 20,82,420 21,94,920
Add: Surcharge @10%, since total income exceeds 2,19,492
` 50,00,000
24,14,412
Add: Health and education cess@4% 96,576
Total tax liability 25,10,988
Less: TDS u/s 194N @ 2% on `1 crore, being the cash
withdrawals exceeding ` 1 crore 2,00,000

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Tax payable 23,10,988

Tax payable (rounded off) 23,10,990
Question 2
(a) Discuss the taxability of the following items in the hands of different persons briefly
explaining the applicable provisions of the Income-tax Act:
(i) Mr. Jayesh, a non-resident is having a plot of land in Jodhpur. He sells this plot to
another non-resident outside India. The consideration is received outside India in
foreign currency.
(ii) Mr. Arpit is having a house property in India. The property is let out by him to a foreign
company. The rent agreement is entered outside India. Monthly rent is also received
outside India.
(iii) Government of Rajasthan has borrowed money from ABC Express Bank, a foreign
bank. The interest payable to ABC Express Bank is remitted outside India.
(iv) Mr. Bhavesh, a citizen of India, is appointed by Reliable Industries Ltd. in their Dubai
Branch. Mr. Bhavesh is a non-resident and receives salary outside India. (4 Marks)
(b) Mr. Gupta and his wife Mrs. Gupta are partners in a partnership firm holding 25% share
each. During the FY 2019-20, the firm paid ` 2,50,000 to each of them as remuneration.
Apart from this, they provide you the following information in respect of FY 2019-20:
(i) Salary received by Mr. Gupta from his employer ` 12,50,000.
(ii) Interest on fixed deposit earned by Mrs. Gupta ` 14,00,000. (The fixed deposit was
opened by using her "Stridhan")
(iii) Income of their three minor children Neeta, Meeta and Seeta was ` 15,000;
` 10,000 and ` 2,000 respectively.
You are required to compute the gross total income of Mr. and Mrs. Gupta as per the
provisions of Income-tax Act for the AY 2020-21. (3 Marks)
Answer
(a) (i) Sale of plot of land at Jodhpur
As per section 9(1)(i), income accruing or arising in the hands of Mr. Jayesh, a non-
resident, from transfer of a capital asset situated in India, namely, land in Jodhpur,
would be deemed to accrue or arise in India.
Hence, capital gains arising from transfer of such land would be chargeable to tax in
the hands of Jayesh, even though the land is transferred to another non -resident
outside India and consideration is received in foreign currency.

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(ii) Rental income from a house property situated in India

As per section 9(1)(i), rental income from a house property in India would be deemed
to accrue or arise in India as the source of income, namely, the house property, is in
India. Therefore, rental income from a house property in India is taxable in the hands
of Mr. Arpit, even though the house has been let-out to a foreign company, the rent
agreement is entered outside India and such income is received outside India.
Note (Alternate assumption): The question does not mention the residential status
of Mr. Arpit. The above reasoning for arriving at the conclusion of taxability is based
on the assumption that Mr. Arpit is a non-resident. However, if Mr. Arpit is a resident,
the answer would be as follows –
The rental income from house property in India would be taxable in the hands of
Mr. Arpit, since global income is taxable in the hands of a resident, irrespective of the
fact that it is received outside India from a foreign company.
(iii) Interest on loan payable by Government of Rajasthan
Income by way interest payable by the Government is deemed to accrue or arise in
India by virtue of section 9(1)(v)(a). Therefore, interest payable by the Government
of Rajasthan would be taxable in the hands of ABC Express Bank, even though it is
a foreign bank and the interest has been remitted outside India.
(iv) Salary income earned outside India
As per section 9(1)(ii), salary received outside India for services rendered outside
India (in Dubai Branch) is not deemed to accrue or arise in India, since the services
are rendered outside India. Hence, the salary income would not be taxable in the
hands of Mr. Bhavesh, a non-resident, since the same is received outside India and
is not deemed to accrue or arise in India.
(b) Computation of Gross Total Income of Mr. Gupta and Mrs. Gupta for A.Y. 2020 -21
Particulars Mr. Gupta Mrs. Gupta
` ` ` `
Salary 12,50,000 -
Less: Standard deduction under section
16(ia) 50,000
12,00,000
Interest on Fixed Deposit earned by Mrs. - 14,00,000
Gupta

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 70 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

Total income (before including 12,00,000 14,00,000

remuneration from firm and minor’s
income)
Remuneration from firm (assumed that 2,50,000
the same is fully deductible in the hands
of the firm)
Remuneration of ` 2,50,000 received by
Mr. Gupta has to be included in the total
income of Mrs. Gupta, since both of
them have substantial interest in the
concern (i.e., each having 25% share in
the firm, in the present case), and her
total income of `14 lakh exceeds the
total income of her spouse excluding this
income (i.e., ` 12 lakh). It is assumed
that such remuneration is fully
deductible in the hands of the firm. 2,50,000 5,00,000
Total Income (before including 19,00,000
minor’s income)
Income of three minor children to be
included in Mrs. Gupta’s income 3, since
her total income before including minor’s
income is higher than that of her
husband. -
15,000
- Neeta
10,000
- Meeta
2,000
- Seeta
27,000
Less: Exemption of ` 1,500 u/s 10(32) in
respect of the income each child so 4,500 22,500
included.
Gross Total Income 12,00,000 19,22,500
Question 3
(a) Mr. Tarun, a resident individual, furnishes the following particulars of his income and other
details for the previous year 2019-20:

3
It is assumed that the income of the minor children are not on account of their skills.

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`
Income from Salary (Computed) 25,00,000
Business loss before providing current year depreciation (Business 1,20,000
discontinued on 31.5.2019)
Current year depreciation 80,000
Interest from Fixed Deposit 12,14,000
Interest on Loan in respect of self-occupied property 2,15,000
Income from specified business (Not eligible for deduction under 20,000
section 35AD)
Brought forward losses (Pertaining to A Y 2019-20)
Unabsorbed depreciation 58,000
Loss from specified business (eligible for deduction under section 35AD) 24,000
You are required to compute his total income for the AY 2020-21 in such a way that his
tax liability is minimised. (4 Marks)
(b) Briefly explain the provisions of section 234F of the Income-tax Act, 1961 with regard to
default in furnishing return of Income. (3 Marks)
Answer
(a) Computation of total income of Mr. Tarun for A.Y.2020-21
Particulars ` `
Income from Salary (Computed) 25,00,000
Less: Loss from self-occupied house property (on account of
interest deduction upto ` 2,00,000) [Loss from house property 2,00,000
can be set-off against salary income as per section 71(1)] 23,00,000

Profits and gains from business and profession

Income from specified business [not eligible for deduction u/s
35AD] 20,000 Nil
Less: Set-off of brought forward loss from specified business (20,000)
[eligible for deduction u/s 35AD] allowable as per section 73A
[Brought forward loss from specified business eligible for
deduction u/s 35AD can be set-off against income from any
specified business, whether or not the same is eligible for
deduction u/s 35AD]
Income from Other Sources

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Interest from fixed deposit 12,14,000

Less: Current year business loss set-off [Inter-head set-off is
permissible by virtue of section 71(1). Hence, current year
business loss can be set-off against interest income from 1,20,000
fixed deposit]
10,94,000

Less: Current year depreciation 80,000

10,14,000
Less: Unabsorbed depreciation under section 32(2) [Can be
set-off against any head of income other than Salaries] 9,56,000
58,000
Gross Total Income/Total Income 32,56,000

(b) Fee for default in furnishing return of income [Section 234F]

Where a person who is required to furnish a return of income under section 139, fails to
furnish return of income within the prescribed time limit under section 139(1), he shall pay,
by way of fee, a sum of –
- ` 5,000, if the return is furnished on or before 31st December of the assessment year;
- ` 10,000 in any other case (after 31st December but before the end of the assessment
year)
However, if the total income of the person does not exceed ` 5 lakhs, the fees payable
shall not exceed ` 1,000.
Question 4
(a) M/s. Bhandari & Batra, a partnership firm consisting of two partners, reports a net profit of
` 7 ,00,000 before deduction of the following items:
 Salary of ` 20,000 each per month payable to two working partners of the firm (as
authorized by the deed of partnership)
 Depreciation on plant and machinery under section 32 ` 1,50,000
 Interest on capital 15% per annum (as per the deed of partnership).
The amount of capital eligible for interest is ` 5,00,000
 Carry forward loss of P.Y. 2018-19- ` 50,000
Compute (for A Y- 2020-21):
(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.
(ii) Amount of salary that can be paid to working partners as per section 40(b).
(4 Marks)

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(b) Compute the tax liability of Ms. Payal for A.Y. 2020-21, a female resident aged 40 years
where her total income is ` 5,00,50,000, assuming that there is no income in the nature
of capital gains. (3 Marks)
Answer
(a)

(i) Computation of book profit of the firm under section 40(b)

Particulars Amount Amount
(`) (`)
Net Profit (before deduction of depreciation, salary 7,00,000
and interest)
1,50,000
Less: Depreciation under section 32
Interest @ 12% p.a. [being the maximum allowable as 60,000
per section 40(b)] (` 5,00,000 × 12%) 2,10,000
Book profit 4,90,000
“Book profit” means the net profit as per the profit and loss account for the
relevant previous year computed in the manner laid down in Chapter IV-D as
increased by the aggregate amount of the remuneration paid or payable to the
partners of the firm if the same has been already deducted while computing the
net profit. Hence, brought forward loss of ` 50,000 of P.Y.2018-19 is not
allowed to be set off for computation of “book profit”.
(ii) Salary actually paid to working partners = ` 20,000 × 2 × 12 = ` 4,80,000
As per the provisions of section 40(b)(v), the maximum allowable working
partners’ salary for the A.Y. 2020-21 in this case would be:
Particulars `
On the first ` 3,00,000 of book profit [(` 1,50,000 or 90% of 2,70,000
` 3,00,000) whichever is more]
On the balance of book profit [60% of (` 4,90,000 – ` 3,00,000)] 1,14,000
Maximum allowable working partners’ salary 3,84,000

(b) Computation of tax liability of Ms. Payal for the A.Y.2020-21

` `
(A) Tax payable including surcharge on total
income of ` 5,00,50,000
` 2,50,000 – ` 5,00,000 @5% 12,500

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 74 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

` 5,00,000 – ` 10,00,000 @20% 1,00,000

` 10,00,000 – ` 5,00,50,000 @30% 1,47,15,000
1,48,27,500
Add: Surcharge @ 37% (since total income
exceeds ` 5 crore) 54,86,175 2,03,13,675
(B) Tax payable on total income of ` 5 crore
[(` 12,500 plus ` 1,00,000 plus ` 1,47,00,000) 1,85,15,625
plus surcharge @25%]
(C) Excess tax payable (A)-(B) 17,98,050
(D) Marginal Relief (` 17,98,050 – ` 50,000, being 17,48,050
the amount of income in excess of
` 5,00,00,000)
(E) Tax payable before cess (A – D) 1,85,65,625
Add: Health and education cess @4% 7,42,625
Tax payable 1,93,08,250
Alternative Presentation
Computation of tax liability of Ms. Payal for the A.Y.2020-21
` `
(A) Tax payable including surcharge on total income
of ` 5,00,50,000
` 2,50,000 – ` 5,00,000 @5% 12,500
` 5,00,000 – ` 10,00,000 @20% 1,00,000
` 10,00,000 – ` 5,00,50,000 @30% 1,47,15,000
1,48,27,500
Add: Surcharge @ 37% (since total income exceeds
` 5 crore) 54,86,175 2,03,13,675
(B) Tax payable on total income of ` 5 crore 1,85,15,625
[(` 12,500 plus ` 1,00,000 plus ` 1,47,00,000) plus
surcharge @25%]
(C) Total income less ` 5 crore 50,000
(D) Tax payable on total income of ` 5 crore plus excess 1,85,65,625
of total income over ` 5 crore (B + C)
(E) Tax payable: Lower of A and D 1,85,65,625
Add: Health and education cess @4% 7,42,625

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Tax payable 1,93,08,250

(F) Marginal Relief (A -D) 17,48,050
Question 5
(a) Briefly discuss the provisions of tax deducted at source under the Income-tax Act in respect
of the following payments:
(i) Mr. Raju (a resident individual aged 54 years) has maintained two fixed deposits in
two different branches of BFG Bank of India (working on core banking solution).
During the year 2019-20, the bank paid ` 32,000 and ` 17,000 as interest on these
fixed deposits.
(ii) Mr. Avinash, pays ` 55,00,000 during FY 2019-20 to Mr. Harsh, for supply of labour,
for carrying out the construction work of his factory. During the PY 2018-19,
Mr. Avinash was not liable for tax audit under section 44AB. (4 Marks)
OR
Compute the quantum of depreciation available u/s 32 of the Income -tax Act, 1961 in
respect of the following items of Plant and Machinery purchased by Gupta Textile Ltd.,
which has set up a manufacturing unit in Notified Backward Area of Andhra Pradesh to
manufacture textile fabrics during the year 2019-20. Also compute the WDV of the block
of assets as at the year end.
Particulars Amount
(` in Crore)
New Machinery installed on 01-05-2019 84
Items purchased after 30th November, 2019:
Lorries for transporting goods to sales depots 3
Fork-lift-trucks, used inside factory 4
New imported machinery 12
The new imported machinery arrived at Chennai port on 30-03-2020 and was installed on
03-04-2020. All others items were installed and put to use during the year ended
31-03-2020. (4 Marks)
(b) (1) Prabhu Dayal Prem Narain, HUF purchased a house property in the year 1945 for
` 30,000. On 30.09.2019, the HUF was totally partitioned and the aforesaid house
property was given to Mr. Prem Narain, a member of the family. Fair Market value of
the house as on 30.09.2019 was ` 18,00,000. FMV of the house as on 1.4.2001 was
` 2,00,000. What will be the tax implications in the hands of Mr. Prem Narain and the
HUF?

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(2) One equity share of a company listed on recognised stock exchange is acquired on
01.01.2017 at ` 100. Its fair market value is ` 200 on 31.01.2018 and it is sold on
01.04.2019 at ` 150. Assuming all conditions required by section 112A are fulfilled,
compute the amount of capital gain/loss on sale of this share u/s 112A. (3 Marks)
Answer
(a) (i) BFG Bank has to deduct tax at source@10% under section 194A, since the aggregate
interest on fixed deposit with the two branches of the bank is ` 49,000, which exceeds
the threshold limit of ` 40,000.
Since BFG Bank has adopted core banking solution (CBS), the aggregate interest
paid by both branches has to be considered.
(ii) If the payment is made on or after 1.9.2019, Mr. Avinash has to deduct tax at
source@5% u/s 194M, although he is not liable to deduct TDS under section 194C,
since the payment to contractor, Mr. Harsh, exceeds `50 lakh.
Note – The question does not mention the date of payment. TDS provisions u/s 194M
have been introduced w.e.f. 1.9.2019. Therefore, if payment is made before that date,
TDS u/s 194M would not be attracted.
OR
(a) Computation of depreciation allowance under section 32 for the A.Y. 2020-21
Normal Additional
Particulars Depreciati Depreciatio
on [u/s n [u/s
32(1)(ii)] 32(1)(iia)]
(` in crores)
(A) Plant and Machinery (15% block) (Put to use for
180 days or more)
- New machinery installed on 01.05.2019 – `84
crores
Normal Depreciation @15% & additional deprecation 12.600 29.40
@35% [Since Gupta Textile Ltd. has set up
manufacturing unit in Notified backward area of
Andhra Pradesh, it is eligible for higher additional
depreciation @35%]
(B) Plant and Machinery (15% block) (Put to use for
less than 180 days – hence, depreciation is
restricted to 7.5%, being 50% of 15%)
- Lorries for transporting goods to sales depots
Being vehicles/road transport vehicles, not

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eligible for additional depreciation] – `3 crores

- Fork-lift trucks, used inside a factory `4 crores
eligible for both normal depreciation and
additional depreciation
- New imported machinery `12 crores [New
imported machinery was not installed during
the P.Y. 2019-20. Hence, it would not be
eligible for normal and additional depreciation for
A.Y. 2020-21.]
Normal Depreciation @ 7.5% of `7 crores 0.525 -
Additional depreciation @17.50% of `4 crores - 0.70
Total depreciation and additional depreciation 13.125 30.10
Depreciation allowable u/s 32 = ` 43.225 crores
Computation of Written down Value (WDV) of block Plant & Machinery (15%) as on
31-03-2020
Particulars (` in crores)
WDV as on 01.04.2019 (The company was started Nil
during the year as given in question)
Add: Plant and Machinery acquired during the year
84.00
- New Machinery installed on 01.05.2019
- Lorries for transporting goods to sales depots 3.00
- Fork-lift trucks, used inside factory 4.00
- New imported machinery 12.00 103.00
103.00
Less: Asset sold during the year Nil
WDV as on 31.3.2020 (before charging depreciation)
103.00
Less: Depreciation for the P.Y.2019-20
- Normal depreciation 13.125
- Additional depreciation 30.10
WDV (after charging depreciation) 59.775

(b) (1) Tax implications in the hands of HUF

As per section 47, any distribution of capital assets on the total or partial partition of
a HUF would not be regarded as transfer for the purpose of capital gains tax.

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 78 INTERMEDIATE (IPC) EXAMINATION: JANUARY, 2021

In this case, Prabhu Dayal Prem Narain, HUF transferred the asset to Mr. Prem
Narain, a member of HUF on total partition of the HUF. Hence, the transaction would
not be regarded as transfer.
Tax implications in the hands of Mr. Prem Narain
If an immovable property is received by any person without consideration, the stamp
duty value of such property would be taxed as the income of the recipient under
section 56(2)(x), if it exceeds ` 50,000. However, it would not be taxable as income
if the transfer is way of a transfer, inter alia, on total or partial partition of a HUF.
In the give case, since Mr. Prem Narain received the house property on total partition
of the HUF, it would not be taxable in his hand.
(2) Computation of long term capital gains/loss under section 112A
Particulars Amount
(`)
Full value of consideration 150
Less: Cost of acquisition
Higher of
- Cost of acquisition `100
- Lower of fair market value as on
31.1.2018 i.e., ` 200 and sale
consideration i.e., ` 150 `150 150
Long term capital gain Nil

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SECTION B: INDIRECT TAXES

Question No. 6 is compulsory.
Attempt any three questions from the rest.
“Working notes should form part of the respective answers.”
“Wherever necessary, suitable assumptions may be made by the candidates, and disclosed by
way of note.”
“All questions should be answered on the basis of the position of GST law as amended upto
30th April, 2020.”
Question 6
Girish Trading Private Limited, a body corporate registered in the State of West Bengal, pays
GST under the regular scheme. It is not eligible for any threshold exemption. The Company has
provided the following information regarding its outward taxable supplies for the month of
May, 2020:
Intra-State supply of goods : ` 50,00,000
Inter-State·supply of goods: ` 22,00,000
Following are the details of inward taxable supplies received during the month of May , 2020:
Intra-State purchase of goods from Registered Supplier : ` 6,10,000
Inter-State purchase of goods from Registered Supplier : ` 16,00,000
Additional Information:
(i) The Company has no brought forward ITC credit for the month of May, 2020.
(ii) Girish Trading Private Limited had additionally collected ` 1,000 as penalty for delay in
payment by one of his customers (Not included in value of outward supplies mentioned
above)
(iii) The Company has paid ` 12,000 (Intra-State supply) as rent for hiring of a motor vehicle
for the business use by one of its directors for the month of March, 2020 (Not included in
value of inward supplies mentioned above). Invoice for the same dated 7th April, 2020 was
received in the month of April, 2020.
(iv) The Company had placed an order for receiving goods (Intra-State supply) worth
` 1,10,000 latest by 30 th May, 2020. However, due to vehicle breakdown, the goods were
delivered only on 1st June, 2020. Invoice was received on 31 st May, 2020 (Included in value
of inward supplies mentioned above).
Note:
(1) Applicable rate of CGST, SGST and IGST is 9%, 9% and 18% respectively.

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 80 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

(2) Amount of inward and outward supplies stated above are exclusive of taxes.
Compute the net GST liability (CGST, SGST, IGST) of Girish Trading Private Limited for the
month of May 2020. (8 Marks)
Answer
Computation of net GST liability of Girish Trading Private Limited for May , 2020
Particulars CGST (`) SGST (`) IGST (`)
Output tax
Intra -State supply of goods 4,50,000 4,50,000
[` 50,00,000 [` 50,00,000
×9%] ×9%]
Inter -State supply of goods 3,96,000
[` 22,00,000
×18%]
Penalty1 on delayed payment 153
[Includible in value in terms of [` 1,000 x
section 15 of the CGST Act, 18/118]
2017. It has been assumed that
penalty collected is inclusive of
GST.]
Total Output Tax (A) 4,50,000 4,50,000 3,96,153
Input tax
Intra -State purchase of goods 45,000 45,000
` 5,00,000 (6,10,000-1,10,000) [` 5,00,000 ×9%] [` 5,00,000
[ITC on goods worth ` 1,10,000 is ×9%]
not available as such goods are
not received in the month of May.]
Inter -State purchase of goods 2,88,000
[` 16,00,000
×18%]
Rent paid for hiring of a motor - -
vehicle
[ITC on renting or hiring of motor
vehicles is blocked in terms of

1It has been assumed that penalty collected is in respect of inter-State sale. However, it is also possible to
assume that penalty collected is in respect of intra-State sale.

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 PAPER – 4 : TAXATION 81

section 17 of the CGST Act,

2017.]
Total ITC (B) 45,000 45,000 2,88,000
Net GST liability (A)-(B) 4,05,000 4,05,000 1,08,153
Question 7
(a) M/s P, a registered supplier of Rajasthan, has received the following amounts in respect
of the activities undertaken by her during the month of April, 2020.
S. Particulars Amount
No. (in ` )
1 Amount received for warehousing of jaggery. 50,000
2 Commission received as business facilitator for the services 20,000
provided to the urban branch of a nationalized bank with respect
to savings bank accounts
3 Amount received for services by way of labour contracts for 10,000
repairing a single residential unit otherwise than as a part of
residential complex
4 Amount received for acting as brand ambassador for corporate 75,000
client
5 Amount received for service provided to theIndian Olympic 80,000
Association as team manager of national team.
All the transactions stated above are Intra-State transactions and all amounts are exclusive
of GST.
You are required to compute gross value of taxable supply on which GST is to be paid by
M/s P for the month of April, 2020 by giving necessary explanations for treatment of various
items. (5 Marks)
(b) Vansh Traders, a registered supplier, is providing restaurant services in Manipur. It has
turnover of ` 55 lakh in the preceding financial year 2019-20. It has started providing intra-
State event management services in the current financial year 2020-21 and discontinued
rendering restaurant services.
(i) With reference to the provisions of the CGST Act, 2017, examine whether Vansh
Traders can opt for the composition scheme under section 10 of the CGST Act, 2017
in the current financial year ?
(ii) Is Vansh Traders eligible to avail benefit of concessional payment of tax under
Notification No. 2/2019 CT (R) dated 07-03-2019? (4 Marks)

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 82 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

Answer
(a) Computation of value of taxable supply on which GST is to be paid by M/s P
Particulars Amount
(`)
Amount received for warehousing of jaggery Nil
[Specifically exempt from GST.]
Commission received as business facilitator Nil
[Services provided by a business facilitator to a banking company with
respect to accounts only in its rural area branch are exempt from GST. In
the given case since services are being provided to urban branch of the
bank, they are taxable. However, the tax payable thereon is to be paid by
the recipient of services i.e. banking company, under reverse charge.
Hence, M/s P will not be liable to pay GST on commission received for said
services.]
Amount received for services by way of labour contracts 10,000
[Services by way of pure labour contracts of construction, erection,
commissioning, or installation of original works pertaining to a single
residential unit otherwise than as a part of a residential complex are exempt
from GST. Since such services are being provided for repairing the
residential unit, they are not eligible for exemption.]
Amount received for acting as brand ambassador for corporate client 75,000
[Liable to tax as it is not specifically exempt.]
Amount received for service provided as team manager Nil
[Exempt, since services provided by a team manager to Indian Olympic
Association (viz. a recognized sports body) are exempt.]
Total value of taxable supply on which GST is to be paid by M/s P 85,000
(b) (i) & (ii) A registered person who is exclusively engaged in providing services other than
restaurant services is not eligible for the composition scheme under sub -
sections (1) and (2) of section 10 of the CGST Act, 2017. Such person is eligible
for the benefit of concessional payment of tax under composition scheme under
sub-section (2A) of section 10 of the CGST Act, 2017/ Notification No. 2/2019
CT (R) dated 07.03.2019 provided his aggregate turnover in the preceding
financial year does not exceed ` 50 lakh.
Since Vansh Traders is engaged exclusively in supply of services other than
restaurant services (viz. event management services) in the current financial
year 2020-21, it is not eligible for composition scheme under sub-sections (1)
and (2) of section 10 in said FY.

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Further, since its aggregate turnover in the preceding financial year 2019-20
exceeds ` 50 lakh, it cannot opt for the composition scheme under sub-section
(2A) of section 10/ Notification No. 2/2019 CT (R) dated 07.03.2019 also in the
current financial year 2020-21.
Question 8
(a) Happy Trader, a sole proprietorship firm, started a business of dealing in supply of both
exempted as well as taxable goods in Assam.
Happy Trader has furnished the following details relating to the sales made for the month
of April, 2020. All amounts are exclusive of GST.
Particulars Amount(`)
Intra-State sale of goods chargeable with GST@ 12% 15,00,000
Intra-State sale of non-taxable goods 5,00,000
Intra-State sale of alcoholic liquor for human consumption 2,00,000
Intra-State sale of Tobacco 3,00,000
With reference to the above and provisions of CGST Act, 2017,
(i) Compute the aggregate turnover.
(ii) Examine whether Happy Trader is liable to be registered under the Act, with reasons
for the same.
(iii) What is the threshold limit for taking registration in this case? (5 Marks)
(b) Yash & Co. a manufacturer and supplier of plastic goods, is registered under GST in the
state of Maharashtra. Yash & Co. sold plastic goods to a retail seller in Punjab, at a value
of ` 43,000 (excluding GST leviable @ 18%). Now, it wants to send the consignment of
such plastic goods to the retail seller in Punjab.
You are required to examine and·advise Yash & Co., whether e-way bill is mandatorily
required to be generated in respect of such movement of goods under GST laws?
(4 Marks)
Answer
(a) (i) Computation of aggregate turnover of Happy Trader
Particulars (`)
Intra-State sale of goods chargeable with GST @ 12% 15,00,000
[Aggregate turnover includes value of all outward taxable supplies.]
Intra-State sale of non-taxable goods 5,00,000

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 84 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

[Non-taxable supply, being an exempt supply is included in aggregate

turnover.]
Intra-State sale of alcoholic liquor for human consumption 2,00,000
[Sale of alcoholic liquor for human consumption, being a non-taxable
supply, is an exempt supply and is therefore, included in aggregate
turnover.]
Intra-State sale of tobacco 3,00,000
[Aggregate turnover includes value of all outward taxable supplies.]
Aggregate turnover 25,00,000
(ii) & (iii) Every person engaged in making a taxable supply is required to obtain
registration if his aggregate turnover exceeds ` 20 lakh in a financial year.
An enhanced threshold limit for registration of ` 40 lakh is available to persons
engaged exclusively in intra-State supply of goods in specified States.
However, it is not applicable in case such person is engaged in supply of
tobacco.
In view of the same, the applicable threshold limit of registratio n for Happy
Traders is ` 20 lakh. Thus, it is liable to be registered under the CGST Act as
its aggregate turnover exceeds the said threshold limit.
(b) E-way bill is mandatorily required to be generated whenever there is a movement of goods
of consignment value exceeding ` 50,000, inter alia, in relation to a supply.
Consignment value of goods, inter alia, includes the central tax, State/Union territory tax,
integrated tax and cess charged, if any. The consignment value of goods, in the given
case, will be ` 50,740 [` 43,000 + (` 43,000 ×18%)].
Thus, in the given case, since the movement of goods is in relation to supply of goods and
the consignment value exceeds ` 50,000, e-way bill is mandatorily required to be
generated in respect of movement of goods from Maharashtra to Punjab.
Question 9
(a) Laxmi Traders a supplier of electric goods, is registered under GST in the state of
Karnataka. Laxmi Traders receives 200 invoices for inward supply of goods and services,
involving GST of ` 8,00,000, from various suppliers during the month of November, 2019.
Compute the input tax credit (ITC) that can be claimed by Laxmi Traders in his GSTR-3B for
the month of November, 2019 to be filed by 20th December, 2019 in the following independent
situations assuming that GST of ` 8,00,000 is otherwise eligible for input tax credit:
Situation 1st: Out of 200 invoices, 160 invoices involving GST of ` 7,00,000 have been
uploaded by the suppliers in their respective GSTR-1 filed on the prescribed due date thereof.

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Situation 2 nd : Out of 200 invoices, 140 invoices involving GST of ` 5,00,000 have been
uploaded by the suppliers in their respective GSTR-1 filed on the prescribed due date
thereof. (5 Marks)
(b) Answer the following individual independent cases with reference to the provisions of filing
of various returns under the CGST Act, 2017 and the rules made thereunder:
(i) While preparing the annual return for the FY 2019-20 in the month of September
2020, Mr. Rahul realized that while filing his GSTR-3B for the month of March, 2020,
he has erroneously mentioned taxable turnover as ` 10,51,000 instead of
` 15,10,000.
He now wants to know whether the error can be rectified. State your views on the
same, with reasons. (2 Marks)
(ii) Mr. Vivek, whose aggregate turnover for the FY 2018-19 is ` 1.5 crore has forgotten
to file his annual return under section 44(1) of the CGST Act, 2017,before the due
date for the said year. He wants to know whether he would be subject to any penal
consequences under the provisions of the CGST Act, 2017. State your views on the
same with reasons. (2 Marks)
Answer
(a) Computation of ITC that can be claimed by Laxmi Traders
Situation 1 st
Invoices Amount of ITC Amount of ITC that
involved in the can be availed (`)
invoices (`)
160 invoices uploaded in GSTR-1 7 lakh 7 lakh
[Refer Note 1]
40 invoices not uploaded in GSTR-1 1 lakh 0.7 lakh
[Refer Note 2]
Total ITC that can be claimed 8 lakh 7.7 lakh
Situation 2 nd
Invoices Amount of ITC Amount of ITC that
involved in the can be availed (`)
invoices (`)
140 invoices uploaded in GSTR-1 5 lakh 5 lakh
[Refer Note 1]
60 invoices not uploaded in GSTR-1 3 lakh 0.5 lakh
[Refer Note 2]
Total ITC that can be claimed 8 lakh 5.5 lakh

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 86 INTERMEDIATE (IPC) EXAMINATION: JANUARY 2021

Notes:
(1) Full ITC can be availed on the invoices uploaded by the suppliers in their GSTR -1s.
(2) ITC on invoices not uploaded by the suppliers in their GSTR-1s is restricted to 10%
of eligible ITC available on invoices uploaded in GSTR-1s.
Note: The question requires the application of the provisions of rule 36(4) of the CGST Rules, 2017
where there has been a change in position of law with effect from 01.01.2020 thereby reducing the
percentage of ITC that can be availed on invoices not uploaded by the suppliers in their GSTR -1s
from 20% to 10%. It may be noted that in November, 2019 [period covered in the question], the
percentage of ITC that can be availed on invoices not uploaded by the suppliers in their GSTR -1s
was 20%.
(b) (i) Omission or incorrect particulars discovered in the returns filed can be rectified in the
return to be filed for the tax period during which such omission or incorrect particulars
are noticed, upto:
(i) due date of filing of return for the month of September following the end of the
financial year [i.e., 20 th October of next financial year]
or
(ii) actual date of filing of the relevant annual return,
whichever is earlier.
Since in the given case, Mr. Rahul noticed the error while preparing the annual return
for FY 2019-20 in the month of September 2020,he can rectify the error so noticed.
(ii) Mr. Vivek is liable to following penalty for not filing annual return under section 44(1)
of the CGST Act, 2017 upto the due date:
(a) ` 100 for every day during which such failure continues,
or

(b) 0.25% of the turnover of the registered person in the State/Union Territory (i.e.
` 37,500),
whichever is lower. 2
Note : It may be noted that filing of GSTR-9 has been made voluntary in respect of financial year
2018-19 for the registered persons whose turnover is less than ` 2 crores and who have not
furnished the said annual return before due date. Here, the annual return is deemed to be furnished
on the due date if it has not been furnished before the due date.

2
It has been most logically assumed that Mr. Vivek has not filed the annual return till the due date for the
same.

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Question 10
(a) Explain the statutory provisions for cancellation or suspension of registration under sub-
Section 2 of section 29 of the CGST Act, 2017: (5 Marks)
OR
Explain the following terms regarding e-way bill under the relevant CGST Rules:
(i) Consolidated e-way bill in case of road transport. (3 Marks)
(ii) Acceptance/rejection of e-way bill. (2 Marks)
(b) (i) Explain with reasons whether transfer of title and /or possession is necessary for a
transaction to constitute supply of goods under the laws of GST. (2 Marks)
(ii) Explain the provisions relating to the transactions where tax invoice is not required to
be issued under the CGST Act, 2017. (2 Marks)
Answer
(a) The proper officer may cancel the registration of a person from such date, including any
retrospective date, as he may deem fit, in the following cases––
(i) A registered person has contravened any of the following prescribed provisions of the
GST law:
(a) he does not conduct any business from the declared place of business
(b) he issues invoice/bill without supply of goods/services in violation of the
provisions of GST law
(c) he violates the provisions of anti-profiteering.
(d) he violates the provision relating to furnishing of bank details.
(ii) A person who opted for composition levy has not furnished returns for 3 consecutive
tax periods.
(iii) A registered person has not filed returns for continuous period of 6 months.
(iv) Voluntarily registered person has not commenced the business within 6 months from
the date of registration.
(v) Registration was obtained by means of fraud, wilful misstatement or suppression of
facts.
Proper officer shall not cancel the registration without giving the person an opportunity
of being heard.
During pendency of the proceedings relating to cancellation of registration, the proper
officer may suspend the registration for prescribed period and in prescribed manner.

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Alternative
(i) Consolidated e-way bill in case of road transport
Consolidated e-way bill (EWB) is a single document containing the details of multiple
e-way bills (even with different validity periods) in respect of multiple consignments
of various consignors and consignees being transported in a single vehicle/
conveyance generated by the transporter to carry a single document instead of
carrying separate documents for each consignment in the conveyance
(ii) Acceptance/rejection of e-way bill
The details of the e-way bill generated shall be made available to:
supplier (if registered), where the information in Part A of e-way bill is furnished by
recipient/transporter, or
recipient (if registered), where the information in Part A of e-way bill is furnished by
supplier/transporter,
who shall communicate his acceptance or rejection of the consignment covered by
the e-way bill.
If such person does not communicate the acceptance/rejection within 72 hours from
the time of the details being made available to him on the common portal or the time
of delivery of goods, whichever is earlier, it will be deemed that he has accepted the
details.
(b) (i) In terms of Schedule II of the CGST Act, 2017, for a supply to constitute the supply
of goods, either the title in the goods is to be transferred immediately or the title in
goods is to be transferred under an agreement which stipulates that property in goods
shall pass at a future date upon payment of full consideration as agreed.
Therefore, transfer in title irrespective of the transfer of possession is necessary in
such cases.
(ii) The tax invoice is not required to be issued under the CGST Act, 2017 in the case of
supply of goods and/or services of value less than ` 200 to an unregistered recipient
who does not require such invoice.
Further, the tax invoice is also not required to be issued under the CGST Act, 2017
in the case of:-
(a) supply of liquid gas where the quantity at the time of removal from the place of
business of the supplier is not known,
(b) transportation of goods for job work,
(c) transportation of goods for reasons other than by way of supply, or
(d) such other supplies as may be notified by the Board.

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