SA May 2012-IPCC GROUP-I

7/29/2019 SA May 2012-IPCC GROUP-I

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May, 2012

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)

New Delhi

SUGGESTED ANSWERS

11Volume 6INTEGRATED PROFESSIONAL

COMPETENCE EXAMINATION

GROUP I

&ACCOUNTING TECHNICIAN EXAMINATION


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SUGGESTED ANSWERS TO QUESTIONS SET AT THE

COMMONFOR

INTEGRATED PROFESSIONAL COMPETENCE

EXAMINATION

GROUP I

&

ACCOUNTING TECHNICIAN EXAMINATION

MAY,2012

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 of

the 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.

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August/ 2012/ 15,000 Copies


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Contents

Page Nos.

Paper 1. Accounting ........................................................................................... 1 27

Paper 2. Business Laws, Ethics and Communication .........................................28 43

Paper 3. Cost Accounting and Financial Management .......................................44 67

Paper 4 Taxation ..............................................................................................68 96

Examiners comments on the performance of the candidates


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PAPER 1 : ACCOUNTING

Question No. 1is 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(a) M/s Excellent Construction Company Limited under took a contract to construct a building

for`3 crore on 1st September, 2011. On 31st March, 2012 the company found that it had alreadyspent `1 crore 80 lakhs on the construction. Prudent estimate of additional cost for completion

was `1 crore 40 lakhs. What amount should be charged, to revenue in the final accounts for the

year ended on 31st March, 2012, as per the provisions of Accounting Standard 7 "Construction

Contracts (Revised)" ?

(b) M/s Innovative Garments Manufacturing Company Limited invested in the shares of another

company on 1st October, 2011 at a cost of ` 2,50,000. It also earlier purchased Gold of `

4,00,000 and Silver of`

2,00,000 on 1

st

March, 2009. Market value as on31st March, 2012 of above investments are as follows:

`

Shares 2,25,000

Gold 6,00,000

Silver 3,50,000

How above investments will be shown in the books of accounts of M/s Innovative Garments

Manufacturing Company Limited for the year ending 31 st March, 2012 as per the provisions of

Accounting Standard 13 "Accounting for Investments"?

(c) MIs Progressive Company Limited has not charged depreciation for the year ended on

31st March, 2012, in respect of a spare bus purchased during the financial year 2011-12 and

kept ready by the company for use as a stand-by, on the ground that, it was not actually used

during the year. State your views with reference to Accounting Standard 6 "Depreciation

Accounting".

Further during the year company made additions to its factory by using its own workforce, at a

cost of`4,50,000 as wages and materials. The lowest estimate from an outside contractor to

carry out the same work was `6,00,000. The directors contend that, since they are fully entitled

to employ an outside contractor, it is reasonable to debit the Factory Building Account with

` 6,00,000. Comment whether the directors' contention is right in view of the provisions ofAccounting Standard 10 "Accounting for Fixed Assets"?

(d) Briefly explain the types of Amalgamations? (4 x 5 = 20 Marks)


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2 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012

An swer

(a) Calculatio n of Estimated Cost of Constructi on

`in crores

Cost of construction incurred till date 1.80

Add: Estimated future cost 1.40

Total estimated cost of construction 3.20

Percentage of completion of contract till date to total estimated cost of construction

= ` (1.80/3.20)100 = 56.25%

Proportion of total contract value recognised as revenue as per AS 7 (Revised)

= Contract price x percentage of completion

=` 3 crores x 56.25% = ` 1.6875 crores

(b) As per AS 13 Accounting for Investments, for investment in shares - if shares are

purchased with an intention to hold for short-term period then it will be shown at the

realizable value of` 2,25,000 as on 31st March, 2012.

However, if equity shares are acquired with an intention to hold for long term period then

it will be shown at cost of` 2,50,000 in the Balance Sheet of the company. However,

provision for diminution shall be made to recognize a decline, if other than temporary, in

the value of shares.

As per the standard, investment acquired for long term period shall be shown at cost.

Gold and silver are generally purchased with an intention to hold it for long term period

untill and unless given otherwise. Hence, the investment in Gold and Silver (purchased

on 1st March, 2009) shall continue to be shown at cost as on 31st March, 2012 i.e.,

` 4,00,000 and ` 2,00,000 respectively, though their realizable values have been

increased.(c) According to para no. 3.1 of AS 6, Depreciation Accounting, depreciation is a measure

of wearing out, consumption or other loss of value of a depreciable asset arising from

use, effluxion of time or obsolescence through technology and market changes.

Accordingly, depreciation may arise even when asset has not been used in the current

year but was ready for use in that year.

The need for using the stand by bus may not have arisen during the year but that does

not imply that the useful life of the bus has not been affected. Therefore, non-provision

of depreciation on the ground that the bus was not used during the year is not tenable.

As per para no. 10.1 of AS 10, Accounting for Fixed Assets, clearly states that the grossbook value of the self constructed fixed asset includes the costs of construction that

relate directly to the specific asset and the costs that are attributable to the construction

activity in general can be allocated to the specific asset. If any internal profit is there it


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PAPER 1 : ACCOUNTING 3

should be eliminated. Saving of` 1,50,000 on account of using its on work force is an

unrealized/ internal profit, which should not be capitalized/recorded as per the standard.

Thus, only ` 4,50,000 should be debited to the factory building account and not

` 6,00,000. Hence, the contention of the directors of the company to capitalize

` 6,00,000 as cost of factory building, on the ground that the company is fully entitled to

employ an outside contractor is not justifiable.

(d) As per AS 14, Accounting for Amalgamations there are two types of amalgamation. In

first type of amalgamation there is a genuine pooling not merely of assets and liabilities

of the amalgamating companies but also of the shareholders interests and of thebusinesses of the companies. Such amalgamations are amalgamations which are in the

nature of merger and the accounting treatment of such amalgamations should ensure

that the resultant figures of assets, liabilities, capital and reserves more or less represent

the sum of the relevant figures of the amalgamating companies.

In the second category are those amalgamations which are in effect a mode by which

one company acquires another company and, as a consequence, the share holders of

the company which is acquired normally do not continue to have a proportionate share in

the equity of the combined company, or the business of the company which is acquired is

not intended to be continued. Such amalgamations are amalgamations in the nature of

purchase.

Note: It is possible to answer this question by specifying all the conditions to be satisfied for

an amalgamation to be an amalgamation in the nature of merger. The amalgamation would

to be an amalgamation in the nature of purchase if any one or more of the said conditions are

not satisfied.

Question 2

M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated

huge losses. The following is the Balance Sheet of the company as on 31st March, 2012

before reconstruction :

Liabilities Amount (`) Assets Amount(`)

Share Capital

50,000 shares of`50each fully paid up 25,00,000

GoodwillLand & Building

22,00,00042,70,000

1,00,000 shares of`50each `40 paid up 40,00,000 MachineryComputers 8,50,0005,20,000Capital Reserve 5,00,000 Stock 3,20,000

8% Debentures of`

100 each4,00,000 Trade Debtors 10,90,000

12% Debentures of`100 each 6,00,000 Cash at Bank 2,68,000Trade Creditors 12,40,000 Profit & Loss A/c 7,82,000


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Outstanding Expenses 10,60,000

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

Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited:

Mr. Shiv Mr. Ganesh

8% Debentures 3,00,000 1,00,000

12% Debentures 4,00,000 2,00,000

Total 7,00,000 Total 3,00,000

The following scheme of internal reconstruction was framed and implemented, as approved bythe court and concerned parties :

(1) Uncalled capital is to be called up in full and then all the shares to be converted into

Equity Shares of` 40 each.

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

each for`12,50,000.

(3) Trade Creditors are given option of either to accept fully paid equity shares of`40 each for

the amount due to them or to accept 70% of the amount due to them in cash in full settlement

of their claim. Trade Creditors for`7,50,000 accept equity shares and rest of them opted for

cash towards full and final settlement of their claim.

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

and agree to accept 15% Debentures for the balance amount due. He also agree to subscribe

further 15% Debentures in cash amounting to `1,00,000.

(5) Mr. Ganesh agrees to cancel debenture amounting to `50,000 out of total debentures due to

him and agree to accept 15% Debentures for the balance amount due.

(6) Land & Building to be revalued at `51,84,000, Machinery at `7,20,000, Computers at `

4,00,000, Stock at `3,50,000 and Trade Debtors at 10% less to as they are appearing in

Balance Sheet as above.

(7) Outstanding Expenses are fully paid in cash.

(8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital

Reduction A/c will be adjusted against Capital Reserve.

You are required to pass necessary Journal Entries for all the above transactions and draft the

company's Balance Sheet immediately after the reconstruction. (16 Marks)

An swer

Journal Entries

Particulars ` `

1. Equity Share final call A/c Dr. 10,00,000


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

(Being final call made for `10 each on

1,00,000 shares)

2. Bank A/c Dr. 10,00,000

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

(Being money on final call received)

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

To Equity Share Capital (`40) A/c 60,00,000

To Capital Reduction A/c 15,00,000

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

4. Bank A/c Dr. 12,50,000


(Being new shares allotted at `40 each)

5. Trade Creditors A/c Dr. 12,40,000


To Bank A/c 3,43,000


(Being payment made to creditors in shares orcash to the extent of 70% as perreconstruction scheme)

6. 8% Debentures A/c Dr. 3,00,000

12% Debentures A/c Dr. 4,00,000To 15% Debentures A/c 5,00,000


(Being cancellation of 8% and 12% debenturesof Shiv, & issuance of new 15% debenturesand balance transferred to capital reductionaccount as per reconstruction scheme)

7. Bank A/c Dr. 1,00,000

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

(Being new debentures subscribed by Shiv)

8. 8% Debentures A/c Dr. 1,00,000


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12% Debentures A/c Dr. 2,00,000


To Capital Reduction A/c 50,000

(Being cancellation of 8% and 12% debenturesof Ganesh, & issuance of new 15% debenturesand balance transferred to capital reduction

account as per reconstruction scheme)9. Land and Building (51,84,000-42,70,000) Dr. 9,14,000

Stock Dr. 30,000


(Being value of assets appreciated)

10. Outstanding expenses A/c Dr. 10,60,000

To Bank A/c 10,60,000

(Being outstanding expenses paid in cash)

11. Capital Reduction A/c Dr. 33,41,000To Machinery A/c 1,30,000

To Computers A/c 1,20,000

To Trade Debtors A/c 1,09,000

To Goodwill A/c 22,00,000

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

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

12. Capital Reserve A/c Dr. 5,00,000

To Capital reduction A/c 5,00,000

(Being debit balance of capital reductionaccount adjusted against capital reserve)

Balance Sheet (as reduced) as on 31.3.2012

Liabilities ` Assets `

Share Capital: Land & Building 51,84,000

2,00,000 Equity shares of` 40 each 80,00,000 Machinery 7,20,00015% Debentures 8,50,000 Computers 4,00,000

Trade Debtors 9,81,000


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Stock 3,50,000

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

88,50,000 88,50,000

Working Notes:

1. Cash at Bank Accoun t

Particulars ` Particulars `

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

A/c10,00,000 By Outstanding expenses A/c 10,60,000

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


26,18,000 26,18,000

2. Capital Reducti on Accoun t


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

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

To Trade Debtors A/c 1,09,000 By 8% and 12% Debentures A/c 2,00,000

To Goodwill A/c 22,00,000 By 8% and 12% Debentures A/c 50,000

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

By Stock 30,000

By Capital Reserve A/c 5,00,000

33,41,000 33,41,000

Question 3

(a) M/s Ice Limited gives you the following information to find out Total Sales and Total

Purchases:

Particulars Amount (`)

Debtors as on 01.04.2011 70,000

Creditors as on 01.04.2011 81,000

Bills Receivables received during the year 47,000

Bills Payable issued during the year 53,000

Cash received from customers 1,56,000


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Cash paid to suppliers 1,72,000

Bad Debts recovered 16,000

Bills Receivables endorsed to creditors 27,000

Bills Receivables dishonoured by customers 5,000

Discount allowed by suppliers 7,000

Discount allowed to customers 9,000

Endorsed Bills Receivables dishonoured 3,000Sales Return 11,000

Bills Receivable discounted 8,000

Discounted Bills Receivable dishonoured 2,000

Cash Sales 1,68,500

Cash Purchases 1,97,800

Debtors as on 31.03.2012 82,000

Creditors as on 31.03.2012 95,000

(8 Marks)

(b) Good, Better and Best are in partnership sharing profits and losses in the ratio 3 : 2 : 4.

Their capital account balances as on 31st March, 2012 are as follows:

`

Good 1,70,000 (Cr)

Better 1,10,000 (Cr)

Best 1,22,000 (Cr)

Following further information provided:

(1) `22,240 is to be transferred to General Reserve.

(2) Good, Better and Best are paid monthly salary in cash amounting `2,400, `1,600

and `1,800 respectively.

(3) Partners are allowed interest on their closing capital balance @ 6% p.a. and are

charged interest on drawings @ 8% p.a.

(4) Good and Best are entitled to commission @ 8% and 10% respectively of the net

profit before making any appropriation.

(5) Better is entitled to commission @ 15% of the net profit before charging Interest onDrawings but after making all other appropriations.


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(6) During the year Good withdraw ` 2,000 at the beginning of every month, Better

`1,750 at the end of every month and Best `1,250 at the middle of every month.

(7) Firm's Accountant is entitled to a salary of`2,000 per month and a commission of

12% of net profit after charging such commission.

The Net Profit of the firm for the year ended on 31st March, 2012 before providing for any

of the above adjustments was `2,76,000.

You are required to prepare Profit and Loss Appropriation Account for the year ended on

31st March, 2012 (8 Marks)An swer(a) 1. Total Sales = Cash sales + Credit sales

=` 1,68,500 +` 2,25,000 (W.N.1)=` 3,93,500

2. Purchases = Cash Purchases + Credit Purchases

=` 1,97,800 +` 2,70,000 (W.N.2)

=` 4,67,800

Working Notes:

1. Debtors Accoun t


To Balance b/d 70,000 By Bills receivable 47,000

To Bills receivable dishonoured 5,000 By Cash 1,56,000

To Bills receivable dishonoured(endorsed)

3,000 By Discount allowed 9,000

To Bills receivable dishonoured(discounted)

2,000 By Sales return 11,000

To Credit sales (bal.fig.) 2,25,000 By Balance c/d 82,0003,05,000 3,05,000

2. Creditor s Accoun t


To Bills payable 53,000 By Balance b/d 81,000

ToTo

CashDiscount received

1,72,0007,000

By Bills receivabledishonoured (endorsed)

3,000

To Bills receivableendorsed

27,000 By Credit purchases(bal.fig.)

2,70,000

To Balance c/d 95,0003,54,000 3,54,000

Note:It is assumed that sales return is out of credit sales only.


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(b) Profit and Loss Appropriation Account

for the year ended on 31st March, 2012


To General reserve 22,240 By Net Profit (See W.N.1) 2,25,000

To Salaries to partners By Interest on drawings(W.N.3)

Good 28,800 Good 1,040

Better 19,200 Better 770

Best 21,600 69,600 Best 600 2,410

To Interest on Capital

Good 10,200

Better 6,600

Best 7,320 24,120

To Commission topartners

Good 18,000

Better 10,281(W.N.4)

Best 22,500 50,781

To Partners Capital A/cs(profit)

Good 20,223

Better 13,482

Best 26,964 60,669

2,27,410 2,27,410

Working Notes:

1. Profit and Loss Accou nt


To Salary (Firms Accountant) 24,000 By Profit 2,76,000

To Commission (FirmsAccountant) (W.N.2) 27,000

To Net Profit transferred to

P & L Appropriation A/c 2,25,000

2,76,000 2,76,000


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2. Commissio n of Firms Accou ntant

=( )

Profit after salary of firm's accountant12%

100+12 %

=( )

( )

2,76,000 - 24,00012%

100+12 % = ` 27,000

3. Interest on Drawing s

`

Good (at the beginning of every month) ( 2,000 x 6.5 x 8%) 1,040

Better (at the end of every month) ( 1,750 x 5.5 x 8%) 770

Best (at the middle of every month) ( 1,250 x 6 x 8%) 600

2,410

4. Commission of Better

Commission of Better = [Net profit for appropriation (excluding interest on drawings)- General reserve Interest on capital - Salaries to partners Commission to Good

and Best] x 15%Commission to Better =` [2,25,000 22,240 24,120 69,600 18,000 22,500] x 15%

= ` 68,540 x 15% = `10,281.

Question 4

From the following Income & Expenditure A/c of Premium Sports Club for the year ended31st March, 2012, you are required to prepare Receipts & Payment A/c for the year ended 31 st

March, 2012 and Balance Sheet as on that date:

Expenditure Amount Income Amount

`

`

To Salaries 1,18,800 By Subscriptions 4,20,000

To Rent 2,16,000 By Entrance Fee 1,20,000

To Printing & Stationery 28,000 By Profit on sale of Sports

To Postage & Telephone 41,600 Material 5,500

To Membership Fee 3,200 By Interest on 8%

To Electricity Charges 38,500 Government Bonds 12,000

To Garden Upkeep 19,300 By Sale of Old Newspaper 11,600To Sports Material Utilized 62,800

To Repairs & Maintenance 18,700


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To Depreciation 13,000

To Miscellaneous Expenses 5,700

To Surplus carried to Capital

Fund 3,500

Total 5,69,100 Total 5,69,100

The following additional information is provided to you:

(a)

Balances as Balances as

on 01.04.2011 on 31.03.2012

Fixed Assets 2,40,000 ?

Bank Balance 8,300 ?

Stock of Sports Material 43,450 35,670

Outstanding Subscription 10,200 5,700

Subscription received in advance 2,400 4,900

8% Government Bonds 1,50,000 1,50,000

Outstanding Salaries 16,000 14,300

Outstanding Rent 21,000 15,000

Advance for Stat ionery 1,350 1,550

Outstanding Repairs & Maintenance 1,200 Nil

Creditors for purchase of Sports Material 3,400 4,200

(b) Some of Fixed Assets were purchased on 01.10.2011 and depreciation is to be charged

@ 5% p.a.

(c) Sports Material worth `72,000 was purchased on credit during the year.

(d) The Club became member of State Table Tennis Association on 01.01.2012 when it paid

fee up to 31.12.2012.

(e) 50% of Entrance Fee is to be capitalized.

(f) Interest on 8% Government Bonds was received for two quarters only.

(g) A Fixed Deposit of`80,000 was made on 31st March, 2012. (16 Marks)


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An swer

Receipts and Payments Account of Premium Sports Club

for the year ended 31st March, 2012

Receipts ` Payments `

To Cash at bank (opening) 8,300 By Salaries (W.N.6) 1,20,500

To Subscription (W.N.1) 4,27,000 By Rent (W.N.7) 2,22,000

To Entrance fee (W.N.2) 2,40,000 By Printing and stationary

(W.N.8)

28,200

To Interest on 8% GovernmentBond (W.N.3)

6,000 By Postage and telephone 41,600

To Sale of old Newspaper 11,600 By Membership fee (W.N.9) 12,800

To Sale of Sports Material(W.N.4)

22,480 By Electricity charges 38,500

By Garden upkeep 19,300

By Payment to creditors forsports material (W.N.5)

71,200

By Purchase of Fixed assets(W.N.10)

40,000

By Repairs and Maintenance(W.N.11)

19,900

By Misc. expenses 5,700

By Fixed Deposit made 80,000

By Cash at bank (closing)(bal.fig.) 15,680

7,15,380 7,15,380

Balance Sheet of Premium Sports Clubas on 31st March, 2012

Liabilities ` ` Assets ` `

Capital fund: Fixed Assets 2,40,000

Opening balance(W.N.12)

4,09,300 Add: Additions(W.N.10)

40,000

Add: Surplus 3,500 4,12,800 2,80,000

Entrance fee 1,20,000 Less: Depreciation 13,000 2,67,000

Subscriptionreceived in advance

4,900 Fixed DepositInvestments in 8%

80,000

Outstanding expenses Government Bonds 1,50,000


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SalaryRent

14,30015,000 29,300

Stock of sportsmaterial

35,670

Creditors forpurchase of sportsmaterial

4,200 SubscriptionreceivableMembership fee

5,700

paid in advance 9,600

Prepaid printing andstationary charges 1,550

Outstanding intereston 8% Govt. Bond 6,000

Cash at bank 15,680

5,71,200 5,71,200

Working Notes:

1. Subscript ion received durin g the year

`

Subscription for the year ended 31st March, 2012 4,20,000Less: Subscription receivable on 31.3.2012 5,700

Less: Subscription received in advance on 1.4.2011 2,400 (8,100)

4,11,900

Add: Subscription receivable on 1.4.2011 10,200

Add: Subscription received in advance on 31.3.2012 4,900 15,100

4,27,000

2. Entrance Fee received dur ing the year

Entrance fee as per Income and Expenditure Account ` 1,20,000

Add: Capitalised entrance fee (50%) ` 1,20,000

` 2,40,000

3. Interest on 8% Governm ent Bond

`

Interest as per Income and Expenditure Account 12,000

Less: Outstanding interest for 2 quarters [12,000x (6/12)] (6,000)

6,000


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4. Sales price of Sports Material sold

`

Stock of Sports Material on 1.4.2011 43,450

Add: Purchase of Sports Material during the year 72,000

1,15,450

Less: Stock of Sports Material on 31.3.2012 (35,670)

Cost of Sports Material consumed in the club and for sale 79,780Less: Sports material consumed in the club (62,800)

Cost of Sports material sold 16,980

Sales Price of sports material sold = ` 16,980 + ` 5,500 = ` 22,480

5. Payment to creditors for Sports Material

`

Purchase of Sports Material 72,000

Less: Closing creditors for purchase of Sports Material on 31.3.2012 (4,200)

67,800

Add: Opening creditors for purchase of Sports Material on 1.4.2011 3,400

71,200

6. Salaries paid durin g the year

`

Salary as per Income and Expenditure Account 1,18,800

Less: Outstanding balance as on 31.3.2012 (14,300)

1,04,500Add: Outstanding balance as on 1.4.2011 16,000

1,20,500

7. Rent paid durin g the year

`

Rent as per Income and Expenditure Account 2,16,000

Less: Outstanding balance as on 31.3.2012 (15,000)

2,01,000

Add: Outstanding balance as on 1.4.2011 21,000

2,22,000


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8. Printing and Stationary paid durin g the year

`

Printing and stationary as per Income and Expenditure Account 28,000

Less: Prepaid balance as on 1.4.2011 (1,350)

26,650

Add: Prepaid balance as on 31.3.2012 1,550

28,200

9. Membership fee paid durin g the year

`

Membership fee as per Income and Expenditure Account 3,200

Add: Prepaid balance as on 31.3.2012 [(3,200/3) x 9] 9,600

12,800

10. Fixed Asset purchased duri ng the year

`

Depreciation during the year 13,000

Less: Depreciation on Opening balance of fixed asset (12,000)

Depreciation on new purchase of fixed asset during the year 1,000

Cost of asset purchased during the year (1,000 x12

6x

100

5)

40,000

11. Repairs and Maintenance paid during the year

`

Repairs and Maintenance as per Income and Expenditure Account 18,700Add: Outstanding balance as on 1.4.2011 1,200

19,900

12. Balance Sheet of Premium Sports Club

as on 1st April, 2011

Liabilities ` Assets `

Capital fund (Bal.fig.) 4,09,300 Fixed Assets 2,40,000

Subscription received in

advance

2,400 Investments in 8% Government

Bonds

1,50,000

Outstanding expenses: Stock of sports material 43,450

Salary 16,000 Subscription receivable 10,200


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Rent 21,000 Prepaid printing and stationarycharges

1,350

Repairs and maintenance 1,200 Bank 8,300

Creditors for purchase ofsports material 3,400

4,53,300 4,53,300

Note: It is assumed that Premium Sports Club has purchased all the sports equipment on

credit basis only.

Question 5

(a) M/s Multistore Limited sells goods both on cash and hire purchase basis and record hire-

purchase transactions on "Stock and Debtors System". It closes its books of accounts on 31st

March every year. On 1st May, 2011, it sold to Manas a Scooter and a LCD TV.

The other information are as follows:

Particulars Scooter LCD TV

Cost Price 30,000 40,000

Down Payment 5,000 6,000Number of Installments Payable 12 6

Amount of each Installment 2,800 7,600

Mode of Payment Monthly Quarterly

1st Installment due on 1st June, 2011 1st July, 2011

Manas paid all the installments due except for those due on 1 st January, 2012. It was

decided that M/s Multistore Limited will take back Scooter at an agreed price of`22,000

and excess amount, if any, will be adjusted against the installments due of LCD TV.

Scooter repossessed was sold for`

24,500 after incurring repair charges of`

1,000.Prepare necessary ledger accounts to record the above transactions and find out the

profit. (8 Marks)

(b) Mr. Brown has made following transactions during the financial year 2011-12:

Date Particulars

01.05.2011 Purchased 24,000 12% Bonds of` 100 each at ` 84 cum-interest.

Interest is payable on 30th September and 31st March every year.

15.06.2011 Purchased ` 1,50,000 equity shares of` 10 each in Alpha Limited

for`

25 each through a broker, who charged brokerage @ 2%.10.07.2011 Purchased 60,000 equity shares of` 10 each in Beeta Limited for

`44 each through a broker, who charged brokerage @2%.


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14.10.2011 Alpha Limited made a bonus issue of two shares for every three

shares held.

31.10.2011 Sold 80,000 shares in Alpha Limited for`22 each.

01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.

15. 01.2012 Beeta Limited made a right issue of one equity share for every four

shares held at `5 per share. Mr. Brown exercised his option for 40%

of his entitlements and sold the balance rights in the market at

`2.25 per share.

01.03.2012 Sold 15,000 12% Bonds at `90 ex-interest.

15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.

Interest on 12% Bonds was duly received on due dates.

Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited

and Equity Shares of Beeta Limited in the books of Mr. Brown for the year ended on 31st

March, 2012. (8 Marks)

An swer

(a) In the books of M/s Multistore Limit edHire Purchase Stock Accoun t

Date Particulars ` Date Particulars `

1.5.2011 To Goods Sold onHire Purchase A/c(38,600+51,600)

90,200 1.5.2011 By Hire PurchaseDebtors A/c (Downpayment)(5,000+6,000)

11,000

1.6.2011 By Hire PurchaseDebtors A/c (Scooter)

2,800

1.7.2011 By Hire PurchaseDebtors A/c (Scooter& LCD T.V.) (`2,800+` 7,600)

10,400


2,800

1.9. 2011 By Hire PurchaseDebtors A/c (Scooter)

2,800

1.10.2011 By Hire Purchase A/c

(Scooter & LCD T.V.)

10,400


2,800


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2,800

1.1.2012 By Hire Purchasedebtor A/c (Scooter &LCD T.V.)

10,400

1.1.2012 By Hire Purchasedebtor A/c (Scooter &LCD T.V.) (4 x

2,800)+(3 x 7,600)(W.N.3)

34,000*

90,200 90,200

Hire Purchase Debtors Accoun t

Date Particulars ` Date Particulars `

1.5.2011 To Hire PurchaseStock A/c

11,000 1.5.2011 By Cash A/c 11,000

1.6.2011 To Hire Purchase

Stock A/c

2,800 1.6.2011 By Cash A/c 2,800


10,400 1.7.2011 By Cash A/c 10,400


2,800 1.8.2011 By Cash A/c 2,800

1.9. 2011 To Hire PurchaseStock A/c

2,800 1.9. 2011 By Cash A/c 2,800


10,400 1.10.2011 By Cash A/c 10,400


2,800 1.11.2011 By Cash A/c 2,800


2,800 1.12.2011 By Cash A/c 2,800


10,400 1.1.2012 By GoodRepossessed A/c

22,000

1.1.2012 To Hire PurchaseStock A/c 34,000

31.03.2012 By Balance c/d (ForLCD T.V. only) 22,400

90,200 90,200


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2012March31

To P & L A/c(W.N.1)

- - 1,05,000 2012Mar. 1

By BankA/c

15,000 75,000 13,50,000

To P & L A/c 2,49,000 2012Mar. 31

By Bank-Interest

54,000

By Balancec/d(W.N.2) 9,000 - 7,47,000

24,000 2,73,000 20,97,000 24,000 2,73,000 20,97,000

Investment in Equity shares of Alph a Ltd. for the year ended 31st

March, 2012Date Particulars No. Dividend

Income

`

Amount

`Date Particulars No. Dividend

Income

`

Amoun t

`

2011June15

To Bank A/c 1,50,000 -- 38,25,000 2011Oct. 31

By Bank A/c 80,000 - 17,60,000

Oct. 14 To Bonus Issue(1,50,000/3 x2)

1,00,000 - - 2012Jan. 1

By Bank A/c-dividend

2,55,000

2012Mar.31

To P & L A/c(W.N.3)

5,36,000 March31

By Balancec/d(W.N.4)

1,70,000 - 26,01,000

To P & L A/c 2,55,000

2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000

Investment in Equi ty sh ares of Beeta Ltd . for the year ended 31st March, 2012

Date Particulars No. DividendIncome

`

Amoun t

`Date Particulars No. Dividend

Income

`

Amoun t

`

2011July 10

To Bank A/c 60,000 -- 26,92,800 2012Jan. 15

By Bank A/c(W.N 6)

- - 20,250

2012

Jan. 15

To Bank A/c

(W.N. 5)

6,000 - 30,000 Mar. 15

2012

By Bank

dividend

- 1,18,800

March31

To P & L A/c

- 1,18,800 -

March31,2012

By Balancec/d

(bal.fig.) 66,000 - 27,02,550

66,000 1,18,800 27,22,800 66,000 1,18,800 27,22,800

Working Notes:

1. Profit on sale of 12% Bond

Sales price ` 13,50,000

Less: Cost of bond sold = 19,92,00024,000

x 15,000 ` 12,45,000

Profit on sale ` 1,05,000


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2. Closi ng balance as on 31.3.2012 of 12 % Bon d

19,92,000

24,000x 9,000 = ` 7,47,000

3. Profit on sale of equity shares of Alpha Ltd.

Sales price (80,000 shares x `22) ` 17,60,000

Less: Cost of bond sold =38,25,000

2,50,000

x 80,000 ` 12,24,000

Profit on sale ` 5,36,000

4. Closi ng balance as on 31.3.2012 ofequity shares of Alpha Ltd.

38,25,000

2,50,000x 1,70,000 = ` 26,01,000

5. Calculation of right shares subscr ibed by Beeta Ltd.

Right Shares =60,000 shares

4x 1= 15,000 shares

Shares subscribed by Mr. Brown = 15,000 x 40%= 6,000 shares

Value of right shares subscribed = 6,000 shares @` 5 per share = ` 30,000

6. Calculation o f sale of right entitlementby Beeta Ltd.

No. of right shares sold = 15,000 - 6,000 = 9,000 shares

Sale value of right = 9,000 shares x ` 2.25 per share = ` 20,250

Note: Shares are assumed to be purchased on cum right basis, therefore, amountreceived from sale of rights is credited to Investment A/c.

Question 6

Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss of

profit, for` 2,10,000 and ` 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a result of

which sales were seriously affected for a period of 3 months.

Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is

given below:

Particulars Amount(`) Particulars Amount (`)

To Opening Stock 96,000 By Sales 12,00,000

To Purchases 7,56,000 By Closing Stock 1,85,000

To Wages 1,58,000

To Manufacturing Expenses 75,000


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To Gross Profit c/d 3,00,000

Total 13,85,000

Total 13,85,000

To Administrative Expenses 83,600 By Gross Profit b/d 3,00,000

To Selling Expenses (Fixed) 72,400

To Commission on Sales 34,200

To Carriage Outward 49,800

To Net Profit 60,000

Total 3,00,000

Total 3,00,000

Further detail provided is as below:

(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 1.04.2011 to

30.06.2011 were `3,36,000, `2,14,000, `51,000 and `12,000 respectively.

(b) Other Sales figure were as follows

`

From 01.04.2010 to 30.06.2010 3,00,000

From 01.07.2010 to 30.09.2010 3,20,000From 01.07.2011 to 30.09.2011 48,000

(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to

increase by 5% on sales.

(d) ` 1,98,000 were additionally incurred during the period after fire. The amount of policy

included ` 1,56,000 for expenses leaving ` 42,000 uncovered. Compute the claim for

stock, loss of profit and additional expenses (16 Marks)

An swer

Claim for l oss of stock

Memorandum Trading Acc ount fo r the period 1st April t o 1st July, 2011

` `

To Opening Stock 1,85,000 By Sales 3,36,000

To Purchases 2,14,000 By Closing stock

To Wages 51,000 (Bal.fig.) 2,26,800

To Manufacturing expenses 12,000

To Gross Profit @ 30% on sales

(W.N) 1,00,800

5,62,800 5,62,800

Claim for loss of stock will be limited to ` 2,10,000 only which is the amount of Insurancepolicy and no average clause will be applied.


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carry on the business without settling the accounts of Z. Final payment to Z made on 1 st

March, 2012. The partnership firm made profit amounting to ` 30,000 during the period

from 1st December, 2011 to 29th February, 2012.

What are the rights of Z to share subsequent profit as per the provisions of Section 37 of

the Indian Partnership Act?

(c) A computer costing ` 60,000 is depreciated on straight line basis, assuming 10 years

working life and Nil residual value, for three years. The estimate of remaining useful life

after third year was reassessed at 5 years. Calculate depreciation as per the provisions

of Accounting Standard 6 "Depreciation Accounting".

(d) What are the maximum limits of managerial remuneration for companies having adequate

profits?

(e) "ERP package is gaining popularity in big organizations." Briefly explain the advantages

of using an ERP package, in the light of above statement. (4 4 = 16 Marks) An swer

(a) Calculati on of Average Due Date

(Taking 4th August as the base date)

Date of bill Term Due date Amount

`

No. of daysfrom the basedate i.e. 4th

August

Product

12th May 3 months 14th August 44,000 10 4,40,000

10th June 4 months 13thOctober 45,000 70 31,50,000

1st July 1 month 4th August 14,000 0 0

19th July 2 months 23thSeptember 17,000 50 8,50,000

1,20,000

44,40,000

Average due date=Base date+ Days equal toTotal of products

Total amount

= 4th August +44,40,000

1,20,000

=4th August +37 days = 10th September

(b) Under Section 37 of the Partnership Act, Z can exercise any of the following two optionsin the absence of a contract:

1. Z is entitled at his option to such share of the profits made since he ceased to be a

partner as may be attributable to the use of his share of the property of the firm or


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2. Z is entitled to interest at the rate of six per cent per annum on the amount of hisshare in the property of the firm.

It may be noted that Z is not bound to make election until the share of the profit thatwould be payable to him has been ascertained.

(c) Depreciation per year = ` 60,000 / 10 = ` 6,000

Depreciation on SLM charged for three years = ` 6,000 x 3 years = ` 18,000

Book value of the computer at the end of third year =` 60,000 ` 18,000 = ` 42,000.

Remaining useful life as per previous estimate = 7 years

Remaining useful life as per revised estimate = 5 years

Depreciation from the fourth year onwards = ` 42,000 / 5 = ` 8,400 per annum

(d) For companies having adequate profits, maximum limits of managerial remuneration in

different circumstances are as under:

(i) Overall (excluding fee for attending meetings) 11% of net profit

(ii) If there is one managerial person 5% of net profit

(iii) If there are more than one managerial person 10% of net profit(iv) Remuneration of part-time directors:

(a) If there is no managing or whole-time director 3% of net profit

(b) If there is a managing or whole-time director 1% of net profit

(e) The advantages of using an ERP for maintaining accounts are as follows:

1. Standardised processes and procedures: An ERP is a generalised package

which covers most of the common functionalities of any specific module.

2. Standardised reporting: Majority of the desired reports are available in an ERP

package. These reports are standardised across industry and are generallyacceptable to the users.

3. No Redundancy: Duplication of data entry is avoided as it is an integrated

package.

4. Better Information: Greater information is available through this package.


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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

Question No. 1is compulsory.

Attempt anyfivequestions from the remainingsixquestions.

Question 1

(a) Explain in brief the rules relating to 'Acceptance' of an offer under the

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

(b) Explain the provisions of the Companies Act, 1956, relating to the utilization, by acompany, of the amount standing to the credit of Securities Premium Account. (5 Marks)

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

(1) Fairness and honesty are the pillars of success in the business.

(2) Ethical behaviour is essential to working environment at the working place.

(2 2 = 5 Marks)

(d) Explain the socio-psychological barriers of communication in relation to an organization.

(5 Marks)

An swer

(a) Following are the general rules regarding acceptance under the Indian Contract Act,

1872.

(i) Acceptance must be absolute and unqualified. As per section 7 of the Act,

acceptance is valid only when it is absolute and unqualified or unconditional.

(ii) Acceptance must be in the prescribed manner. If the offer is not accepted in the

prescribed manner, then the offeror may reject the acceptance within a reasonable

time.

(iii) Acceptance must be communicated to the offeror. If acceptance is communicated

to the person, other than the offeror, it will not create any legal relationship. Thus,

to conclude a contract between the parties, the acceptance must be communicated

in some perceptible form.

(iv) Acceptance must be given by the party to whom the offer is made.

(v) Acceptance must be given within the prescribed time or within a reasonable time.

(vi) Acceptance cannot be given before communication of an offer

(vii) Acceptance must be made before the offer lapses or is withdrawn.

(viii) Acceptance must show intention to fulfill the promise.

(ix) Acceptance cannot be presumed from silence


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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 29

(x) Acceptance by conduct/performance of condition: Acceptance may also be by

performance of some condition / act as required by the Offeror.

(b) Securities Premium Account Utilization

In accordance with the provisions of the Companies Act, 1956, as contained in section 78(2), the amount standing to the credit of the Share Premium Account can be utilized by a

company for the following purposes :

a. in paying up un-issued securities of the company to be issued to members of the

company as fully paid bonus shares;b. in writing off the Preliminary Expenses of the company;

c. in writing off the expenses of or commission paid or discount allowed on any issue

of shares or debentures of the company;

d. in providing for premium payable on the redemption of any redeemable preference

shares or of any debentures of the company.

(c) (1) Correct. The success of the business depends very much on fairness and honesty

in the business. Fairness and honesty are at the heart of the business ethics and

relate to the general values of decision makers. The business professionals and

persons are expected to follow all applicable rules and regulations, without causingharm to the customers, employees, clients or competitors knowingly throughdeception, misrepresentation, coercion or discrimination. One aspect of fairness

and honesty is related to disclosure of potential harm caused by product use.

Another aspect of fairness relates to competition. Although, numerous laws have

been passed to foster competition and make monopolistic practices illegal,

companies sometimes gain control over markets by using questionable practices

that harm competition. Therefore, we may say that fairness and honesty are the

pillars of success in the business.

(2) Correct. Every organization, whether a business or a Government agency is first

and foremost a human society. In all these setups ethical behavior is essential to

working environment. If an employer does not take steps to create a working

environment where the employees have a clear, common understanding of what is

right and wrong, and feel free to discuss and ask questions about ethical issues and

report violations, significant problems may arise. Lacking of ethical behavior in

working environment may give rise to some significant problems, namely :

(i) Increases risk of making unethical decisions by employees

(ii) Increases tendency of employees to report violations to outside regulatory

authorities (whistle blowing) because of lacking of an adequate internal forum.

(iii) Inability to recruit and retain top people

(iv) Diminishes reputation in the industry and the community


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(v) Significant legal exposure and loss of competitive advantage in the market

place

Therefore, ethical behavior is essential to working environment at the workplace

(d) Socio Psychological barriers of Communication: The attitudes and opinions, placein society and status consciousness arising from ones position in the hierarchical

structure of the organization, ones relations with peers, seniors, juniors and family

background all these deeply affect ones ability to communicate both as a sender and

receiver. Status consciousness is widely known to be a serious communication barrier in

organizations. It leads to psychological distancing which further leads to breakdown ofcommunication or miscommunication. Often, it is seen that a man high up in an

organization builds up a wall around himself. This restricts participation of the less

powerful in decision making. In the same way, ones family background formulates ones

attitude and communication skills.

Frame of reference is another barrier to clear communication. Every individual has aunique frame of reference formed by a combination of his experiences, education,

culture, attitude and other elements, resulting in biases and different experiences in a

communication situation.

Emotions play a very important role in communication. Both encoding and decoding ofmessages are influenced by our emotions. A message received when we are

emotionally worked up will have a different meaning for us than when we are calm and

composed.

Perception provides each of us with a unique view of the world a view sometimes

related to, but not necessarily identical with that held by others. Selective perception

means that the receivers selectively see and hear depending upon their needs,

background, motivations, experience and other personal characteristics.

Question 2

(a) (i) Explain the provisions of the Payment of Bonus Act, 1965 relating to the time limitwithin which an employer must pay the amount of bonus due to an employee.

(4 Marks)

(ii) Explain as to when is the gratuity payable to an employee of an establishment,

under the provisions of the Payment of Gratuity Act, 1972. (4 Marks)

(b) What reasons force a marketing executive to adopt ethical practices in marketing?

Explain. (4 Marks)

(c) In what way is the 'Ethical Communication' advantageous to a business establishment?

Explain. (4 Marks)


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Answer

(a) (i) As per section 19 of the Payment of Bonus Act, 1965, the employer is bound to pay

his employee bonus within one month from the date on which the award becomes

enforceable or the settlement comes into operation, if a dispute regarding payment

of bonus is pending before any authority under Section 22 of the Act.

In other cases, however, the payment of the bonus is to be made within a period of

8 months from closing of the accounting year. But this period of 8 months may be

extended upto a maximum of 2 years by the Appropriate Government or by any

authority specified by the Appropriate Government. This extension is to be grantedon the application of the employer and only for sufficient reasons.

(ii) According to section 4 (1) of the Payment of Gratuity Act, 1972, Gratuity shall be

payable to an employee on the termination of his employment after he has

rendered continuous services for not less than 5 years:

On his superannuation, or

On his retirement or resignation, or

On his death or disablement due to accident or disease

The condition of the completion of five years continuous service is not essential incase of the termination of the employment of any employee due to death or

disablement.

Generally, gratuity is payable to the employee himself. However, in case of death

of the employee, it shall be paid to his nominee or if no nomination has been made,

to his legal heirs.

The payability of gratuity to the employee is his right as well as the obligation of the

employer. By the change of ownership, the relationship of employer and employees

subsist and the new employer cannot escape from the liability of payment of gratuity

to the employees. (Pattathurila K. Damodharan Vs M. Kassin Kanju, 1993).An employee resigning from service is also entitled to gratuity (Texmaco Ltd. V/s Sri

Ram Dham, 1992) and non acceptance of the resignation is no hurdle in the way of

an employee to claim gratuity (Mathur Spinning Mills V/s Deputy Commissioner of

Labour, 1983).

(b) Behaving Ethically in Marketing: Marketing Executives should practice ethical behavior

because it is morally correct. While this is simple and beautiful in concept, it is not

sufficient motivation for everyone. So let us consider four pragmatic reasons for ethical

behavior :-

(i) To reverse dealing public confidence in marketing: periodically we hear aboutmisleading package labels, false claims in ads, phony list prices and infringement of

well established trademarks. Though, such practices are limited to only a small


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proportion of all marketing, the reputation of all marketers is damaged. To reverse

this situation, business leaders must demonstrate convincingly, that they are aware

of their ethical responsibility and will fulfill it. Companies must set high ethical

standards and enforce them.

(ii) To avoid increase in Government regulation: Business apathy, resistance or token

responses to unethical behavior simply increase the probability of more Governmentregulation. Indeed, most of Governmental limitations on marketing are the result

of managements failure to live up to ethical responsibilities at one time or other.

Moreover, once some form of Government control has been introduced, it is rarelyremoved.

(iii) To regain the power granted by society: Marketing executives wield a great deal of

social power as they influence markets and speak out on economic issues.

However, there is responsibility tied to that power. If marketers do not use their

power in a socially acceptable manner, that power will be lost in the long run.

(iv) To protect the image of the organization: Buyers often form an impression of an

entire organization based on their contact with one person i.e. salesman or

marketing executive. A customers opinion of a retail store is based on the

behaviour of single sales clerk as observed by Procter and Gamble.(c) Advantages of ethical commun ication: Ethical Communication promotes long term

business success and profit. However, improving profits isnt reason enough to be

ethical; as soon as the cost of being ethical outweighed the benefits, ethical choiceswould no longer be possible. Surveys report that all employees want to work for

organizations with high ethical standards because ethical communication is fundamental

to responsible thinking, decision making and the development of relationship and

communities within and across contexts, cultures, channels and media. Further, it

enhances human worth and dignity by fostering truthfulness, fairness, responsibility,

personal integrity and respect for self and others.

Competent people are likely to search for organizations that maintain high ethical

standards. When competent people migrate towards ethical firms, everyone benefits

because both, competence and ethics go hand in hand. They know that ethical practices

are the only way to meet the level of ethical awareness that has risen over the last fewyears. Many companies are reassessing their communication budgets, moving away

from traditional, functional approaches to public relations and public affairs and pursuing

internal and external corporate communication strategies. The theory and practice

arising from corporate communications lies at the heart of effective strategic

management, planning and control. New digital media technologies are having greater

impact on managements and the monitoring and evaluation of corporate identity,

corporate advertising, organizational reputation and overall performance.


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Question 3

(a) What do you understand by the term 'Consideration'? Are there any circumstances under

which a contract, under the provisions of the Indian Contract Act, 1872, without

consideration is valid? Explain. (8 Marks)

(b) State the special responsibilities of industries that are based on natural resources. How

does the adoption of 'Green Accounting System' help in avoiding policy decisions which

are non-sustainable for the country? Explain. (4 Marks)

(c) What do you understand by non-verbal communication? Explain its methods in brief.(4 Marks)

An swer

(a) Meaning of cons ideration : The expression consideration in general means price paidfor an obligation. According to Section 2 (d) of the Indian Contract Act, 1872 when at the

desire of the promisor, the promisee or any other person has done or abstained from

doing, or does or abstains from doing or promises to do or abstain from doing something,

such an act or abstinence or promise is called consideration for the promise. Thus, on

analyzing the above definition, the following ingredients are essential in understanding

the meaning of the term consideration :-

(i) An act i.e. doing something

(ii) An abstinence or forbearance i.e. abstaining or refraining from doing something,

and

(iii) A return promise.

The general rule is that an agreement made without consideration is void. Sections 25

and 185 of the Indian Contract Act, 1872, provide for exceptions to this rule where an

agreement without consideration is valid. These are :

(1) Love & Affection [Section 25 (1)]Where an agreement is expressed in writing and registered under the law for the

time being in force for the registration of documents and is made on account of

natural love and affection between the parties standing in near relation to each

other, the agreement is enforceable, even through, the consideration is absent.

(2) Compensation for voluntary service [Section 25 (2)]

A promise to compensate, wholly or in part, a person who has already voluntarily

done something for the promissor, is enforceable even without consideration.

(3) Promise to pay, a time barred Debt [Section 25 (3)]

The agreement is valid provided it is made in writing and is signed by the debtor or

by his agent authorized in that behalf.


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(4) Completed Gift [Explanation 1 to Section 25]

As per explanation 1 to section 25, nothing in section 25 shall affect the validity as

between donor and donee, on any gift actually made.

(5) Agency (Section 185)

No consideration is necessary to create an agency.

(b) Special responsibilities of the industries based on natural resources : Industries that are

based on natural resources like minerals, timber, fiber and foodstuffs etc., have a special

responsibility for :

(i) Adopting practices that have built-in environmental considerations.

(ii) Introducing processes that minimize the use of natural resources and energy,

reduce waste and prevent pollution.

(iii) Making products that are environment-friendly with minimum adverse impact on

people and ecosystem.

Green Accounting Systems: Conventional accounts may result in policy decisions

which are non- sustainable for the country. Green accounting, on the other hand is,

focused on addressing such deficiencies in conventional accounts with respect toenvironment. If the environmental costs are properly reflected in the prices paid for

goods and services, then companies and ultimately the consumer would adjust market

behavior in a way that would reduce damage to environment, pollution and waste

production. Such measures would facilitate the approach of polluter pays principle.

Removing subsidies that encourage environmental damage is another measure.

(c) Non verbal communication: Words are not the only way we communicate. Even while

we use language to communicate explicit information and message content, we use non-

verbal communication along with it to convey relational messages, our feelings about

another person as well as status and power. Methods of non-verbal communication :

(i) Kinesics or Body language: It must be noted, though it is known to almost all, thatall our bodily movements, gestures, postures etc., are guided by our feelings and

thought processes. The nodding of our head, blinking of our eyes, waving of our

hands, shrugging of our shoulders etc., are expressions of our thought and feelings.

All these movements are the signals that our body sends out to communicate. That

is why this area of study has been called body language.

(ii) Paralanguage: The term Paralanguage' is used to describe a wide range of vocal

characteristics like tone, pitch and speed etc., Vocal cues that accompany spoken

language which help to express and reflect the speakers attitude are termed as

paralanguage. It consists of pitch variation, speaking speed, pause, word stressetc.,


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(iii) Arti ficial communication : Sometimes we react to people on the basis of their

appearance. The use of personal adomment like clothing, accessories, makeup,

hairstyle etc., provides important non verbal cues about ones age, social and

economic status, education level and personality etc.,

(iv) Proxemics: It refers to the space that exists between us when we talk or relate to

each other as well as the way we organize space around us. We can also call it

space language.

(v) Chronemics or time language: It is the study of how we use time to communicate.

Punctuality is an important factor in time communication. Misunderstandings ordisagreements involving time can create communication and relationship problems.

(vi) Haptics: It is communication through touch. The impact of touch sends important

messages about us. It reveals our perception of status, our attitudes and even our

needs.

(vi) Silence: The absence of paralinguistic and verbal cues also serves important

communicative functions.

Question 4

(a) Explain the doctrine of 'Indoor Management' as applicable in case of companies. Explainalso the circumstances in which an outsider dealing with a company cannot claim any

relief on the basis of doctrine of 'Indoor Management'. (8 Marks)

(b) What do you understand by the term 'discrimination' inemployment as sometime foundin an establishment ? Explain the basic elements of 'discrimination'. (4 Marks)

(c) Why is the' Active Listening' important for an individual? State the guidelines for' Active

Listening'. (4 Marks)

An swer

(a) Doctrine of Indoor Management & Exception s: One limitation to the doctrine ofconstructive notice of the memorandum and articles of a company is the doctrine of

indoor management. According to the doctrine of indoor management, the outsider,

dealing with the company is entitled to assume that as far as the internal proceedings of

the company are concerned, everything has been regularly done. They are bound toread the registered documents and to see that the proposed dealing is not inconsistent

therewith, but they are not bound to do more; they need not inquire into the regularity of

the internal proceedings as required by the Memorandum and Articles. This limitation of

the doctrine of constructive notice is known as the Doctrine of Indoor Management,

popularly known as rule in Royal British Bank v/s Turquand. Thus, the doctrine of

indoor management aims to protect outsiders against the company.Exceptions: In the following circumstances an outsider dealing with the company cannot

claim any relief on the ground of Indoor Management.


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(i) Knowledge of irregularity: Where a person dealing with a company has actual or

constructive notice of the irregularity as regards internal management, he cannot

claim the benefit under the rule of Indoor Management (T.R. Pratt, Bombay Ltd., V/s

E.D. Sassoon & Co. Ltd.).

(ii) Negligence: Where a person dealing with a company could discover the irregularity

if he had made proper inquiries, he cannot claim the benefit of the rule of indoormanagement. The protection of the rule is also not available where the

circumstances surrounding the contract are so suspicious as to invite inquiry and

the outsider dealing with the company does not make proper inquiry (Anand BihariLtd., V/s. Dinshaw & Co.). Also, the case ofUnderwood V/s. Bank of Liverpool.

(iii) Act void ab initio and forgery: Where the acts done in the name of a company are

void ab initio, the doctrine of indoor management does not apply. The doctrine

applies only to irregularities that otherwise might affect a genuine transaction. Itdoes not apply to a forgery. A company can never the held liable for forgeries

committed by its officers (Ruben V/s. Great Fingall Consolidated Co.)

(iv) Acts outside the scope of apparent authority: If an officer of a company enters into

a contract with a third party and if the act of the officer is beyond the scope of his

authority, the company is not bound (Kreditbank Cassel V/s. Schenkers Ltd.)(v) A person having no knowledge of articles cannot seek protection under Indoor

Management.

(b) The root meaning of the term discriminate is to distinguish one object from another

Employment discrimination is treating one person better than another because of their

age, gender, race, religion or other protected class of status. Discrimination in

employment is wrong because it violates the basic principle of equality. Discrimination is

to treat people differently. It is usually intended to refer to the wrongful act of making a

difference in treatment or favour on a basis other than individual merit.

Discrimination in employment involves the following three basic elements:(i) It is a decision against one or more employees (or prospective employees) that is

not based on individual merit, such as the ability to perform a given job, seniority or

other morally legitimate qualifications.

(ii) The decision derives solely or in part from racial or sexual prejudice, false

stereotypes or some other kind of morally unjustified attitude against members of

the class to which employee belongs.

(iii) The decision has a harmful or negative impact on the interests of the employees,

perhaps costing them jobs, promotions, or better pay.

(c) Importance of Active Listening :

Active listening is important for several reasons :-


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(i) It aids the organization in carrying out its mission

(ii) It helps individuals to advance in their careers

(iii) It provides information that helps them to learn about important happenings in the

organization, as well as assisting them in doing their own jobs well.

(iv) It also helps to build strong personal relationships.

Guidelines for Active Listening:

(i) Look at the person and suspend other things you are doing in order to understand

the other persons concerns, intentions.

(ii) Be interested in what the person is saying. If you just cant make yourself

interested, you will lose important information, so try taking notes. Doing so will

keep your body and mind active.

(iii) Listen to the tone of voice and inflections; look at gestures and body language,

these may carry an unspoken message.

(iv) Restate what the person said. Restating their meaning is a way for you to make

sure you understand the person clearly.

(v) Ask questions once in a while to clarify meaning. Doing so, will keep you alert andlet the other person know you have been listening and are interested in getting all

the facts and ramifications.

(vi) Be aware of your own feelings and opinions.

Question 5

(a) Examining the provisions of the Negotiable Instruments Act, 1881, distinguish between a

'Bill of Exchange' and a 'Promissory Note'. (8 Marks)

(b) What do you understand by the term 'Floating charge'? State the circumstances under

which 'Floating charge' becomes 'Fixed charge'. (4 Marks)(c) Mr. X has received a cheque book from his bank (Sun Bank) where he (X) has his

savings account. Write a letter to the Bank acknowledging the receipt of the cheque

book. (4 Marks)

An swer

(a) Distinctio n between a Promissory Note and a Bill of Exchange: The distinctive

features of these two types of negotiable instruments are tabulated below:-

Sl. No. Promissory Note Bill of Exchange

1. It contains a promise to pay It contains an order to pay

2. The liability of the maker of a note isprimary and absolute

The liability of the drawer of a bill issecondary and conditional. Hewould be liable if the drawee, after


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accepting the bill fails to pay themoney due upon it provided notice ofdishonor is given to the drawerwithin the prescribed time.

3. It is presented for payment withoutany previous acceptance by maker

If a bill is payable sometime aftersight, it is required to be acceptedeither by the drawee himself or bysomeone else on his behalf, before itcan be presented for payment.

4. The maker of a promissory notestands in immediate relationship withthe payee and is primarily liable to thepayee or the holder.

The maker or drawer of an acceptedbill stands in immediate relationshipwith the acceptor and the payee

5. It cannot be made payable to themaker himself, that is the maker andthe payee cannot be the same person

In the case of bill, the drawer andpayee or the drawee and the payeemay be the same person.

6. In the case of a promissory note thereare only two parties, viz. the maker

(debtor) and the payee (creditor).

In the case of a bill of exchange,there are three parties, viz., drawer,

drawee and payee, and any two ofthese three capacities can be filledby one and the same person.

7. A promissory note cannot be drawn insets

The bills can be drawn in sets

8. A promissory note can never beconditional

A bill of exchange too cannot bedrawn conditionally, but it can beaccepted conditionally with theconsent of the holder. It should benoted that neither a promissory note

nor a bill of exchange can be madepayable to bearer on demand.

(b) A floating charge is an equitable charge which is not a specific charge on any property of

the company. It is a charge on a class of assets, which may be present or future and

which changes from time to time in the ordinary course of business, for example Stock

in trade. Thus, the company may, despite of the charge, deal with any of the assets in

the ordinary course of business. It is of the essence of a floating charge that it remains

dormant until the undertaking charged ceases to be a going concern or until the person in

whose favour the charge created, intervenes.

Process of conversion of floating charge into a fixed charge is termed as Crystallizationwhich is subject to the same restrictions as the fixed charge. A floating charge

crystallizes or get fixed under the following circumstances.


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(iv) 'A holder of share-warrant of a company is not a member of the company'.

An swer

(a) Procedu re for the Change of name und er the Companies Act, 1956: According to

Section 21 of the Companies Act, 1956, a company may, by special resolution, and with

the approval of the Central Government, signified in writing, change its name. This

power has been delegated to the Registrar of Companies. The application for change of

name is required to be made to Registrar of Companies in form IA with a fee of Rs. 500.

Where the Registrar is satisfied with the companys proposal, he may accord to the

proposal which will be valid for a period of six months.

However, such an approval of the Central Government would not be necessary where the

only change in the name of the company is the addition thereto or the deletion there from

of the words private consequent upon the conversion as per the provisions of this Act of

a public company into a private company or vice versa (Proviso to Section 21).

Further, according to Section 22 of the above Act, if through inadvertence etc., the name

is identical with, or too nearly resembles, the name by which a company, in existence,

has been previously registered, it may be changed by ordinary resolution with the

sanction of the Central Government within twelve months of the registration. The

company shall make the change by ordinary resolution and with the previous approval ofthe Central Government within three months of the date of the direction of the CentralGovernment being received or such longer period as the Central Government may deem

fit to allow.

According to Section 23 of the above Act, where the name of a company has been

changed, the Registrar of Companies shall issue fresh certificate with the change

embodied therein. The change in name shall not affect any of the companys rights or

obligations of the company or render defective any legal proceedings by or against it.

Any legal proceedings, which might have been continued or commenced by or against

the company by its former name, may be continued by its name.

(b) Indemnity Bond

I, Mr. V, S/o ------resident of ------------ do hereby agree to indemnify the M/s. Brown Ltd.,

for any loss that may occur for seeking release of dividend for 150 shares of Rs. 1,500/-.

I further declare that personally I have not received the dividend warrant in question.

Mr. V

Date : (Signature)

Place :

(c) Correct / Incorrect

(i) Correct


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(ii) Correct

(iii) Correct

(iv) Correct

Question 7

Answer any FOUR of the following:

(a) Explain clearly the meaning of the term 'Basic wages' as defined under the Employees'

Provident Funds and Miscellaneous Provisions Act, 1952. State also what is not includedin the term 'Basic Wages'. (4 Marks)

(b) In what way a 'Member' of a company is different from that of a 'shareholder' of the

company? (4 Marks)

(c) State the ordinary business which may be transacted at an Annual General Meeting of a

public limited company incorporated under the Companies Act, 1956. (4 Marks)

(d) Explain the role played by different committees in regulating the 'Corporate Governance'.

(4 Marks)

(e) Explain the importance of 'Ethics' for finance and accounting professionals. (4 Marks)

An swer

(a) As per section 2 (b) of the Employees Provident Funds and Miscellaneous Provisions Act,

1952, Basic Wages means all emoluments which are earned by an employee while on duty

or on leave or holidays with wages in either case in accordance with the terms of the contract

of employment and which are paid or payable in cash to him, but does not include :-

(i) the cash value of any food concessions

(ii) any dearness allowance (that is to say all cash payments by whatever name iscalled, paid to an employee on account of rise in the cost of living), house rent

allowance, overtime allowance, bonus, commission or pay and other similarallowance payable to the employee in respect of his employment or of work done insuch employment or

(iii) any presents made by the employer.

(b) Members or share holders of a company are the persons who collectively constitute the

company as a corporate entity. They are synonymous in the case of a company limitedby shares, a company limited by guarantee and having a share capital and unlimited

company whose capital is held in definite shares. But in the case of an unlimited

company or a company limited by guarantee, a member may not be a shareholder, for

such a company may or may not have a share capital. However, in certain respect

members and shareholders are separate. They are as follows:-

(i) A registered shareholder is a member but a registered member may not be a

shareholder because the company may not have a share capital.


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(ii) A person who owns a bearer share warrant is a shareholder but he is not a member

as his name is struck off from the register of members [Section 115 (1)]. This

means that a person can be a holder of shares without being a member.

(iii) A legal representative of a deceased member is not a member until he applies for

registration. He is, however, a shareholder eventhough, his name does not appear

on the register of members.

(iv) A person who subscribes to the memorandum of association immediately becomes

the member, even though no shares are allotted to him. Till shares are allotted to

the subscriber, he is a member but not a shareholder of the company.

(v) A person who has transferred his shares ceases to be a holder of those shares from

the date of the transfer but he continues to be a member till such time the transfer is

registered in the books of the company.

(c) Ordinary Business to be transacted at an Annual General Meeting.

The following business is called the ordinary business, which is transacted at the Annual

General Meeting of a company :-

(1) Consideration of Annual Accounts, Balance sheet & the Reports of the Board of

Directors and Auditors(2) Declaration of Dividend

(3) Appointment of directors in place of those retiring

(4) Appointment of and fixation of remuneration of auditors

Any business other than the above shall be called special business.

(d) Role of different committees in regulating Corporate Governance :

The core roles of the various committees in regulation of Corporate Governance are as

follows :-

(1) Board of directors: The Boards role is that of trusteeship to protect and enhance

shareholders value through strategic supervision. The strategy should aim at

accountability and fulfillment of goals.

(2) Audit committee: They have to provide assurance to Board on adequacy of internal

control systems and financial disclosures.

(3) Compensation Committee: The committee has to recommend to the Board

compensation terms for Executive Directors and the senior most level of

management below the Executive Director.

(4) Nomination committee: It is to recommend to the Board nominations for

membership of the Corporate Management Committee and the Board and oversee

succession to the senior most level of management below the Executive Director.


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(5) Corporate management committee: Its primary role is strategic management of

companys business within Boards approved direction.

(6) Investor services committee: It is to look into redressal of shareholders and

investors grievances, approval of transmissions, sub division of shares, issue of

duplicate shares etc.,

(7) Divisional Management Committee: It is to realize tactical and strategic objectives

in accordance with Corporate Management Committee / Board approved plan.

(e) Finance and Accounts is perhaps the only business function which accepts responsibilityto act in public interest. Hence, a finance and accounting professionals responsibility is

not restricted to satisfy the needs of any particular individual or organization. While acting

in public interest, it becomes imperative that the finance and accounting professional

adheres to certain basic ethics in order to achieve his objectives.

Until recently, various surveys conducted globally had ranked finance and accounting

professionals very high in terms of professional ethics. However, various accounting

scandals witnessed during the past few years have put a serious question mark on the

role of the finance and accounting professional in providing the right information for

decision making both within and outside their respective organizations. As these finance

and accounting professionals are in public practice, they should take reasonable steps toidentify circumstances that could pose the conflict of interest and thus leading to follow

unethical behavior.


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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 45

(vi) Depreciation is charged on straight line basis

Compute machine hour rate for the new machine.

(c) RES Ltd. is an all equity financed company with a market value of`25,00,000 and cost

of equity Ke = 21%. The company wants to buyback equity shares worth `5,00,000 byissuing and raising 15% perpetual debt of the same amount. Rate of tax may be taken

as 30%. After the capital restructuring and applying MM Model (with taxes), you are

required to calculate:

(i) Market value of RES Ltd.(ii) Cost of Equity Ke

(iii) Weighted average cost of capital and comment on it.

(d) A company is presently having credit sales of`12 lakh. The existing credit terms are 1/10,net 45 days and average collection period is 30 days. The current bad debts loss is 1.5%. In

order to accelerate the collection process further as also to increase sales, the company is

contemplating liberalization of its existing credit terms to 2/10, net 45 days. It is expected that

sales are likely to increase by 1/3 of existing sales, bad debts increase to 2% of sales and

average collection period to decline to 20 days. The contribution to sales ratio of the

company is 22% and opportunity cost of investment in receivables is 15 percent (pre-tax). 50per cent and 80 percent of customers in terms of sales revenue are expected to avail cash

discount under existing and liberalization scheme respectively. The tax rate is 30%.

Should the company change its credit terms? (Assume 360 days in a year).

(4 5 = 20 Marks)

An swer

(a) (i) Productio n Budget for the year 2012 by Quarters

I II III IV Total

Sales demand(Unit) 18,000 22,000 25,000 27,000 92,000

I Opening Stock 6,000 7,200 8,100 8,700 30,000

II 70% of Current Quarters Demand

12,600 15,400 17,500 18,900 64,400

III 30% of FollowingQuarters Demand

6,600 7,500 8,100 7,400* 29,600

IV Total Production(II &III) 19,200 22,900 25,600 26,300 94,000

V Closing Stock (I+IV-Sales)

7,200 8,100 8,700 8,000 32,000

*Balancing Figure


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46 INTEGRATED PROFESSIONAL COMPETENCEEXAMINATION:MAY,2012

(ii) Break Even Point = Fixed Cost/ PV Ratio

=220000/13.75% = 1600000 or 40000 units.

P/V Ratio = (40 - 34.50 = 5.50)/40 100 =13.75%

(Or, Break Even Point= Fixed Cost/ Contribution = 2,20,000/5.50 = 40,000 Units)

Total sales in the quarter II is 40000 equal to BEP means BEP achieved in II quarter.

(b) Computation of machine hour rate of new Machine

Total(`)

Per hour(`)

A. Standing Charges

I. Insurance Premium 9000 x1

9

1,000

II. Rent1

10x2400x12 2,880

3,880 0.97*

B. Machine expenses

I. Repairs and Maintenance [5,000/4,000] 1.25

II. Depreciation10,00,000 10,000

10 4,000

24.75

III. Electricity 8 units x

` 3.75 30.00

Machine hour rate 56.97

Working Note

1 Calculation of productive Machine hour rateTotal hours 4,200

Less: Non-Productive hours 200

4,000

* 3,880/ 4000 = 0.97

(c) Compu tation of Market Value, Cost of Equi ty and WACC of RES Ltd .

Market Value of Equity = 25,00,000

Ke =21%

e

Net income (NI) for equity holders

K= Market Value of Equity


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PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT 47

Net income (NI) for equity holders

0.21= 25,00,000

Net income for equity holders = 5,25,000

EBIT= 5,25,000/0.7=7,50,000

All Equity Debt and Equity

EBIT 7,50,000 7,50,000

Interest to d

Documents

SA May 2012-IPCC GROUP-I