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Suggested AnswersNovember, 2011

INTEGRATED PROFESSIONAL

COMPETENCE EXAMINATION

GROUP I

&

ACCOUNTING TECHNICIAN EXAMINATION

Volume 5

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)

New Delhi

9

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SUGGESTED ANSWERS TO QUESTIONS SET AT THE

COMMONFOR

INTEGRATED PROFESSIONAL COMPETENCE

EXAMINATION

GROUP I

&

ACCOUNTING TECHNICIAN EXAMINATION

NOVEMBER,2011

BOARD OF STUDIES

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

(Set up by an Act of Parliament)

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The suggested Answers published in this volume do not constitute the basis for evaluation ofthe students answers in the examination. The answers are prepared by the Faculty of the

Board of Studies with a view to assist the students in their education. While due care is taken

in preparation of the answers, if any errors or omissions are noticed, the same may be brought

to the attention of the Director of Studies. The Council of the Institute is not in anyway

responsible for the correctness or otherwise of the answers published herein.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this publicat ion may be reproduced, stored in a retr ieval

system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying,

recording, or otherwise, without prior permission, in writing, form the publisher.

Website : www.icai.org

Committee/ : Board of StudiesDepartment

E-mail : [email protected]

Price : ` 40/-

ISBN No. : 978-81-8441-521-6

Published by : The Publication Department on behalf of The Institute of CharteredAccountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha

Marg, New Delhi- 110 002, India

Typeset and designed at Board of Studies.

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003

March/2012/20,000 Copies

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Contents

Page Nos.

Paper 1. Accounting ........................................................................................... 1 24

Paper 2. Business Laws, Ethics and Communication .........................................25 38

Paper 3. Cost Accounting and Financial Management .......................................39 60

Paper 4 Taxation ..............................................................................................61 84

Examiners comments on the performance of the candidates

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PAPER 1 : ACCOUNTING

Question No. 1 is compulsory

Answer any fivequestions from the remaining sixquestions.

Wherever appropriate, suitable assumption/s should be made and indicated in

answer by the candidate.

Working notes should form part of the answer.

Question 1

Answer the fol lowing quest ions:

(a) Calculate the maximum remuneration payable to the Managing Director based oneffective capital of a non-investment company for the year, from the information given

below:

(` in000)

(i) Profit for the year (calculated as per Section 349, 350 & 351 ofthe Companies Act, 1956)

3,000

(ii) Paid up capital 18,000

(iii) Reserves & surplus 7,200

(iv) Securities premium 1,200

(v) Long term loans 6,000

(vi) Investment 3,600

(vii) Preliminary expenses not written off 3,000

(viii) Remuneration paid to the Managing Director during the year 600

(b) M/s Vijoy Electricals sends goods to its customers on sale or returnable basis. Thefollowing transactions took place during January to March 2011:

2011 `

January-10 Sent goods to customers on sale or returnable basis atcost plus 25%

5,00,000

January -30 Goods returned by customers 2,00,000

February -28 Received letter of approval from customers 2,00,000

March -31 Goods with customers awaiting approval 1,00,000

Vijoy Electricals records sale or return transactions as ordinary sales transaction. Youare required to pass the necessary journal entries in the books of account assuming that

the accounting year closes on 31stMarch, 2011.

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PAPER 1 : ACCOUNTING 3

As effective capital is less than ` 5 crores but more than ` 1 crore, thereforemaximum remuneration payable to the Managing Director should be @ ` 1,00,000per month.

So, maximum remuneration payable to the Managing Director for the year(` 1,00,000 x 12) = ` 12,00,000.

(b) In the books of M/s. Vijoy Electricals

Journal Entries

Date2011

Particulars Debit`

Credit`

Jan.10 Sundry Debtors Account Dr. 5,00,000

To Sales Account

(Being the goods sent to customers on sale orreturnable basis)

5,00,000

Jan.30 Returns Inward Account* Dr.

To Sundry Debtors Account

2,00,000

2,00,000

(Being the goods returned by customers as notapproved or cancellation of sales on return of goods)

Feb.28 No entry on receiving letter of approval from the

customerMar. 31 Sales Account Dr. 1,00,000

To Sundry Debtors Account 1,00,000

(Being cancellat ion of original entry at the year end ongoods with customer awaiting approval)

Mar. 31 Stock with customer on sale or return Account Dr. 80,000

To Trading Account (Refer W.N.) 80,000

(Being the adjustment for cost of goods lying withcustomers awaiting approval at the year end)

* Alternatively, Sales account can be debited in place of Returns Inward account.

Working Note:

Cost of goods with customers =` 1,00,000

100125

= ` 80,000.

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4 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2011

(c) (i) Total Depreciation to be charged in the Profit and Loss Account

`

Depreciation on old machinery in use [10% of (5,60,000-1,60,000)] 40,000

Add: Depreciation on new machine @ 10% for six months

61,50,000 10%

12

7,500

Total depreciation on machinery in use 47,500

Add: Depreciation on machine disposed of (10% for 6 months)

6

1,60,000 10% 12

8,000

So, total depreciation to be charged in Profit and Loss A/c 55,500

(ii) Loss on Exchange of Machine

`

Book value of machine as on 1.4.2010 1,60,000

Less: Depreciation for 6 months @ 10% (8,000)

Written Down Value as on 30.9.2010 1,52,000

Less: Exchange value (1,35,000)

Loss on exchange of machine 17,000(iii) Book Value of Machinery in the Balance Sheet as on 31.03.2011

`

Balance as per trial balance 5,60,000

Less: Book value of machine sold (1,60,000)

4,00,000

Add: Purchase of new machine 1,50,000

5,50,000

Less: Depreciation on machinery in use (47,500)

5,02,500

(d) Share of profit taken from A and B each= 1/5 x 1/2 = 1/10 each

Calculation of New Profit Sharing Ratio

A B

Existing ratio 3/5 2/5

Less: Share of profit transferred to C (1/10) (1/10)

New share 5/10 3/10

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New profit sharing ratio of A:B:C = 5/10 : 3/10 : 2/10

Calculation of Total Capital of the Reconstituted Firm

Capital brought in by C for 1/5thshare = ` 35,000

Total Capital = ` 35,000 x (5/1) = ` 1,75,000

Calculation of Actual Cash to be paid or brought in by old partners

A B C

(`) (`) (`)

New capital of ` 1,75,000 distributed in the ratio 5:3:2 87,500 52,500 35,000

Less: Adjusted old capital of A & B (80,000) (60,000) -

Cash brought in 7,500 35,000

Cash to be paid (7,500)

Journal Entries

Dr. Cr.

Particulars L.F. Amount Amount

` `

Cash A/c Dr. 7,500

To As Capital A/c 7,500

(Being the shortage of capital brought in cash by A)

Bs Capital A/c Dr. 7,500

To Cash A/c 7,500

(Being the excess capital withdrawn by B)

Note:Entries for cash brought in and paid off only, have been passed.

Question 2

The Balance Sheet of M/s. Ice Ltd. as on 31-03-2011 is given below:

Liabilities ` Assets `

1,00,000 Equity shares of` 10 each fully paid up

10,00,000 Freehold propertyPlant and machinery

5,50,0002,00,000

4,000, 8% Preference shares of` 100 each fully paid

4,00,000 Trade investment (at cost)Sundry debtors

2,00,0004,50,000

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6% Debentures 4,00,000 Stock-in trade 3,00,000

(secured by freeholdproperty)Arrear interest 24,000 4,24,000

Deferred advertisement

expenses 50,000

Sundry creditors 1,01,000 Profit and loss account 4,75,000

Directors loan 3,00,000

22,25,000 22,25,000

The Board of Directors of the company decided upon the following scheme of reconstructionwith the consent of respective stakeholders:

(i) Preference shares are to be written down to ` 80 each and equity shares to ` 2 each.(ii) Preference dividend in arrear for 3 years to be waived by 2/3rd and for balance 1/3rd,

equity shares of ` 2 each to be allotted.

(iii) Debentureholders agreed to take one freehold property at its book value of` 3,00,000 in part payment of their holding. Balance debentures to remain as liability of

the company.

(iv) Arrear debenture interest to be paid in cash.

(v) Remaining freehold property to be valued at ` 4,00,000.

(vi) Investment sold out for ` 2,50,000.

(vii) 75% of Directors loan to be waived and for the balance, equity shares of ` 2 each to be

allotted.(viii) 40% of sundry debtors, 80% of stock and 100% of deferred advertisement expenses to

be written off.

(ix) Companys contractual commitments amounting to ` 6,00,000 have been settled by

paying 5% penalty of contract value.

Show the Journal Entries for giving effect to the internal re-construction and draw the Balance

Sheet of the company after effecting the scheme. (16 Marks)

Answer

In the books of Ice Ltd.

Journal Entries

Particulars Debit`

Credit`

i 8% Preference share capital A/c (` 100 each) Dr. 4,00,000

To 8% Preference share capital A/c (` 80 each) 3,20,000

As per para 56 of AS 26, deferred advertisement expenses should not appear in the Balance Sheet.

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To Capital reduction A/c 80,000

(Being the preference shares of ` 100 each reduced

to ` 80 each as per the approved scheme)

ii Equity share capital A/c (` 10 each) Dr. 10,00,000

To Equity share capital A/c (` 2 each) 2,00,000

To Capital reduction A/c 8,00,000

(Being the equity shares of ` 10 each reduced to ` 2

each)

iii Capital reduction A/c Dr. 32,000

To Equity share capital A/c (` 2 each) 32,000

(Being arrears of preference share dividend of oneyear to be satisfied by issue of 16,000 equity shares of

` 2 each)

iv 6% Debentures A/c Dr. 3,00,000

To Freehold property A/c 3,00,000

(Being claim settled in part by transfer of freehold

property)

v Accrued debenture interest A/c Dr. 24,000

To Bank A/c 24,000 (Being accrued debenture interest paid)

vi Freehold property A/c Dr. 1,50,000


(Being appreciation in the value of freehold property)

vii Bank A/c Dr. 2,50,000

To Trade investment A/c 2,00,000

To Capital reduction A/c 50,000

(Being trade investment sold on profit)

viii Directors loan A/c Dr. 3,00,000

To Equity share capital A/c (` 2 each) 75,000


(Being directors loan waived by 75% and balancebeing discharged by issue of 37,500 equity shares of

` 2 each)

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ix Capital Reduction A/c Dr. 12,73,000

To Profit and loss A/c 4,75,000

To Sundry debtors A/c 1,80,000

To Stock-in-trade A/c 2,40,000

To Deferred advertisement expenses A/c 50,000

To Bank A/c 30,000

To Capital reserve A/c 2,98,000

(Being various assets, penalty on cancellation ofcontract, profit and loss account debit balance written

off, and balance transferred to capital reserve accountas per the scheme)

Balance Sheet of Ice Ltd. (As reduced)


Share capital Freehold property 4,00,000

1,53,500 Equity shares of ` 2 each 3,07,000 Plant and machinery 2,00,000

(out of which 53,500 shares have beenissued for consideration other than cash)

Sundry debtorsStock-in-trade

2,70,00060,000

4,000, 8% Preference shares of ` 80 Cash at bank 1,96,000

each fully paid up 3,20,000 (2,50,000 24,000 Capital reserve 2,98,000 30,000)

6% Debentures 1,00,000

Sundry creditors 1,01,000

11,26,000 11,26,000

Question 3

Bear Bar club was registered in a city and the accountant prepared the following Receipts and

Payments Account for the year ended 31stMarch, 2011 and showed a deficit of ` 14,520.

Receipts Amount

`Payments Amount

`

Subscriptions 62,130 Premises 30,000

Fair receipts 7,200 Honorarium to Secretary 12,000

Variety show receipt (net) 12,810 Rent 2,400

Interest 690 Rates & taxes 3,780

Bar collection 22,350 Printing & stationary 1,410

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Excess cash spent 1,000 Sundry expenses 5,350

Deficit 14,520 Wages 2,520

Fair expenses 7,170

Bar purchases payments 17,310

Repair 960

New car (less proceeds of old car` 9,000)

37,800

1,20,700 1,20,700

The following additional information are:

01-04-2010 31-03-2011

Cash in hand 450 -

Bank balances as per pass book 24,690 10,440

Cheque issued but not presented - for sundry expenses 270 90

Subscriptions due 3,600 2,940

Premises at cost 87,000 1,17,000

Accumulated depreciation on premises 56,400 -

Car at cost 36,570 46,800

Accumulated depreciation on car 30,870 -

Bar stock 2,130 2,610

Creditors for the bar purchases 1,770 1,290

Cash excess spent represent honorarium to secretary not withdrawn due to cash deficit. His

annual honorarium is ` 12,000.

Depreciation on premises and car is to be provided at 5% and 20% on written down value

method.

You are required to prepare the correct Receipts and Payments Account, Income andExpenditure Account and Balance Sheet as on 31stMarch, 2011. (16 Marks)

Answer

In the books of Bear Bar Club

Receipts & Payments Account for the year ended 31.03.2011Receipts Amount Payments Amount

` `

To Balance b/d By Honorarium to Secretary 11,000

Cash in hand 450 (12,000 1,000)

Bank (W.N.6) 24,420 24,870 By Rent 2,400

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2. Creditors for Bar Purchases

` `

To Bank 17,310 By Balance b/d 1,770

To Balance c/d 1,290 By Purchases (Bal. fig.) 16,830

18,600 18,600

3. Trading Account (of Bar)

` `

To Opening stock 2,130 By Bar collections 22,350

To Purchases (W.N.2) 16,830 (Cash)

To Profit (Bal. fig.) 6,000 By Closing stock 2,610

24,960 24,960

4. Accumulated Depreciation on Premises

`

Opening Balance 56,400

Add: Depreciation on old premises [(87,000 56,400) 5%] 1,530

Depreciation on new premises (30,000 5%) 1,500

59,430

5. Profit on sale of car

` `

Sales price of a car 9,000

Less: Book value of old car sold 36,570

Less:Accumulated depreciation (30,870) (5,700)Profit on sale 3,300

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6. Bank balance as per cash book

1.4.2010 31.3.2011

` `

Bank balance as per Pass book 24,690 10,440

Less: Cheque issued but not presented for payment (270) (90)

Bank balance as per cash book 24,420 10,350

Question 4

(a) Balance Sheet of M/s Hero Ltd. as on 31stMarch, 2010 and 2011 are as follows:

( in 000)

Liabilities 31-3-10 31-03-11 Assets 31-3-10 31-03-11

Equity share capital 1,000 1,150 Land & buildings 500 480

Capital reserve - 10 Machinery 750 820

General reserve 250 300 Investments 100 50

Profit and loss A/c 150 180 Stock 300 280

Long term loan from bank 500 400 Sundry debtors 400 420

Sundry creditors 500 400 Cash in hand 200 165

Provision for taxation 50 60 Cash at bank 300 410

Proposed dividends 100 125

2,550 2,625 2,550 2,625

Additional information:

(i) Dividend of ` 1,00,000 was paid during the year ended 31stMarch, 2011.

(ii) Machinery purchased during the year for ` 1,25,000.

(iii) Company sold some investment at a profit of ` 10,000 which was credited to capital

reserve.(iv) Depreciation written off on land and building ` 20,000.

(v) Income tax provided during the year ` 55,000.

From the above particulars, prepare a cash flow statement for the year ended 31 stMarch,

2011 as per AS 3 using indirect method.

(b) A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets Itself

incorporated as a company on 1stNovember, 2010. The first accounts are drawn upto

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31stMarch 2011. The gross profit for the period is ` 56,000. The general expenses are` 14,220; Director's fee ` 12,000 p.a.; Incorporation expenses ` 1,500. Rent upto31stDecember was ` 1,200 p.a after which it is increased to ` 3,000 p.a. Salary of the

manager, who upon incorporation of the company was made a director, is ` 6,000 p.a.

His remuneration thereafter is included in the above figure of fee to the directors.

Give profit and loss account showing pre and post incorporation profit. The net sales are` 8,20,000, the monthly average of which for the first four months is one-half of that of

the remaining period. The company earned a uniform profit. Interest and tax may be

ignored. (10 + 6 = 16 Marks)

Answer

(a) Cash Flow Statement for the year ended on 31stMarch, 2011

` `

I Cash flow from Operating Activities

Net profit made during the year (W.N.1) 2,60,000

Add: Depreciation on machinery (W.N.2) 55,000

Add: Depreciation on land and building 20,000

Operating profit before change in working capital 3,35,000

Add: Decrease in stock (3,00,000 2,80,000) 20,000

Less: Increase in sundry debtors(4,20,000 4,00,000) (20,000)

Less: Decrease in sundry creditors (5,00,000 4,00,000) (1,00,000)

Less: Income tax paid (W.N.3) (45,000)

Net cash generated from operating activities 1,90,000

II Cash flow from Investing Activities

Purchase of machinery (1,25,000)

Sale of investment (50,000 + 10,000) 60,000

Net cash used in investing activities (65,000)

III Cash flow from Financing Activities

Issue of equity shares (11,50,000 10,00,000) 1,50,000

Repayment of long term loan from bank(5,00,000 4,00,000) (1,00,000)

Dividend paid (1,00,000)

Net cash used in financing activities (50,000)

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Net increase in cash and cash equivalent 75,000

Add: Cash and Cash Equivalents at the beginning of theperiod (2,00,000 + 3,00,000) 5,00,000

Cash and cash equivalents at the end of the period(1,65,000 + 4,10,000) 5,75,000

Working Notes:

1. Net profit (before tax) made during the year `Increase in Profit and Loss A/c balance (1,80,000 1,50,000) 30,000

Add: Transfer to General Reserve (3,00,000 2,50,000) 50,000Add: Provision for taxation made during the year 55,000

Add: Provided for proposed dividend during the year (W.N.4) 1,25,000

2,60,000

2. Machinery Account

` `

To Balance b/d 7,50,000 By Bank (machinery sold)(Bal. Fig.)

55,000

To Bank (machinery

purchased)

1,25,000 By Balance c/d 8,20,000

8,75,000 8,75,000

3. Provision for Taxation

` `

To Cash (Bal. fig.) 45,000 By Balance b/d 50,000

To Balance c/d 60,000 By Profit & Loss A/c 55,000

1,05,000 1,05,000

4. Proposed Dividend A/c

` `

To Bank 1,00,000 By Balance b/d 1,00,000

To Balance c/d 1,25,000 By Profit & Loss A/c (Bal. fig.) 1,25,000

2,25,000 2,25,000

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(b) Profit & Loss Account for 9 months ended on 31stMarch, 2011

Particulars Basis Pre incorporati

on period

Post-incorporation period

Total Particulars Basis PrIncorpora

on perio

` ` `

To General expenses Time ratio 6,320 7,900 14,220 By Gross Profit Sales 16,00

To Directors fee Actual - 5,000 5,000 ratio

To Formation expenses Actual - 1,500 1,500

To Rent (600 + 750) W.N. 2 400 950 1,350

To Managers salary Actual 2,000 - 2,000

To Net Profit transfd to: 31,930

Capital Reserve 7,280 - -P & L Appr. A/c - - 24,650 -

16,000 40,000 56,000 16,00

Working Notes:

1. Calculation of sales ratio

Let the average monthly sales of first four months = 100 and next five months = 200

Total sales of first four months = 100 x 4 = 400 and total sales of next five months = 200 x 5

The ratio of sales = 400 : 1,000 =2 : 5

2. Rent

Till 31st December, 2010, rent was ` 1,200 p.a. i.e. ` 100 p.m.

So, Pre-incorporat ion rent = ` 100 x 4 months = ` 400

Post-incorporation rent = (`100 x 2 months) + (` 250 x 3 months) = ` 950

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Question 5

(a) A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2010. From thefollowing particulars relating to the period from 1stApril, 2010 to 31stAugust, 2010, you

are requested to ascertain the amount of claim to be filed with the insurance company forthe loss of stock. The concern had taken an insurance policy for ` 60,000 which is

subject to an average clause.

`

(i) Stock as per Balance Sheet at 31-03-2010 99,000

(ii) Purchases 1,70,000

(iii) Wages (including wages for the installation of a machine ` 3,000) 50,000(iv) Sales 2,42,000

(v) Sale value of goods drawn by partners 15,000

(vi) Cost of goods sent to consignee on 16th August, 2010, lyingunsold with them 16,500

(vii) Cost of goods distributed as free samples 1,500

While valuing the stock at 31stMarch, 2010, ` 1,000 were written off in respect of a slow

moving item. The cost of which was ` 5,000. A portion of these goods were sold at a lossof ` 500 on the original cost of ` 2,500. The remainder of the stock is now estimated tobe worth the original cost. The value of goods salvaged was estimated at ` 20,000. The

average rate of gross profit was 20% throughout.(b) Explain the factors to be considered before selecting the pre-packaged accounting

software. (10 + 6 = 16 Marks)

Answer

(a) Memorandum Trading Account for the period 1stApril, 2010 to 31stAugust, 2010

NormalItems

AbnormalItems

Total NormalItems

AbnormalItems

Total

` ` ` ` ` `

To Opening stock 95,000 5,000 1,00,000 By Sales 2,40,000 2,000 2,42,000

To Purchases(Refer W.N.) 1,56,500 - 1,56,500 By Goods sent to consignee 16,500 - 16,500

To Wages 47,000 - 47,000 By Loss - 500 500

To Gross profit@ 20%

48,000 - 48,000 By Clos ing stock (Bal.fig.)

90,000 2,500 92,500

3,46,500 5,000 3,51,500 3,46,500 5,000 3,51,500

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Question 6

(a) Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31stMarch, 2011:

( )

Authorised capital:

50,000, 10% Preference shares of ` 10 each 5,00,000

2,00,000 Equity shares of ` 10 each 20,00,000

Issued and subscribed capital:

40,000, 10% Preference shares of ` 10 each fully paid 4,00,000

1,80,000, Equity shares of`

10 each, of which`

7.50 paid up 13,50,000Reserves and Surplus:

General reserve 2,40,000

Capital reserve 1,50,000

Securities premium 50,000

Profit and loss account 3,00,000

On 1stApril, 2011, the company has made a final call @ ` 2.50 each on 1,80,000 equityshares. The call money was received by 30th April, 2011. There after the companydecided to capitalize its reserves by issuing bonus shares at the rate of one share for

every three shares held. Securities premium of ` 50,000 includes a premium of ` 20,000

for shares issued to vendor for purchase of a special machinery. Capital reserve includes` 60,000 being profit on exchange of plant and machinery.

Show necessary Journal Entries in the books of the company and prepare the extract of

the Balance Sheet after bonus issue. Necessary assumption, if any, should form part of

your answer.

(b) Mr. Black accepted the following bills drawn by Mr. White:

Date of Bill Period Amount ( )

09-03-2010 4 months 4,000

16-03-2010 3 months 5,000

07-04-2010 5 months 6,00018-05-2010 3 months 5,000

He wants to pay all the bills on a single date. Interest chargeable is @ 18% p.a. and

Mr. Black wants to save ` 150 on account of interest payment. Find out the date on

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which he has to effect the payment to saveinterest of ` 150. Base date to be taken shallbe the earliest due date. (8 + 8 = 16 Marks)

Answer

(a) In the books of M/s. Yahoo Ltd.Journal Entries

Date Particulars ` `

1.4.2011 Equity share final call A/c Dr. 4,50,000

To Equity share capital A/c 4,50,000

(Being the final call of ` 2.50 per share on 1,80,000

equity shares made)30.4.2011 Bank A/c Dr. 4,50,000

To Equity share final call A/c 4,50,000

(Being final call money on 1,80,000 sharesreceived)

30.4.2011 Securities premium A/c (50,000 20,000) Dr. 30,000

Capital reserve A/c (1,50,000 60,000) Dr. 90,000

General reserve A/c Dr. 2,40,000

Profit and loss A/c Dr. 2,40,000

To Bonus to shareholders A/c 6,00,000 (Being utilisation of reserves for bonus issue of one

share for every three shares held)

30.4.2011 Bonus to equity shareholders A/c Dr. 6,00,000

To Equity share capital A/c 6,00,000

(Being bonus shares issued)

Extract of Balance Sheet (After bonus issue)

`

Authorised capital:

50,000, 10% Preference shares of ` 10 each 5,00,0002,40,000, Equity shares of ` 10 each (refer W.N.) 24,00,000

Issued and subscribed capital:

40,000, 10% Preference shares of ` 10 each fully paid 4,00,000

2,40,000, Equity shares of ` 10 each fully paid 24,00,000

The word save should be read as earn for better understanding of the requirement of the question.

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(Out of the above, 60,000 equity shares of ` 10 each have beenissued by way of bonus)

Reserves and Surplus:

Capital reserve 60,000

Securities premium 20,000

Profit and loss A/c (3,00,000 2,40,000) 60,000

Assumption:

1. As per SEBI Guidelines, Capital Reserve and Securities Premium collected in cashonly can be utilized for the purpose of issue of bonus shares. It is assumed that

balance of capital reserve and securities premium is collected in cash only.

2. It is also assumed that necessary resolutions have been passed and requisite legal

requirements related to the issue of bonus shares have been complied with before

issue of bonus shares.

Working Note:

On the basis of the above assumptions, the Authorised Capital should be increased as

under:

Required for bonus issue ` 6,00,000

Less: Balance of authorised equity share capital (available) (` 2,00,000)

Authorised capital to be increased ` 4,00,000

Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) = ` 24,00,000.

(b) Calculation of Average Due Date taking base date as 19.06.2010

Date of Bill Period Maturitydate

No. of days from thebase date

Amount

( )

Products

09.03.2010 4 months 12.07.2010 23 4,000 92,000

16.03.2010 3 months 19.06.2010 0 5,000 0

07.04.2010 5 months 10.09.2010 83 6,000 4,98,000

18.05.2010 3 months 21.08.2010 63 5,000 3,15,000

20,000 9,05,000

Average due date = Base date +Total of product

Total of amount

= 19.06.2010+9,05,000

20,000=45 days (approx.)

= 3rdAugust, 2010.

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Computation of date of payment to earn interest of 150

Interest per day = [` 20,000 x (18/100)]/365 days

= ` 3,600/365 = ` 10 per day (approx.)

To earn interest of ` 150, the payment should be made 15 days (` 150 / ` 10 per day)

earlier to the due date. Accordingly, the date of payment would be:

Date of payment to earn interest of ` 150 = 3rdAugust, 2010 15 days

= 19 thJuly, 2010.

Question 7

Answer anyfour

of the following:(a) M/s. Tiger Ltd. allotted 7,500 equity shares of ` 100 each fully paid up to Lion Ltd. in

consideration for supply of a special machinery. The shares exchanged for machineryare quoted at National Stock Exchange (NSE) at ` 95 per share, at the time of

transaction. In the absence of fair market value of the machinery acquired, show how the

value of the machinery would be recorded in the books of Tiger Ltd.?

(b) M/s. Sea Ltd. recognized ` 5.00 lakhs, on accrual basis, income from dividend during theyear 2010-11, on shares of the face value of ` 25.00 lakhs held by it in Rock Ltd. as at

31st March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011. However,dividend was declared on 30th June, 2011. Please state with reference to relevant

Accounting Standard, whether the treatment accorded by Sea Ltd. is in order.

(c) What disclosures should be made in the first financial statements following theamalgamation?

(d) From the following data, show Profit and Loss A/c (Extract) as would appear in the books

of a contractor following Accounting Standard-7:

(` in lakhs)

Contract price (fixed) 480.00

Cost incurred to date 300.00

Estimated cost to complete 200.00

(e) M/s. Son Ltd. charged depreciation on its assets on SLM basis. In the year ended

31st March, 2011, it changed to WDV basis. The impact of the change when computedfrom the date of the assets putting into use amounts to ` 18 lakhs being additionaldepreciation. Discuss, when should an enterprise change method of charging

depreciation and how it should be dealt with in the Profit and Loss Alc. (4 x 4 = 16 Marks)

Answer

(a) As per para 11 of AS 10 Accounting for Fixed Assets, fixed asset acquired in exchangefor shares or other securities in the enterprise should be recorded at its fair market value,

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or the fair market value of the securities issued, whichever is more clearly evident.Since, in the given situation, the market value of the shares exchanged for the asset ismore clearly evident, the company should record the value of machinery at ` 7,12,500

(i.e., 7,500 shares x ` 95 per share) being the market price of the shares issued in

exchange.

(b) Para 8.4 of AS 9 Revenue Recognition states that dividend from investments in sharesare not recognized in the statement of Profit and Loss until the right to receive dividend is

established.

In the given case, the dividend is proposed on 10 thApril, 2011, while it was declared on

30thJune, 2011. Hence, the right to receive dividend is established on 30th June, 2011only. Therefore, on applying the provisions stated in the standard, income from dividend

on shares should be recognized by Sea Ltd. in the financial year 2011-2012 only.

Therefore, the recognition of income from dividend of ` 5 lakhs, on accrual basis, in the

financial year 2010-11 is not in accordance with AS 9.

(c) Para 24 of AS 14 Accounting for Amalgamations states that for all amalgamations(whether for amalgamations accounted for under the pooling of interests method or

amalgamations accounted for under the purchase method), the following disclosures are

considered appropriate in the first financial statements following the amalgamation:

(a) Names and general nature of business of the amalgamating companies;

(b) Effective date of amalgamation for accounting purposes;

(c) The method of accounting used to reflect the amalgamation; and

(d) Particulars of the scheme sanctioned under a statute.

(d) Calculation of Estimated Total Cost

( in lakhs)

Cost incurred to date 300

Estimate of cost to completion 200

Estimated total cost in completing the contract 500

Percentage of completion (300/500) x 100 = 60%

Revenue recognised as a percentage to contract price

= 60% of ` 480 lakhs = ` 288 lakhs

As per para 35 of AS 7 Construction Contracts, when it is probable that total contract

costs will exceed total contract revenue, the expected loss should be recognised as anexpense immediately. Accordingly, expenses to be recognized in the Profit and Loss

Account will be

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( in lakhs)

Total foreseeable loss (500-480) 20

Less: Loss for the current year (300-288) (12)

Expected loss to be recognized immediately as per para 35 of AS 7 8

Profit and Loss A/c (An Extract)

( in lakhs) ( in lakhs)

To Construction cost 300 By Contract price 288

To Estimated loss on completion of

contract 8

? ?

(e) As per para 21 of AS 6 Depreciation Accounting, an enterprise can change one methodof charging depreciation to another method only if the adoption of the new method is

required by statute or for compliance with an accounting standard or if it is consideredthat the change would result in a more appropriate preparation or presentation of the

financial statements of the enterprise.

When such a change in the method of depreciation is made, depreciation should be

recalculated in accordance with the new method from the date of the asset coming intouse. The deficiency or surplus arising from retrospective recomputation of depreciation

in accordance with the new method should be adjusted in the accounts throughstatement of profit and loss in the year in which the method of depreciation is changed. Incase the change in the method results in deficiency in depreciation in respect of past

years, the deficiency should be charged in the statement of profit and loss.

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

Question No. 1is compulsory.

Attempt anyfivequestions from the remaining six questions.

Question 1

(a) State, in brief, the grounds on the basis of which a contract is discharged under the

provisions of the Indian Contract Act, 1872. (5 Marks)

(b) What is the law and procedure for issuing a duplicate share certificate under theprovisions of the Companies Act, 1956 in case the original share certi ficate is lost or

destroyed? (5 Marks)

(c) State with reasons whether the following statements are correct or incorrect:

(1) Business ethics helps to promote public reputation.

(2) A nation should satisfy its social and economic requirements without damaging the

interest of future generations. (2 2 = 5 Marks)

(d) What do you understand by ethical communication? What are its elements (5 Marks)

Answer

(a) Discharge of Contract : A contract under the provisions of Indian Contract Act, 1872,may be discharged in any of the following ways:

(1) Discharge by performance: Discharge by performance will take place when there is :(i) Actual performance (parties fulfilling obligations within time and in the manner

prescribed); or

(ii) Attempted performance (promisor offers to perform but promisee refuses toaccept it). This is also known as tender.

(2) Discharge by mutual agreement: Discharge also takes place where there issubstitution [novation], rescission, alteration and remission. In all these cases oldcontract need not be performed.

(3) Discharge by impossibility of performance: A situation of impossibility may haveexisted at the time of entering into the contract or it may have transpired

subsequently (also known as supervening impossibility). Situations are destructionof the subject-matter, incapacity, declaration of war etc.

(4) Discharge by lapse of time: Performance of contract has to be done within certainprescribed time. In other words it should be performed before it is barred by law oflimitation. In such a case there is no remedy for the promisee. For example wherethe debt is barred by law of limitation.

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(5) Discharge by operation of law:Where the promisor dies or goes insolvent there is adischarge of contract by operation of law.

(6) Discharge by breach of contract: Where there is a default by one party fromperforming his part of contract on due date then there is breach of contract. Breachof contract can be actual breach or anticipatory breach. Where a person repudiatesa contract before the stipulated due date, it is anticipatory breach.

(7) Discharge by remission or satisfaction: A promisee may remit the performance ofthe promise by the promisor. Here there is a discharge. Similarly the promisee mayaccept some other satisfaction. Then again there is a discharge on the ground ofaccord and satisfaction.

(8) Under the provisions of the Indian Contract Act,1872 as contained in Section67,when a promisee neglects or refuses to afford the promisor reasonable facilitiesor opportunities for performance, promisor is excused by such neglect or refusal.

(b) Law for issuing a duplicate share certificate under the Companies Act, 1956: Section84(2) of the Companies Act,1956 provides that a company may renew or issue aduplicate certificate if it is proved to have been lost or destroyed or having been defaced,mutilated or torned, after the certificate is surrendered to the company. Section 84(4)makes it obligatory for companies to follow the rules prescribed by Government known as- The Company (Issue of Certificate) Rules, 1960.

Further, Section 84(4) of the Companies Act,1956 makes it obligatory for companies tofollow the rules prescribed by the Government in regard to the following matters:

(i) The form of a certificate (original or renewed or a duplicate thereof).

(ii) The particulars to be entered in the Register of Members or in the register ofrenewed or duplicate certificate.

(iii) The form of such registers.

(iv) The fee on payment of which the terms and conditions, if any including terms andconditions as to evidence and indemnity and reimbursement for expenses incurredin connection with investigating evidence on which a certificate may be renewed orduplicate thereof may be issued.

Procedure:

(i) The duplicate share certificate must not be issued in lieu of the lost or destroyedshare certificate, without prior consent of the Board having been obtained or withoutpayment having been made of fees not exceeding`2 on such reasonable terms asregards evidence, etc., as the Board thinks fit. [Rule 4(3)]

(ii) When a certificate is issued in lieu of one lost or destroyed, it must contain thestatement Duplicate issued is lieu of certificate N.... In addition, the word

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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 27

duplicate shall be stamped or punched in bold letters across the face of the sharecertificate. [Rule 5(3)]

(iii) Entries must also be made in a register in respect of certificates issued underrenewed and duplicate certificates indicating against the names of members, thenumber and date of issue of certificate, in lieu whereof the new certificate has beenissued. The entries should be authenticated either by the Secretary or by a personappointed by the Board.

(c) (1) Correct: Ethics helps to promote a strong public image. An organization that paysattention to its ethics can portray a strong and positive image to the public. Peoplesee such organizations as valuing people more than profit and striving to operatewith the integrity and honour.

(2) Correct: An element of resource regeneration and positive approach to environmenthas to be incorporated in developmental programmes. Sustainable development isnecessary because it meets the needs of the present without compromising theability of future generations to meet their own needs.

(d) According to the National communication Association, ethical communication isfundamental to responsible thinking, decision making and the development ofrelationship and communities within and across contexts, cultures, channels and media.Ethical communication enhances human worth and dignity by fostering, truthfulness,fairness, responsibility, personal integrity and respect for self and others. Whileunethical communication threatens the quality of all communication and consequently the

well-being of individuals and the society in which we live. In nutshell ethicalcommunicators have a well developed sense of social responsibility.

An ethical communication is one which:

includes all relevant information is true in every sense and is not deceptive in any way. is accurate and sincere. Avoids language that manipulates, discriminates or

exaggerates.

does not hide negative information behind an optimistic attitude . does not state opinions as facts. portrays graphic data fairly.

Question 2

(a) (i) What is the amount of minimum bonus to be paid to the employees under the

provisions of the Payment of Bonus Act, 1965? (4 Marks)

(ii) What is the law relating to recovery of amount of gratuity under the payment of

Gratuity Act, 1972 in case the said amount is not paid by the employer? (4 Marks)

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(b) What is the difference between Morals and Ethics? (4 Marks)

(c) Explain the significance of active listening in inter-personal communication skills. (4 Marks)

Answer

(a) (i) Minimum Bonus under the Payment of Bonus Act, 1965:In accordance with theprovisions of the Payment of Bonus Act,1965, every employer shall be bound to payto every employee in respect of every accounting year, minimum bonus which shallbe 8.33% of the salary or wage earned by the employee during the accounting yearor ` 100, whichever is higher, whether or not the employer has any allocablesurplus in the accounting year.

But if the employee has not completed 15 years of age at the beginning of the

accounting year he will be entitled to a minimum bonus which shall be 8.33% of thesalary or wage during the accounting year or `60, whichever is higher.

Even if the employer suffers losses during the accounting year he is bound to payminimum bonus as prescribed by Section 10 of the Payment of BonusAct,1965[State vs. Sardar Dalip Singh Majilhia, 1979, Lab. I.C. (913) (All)].

(ii) Law relating to recovery of gratuity under the Payment of Gratuity Act, 1972:As per the provision given under the Act, if the gratuity payable under the Act is notpaid by the employer within the prescribed time, to the person entitled thereto, therethe Controlling Authority shall issue a certificate for the amount to the Collector torecover the same along with the compound interest at such rate as prescribed by

the Central Government from the date of expiry of the prescribed time as landrevenue arrears to enable the person entitled to get the amount after receiving theapplication from the aggrieved person [Section 8].

Before issuing the certificate for such recovery the Controlling Authority shall givethe employer a reasonable opportunity of showing cause against the issue of suchcertificate.

The amount of interest payable under this Section shall not exceed the amount ofgratuity payable under this Act in no case.[Section 8]

(b) Moral vs. Ethics: Following are the points of difference between Ethics and Moral :

(i) The word thics is derived from Ancient Greek thikos meaning haracter . The

word moral is derived from Latin mos meaning ustom.(ii) Character is the essence of values and habits of a person or group. It severs the

analysis and employment of concepts such as right and wrong, good and evil andacting with responsibility. Moral is defined as relating to principles of right andwrong.

(iii) Character is a personal attitude, while custom is defined by a group over a period oftime. For example People have character, Societies have custom.

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(iv) Morals are accepted from an authority (such as cultural, religious etc.) while ethicsare accepted because they follow from personally accepted principles. An ethicalview might be based on an idea of personal property that should not be takenwithout social consent. Moral norms can usually be expressed as general rules andstatements such as always tell the truth.

(v) Morals work on smaller scale than ethics, more reliably, but by addressing humanneeds for belonging and emulation, while ethics has a much wider scope.

(c) Significance of active listening: If one does not learn how to listen, a great deal ofwhat people are trying to tell you would be missed. In addition, appropriate responsewould not be possible. Active listening is important for several reasons. First, it aids theorganization in carrying out its mission. In addition, it helps individuals to advance intheir careers. It provides information that helps them to learn about importanthappenings in the organization, as well as assisting them in doing their own jobs well. Italso helps build strong personal relationships.

Question 3

(a) What do you understand by coercion and undue influence under the provisions of the

Indian Contract Act, 1872? What are the differences between them? (8 Marks)

(b) State the Common Corporate Social responsibility (CSR) policies for business

organizations. (4 Marks)

(c) Point out the factors which lead to grapevine communication. (4 Marks)

Answer

(a) Coercion and Undue Influence Meaning and Differences: Coercion is thecommitting, or threatening to commit any act forbidden by the Indian Penal Code 1860,or the unlawful detaining, or threatening to detain any property, to the prejudice of anyperson whatever, with the intention of causing any person to enter into an agreement.(Section 15, The Indian Contract Act, 1872).

A contract is said to be induced by undue influence where the relations subsistingbetween the parties are such that one of the parties is in a position to dominate the will ofthe other and uses that position to obtain an unfair advantage of the other. A person isdeemed to be in a position to dominate the will of the other, when he holds authority, real

or apparent over the other, or when he stands in a fiduciary relation to other (Section 16,The Indian Contract Act, 1872)

Differences between Coercion and Undue Influence

Nature of action: Coercion involves physical force and sometimes only threat. Undueinfluence involves only moral pressure.

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Involvement of criminal action: Coercion involves committing or threatening to commitany act prohibited or forbidden by law, or detention or threatening to detain a person orproperty. In undue influence there is no such illegal act involved.

Relationship between parties: In coercion there need not be any relationship betweenparties; whereas in undue influence, there must be some kind of relationship betweenparties, which enables to exercise undue influence over the other.

Exercise by whom: Coercion need not proceed from the promisor. It also need not bedirected against the promisee. Undue influence is always exercised by one on the other,both of whom are parties to a contract.

Enforceability:Where there is coercion, the contract is voidable at the option of the party

whose consent has been obtained by coercion. Where there is undue influence thecontract is voidable or court may set it aside or enforce it in a modified form.

Position of benefits received: In case of coercion, where the contract is rescinded by theaggrieved party any benefit received has to be restored back. In the case of undueinfluence, the court has discretion to pass orders for return of any such benefit or not togive any such directions.

(b) Common Policies under CSR are as under:

Commitment to diversity in hiring employees and barring discrimination; Adoption of internal controls reform in the wake of Enron and other accounting

scandals;

Management teams that view employees as assets rather than costs; High performance workplaces that integrate the views of line employees into

decision-making processes;

Adoption of operating policies that exceed compliance with social andenvironmental laws;

Advanced resource productivity, focused on the use of natural resources in a moreproductive, efficient and profitable fashion (such as recycled content and productrecycling); and

Taking responsibility for conditions under which goods are produced directly or bycontract employees domestically or abroad.

Management teams that view employees as assets rather than costs; High performance workplaces that integrate the views of line employees into

decision-making processes;

Adoption of operating policies that exceed compliance with social andenvironmental laws;

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Advanced resource productivity, focused on the use of natural resources in a moreproductive, efficient and profitable fashion (such as recycled content and productrecycling); and

Taking responsibility for conditions under which goods are produced directly or bycontract employees domestically or abroad.

(c) Factors that lead to grapevine communication:

The grapevine becomes active when the following factors are present:

(i) Feeling of uncertainty or lack of sense of direction when the organization is passingthrough a difficult period.

(ii) Feeling of inadequacy or lack of self confidence on the part of the employee,leading to the formation of groups.

(iii) Formation of a coterie or favoured group by the manager, giving other employees afeeling of insecurity or isolation. People operating in such circumstances will befilled with all sorts of ideas and will share them with likeminded companions, atwhatever level they may be. Mostly they find them at their own level, but otherlevels are not barred. This type of communication is being seriously studied bypsychologists and management experts.

Question 4

(a) What is the importance of registered office of a company? State the procedure for

shifting of registered office of the company from one State to another State under theprovisions of the Companies Act, 1956. (8 Marks)

(b) Explain the concept of Sexual harassment in relation to work place. (4 Marks)

(c) What are the features of groups in an organization? (4 Marks)

Answer

(a) Importance of registered office and its change from one state to another:

Every company must have registered office where : (a) necessary documents maybe served upon, or deposited; (b) notices, letters, etc., may be issued ; (c)inspection may be had, and (d) communication may be made. The domicile and thenationality of a company is determined by the place of its registered office. This is

also important for determining the jurisdiction of the Court.

A company must have a registered office as from the day on which it commencesbusiness, or as from the 30th day after the date of its incorporation whichever isearlier, it may be noted that the address of the registered office ordinarily is not tobe stated in the Memorandum of Association. For if this was done, every changetherein would require amendment of the Memorandum. It is advisable to provide inthe articles that the registered office should be situated at such place, as the Board

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should from time to time fix. Otherwise, the registered office cannot be removedoutside the city etc., where it is situated, without special resolution.

Notice of the situation of the registered office and of every change therein must besent to the Registrar (otherwise than through a statement as to the address of theregistered office in the annual report) within 30 days of the date of incorporation ofthe date of change. This provision is designed to locate the spot where the recordsof the company could be inspected and where the letters should be addressed andnotices served upon thecompany.

Procedure for shifting the registered office from one state to another state(Section

17, the Companies Act,1956):

The Company may by a special resolution, alter the provisions of its memorandumso as to change the place of its registered office from one State to another State. The change needs confirmation of the Company Law Board. When an application is made for a change as aforesaid, it is the State where the

registered office is at present situated, where interests are likely to be affected bythe change and thus will have the locus standi to oppose such an application [orissaPaper Mills Ltd. vs. State AIR 1957, 482]. Furthermore, it shall be necessary tosatisfy the Company Law Board as to the bona fides of the companys applicationfor the proposed change [Orissa Chemicals and Distilleries Pvt. Ltd., in Re. AIR1961 Orissa 621]. The Company Law Board has the power either to confirm orrefuse toconfirm alteration relating to change/shifting of registered office.

The company cannot do such change/shifting of office unless the Regional Directorconfirms it.

To obtain confirmation, the company has to apply in the prescribed form. The confirmation must be communicated to the company within 4 weeks from the

date of receipt of the application.

Certified copy of the confirmation along with the attested copy of the Memorandumof Association must be filed with the ROC for registration within 2 months from thedate of confirmation.

Within one month of filing, the ROC shall certify registration, which shall be theconclusive evidence that all requirements with respect to alteration and confirmationhave been complied with.

(b) Concept of Sexual harassment:Sexual harassment is a situation in which an employeeis coerced into giving into another employee's sexual demands by the threat of losingsome significant job benefit, such as a promotion, raise, or even the job. This kind ofdegrading coercion exerted on employees who are vulnerable and defenseless inflictsgreat psychological harm on the employee, violates the employees most basic right tofreedom and dignity and is an unjust misuse of the unequal power that an employer can

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exercise over the employee. Sexual harassment is prohibited, and an employer is heldresponsible for all sexual harassment engaged in by employees.

(c) Following are the features of groups in an organization :

Group Goals every group establishes its own group goals, which providemotivation for their existence.

Group Structure is based on the roles to be performed and member positions. Group Patterns of communication is the pattern of message flow in a group. Group Norms are the informed rules of interaction in a group. Group Climate is the emotional atmosphere of a group based on

(1) Bonding and trust among members

(2) Participating spirit

(3) Openness

(4) High performance goals.

Question 5

(a) State, in brief, the grounds on the basis of which a banker can dishonor a cheque under

the provisions of the Negotiable Instruments Act, 1881. (8 Marks)

(b) Distinguish between pre-incorporation contracts and provisional contracts under the

Companies Act, 1956. (4 Marks)(c) Draft a business letter, presuming your facts that you have received the goods from the

company and you are sending payments. (4 Marks)

Answer

(a) Dishonour of Cheque Grounds: A banker will be justified or bound to dishonor acheque in the following cases, viz;

If a cheque is undated, if it is stale, that is if it has not been presented withinreasonable period, which may vary three months to a year after its issue dependenton the circumstances of the case

If the instrument is inchoate or not free from reasonable doubt If the cheque is post-dated and presented for payment before its ostensible date If the customers funds in the bankers hands are not properly applicable to the

payment of cheque drawn by the former. Thus, should the funds in the bankershands be subject to a lien or should the banker be entitled to a set-off in respect ofthem, the funds cannot be said to be properly applicable to the payment of thecustomers cheque, and the banker would be justified in refusing payment.

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If the customer has credit with one branch of a bank and he draws a cheque uponanother branch of the same bank in which either he has account or his account isoverdrawn.

If the bankers receive notice of customers insolvency or lunacy If the customer countermands the payment of cheque for the bankers duty and

authority to pay on a cheque ceases

If a garnishee or other legal order from the Court attaching or otherwise dealing withthe money in the hand of the banker, is served on the banker

If the authority of the banker to honor a cheque of his customer is undermined bythe notice of the latters death. However, any payment made prior to the receipt ofthe notice of death is valid.

If notice in respect of closure of the account is served by either party on the other. If it contains material alterations, irregular signature or irregular endorsement.

(b) Pre-incorporation vs. Provisional Contracts: Following are the points of distinctionbetween Pre-incorporation contracts and Provisional-contracts:

(i) Pre-incorporat ion contracts are those contracts, which are entered into, by thepersons proposing to float a company for prospective company before it has comeinto existence. Contracts which are entered into by a company after obtaining the

certificate of incorporation but before getting the certificate to commence businessare known as provisional contracts.

(ii) The company which is not in existence, is not bound by the pre-incorporationcontracts unless the company adopts the same after incorporation. There can be noratification in case of pre-incorporation contracts. Provisional contracts on the otherhand shall be binding upon the company from the date on which the company isentitled to commence business.

(iii) Contracts entered into by a company after its incorporation and before it is entitledto commence business are provisional only and are not binding on the companyuntil the trading certificate is issued[Sec. 149(4) of the Companies Act, 1956]. Theexpressional provisional denotes that the contract should be read subject to animplied term that it shall not be binding until the company becomes entitled tocommence business. Consequently, should the company go into liquidation withoutcommencing business, such contracts cannot be enforced at all.

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Answer

(a) Position of a minor as a member in a company: The Company Law Board has laiddown in Nandita Jain v. Bennet Coleman & Company Limitedthat a minor can become amember provided four conditions are fulfilled:

Company must be a Company Limited by shares. Shares are fully paid up. Application for transfer is made on behalf of minor by lawful guardian. The transfer is manifestly for the benefit of the minor.In Diwan Singh v. Minerva Films Ltd. [(1958) 28 Comp. Cases 191 (Punj.), (1959) 29Comp. Cases 263 (Punj.)], the Punjab High Court held that there is no legal bar to minorbecoming a member of a company by acquiring shares (by way of transfer) provided theshares are fully paid and no further obligation or liability is attached to them.

Minor can become member by transfer or transmission, but a company may not allow aminor to be a member by allotment.

(b) Parameter under Competition Law in India:

Prohibition of certain agreements, which are considered to be anti-competitive innature. Such agreements namely tie in arrangements, exclusive dealings (supply

and distribution), refusal to deal and resale price maintenance shall be presumed asanti-competitive if they cause or likely to cause an appreciable adverse effect oncompetition within India.

Abuse of dominant position by imposing unfair or discriminatory conditions orlimiting and restricting production of goods or services or indulging in practicesresulting in denial of market excess or through in any other mode are prohibited.

Regulation of combinations which cause or likely to cause an appreciableadverse affect on competition within the relevant market in India is also consideredto be void.

(c) (i) Correct

(ii) Incorrect

(iii) Correct

(iv) Correct

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Question 7

Answer any FOUR of the following:

(a) The Employees Deposit Linked Insurance Scheme, under Section 6C of the EmployeesProvident funds and Miscellaneous Provisions Act, 1952 has been amended by the

Central Government. State these amendments. (4 Marks)

(b) State the conditions which are applicable for the purpose of commencement of business

by a public company under the Companies Act, 1956. (4 Marks)

(c) What is the law relating to criminal liability for mis-statement in the prospectus under the

Section 63 of the Companies Act, 1956? (4 Marks)

(d) Write a note on Social Accountability-8000 (4 Marks)(e) What do you understand by the Semantic Barriers to the communication? (4 Marks)

Answer

(a) Amendment in the Employees Deposit Linked Insurance Scheme:

As per the Notification No.G.S.R.523 (E),dated 18th June,2010 amendment made inEmployees Deposit Linked Insurance Scheme, 1976 by the Employees Deposit LinkedInsurance (Amendment) Scheme,2010, by the Ministry of Labour and Employment inParagraph 22, Sub-paragraph (1). This modified Employees Deposit Linked Insurance(Amendment) Scheme, 2010, Substituted the provision by-

The Central Government amended the Employees Deposit Linked Insurance Scheme,1976 by Employees Deposit Linked Insurance (Amendment) Scheme, 2010. Accordingto which on the death of an employee, who is member of the Fund or of a provident fundexempted under section 17 of the Act, the person entitled to receive the provident fundaccumulations of the deceased shall, in addition to such accumulations be paid anamount, equal to the average balance in the account of the deceased in the fund or aprovident fund exempted under section 17 of the Act, as the case may be, duringpreceding twelve months or during the period of his membership, whichever is less,except where the average balance exceeds rupees fifty thousand, the amount payableshall be rupees fifty thousand plus 40% of the amount in excess of fifty thousand subjectto a ceiling of Rupees one lakh.

This above provision says that the EDLI amount is equal to the average balance ofincumbents PF in the last 12 months or the overall balance, whichever is less. But if thebalance exceeds Rs.50,000, the incumbents nominee will get Rs.50,000 plus 40% ofthe excess balance up to a total of Rs. 1 lakh.

(b) Conditions for commencement of business:A company having a share capital whichhas issued a prospectus inviting the public to subscribe for its shares cannot commenceany business or exercise any borrowing power unless:

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(a) the minimum number of shares which have to be paid for in cash has beensubscribed and allotted ;

(b) every director has paid, in respect of shares for which he is bound to pay an amountequal to what is payable on shares offered to the public on application and allotment ;

(c) no money is or may become liable to be paid to application of any shares ordebentures offered for public subscription by reason of any failure to apply for or toobtain permission for the shares or debentures to be dealt in on any recognisedStock Exchange, and

(d) a statutory declaration by the secretary or one of the directors that the aforesaidrequirements have been complied with, is filed with the Registrar.

(c) Criminal Liability for misstatements in the prospectus [Section 63, of the CompaniesAct, 1956]:Apart from the liability to compensate shareholders who have suffered a loss dueto untrue statement in the prospectus, directors and other persons responsible for the issue ofthe prospectus may also render themselves punishable with imprisonment for a term whichmay extend to two years or with fine up to fifty thousand rupees, or with both. That is to say,every person who had authorised the issue of the prospectus containing an untrue statementis prima facieguilty of criminal offence under Section 63 of the Act. However, such personsmay plead that the statement was immaterial or that they had reasonable ground to believeand did, up to the time of the issue of the prospectus, believe that the statement was true inorder to exonerate them from this criminal liability.

(d) Social Accountability 8000: SA 8000 is a comprehensive, global, verifiable performance

standard for auditing and certifying compliance with corporate responsibility. The heart of thestandard is the belief that all workplaces should be managed in such a manner that basichuman rights are supported and that management is prepared to accept accountability forthis. SA8000 is an international standard for improving working conditions. This standard isbased on the principles of the international human rights norms as described in InternationalLabour Organization conventions, the United Nations Convention on the Rights of the Childand the Universal Declaration of Human Rights. The requirements of this standard applyregardless of geographic location, industry sector, or company size.

(e) Semantic Barriers to the communication: Semantics is the systematic study ofmeaning. That is why the problems arising from expression or transmission of meaning incommunication are called semantic problems. Oral or written communication is based on

words. And words, limited in number, may be used in unlimited ways. The meaning is inthe mind of the sender and also in that of the receiver. But it is not always necessary forthe meaning in the mind of the sender to be the same as in the mind of receiver. Much,therefore, depends on how the sender encodes his message. The sender has to takecare that the receiver does not misconstrue his message, and gets the intendedmeaning. Quite often it does not happen in this way. That leads to semantic problems. Itcan be ensured only if we aim at clarity, simplicity and brevity so that the receiver getsthe intended meaning.

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Question No. 1is compulsory.

Attempt any fivequestions from the remaining sixquestions.

Working Notes should form part of the answer.

Question 1

(a) The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40%. The company sold 500

units for ` 5,00,000. You are required to calculate:

(i) Break even point, and

(ii) Sales in units to earn a profit of 10% on sales(b) X executes a piece of work in 120 hours as against 150 hours allowed to him. His hourly

rate is ` 10 and he gets a dearness allowance @ ` 30 per day of 8 hours worked inaddition to his wages. You are required to calculate total wages received by X under the

following incentive schemes:

(i) Rowan Premium Plan, and

(ii) Emerson's Efficiency Plan

(c) A new customer with 10% risk of non-payment desires to establish business connectionswith you. He would require 1.5 month of credit and is likely to increase your sales by`1,20,000 p.a. Cost of sales amounted to 85% of sales. The tax rate is 30%. Should you

accept the offer if the required rate of return is 40% (after tax)?(d) Beeta Ltd. has furnished the following information:

- Earning per share (ESP) `4

- Dividend payout ratio `25%

- Market price per share `40

- Rate of tax 30%

- Growth rate of dividend 8%

The company wants to raise additional capital of ` 10 lakhs including debt of `4 lakhs.

The cost of debt (before tax) is 10% upto ` 2 lakhs and 15% beyond that.

Compute the after tax cost of equity and debt and the weighted average cost of capital.

(4 x 5 = 20 Marks)

Answer

(a) (i) P/V Ratio - 50%

Margin of Safety - 40%

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40 INTEGRATED PROFESSIONALCOMPETENCEEXAMINATION: NOVEMBER,2011

Sales 500 Units for ` 5,00,000

Sales Per Unit - ` 1000

Calculation of Break Even Point (BEP)

Margin of Safety Ratio = 100Sales

BEPSales

40 = 100000,00,5

BEP000,00,5

BEP = `3,00,000

BEP Per Unit = 3,00,000/1000 = 300 Units(ii) Sales in units to earn a profit of 10 % on sales

Sales =Fixed Cost Desired Profit

P / VRatio

+

Let the sales be x

Profit = 10% of x i.e. 0.1X.

Thus -

x =

+

%50

X1.0000,50,1

or x = `3,75,000

To find out sales in units amount of sales ` 3,75,000 is to be divided by Selling

Price Per unit

Thus -

Sales (in units ) =1000

000,75,3

= 375 Units

Working Notes

1. Selling price = `5,00,000/` 500= `1000 per unit

2. Variable cost per unit

Selling Price - (Selling Price x P/V Ratio)

1000 (1000 x 50%) = `500

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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 41

3. Profit at present level of sales

Margin of Safety =RatioV/P

ofitPr

Margin of Safety = 40% of `5,00,000 = `2,00,000

2,00,000 =%50

ofitPr

Profit = `1,00,000

4. Fixed Cost

= (Sales x P/V Ratio) Profit= 5,00,000 x 50% 1,00,000 = `1,50,000

Note: Alternative ways of calculation of Break Even Point and required sales to

earn a profit of 10% of sales can be adopted to solve the problem.

(b) (i) Rowan Premium Plan `

Normal wages (10 x 120) 1,200

D.A. for 15 days (30 x 15 ) 450

Bonus :

Bonus hours =150

30120= 24 Hours

Bonus (24 x 10) 240

Total Wages = 1890

(ii) Emersion`s Efficiency Plan

Normal wages 1200

D.A. (15 x 30) 450

Bonus : = 100TakenTime

AllowedTime

Efficiency Level = 100hours120150 = 125 %

Rate of Bonus up to 100% = 20%

From 101% to 125% = 25%

45%

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Bonus being 45% normal wages

1200100

45

= 540

Total Wages = 2190

(c) Evaluation of Credit to New Customer

A. Profit on Additional Sales

Increase in Annual Sales 1,20,000

Less: Cost of Sales being 85% 1,02,000

18,000Less: Bad Debts Loss (10% on sales) 12,000

Profit before Tax 6,000

Less: Tax @ 30% 1,800

Net Profit after Tax 4,200

B. Opportunity Cost of Investment

in Receivables(12,750 x 40) 5,100

C. Net Benefit/Loss (A-B) (900)

Decision: Since the estimated profit after tax on additional sales`

4200 is lessthan the required return on additional investment of `5,100 in receivables, hence

the offer should not be accepted.

Working Notes:

(i) Receivables Turnover =5.1

12= 8 Times

(ii) Average Investment in Receivables

=TurnoversReceivable

SalesofCost=

8

000,02,1

=`

12,750(iii) Opportunity Cost of Funds Blocked = 12,750x 40/100 = 5,100

(d) (i) Cost of Equity Share Capital (Ke)

Ke(after tax) =

100

MPS

DPS+ G

DPS = 25% of `4 = `1.00

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Ke =

10040

1+ 8

Ke = 10.5%

(ii) Cost of Debt (Kd)

Kd (After tax) =oceedsPrNet

Interest

100 (1 T)

Interest on `2,00,000 @ 10% = 20,000

Interest on `2,00,000 @ 15% = 30,000

50,000

Kd =000,00,4

000,50 100 (1 0.3)

= 8.75 %

(iii) Weighted Average Cost of Capital (WACC)

Source(1)

Amount(2)

In `

Weights(3)

Cost of Capital(4)

Weighted Average Cost

(5) = (3)x(4)

Equity

Debt

6,00,000

4,00,000

0.6

0.4

0.105

0.0875

0.063

0.035Weighted Average Cost of Capital 0.098 or 9.8%

[Note: Ke can be computed alternatively taking growth rate into consideration

(D0(1+g)/P0 +g). The values of Ke and WACC then would change accordingly as

10.7% and 9.92% respectively.]

Question 2

(a) X Ltd. recovers overheads at a pre-determined rate of ` 50 per man-day. The total

factory overheads incurred and the man-days actually worked were ` 79 lakhs and 1.5

lakhs days respectively. During the period 30,000 units were sold. At the end of theperiod 5,000 completed units were held in stock but there was no opening stock of

finished goods. Similarly, there was no stock of uncompleted units at the beginning of theperiod but at the end of the period there were 10,000 uncompleted units which may be

treated as 50% complete.

On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due

to defective planning and the balance were attributable to increase in overhead cost.

How would unabsorbed overheads be treated in cost accounts? (8 Marks)

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(b) The financial statements of a company contain the following information for the yearending 31stMarch, 2011:

Particulars `

Cash 1,60,000

Sundry Debtors 4,00,000

Short-term Investment 3,20,000

Stock 21,60,000

Prepaid Expenses 10,000

Total Current Assets 30,50,000

Current Liabilities 10,00,000


Equity Share Capital 20,00,000

Retained Earnings 8,00,000

Statement of Profit for the year ended 31stMarch, 2011

Sales (20% cash sales) 40,00,000

Less: Cost of goods sold 28,00,000

Profit before Interest & Tax 12,00,000

Less: Interest 1,60,000

Profit before tax 10,40,000

Less: Tax @ 30% 3,12,000

Profit After Tax 7,28,000

You are required to calculate:

(i) Quick Ratio

(ii) Debt-equity Ratio

(iii) Return on Capital Employed, and

(iv) Average collection period (Assuming 360 days in a year). (8 Marks)

Answer

(a) Absorbed overheads = Actual Man days x Rate

= 1,50,000 x 50

= `75,00,000

Under absorption of overheads = Actual overheads Absorbed overheads

= 79,00,000 75,00,000 = `4,00,000

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Reasons for under-absorption:

1. Defective Planning 4,00,000 x 60% = `2,40,000

2. Increase in overhead cost 4,00,000 x 40% = `1,60,000

Treatment in Cost Accounts:

(i) The unabsorbed overheads of ` 2,40,000 on account of defective planning to be

treated as abnormal and thus be charged to costing profit & loss account.

(ii) The balance of unabsorbed overheads i.e. `1,60,000 be charged as below on thebasis of supplementary overhead absorption rate

Supplementary Rate =`1,60,000/(30,000+5,000+50% of 10,000)= `4 per unit

(a) To Cost of Sales Account = 30,000 x4 = `1,20,000

(b) To Finished Stock Account = 5,000 x 4 = ` 20,000

(c) To WIP Account = 50% of 10,000 x 4 = ` 20,000

`1,60,000

(b) (i) Quick Ratio =sLiabilitieCurrent

AssetsQuick

Quick Assets = Current Assets Stock Prepaid Expenses

= 30,50,000- 21,60,000-10,000Quick Assets = 8,80,000

Quick Ratio = 8,80,000/10,00,000

= 0.88 : 1

(ii) Debt-Equity Ratio =FundsrsShareholde

debttermLong

=)000,00,8000,00,20(

000,00,16

+

= 0.57:1

(iii) Return on Capital Employed (ROCE)

ROCE =ployedCapital Em

PBIT 100

=000,00,44

000,00,12 100 = 27.27%

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(ii) Cost per unit (8 Marks)

(b) Alpha Ltd. has furnished the following Balance Sheet as on March 31, ,2011:


Equity Share Capital (1,00,000) 10,00,000 Fixed Assets 30,00,000

equity shares of `10 each) Current Assets 18,00,000

General Reserve 2,00,000


Current Liabilities 8,00,000

48,00,000 48,00,000

Additional Information:

(1) Annual Fixed Cost other than Interest 28,00,000

(2) Variable Cost Ratio 60%

(3) Total Assets Turnover Ratio 2.5

(4) Tax Rate 30%

You are required to calculate:

(i) Earnings per Share (EPS), and

(ii) Combined Leverage. (8 Marks)

Answer

(a) (i) Statement of Equivalent Production

Particulars Units Material Labour andOverhead

% Units % Units

Production units completed 1,58,000 100 1,58,000 100 1,58,000

Normal Loss

8% of (1,82,000 + 8,000)

15,200 - - - -

Closing WIP 18,000 100 18,000 70 12,600Total 1,91,200 - 1,76,000 - 1,70,600

Less : Abnormal Gain 1,200 100 1,200 100 1,200

Total 1,90,000 1,74,800 1,69,400

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(ii) Statement of cost

Particulars Materials Labour Overhead

` ` `

Opening WIP 63,900 10,800 5,400

Input of Materials 7,56,900 - -

Expenses - 3,28,000 1,64,000

Total 8,20,800 3,38,800 1,69,400

Less : Sale of Scrap (15,200 x 8 ) 1,21,600 - -

Net cost 6,99,200 3,38,800 1,69,400

Equivalent Units 1,74,800 1,69,400 1,69,400

Cost Per Unit `4.00 `2.00 `1.00

Total cost per unit = 4+2+1 = `7.00

Note:The treatment of scrap can be done alternatively as follows and rest of theproblem (Calculation of Cost per Equivalent units and Statement of Cost) can be

solved accordingly.

Statement of Equivalent Production:

Output Units Materials Labour Overheads

% Units % Units % UnitsUnits to Nextprocess

158000 100 158000 100 158000 100 158000

Closing WIP 18000 100 18000 70 12600 70 12600

Abnormal gain (1200) 100 (1200) 80 (960) 80 (960)

Equivalent Units 174800 174800 169640 169640

Normal Loss = 8% of (opening WIP + New Inputs)

= 8% of (8000+182000) = 15200 Units

(b) Total Assets = ` 48,00,000

Total Assets Turnover Ratio = 2.5

Total Sales = 48,00,000 2.5 = `1,20,00,000

Computation of Profit after Tax (PAT)

Particulars Amount

Sales

Less:Variable Cost ( 60% of Sales Contribution)

1,20,00,000

72,00,000

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ContributionLess:Fixed Cost (other than Interest)

Less: Interest on Debentures (15% of 28,00,000)

PBT

Less:Tax @ 30%

PAT

48,00,00028,00,000

20,00,000

4,20,000

15,80,000

4,74,000

11,06,000

(i) EPS =SharesityNo. of Equ

PAT

=000,00,1000,06,11 = ` 11.06

(ii) DCL =PBT

EBITx

EBIT

onContributi

Or =PBT

onContributi

=000,80,15

000,00,48= 3.04

Question 4

(a) The Trading and Profit and Loss Account of Beta Ltd. for the year ended 31 st March,

2011 is given below:

Particulars Amount( )

Particulars( )

Amount( )

To Opening Stock: By Sales (Credit) 20,00,000Raw Materials 1,80,000 By Closing Stock:Work- in- progress 60,000 Raw Materials 2,00,000Finished Goods 2,60,000 5,00,000 Work-in-progress 1,00,000To Purchases (credit) 11,00,000 Finished Goods 3,00,000 6,00,000To Wages 3,00,000To Production

Expenses2,00,000

To Gross Profit c/d 5,00,00026,00,000 26,00,000

To AdministrationExpenses

1,75,000 By Gross Profitb/s

5,00,000

To Selling Expenses 75,000To Net Profit 2,50,000

5,00,000 5,00,000

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The opening and closing balances of debtors were ` 1,50,000 and ` 2,00,000 respectivelywhereas opening and closing creditors were ` 2,00,000 and `2,40,000 respectively.

You are required to ascertain the working capital requirement by operating cycle method.

(8 Marks)

(b) The following information have been extracted from the cost records of a manufacturing

company:

Stores `

* Opening balance 9,000

* Purchases 48,000

* Transfer from WIP 24,000* Issue to work-in-progress 48,000

* Issue for repairs 6,000

* Deficiency found in stock 1,800

Work-in-Progress:

* Opening balance 18,000

* Direct Wages applied 18,000

* Overhead charged 72,000

* Closing balance 12,000

Finished Production :

* Entire production is sold at a profit of 10% on cost from work-in-progress

* Wages paid. 21,000

* Overhead incurred 75,000

Draw the Stores Leger Control A/c, Work-in-Progress Control A/c, Overheads Control A/c

and Costing Profit and Loss A/c. (8 Marks)

Answer

(a) Computation of Operating Cycle

(1) Raw Material Storage Period (R)

Raw Material Storage Period (R)=materialRawofnConsumptioageDaily AverMaterialRawofStockAverage

=/36010,80,000

)/2200000(1,80,000+= 63.33 Days

Raw Material Consumed = Opening Stock + Purchases Closing Stock

= 1,80,000 + 11,00,000 2,00,000 = `10,80,000

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(2) Conversion/Work-in-Process Period (W)

Conversion/Processing Period =tcosoductionPrAverageDaily

of WIPStockAverage

=36015,40,000/

)/21,00,000(60,000+= 18.7 days

Production Cost:

Opening Stock of WIP = 60,000

Add:Raw Material Consumed = 10,80,000

Add: Wages = 3,00,000

Add:Production Expenses = 2,00,000

16,40,000

Less: Closing Stock of WIP = 1,00,000

Production Cost 15,40,000

(3) Finished Goods Storage Period (F)

Finished Goods Storage Period =SoldGoodofCostageDaily Aver

GoodsFinishedofStockAverage

=360/000,00,15

2/)000,00,3000,60,2( += 67.19 Days

Cost of Goods Sold `Opening Stock of Finished Goods 2,60,000

Add: Production Cost 15,40,000

18,00,000

Less:Closing Stock of Finished Goods 3,00,000

15,00,000

(4) Debtors Collection Period (D)

Debtors Collection Period =lesAverage SaDaily

DebtorsAverage

=

360/000,00,20

2)/200000150000( += 31.5 Days

(5) Creditors Payment Period (C)

Creditors Payment Period =PurchaseageDaily Aver

CreditorsAverage

=360/000,00,11

2)/000,40,2000,00,2( += 72 Days

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(6) Duration of Operating Cycle(O)

O = R + W + F + D C

= 63.33 + 18.7 + 67.19 + 31.5 72

= 108.72 days

Computation of Working Capital

(i) Number of Operating Cycles per Year

= 360/Duration Operating Cycle = 360/108.72 = 3.311

(ii) Total Operating Expenses `

Total Cost of Production 15,00,000Add:Administration Expenses 1,75,000

Selling Expenses 75,000

17,50,000

(iii) Working Capital Required

Working Capital Required =yearperCyclesOperatingofNumber

ExpensesOperatingTotal

=311.3

000,50,17 = ` 5,28,541

[Note: For computational purposes, the above solution is based on 360 days a year. Thesolution can also be solved on the basis of 365 days a year. Work-in-process (W) can be

computed alternatively taking Administration Expenses as part of Cost of Production. Thiswould lead to further changes in figures of Finished Goods Storage Period, Duration of

operating cycle, Number of operating cycles per year and amount of capital required.]

(b) Stores Ledger Control A/c

Particulars ` Particulars `To Balance b/d

To General Ledger

Adjustment A/cTo Work in Process A/c

9,000

48,000

24,000

By Work in Process

By Overhead Control A/c

By Overhead Control A/c(Deficiency )

By Balance c/d

48,000

6,000

1,800*

25,200

81,000 81,000

*Deficiency assumed as normal (alternatively can be treated as abnormal loss)

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PAPER 3 : COST ACCOUNT

Documents

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