CMA Test Paper June 2018

Revisionary Test Paper_June2018
Intermediate
Group I
Paper 8 : COST ACCOUNTING
(SYLLABUS – 2016)
Objective Question
1. (a) M.C.Q.
1. Joint Cost is suitable for-
A. Infrastructure Industry
B. Ornament Industry.
C. Oil Industry
D. Fertilizer Industry
2. Which of the following is considered as accounting record?
A. Bin Card
B. Bill of material
C. Store Ledger
D. None of these
3. Which of the following is considered as normal loss of material?
A. Pilferage
B. Loss due to accident
C. Loss due to careless handling of material
D. None of these.
4. Cost of idle time arising due to non availability of raw material is
A. Charged to costing profit and loss A/c
B. Charged to factory overheads
C. Recovered by inflating the wage rate
D. Ignored
5. Time and motion study is conducted by the
A. Time –keeping department
B. Personnel department
C. Payroll department
D. Engineering department
6. Time keeping refers to
A. Time spent by workers on their job
B. Time spent by workers in factory
DOS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
C. Time spent by workers without work
D. Time spent by workers on their job
7. Royalty paid on sales `89,000 and Software development charges related to product is
`22,000. Calculate Direct Expenses.
A. 1,11,100 B. 1,11,000 C. 111,110 D. 1,10,000
8. Direct Expenses does not meet the test of materiality can be ———— part of part of
overhead.
A. Treated B. Not treated C. All of the these D. None of these
9. The allotment of whole items of cost of centres or cost unit is called
A. Cost allocation
B. Cost apportionment
C. Overhead absorption
D. None of the above
10. When the amount of under-or-over-absorption is significant, it should be disposed of by
A. Transferring to costing profit and loss A/c
B. The use of supplementary rates
C. Carrying over as a deferred charge to the next accounting year
D. None of above
11. Charging to a cost center those overheads that result solely for the existence of that
cost Center is known as
A. Allocation B. Apportionment C. Absorption D. Allotment
12. CAS 21 stands for
A. Capacity Determination
B. Joint Cost
C. Direct Expenses
D. None of these.
13. Standards deals with determination of averages/ equalized transportation cost-
A. CAS 6 B. CAS 22 C. CAS 9 D. CAS 5
14. Standards deals with the principles and methods of determining depreciation and
amortization cost-
A. CAS 9 B. CAS 12 C. CAS 15 D. CAS 16
15. Integral accounts eliminate the necessity of operating
A. Cost Ledger control account
B. Store Ledger control account
C. Overhead adjustment account
16. Equivalent production of 1,000 units, 60% complete in all respects, is:
A. 1000 units B. 1600 units C. 600 units D. 1060 units
17. In a process 8000 units are introduced during a period. 5% of input is normal loss. Closing
work in progress 60% complete is 1000 units. 6600 completed units are transferred to
next process. Equivalent production for the period is:
A. 9000 units B. 7440 units C. 5400 units D. 7200 units
18. Standard price of material per kg is `20, standard usage per unit of production is 5 kg.
Actual usage of production 100 units is 520 kgs, all of which was purchase at the rate of
` 22 per kg. Material cost variance is
A. 2,440 (A)
B. 1,440 (A)
C. 1,440 (F)
D. 2,300 (F)
19. Standard cost of material for a given quantity of output is `15,000 while the actual cost
of material used is `16,200. The material cost variance is:
A. `1,200 (A)
B. `16,200 (A)
C. ` 15,000 (F)
D. ` 31,200 (A)
20. The basic difference between a fixed budget and flexible budget is that a fixed
budget…….
A. is concerned with a single level of activity, while flexible budget is prepared for
different levels of activity
B. Is concerned with fixed costs, while flexible budget is concerned with variable costs.
C. is fixed while flexible budget changes
D. None of these.
Answer :
1. (C), 2. (C) 3. (C), 4. (A), 5. (D), 6. (B),
7. (B), 8. (A), 9. (A), 10. (B), 11.(A), 12.(D),
13.(D), 14.(D), 15.(A), 16.(C), 17.(D), 18.(B),
19.(A), 20. (A)
(b) Match the following:

Column ‘A’ Column ‘B’
1. Pollution Control Cost A CAS 18
2. Joint Cost B CAS 2
3. Capacity Determination C CAS 10
4. Direct Expenses D CAS 14
5. Research and Development Cost E CAS 19
6 Donations F Decision Package
7 Notional Rent charged to G Difference in Fixed Cost/Difference in
contribution per unit
8 The method which is followed for H Average price method
evaluation of equivalent production
when prices are fluctuating
9 Indifference Point(in Unit) I Expenses debited only in cost
accounts
10 Zero based budgeting J Appropriations only in financial
accounts
Answer :
1. (D), 2. (E) 3. (B), 4. (C), 5. (A),

6. (J), 7. (I), 8. (H), 9. (G), 10. (F) ]
(C) True/False
1. ABC analysis is not based on the concept of selection inventory management.

2. In India, if a worker works for more than 8 hours on any day or for more than 40 hours in
a week, he is treated to be engaged in overtime.
3. If an expense can be identified with a specific cost unit, it is treated as direct expense.
4. CAS 9 is for Direct Expenses as issued by the Cost Accounting Standards Board (CASB)
of the Institute of Cost Accountants of India.
5. The principal based used for applying factory overhead are: units of production,
material cost, direct wages, direct labour hours and machine hours.
6. The balancing in costing profit and loss account represents under or over absorption of
overheads.
7. At breakeven point, contribution available is equal to total fixed cost.
8. Standards costing are more profitability employed in job order industries than in process
type industries.
9. To achieve the anticipated targets, Planning, Co-ordination and Control are the
important main tasks of management, achieved through budgeting and budgetary
control.
10. A flexible budget recognises the difference between fixed, semi-fixed and variable cost
and is designed to change in relation to the change in level of activity.
Answer :
1. (F), 2. (F) 3. (T), 4. (F), 5. (F), 6. (F), 7. (T), 8. (F), 9. (T), 10. (T)
(d) Fill in the blank
1. Store Ledger is kept and maintained in _______________.

2. In a company there were 1200 employee on the rolls at the beginning of a year and
1180 at the end. During the year 120 persons left services and 96 replacements were
made. The labour turnover to flux method is _________ %.
3. Ideal time arises only when workers are paid on ______________ basis.
4. Normal idle time costs should be change to _________ which that due to abnormal
reasons should be change to _______________.
5. Direct Expenses incurred for brought out resources shall be determined at
______________.
6. Direct Expenses incurred lump-sum shall be ___________________.
7. Overhead incurred `16,000 and overhead absorbed `15,300. There is under absorption
of `___________.
8. Under integrated accounting system, the accounting entry for payment of wages is to
debit _____ and to credit cash.
9. Two principle method of evaluation of equivalent production are ______________ and
__________________.
10. When sales are `300,000 and variable cost is `180,000, P/V ratio will be ____________.
(40%)
Answer :
1. Cost Office; 2. 9.08; 3. Time; 4. Production overhead + Costing P/L A/c;

5. Invoice Price; 6. Amortized; 7. `700;
8. Wages control Accounts; 9. FIFO and Average method, 10. 40%)
Materials:
Q2: A company manufactures a special product which requires a component ‘Gamma’. The
following particulars are collected for the year 2017.
1. Annual demand of Gamma 10,000 units
2. Cost of placing an order `200 per order
3. Cost per unit of Alpha ` 400
4. Carrying cost % p.a. 25%
The company has been offered a quantity discount of 5% on the purchase of ‘Gamma’
provided the order size is 5,000 components at a time.
Required:
(a) Compute the economic order quantity.
(b) Advise whether the quantity discount offer can be accepted.
Answer: 2
(a) Calculation of Economic Order Quantity

EOQ = 2AO / C
Where, A = Annual requirement for inventory = 10,000 units
O = Ordering cost = `200 per order
Cost per Unit = `400
C = Carrying cost per unit per annum = 25% of 400 = `100
2 ×10,000 units × ` 200

EOQ = = 200 units
100
(b) Evaluation of Profitability of Different Options of Order Quantity
(i) When EOQ is ordered
Purchase Cost (10,000 units × ` 400) 40,00,000
Ordering Cost [(10,000 units / 200 units) × ` 200] 10,000
Carrying Cost (200 units × ` 400 × ½) × 25/100 10,000
Total Cost 40,20,000
(ii) When quantity discount is accepted
Purchase Cost (10,000 units × ` 380) 38,00,000
Ordering Cost [(10,000 units /5000 units) × ` 200] 400
Carrying Cost (5000 units × ` 380 × ½) × 25/100 2,37,500
Total Cost 40,37,900
Advise:
The total cost of inventory is lower if EOQ is adopted. Hence, the company is advised not
to accept the quantity discount.
Q3: Xpro Ltd. is the manufacturers of LED display screen for T.V. The following are the details of
their operation during the year 2017:
Average monthly market demand 4,000 LED display
Ordering Cost `500 per order
Inventory carrying cost 20% per annum
Cost of LED display screen ` 2000 per LED
Normal usage 500 units per week
Minimum usage 250 units per week
Maximum usage 1000 units per week
Lead time to supply 6 – 8 weeks
The Re-order Quantity is 50 LED display screen less than the Economic Order Quantity.
Compute from the above:
(i) Re-order level
(ii) Re-order Quantity
(iii) Maximum level of stock
(iv) Minimum level of stock
(v) Calculate the impact on the profitability of the company by not ordering the EOQ.
(vi) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a
discount of 5% is it worth accepting?
Answer: 3
Working Notes:
A = Annual usage of LED display = Normal usage per week x 52 weeks
= 500 tubes x 52 weeks = 26,000 LED
O = Ordering cost per order = ` 500 per order
C = Inventory carrying cost per unit per annum
= 20% x ` 2,000 = ` 400 per unit, per annum
Economic Order Quantity:
2AO 2 × 26,000 × 500

EOQ = = = 255 units (approx.)
C 400
(i) Re-order Level:

= Maximum Consumption × Maximum Re-order Period
= 1000 units × 8 weeks = 8,000 units.
(ii) Re-order Quantity

= EOQ-50 units = 255 - 50 = 205 units
(iii) Maximum level of Stock:

= Re-order Level + Re-order Quantity – (Min. Usage x Min. - Re-order Period)
= 8,000 units + 205 units – (250 units × 6 weeks)
= 6,705 units.
(iv) Minimum level of Stock:
= Re-order Level - Normal Usage × Average Re-order Period
= 8,000 units - 500 units × 7 weeks = 4,500 units.
(v) The impact on the profitability of the company by not ordering the EOQ
When purchasing the ROQ When purchasing the EOQ
Order Quantity 205 units 255 units
No of orders a year 26,000/205 = 126.8 or 127 orders 26,000/255 = 101.96 or 102
orders
Ordering cost 127 ×500 = `63,500 102 × 500 = ` 51,000
Average Inventory 205/2 = 102.5 units 255/2 = 127.5 units
Carrying Cost 102.5 × 400 = `41,000 127.5 ×400 = ` 51,000
Total Cost ` 1,04,500 `1,02,000
(vi) If the supplier is willing to supply 1,500 units at a discount of 5%

Total cost (when order size is 1,500 units)
= Cost of 26,000 units + Ordering cost + Carrying cost.
= 26,000 units x ` 1900 + {(26,000/1,500)× 500} + {(1500 × 20% of 1900)/2}
= ` 4,94,00,000 + ` 8,667 + ` 2,85,000
= ` 49,693,667
Total cost (when order size is 255 units)
26,000 units x ` 2000 + {(26,000/255) × 500} + {(255 × 20% of 2000)/2}
= ` 52,00,000 + 50,980 + 51,000
= ` 53,01,980
Labour:
Q 4.
M/s. Maheswari Bros. Wants to ascertain the profit lost during the year 2016-17 due to
increased labour turnover. They have given you the following information:
(i) Traning period of the new recruits is 60,000 hours. During this period their productivity is
75% of the experienced workers. Time required by an experienced worker is 10 hours per
unit.
(ii) 20 % of the output during training period was defective. Cost of rectification of a
defective unit was ` 40.
(iii) Potential productive hours lost due to delay in recruitment were 1, 20, 000 hours.
(iv) Selling price per unit is ` 400 and P/V ratio is 20%.
(v) Settlement cost of the workers leaving the organisation was ` 4, 00, 000.
(vi) Training cost was ` 2, 00, 000.
(vii)Recruitment cost was ` 1, 60, 000.
You are required to calculate the profit lost by the company due to increased labour turnover
during the year 2016-17.
Answer: 4
Output by experienced workers in 60,000 hours = (60,000/10) = 6,000 units

Output by new recruits = 75% of 6000 = 4,500 units
Loss of output = 6,000 – 4,500 = 1,500 units
Total loss of output = Due to delay recruitment + due to inexperience
= (1,20,000/10)+1500 = 12,000 + 1,500 = 13,500 units
Contribution per unit = 20% of ` 400 = `80
Total contribution lost = `80 × 13,500 units = `10,80,000
Cost of repairing defective units = 4,500 × 0.2 × `40 = ` 36,000
Profit forgone due to labour turnover
`
Loss of Contribution 10,80,000
Cost of repairing defective units 36,000
Recruitment cost 1, 60, 000
Settlement cost of workers leaving 4, 00, 000
Profit forgone in 2016-17 16,76,000
Q 5. Calculate the earnings of two workers X and Y for every 200 units of output from the
following information-
• Standard Conversion Costs of the product: `60 per unit.
• Overheads -150% of Wages Cost, Wage Rate: Worker A - `10 per hour, Worker B - `12 per
hour.
• Time taken to complete 200 units by Worker A is 400 hours and by Worker B is 380 hours.
• There is an incentive system based on the reduction of Labour and Overhead Cost in the
following scale –
Reduction upto 15% 20% 25%
Earns a bonus 10% of wages 20% of wages 25% of wages
Answer: 5
Worker A B
(a) Production 200 units 200 units
(b) Time taken 400 hours 380 hours
(c) Wage Rate per hour `10 12
(d) Wages Cost (before Bonus) = (b) x (c) `4,000 `4,560
(e) Overhead Cost at 150% of Labour = (d)× 150% ` 6,000 ` 6,840
(f) Total Conversion Cost = Wages + OH = (d) + (e) `10,000 ` 11,400
(g) Standard Conversion Cost at ` 60 per hour ` 12,000 ` 12,000
(h) Reduction in Conversion Cost = (g) - (f) ` 2,000 ` 600
(i) % of Reduction to Standard Cost = (h) ÷ (g) 16.67% 5%
(j) Therefore Eligible Bonus % 20% 10%
(k) Bonus Amount (Wages x Bonus %) = (d) x (j) ` 800 ` 456
(1) So, Earnings = Wages + Bonus = (d) + (k) ` 4,800 ` 5,016
Direct Expenses:
Q 6.
A manufacturing unit produces two products ‘Exe’ and ‘Dee’. The following information is
furnished:
Particulars Product Exe Product Dee
Units produced ( Qty) 40,000 25,000
Units Sold (Qty) 30,000 20,000
Machine Hours utilised 10,000 5,000
Design charges 25,000 20,000
Software development charges 28,000 40,000
Royalty paid on sales ₹1, 50, 000 [@ ₹3 per unit sold, for both the products]; Royalty paid on units
produced ₹65,000 [@ Re.1 per unit purchased, for both the products]. Hire charges of equipment
used in manufacturing process of Product Exe only ₹16,000, Compute the Direct Expenses.
Answer: 6
Computation of Direct Expenses
Particulars Product Product
Exe Dee
Royalty paid on Sales (30000*3) (20000*3) 90,000 60,000
Add Royalty paid on units produced (40,000*1) (25,000*1) 40,000 25,000
Add Hire charges of equipment used in manufacturing 16,000 —
process of Product ‘Exe’ only
Add Design Charges 25,000 20,000
Add Software development charges related to production 28,000 40,000
Direct Expenses 1,99,000 1,45,000
Note:
(i) Royalty on production and royalty on sales are allocated on the basis of units produced and
units sold respectively. These are directly identifiable and traceable to the number of units
produced and units sold. Hence, this is not an apportionment.
(ii) No adjustments are made related to units held, i.e. closing stock.
Overheads:
Q 7. A company is making a study of the relative profitability of the two products – M and N. In
addition to direct costs, indirect selling and distribution costs to be allocated between the
two products are as under:
₹
Insurance charges for inventory (finished) 1,04,000
Storage costs 1,68,000
Packing and forwarding charges 9,00,000
Salesmen salaries 8,00,000
Invoicing costs 4,50,000
Other details are as under-

Product M Product N
Selling price per unit (`) 500 1,000
Cost per unit 300 600
(exclusive of indirect selling and distribution costs) (`)
Annual sales in units 10,000 8,000
Average inventory (units) 1,000 800
Number of invoices 2,500 2,000
One unit of product M requires a storage space twice as much as product N. The cost to
packing and forwarding one unit is the same for both the products. Salesmen are paid
salary plus commission @ 5% on sales and equal amount of efforts are put forth on the sales
of each of the product.
Required
(i) Set-up a schedule showing the apportionment of the indirect selling and distribution costs
between the two products.
(ii) Prepare a statement showing the relative profitability of the two products.
Answer: 7
(i) Schedule showing the apportionment of the indirect selling and distribution costs
between the two products:
Products
Items Basis of apportionment Total M N
` ` `
Insurance charges Average inventory value 1,04,000 40,000 64,000
(1000 × ` 500) : (800 × `1000)
Storage cost Average Inventory storage space 1,68,000 1,20,000 48,000
(1000 × 2) : (800 × 1)
Packing & Forwarding Annual sales in units 9,00,000 5,00,000 4,00,000
charges (10000) : (8000)
Salesmen salaries Efforts of Salesmen 8,00,000 4,00,000 4,00,000
(1:1)
Salesmen Annual sales value 6,50,000 2,50,000 4,00,000
Commission (5:8)
Invoicing Costs No. of invoices 4,50,000 2,50,000 2,00,000
(2500 : 2000)
30,72,000 15,60,000 15,12,000
(ii) Statement showing the relative profitability of the two products:
Products M N
` `
Annual sales value 50,00,000 80,00,000
(10,000 units × ` 500) (8,000 units × ` 1000)
Less: Cost of sales 30,00,000 48,00,000
(10,000 units × ` 300) (8,000 units × ` 600)
Gross Profit 20,00,000 32,00,000
Less: Indirect selling and 15,60,000 15,12,000
Distribution cost
Profit 4,40,000 16,88,000
Profitability as percentage of 8.8 % 21.1 %
sales
(`4,40,000/`50,00,000)x100 (`16,88,000/`80,00,000) x100
Q 8. XYZ Ltd. manufactures two products A and B. The manufacturing division consists of two production
department P1 and P2 and two service departments S1and S2. Budgeted overhead rates are used in
the production departments to absorb factory overhead to the products. The rate of department P1
is based on direct machine hours, while the rate of department P2 is based on direct labour
hours. In applying overheads, the predetermined rates are multiplied by actual hours.
For allocating the service department costs to production departments, the basis adopted is as
follows:
(i) Cost of department S1to department P1 and P2 equal and

(ii) Cost of department S2 to department P1 and P2 in the ratio of 2:1 respectively.
Annual profit plan data:
Factory Overheads budgeted for the year:
Departments P1 P2 S1 S2
Amount (`) 27,85,000 22,55,000 7,50,000 5,10,000
Budgeted output of product A and B are 50,000 units and 30,000 units respectively. Budgeted raw
material cost per unit for product A and B are `120 and `150 respectively. Budgeted time required
for production per unit:
Product A Product B
Department P1 1.5 machine hours 1.0 machine hours
Department P2 2 direct labour hours 2.5 direct labour hours
Average wage rates budgeted in Department P2 are: Product A - ` 72 per hour and Product B
- ` 75 per hour.
All materials are used in Department P1 only.

Actual data (for the month of July 2017)
Units actually produced:
Product A 4,000 units
Product B 3,000 units
Actual direct machine hours worked in Department P1:
On Product A - 6,100 hours, Product B - 4,150 hours.
Actual direct labour hours worked in Department P2:
On Product A - 8,200 hours, Product B - 7,400 hours.
Costs actually incurred:
Product A Product B
Raw Materials 5,10,000 4,80,000
Wages 5,80,000 5,50,000
Factory Overheads:
Departments P1 P2 S1 S2
Amount (`) 2,81,000 2,25,000 72,000 51,000
You are required to:

(i) Compute the predetermined overhead rate for each production department.
(ii) Prepare a Statement showing Budgeted and Actual costs for the month of July, 2017.
Answer:8
(i) Computation of predetermined overhead rate for each production department for
budgeted data
Particulars Production Service
Departments Departments
P1(`) P2(`) S1(`) S2(`)
Budgeted overhead for the year 27,85,000 22,55,000 7,50,000 5,10,000
Allocation of Service department S1's cost to 3,75,000 3,75,000 (7,50,000) —
Production Dept. P1 and P2 equally
Allocation of Service department S2’s cost to 3,40,000 1,70,000 (5,10,000)
Production Dept. P1and P2 in the ratio of 2:1
Total 35,00,000 28,00,000 Nil Nil
Budgeted Machine hours in department P1(working 1,05,000
note 1)
Budgeted Direct labour hours in department P2 (working 1,75,000
note 1)
Budgeted Machine/ Direct labour hour rate `33.33 `16
(ii) Statement showing Budgeted and Actual Costs for the month of July 2017.
Budgeted (`) Actual (`)
Raw Materials used in Department P1
A (4,000 units x `120) 4,80,000 5,10,000
B (3,000 units X `150) 4,50,000 4,80,000
Direct Labour Cost on the basis of labour hours worked in
department P2
A (4,000 x 2 hrs x ` 72) 5,76,000 5,80,000

B (3,000 x 2.5 hrs x `75) 5,62,500 5,50,000
Factory Overheads:
On machine hour basis in Department P1
A(4,000 x1.5 hrs x `33.33) 1,99,980 2,08,888*
B (3,000 x 1hr x `33.33) 99,990 1,42,112*
On Direct labour hour basis in Department P2
A(4,000 x 2 hrs x `16) 1,28,000 1,46,128*
B (3,000 x 2.5 hrs x `16) 1,20,000 1,31,872*
26,16,470 27,49,000
*Refer Working Note - 3
Working Notes:
Product A Product B Total
1. Budgeted output (in units) 50,000 30,000
Budgeted Machine hours in 75,000 hrs 30,000 hrs 1,05,000 hrs
Department P1 (50,000x1.5 (30,000 x 1 hr)
hrs)
Budgeted Direct labour hour in 1,00,000 hrs 75,000 hrs 1,75,000 hrs
Department P2 (50,000 x 2 hrs) (30,000 x 2.5
hrs)
2. Actual output (units) 4,000 3,000
Actual Machine hours utilized in 6,100 4,150 10,250
Department P1
Actual Direct labour hours utilized in 8,200 7,400 15,600
Department P2
Working Notes: 3
Computation of actual overhead rates for each production department from actual data
Particulars Production Departments Service
Departments
P1(`) P2 (`) S1 (`) S2(`)
Actual factory overhead for July 2017. 2,81,000 2,25,000 72,000 51,000
Allocation of Service department S1's 36,000 36,000 (72,000) --
cost to Production Dept. P1 and P2
equally
Allocation of Service department S2's 34,000 17,000 -- (51,000)
cost to Production Dept. P1 and P2 in
the ratio of 2:1
Total 3,51,000 2,78,000 Nil Nil
Actual Machine hours in 10,250
department P1 (Working note 2)
Actual Direct labour hours in 15,600
department P2 (Working note 2)
Machine hour rate
(₹3,51,000 /10,250) ` 34.2439
Direct Labour hour rate ` 17.8205
(₹2,78,000 / 15,600)
Product A 2,08,888 1,46,128
(` 34.2439 x 6,100) (`17.8205 x 8,200)
Product B 1,42,112 1,31,872
(`34.2439x 4,150) (`17.8205 x 7,400)
Total 3,51,000 2,78,000
Q 9. (a) Explain the objectives and functions of the Cost Accounting Standards Board.
(b) What is the basic rules and basis for cost classification as per CAS-1?
Answer 9(a):
The objectives of the CASB are to develop high quality Cost Accounting Standards to
enable the management to take informed decisions and to enable regulators to function
more effectively by integrating, harmonizing and standardizing Cost Accounting Principles
and Practices.
The following will be the functions of the CASB :-
(a) To issue the framework for the Cost Accounting Standards.
(b) To equip the Cost & Management Accounting professionals with better guide lines on
cost Accounting Principles.
(c) To assists the members in preparation of uniform cost statements under various statutes.
(d) To provide from time to time interpretations on Cost Accounting Standards.
(e) To issue application guidance relating to particular standard.
(f) To propagate the Cost Accounting Standards and to persuade the users to adopt them
in the preparation and presentation of general purpose Cost Statement.
(g) To persuade the government and appropriate authorities to enforce Cost Accounting
Standards, to facilitate the adoption thereof, by industry and corporate entities in order
to achieve the desired objectives of standardization of Cost Accounting Practices.
(h) To educate the users about the utility and the need for compliance of Cost Accounting
Standards.
Answer 9(b):
Basic Rules for Classification of Costs

(a) Classification of cost is the arrangement of items of costs in logical groups having regard to
their nature (subjective classification) or purpose (objective classification).
(b) Items should be classified by one characteristic for a specific purpose without ambiguity.
(c) Scheme of classification should be such that every item of cost can be classified.
Basis of classification
(a) Nature of expense
(b) Relation to object – traceability
(c) Functions / activities
(d) Behaviour - Fixed, Semi-variable or Variable
(e) Management decision making
(f) Production Process
(g) Time period
Cost Statements/ Reconciliation/Integration/Items excluded from cost and normal and
abnormal items
Q 10. SPR Ltd. provides you the following figures for the year 2016-17:
Particulars `
Direct Material 3,20,000
Direct Wages 8,00,000
Production Overheads (25% variable) 4,80,000
Administration Overheads (75% Fixed) 1,60,000
Selling and Distribution Overheads (2/3rd Fixed) 2,40,000
Sales @ ` 125 per unit 25,00,000
For the year 2017-18, it is estimated that:
1. Output and sales quantity will increase by 25% by incurring additional Advertisement
Expenses of ` 60,000.
2. Material prices will go up 10%.
3. Wage Rate will go up by 6% along with, increase in overall direct labour efficiency by 12%.
4. Variable Overheads will increase by 6%.
5. Fixed Production Overheads will increase by 20 %
Required:
(a) Calculate the Cost of Sales for the year 2016-2017 and 2017-2018.
(b) Find out the new selling price for the year 2017-2018.
(i) If the same amount of profit is to be earned as in 2016-2017.
(ii) If the same percentage of profit to sales is to be earned as in 2016-2017.
(iii) If the existing percentage of profit to sales is to be increased by 25%.
(iv) If Profit per unit ₹10 is to be earned.
Answer 10:
(a) Statement showing the Cost of Sales `
Particulars For 20000 units For 25000 units
A. Direct Materials 3,20,000 4,40,000
[`3,20,000 x 110% x 125%]
B. Direct wages 8,00,000 9,46,429
[` 8,00,000 x (106/100) x
(100/112) x 125%]
C. Prime Cost 11,20,000 13,86,429
D. Add: Production Overheads 1,20,000 1,59,000
Variable Production Overheads [` 4,80,000 x 25%] [`1,20,000 x 106% x 125%]
Fixed Production Overheads 3,60,000 4,32,000
[` 4,80,000 x 75%] [` 3,60,000 x 120%]
E. Works Cost (C + D) 16,00,000 19,77,429
F. Add: Administration Overheads 40,000 53,000
Variable Admn. Overheads [1,60,000 x (1/4)] [` 40,000 x 106% x 125%]
Fixed Admn. Overheads 1,20,000 1,20,000
[1,60,000 x (3/4)]
G. Cost of Goods Produced 17,60,000 21,50,429
H. Add: Selling and Distribution 80,000 1,06,000
Overheads
Variable Selling & Distribution OHs [2,40,000x(1/3)] [` 80,000 x 106% x 125%]
Fixed Selling & Distribution OHs 1,60,000 1,60,000
[2,40,000x(2/3)]
Additional Advertisement Exp. - 60,000
I. Cost of Sales [G + H] 20,00,000 24,76,429
(b)
(i) New Selling Price = (` 24,76,429 + ` 5,00,000)/25,000 units = ` 119.06
(ii) New Selling Price = (` 24,76,429 + 25% of ` 24,76,429)/25,000 units = ` 123.82
(iii) New Selling Price = (` 24,76,429 + 1/3rd of ` 24,76,429)/25,000 units = ` 132.07
(iv) New Selling Price = (` 24,76,429 + (25,000 x ` 10) / 25,000 units = ` 109.06
Q 11.
A Music System manufacturer, who commenced his business on 1st June, 2015 supplies you with
the following information and asks you to prepare a statement showing the profit per Music
System sold. Wages and materials are to be charged at actual cost, works overhead at 75% of
wages and office overhead at 30% of works cost. Number of Music System manufactured and
sold during the year was 500.
Other particulars:
Materials per set ` 240
Wages per set ` 80
Selling price per set ` 750
If the actual works expenses were `32,160 and office expenses were `61,800, prepare a
Reconciliation Statement.
Answer 11:
Cost Sheet (or) Statement of Cost and Profit
Particulars Unit Total
` `
Material 240 1,29,600
Wages 80 43,200
Prime cost 320 1,72,800
(+) Works overhead (75% of wages) 60 32,400
Works cost 380 2,05,200
(+) Office overheads (30% of Work Cost) 114 61,560
Total cost 494 2,66,760
(+) Profit 256 1,08,240
Sales 750 3,75,000
Dr. Trading and Profit & Loss Account Cr.
Particulars Amount Particulars Amount
` `
To, Materials A/c 1,29,600 By, Sales A/c 3,75,000
To, Wages A/c 43,200
To, Works Overheads A/c 32,160
To, Gross Profit 1,70,040
3,75,000 3,75,000
To, Office Expenses 61,800 By, Gross Profit 1,70,040
To, Net Profit 1,08,240 b/d
1,70,040 1,70,040
Statement of Reconciliation
Particulars Amount
`
Profit as per Financial Accounts 1,08,240
(-) Over recovery of works overheads (240)
(+) Under recovery of office expenses 240
Profit as per Cost Accounts 1,08,240
Job Costing
Q 12. Intro Limited undertakes to supply 1,000 units of a component per month for the months of
January, February and March 2017. Every month a batch order is opened against which
materials and labour cost are booked at actuals. Overheads are levied at a rate per labour
hour. The selling price is contracted at ` 15 per unit.
From the following data, present the cost and profit per unit of each batch order and the
overall position of the order for the 3000 units:
Month Batch Output Material Labour Overheads Total

(Numbers) Cost Cost Labour Hours
January 2017 1,250 ` 6,250 ` 2,500 ` 12,000 4,000
February 2017 1,500 9,000 3,000 9,000 4,500
March 2017 1,000 5,000 2,000 5,000 5,000
Labour is paid at the rate of ` 2 per hour.
Answer 12.
Statement showing the Cost and Profit per unit for each batch.
Jan. Feb. March Total
(i) Batch output (numbers) 1,250 1,500 1,000 3,750
(ii) Total sales realisation from (i) above
@ ` 15 `18,750 ` 22,500 `15,000 `56,250
(iii) Costs
Material 6,250 9,000 5,000 20,250
Labour 2,500 3,000 2,000 7,500
Overheads (see working note) 3,750 3,000 3,000 9,750
Total Cost 12,500 15,000 10,000 37,500
(iv) Profit (i) - (iii) 6,250 7,500 5,000 18,750
(v) Profit per unit (iv ÷ i) 5 5 5
(vi) Cost per unit (iii ÷ i) 10 10 10
Profitability for 3,000 units
Sales value (3,000 x ` 15) ` 45,000

Less: Costs (3,000 x ` 10) ` 30,000
Profit 15,000
Working Notes:
The batch labour cost for the month is given. The labour is paid @ `2 per hour. Thus, by dividing the
batch labour cost with hourly rate, batch labour hours can be found out:
(a) Batch labour hours ` 2,500 ÷ 2 3,000 ÷ 2 2,000 ÷ 2
= 1250 hrs. = 1500 hrs. = 1000 hrs.
(b) Overhead per hour (Total overheads 12000 ÷ 4000 9000 ÷ 4500 15000 ÷ 5000
of Total labour hours) `3 `2 `3
Overhead for the batch (a x b) or ` 3,750 ` 3,000 ` 3,000
Process Costing
Q13. PSL Ltd. produces a product "ABU", which passes through two processes, viz., process I and
process II. The output of each process is treated as the raw material of the next process to
which it is transferred and output of the second process is transferred to finished stock. The
following data related to December, 2017:
Process I Process II
25,000 units introduced at a cost of `2,00,000 —
Material consumed `1,92,000 `96,020
Direct labour `2,24,000 `1,28,000
Manufacturing expenses `1, 40, 000 `60,000
Normal wastage of input 10% 10%
Scrap value of normal wastage (per unit) `10.00 `9.00
Output in Units 22,000 20,000
Required:
(i) Prepare Process land Process II account.
(ii) Prepare Abnormal effective/wastage account as the case may be each process.
Answer 13.
Process I Account
Particulars Units Amount Particulars Units Amount
(in `) (in `)
To Input 25,000 2,00,000 By Normal wastage 2,500 25,000
To Material 1,92,000 By Abnormal 500 16,244
wastage
To Direct Labour 2,24,000 By Process II 22,000 7,14,756
To Manufacturing Exp. 1,40,000
Total 25,000 7,56,000 Total 25,000 7,56,000
Cost per unit = (7,56, 000 – 25,000) /(25,000-2,500)= `32.48889 per unit
Process II Account
(in `) (in `)
To Process I 22,000 7,14,756 By Normal wastage 2,200 18,920
To Material 96,020 By Finished stock 20,000 9,89,754
To Direct Labour 1,28,000
To Manufacturing Exp. 60,000
To Abnormal effect 200 9898
Total 22,200 10,08,674 Total 22,200 10,08,674
Cost per unit =( 9,98,776- 18,920)/ (22,000 - 2,200)= `49.4877 per unit
Abnormal Wastage Account

(in `) (in `)
To Process I A/c 500 16,244 By Cash (Sales) 500 5,000
By Costing Profit and 11,244
Loss A/c
Total 500 16,244 Total 500 16,244
Abnormal Effectives Account

(in ₹) (in ₹)
To Normal wastage 200 1800 By Process II A/c 200 9,898
To Costing Profit and 8,098

Loss A/c
Total 200 9,898 Total 200 9,898
Q14. Following information is available regarding Process A for the month of December 2017:
Production Record:
(i) Opening work-in progress 40,000 Units
(Material: 100% complete, 25% complete for labour and overheads)
(ii) Units Introduced 1,80,000 Units
(iii) Units Completed 1,50,000 Units
(iv) Units in-process on 31.12.2017 70,000 Units
(Material: 100% complete, 50% complete for labour and overheads)
Cost Record:
Opening Work-in-progress:
Material `1,00,000
Labour `25,000
Overheads `45,000
Cost incurred during the month:
Material `7,20,000
Labour `6,00,000
Overheads `8,00,000
Assume that FIFO method is used for W.I.P. inventory valuation.
Required:
(i) Statement of Equivalent Production (ii) Statement showing Cost for each element (iii)
Statement of apportionment of Cost (iv) Process Account
Answer 14:
Statement of Equivalent Production (FIFO Method)
Particulars Equivalent Production
Material Labour and Overhead
Input Units Output Units % of Qty % of Qfy
completion completion
Opening 40,000 Transfer to
WIP Process II
Introduced 1,80,000 Opening WIP 40,000 — — 75 30,000
Completed
Introduced 1,10,000 100 1,10,000 100 1,10,000
and
Completed
Closing WIP 70,000 100 70,000 50 35,000
Total 2,20,000 2,20,000 1,80,000 1,75,000
Statement showing Cost for each element

Item of Cost Equivalent Production Cost Incurred Cost per Unit
Material 1,80,000 7,20,000 4
Labour & 1,75,000 14,00,000 8
Overheads
Total 12
Statement of Evaluation
Transfer to Process II
Opening WIP Completed:
Cost already Incurred 1,70,000
Cost Incurred during the Month:
Labour & Overheads (30,000 x 8) 2,40,000 4,10,000
Introduced & Completed (1,10,000 x 12) 13,20,000
17,30,000
Closing WIP
Material 70,000 x 4 2,80,000
Labour and Overheads 35,000 x 8 2,80,000 5,60,000
Process A/c
Units Amount Units Amount
To Opening WIP 40,000 1,70,000 By Process II A/c 1,50,000 17,30,000
To Materials 1,80,000 7,20,000 By Closing WIP 70,000 5,60,000
To Labour 6,00,000
To Overheads 8,00,000
Total 2,20,000 23,10,000 Total 2,20,000 22,90,000
Q 15
Leo Limited produces a product which passes through two processes before it is completed and
transferred to finished stock. The following data relate to September, 2017:
Particulars Process Finished Stock
I II
Opening Stock ` 3,000 Rs. 3,600 ` 9,000
Direct Materials 6,000 6,300
Direct Wages 4,480 4,500
Factory Overheads 4,200 1,800
Closing Stock 1,480 1,800 4,500
Inter-process profit included in Opening Stock 600 3,300
Output of Process I is transferred to Process II at 25% profit on the transfer price and output of Process
II is transferred to finished stock at 20% profit on the transfer price.
Stocks in process are valued at prime cost. Finished stock is valued at the price at which it is
received from Process II. Sales during the period were ` 56,000.
Prepare Process Cost Accounts and Finished Stock Account showing the profit element at each
stage.
Answer 15:
Process I Account
Total Cost Profit Total Cost Profit
Opening stock 3,000 3,000 Transfer to 21,600 16,200 5,400
Direct material 6,000 6,000 Process II A/c
Direct wages 4,480 4,480
Total 13,480 13,480
Less: C/stock 1,480 1,480
Prime cost 12,000 12,000
Fy. overheads 4,200 4,200
Process cost 16,200 16,200
Profit 33-1/3 on cost 5,400 5,400

(Working Note 1) 21,600 16,200 5,400 21,600 16,200 5,400
Process II Account
` ` ` ` ` `
Opening stock Trnfr. from 3,600 3,000 600 Trfd. to 45,000 30,300 14,700
Process I 21,600 16,200 5,400 Finished
Direct materials 6,300 6,300 Stock A/c
Direct wages 4.500 4,500
36,000 30,000 6,000
Less: C/stock 1,800 1,500 300*
Prime cost 34,200 28,500 5,700
Fy. overhead 1,800 1,800
Process cost 36,000 30,300 5,700
Profit (25% on cost) 9,000 9,000
(Working Note 2)
45,000 30,300 14,700 45,000 30,300 14,700
*(Profit/ Total Cost) x Closing stock = (6,000/36000) x ` 1,800 = `300
Finished Stock Account
` ` ` ` ` `
Opening Stock 9,000 5,700 3,300 Sales 56,000 33,000 23,000
Trnfr. from Process II 45,000 30,300 14,700
54,000 36,000 18,000
Less: Closing stock 4,500 3,000 1,500 @
Cost of F. Stock 49,500 33,000 16,500
Profit 6,500 - 6,500
56,000 33,000 23,000 56,000 33,000 23,000
@ (18,000/54,000) x ` 4,500 = ` 1,500
Working Notes:
1. 25% profit on transfer price is equal to 33-1/3% on cost. Suppose transfer price is `100 and
profits ` 25. Thus cost will be `75. ` 25 as a ratio of ` 75 is one-third = `16,200 ÷ 3 = ` 5,400.
2. 20% profit on transfer price is equal to 25% on cost. Suppose transfer price is ` 100 and profit is
`20. Thus cost will be ` 80. ` 20 as a ratio of ` 80 is one fourth = ` 36,000 ÷ 4 = ` 9,000.
Joint Product and By-Product
Q16. ABC company's plant processes 1,50,000 kg. if raw material in a month to produce two
products, viz. P and Q. The cost of raw material is Rs. 12 per kg.
The process costs per month are:
Direct Materials Rs. 90,000
Direct Wages 1,20,000
Variable Overheads 1,00,000
Fixed Overheads 1,00,000
The loss in process is 5% of input and the output ratio of P and Q which emerge simultaneously is
1:2. The selling prices of the two products at the point of split off are: P — Rs. 12 per kg. and Q — Rs.
20 per kg. A proposal is available to P further by mixing it with other purchased materials. The entire
current output of the plant can be so processed further to obtain a new product 'S'. The price per
kg. of ‘S’ is Rs. 15 and each kg. of output of S will require one kilogram of input P. The cost of
processing of P into S (including other materials) is Rs. 1,85,000 per month.
You are required to prepare a statement showing the monthly profitability based both on the
existing manufacturing operations and on further processing. Will you recommend further
processing?
Answer 16: Working Notes:

1. Material output (1,50,000 kg less 5% of 150,000 kg) 1,42,500 kg
2. Output of products P and Q
P = 1,42,500 × 1/3 = 47,500 kg
Q = 1,42,500 × 2/3 = 95,000 kg
3. Joint costs:
Raw materials (1,50,000 × Rs. 12) Rs. 18,00,000
Direct materials 90,000
Direct labour 1,20,000
Variable overheads 1,00,000
Fixed overheads 1,00,000
22,10,000
4. Sales revenue of products P, Q and S:
P = 47,500 kg × Rs. 12 Rs. 5,70,000
Q = 95,000 kg x Rs. 20 = 19,00,000
S = 47,500 kg × Rs. 15= 7,12,500
5. Joint costs apportionment to products P and Q (Sales value basis):
Particulars P Q Total
Joint Costs (57,000: 19,00,000 or 3: 10) 5,10,000 17,00,000 22,10,000
Total Cost of S = Joint cost of product P + Further processing costs)
= Rs. 5,10,000 + Rs. 1,85,000 = Rs. 6,95,000
Statement showing the monthly profitability with and without further processing:
Without further Processing Further Processing P into S
Products P Q Total S Q Total
Sales volume (kg) 47,500 95,000 1,42,500 47,500 95,000 1,42,000
Sales value (Note 4) (Rs.) 5,70,000 19,00,000 24,70,000 7,12,500 19,00,000 26,12,500
Less: Joint cost (Note 5) 5,10,000 17,00,000 22,10,000 6,95,000 17,00,000 23,95,000
Profit 60,000 2,00,000 2,60,000 17,500 2,00,000 2,17,500
Total profit without processing is Rs. 2,60,000 and with further processing is Rs. 2,17,500. Further
process is, therefore, not recommended.
Operating Costing
Q17. The following information relates to a bus operator:
Cost of the bus ` 18,00.000

Insurance charges 3%p.a.
Manager- cum accountant's salary ` 8,000 p.m.
Annual Tax ` 50,000
Garage Rent ` 2,500 p.m.
Annual repair & maintenance ` 1,50,000
Expected life of the bus 15 years
Scrap value at the end of 15 years ` 1,20,000
Driver's salary ` 15,000 P.m.
Conductor's salary ` 12,000p.m.
Stationery ` 500 p.m.
Engine oil, lubricants (for 1200 kms.) ` 2,500
Diesel and oil (for 10 kms.) ` 52
Commission to driver and conductor (shared equally) 10% of collections
Route distance 20 km long
The bus will make 3 round trips for carrying on the average 50 passengers in each trip. Assume
15% profit on collections. The bus will work on the average 25 days in a month.
Calculate fare for passenger-km.
Q17. Answer: Working Notes

(i) Calculation of Depreciation of Bus (Per month)
=(Cost of the bus - Scrap value at the end of the 15 years)/Expected life of the bus
= (18,00,000 -1,20,000)/15 years
= `1,12,000 p.a.
Depreciation per month = (1,12,000/12 months) = 9,333.33
(ii) Calculation of total distance travelled and Passenger-km. per month
Total distance = 3 trips x 2 x 20 k.m. x 25 days = 3,000 k.m.
Total Passenger-km. = 3 trips x 2 x 20 k.m. x 25 days x 50 passengers
= 1,50,000 Passenger-k.m.
(iii) Cost of Engine oil, Lubricants and Diesel & oil (Per month)
= (Total distance Travelled/ 1200 km) x 2,500
= (3,000 km/1200 km) x 2500 km. = `6,250.
Diesel and Oil = (Total distance Travelled/ 10 km) x 52 = (3,000/10) x 52 = `15,600
Statement showing the Operating Cost per Passenger-km

` `
(i) Standing Charges:
Depreciation {Working Note- (i)} 9,333.33
Insurance charge (18,00,000 x 3 %)/12 4,500
Manager cum Accountant's salary 8,000
Annual Tax P.m. (50,000/12) 4,166.67
Garage rent 2,500 28,500
(ii) Maintenance Charges:
Repair & Maintenance per month (150000/12) 12,500
(iii) Running Cost:
Driver's Salarv 15,000
Conductor's Salary 12,000
Stationery 500
Engine oil & Lubricants {Working Note- (iii)} 6,250
Diesel and oil {Working Note- (iii)} 15,600
Total running cost before deducting commission to driver and 49,350 49,350
conductor
(a) Total cost excluding commission to driver and conductor 90,350
(b) Driver's commission on collection* 6,023.34
(c) Conductor's commission on collection* 6,023.33
Total Cost (a) +(b) + (c) 1,02,396.67
Add: Profit** 18,070
Total Collection 1,20,466.67
Working note
Total costs before commission on collection and net profit is `90,350.
Commission on collection to driver and conductor is 10% of collection and Profit is 15% of
collection means
100% - (10% -l- 15%) i.e. 75% = `90,350
So, Total collection = (90350/75) x 100 = 1,20,466.67
* Total Commission on collection = 10% x ` 1,20,466.67 = `12,046.67
Driver's share = 50% x ` 12,046.67 = 6,023.34
Conductor's share = 50% x ` 12,046.67 = 6,023.33
** Profit on collection = ` 1,20,466.67 x 15% =` 18,070
Fare per Passenger-km. =Total contribution/Total Passenger-k.m {working Notes (ii)}
= 1,20,466.67 /1,50,000 = ` 0.8031 (approx.)
Q18. Elora Hotel has a capacity of 100 single rooms and 20 double rooms. It has a sports centre
with a swimming pool, which is also used by persons other than residents of the hotel. The hotel has
a shopping arcade at the basement and a speciality restaurant at the roof top.
The following information is available:
(i) Average occupancy: 75% for 365 days of the year.
(ii) Current costs are :
Variable cost Fixed cost
`/per day `/per day
Single Room 400 200
Double Room 500 250
(iii) Average sales per day of restaurant ` 1,00,000; contribution is at 30%. Fixed cost
` 10,00,000.
(iv) The sports centre/swimming pool is likely to be used by 50 non-residents daily; average
contribution per day per non-resident is estimated at ` 50; fixed cost is ` 5,00,000 per annum.
(v) Average contribution per month from the shopping arcade is ` 50,000; fixed cost is `
6,00,000 per annum.
You are required to find out:

(a) Rent chargeable for single and double room per day, so that there is a margin of safety of
20% on hire of rooms and that the rent for a double room should be kept at 120% of a single
room.
(b) Evaluate the profitability of restaurant, sports centre and shopping arcade separately.
Answer 18:
Working Notes:
1. Single room occupancy days in a year : 100 rooms x 365 days x 75% = 27,375 days
2. Double room occupancy days in a year : 20 rooms x 365 days x 75% = 5,475 days
3. Total rooms occupany days in terms of single room : = 27,375 + 1.20 (5,475)
= 33,945 days
(a) Statement showing the rent chargeable for single and double room per day
Type of room Occupancy Variable Fixed Total Total Total Cost
days in a cost per day cost variable Fixed
year ` /day `/day cost (`) cost (`)
Single room 27,375 400 200 1,09,50,000 54,75,000 1,64,25,000
Double room 5,475 500 250 27,37,500 13,68,750 41,06,250
2,05,31,250
Add margin of 51,32,812
safety*
Total amount to 2,56,64,062

be recovered
*20% of hire charges of room or 25% of cost.

Rent per day of single room (in `) = ` 2,56,64,062 ÷ 33,945 = ` 756 Approx.
Rent per day of double room (in `) = ` 756 x 1.2 times = ` 907 Approx.
(b) Profitability of restaurant
Total sales per annum : 365 day x ` 1,00,000 = ` 3,65,00,000

Contribution per annum (A) (30% of sales) 1,09,50,000
Less : Fixed cost (S) 10,00,000
Profit [(A) - (B)] 99,50,000
Profitability of Sports Centre:

Contribution of sports centre per day (50 persons x ` 50) 2,500
Total contribution for the year (` 2,500 x 365 days) ` 9,12,500
Less : Fixed cost 5,00,000
4,12,500
Profitability of shopping arcade
Contribution per annum (` 50,000 x 12 months) ` 6,00,000
Less : Fixed cost 6,00,000
Profit Nil
Contract Costing
Q19. Compute a conservative estimate of profit on a contract (which has been 80% complete)
from the following particulars. Illustrate at least 4 methods of computing the profit:
`
Total expenditure to date 85,000
Estimated further expenditure to complete the
contract (including contingencies) 17,000
Contract Price 1,53,000
Works certified 1,00,000
Works not certified 8,500
Cash received 81,600
Answer 19:
Value of work certified ` 1,00,000
Work not certified 8, 500
Total work done so far 1,08,500
Less: Total expenditure up to date 85, 000
Notional Profit 23, 500
Contract Price ` 1,53,000
Less: Expenditure up to date ` 85,000
Estimated further expenditure to complete contract 17,000 1,02,000
Estimated total profit 51,000
Four methods of Computing Profit:

1. (2/ 3) x Notional Profit x (Cash received/work certified)
= 2/3 x ` 23,500 x (` 81,600/` 1,00,000)
= ` 12,784
2. Notional Profit x (Work certified/Contract price)
= 23,500 x (` 1,00,000/` 1,53,000)
= ` 15,359
3. Estimated Total Profit x (Value of work certified/contract Price) x (Cash Received/ Value of
work certified)
= ` 51,000 x (` 1,00,000/` 1,53,000) x (`81,600/` 1,00,000) = ` 27,200
4 Estimated total profits x (Cost of work to date/ Estimated total cost) x (Cash received/
Value of work certified)
= ` 51,000 x (`85,000/` 1,02,000) x (` 81,600/` 1,00,000) = ` 34,680
Q20. Act Infrastructure Limited undertook a contract for ` 5,00,000 on 1st July 2016. On 30th June
2017, when the accounts were closed, the following details about the contract were
gathered:
Materials purchased ` 1,00,000

Wages paid 45,000
General Expenses 10,000
Plant Purchased 50,000
Materials on hand 30-6-17 25,000
Wages Accrued 30-6-17 5,000
Work Certified 2,00,000
Cash Received 1,50,000
Work Uncertified 15,000
Depreciation of Plant 5,000
The above contract contained an escalation clause which read as follows:
"In the event of prices of materials and rates of wages increase by more than 5% the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages
beyond 5% in each case." It was found that since the date of signing the agreement the
prices of materials and wage rates increased by 25%. The value of the work certified does not
take into account the effect of the above clause.
Prepare the contract account.
Answer 20:
Contract Account of Act Infrastructure Limited
(For the year ending 30th June 2017)
To Materials ` 1,00,000 Work in progress A/c: `
" Wages Paid 45,000 Work certified 2,00,000
" Wages Accrued 5,000 50,000 Work uncertified 15,000
Materials in hand 25,000
" General Expenses 10,000 Contract escalation 5,000
" Plant Depreciation (Note 1)
" Balance c/d 5,000
(Notional profit) 80,000
2,45,000 2,45,000
" P & L A/c (Note 2) 20,000 By Balance b/d 80,000
" Work in progress 60,000
80,000 80,000
Note 1: Calculation of escalation

Material and Wages increased by 25%
(a) Increase in material price
(` 1,00,000 - ` 25,000) x (25/125) = `15,000
(b) Increase in wages
` 50,000 x (25/125) = 10,000
Total increase 25,000
It is 5% of contract price
Escalation is 25% of the rise in the cost of material and wage beyond 5% in each case.
25% increase = ` 25,000
∴ 5% increase = 5,000
Escalation = 25% of (` 25,000 - ` 5,000) = ` 5,000
Note 2: Profit to be credited to P & L A/c
Profit = (1/3) × (Cash received/ Work certified) × Notional profit
=(1/3) x (1,50,000/2,00,000) × 80,000 = `20,000
Since contract completion is less than 50%, only l/3rd profit as restricted by ratio of cash
received to work certified is transferred to P & L A/c.
Marginal Costing
Q21 (a). Xpro Ltd sold 3,00,000 units of its product at `40 per unit. Variable costs are `20 per unit
[manufacturing costs of `14 and selling cost `6 per unit). Fixed costs are incurred uniformly
throughout the year and amount to `35,00,000 (including depreciation of `15,00,000). There
are no beginning or ending inventories.
Required:
(a) Estimate break-even sales level quantity and cash break-even sales level quantity.
(b) Estimate the P/V ratio.
(c) Estimate the number of units that must be sold to earn an income (EBIT) of ` 2,50,000.
(d) Estimate the sales level achieve an after-tax income (PAT) of `2,50,000.
Assume 40% corporate Income Tax rate.
Answer 21(a):
(a) Break-even Sales Quantity = (FC/C per unit)= 35,00,000 / 20 = 1,75,000 units
Cash-even Sales Quantity = (Cash FC/C per unit) = 20,00,000 /20 = 1,00,000 units
(b) PV Ratio = (C/selling price per unit) x 100 = (20/40)*100 = 50%
(c) No. of units that must be sold to earn an Income(EBIT) of ` 2,50,000
=( FC+ Desired EBIT Level)/ C per unit = (35,00,000+2,50,000)/20 = 1,87,500 units
(d) After Tax Income(PAT) = ` 2,50,000
Tax rate = 40%
Desired level of Profit before tax = (2,50,000/60)x100 = `4,16,667
Estimate Sales Level = (FC+ Desired Profit) / PV ratio = (35,00,000+4,16,667)/50% = ` 78,33,334
Q21 (b). ‘XYZ’ company sells its product at `15 per unit. In a period, if it produces and sells 8,000
units, it incurs a loss of ` 5 per unit. If the volume is raised to 20,000 units, it earns a profit of ` 4
per unit.
Calculate break-even point both in terms of rupees as well as in units.
Answer 21(b): We know that S - V = F + P
Suppose variable cost = x
Fixed cost = y
In first situation :
15 x 8,000 + 8,000 x =y - 40,000 ...(1)
In second situation:
15 x 20,000 + 20,000 x = y + 80,000 ... (2)
or 1,20,000 - 8,000 x = y - 40,000 ... (3)
3,00,000 -20,000 = y + 80,000 ...(4)
From (3) & (4) we get x = ` 5.
Variable cost per unit = ` 5
Putting this value in 3rd equation.
1,20,000 - (8,000 x5)= y- 40,000
Or y = ` 1,20,000
Fixed cost = ` 1,20,000

P/V ratio= (S-V)/S = {(15-5)/15} *100 = (200/3) = 66-2/3 %
Suppose break-even sales= x
15x – 5x = 1,20,000 (at BEP contribution will be equal to fixed cost)
x= 12,000 unit.
or Break-even sales in units = 12,000
Break-even sales in rupees = 12,000 x 15 = ` 1,80,000
Q22. MCo International is manufacturing and selling two products: X and Y, at selling price of ` 3
and ` 4 respectively. The following sales strategy has been outlined for the year 2017:
(i) Sales planned for the year will be ` 7.20 lakhs in the case of X and ` 3.50 lakhs in the
case of Y.
(ii) To meet competition, the selling price of X will be reduced by 20% and that of Y by
12.5%.
(iii) Break-even is planned at 60% of the total sales of each product.
(iv) Profit for the year to be achieved is planned at ` 69,120 in the case of X and ` 17,500 in
the case of Y. This would be possible by launching a cost reduction programme and
reducing the present annual fixed expenses of ` 1,35,000 allocated as ` 1,08,000 to X
and ` 27,000 to Y.
You are required to present the proposal in financial terms giving clearly the following
information:
(a) Number of units to be sold of X and Y to break-even as well as the total number of units on
X and Y to be sold during the year.
(b) Reduction in fixed expenses product-wise that is envisaged by the Cost Reduction
Programme.
Answer 22:
(a) Number of units sold to break-even and total units to be sold during 2017
Total X Y
Planned sales `10,70,000 ` 7,20,000 ` 3,50,000
Selling price per unit after reduction 2.40 3.50
Total sales (units) 4,00,000 3,00,000 1,00,000
B.E. sales (units) 2,40,000 1,80,000 60,000
60% of total sales
(b) Reduction in fixed expenses product-wise

B.E. sales (60% of planned sales) ` 6,42,000 `4,32,000 `2,10,000
Margin of safety (40% of planned sales) 4,28,000 2,88,000 1,40,000
Planned profit 86,620 69,120 17,500
P/V Ratio = Profit/M.S. 24% 12.5%
Fixed Cost* at B.E. Sales 1,29,930 1,03,680* 26,250*
Existing in fixed expenses 1,35,000 1,08,000 27,000
Savings in fixed expenses 5,070 4,320 750
* Product ‘X’ ` 4, 32,000 x 24 % = ` 1, 03,680 and Product ‘Y’ ` 2, 10,000 x 12.5 % = ` 26,250
Q23. From the following figures find the break-even volume:

Selling price per tonne ` 69.50
Variable cost per tonne ` 35.50
Fixed expenses ` 18.02 lakhs.
If this volume represents 40% capacity, what is the additional profit for an added
production of 40% capacity, the selling price of which is 10% lower for 20% capacity
production and 15% lower than the existing price, for the other 20% capacity.
Answer 23:
Existing B'reak-even Sales
BES x PV Ratio= Fixed Cost
BES x ((69.50- 35.50)/69.50) = ` 18.02 lakhs or ` 36,83,500 or 53,000 tonnes.
It is given that 53,000 tonnes represent 40% capacity.
∴ 80% will be represented by 1,06,000 tonnes
Any contribution beyond this represents profit
(i) Contribution by 20% capacity for which selling price falls by 10%
Revised Selling Price= ` 69.50 - 6.95 =62.55
Variable Cost 35.50
Contribution 27.05
20% Capacity= 53,000 tonnes ÷ 2 or 26,500 tonnes
Profit if sale price is ` 62.55 = Sales after BES x PV ratio
= (26,500 x 62.55) x (27.05 ÷ 62.55) = ` 7,16,825
(ii) Contribution by 20% capacity for which selling price falls by 15%
Revised Selling price= ` 69.50- 10.425 = ` 59.075
Variable Cost 35.500
Contribution per tonne 23.575
Profit if sale price is ` 59.075 per tonne
= Sale representing 20% capacity x PV Ratio
= (26,500 x ` 59.075) x (` 23.575 ÷ 59.075) = ` 6,24,737
∴ Additional profit by 40% Sales= Profit in (i) and (ii)
= ` 7,16,825 + ` 6,24,737 = ` 13,41,562
Q24. The directors of MNO Ltd., manufacturers of products A, B and C, have asked for advice on
the product mix of the company. The following information is given:
Products A B C
Standard cost per unit:
Direct Material `20 `60 `40
Variable overhead 6 4 10
Direct labour:
Department Rate/Hr. Hrs. Hrs. Hrs.
1 `1 28 16 30
2 `2 5 6 10
3 `1 16 8 30
Current production per annum (units) 10,000 5,000 6,000
Selling price per unit `100 `136 `180
Forecast of sales for the next year 12,000 7,000 9,000
Fixed overhead per annum ` 4,00,000.
Further, the type of labour required by Department 2 is in short supply and it is not possible to
increase the manpower of this department beyond its present level.
You are required to prepare a statement showing the most profitable mix of the products to be
made and sold. The statement which should be presented in two parts should show:
(i) the profit expected on the current budgeted production, and
(ii) the profit which could be expected if the most profitable mix was produced.
Answer 24:
(i) Statement showing the profitability of the current budgeted production
Products A B C Total
Production (units) 10,000 5,000 6,000
1. Selling price per unit `100 `136 `180
2. Variable cost per unit:
Direct material 20 60 40
Variable overhead 6 4 10
Direct labour :
Department 1 28 16 30
Total of 2 80 100 130
3. Contribution (1 -2) 20 36 50
4. Total contribution 2,00,000 1,80,000 3,00,000 6,80,000
5. Fixed cost 4,00,000
6. Profit 2,80,000
7. Key factor (Labour times of Dept. 5 6 10
2) - hours
8. Contribution per hour `4 `6 `5
9. Ranking III I II
The total production hours available should be utilized in the order of products B, C and A.
The total production hours in Department 2 available have been worked out as under:
Product Production(units) Labour hours of Total production
Dept. 2 hours utilised in Dept. 2
A 10,000 5 50,000
B 5,000 6 30,000
C 6,000 10 60,000
1,40,000
These available hours can be utilized according to the ranking, i.e., products B, C and A.
Product Production(units) Labour hours of Estimated total production

Dept. 2 hours utilised
B 7,000 6 42,000
C 9,000 10 90,000
A 1,600 5 8,000 (balance)
1,40,000
(ii) Statement showing the estimated profitability of most profitable mix

Product A B C Total
Estimated production (units) 1,600 7,000 9,000
Contribution per unit as in (i) ₹20 ₹36 ₹50
Total contribution (`) 32,000 2,52,000 4,50,000 7,34,000
Less: Fixed cost (`) 4,00,000
Profit (`) 3,34,000
It is noticed that the estimated total contribution has gone up from ` 6,50,000 to ` 7,34,000.
Q 25.
UNCO Limited makes and sells a range of plastic garden furniture. These items are sold in
sets of one table with four chairs for ` 80 per set.
The variable costs per set are ` 20 for manufacturing and ` 10 for variable selling, distribution
and administration.
Direct labour is treated as a fixed cost and the total fixed costs of manufacturing, including
depreciation of the plastic-moulding machinery, are ` 8,00,000 per annum. Budgeted profit
for the forthcoming year is ` 4,00,000.
Increased competition has resulted in the management of UNCO Limited engaging market
research consultants. The consultants have recommended three possible strategies, as
follows:
Reducing selling price Expected increase in
per set by (%) sales (sets)(%)
Strategy 1 5 10
Strategy 2 7.5 20
Strategy 3 10 25
You are required to assess the effect on profits of each of the three strategies, and to
recommend which strategy, if any, ought to be adopted.
Answer 25:
Statement showing profit from each strategy
Per Set
Sales ` 80
Variable costs (` 20+10) 30
Contribution 50
Fixed cost per annum ` 8,00,000
Budgeted production: 24,000 sets (i.e. ` 8,00,000 + ` 4,00,000 or ` 12,00,000 ÷ `50)
Strategy Units Contribution Total Fixed Profit
Total per unit contribution cost
1 26,400* ` 46 # ` 12,14,400 ` 8,00,000 `4,14,400

2 28,800* 44 12,67,200 8,00,000 4,67,200
3 30,000* 42 12,60,000 8,00,000 4,60,000
The second strategy should be implemented as the profit (` 4,67,200) is the maximum from this
strategy. However, it is assumed that increase in production will not in any way affect the
variable cost.
* 24,000 sets x 1.1 = 26,400; 24,000 sets x 1.2 = 28,800; 24,000 sets x 1.25 = 30,000
I II III
# ` 80 - (5% of 80) 76 (Reduced S.P.) 74 72
V.C. 30 30 30
46 44 42
Q26
A company presently sells an equipment for ` 35,000. Increase in prices of labour and material
cost are anticipated to the extent of 15% and 10% respectively, in the coming year. Material cost
represents 40% of cost of sales and labour cost 30% of cost of sales. The remaining relate to
overheads. If the existing selling price is retained, despite the increase in labour and material
prices, the company would face a 20% decrease in the existing amount of profit on the
equipment.
You are required to arrive at a selling price so as to give the same percentage of profit on
increased cost of sales, as before. Prepare a statement of profit/loss per unit, showing the new
selling price and cost per unit in support of your answer.
Answer 26:
Statement showing profits under the revised and existing selling price
Existing Revised
Selling price ` 35,000 ` 37,975
Less : Elements of cost*
Materials 9,825 10,808
Labour 7,368 8,473
Overhead 7,368 24,561 7,368 26,649
Profit 10,439 11,326
Profit on cost of sales 42.5% 42.5%
*Working Notes
(i) (a) Existing material cost = 40% of cost of sales
Existing labour cost = 30% of cost of sales
Existing overhead costs = 30% of cost of sales
(b) Anticipated increase in cost of sales would be as under:
Material = 10% of existing 40% = 4%
Labour = 15% of existing 30% = 4.5%
Overheads remain the same Total increase = 4 + 4.5 = 8.5%
(c) Reduction in profit is anticipated at 20%

(d) Suppose x = Cost of sales and
y = Profit
x + y = `35,000 (i)
It is given that increase is equal to 20% of profit
8.5% x = 20% y
X = (0.20/.085)y
By putting the values in (i) we get

(0.20y/0.085y) + y = ` 35,000 or y = ` 10,439
Existing profit (i.e. y) = ` 10,439

Existing cost of sales = ` 35,000 - 10,439 = ` 24,561
Existing material cost = ` 24,561 x 0.40 = ` 9,825
Existing labour cost = ` 24,561 x 0.30 = ` 7,368
Existing overhead cost = ` 24,561 x 0.30 = ` 7,368
24,561
Percentage of existing profit to cost of sales = (10,439 ÷ 24,561) x 100 = 42.5%
(ii) Anticipated cost of sales is as under
Material = 1.10 x ` 9,825 = ` 10,808

Labour = 1.15 x ` 7,368 = 8,473
Overhead = Existing = 7,368
26,649
Anticipated percentage of profit on cost of sales = 42.5%
Hence anticipated profit = ` 26,649 x 0.425 = ` 11,326
Check
Increase in cost of sale = 20% decrease in existing profit
Increase in cost of sales = 26,649 - 24,561 = ` 2,088
20% decrease in existing profit = 20% of 10,439 = ` 2,088
Standard Costing & Variance Analysis
Q27. Compute the sales variances (total, price and volume) from the following figures:
Product Budgeted quantity Budgeted Price per Actual quantity Actual Price per
Unit(`) unit (`)
A 4000 25 4800 30
B 3000 50 2800 45
C 2000 75 2400 70
D 1000 100 800 105
Answer 27:
Working:
Product Budgeted Actual Budgeted Actual Budgeted Standard Sales Actual Sales
Price Price Qty. Qty. Sales (Actual Sales at (`)
(`) (`) (`) Budgeted price)
(a) (b) (c) (d) (e) =(a) x (c) (`) (g) = (b) x (d)
(f) = (a)x(d)
A 25 30 4,000 4,800 1,00,000 1,20,000 1,44,000
B 50 45 3,000 2,800 1,50,000 1,40,000 1,26,000
C 75 70 2,000 2,400 1,50,000 1,80,000 1,68,000
D 100 105 1,000 800 1,00,000 80,000 84,000
5,00,000 5,20,000 5,22,000
Calculation of variances:
(1) Sale Price Variance = Actual Quantity (Actual Price - Budgeted Price)
= Actual Sales - Standard. Sales
= 5,22,000 - 5,20,000 = `2,000 (F)
(2) Sales Volume Variance = Budgeted Price (Actual Quantity Budgeted Quantity)
= Standard Sales (Actual Sale at Standard Price) – Budgeted Sales
= 5,20,000 - 5,00,000 = `20,000 (F)
(3) Total Sales Variance = Actual Sales - Budgeted Sales

= 5,22,000 - 5,00,000 = `22,000 (F)
Verification: Total Sales Variance (`22,000 F) = Sales Price Variance (`2,000 F) + Sales Volume
Variance (`20,000 F)
Q28.
The standard material inputs required for 1,000 kgs. of a finished product are given below:
Material Quantity(in kg.) Standard rate per kg.( `)

P 450 20
Q 400 40
R 250 60
1100
Standard Loss 100
Standard output 1000
Actual production in a period was 20,000 kgs. Of the finished product for which the actual
quantities of material used and the prices paid thereof are as under:
Material Quantity used Purchase price per kg.( `)

(in kg.)
P 10,000 19
Q 8,500 42
R 4,500 65
Calculate the Material Cost Variance, Material Price Variance, Material Usage Variance, Material
Mix Variance and Material Yield Variance. Present reconciliation among the variances.
Answer 28:
Material Actual Actual AQ x AR Standard AQ x SR SP* x SR SQ** x SR
rate(₹) Qty(kg.) (1) Rate(₹) (2) (3) (4)
AR AQ
P 19 10,000 1,90,000 20 2,00,000 1,88,182 1,80,000
Q 42 8,500 3,57,000 40 3,40,000 3,34,545 3,20,000
R 65 4,500 2,92,500 60 2,70,000 3,13,636 3,00,000
8,39,500 8,10,000 8,36,363 8,00,000
Standard production (SP*)
P = 23,000 x (450/1,100) = 9409.09
P = 23,000 x (400/1,100) = 8363.636
P = 23,000 x (250/1,100) = 5227.27
Standard quantity (SQ**) for 20000kg.
P = 450 x 20 = 9,000
P =400 x 20 = 8,000
P = 250 x 20 = 5,000
Calculation of Variances:
Material Price variance = 1 - 2 = 8,39,500 - 8,10,000 = 29,500(A)
Material Mix variance = 2 - 3 = 8,10,000 – 8,36,363 = 26,363(F)
Material Yield variance = 3 - 4 =8,36,363 - 8,00,000 = 36,363(A)
Material Usage variance = 2-4 =8,10,000 - 8,00,000 = 10,000(A)
Material Cost variance = 1-4 =8,39,500 - 8,00,000 = 39,500(A)
Reconciliation
Material Usage variance = Material Mix variance + Material Yield variance
= 26,363(F) + 36,363(A) = 10,000 (A)
Material Cost variance = Material Price variance + Material Usage variance
= 29,500(A) + 10,000(A) = 29,500(A)
Budget and Budgetary Control
Q29.
(a) VC Pvt.Ltd produces and sells a single product. Sales budget for calendar year 2017 by
quarters is as under:
Quarters 1st 2nd 3rd 4th

No. of units to be sold 20,000 24,000 30,000 36,000
The year is expected to open with an inventory of 6,000 units of finished products and close with
inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current
quarter's sales demand plus 30% of the following quarter demand. The budgeted selling price
per unit is `40. The standard cost details for one unit of the product are as follows:
Variable Cost `35 per unit.
Fixed Overheads 2 hours 30 minutes @ `2 per hour based on a budgeted production volume of
1,00,000 direct labour hours for the year. Fixed overheads are evenly distributed throughout the
year.
You are required to:
(i) Prepare Quarterly Production Budget for the year.
(ii) In which quarter of the year, company expected to achieve break-even point.
Answer 29:
(i) Quarterly Production Budget of VC Pvt. Ltd. for the calendar year 2017.
Annual Production
Quarter 1st 2nd 3rd 4th Total
Unit sold 20,000 24,000 30,000 36,000 1,10,000
Total unit sold 1,10,000

Add: Closing stock of finished Product 8,000
Total 1,18,000
Less: Opening stock of finished Product 6,000
Annual Production 1,12,000
Quarterly Production Budget

Particulars 1st 2nd 3rd 4th
70% of current quarter sales 14,000 16,800 21,000 25,200
30% of following quarter sales 7,200 9,000 10,800 8,000
Total 21,200 25,800 31,800 33,200* (WN1)
*Balancing figure
Working Note I:
Total Production in first third quarter =21,200 + 25,800 +31,800 = 78,800 units
4’th Quarter Production = 1,12,000 – 78,800 = 33,200
(ii)
Selling price P.U `40
Variable Cost P.U. `35
C.P.U. `5
Total fixed Cost = 1,10,000 hr x `2 = `2,20,000
B.E.P =(F/C.U.P.) = 2,20,000/5 = 44,000 units
Quarter Sales (units) Cumulative sales
1st 20,000 20,000
2 nd 24,000 44,000(BEP)
3 rd 30,000 74,000
4th 36,000 1,10,000
“BEP will be achieved in 2nd Quarter”
Q30. Short Notes
(a) Perpetual Inventory System
(b) Just in time
(c) VED analysis.
(d) Semi-Variable Overheads
(e) Principal Budget Factor
(f) Performance Budgeting
Answer 30:
(a) Perpetual Inventory System
Perpetual Inventory System may be defined as ‘a system of records maintained by the
controlling department, which reflects the physical movements of stocks and their current
balance’. Perpetual inventory means the system of stock records and continuous stock
taking, where as continuous stock taking means only the physical verification of the stock
records with actual stocks.
To ensure the accuracy of the perpetual inventory records (bin card and Stores ledger),
physical verification of stores is made by a programme of continuous stock taking.
The operation of the perpetual inventory system may be as follows :-
(a) The stock records are maintained and up to date posting of transactions are made
there in so that current balance may be known at any time.
(b) Different sections of the stores are taken up by rotation for physical checking. Every day
some items are checked so that every item may be checked for a number of times
during the year.
(c) Stores received but awaiting quality inspection are not mixed up with the regular stores
at the time of physical verification, because entries relating to such stores have not yet
been made in the stock records.
(d) The physical stock available in the store, after counting, weighing, measuring or listing
as the case may be, is properly recorded in the bin cards / Inventory tags and stock
verification sheets.
(b) Just in time

Just in time (JIT) is a production strategy that strives to improve a business return on
investment by reducing in-process inventory and associated carrying costs. Inventory is seen
as incurring costs, or waste, instead of adding and storing value, contrary to traditional
accounting. In short, the Just-in-Time inventory system focuses on “the right material, at the
right time, at the right place, and in the exact amount” without the safety net of inventory.
The advantages of Just-in-Time system are as follows :-

(a) Increased emphasis on supplier relationships. A company without inventory does not
want a supply system problem that creates a part shortage. This makes supplier
relationships extremely important.
(b) Supplies come in at regular intervals throughout the production day. Supply is
synchronized with production demand and the optimal amount of inventory is on hand
at any time. When parts move directly from the truck to the point of assembly, the
need for storage facilities is reduced.
(c) Reduces the working capital requirements, as very little inventory is maintained.
(d) Minimizes storage space.
(e) Reduces the chance of inventory obsolescence or damage.
(c) VED analysis.

VED stands for Vital, Essential and Desirable- analysis is used primarily for control of spare
parts. The spare parts can be classified in to three categories i.e Vital, Essential and
Desirable- keeping in view the criticality to production.
Vital: The spares, stock-out of which even for a short time will stop the production for quite
some time, and where in the stock-out cost is very high are known as Vital spares. For a car
Assembly Company, Engine is a vital part, without the engine the assembly activity will not
be started.
Essential: The spares or material absence of which cannot be tolerated for more than few
hours or a day and the cost of lost production is high and which is essential for production to
continue are known as Essential items. For a car assembly company ‘Tyres’ is an essential
item, without fixing the tyres the assembly of car will not be completed.
Desirable: The Desirable spares are those parts which are needed, but their absence for
even a week or more also will not lead to stoppage of production. For example, CD player,
for a car assembly company.
Some spares though small in value, may be vital for production, requires constant attention.
Such spares may not pay attention if the organization adopts ABC analysis.
(d) Semi-Variable Overheads

These are a sort of mixed or hybrid costs, partly fixed and partly variable costs. For example
Telephone expenses, include a fixed portion of annual charge plus variable charge
according to the calls. Thus total telephone expenses are semi-variable.
Semi-variable overheads are of two types:-
(i) The expenses which change with the change in volume of output, but the variation cost is
less than proportionate to change in output. Examples are power & fuel, lighting, repairs
and maintenance of buildings, etc.
(ii) The costs tend to remain constant within certain range of output, then jump up and
remain constant for another range and so on.
Semi variable cost needs to be classified into fixed and variable due to the following
reasons:
(a) Effective Cost Control
(b) Decision Making
(c) Preparation of Break-even Charts
(d) Marginal Costing
(e) Method of Absorption Costing
(f) Flexible Budget
Methods of classification of semi variable cost in fixed and variable
(a) Graphical Method
(b) Simultaneous Equations
(d) High and Low Method
(d) Least Square Method
(e) Principal Budget Factor

Budgets cover all the functional areas of the organisation. For the effective implementation
of the budgetary system, all the functional areas are to be considered which are interlinked.
Because of these interlinks, certain factors have the ability to affect all other budgets. Such
factor is known as principle budget factor.
Principal Budget factor is the factor the extent of influence of which must first be assessed in
order to ensure that the functional budgets are reasonably capable of fulfillment. A
principal budget factor may be lack of demand, scarcity of raw material, non-availability of
skilled labour, inadequate working capital etc.
If for example, the organisation has the capacity to produce 2500 units per annum. But the
production department is able to produce only 1800 units due to non-availability of raw
materials. In this case, non-availability of raw materials is the principal budget factor (limiting
factor). If the sales manger estimates that he can sell only 1500 units due to lack of
demand. Then lack of demand is the principal budget factor. This concept is also known as
key factor, or governing factor. This factor highlights the constraints with in which the
organisation functions.
(f) Performance Budgeting

Performance Budgeting is synonymous with Responsibility Accounting which means thus
the responsibility of various levels of management is predetermined in terms of output or
result keeping in view the authority vested with them. The main concepts of such a system
are enumerated below:
(a) It is based on a classification of managerial level for the purpose of establishing a budget
for each level. The individual in charge of that level should be made responsible and
held accountable for its performance over a given period of time.
(b) The starting point of the performance budgeting system rests with the organisation chart
in which the spheres of jurisdiction have been determined. Authority leads to the
responsibility for certain costs and expenses which are forecast or present in the budget
with the knowledge of the manager concerned.
(c) The costs in each individual’s or department’s budget should be limited to the cost
controllable by him.
(d) The person concerned should have the authority to bear the responsibility.
Intermediate
Group I
Paper 7 : DIRECT TAXATION
(SYLLABUS – 2016)
Objectives
1. (a) Multiple Choice Questions:
1. When the shares are held in unlisted company , it is trusted as long term capital
assets when the holding period exceeds
A. 36 months
B. 12 months
C. 6 months
D. 24 months
2. Personal effect do not cover the following
A. Jewellery
B. Immovable property
C. Drawings
D. All of the above
3. TDS on interest on securities is covered under section
A. Section 192
B. Section 192A
C. Section 193
4. Rate of TDS on dividend u/s 194
A. 5%
B. 10%
C. 20%
5. Income of minor child is exempt upto ______.
A. ` 1,000
B. ` 1,500
C. ` 2,500
D. None of the above.
6. The accounts of the political party shall be audited by a __________.
A. Cost Accountant
B. Chartered Accountant
C. Company Secretary
D. None of the above.
7. Loss from specified business covered u/s 35AD can be adjusted against the income
of
A. Any other business income
B. Cannot be adjusted
C. Any income other than salary
D. Income from other specified business
8. ICDS-II stands for _______.
A. Accounting policies
B. Construction Contract
C. Revenue recognition
D. Valuation of inventories
9. ICDS-IV stands for _______.
A. Accounting policies
B. Construction Contract
C. Revenue recognition
D. Valuation of inventories
10. TDS on income of FII from securities
A. 5%
B. 10%
C. 20%
D. 30%
11. TDS on commission other than insurance commission
A. 5%
B. 10%
C. 20%
D. 30%
12. As per ICDS-II ―Valuation on Inventories‖ there recognises _____ costing formulae.
A. 2
B. 3
C. 4
D.5
13. Mr Pankaj, partner of PKJ, is assessable as
A. Firm
B. Individual
C. HUF
D.None of the above
14. In case of local authority the return of income is verified by
A. Karta
B. Managing director
C. Principal officer
D. Partner
15. In case of self occupied house property, following category of person are
considered.
A. All assessee
B. All assessee other than company
C. All Assessee other than HUF
D. Individual and HUF
16. Amortization of preliminary expenses has been restricted to ___ of the cost of project.
A. 2%
B. 3%
C. 5%
D. 8%
17. Unabsorbed business losses cannot be carried forward for more than
A. 5 A.Y
B. 6 A.Y
C. 8 A.Y
D. 10 A.Y
18. Coverage of best judgment assessment is under which section.
A. 143
B. 139(1)
C. 147
D. 144
19. Monetary limit for exemption in the case of encashment of earned leave on
superannuation received by private sector employee is
A. 1 Lakh
B. 2 Lakh
C. 3 Lakh
20. Deduction is not allowed to the assessee while computing income from other sources
for
A. Direct Tax
B. Interest payable outside India without TDS
C. Personal expenditure
D. All of the above
Answer:
Sl/No. Answer
1. D
2. D
3. C
4. B
5. B
6. B
7. D
8. D
9. C
10. B
11. A
12. B
13. B
14. C
15. D
16. C
17. C
18. D
19. C
20. D
1.(b). Fill in the blanks:
1. Failure to apply for PAN or to quote PAN in prescribed documents attracts penalty of
` ______ u/s 272B.
2. ___________ means the transfer of one or more undertaking for a lump sum
consideration without assigning values to the individual assets and liabilities in such
sales.
3. ________ on sale of equity share through stock exchange is exempt u/s 10(38).
4. ___________ available for donations made to Research Associations.
5. Form _____ is to be used for filling the return of income by an individual having
business income.
6. The maximum limit for deduction u/s 80TTA is ` ________.
7. Salary forgone is _________ in computing the income from salaries in the hands of the
concerned employee.
8. Advance tax is required to be paid by all assessee only if estimated advance tax
liability is ` _______ or more.
9. Rebate u/s 87A is available only if the income doesn’t exceed ` _______.
10. ________ Company means a company which is not a domestic company.
Answer:
Sl/No. Answer
1. ` 10,000
2. Slump sale
3. Long term capital gain
4. Section 80GGA
5. Form no.3
6. `10,000
7. taxable
8. ` 10,000
9. ` 3,50,000
10. Foreign company
1.c. Match the followings:
Column I Column-II
1. Rounding of Total Income A Section 87A
2. Failure to apply PAN B Section 44A
3. Entry No 46 of State List C Section 139AA
4. Rebate D ` 10,000 u/s 272B
5. Quoting of Aadhaar number E Taxes on Agricultural Income
6. Scrutiny Assessment F Section 87A
7. ICDSX G Section 143(3)
8. Maintenance of books of H 30% Plus Surcharge, Education
account. cess and SHEC
9. Rate of TDS on winning from I Contingent Assests
lotteries for Non Resident
10. Rounding of tax J Section 288A
Answer:
Sl/No. Answer
1. J
2. D
3. E
4. A
5. C
6. G
7. I
8. B
9. H
10. F
1.d. State whether the following statement is true or false.

1. Every person shall intimate the Assessing Officer (A.O), in the prescribed manner, any
change in his address or in the name & nature of his business on his business on the
basis of PAN was allotted to him.
2. The provision of Alternate Minimum Tax (AMT) shall not apply to an individual or an
AOP or a BOI, whether incorporated or not, or an artificial judicial person, if the
adjusted total income of such person doesn’t exceed ` 20 lakh.
3. ICDS-1 stands for valuation of inventory.
4. A return furnished without paying self assessment tax and interest, if any shall be
treated as defective return.
5. Apart from TDS another device applied for quicker collection of tax is Tax collection
at source (TCS) u/s 141.
6. Deduction in respect of interest on loan taken for education is covered under section
80U.
7. Unabsorbed business loss cannot be carried for more than 7 assessment year.
8. Unabsorbed deprecation can be carried forward for any number of the years.
9. A person is deemed to have substantial interest in a company if he is the owner of at
least 51% of equity capital of the company.
10. Long term capital gain on sale of equity share through stock exchange is exempt
under section 10(38).
Answer:
Sl/No. Answer
1. True. Section 139A(5)(d)
2. True. Section 115JC
3. False. Accounting Policies
4. True.
5. False. Section 206C
6. False. Section 80E
7. False. 8 Assessment Year
8. True.
9. False. 20% holding is required
10. True.
Income Which do not form part of Total Income
Question No.: 2
Exemption of long-term capital gain arising from sale of shares and units [Section 10(38)].
Answer: Any income arising from the transfer of a long-term capital asset, being an equity share
in a company or a unit of an equity oriented fund or unit of a business trust shall be exempt
provided—
(a) the transaction of sale of such equity share or unit is entered into on or after 1 -10-2004, and
(b) such transaction is chargeable to securities transaction tax (STT). However, for a transaction
undertaken on a recognised stock exchange located in any International Financial Services
Centre, STT is not required to be paid.
Exemption under section 10(38) shall not be allowed if STT was not paid on the equity shares
which have been acquired on or after 1.10.2004. However, the Central Government may give
exemption in certain cases by notification even if STT was not paid at the time of acquisition of
such shares.
In other words, exemption of income arising on transfer of equity share acquired or on after
1.10.2004 shall be available only if the acquisition of share is chargeable to Securities Transactions
Tax.
"Equity oriented fund" means a fund—
(i) where the investible funds are invested by way of equity shares in domestic companies to
the extent of more than 65% of the total proceeds of such fund; and
(ii) which has been set up under a scheme of a Mutual Fund specified under clause (23D):
The percentage of equity share holding of the fund shall be computed with reference to the
annual average of the monthly averages of the opening and closing figures.
Residential Status
Question No.: 3
Indian citizen and businessman Shri Pankaj, who resides in Jaipur, went to Germany for purposes
of employment on 15.8.2017 and came back to India on 10.11.2018. He has never been out of
India in the past.
(a) Determine residential status of Shri Pankaj for the assessment year 2018-19.
(b) Will your answer be different if he had gone on a leisure trip?
Answer:
(a) The previous year for the assessment year 2018-19 is 2017-18. During this period he was in
India for 137 days (30 + 31 + 30 + 31 + 15 i.e. from 1.4.2017 to 15.8.2017). As he is not in India
for 182 days, he does not satisfy the first condition of category (A).
The second condition of category (A) is not applicable in his case as he is a citizen of India
and leaves India during the previous year for employment outside India.
Therefore, he is a non-resident. Conditions of category (B) need not be examined.
(b) When he had gone for a leisure trip: In this case, although he does not satisfy the first
condition of category (A), he satisfies the second condition as he was in India for more than
60 days in the relevant previous year i.e. 2017-18 and was also here for more than 365 days
during four preceding previous years (i.e. previous year 2012-13 to 2016-17). He is therefore,
resident in India. The exception will not be applicable to him because he did not leave India
for the purpose of employment. He satisfies both the conditions of category (B) because he
has always been in India before 15.8.2017.
The status of the assessee for the assessment year 2018-19 will in this case be resident and
ordinarily resident in India.
Question No.: 4
The following is the income of Shri Amit for the previous year 2017-18:
Particulars `
(a) Profits from business in Iran received in India. 5,00,000
(b) Income from house property in Iran received in India. 1,20,000
(c) Income from house property in Sri Lanka deposited in a bank there. 1,80,000
(d) Profits of business established in Sri Lanka deposited in a bank there, this 2,00,000
business is controlled in India (out of ` 2,00,000 a sum of ` 1,00,000 is remitted
in India).
(e) Income from profession in India but received in England. 2,40,000
(f) Profits earned from business in Kanpur. 1,60,000
(g) Income from agriculture in England, it is all spent on the education of children 2,70,000
in London.
From the above particulars ascertain the taxable income of Shri Amit for the previous year 2017-
18, if Shri Amit is
(i) a resident and ordinarily resident,
(ii) not ordinarily resident, and
(iii) a non-resident.
Answer:
Taxable Income of Shri Amit for the previous year 2017-18
Particulars R&OR (`) NOR (`) NR (`)

(1) Income received in India wherever accrues
(i) Profit from business in Iran received in India. 5,00,000 5,00,000 5,00,000
(ii) Income from house property in Iran received in India. 1,20,000 1,20,000 1,20,000
(2) Income accrued in India wherever received
(i) Profit earned from business in Kanpur 1,60,000 1,60,000 1,60,000
(ii) Income from profession in India but received in 2,40,000 2,40,000 2,40,000
England.
(3) Income accrued and received outside India
(i) Income from house property in Sri Lanka deposited in 1,80,000 --- ---
bank there.
(ii) Profit of business established in Sri Lanka 2,00,000 2,00,000 ---
(iii) Income from agriculture in England 2,70,000 --- ---
Total Income 16,70,000 12,20,000 10,20,000
Question No.: 5 PKJ earns the following income during the financial year 2017-18:
Particulars `
(a) Interest from an Indian company received in London. 1,20,000
(b) Pension from former employer in India received in USA. 1,80,000
(c) Profits earned from a business in Paris which is controlled in India, half of the 2,00,000
profits being received in India.
(d) Income from agriculture in Bhutan and remitted to India. 1,25,000
(e) Income from property in England received there. 4,00,000
(f) Past foreign income brought to India. 10,000
Compute his income for the assessment year 2018-19 if he is:
(i) Resident and ordinarily resident in India.
(ii) Not ordinarily resident in India.
(iii) Non-resident in India.
Answer:
Particulars Resident and Not Non resident

Ordinarily ordinarily
resident resident
` ` `
(1) Income deemed to accrue/arise in India
Interest from Indian Company. 1,20,000 1,20,000 1,20,000
Pension from employer in India. 1,80,000 1,80,000 1,80,000
(2) Income received in India
50% of profits of business in Paris. 1,00,000 1,00,000 1,00,000
(3) Income earned and received outside India, from a
business controlled from India
50% of profits of business in Paris. 1,00,000 1,00,000 —
(4) Income earned and received outside India other
than (3)
Income from Agriculture in Bhutan. 1,25,000 — —
Income from Property in England. 4,00,000 — —
10,25,000 5,00,000 4,00,000
Past foreign income is not to be included because it is not the income of the previous year 2017-18.
Income under Head Salaries
Question No.: 6
Compute his income under the head salary of PKJ the assessment year 2018-19 from the
following information submitted to you:
Sl. No. Particulars `

1. Basic Salary 20,000 p.m.
2. D.A. (60% of which is part of retirement benefits) 10,000 p.m.
3. Children education allowance (for two children) 200 p.m. per child
4. Free lunch for 300 days in the office during office hours 80 per meal
5. Reimbursement of expenses incurred on credit card provided 10,000
by the employer
6. Gift of Titan watch 12,000
7. Rent free unfurnished accommodation at Delhi, the fair rent value of which is ` 84,000
p.a.
8. Motor car of 1.8 litre with driver both for official and private purposes
9. Watchman facility by the employer. Wages of watchman paid by employer 1,000 p.m.
10. Telephone facility at his residence. The employer has incurred expenses of ` 15,000 for
the same.
Answer: Computation of income under the head salary of PKJ for the assessment year 2018-19
Particulars ` `
Basic salary (20,000 x 12) 2,40,000
D.A. 1,20,000
Children education allowance (200 x 2 x 12) 4,800
Less: Exempt (100 x 2 x 12) 2,400 2,400
Free lunch (` 80 - 50 = 30 x 300) 9,000
Credit card expenses reimbursed 10,000
Value of gift in kind (12,000 - 5,000) 7,000
Motor car (` 2,400 + 900 = 3,300 x 12) 39,600
Watchman (1,000x12) 12,000
Telephone facility Tax free
Rent free unfurnished accommodation 15% of salary ` 3,14,400 (` 47,160

2,40,000 + 72,000 + 2,400)
Gross Salary 4,87,160
Less: Deduction Nil
Income under the head salary 4,87,160
Note: Telephone facility shall be a tax free perquisite.
Question No.: 7
P, a Director of XYZ Pvt. Ltd. Pune is offered an employment with the following two alternative
packages:
Particulars I (`) II (`)

Basic Pay per annum 1,38,000 1,38,000
Conveyance allowance for private use 9,000 —
Motor car facility for private use of P and his family members (valued) — 9,000
Entertainment Allowance 18,000 —
Club facility (Valued) — 18,000
Children Education Allowance (for 2 children) 9,700 —
Free Education Facility in an institution run by the employer for Children 9,700
(Valued)
Rent Free unfurnished house with fair rental value 30,000 30,000
Which of the two packages should P opt for on the assumption that both employer and
employee will contribute 20% of the basic pay towards an unrecognised provident fund? Assume
the population of Pune is more than 25 lakhs as per 2001 census.
Answer:
The Taxable Income of P under the two options will be as under:
Particulars I (`) II (`)

Basic pay per annum 1,38,000 1,38,000
Conveyance allowance for private use 9,000 —
Motor car facility for private use of P and his family members — 9,000
Entertainment allowance 18,000 —
Club facility — 18,000
Children education allowance (9,700 - 2,400) 7,300 —
Free education facility for children — —
Rent free unfurnished house 25,845 20,700
1,98,145 1085,700
Less: Deduction Nil Nil
Income from Salary 1,98,145 1,85,700
As the taxable income under the second package is less therefore, P should opt for the second
package.
Question No.: 8
Mrs. Z has the following income during the previous year 2017-18:
Sl. No. Particulars `

1 Salary 3,10,000
2 Dearness Allowance (forming part of salary for retirement benefits) 72,000
3 Medical Allowance (Actual expenditure ` 28,000) 30,000
4 Education Allowance (for three children) 5,200
5 Rent free house in Delhi for which Z Ltd., the employer, paid ` 5,000 per month as rent.
The house is equipped with rented furniture. The rent of the furniture is ` 3,000 per month.
6 The employer had provided her a domestic servant, a sweeper and a watchman. The
employer paid ` 500 per month to each.
7 The employer spent ` 2,500 on her refresher course.
8 The employer paid her telephone bills of 22,200
9 Profession tax paid by Mrs. Z 1,200
Compute her taxable income for the assessment year 2018-19 assuming that she has no other
income.
Answer:
Particulars ` `
(i) Salary 3,10,000
(ii) Dearness Allowance 72,000
(iii) Medical Allowance 30,000
(iv) Education Allowance 5,200
Less: Exempt (`100 x 2 x 12) 2,400 2,800
Perquisites:
(i) Value of rent free furnished house 96,000
(ii) Domestic servant @ ` 200 p.m. 6,000
(iii) Sweeper @ ` 200 p.m. 6,000
(iv) Watchman @ ` 200 p.m. 6,000
Less: Professional tax u/s 16(iii) 1,200
Net income from salary 5,27,600
1. Medical allowance is fully taxable irrespective of the actual expenditure.
2. Salary for purpose of rent free accommodation is ` 3,10,000 + ` 72,000 (DA) + ` 30,000
(Medical Allowance) + ` 2,800 (Education Allowance) i.e. 4, 14,800.
3. Valuation of rent free accommodation is 15% of ` 4,14,800 i.e. ` 62,220 or ` 60,000 whichever
is less. To this add ` 36,000 for furniture.
4. Amounts spent on refresher course and telephone bills are exempted perquisites.
Question No.: 9.a.
Mr. K. Sikri is Asstt. Manager of a Textile Company of Jaipur, since 1991. He has submitted the
following particulars of his income for the financial year 2017-18:
(i) Basic salary ` 2,40,000.

(ii) Dearness Allowance ` 5,000 per month (` 200 p.m. enters into retirement benefits).
(iii) Education allowance for two children at ` 150 p.m. per child.
(iv) Commission on sales 1% of turnover of ` 10,00,000.
(v) Entertainment allowance ` 700 p.m.
(vi) Travelling Allowance for his official tours ` 30,000. The entire amount is spent on the official
tour.
(vii) He was given cloth worth ` 1,000 by his employer free of cost.
(viii) He resides in the flat of the company. Its market rent is ` 12,000 p.m. A watchman and a
cook have been provided by the company at the bungalow who are paid ` 400 per month
each.
(ix) He has been provided with a motor car of 1.8 ltr. engine capacity for his official as well as
personal use. The running and maintenance costs are borne by the Company.
(x) Employer's contribution to R.P.F. is ` 40,000 and the interest credited to this fund at 13% rate
amounted to ` 16,250.
(xi) Contribution by Sikri to recognised provident fund ` 40,000.
(xii) Rent of house recovered from Sikri ` 1,500 p.m.
(xiii) Tax deducted at source from the above payments ` 6,000.
Compute income from salaries for the assessment year 2018-19. Assume the population of Jaipur
is 26 lakhs as per 2001 census.
Answer:
Particulars ` `
Basic Salary 2,40,000
Dearness Allowance @ ` 5,000 p.m. 60,000
Education Allowance 3,600
Less: Exempt 2,400 1,200
Commission on Sales 10,000
Entertainment Allowance @ 700 p.m. 8,400
Travelling Allowance 30,000
Less: Amount actually spent 30,000 Nil
Cloth given free of cost (tax free perquisites as it does not exceed ` 5,000) —
Value of accommodation at concessional rate: 15% of salary of ` 39,300
2,62,000
Less: Rent deducted 18,000 21,300
Value of facility of cook @ ` 400 p.m. 4,800
Value of facility of watchman @ ` 400 p.m. 4,800
Value of car facility (` 2,400 x 12) 28,800
Employer's contribution to RPF 40,000
Less: 12% of salary i.e. of ` 2,52,400 30,288 9,712
Interest credited to RPF 16,250
Less: Exempt 9.5% p.a. 11,875 4,375
Less: Deduction u/s 16 Nil
Income from Salary 3,93,387
1. Commission on sales has been taken to be a part of salary as it is a fixed percentage on
turnover.
2. Salary for purpose of accommodation will include Basic ` 2,40,000, DA ` 2,400, Education
Allowance ` 1,200, Commission ` 10,000, Entertainment Allowance ` 8,400.
Income under Head House Property
Question No.: 9.b.
Mr. Pankaj has a house property in Cochin. The house property has two equal dimension
residential units. Unit 1 is self occupied throughout the year and unit 2 is let out for 9 months for `
10,000 p.m. and for remaining 3 months it was self-occupied. Compute his taxable income from
the following details:
Municipal value ` 2,00,000, Fair Rent ` 1,60,000, Standard rent ` 3,00,000, Municipal tax 10%
(60% paid by assessee), Interest on loan ` 40,000, Expenditure on repairs ` 20,000.
Answer:
Working
1. Computation of Gross Annual Value (GAV)

Particulars Working Unit 1 Unit 2
Municipal Value 1:1 1,00,000 1,00,000
Fair Rent 1:1 80,000 80,000
Standard Rent 1:1 1,50,000 1,50,000
Reasonable Expected Rent Higher of MV & FR (RER cannot exceed SR) Nil 1,00,000
Actual Rent Receivable ` 10,000 * 9 -- 90,000
Gross Annual Value Higher of Step 1 & 2 Nil 1,00,000
2. Municipal tax = 10% of ` 2,00,000 = ` 20,000 being divided in the ratio 1:1 between Unit 1 and
Unit 2. Out of such Municipal tax only 60% is paid, therefore, Municipal tax allowed as
deduction in case of Unit 2 is only ` 6,000 [i.e. ` 20,000 * ½ * 60%].
3. Interest on loan is divided in unit A and unit B in 1:1 as both units are of equal dimension.
Computation of income from house property of Mr. Pankaj for the A.Y. 2018-19
Unit 1 Unit 2
Particulars Working
Details Amount Details Amount
Gross Annual Value 1 Nil 1,00,000
Less: Municipal Tax 2 Nil 6,000
Net Annual Value Nil 94,000
Less: Deduction u/s
24(a) Standard Deduction Nil 28200
24(b) Interest on loan 3 20,000 20,000 20000 48,200
Income from house property (-) 20,000 45,800
Conclusion: Income under the head Income from house property is ` 25,800 (being ` 45,800 – `
20,000).
Income under Head Capital Gain and Clubbing of Income
Question No.: 10.a.
A acquired a plot of land on 15.6.2003 for ` 18,50,000, which was ` 65,00,000. The expenses of
transfer were ` 1,00,000.
A made the following investments on 4.2.2018 from the proceeds of the above plot:
1. Bonds of Rural Electrification Corporation Ltd. redeemable after a period of 3 years `

12,00,000.
2. Deposits under Capital Gain Scheme for purchase of a residential house as he does not own
any house ` 10,00,000.
Compute the Capital Gain chargeable to tax for the assessment year 2018-19.
Answer:
Assessment year 2018-19
Particulars Amount (`) Amount (`)

Total consideration 65,00,000
Less: (i) Expenses of transfer 1,00,000
272 46,16,514 47,16,514
(ii) Indexed cost of acquisition —` 18,50,000 ×
109
Long-term capital gain 17,83,486
Less: Exemption u/s 54EC 12,00,000
Exemption u/s 54F (` 17,83,486 × 10,00,000/65,00,000) 2,74,382 14,74,382
Taxable long-term capital gain 3,09,104
Question No.: 10.b.
Mrs Nikita Jaiswal received the following amounts during the financial year 2017-18.
Particulars Amount (`)

Family Pension (10,000 x 12) 1,20,000
Income of minor child 49,000
Accumulated balance in PF of her husband after his death 1,00,000
Gratuity received after the death of husband 1,00,000
Calculate taxable income of Mrs. Nikita Jaiswal and tax liability for the A.Y 2018-19.
Answer:
Computation of taxable income of Mrs Nikita Jaiswal for the A.Y 2018-19
Amount (`) Amount (`)

Less: Deduction Nil 5,30,000
Income from other sources
Family Pension 1,20,000
Less: Deduction u/s 56 15,000 1,05,000
1/3 or ` 15,000 whichever is lower
Income of minor child 49,000
Less: Exemption u/s 10(32) 1,500 47,500
Gross Total Income 6,82,500
Tax Payable 49,000
Add: Education cess and SHEC @ 3% 1,470
Tax Rounded off (288 B) 50,470
Note:
Accumulated balance in PF and amount of gratuity received after the death of husband is
exempt from tax as it is assumed to be within the limit prescribed by section 10(10).
Set off and carry forward of Income
Question No.: 11.a
A sold on 31.10.2017 an agricultural land, which he has been using for agricultural purposes for
several years, for ` 30,00,000. He acquired that land in 1978 for ` 1,00,000. The market value of
such land as on 1.4.2001 was ` 8,50,000. He purchased rural agricultural land for ` 3,50,000 on
25.2.2018 which was sold for ` 5,00,000 on 15.5.2018. Further, a sum of ` 5,50,000 was invested by
him in purchase of residential property on 25.5.2018. He owned only one house property before
this date. The new house property was sold on 31.8.2018 for ` 6,50,000. Compute capital gain for
assessment year 2018-19 and assessment year 2019-20.
Answer:

Value of consideration 30,00,000
272 23,12,000
Less: Indexed cost of acquisition — ` 8,50,000 ×
100
6,88,000
Less: Capital gain exempt u/s 54B 3,50,000
688000 1,26,133 4,76,133
u/s 54F (` 5,50,000 × )
3000000
Particulars Amount
Sale price of house property 6,50,000
Less: Cost of acquisition 5,50,000
Short-term capital gain 1,00,000
(1) ` 1,26,133 exempt earlier u/s 54F shall also be taxable as long-term capital gain in the
previous year 2018-19 i.e., the year of sale of new house property.
(2) There will be no capital gain on the transfer of rural agricultural land although sold within 3
years from the date of its acquisition, as it is not a capital asset for capital gain purposes.
Question No.: 11.b.
From the following details, compute the Gross Total Income of Pankaj for the Assessment Year
2018-19.
`
Taxable Income from salary 2,80,000
Income from house property
House A(Let out) (-)2,95,000
House B (Self occupied, interest on borrowed capital) (-)9,000
Short term capital gain 12,000
Loss from long term assets 25,000
Interest on securities 10,000
Answer:
` `
Taxable income from salary 2,80,000
Less: Loss under the head house property set off 2,00,000 80,000
House A(Let out) (-)2,95,000
House B Self occupied (-)9,000
(-)3,04,000
Less: Set off from salary 2,00,000
Loss to be allowed to the maximum of ` 2,00,000, balance 1,04,000 Nil
carried forward
Income from capital gain
Short term capital gain 12,000
Long term capital loss to be carried forward (not allowed to (-)25,000
be sett off from STCG)
Interest on securities 10,000
Loss from long term capital assets cannot be set off against short term capital gain or income
under head of income. Such a loss of ` 25,000 which could not be adjusted in the A.Y 2017-18
will be carried forward to the subsequent A.Y. Loss from House property amounting ` 1,04,000
shall be carried forward.
Deductions under chapter VIA
Question No.: 12.a
R enters into a partnership with G on 1.5.2017 to start an export business. The following assets
have been introduced by R as his capital contribution which he was using in his business earlier:
(A) Land; (B) Plant and Machinery
The particulars of the above assets are given below:
Particulars Land Plant and Machinery

Date of Acquisition 6.6.1978 7.7.1991
Amount (`) Amount (` )
Fair Market Value as on 1.5.2017 10,00,000 5,00,000
Amount recorded in the books of accounts 7,40,000 7,00,000
Cost of acquisition 30,000 —
WDV of Plant & Machinery as on 1.4.2017 — 3,00,000
Fair Market Value as on 1.4.2001 2,10,000 —
On 25.3.2018 he purchased a residential house property for ` 4,20,000. The said property was
sold on 28.3.2020 for ` 7,00,000. Compute the capital gain for various assessment years.
Assume CII of financial year 2019-20 shall be 300.
Answer: Assessment year 2018-19
Particulars Land Amount (`) Plant &

Machinery
Amount (`)
Full Value of consideration (Amount recorded in books of
accounts)
7,40,000 7,00,000
272 5,71,200
Less: Indexed cost of acquisition — ` 2,10,000 ×
100
Cost of acquisition (WDV as on 1.4.2017) — 3,00,000
Long-term capital Gain 1,68,800 —
Short-term capital Gain — 4,00,000
420000 95,805 ---
Less: Capital gain exempt: U/s 54F (` 1,68,800 × )
740000
Long-term capital gain/Short-term Capital Gain 72,995 4,00,000

Sale price of residential house property 5,00,000
Less: Indexed cost of acquisition (assume CII of 2019-20 is 300) (` 4,20,000 x 4,63,235
300/272)
Long-term capital gain (as the house property is sold after 24 months) 36,765
In addition, ` 95,805 exempt u/s 54F earlier will be taxable as LTCG in the assessment year 2020-
21.
Question No.: 12.b.
Mr. Amit (38 years) has incurred following expenses:

Particulars `
Mediclaim Insurance premium paid for himself 9,000
Mediclaim Insurance premium paid for spouse 8,000
Mediclaim Insurance premium paid for dependent children 6,000
Mediclaim Insurance premium paid for father (62 years) 18,000
Preventive health-check up expenditure for father 6,000
Preventive health-check up expenditure for himself (paid in cash) 4,000
Answer:
Computation of deduction u/s 80D available to Mr. Amit

Particulars Amount Amount
Mediclaim Insurance premium paid for himself 9,000
Mediclaim Insurance premium paid for spouse 8,000
Mediclaim Insurance premium paid for dependent children 6,000
Qualifying amount (A) 23,000
Add: Additional deduction for parents
Mediclaim Insurance premium paid for father (B) 18,000
Add: Expenditure incurred for preventive health check up Incurred Max. Limit
Preventive health-check up expenditure for father Max. 6,000 5,000
limit
Preventive health-check up expenditure for himself [` 25,000 4,000 2,000
– (A)]
7,000
Restricted to overall maximum limit for preventive health check ups (C) 5,000
Deduction u/s 80D (A + B + C) 46,000
Question No.: 13
R acquired shares of G Ltd., on 15.12.2008 for ` 8,00,000 which were sold on 15.5.2017 for `
19,50,000. Expenses of transfer were ` 20,000. He invests ` 3,00,000 in the bonds of Rural
Electrification Corporation Ltd. on 16.10.2017.
(a) Compute the capital gain for the assessment year 2018-19.
(b) State the period for which the bonds should be held by the assessee. What will be the
consequences if such bonds are sold within the specified period?
(c) What will be the consequences if R takes a loan against the security of such bonds?
Answer:

(a) Sales consideration 19,50,000
Less: (i) Expenses of transfer 20,000
272 15,88,321 16,08,321
(ii) Indexed cost of acquisition — ` 8,00,000 ×
137
Less: Exemption under section 54EC 3,00,000
Taxable long-term capital gain 41,679
(b) R should not transfer or convert (otherwise then transfer) into money such bonds within 3
years from the date of their acquisition.
If these bonds are transferred or converted into money within 3 years, capital gain of `
3,00,000 exempt under section 54EC earlier, will be long-term capital gain of the previous
year in which such asset is transferred or converted into money.
(c) If any loan is taken against the security of such bonds, it will be treated as if it is converted
into money as such capital gain exempt earlier on such bonds, shall be long-term capital
gain of the previous year in which such loan is taken against the security of such bonds.
Income under Head Profit and Gains of Business or Profession
Question No.: 14

Depreciated value of the block of assets (consisting of Plants A, B and C) on 1.4.2017 14,80,000
Addition of eligible Plant D made on 1.9.2017 (it is put to use on 8.9.2017) 1,60,000
Cost of eligible Plant E purchased on 24.12.2017 3,10,000
Sale proceeds of Plant A (sold on 3.3.2018) which was originally purchased on 16,30,000
1.4.2008 for 1,20,000
Assuming that the assessee is an industrial undertaking and rate of depreciation is 15%, find out
the admissible depreciation and income under the head 'Capital gains' for the assessment year
2018-19.
Answer:
Block- Plant 15%:

Written down value of block as on 1.4.2017 14,80,000
Add: Additions during the previous year
Plant D (for 180 days or more) 1,60,000
Plant E (for less than 180 days) 3,10,000 4,70,000
19,50,000
Less: Assets sold during the previous year Plant A 16,30,000
Written down value as on 31.3.2018 3,20,000
Less: Normal depreciation
On ` 3,10,000 × 7.5% 23,250
On ` 10,000 × 15% 1,500
24,750
Add: Additional depreciation
On ` 1,60,000 @ 20% 32,000
On ` 3,10,000 @10% 31,000 87,750
WDV as on 1.4.2018 2,32,250
No capital gain on sale of plant A because sale proceeds are less than the written down value
of block of asset. Hence no short-term capital gain u/s 50(2).
Question No.: 15
Sri Sagar is the owner of a business. Following is his P&L A/c for the year ended on 31.3.2018:
Profit and Loss Account for the year ended 31.03.2018
Dr. Cr.

(`) (`)
Establishment charges 5,110 Gross profit 50,870
Rent, rates and taxes 2,900 Interest on Govt. Securities (Gross) 5,350
Sundry expenses 7,050 Rent from property 5,400
Household expenses 1,880
Provision for bad debts 1,200
Loss on sale of motor car (used for 1,800
private purpose)
Insurance premium (including life 2,880
insurance of ` 1,790)
Interest on bank loan 1,380
Provision for Depreciation 6,400
Net profit 31,020
61,620 61,620
Additional information:
(i) Bad debts written off during the year — ` 650
(ii) Admissible depreciation as per Income-tax rules — ` 1,600
(iii) The assessee is running his business in a rented property, half of which is used by him for his
own residence. Rent of ` 2,400 in respect of entire house is included in rent, rates and taxes.
The balance of ` 500 is on account of municipal tax paid for property given on rent.
Compute the Gross Total Income of Shri Sagar for the assessment year 2018-19.
Answer:
Particulars ` `
Rent received 5,400
Less: Municipal taxes 500
4,900
Less: Standard deduction @ 30% 1,470
3,430
Profit and Gains from Business or Profession
Profit as per P&L Account 31,020
Add: Inadmissible expenses
Rent (50% for personal use) 1,200
Household expenses 1,880
Provision for bad debts 1,200
Loss on sale of car 1,800
Life insurance premium 1,790
Provision for depreciation 6,400
M. Taxes for let out house property 500 14,770
Less: Expenses allowed but not debited to P&L A/c. 45,790
Bad debts 650
Depreciation 1,600 2,250
43,540
Less: Incomes not taxable under this head but credited to P&L A/c. 5,350
Interest on govt. securities
Rent from property 5,400 10,750
Income from Business 32,790
Income from other sources:
Interest on Govt. securities 5,350
Gross Total Income (3,430 + 32,790 + 5,350) 41,570
Assessment of Cooperative Societies
Question No.: 16.a.
Shri Pankaj is practicing as a Chartered Accountant in Delhi. He deposits all receipts in his bank
account and pays all expenses by account payee cheque. Following is the analysis of his bank
account for the year ending 31.3.2018:
Particulars (`) Particulars (`) (`)

Balance b/f 7,250 Salaries 30,14,000
Professional Receipts 51,40,000 Rent of Chamber 6,84,500
Dividend from U.T.I. 8,000 Professional Expenses 23,000
House Rent 22,500 Telephone Expenses 51,000
Horse race Income (Gross) 12,000 Misc. Office Exp. 55,500
Share of Income in HUF 6,750 Motor car exp. 8,000
Loan from wife for Purchase of car 1,00,000 Purchase of car 1,15,000
Advance Income-tax 40,000
Donation to Delhi 10,000
University
Personal Expenses 45,500
House Property Exp.
Taxes 5,000
Repairs 1,500
Insurance 1,500
Collection Charges 2,000 10,000
Balance c/d 12,40,000
52,96,500 52,96,500
Compute the Gross Total Income of Shri Pankaj after taking into account the following:
(i) 1/4th of the motor car expenses relate to personal use

(ii) Car was purchased on 15.6.2017 and rate of depreciation on car is 15%.
(iii) He stays in his house, the municipal value of which is ` 8,000. Following are the expenses
which have been included in the above account in respect of this house: Insurance premium
` 500; Municipal tax ` 2,400.
Answer:
Computation of Gross Total Income of Shri Pankaj for the assessment year 2018-19
Particulars Amount (`) Amount (`) Amount (`)
Income from house property:
Annual Value (Rent received) 22,500
Less: Municipal taxes 2,600
Net Annual Value 19,900
Less: Standard deduction 30% 5,970 13,930
Profit and Gains from Business or Profession:

Professional receipts 51,40,000
Less: Expenses incurred
Salary 30,14,000
Rent of chamber 6,84,500
Audit fee 23,000
Telephone expenses 51,000
Misc. Office exp. 55,500
3 6,000
Motor car expenses ( th of ` 8,000) to be allowed
4
15 3 12,938 38,46,938 12,93,062
Depreciation on car (` 1,15,000 × × )
100 4
Income from other sources:

Dividend from U.T.I. Exempt
Horse racing income 12,000 12,000
1. Income from self-occupied house property shall be Nil.

2. Donation to Delhi University can be claimed under section 80G.
Question No.: 16.b.
AD Consumer Co-operative Society furnishes the following particulars of its income in respect of
financial year ended on 31-3-2018, find tax liability of the co-operative society.
`
Income from business 2,50,000
Interest received on company deposits 50,000
Interest on deposit with banks 10,000
Income from letting of godown for storage of commodities (computed) 20,000
Answer:
Computation of taxable income of AD Consumer Co-operative Society for the A.Y. 2018-19
Particulars Amount Amount

Income from letting of godown for storage of commodities 20,000
Profit and gains from business or profession 2,50,000
Interest received on company deposits 50,000
Interest on deposit with banks 10,000 60,000
Gross total income 3,30,000
Less: Deduction u/s 80P
Income from letting of godown for storage of commodities 20,000
Income from activity other than specified activity (consumer co-operative 1,00,000 1,20,000
society)
Total income 2,10,000
Tax liability (including education cess) 61,800
Question No.: 17
Shri Pankaj furnished the following information relevant for the assessment year 2018-19:
Profit & Loss A/c for the year ending 31.3.2018
Dr. Cr.
Particulars Amount (`) Particulars Amount (`)
Household expenses 11,200 Gross Profit 2,69,000

Bad debts 600 Commission 5,000
Provision for bad debts 4,800 Sundry receipts 8,000
Fire insurance 1,000 Bad debts recovered 2,000
(earlier allowed as deduction)
Salary to Staff 8,000 Interest on Govt. securities 17,000
Salary to Raman 3,000
Contribution towards Unrecognised 32,000
Provident fund
Interest on overdraft from bank 6,000
Interest on capital 13,000
Interest on loan given by Raman's 1,000
brother
Depreciation on building and 13,600
furniture
Advertisement Revenue expenses 3,800
Expenses on Neon sign board 1,000
General expenses 4,700
Net profit 1,97,300
3,01,000 3,01,000
Other information
1. General expenses include personal expenses of ` 1,700.

2. Business income of ` 3,000, accrued during previous year ending 31.3.2018 is not recorded
in the Profit and loss A/c.
3. Raman contributes ` 14,000 towards public provident fund
4. Depreciation on building and furniture comes to ` 3,000 according to the tax provisions.
Determine the taxable income of Shri Pankaj for the assessment year 2018-19.
Answer:
Computation of Taxable Income of Shri Pankaj for the assessment year 2018-19
Profit and Gains from Business or Profession ` `

Net Profit as per P & L A/c. 1,97,300
Add: Expenses/Payments not admissible:
(1) Household expenses 11,200
(2) Provision for bad debts 4,800
(3) Salary to Raman 3,000
(4) Contribution towards URPF 32,000
(5) Interest on capital 13,000
(6) Depreciation (in excess of tax provision i.e. ` 13,600 - ` 3,000) 10,600
(7) General Expenses to the extent of personal expenses 1,700 76,300
2,73,600
Add: Income not recorded in P&L A/c. 3,000
2,76,600
Interest on Government securities 17,000
Business Income 2,59,600
Income from Other Sources: Interest on Government Securities 17,000
Less: Deduction under sections 80C (PPF) 14,000
Taxable Income 2,62,600
Expenses on neon sign and glow board shall be treated as revenue expenditure.
Assessment of Various Entities
Question No.: 18
Mr. X, a Government employee and a citizen of India, was sent to London on official duty, on
1.6.2017. He stayed there upto 31.1.2018. The salary and allowance drawn by him during this
period are given below.

4 months salary in India 1,80,000
8 months salary in London 3.60,000
Overseas allowance 2,40,000
Free residence in London (Rent ` 40,000 per month for 8 months) 3,20,000
He has a house property situated in Delhi which is self-occupied. During his stay in London his
wife and children were staying in this property throughout the previous year. The fair rental value
of the house is ` 56,000. He has paid ` 6,000 as municipal taxes and ` 2,000 as ground rent
during the year.
He received dividend from and Indian company amounting to ` 2,200.
He has donated a sum of ` 60,000 to an institution to which section 80G is applicable.
Compute his Total Income for the assessment year 2018-19.
Answer:
Computation of Total Income of Mr. X for the assessment year 2018-19

I. Income from Salary:
Salary in India 1,80,000
Salary in London 3,60,000
Overseas allowance (Exempt) Nil
Value of free residence in London (Exempt) Nil
5,40,000
Less: Deductions Nil 5,40,000
II. Income from House Property:
Self-occupied house Nil
III. Income from Other Sources:
Dividend Exempt
Gross total income 5,40,000
Less: Deductions:
U/s 80G, 50% of ` 54,000 in respect of donation 27,000
Total income 5,13,000
Allowances and perquisites paid or allowed outside India by the Government to a citizen of India for
rendering services outside India are exempt u/s 10(7). However salary paid outside India shall be taxable.
Question No.: 19
The following particulars are submitted by Mr. Ajay Baweja, aged 61 years for the assessment
year 2018-19.

1/2 share of profit of a firm 80,000
Income from House Property (computed) 1,35,000
Long term capital gains on transfer of equity shares sold on 2.12.2017 through a 40,000
recognised stock exchange
Long-term capital gains on transfer of house 1,30,000
Lottery winning (Net, after TDS) 11,200
Life Insurance premium paid 25,000
Donations to National Children Fund 10,000
Royalty from books of literary nature 4,14,000
You are required to compute his total taxable income and his tax liability.
Solution
Computation of Total Income of Mr. Ajay Baweja for the assessment year 2018-19
Particulars Amount Amount (`)

(`)
1. Income from House property {computed) 1,35,000
2. Income from profession
Royalty from books 4,14,000
3. Capital Gains:
Long term capital gains on transfer of shares Exempt
Long term capital gains on transfer of house 1,30,000 1,30,000
100 16,000
4. Income from Other Sources - Gross winning of lottery ` 11,200 ×
70
Less: Deduction
U/s 80C 25,000
U/s 80G (100% of ` 10,000) 10,000
U/s 80QQB 3,00,000 3,35,000
Total Income 3,60,000
Computation of tax:
Tax on lottery — 30% of ` 16,000 4,800
Tax on long-term capital gain [` 1,30,000 - 86,000 (` 3,00,000 - 2,14,000) 8,800
20% of ` 44,000]
Tax on balance income of ` 3,00,000 Nil
Total tax 13,600
Less: Rebate u/s 87A (Nil as the total income exceed ` 3,50,000) ---
13,600
Add: Education cess & SHEC @ 3% 408
Total tax payable 14,008
Tax rounded off 14,010
Share of profit from a firm is exempt.
Question No.: 20
Mrs. Nikita is a Professor in the Department of Economics, in Delhi University. Following are the
particulars of her income for the assessment year 2018-19:
(i) Basic pay ` 60,000 per month;

(ii) Dearness allowance @ 30% of salary;
(iii) House Rent allowance 30% of basic salary;
(iv) Medical Allowance ` 500 p.m. (amount actually spent on her own treatment is ` 2,000);
(v) Wardenship Allowance ` 1,000 p.m.;
(vi) Rent from House property ` 2,000 p.m.;
(vii) Interest received from Government securities ` 5,000;
(viii) Dividend received from an Indian company ` 1,200;
(ix) Interest on Saving Bank Deposits ` 12,000.
(x) Contribution to Recognised Provident Fund 10% of basic salary;
(xi) Premium paid by cheque on medical insurance policy on health of dependent mother `
5,000, ` 2,000 for dependent mother in law and ` 1,000 for dependent brother;
(xii) Donation to an approved charitable institution ` 1,00,000;
(xiii) House rent paid ` 28,000 p.m.
Compute her total income for assessment year 2018-19.
Answer:
Computation of Total Income of Mrs. Nikita Gupta for the assessment year 2018-19
1. Income from salary Amount (`) Amount (`)

Salary @ ?60,000 p.m. (60,000 x 12) 7,20,000
D.A. @ 30% of salary 2,16,000
Wardenship allowance @ ` 1,000 p.m. (1,000 x 12) 12,000
House Rent allowance (see note below) Nil
Medical Allowance (` 500 x 12) 6,000
9,54,000
2. Income from House property
Rent from house property 24,000
Less: Standard deduction 30% 7,200 16,800
3. Income from Other Sources
Interest from Government Securities 5,000
Dividend from an Indian company Exempt
Interest on Saving Bank Deposits 12,000 17,000
Less: Deductions:
U/s 80C (RPF) 72,000
U/s 80D for Medical Insurance 5,000
U/s 80G for Donations — 50% of ` 90,800 {see Below) 45,400
U/s 80TTA 10,000 1,32,400
1. Qualifying limit for section 80G shall be 10% of Adjusted Gross Total Income i.e. ` 9,87,800 - `
72,000 - ` 5,000 - ` 10,000 = ` 9,00,800
2. HRA is exempt to the extent of the minimum of following three limits:
(1) Actual amount received 18,000 x 12 2,16,000

(2) Rent paid — 10% of salary ` 3,36,000 - 72,000 2,64,000
(3) 50% of salary 3,60,000
Question No.: 21
From the following information, compute the total income and the tax payable by an individual
for the assessment year 2018-19.
(a) Salary @ ` 30,000 p. m.

(b) Dearness allowance ` 10,000 p.m.
(c) He contributes 20% of his salary & D.A. to a recognised provident fund.
(d) Employers contribution to provident fund is 14% of salary and dearness allowances.
(e) Rent from house property ` 12,000 p.m.
(f) Interest from an Indian company, ` 50,000 (Gross)
(g) Life Insurance premium paid ` 4,000.
Answer:
Computation of Total Income of an Individual for the assessment year 2018-19
1. Income from Salary: Amount (`) Amount (`)
Salary (` 30,000 x 12) 3,60,000

Dearness allowance (` 10,000 x 12) 1,20,000
Contribution to R.P.F. by employer in excess of 12% (` 4,80,000 x 2/100) 9,600
Gross salary 4,89,600
Less: Deduction u/s 16 Nil 4,89,600
2. Income from house property
Actual rent (` 12,000 x 12) 1,44,000
Less: Standard deduction @ 30% 43,200 1,00,800
3. Income from Other Sources
Interest from Indian Co. 50,000
Gross Total Income
6,40,400
Less: Deductions under section 80C (LIP — ` 4,000 + RPF — ` 96,000) 1,00,000
Computation of tax:
Tax on ` 5,40,400 20,580
Add: Education cess & SHEC @ 3% 618
Tax rounded off 21,200
Question No.: 22
Mr. Rajat carries on his own business. For the year ending 31.3.2018 his Trading/Profit and Loss
Account was as follows:—
Opening stock 2,20,000 Sales 2,12,89,000

Purchases 1,86,09,000 Closing stock 2,52,000
Salaries 2,56,000 Interest on Jay Co. Ltd. Debentures 2,000
Rent 2,31,000 Dividend from UTI 2,000
Audit fee 3,30,000 Discount received 12,000
Bonus 3,000 Race winning (Gross) 12,000
Printing, Postage and stationery 4,000
Miscellaneous expenses 4,000
Advertisement expenses 22,000
Drawings 12,000
LIC premium 5,000
Car expenses:
Driver's salary 6,000
Petrol & repairs 12,000
Property tax 4,000
Cost of NSC (VIII series) 6,000
Net profit 18,45,000
2,15,69,000 2,15,69,000
Additional information
(a) Advertisement expenses included cost of 20 gift packs of ` 1,100 each presented to leading
esteemed customers on occasion of Diwali.
(b) The car was used both for business and personal purposes. 2/3rd is for business purposes.
(c) The property tax of ` 4,000 was in respect of his self-occupied house whose rental value is `
18,000.
(d) Rent paid includes ` 4,00,000 from which tax was deducted at source on 31-3-2018 but the
same was deposited on 16-10-2018.
Compute the Gross Total Income and Total Income of Mr. Rajat for assessment year 2018-19
showing the incomes under various heads.
Answer:
Computation of Total Income of Mr. Rajat for the Assessment Year 2018-19
Profit and Gains from Business or Profession ` ` `

Net Profit as per P&L A/c. 18,45,000
Add: Expenses/Payments not admissible
Drawings 12,000
LIC Premium 5,000
Car expenses
Driver salary (1/3) 2,000
Petrol (1/3) 4,000
Property Tax 4,000
Cost of NSC 6,000
30% of the rent of ` 4,00,000, TDS on account of which 1,20,000 1,53,000
was deposited after due date of return u/s 13 9(1)
19,98,000
Less: Incomes which are not taxable under this head
Interest on debentures 2,000
Dividend from U.T.I. 2,000
Horse race income 12,000 16,000
Income from Business 19,82,000
Income from Other Sources
Interest 2,000
Dividend from U.T.I. Exempt
Horse race income 12,000 14,000
Less: Deductions under Chapter VIA
U/s 80C (LIC - ` 5,000 + NSC - ` 6,000) 11,000
Taxable income 19,85,000
Question No.: 23
X furnishes the following particulars for the previous year relevant to the assessment year 2018-
19.
Profit and Loss A/c for the year ending 31.3.2018
To salary to staff 22,000 By Gross Profit 2,50,00
To entertainment expenses 13,000
To general expenses 11,000
To bad debts 4,500
To reserve for bad debts 10,000
To advertisement expenses 7,000
To interest on X's capital A/c. 3,000
To expenditure on acquisition of patent's 28,000
rights
To telephone expenses 12,000
To depreciation 10,000
To provision for income-tax 4,000
To net profit 1,25,500
2,50,000 2,50,000
Other information
1. Salary to staff includes salary paid to a relative which is unreasonable to the extent of `
3,100.
2. Provision for income-tax is excessive to the extent of ` 3,000.
3. Depreciation on tangible assets according to the income-tax provisions comes to ` 9,500.
4. During the previous year 2017-18 the following payments were made and the same have not
been debited to profit and loss account of 2017-18.
(a) ` 3000 paid on 10.9.2017 on account of outstanding customs duty of the previous year
2016-17, and
(b) ` 5,000 paid on 15.12.2017 on account of outstanding sales-tax of the previous year
2016-17.
5. Patents were acquired on 4.11.2017
Find out the taxable income of X for the assessment year 2018-19. Due date of filing return of
income of assessment years 2017-18 and 2018-19 is 30th September of the relevant assessment
year.
Answer:
Computation of Taxable Income of X for the assessment year 2018-19
Particulars (`) (`)

Profit and gains from business or profession
Net Profit as per P & L A/c. 1,25,500
Add: Expenses/payments not admissible
(1) Salary to a relative 3,100
(2) Reserve for bad debts 10,000
(3) Interest on X's capital A/c. 3,000
(4) Expenditure on acquisition of patent rights 28,000
(5) Depreciation (in excess of income-tax provisions) 500
(6) Provision for income-tax (full amount) 4,000 48,600
1,74,100
Less: Sales-tax for assessment year 2017-18 5,000
Depreciation on patent rights 121/2% of ` 28,000 3,500 8,500
Income from business/Gross total income 1,65,600
1. ` 3,000 due on 31.3.2017 towards custom duty was paid on 10.9.2017 i.e. before 30th
September, the due date of filing of the return of income and as such deduction must have
been allowed in the assessment year 2017-18 itself.
2. ` 5,000 due on 31.3.2017 towards sales tax was paid on 15.12.2017 i.e., after the due date of
filing the return of income of assessment year 2017-18 and as such deduction was not
allowed in the assessment year 2017-18 as per provisions of section 43B. The deduction will
however, be allowed in the previous year in which such payment is made.
3. Since the patents were acquired in November, 2017, it is put to use for less than 180 days,
50% of normal rate is applicable.
Question No.: 24
From the following information, compute the tax payable by R for the assessment year 2018-19:
(1) Listed share purchased on 31.08.2002 for ` 40,000 sold for ` 2,00,000 on 1.11.207 through
a recognised stock exchange.
(2) Gold ornaments purchased for ` 2,00,000 on 1.9.2001 sold for ` 4,80,000 on 1.12.2017.
(3) His gross salary for the previous year ending 31.3.2018 was ` 2,60,000.
Answer:
Computation of total income and tax payable by R for the assessment year 2018-19.
Particulars ` ` `
Income under head ―Salaries‖
Long term capital gain
(a) From Shares
Sold through recognized stock Exempt
exchange
Long term capital gain/Loss from
gold ornaments:
Consideration price 4,80,000
Less: Indexed Cost of acquisition 5,44,000 (-)64,000 _
2,00,000x 272/100

Tax on 2,60,000 500
Less: Rebate u/s 87A 500
Tax payable Nil
Notes:
1. LTCG on listed securities shall be exempt u/s 10(38)

2. LTCL of ` 64,000 on gold is not allowed to be set off from other sources. Hence, it shall be
carried forward to claim it as set off from LTCG in subsequent years.
Income under Head Income from Other Sources
Question No.: 25
'R', a resident of India, purchased 1000 listed equity shares of ` 10 each at ` 115 per share
from a broker on 5.4.2001. He paid ` 2,000 as brokerage. On 2.3.2003 he was given bonus shares
by the company on the basis of one share for every 2 shares held. On 24.2.2017 he was given a
right to acquire 1,000 right share @ ` 60 per share. He acquired 50% of the right shares offered
and sold the balance 50% of the right for a sum of ` 60,000 on 3.4.2017. The right shares were
allotted to him on 20.4.2017.
All the shares held by him were sold on 24.3.2018 @ ` 400 per shares.
Please compute capital gain and tax for the assessment year 2018-19 assuming that his income
from other sources is ` 1,12,000.
Answer:
Particulars ` `
Capital gain on original shares i.e. 1000 shares
Full Value of consideration (` 1000 x 400) 4,00,000
Less: Indexed cost of acquisition 3,18,240
` 117000 x 272/100
Long-term capital gain after indexation 81,760
Long term capital gain (without indexation) ` 4,00,000 -
1,17,000 = 2,83,000
Capital Gain on Bonus shares
Less: Indexed cost of acquisition Nil
Long-term capital gain with indexation 2,00,000
Long-term capital (without indexation) ` 2,00,000 - Nil = 2,00,000
Capital Gain on right shares
Less: Cost of acquisition (` 500 x 60) 30,000
Short-term capital gain 1,70,000
Capital gain on the sale of right
Sale price 60,000
Less: Cost of acquisition Nil
Short-term capital gain 60,000
Tax on long-term capital gain on shares @ 20% @ 10%
(after (without
indexation) indexation
(i) Original shares 16,352 28,300
(ii) Bonus shares 40,000 20,000
Take in each case whichever is minimum
Thus it will be ` 16,352 + 20,000 36,352
Tax on other income ` 1,12,000 + 1,70,000 + ` 4,600
60,000 =` 3,42,000
Tax 40,952
Add: Education cess & SHEC - @ 3% 1,229
Total tax payable (rounded off) 42,180
Agricultural Income
Question No.: 26
The Total Income of Mrs. A, resident in India, computed for assessment year 2018-19 is ` 3,20,000
which includes long-term capital gains of ` 30,000 and winning of lotteries ` 20,000 and short-
term capital gain covered under section 111A ` 10,000. Compute the tax payable assuming his
agricultural income for the previous year was ` 2,50,000.
Answer:
Particulars ` `
Step-1
Add: Agricultural Income and Non Agricultural Income
(2,50,000 + 3,20,000) 5,70,000
Tax on above income
Tax on long-term capital gain of ` 30,000 @ 20% 6,000
Tax on lottery income of ` 20,000 @ 30% 6,000
Tax on short-term capital gain covered under section 111A 15% 1,500
of ` 10,000
Tax on balance income of ` 5,10,000 (including agricultural 14,500 28,000
income)
Step-2
Add maximum exemption limit to agricultural income (` 5,00,000
2,50,000 + ` 2,50,000)
Tax on ` 5,00,000 12,500
Step-3
Tax on non-agricultural income
Tax under Step 1 - Tax under Step 2 (` 28,000 - ` 12,500) 15,500
Less: Rebate u/s 87A 2,500
13,000
Add: Education cess and SHEC @ 3% 390
Total Tax Payable(Rounded off) 13,390
TDS,TCS, Administrative Procedure and ICDS
Question No.: 27
Write Short notes on the followings
a. Return by whom to be verified
b. PAN
c. ICDS-1 on ―Accounting Policies‖
d. Deduction u/s 80E.
Answer:
a. The return under section 139 shall be verified:
(a) in the case of an individual — (i) by the individual himself; or (ii) where he is absent from
India, by the individual himself or by some person duly authorised by him on his behalf; or
(iii) where he is mentally incapacitated from attending to his affairs, by his guardian or
any other person competent to act on his behalf and (iv) where, for any other reason it is
not possible for the individual to verify the return, by any person duly authorised by him in
this behalf.
In case of (ii) and (iv) above, the person verifying the return should hold a valid power of
attorney from the individual to do so, which shall be attached to the return.
(b) in the case of a Hindu Undivided Family — only by the Karta. However, in the following
two cases it can be verified by any other adult member of the family:
(i) where the Karta is absent from India; or
(ii) where the Karta is mentally incapacitated from attending to his affairs.
(c) in the case of a company — (i) by the managing director thereof, or (ii) where for any
unavoidable reason such managing director is not able to verify the return, or where
there is no managing director, by any director thereof or (iii) in the case of a company
being wound up, by the liquidator or (iv) in case of a company whose management has
been taken over by the Central Government or the State Government, by the Principal
Officer thereof. However, if the company is non-resident in India, the return may be
verified by a person who holds a valid power of attorney from such company to do so.
(d) in the case of a firm — (i) by the managing partner thereof, or (ii) where for any
unavoidable reason, such managing partner is not able to verify the return, or where
there is no managing partner as such, by any partner thereof, not being a minor;
(e) in the case of a limited liability partnership—by the designated partner thereof, or where
for any unavoidable reason such designated partner is not able to verify the return, or
where there is no designated partner as such, by any partner thereof;
(f) in the case of a local authority — by the principal officer thereof;
(g) in the case of a political party — by the chief executive officer of such party (whether
such Chief Executive Officer is known as Secretary or by any other designation).
(h) in the case of any other association — by any member of the association or the principal
officer.
(i) in the case of any other person — (i) by that person or (ii) by some person competent to
act on his behalf.
b. Permanent account number [Section 139A]
(1) Who has to apply for PAN? [Section 139A(1)]: Every person who has not been allotted a
permanent account number shall, within such time, as may be prescribed, apply to the
Assessing Officer for the allotment of a permanent account number in the following
cases:
(a) if his total income or the total income of any other person in respect of which he is
assessable under this Act during any previous year exceeded the maximum amount
which is not chargeable to income-tax; or
(b) if he is carrying on any business or profession whose total sales, turnover or gross receipts
are or is likely to exceed ` 5,00,000 in any previous year; or
(c) he is required to furnish a return of income under section 139(4A), i.e., return of trust and
charitable institutions.
(2) Power delegated to the Central Government to notify class or classes of persons for whom
it will be obligatory to apply for permanent account number (PAN) [Section 139A(1A)].
(3) Prescribing new class of persons for allotment of PAN and suo-moto allotment of PAN
[Section 139A(1B)] The Central Government may, for the purpose of collecting any
information which may be useful for or relevant to the purposes of this Act, by way of
notification specify any class or classes of persons, and such persons shall within the
prescribed time apply to the Assessing Officer for allotment of a permanent account
number.
(4) PAN may be allotted by the AO [Section 139A(2)]: The Assessing Officer having regard to
the nature of transactions as may be prescribed may also allot a permanent account
number to any other person (whether any tax is payable by him or not) in the manner and
in accordance with the procedure as may be prescribed.
(5) Person other than falling under section 139A(1) or (2) may apply for PAN [Section 139A(3)]
Any person, not falling under section 139A(1) or section 139A(2) above, may apply to the
Assessing Officer for the allotment of a permanent account number and, thereupon, the
Assessing Officer shall allot a permanent account number to such person forthwith.
( c). ICDS-I on ―Accounting Policies‖
 Accounting policies adopted by a person shall be such so as to represent a true and fair
view of the state of affairs and income of the business, profession or vocation.
 The treatment and presentation of transactions and events shall be governed by their
substance and not merely by the legal form.
 Marked to market loss or an expected loss shall not be recognised unless the recognition
of such loss is in accordance with the provisions of any other Income Computation and
Disclosure Standard.
Fundamental Accounting Assumptions

The fundamental accounting assumptions i.e., Going Concern, Consistency and Accrual
are assumed as followed. No specific disclosure is required, if these assumptions are
followed, however, if such assumption are not followed, the fact shall be disclosed.
Change in Accounting Policies
An accounting policy shall not be changed without reasonable cause.
Disclosure of Accounting Policies

 All significant accounting policies adopted by a person shall be disclosed.
 Any change in an accounting policy which has a material effect shall be disclosed (with
quantum of the effect, if ascertainable). Where such amount is not ascertainable, the
fact shall be indicated.
 Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item.
( d). Deduction u/s 87E
Applicable to
An Individual (irrespective of residential status and citizenship of the individual).
Conditions to be satisfied
1. Loan from specified institution: The assessee had taken a loan from -
 a financial institution; or
Financial Institution means a banking company to which the Banking Regulation Act,
1949 applies (including any banking institution referred to in sec. 51 of that Act) or any
other specified financial institution.
 an approved charitable institution
Approved Charitable Institution means an institution established for charitable purposes
and approved by the prescribed authority u/s 10(23C) or an institution referred to in Sec.
80G(2)(a)
2. Purpose of loan: The loan must have been taken for the purpose of pursuing higher
education of himself/herself or for any other following persons:
a. Spouse b. Children (dependent or c. the student for whom the individual is the
not); or legal guardian
―Higher education‖ means any course of study pursued after passing the Senior Secondary
Examination or its equivalent from any school, board or university recognised by the Central
Government or State Government or local authority or by any other authority authorised by
the Central Government or State Government or local authority to do so.
3. Payment of interest: The assessee pays interest on such loan.
4. Payment out of taxable income: The amount must be paid out of income chargeable to tax.
However, it is not necessary that such income relates to the current year.
Quantum of deduction
Amount paid during the year by way of payment of interest.
Maximum permissible period for which deduction is available [Sec.80E(2)]
Deduction under this section shall be allowed for the initial assessment year and 7 assessment
years immediately succeeding the initial assessment year $ or until interest is paid by the assessee
in full, whichever is earlier.
$ Initial Assessment Year means the assessment year relevant to the previous year, in which the
assessee starts repaying the loan or interest thereon.
Taxpoint
 The deduction is available for a maximum period of 8 consecutive years.
 The period starts from the year in which the assessee starts paying the interest on such loan.
Question No.: 28
Write short notes on the followings
a. Best Judgment Assessment
b. Retrenchment Compensation
c. ICDS-8 on ―Securities‖
d. Clubbing of Income of minor child
Answer:
a. Best Judgment Assessment (Section 144)
Under this section, assessment shall be made by the Assessing Officer to the best of his judgment
after considering all relevant materials which he has gathered. Assessing Officer cannot reduce
the tax liability of the assessee by assessment under this section.
Taxpoint: A refund cannot be granted u/s 144.
Situation in which it is applicable: In the following situations assessment shall be made under this
section -
a. If the person fails to file the return u/s 139(1), 139(4) or 139(5); or
b. If the person fails to comply with the terms of notice u/s 142(1); or
c. If the person fails to comply with the directions u/s 142(2A) requiring him to get his accounts
audited; or
d. If the person fails to comply with the terms of notice u/s 143(2), requiring his presence or
production of evidence and documents.
Note: In any of the given situation, the Assessing Officer is under an obligation to make an
assessment under this section. In other words, Best judgment assessment is not the discretionary
power of the Assessing Officer but mandatory in nature.
Opportunity of being heard
The assessment u/s 144 can only be made after giving the assessee a reasonable opportunity of
being heard. Such opportunity shall be given by serving a ―Show cause notice‖ calling upon the
assessee to show cause(s), on a date and time specified in the notice, why the assessment
should not be completed to the best of judgment of the Assessing Officer.
Exception: Such opportunity need not be given, where notice u/s 142(1) has already been
issued.
Time limit for completion of assessment [Sec. 153(1)]
18 months (from A.Y. 2019-20: 12 months) from the end of relevant assessment year
Other points
Non-maintenance of proper accounts: As per sec. 145(3), if the Assessing Officer is not satisfied
with the correctness or the completeness of the accounts of the assessee or if no regular
method of accountancy or accounting standards [as notified by the Central Government u/s
145(2)] is followed by the assessee, the Assessing Officer may make an assessment in the manner
provided u/s 144.
b. Retrenchment Compensation
Retrenchment means cancellation of contract of service by employer.

Tax Treatment [Sec. 10(10B)]: Any compensation received by a worker at the time of
retrenchment is exempted to the extent of minimum of the following:
a) Actual amount received;
b) ` 5,00,000; or
c) An amount calculated in accordance with the provisions of sec. 25F(b) of Industrial Dispute
Act, 1947 (Under the said Act a workman is entitled to retrenchment compensation
equivalent to 15 days‘ average pay, for every completed year of service or any part thereof
in excess of 6 months).
Notes
 In case, where the compensation is paid under any scheme approved by the Central
Government nothing shall be taxable.
 Compensation received by a workman at the time of closing down of the undertaking in
which he is employed is treated as compensation received at the time of his retrenchment.
(c) ICDS-8 on ―Securities‖
Scope
 This part of the Standard deals with securities held as stock-in-trade. However, this part of
the Standard does not deal with:
 the bases for recognition of interest and dividends on securities;
 securities held by a person engaged in the business of insurance;
 securities held by mutual funds, venture capital funds, banks and public financial
institutions formed under a Central or a State Act or so declared under the
Companies Act, 1956 or the Companies Act, 2013
 Securities shall have the meaning assigned to it in sec. 2(h) of the Securities Contracts
(Regulation) Act, 1956 and shall include share of a company in which public are not
substantially interested but shall not include derivatives.
Recognition and Initial Measurement of Securities

 A security on acquisition shall be recognised at actual cost i.e., its purchase price +
acquisition charges such as brokerage, fees, tax, duty or cess.
 Where a security is acquired in exchange for other securities or other asset, the fair value
of the security so acquired shall be its actual cost.
 Fair value is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm‘s length
transaction.
 Where unpaid interest has accrued before the acquisition of an interest-bearing security
and is included in the price paid for the security, the subsequent receipt of interest is
allocated between pre-acquisition and post-acquisition periods; the pre-acquisition
portion of the interest is deducted from the actual cost.
Subsequent Measurement of Securities
 At the end of any previous year, securities held as stock-in-trade shall be valued at
actual cost initially recognised or net realisable value at the end of that previous year,
whichever is lower.
 The comparison of actual cost initially recognised and net realisable value shall be done
categorywise (viz., shares; debt securities; convertible securities; and any other securities)
and not for each individual security.
 Securities not listed on a recognised stock exchange or listed but not quoted on a
recognised stock exchange shall be valued at actual cost initially recognised.
d. Clubbing of Income of minor child
Income of a minor child shall be clubbed with income of the parent whose total income (excluding
this income) is higher.
Exceptions
The above clubbing provision shall not apply in the following cases -
1. The income arises or accrues to the minor child due to any manual work done by him; or
2. The income arises or accrues to the minor child due to his skill, talent, specialised knowledge
or experience; or
3. The minor child is suffering from any disability of nature specified u/s 80U.
Exemption [Sec. 10(32)]
In case income of a minor child is clubbed in hands of parent as per provision of sec. 64(1A), the
assessee (parent) can claim exemption of an amount being minimum of the following -
a) ` 1,500; or
b) Income so clubbed
Taxpoint: Such exemption shall be available for each child (irrespective of the number of
children) whose income is so clubbed.
When marriage does not subsist between parents
In case marital relationship does not subsist at the time of accrual of income to the minor child,
income of minor child shall be clubbed with income of that parent who maintains the minor
child during the previous year.
Taxpoint: Income of the minor child shall be clubbed in hands of parent in the following manner
-
Relation between parents Tax treatment
With the income of that parent whose total income excluding
When marriage subsists
this income is higher
When marriage does not With the income of that parent who maintains the minor child in
subsist the previous year
Notes
WhereCany such income is once clubbed with the total income of either parent,
Clubbing in then any such income arising in any subsequent years shall not be clubbed with
subsequent the total income of the other parent, unless the Assessing Officer is satisfied.
year(s) However, the Assessing Officer will do so only after giving an opportunity of
being heard to the other spouse.
C
Child Child in relation to an individual includes a stepchild & adopted child but does
not include a grandchild [Sec. 2(15B)]
ThoughI sec. 27(i) [Deemed owner of house property] specifically excludes
Income of married daughter but sec. 64(1A) does not have this exception, hence income
married arising to minor married daughter shall be clubbed in the hands of parent.
daughter
W
When neither
of the parent
is alive Income of minor child cannot be added with the income of the guardian if the
guardian is not the parent of the minor.
C
Capital gain Profit on sale of the property, which is gifted to minor child, shall be clubbed in
hands of parent as per the provision of sec. 64(1A)
Income
I of that year shall be treated as under:
Income of
Income arose to the period Clubbing provision
the year
when minor When child does not attain age of Such income shall be clubbed in hands
attains majority of parent
majority
Such income shall not be clubbed and
When child attains the age of
taxable in hands of assessee himself (i.e.
majority and afterwards
child)
Question No.: 29
a. Quoting of Aadhaar Number
b. Deduction from salary
c. ICDS-IX on ―Borrowing Cost‖
d. Agricultural Income
Answer.
a. Quoting of Aadhaar number [Section 139AA] [W.e.f. 1.7.2017]
(1) Eligible person to quote Aadhaar Number [Section 139AA(1)]: Every person who is eligible
to obtain Aadhaar number shall, on or after 1.7.2017, quote Aadhaar number—
(i) in the application form for allotment of permanent account number;
(ii) in the return of income:
However, where the person does not possess the Aadhaar Number, the Enrolment ID of
Aadhaar application form issued to him at the time of enrolment shall be quoted in the
application for permanent account number or. as the case may be, in the return of income
furnished by him.
(2) Eligible person to intimate Aadhaar Number [Section 139AA(2)]: Every person who has
been allotted permanent account number as on 1.7.2017, and who is eligible to obtain
Aadhaar number, shall intimate his Aadhaar number to such authority in such form and manner
as may be prescribed, on or before a date to be notified by the Central Government in the
Official Gazette.
However, in case of failure to intimate the Aadhaar number, the permanent account number
allotted to the person shall be deemed to be invalid and the other provisions of this Act shall
apply, as if the person had not applied for allotment of permanent account number.
(3) Provisions not to apply to certain persons or a State [Section 139AA(3)]: The provisions of
this section shall not apply to such person or class or classes of persons or any State or part of
any State, as may be notified (See Notification No. 37/2017 in the box below) by the Central
Government in this behalf, in the Official Gazette.
b. Deduction from salary
So far, we have discussed what are the various incomes, allowances and perquisites which
are exempt and which are to be included in gross salary. From the gross salary so
computed, the following two deductions are allowed under section 16:
(i) Entertainment allowance [Section 16 (II))]
(II) Tax on employment [Section 16(iii)]
Entertainment Allowance [Section 16(ii)]
Entertainment allowance is first included in computation of the gross salary. A deduction is

then allowed under section 16(II ) if conditions prescribed have been satisfied.
Tax on Employment (Professional Tax) [Section 16(iii)]
As per the Constitution of India, the State Governments/Local Authorities are empowered
to make law and collect taxes on professions, trades, callings and employment.
As per section 16(iii), a deduction of any sum paid by the assessee, on account of a tax on
employment, shall be allowed. The deduction will be allowed in the year in which the tax is
actually paid by the employee.
1. Where professional tax is paid by the employer on behalf of the employee, it will first be
included in his gross salary as a perquisite, being a monetary obligation of the
employee discharged by the employer. Thereafter, a deduction on account of such
professional tax will be allowed to the employee from his gross salary.
2. Professional tax due but not paid shall not be allowed as deduction.
c. ICDS-IX on ―Borrowing Cost‖
Scope
The Standard deals with treatment of borrowing costs. However, the Standard does not deal
with the actual or imputed cost of owners‘ equity and preference share capital.
 Borrowing costs are interest and other costs incurred by a person in connection with the
borrowing of funds and include:
a) commitment charges on borrowings;
b) amortised amount of discounts or premiums relating to borrowings;
c) amortised amount of ancillary costs incurred in connection with the arrangement
of borrowings;
d) finance charges in respect of assets acquired under finance leases or under
other similar arrangements.
Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of
a qualifying asset shall be capitalised as part of the cost of that asset.
 Qualifying asset means:
a. land, building, machinery, plant or furniture, being tangible assets;
b. know-how, patents, copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets;
c. inventories that require a period of 12 months or more to bring them to a saleable
condition.
Borrowing Costs Eligible for Capitalisation
Specific Borrowing: The extent to which funds are borrowed specifically for the purposes of
acquisition, construction or production of a qualifying asset, the amount of borrowing costs to
be capitalised on that asset shall be the actual borrowing costs incurred during the period on
the funds so borrowed.
Other than specific borrowing: The amount of borrowing costs to be capitalised shall be
computed in accordance with this formula: A x B / C
A Borrowing costs incurred during the previous year except on specific borrowings
B i. the average of costs of qualifying asset as appearing in the balance sheet of a person
on the first day and the last day of the previous year
ii. in case the qualifying asset does not appear in the balance sheet of a person on the
first day, half of the cost of qualifying asset; or
iii. in case the qualifying asset does not appear in the balance sheet of a person on the
last day of the previous year, the average of the costs of qualifying asset as appearing
in the balance sheet of a person on the first day of the previous year and on the date
of put to use or completion, as the case may be,
excluding the extent to which the qualifying assets are directly funded out of specific
borrowings
C the average of the amount of total assets as appearing in the balance sheet of a person
on the first day and the last day of the previous year, other than assets to the extent they
are directly funded out of specific borrowings
Commencement of Capitalisation
The capitalisation of borrowing costs shall commence
 In case of specific borrowing : from the date on which funds were borrowed
 In case of other borrowing : from the date on which funds were utilised
Cessation of Capitalisation
Capitalisation of borrowing costs shall cease:
 In case of asset other than inventory When such asset is first put to use
 In case of inventory When substantially all the activities necessary to
prepare such inventory for its intended sale are
complete.
Disclosure
The following disclosure shall be made in respect of borrowing costs, namely:—
a) the accounting policy adopted for borrowing costs; and
b) the amount of borrowing costs capitalised during the previous year.
d. Agricultural Income
By virtue of sec. 2(1A), agricultural income means -

1. Any rent or revenue derived from a land, which is situated in India & is used for agricultural
purposes;
Taxpoint:
 Rent may be in cash or in kind.
 Assessee may be the owner or tenant of such land.
2. Any income derived from such land by agriculture $
3. Any income derived from such land by the performance by –
a) a cultivator;
b) receiver of rent in kind;
- of any process ordinarily employed by a them to render the produce raised or received by
him fit to be taken to market.
4. Any income derived from such land by the sale by
a) a cultivator of the produce raised by him; or
b) receiver of rent-in-kind of the produce received by him;
- in respect of which no process has been performed other than a process required to render
it fit for the market.
Taxpoint: The process must be employed only to convert ‗the produce or rent in kind‘ in
marketable form. If marketing process is performed on the ‗produce or rent in kind‘, which
can be sold in its raw form in market, then income derived from such product is partly
agricultural & partly non-agricultural income. (Detail discussion is given later in this chapter)
5. Any income derived from a building subject to fulfillment of the following conditions -
a) The building should be occupied by the cultivator or receiver of rent in kind.
b) The building should be on or in the immediate vicinity of the land, being situated in India
and used for agricultural purposes.
c) The building should be used as dwelling house or store-house or other out building.
d) The land is either situated in –
i) Rural area; or
ii) Urban area1 and assessed to land revenue / local rates.
Taxpoint:
 Where such land or building is used for non-agricultural purpose then any income
derived from such land or building shall not be treated as agricultural income.
 Income derived from land being let out for storing crop shall not be agricultural income.
 Building should be owned and occupied by the land-holder if he receives rent or
revenue from the land. On the other hand, in case of cultivator or receiver of rent in kind,
it is enough that the building is occupied by him.
Question No.: 30.
a. Return of Income of Political Party

b. Is tax audit u/s 44AB is compulsory even if the accounts are audited under any other law or
any other provision of IT Act
c. ICDS-X on ―Contingent Assets‖
d. Cost of Improvement.
Answer:
a. Return of Income of Political Party
The Chief Executive Officer of every political party, shall , if the total income of the political party
(computed before allowing exemption under section 13A) exceeds the maximum amount not
chargeable to income tax furnish a return of such income. It must submitted with the time period
prescribed under section 139(1).
Note:
1. The due date of filing of return of income in case of a political party is 30 th September, if it
want to seek exemption under section 13A as in that case audit is compulsory. Otherwise the
due date is 31st July.
2. Although income of a charitable trust or a political party may be exempt but retun of income
must be filed if their income before claiming exemption under section 11,12,13A exceeds the
maximum exemption limit
b. Is Tax Audit u/s 44AB is compulsory even if the accounts are audited under any other law or
any other provision of IT Act
(i) Where accounts are audited under any other law: As per proviso 2 to section 44AB, in a case
where such / person is required by or under any other law to get his accounts audited, it shall be
sufficient compliance with the provisions of this Section, if such person gets the accounts of such
business or profession audited under such law before the specified date and furnishes by that
date the report of the audit as required under such other law and a
further report in the form prescribed (Form No. 3CA and 3CD) under this section.
(ii) Where accounts are audited and/or report/certificate of an accountant are required under
other provisions of Income-tax Act: Under the provisions of sections 12A, 33AB, 33ABA, 35D, 35E,
36(1)(xi), 80-IA, 80-IB, 80-IC, 80-ID, 80JJA, 80JJAA and 142(2A) audit has to be conducted by a
chartered accountant and the assessee has to obtain a report/ certificate from him and file
the same along with the return of income. In this case also, if the accounts of the assessee are
audited by the chartered accountant under any other law, it will be a sufficient compliance
but separate report/certificate will have to be obtained for the relevant sections. However, if
the accounts are audited only as per the above sections, a separate tax audit u/s 44AB shall
be necessary. Conversely, if the audit is conducted u/s 44AB, a separate audit shall have to be
conducted for the purpose of other sections.
c. ICDS-X on ―Contingent Assets‖
Scope
The Standard deals with provisions, contingent liabilities and contingent assets, except those:
a. resulting from financial instruments;
b. resulting from executory contracts;
c. arising in insurance business from contracts with policyholders; and
d. covered by another ICDS.
 Provision is a liability which can be measured only by using a substantial degree of
estimation.
 Liability is a present obligation of the person arising from past events, the settlement of
which is expected to result in an outflow from the person of resources embodying
economic benefits.
 Obligating event is an event that creates an obligation that results in a person having no
realistic alternative to settling that obligation.
 Contingent liability is:
a. a possible obligation that arises from past events and the existence of which will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the person; or
b. a present obligation that arises from past events but is not recognised because:
A. it is not reasonably certain that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
B. a reliable estimate of the amount of the obligation cannot be made.
 Contingent asset is a possible asset that arises from past events the existence of which will
be confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the person.
 Executory contracts are contracts under which neither party has performed any of its
obligations or both parties have partially performed their obligations to an equal extent.
 Present obligation is an obligation if, based on the evidence available, its existence at the
end of the previous year is considered reasonably certain.
Recognition
Provisions
A provision shall be recognised when:
a. a person has a present obligation as a result of a past event;
b. it is reasonably certain that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
c. a reliable estimate can be made of the amount of the obligation.
No provision shall be recognised for costs that need to be incurred to operate in the future. It is
only those obligations arising from past events existing independently of a person‘s future
actions, that is the future conduct of its business, that are recognised as provisions.
Contingent Liabilities
A person shall not recognise a contingent liability.
Contingent Assets
A person shall not recognise a contingent asset. Contingent assets are assessed continually and
when it becomes reasonably certain that inflow of economic benefit will arise, the asset and
related income are recognised in the previous year in which the change occurs.
Measurement
The amount recognised as a provision shall be the best estimate of the expenditure required to
settle the present obligation at the end of the previous year. The amount of a provision shall not
be discounted to its present value.
Reimbursements
Where some or all of the expenditure required to settle a provision is expected to be reimbursed
by another party, the reimbursement shall be recognised when it is reasonably certain that
reimbursement will be received if the person settles the obligation. The amount recognised for
the reimbursement shall not exceed the amount of the provision.
Where a person is not liable for payment of costs in case the third party fails to pay, no provision
shall be made for those costs.
An obligation, for which a person is jointly and severally liable, is a contingent liability to the
extent that it is expected that the obligation will be settled by the other parties.
Review
Provisions shall be reviewed at the end of each previous year and adjusted to reflect the current
best estimate. If it is no longer reasonably certain that an outflow of resources embodying
economic benefits will be required to settle the obligation, the provision should be reversed.
Use of Provisions
A provision shall be used only for expenditures for which the provision was originally recognised.
Disclosure
Following disclosure shall be made in respect of each class of provision:
a) a brief description of the nature of the obligation;
b) the carrying amount at the beginning and end of the previous year;
c)additional provisions made during the previous year, including increases to existing
provisions;
d) amounts used, that is incurred and charged against the provision, during the previous
year;
e)unused amounts reversed during the previous year; and
f) the amount of any expected reimbursement, stating the amount of any asset that has
been recognised for that expected reimbursement.
d. Cost of Improvement.
(a) Where the capital assets become the property of the previous owner or the assessee bwfore
1.4.2001, it will be all capital expenditure incurred in making any additions or alterations to the
capital assets on or after 1.4.2011 by the previous owner or the assessee.
Expenditure incurred by the assessee or the previous owner 1.4.2001 is to be completely ignored,
whether the assessee opts for the market value as on 1.4.2001 or not.
(b) In other cases i.e assets acquired after 1.4.2001, all capital expenditure incurred in making
any additions or alterations to the capital assets by the assessee after it became his property
and where the capital asets became the property of the assessee by any mode specified in
section 49(1), capital expenditure incurred by the previous owner also be treated as cost of
Improvement.
Revisionary Test Paper_ June 2018
Intermediate
Group I
Paper 6 : LAWS & ETHICS
(SYLLABUS – 2016)
Objectives
Question 1:
A. Choose the correct answer from the given four alternatives
(i) An agreement which is enforceable at the option of one or more parties thereto but
not at the option of other or others is called
(a) Void contract.
(b) Voidable contract.
(c) Void agreement.
(d) Unenforceable contract.
(ii) Which of the following agency is irrevocable under The Indian Contract Act, 1872?
(a) Agency for fixed period
(b) Agency for single transaction
(c) Agency coupled with interest
(d) Continuing agency
(iii) A sort of tacit understanding/agreement among the intending bidders to stifle

competition by not bidding against each other in an auction sale is called as
(a) Damping
(b) Knock-out agreement
(c) Puffers
(d) By-bidders
(iv) When an instrument is drawn conditionally or for a special purpose as a collateral

security and not for the purpose of transferring property therein, it is called
(a) Ambiguous
(b) Inchoate
(c) Escrow
(d) Inland
(v) Which Committee is constituted by the occupier to promote cooperation between
DOS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 1
the workers and management in maintaining proper safety and health at workplace?
(a) Safety Committee
(b) Health Committee
(c) Management Workers Consultative Committee
(d) Maintenance Committee
(vi) Under Payment of Bonus Act, 1965, in disputed cases, bonus most be paid
(a) Within 8 months from the close of the accounting year.
(b) Within 1 month from the date on which the award becomes enforceable.
(c) Within 2 months from the date on which the award becomes enforceable.
(d) Within 6 months from the date of closing of the accounting year.
(vii) The study of ethics can be divided into four operational areas namely meta ethics,
normative ethics, descriptive ethics and
(a) Positive ethics
(b) Physical ethics
(c) Applied ethics
(d) Natural ethics
(viii) When a professional promotes a position or opinion to such extent that some
objectivity may have to be compromised, this threat is known as
(a) Familiarity threat
(b) Objectivity threat
(c) Advocacy threat
(d) Intimidation threat
(ix) Intimation of reconstruction of changes in a registered partnership is to be given to the

Registrar of firms
(a) No time limit
(b) Within 30 days
(c) Within 60 days
(d) Within 90 days
(x) The _______________ of the company shall contain the regulations for management of
the company.
(a) Articles
(b) Memorandum
(c) Both
(d) None of the above
(xi) A person who is not a partner of a Partnership Firm, but he may liable for firm‘s debt as
if he was a Partner. Such a person is called
(a) Nominal Partner

(b) Sleeping Partner
(c) Partner by estoppels
(d) Partner for profit only
(xii) Under Companies (Registration Offices and Fees) Rules, 2014, every foreign company
shall file with the Registrar of Companies along with the financial statement in form —
————— which belong to the list of all the places of business established by the
foreign company in India.
(a) FC 4
(b) FC 2
(c) FC 1
(d) FC 3
(xiii) The supervisory board under the German Model is known as

(a) Aufsichtsrat
(b) Kiertsu
(c) Vorstand
(d) Kyosei
(xiv) An audit committee has four fold relationship and therefore has to interact with
management, internal auditor, public and
(a) Cost auditor
(b) Statutory auditor
(c) Tax auditor
(d) Management auditor
(xv) Business ethics are needed to create a faith about the quality, quantity, price etc. of
products. The customers have more trust and faith in the businessmen who follow
ethical rules. They feel that such businessmen would not cheat them. Which one of the
following is appropriate for it?
(a) Sefeguarding consumers‘ right
(b) Improve customers’ confidence
(c) Survival of business
(d) Consumer movement
(xvi) Holders of public office should not place themselves under any financial or other
obligation to outside individuals or organizations that might influence them in the
performance or their official duties. This principle of public life is called
(a) Selflessness
(b) Honesty
(c) Objectivity
(d) Integrity
(xvii) There are many types of ethical conflicts in the

(a) Business place
(b) Office place
(c) Work place
(d) Public place
(xviii) Which one of the following is said to be ―unethical behavior‖?

(a) Encouraging communication
(b) Adulteration
(c) Employees awareness
(d) Objectivity
(xix) No fine shall be imposed on employees under the age of ____________________

(a) 15
(b) 13
(c) 12
(d) 18
(xx) Holder in due course means any person

(a) Drawing the instrument
(b) Who for consideration came in possession of a promissory note
(c) Named in the instrument to whom or to whom the money is directed to be paid
(d) None of the above
B. Match and Pair:
Column A Column B
1 wagering agreement A Voting through electronic means
work of the same kind is carried out by
2 delivery by attornment B two or more sets of workers during
different period of the day
a company in which that other company
3 Shift C
has a significant influence
Deduction on account of payment to
4 D Code of conduct
cooperative societies
5 Drawn without consideration E Ultra Vires
6 Associate Company F Annual Return
7 Section 108 G Promise to pay ` 1,000 if it rains today.
8 Beyond (their) powers H Accommodation bill

9 Section 92 I Constructive
10 Business ethics J 75% of wages
Answer:
Column A Column B
1 wagering agreement G Promise to pay ` 1,000 if it rains today.
2 delivery by attornment I Constructive
work of the same kind is carried out by
3 Shift B two or more sets of workers during
different period of the day
Deduction on account of payment to
4 J 75% of wages
cooperative societies
5 Drawn without consideration H Accommodation bill
a company in which that other
6 Associate Company C
company has a significant influence
7 Section 108 A Voting through electronic means
8 Beyond (their) powers E Ultra Vires
9 Section 92 F Annual Return
10 Business ethics D Code of conduct
C. True False
(i) Currency note, being a promissory note, is a negotiable instrument

False
(ii) A stranger to contract cannot sue upon it.

True
(iii) When the affected party treat breach of condition as breach of warranty he cannot
repudiate the contract but claim damages only
True
(iv) If there is a custom in that particular trade that the risk does not pass with property, in such a
case the risk will pass with the property
False
(v) If the Tribunal is of the opinion that an LLP can be revived or rehabilitated, it may, direct that
an action for revival or rehabilitation may be taken.
True
(vi) The expression ‘preferential offer’ means an issue of shares or other securities, by a
company to any select person or group of persons on a preferential basis and includes
shares or other securities offered through a public issue.
False
(vii) Rule 12 (6)(b) provides that the company shall have the freedom to specify the lock-in-
period for the shares issued pursuant to exercise such option.
True
(viii) The company shall not convert its existing equity share capital with voting rights into equity
share capital carrying differential voting rights and vice versa
True
(ix) If more than 150 workers are employed in a factory a canteen or canteens shall be
provided and maintained by the occupier.
False
(x) Ethics is a requirement for human life.

True
D. Fill in the blanks
(i) No suit shall be brought for recovering anything alleged to be won on any ________________.
Wager
(ii) An agency is terminated by the principle by _______________ his authority.

Revoking
(iii) __________________ may appoint qualified medical practitioners to be certifying surgeons.

State Government
(iv) No gratuity payable under this Act shall be liable to _____________ in execution of any
decree or order of any civil, revenue or criminal court.
Attachment
(v) ________________ includes pension fund, central recordkeeping agency, National Pension
System Trust, pension fund adviser, retirement adviser, point of presence and such other
person or entity connected with collection, management, recordkeeping and distribution of
accumulations
Intermediary
(vi) An application in Form No. ___________ along with the fee is filed with the Regional Director
for seeking confirmation for shifting the registered office within the same state.
INC 23
(vii) The company shall not use any amount raised through the issue of ____________ for buying,
trading or otherwise dealing in equity shares of any other listed company.
Prospectus
(viii) Sweat equity shares are such equity shares as are issued by a company to its ______________
or __________________ at a discount or for consideration, other than cash.
Directors, employees
(ix) Section 95 provides that the register, their indices shall be ________________ of any matter
directed or authorized to be inserted therein.
prima facie evidence
(x) The Seven Principles of Public Life were set out by ____________ for the first time in the year
1995.
Lord Nolan
SECTION - A
Study Note 1 – Indian Contract Act, 1872
Question 2:
(a) Mr. Paul of his own promised to subscribe to Mahatma Gandhi Memorial Fund by 30.09.2017,
but did not pay. Under the circumstances, he can be enforced – Comment.
Answer:
Consideration is essential element of contract without which no promise can be enforced.

Therefore a gratuitous promise to contribute to Mahatma Gandhi Memorial Fund cannot be
enforced. However if the promisor knew the purpose and also knew that on the faith of such
promise, certain obligations are incurred, the promisor would be bound by the promise.
(b) Mr. Dey writes a letter to Mr. Gupta to sell his plot of land for a certain sum of money on
11.12.2017. Mr. Gupta receives the letter on 14.12.2017. Acceptance was communicated by
Mr. Gupta 16.12.2017. It reaches Mr. Dey on 20.12.2017. When is the communication of the
offer and acceptance binding on the parties?
Answer:
Communication of offer
 Communication of offer completes on 14.12.17.
 Offer can be accepted by Mr. Gupta on or after 14.12.17
Communication of acceptance - Acceptance is communicated by Mr. Gupta on 16.12.17.
Effect of communication of acceptance:

(i) Binding on Mr. Dey - on 16.12.17 (i.e., Mr. Dey cannot withdraw his offer on or after
16.12.17).
(ii) Binding on Mr. Gupta - on 20.12.17 (i.e., Mr. Gupta may withdraw his acceptance before
20.12.17).
Question 3:
(a) Mr. Shaw an industrialist has been fighting a long drawn litigation with Mr. Mishra another
industrialist. To support his legal campaign Mr. Shaw enlists the services of Mr. Nandu a legal
expert stating that an amount of ` 5 lakhs would be paid, if Mr. Nandu does not take up the
brief of Mr. Mishra. Mr. Nandu agrees, but at the end of the litigation Mr. Shaw refuses to pay.
Decide whether Mr. Nandu can recover the amount promised by Mr. Shaw under the
provisions of the Indian Contract Act, 1872.
Answer:
The problem as asked in the question is based on one of the essentials of a valid contract.
Accordingly, one of the essential elements of a valid contract is that the agreement must not be
one which the law declares to be either illegal or void.
Further Contract Act specifies that any agreements in restraint of trade, marriage, legal
proceedings etc., are void agreements.
Thus Mr. Nandu cannot recover the amount of ` 5 lakhs premised by Mr. Shaw because it is an
illegal agreement and cannot be enforced by law.
(b) Sanjay holds agricultural land in Bihar on a lease granted by Palash, the owner. The land
revenue payable by Palash to the Government being in arrear, his land is advertised for sale
by the Government. Under the Revenue law, the consequence of such sale will be
termination of Sanjay's lease. Sanjay, in order to prevent the sale and the consequent
termination of his own lease, pays the Government, the sum due from Palash. Referring to
the provisions of the Indian Contract Act, 1872 decide whether Palash is liable to make
good to Sanjay, the amount so paid?
Answer:
Yes, Palash is bound to make good to Sanjay the amount so paid. Section 69 of the Indian
Contract Act, 1872, provides that "A person who is interested in the payment of money which
another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the
other. In the given case Sanjay has made the payment of lawful dues of Palash in which Sanjay
had an interest. Therefore, Sanjay is entitled to get the reimbursement from Palash.
(c) When is consideration said to be against public policy?
Answer:
A consideration would be considered to be against a public policy in the following cases:
1. Agreement for trading with enemy

2. Agreement interfering with personal liberty
3. Agreement interfering with parental duties
4. Agreement interfering with marital duties
5. Agreement interfering with course of justice
6. Agreement for improper promotion or litigation
7. Agreement for suppressing prosecution
8. Agreement to do an act against the duty of a person
9. Marriage brokerage agreement
10. Agreement not to bid
11. Agreement to create monopolies or reduce competition
12. Agreement for sale of public offices or titles.
Question 4:
(a) State the circumstances when an agent is personally liable for the contracts entered into by
him on behalf of the principal?
Answer:
The general rule states that:

(i) Only the principal can enforce and can be held liable on a contract entered into by an
agent.
(ii) The agent is not personally liable on a contract entered into by him on behalf of the
principal.
The following are the exceptions to the above rule:
1. When agent acts for sale or purchase of goods for a principal resident abroad i.e., foreign
principal.
2. Where it is expressly provided in the contract that the agent shall be personally liable.
3. Where agent does not disclose the name/identity of the principal.
4. Where the principal is disclosed but cannot be sued, e.g., foreign sovereigns, ambassadors
etc.
5. When the principal is not in existence at the time when the act was done, i.e., the agent
acted for a non-existent principal.
6. When the agent exceeds his authority or commits a breach of warranty of authority.
7. When he acts as a pretended agent
8. When he receives or pays money by mistake or fraud.
9. Where an agent signs a negotiable instrument without mentioning that he is signing as an
agent.
10. Where the usage of trade or custom makes an agent personally liable.
(b) Kwality Ltd., contracts with Walls Traders to make and deliver certain machinery to them by
30.6.2014 for ` 11.50 lakhs. Due to labour strike, Kwality Ltd. could not manufacture and
deliver the machinery to Walls Traders. Later, Walls Traders procured the machinery from
another manufacturer for `12.75 lakhs. Walls Traders was also prevented from performing a
contract which it had made with Zenith Traders at the time of their contract with Kwality Ltd.
And were compelled to pay compensation for breach of contract. Advise Walls Traders the
amount of compensation which it can claim from Kwality Ltd., referring to the legal provisions
of the Indian Contract Act.
Answer:
Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of contract.
According to it, when a contract has been broken, the party who suffers by such breach is
entitled to receive from the party who has broken the contract, compensation for any loss or
damage caused to him thereby which naturally arose in the usual course of things from such
breach or which the parties knew when they made the contract, to be likely to result from the
breach of it.
Such compensation is not given for any remote and indirect loss or damage sustained by reason
of the breach.
Applying the above principle of law to the given case, Kwality Ltd is liable to compensate for
the loss of `1.25 lakhs (`12.75 less `11.50 i.e. `1.25 lakhs) which had naturally arisen due to default
in performing the contract by the specified date.
Regarding the amount of compensation which Walls Traders were compelled to make to Zenith
Traders, it depends upon the fact whether Kwality Ltd knew about the contract of Walls Traders
for supply of the contracted machinery to Zenith Traders on the specified date.
If he was aware than Kwality Ltd is also liable to reimburse the compensation which Walls Traders
had to pay to Zenith Traders for breach of contract. Otherwise Kwality Ltd is not liable.
Question 5:
Comment on the following:
(a) Piyu requests Sidhartha to sell and deliver her goods on credit. Sidhartha agrees to do so,
provided Ajay will guarantees the payment of the price of the goods. Ajay promises to
guarantee the payment in consideration of Sidhartha’s promise to deliver the goods.
Answer:
All essentials of a valid contract must be present in the contract of guarantee [Sec 126]. Again
Sec 127 states that, consideration received by the principal debtor is sufficient consideration to
the surety for giving guarantee.
In the given case, there is a sufficient consideration for Ajay‘s promise. Therefore the guarantee
is valid.
(b) Sidhartha contracts with Piyu for a fixed price to construct a house for Piyu within a
stipulated time. Piyu would supply the necessary materials to be used in the construction.
Ajay guarantees Sidhartha’s performance for the contract. Piyu does not supply the
materials. Would Ajay be still liable?
Answer:
Ajay is discharged from the liability since the surety is discharged by any act or omission of the
creditor, the legal consequences of which is the discharge of the principal debtor {sec 134].
In the given case, failure to supply necessary materials by Piyu (the creditor) amounts to an
omission on the part of the creditor resulting in the discharge of Sidhartha (the principal debtor)
and hence discharging Ajay (the surety).
(c) Sidhartha guarantees Ajay against the misconduct of Piyu in an office to which Piyu is
appointed by Ajay, and of which the duties are defined by an Act of Legislature. By a
subsequent Act, the nature of the office is materially altered. Afterwards, Piyu misconducts
himself.
Answer:
As per section 133, if subsequent to the formation of contract of guarantee, any variation is
made in the terms and conditions of contract of guarantee and such variation is made without
the consent of surety, then the surety shall be released for such transactions, which takes place
after such variations.
Material alteration in duties of Piyu amounts to variation in terms and conditions of the
guarantee. Although such variations are not due to an agreement between the principal
debtor and creditor, yet the surety is discharged.
(d) Sidhartha guarantees to Ajay payment for iron to be supplied by him to Piyu to the amount
of 3,000 tons. Piyu and Ajay have privately agreed that Piyu would pay 5 rupees per ton
beyond the market price, such excess to be applied to the liquidation of an old debt. This
agreement is concealed from Sidhartha.
Answer:
Section 143 states that, any guarantee which the creditor has obtained by means of keeping
silence as to material circumstances is invalid.
Sidhartha is not liable as a surety since Ajay (the creditor) has obtained the guarantee from
Sidhartha by means of keeping silence as to material circumstances (i.e. Piyu paying an excess
of 5 rupees per ton to be applied in liquidation of an old debt).
Study Note 2 – Sale of Goods Act, 1930
Question 6:
(a) Raman instructed Soman, a transporter, to send a consignment of apples to Mumbai. After
covering half a distance, Soman found that the apples will perish before reaching Mumbai.
Hence, he sold the same at a half the market price. Raman sued against Soman. Will he
succeed?
Answer:
Agent’s Authority in an emergency:
As per section 189 of the sale of Goods Act, 1930, An agent has the authority in an emergency
to do all such acts as man of ordinary prudence would do for protecting his principal from losses
which the principal would have done under similar circumstances. A typical case is where the
agent handling perishable goods like 'apples' can decide the time, date and place of sale, not
necessary as per instructions of the principal, with the intention of protecting the principal from
losses.
Here the agent acts in an emergency and act as a man of ordinary prudence. In the given
case, Soman had acted in an emergency situation and Raman will not succeed against him.
(b) Differentiate between a contract of Sale and an Agreement to sell.
Answer:
Basis Contract of Sale Agreement to sell

Transfer of The property of the goods passes from The transfer of property takes place
property the buyer to the seller. at a future time or subject to certain
conditions to be fulfilled.
Type of contract It is an executed contract It is an executory contract
Type of goods Sales takes place only for existing and Future and contingent goods
specific goods
Risk of loss If the goods are destroyed, the loss If the goods are destroyed, the loss
falls on the buyer despite the goods falls on the seller despite the goods
are in the possession of the seller. are in the possession of the buyer
Breach of The seller can sue the buyer for price The seller can sue for damages only
contract and for damages in case of breach in case of breach by the buyer
by the buyer
General and It gives buyer to enjoy the goods as It gives a right to the buyer against
particular against the world at large including the seller to sue for damages
property the seller
Insolvency of the In the absence of lien over the goods The seller is not bound to part with
buyer the seller is to return the goods to the the goods until the price is paid to
Official receiver or assignee. He is him.
entitled to get the dividend declared
by the Official receiver which will be
at the reduced rate.
Insolvency of the The buyer, becoming the owner, is The buyer cannot claim the goods
seller entitled to recover the same from the but the dividend declared by the
Official receiver or assignee Official receiver or assignee.
Question 7:
(a) Justify the following:
(i) On 30.11.13 Mr. Sham agrees to sell a painting to Mr. Ram for ` 5,000 but Mr. Sham died
on 8.12.13. Mr. Sham's son claimed ` 10,000, Can Mr. Ram obtain the painting at ` 5,000
which was agreed to by Mr. Sham?
Answer:
A contract of sale of goods is a contract where by the seller transfer or agrees to transfer the
property in goods to the buyer for price.
A contract may provide for payment by installment or that the delivery or payment or both shall
be postponed.
Subject to the provisions of any law for the time being in force, a contract of sale may be made
in writing or by word of mouth.
In this case although the contract was not executed but in view of above, Ram, may enforce
'Sham's heirs for the painting at ` 5000 which was agreed to by 'Sham'.
(ii) Mr. Sham informs Mr. Ram that Mr. Sham's estate is free from encumbrances. Mr. Ram
buys the property fully relating on Mr. Sham. Subsequently it revealed that the estate
was mortgaged. What will be the position of Mr. Ram?
Answer:
In this the contract is voidable at the option of Ram, he may avoid the contract. He may insist on
its being carried out and the mortgaged debt redeemed.
(iii) Mr. Ram gives diamond to Mr. Sham on "sale or return" basis on the same day; Mr. Sham
gives those diamonds to Mr. Jadu on "sale or return" basis. Those diamonds were lost
from Mr. Jadu on the same day, who will the loss?
Answer:
Ownership under sale on return remains with seller until it passes to buyer. Mr. Sham, giving
diamonds to Jadu, acquires ownership. Although the diamonds were lost from Mr. Jadu's
custody on the same day but he was not owner in this case. The owner i.e. Sham shall bear the
loss i.e. Mr. Sham shall pay to Mr. Ram.
(iv) Mr. Sham orders on Mr. Ram to deliver certain goods at Mumbai. While the goods are
lying at Mumbai Railway Station. The Station Master informs Mr. Sham that the goods are
held at station at Mr. Sham's risk, but Mr. Sham became insolvent. Has Mr. Ram has any
right as an unpaid seller?
Answer:
Mr. Ram has lost his right of stoppage in transit; the intimation by the station master that the
goods are held at the Station at Mr. Sham's rights has transformed the position of station master
into a bailee of Mr. Sham instead of Mr. Ram. The transit has thus come to an end.
An unpaid seller can stop the goods in transit in the event of buyers' insolvency. The transit being
over, the right is thus lost.
(b) M/s. Wholesaler agreed to supply 1,000 Pcs. of Cotton Shirts to M/s. Retailer at `300 per shirt
by 31.05.2014. On 01.02.2014 M/s. Wholesaler informs the Retailer that he is not willing to
supply the shirt as the price of shirt increased to `350 each. Examine the right of M/s. Retailer.
Answer:
In terms of the provisions of Section 32 and 33 of the Sale of Goods Act, 1930; unless otherwise
agreed, delivery of the goods and payment of the price are concurrent conditions, that is to
say, the- seller shall be ready and willing to give possession of the goods to the buyer in
exchange for the price, and the buyer shall be ready and willing to pay the price in exchange
for possession of the goods.
Rights of the Buyer according to the Sale of Goods Act, 1930 include:
(1) To have delivery of the goods as per contract. (Sec. 31 & 32);
(2) To sue the seller for recovery of the price, if already paid, when the seller fails to deliver the
goods;
(3) To sue the seller for damages if the seller wrongfully neglects or refuses to deliver the goods
to the buyer ( Sec 57);
(4) To sue the seller for specific performance;
(5) To sue the seller for damages for breach of a warranty or for breach of a condition treated
as breach of a warranty ( Sec 59);
(6) To sue the seller the damages for anticipatory breach of contract (Sec 60)
In the instant case M/s. Retailer can exercise any of his rights discussed above
Study Note 3 – Negotiable Instruments Act, 1881
Question 8:
(a) Atul draws a bill of exchange payable to himself on Sidhartha, who accepts the bill without
consideration just to accommodate Atul. Atul transfers the bill to Bikash for good
consideration. State the rights of Atul and Bikash. Would your answer be different if Atul
transferred the bill to Bikash after maturity.
Answer:
Section 43 of Negotiable Instruments Act, 1881 states the following:
(i) Liability of parties if there is no consideration – A negotiable instrument made, drawn,

accepted, endorsed or transferred without consideration, or for a consideration which fails,
creates no obligation of payment between the parties to the transaction.
(ii) Rights of holder for consideration – But if any such party has transferred the instrument to a
holder for consideration, such holder, and every subsequent holder deriving title from him,
may recover the amount due on such instrument from the transferor for consideration or
any prior party thereto.
(iii) No right of accommodating party to recover from accommodating party – No party for
whose accommodation a negotiable instrument has been made, drawn, accepted or
endorsed can, if he has paid the amount thereof, recover thereon such amount from any
person who became a party to such instrument for his accommodation.
In the given case, Atul is not entitled to sue Sidhartha, since there is no consideration between
Atul and Sidhartha and hence there is no obligation to pay.
Again Bikash is entitled to sue Atul and Sidhartha, since Bikash is a holder for consideration.
Bikash is entitled to sue the transferor for consideration and every other party prior to him.
Even if Atul has transferred the bill after maturity, Bikash would have the right to sue, since the
right to sue the transferor for consideration and every other party prior to him, is available to
holder for consideration, even though he is not the ‗holder in due course‘ i.e. even if the holder
for consideration obtains the bill after maturity.
(b) Rahul accepted a bill of exchange and gave it to Keshav for the purpose of getting it
discounted and handing over the proceeds to Rahul. Keshav having failed to discount it
returned the bill to Rahul. Rahul tore the bill in two pieces with the intention of cancelling it
and threw the pieces in the street. Keshav picked up the pieces and pasted the two pieces
together, in such manner that the bill seemed to have been folded for safe custody rather
than cancelled. Keshav put it into circulation and it ultimately reached Sidhartha, who took
it in good faith and for value. Is Rahul liable to pay the bill under the provisions of the
Negotiable Instruments Act, 1881?
Answer:
Sidhartha is a holder in due course, since he acquired the bill in good faith and for value; and
since he became the possessor of the bill payable to bearer (assumed that the bill was payable
to bearer) (Sec. 9)
Rahul cannot deny the validity of the bill, since no drawer or acceptor of a bill shall, in a suit by a
holder in due course, be permitted to deny the validity of the bill as originally drawn, and thus,
Sidhartha who is the holder in due course, acquires a good title to the bill (Sec. 120).
Sidhartha is entitled to recover the payment of the bill from Rahul and all prior parties, since a
holder in due course has the right to sue all the prior parties (Sec. 36)
Study Note 4 – Indian Partnership Act, 1932
Question 9:
(a) Sunil, Bikash and Rishi were partners under the agreement that they were to share equally in
the profits and losses of the firm. In a suit between them for dissolution and accounts, it is
ascertained that contributions of Sunil, Bikash and Rishi to the capital of the firm, were `
10,000, ` 5,000 and ` 1,000 respectively. The assets of the firm after paying debts of the firm
and advances made by the partners, as distinguished from their contributions to the capital
of the firm, are ` 7,000. Comment on the settlement of this partnership Account.
Answer:
The deficiency of capital (which must be regarded as loss) being ` 9,000, each partner must
contribute to the assets an equal share of the deficiency, i.e. ` 3,000. After this is done, the assets
then available, ` 7,000 + ` 9,000 or ` 16,000 will be distributed among the partners with the result
that each will have suffered a loss of ` 3,000.
In actual practice, it will not be necessary for Sunil and Bikash to pay ` 3,000 each but the matter
will be settled on the basis of notional contributions so that Rishi whose capital is ` 1,000 only will
pay ` 2,000 out of ` 9,000 with the firm. Sunil will take ` 7,000 and Bikash ` 2,000. Assuming that
Sunil and Bikash contribute to the capital deficiency ` 3,000 each and Rishi cannot, Sunil and
Bikash will share ` 13,000, i.e. ` 7,000 plus ` 6,000 in the proportion of ` 10,000: 5,000. Sunil will
suffer a loss of ` 4,333 in all and Bikash ` 3,667.
(b) State the rules of partnership by holding out, as per Indian Partnership Act, 1932.
Answer:
As per section 28 of Indian Partnership Act, 1932, partnership by holding out would occur if,
1. Anyone who by words spoken or written or by conduct represents himself or knowingly

permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm
to anyone who has on the faith of any such representation given credit to the firm, whether
the person representing himself or represented to be a partner does or does not know that
the representation has reached the person so giving credit.
2. Where after a partners death the business is continued in the old firm name, the continued
use of that name or of the deceased partners name as a part thereof shall not of itself make
his legal representative or his estate liable for any act of the firm done after his death.
Study Note 5 – Limited Liability Partnership Act, 2008
Question 10:
(a) State the duties of a LLP Liquidator. Would his accounts be audited?
Answer:
Rule 13 provides that on appointment of a LLP liquidator, all the powers of the designated
partner and other partner, if any, shall cease, except for the purpose of giving notice of such
appointment of the LLP liquidator to the Registrar. Rule 14 prescribes the following duties -
 He shall settle the list of creditors or partners, which shall prima facie evidence of the liability
of the persons therein to the creditors or partner;
 He shall obtain approval of partners or creditors for any purpose he may consider
necessary;
 He shall maintain register and proper books of accounts in the form and manner as
specified;
 He shall the debts of the LLP and shall adjust the rights of the partners among themselves;
 He shall observe due care and diligence in the discharge of duties.
Audit of LLP liquidator’s account - Rule 15 provides that the accounts of the LLP liquidator shall
be audited.
Supervision of winding up - Rule 16 provides that the partners or the creditors may appoint such
committees as they consider appropriate to supervise the voluntary winding up and assist the
LLP liquidator in discharging the functions.
The LLP liquidator shall report quarterly on the progress of the winding up of the LLP in Form No. 8
to the partners or creditors which shall be made before the end of the following quarter. Where
the fraud is reported against any person other than a partner or designated partner, the LLP
liquidator, before sending a report to the Tribunal, may intimate it to the partners or designated
partners and include their views in the report.
The Tribunal is having power to make any order to transfer the winding up proceedings from
voluntary winding up to compulsory winding up by Tribunal.
(b) A limited liability partnership wants to shift its registered office from Udaipur in the State of
Rajasthan to Gurgaon in the State of Haryana. What procedure the corporate has to follow?
Answer:
Sec 13 of the LLP Act states that a limited liability partnership may change the place of its
registered office and file the notice of such change With the Registrar in form 15 within 30 days.
Registered office can be changed from one place to another place in the manner provided in
the Partnership Agreement, if the agreement is silent then consent of all partners shall be
required for changing the place of registered office of limited liability partnership to another
place, where the change in place of registered office is from one State to another State, the
limited liability partnership having secured creditors shall also obtain consent of such secured
creditors.
Where the change in place of registered office is from one state to another state, a general
notice, not less than 21 days before filing any notice with Registrar, is required to be published in
a daily newspaper published in English and in the principal language of the district in which the
registered office of the limited liability partnership is situated and circulating in that district giving
notice of change of registered office. However, there is just change in the jurisdiction of one
Registrar to the jurisdiction of another Registrar; the limited liability Partnership shall file the notice
in Form 15 with the Registrar from where the Limited liability partnership proposes to shift its
registered office with a copy thereof for the information to the Registrar under whose Jurisdiction
the registered office is proposed to be shifted. Failure to comply with the provision of this section
the limited liability partnership and its every partner is liable to be punishable with fine which shall
not be less than two thousand rupees but which may extend to twenty five thousand rupees.
SECTION - B
Study Note 6 to 12 – Industrial Laws
Question 11:
(a) Ajit an employee of Supertech Copper Ltd., continued to occupy the quarter of the
company for eight months after superannuation, company decided to forfeit the amount of
gratuity of Ajit. Examine the decision taken by the company to forfeit the amount of gratuity
in the light of the Payment of Gratuity Act, 1972.
Answer:
The gratuity of an employee, whose services have been terminated for any act, willful omission
or negligence causing any damage or loss to, or destruction of, property belonging to the
employer, can be forfeited to the extent of the damage or loss so caused. The gratuity payable
to an employee may be wholly or partially forfeited:- (i) if the services of such employee have
been terminated for his riotous or disorderly conduct or any other act of violence on his part or
(ii) if the services of such employee have been terminated for any act which constitutes an
offence involving moral turpitude, provided that such offence is committed by him in the course
of his employment.
It is not a valid ground for forfeiture of entire gratuity. In such a case, the company is entitled to
charge the quarter rent as per rules and after adjustment of such charges, Ajit is entitled to
receive the balance gratuity.
(b) Explain the procedure for fixing and revising minimum wages under Minimum Wages Act
1948.
Answer:
Procedure for Fixing and revising Minimum Wages (Sec 5)

In fixing minimum rates of wages in respect of any scheduled employment for the first time or in
revising minimum rates of wages so fixed, the appropriate Government shall follow either of the
following 2 methods:
(a) Appointment of committees. The appropriate Government shall appoint as many

committees and sub-committees as it considers necessary to hold inquiries and advise it in
respect of fixation or revision of minimum rates of wages, as the case may be [Sec. 5(1)(a)] ;
or
(b) Publication of proposals in the Official Gazette. The appropriate Government shall, by
notification in the Official Gazette, publish its proposals for the information of persons likely to
be affected by the fixation or revision of minimum rates of wages. It shall also specify a date
on which the proposals will be taken into consideration. The date so specified shall not be
less than 2 months from the date of the notification [Sec. 5(1)(b)].
After considering the advice of the committee or committees [under Sec. 5(1)(a)] or all
representations received by it before the date specified in the notification [under Sec.
5(1)(b)], the appropriate Government shall, by notification in the Official Gazette, fix or
revise the minimum rates of wages in respect of each scheduled employment. The fixation
or revision shall come into force on the expiry of 3 months from the date of the issue of
notification, unless the notification otherwise provides [Sec. 5(2)]. The power of the
Government under Sec. 5 (2) to issue notification revising minimum wages includes power to
give retrospective effect to notification
Question 12:
(a) Sushil retired from the services of ABC Limited, on 31st March, 2014. He had a sum of ` 10
lakhs in his Provident Fund Account. It has become due for payment to Sushil on 30th April,
2014, but the company made the payment of the said amount after one year. Sushil
claimed for the payment of interest on due amount at the rate of 15 per cent per-annum for
one year. Decide, whether the claim of Sushil is tenable under the provisions of the
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
Answer:
According to Section 7Q of the Employees‘ Provident Funds and Miscellaneous Provisions Act,
1952, the employer shall be liable to pay simple interest @ of 12% per annum or at such higher
rate as may be specified in the Scheme on any amount due from him under this Act from the
date on which the amount has become so due till the date of its actual payment.
However, the higher rate of interest specified in the Scheme cannot exceed the
lending rate of interest charged by any scheduled bank. As per above provision,
Sushil can claim for the payment of interest on due amount @ 12 percent per annum or at the
rate specified in the Scheme, whichever is higher, for one year. Here in the absence of specified
rate Sushil can claim only 12 percent per annum interest on the due amount. Hence claim of
Sushil for interest rate 15% is not tenable.
(b) ABC Ltd. carrying manufacturing activities with aid of power and with eight workers for last
two years ending on 31.03.2014. Three more workers were appointed on 01.04.2014, two
workmen left the company on 30.04.2014. Thereafter no workman was employed nor any
workmen left. Mr. Basant, one of the workman demanded that Factories Act, 1948 shall be
applicable to this company but the management denied. Give your opinion.
Answer:
According to Sec 2 (m) of the Factories Act, 1948, ‗factory‘ means any premises including the
precincts thereof –
(i) Wherein 10 or more workers are working or were working on any day of the preceding 12
months, and in any part of which a manufacturing process is being carried on with the aid
of power, or is ordinarily so carried on, or
(ii) Wherein 20 or more workers are working or were working on any day of the preceding 12
months, and in any part of which a manufacturing process is being carried on without the
aid of power, or is ordinarily so carried on.
In the given case, during the period 01.04.2014 to 30.04.2014, there were 11 workers carrying
manufacturing activities with aid of power. So, the Factories Act, 1948 is applicable on ABC Ltd.
Mr. Basant is correct.
Question 13:
(a) Notun Textiles Limited has three separate units at three separate places in the country. Every
unit of the said company prepares and maintains separate Balance Sheet and Profit and
Loss Account. One of these units is incurring continuous losses and hence bonus is not paid
to the employees of this unit. Decide, under the Payment of Bonus Act, 1965 whether the
employees of the said unit can claim bonus on the ground that the unit incurring loss is a
part of one single establishment?
Answer:
All the 3 units shall be treated as 3 separate establishments since all the 3 units maintain separate
B/S and P&L Account.
Employees of the unit which is incurring losses:

 are not entitled to claim bonus on the ground that the unit incurring loss is a part of one
single establishment;
 are entitled to minimum bonus as per the provisions of Sec. 10, 12, 13 and 14 of the Act,
since minimum bonus is payable whether or not there is any allocable surplus (and whether
the establishment has made a profit or incurred a loss).
 However, for the purpose of computation of bonus, the amount of allocable surplus shall be
taken for that particular unit only, and not of all the 3 units taken together.
(b) Explain the composition of Medical benefit council, under Employees State Insurance Act,
1948.
Answer:
As per section 10 of Employees State insurance Act, 1948, the Central Government shall
constitute a Medical Benefit Council consisting of:
1. the Director General, Health Services, ex officio, as Chairman;
2. a Deputy Director General, Health Services, to be appointed by the Central Government;
3. the medical commissioner of the Corporation, ex officio;
4. one member each representing each of the States (other than Union Territories) in which this
Act is in force to be appointed by the State Government concerned;
5. three members representing employers to be appointed by the Central Government in

consultation with such organizations of employers as may be recognized for the purpose by
the Central Government;
6. three members representing employees to be appointed by the Central Government in

consultation with such organizations of employees as may be recognized for the purpose by
the Central Government; and
7. Three members, of whom not less than one shall be a woman, representing the medical
profession, to be appointed by the Central Government in consultation with such
organizations of medical practitioners as may be recognized for the purpose by the Central
Government.
Question 14:
(a) Examine with reasons, the validity of the following nominations made under the provisions of
the Employees' Provident Fund and Miscellaneous Provisions Act, 1952:
1. J nominated N (his son) as a nominee.
2. M nominated S (his wife) and K (a friend) as nominees.
3. R who does not have a family nominated A (a close relative) as a nominee.
4. G nominated N (a friend) as a nominee because he does not have a family at the time of
nomination. Later, after one year he gets married to Z.
Answer:
1. Nomination by J in favour of N is valid, since N is a member of the family of J (since son is

covered under the definition of 'family').
2. Nomination by M in favour of S is valid, since S is a member of the family of M (since wife is

covered under the definition of 'family'); But in favour of K is void, since K is not a member of
the family of M (since K is only a friend, and a friend is not covered under the definition of
'family').
3. Nomination by R in favour of A is valid although A is not covered under the definition of

family; but if the employee does not have a family, then, nomination may be made in
favour of any person.
4. Nomination by G in favour of N is valid but it becomes void immediately on marriage since

a nomination made in favour of a person who is not a member of the family, becomes void
immediately when the employee subsequently acquires a family.
(b) Discuss the general duties of an ‘occupier’ under the Factories Act, 1948
Answer:
General duties of an ‗occupier‘ are discussed in sec 7A of the Factories Act, 1948. These are as
follows:
Every occupier shall ensure, so far as is reasonably practicable, the health, safety and welfare of
all workers while they are at work in the factory.
Without prejudice to the generality of the provisions of sub-section (1), the matters to which such
duty extends, shall include –
(i) the provision and maintenance of plant and systems of work in the factory that are safe
and without risks to health;
(ii) the arrangements in the factory for ensuring safety and absence of risks to health in
connection with the use, handling, storage and transport of articles and substances;
(iii) the provision of such information, instruction, training and supervision as are necessary to
ensure the health and safety, of all workers at work;
(iv) the maintenance of all places of work in the factory in a condition that is safe and without
risks to health and the provision and maintenance of such means of access to, and egress
from, such places as are safe and without such risks;
(v) the provision, maintenance or monitoring of such working environment in the factory for the
workers that is safe, without risks to health and adequate as regards facilities and
arrangements for their welfare at work.
Except in such cases as may be prescribed, every occupier shall prepare, and, as often as may
be appropriate, revise, a written statement of his general policy with respect to the health and
safety of the workers at work and the organisation and arrangements for the time being in force
for carrying out that policy, and to bring the statement and any revision thereof to the notice of
all the workers in such manner as may be prescribed.
Question 15:
(a) How is the amount of Gratuity determined in case of the following employees:
(i) A monthly rated employee
(ii) A piece rated employee
(iii) An employee of a seasonal establishment
Answer:
Calculation of amount of gratuity:
(i) In case of monthly rated employee:

 The gratuity shall be payable @ 15 days wages for every completed year of service or
part thereof in excess of 6 months.
 'Wages' means last drawn wages.
 'Month' means a period of 26 days.
 Thus, gratuity shall be computed as follows:
 Last drawn wages x 15/26 x Completed years of service (including a part of year in excess
of 6 months).
(ii) In case of piece rated employee:

 Gratuity shall be computed as follows:
 Last drawn wages x 15/26 x Completed years of service (including a part of year in
excess of 6 months).
 Last drawn wages shall be computed by taking average of the total wages received by
him for a period of 3 months immediately preceding the termination of his employment.
While computing daily wages, the total wages of last 3 months is to be divided by
number of days the employee actually worked, and not by the number of days or the
number of working days in the said period of 3 months.
 For the purpose of computation of last drawn wages, wages paid for overtime work shall
not be included in 'wages'.
(iii) In the case of an employee of a seasonal establishment:

 Such an employee shall be paid gratuity at the rate of 7 days' wages for each season.
(b) Abhay Textiles Ltd. employed 20 full-time and 5 part-time employees who were drawing
salary of less than ` 10,000 per month. After completing service of 28 days, in an accounting
year, 10 full-time employees submitted their resignations and left the service of the
company. The Board of directors of this company decided not to give the bonus to the
employees, who resigned, to the remaining full-time employees and to the part-time
employees. Against the decision, all the employees applied to the authorities for relief.
Decide, stating the provisions of the Payment of Bonus Act, 1965, whether the employees,
who resigned, remaining full-time employees and part-time employees will get relief.
Answer:
The Act is applicable to the establishment since the establishment has employed 20 or more
persons during any day of the AY; and if the provisions of the Act become applicable to an
establishment once, they shall continue to be applicable notwithstanding subsequent reduction
in the number of persons employed (Sec. 1).
20 full-time and 5 part-time employees are 'employees' within the definition of 'employee' [Sec.
2(13)].
The 10 full-time employees who resigned are not eligible for bonus since they have not worked
for 30 days (Sec. 8).
The remaining 10 full-time employees and all the 5 part time employees are eligible for bonus,
since they have worked for 30 days or more during the AY (Sec. 8)and even a part-time
employee is entitled to bonus (Automobile Karmchari Sangh v Industrial Tribunal).
Question 16:
(a) With whom does the responsibility of fixing minimum rates of wages lie?
Answer:
This is provided in Sec 3 of the Minimum Wages Act, 1948.
The responsibility of fixing minimum wages lies with appropriate government. The appropriate
government shall in the manner hereinafter provided-
(a) fix the minimum rates of wages payable to employees employed in an employment
specified in Part I or Part II of the Schedule and in an employment added to either Part by
notification under section 27:
Provided that the appropriate government may in respect of employees employed in an

employment specified in Part II of the Schedule instead of fixing minimum rates of wages
under this clause for the whole State fix such rates for a part of the State or for any specified
class or classes of such employment in the whole State or part thereof;
(b) review at such intervals as it may think fit such intervals not exceeding five years the
minimum rates of wages so fixed and revise the minimum rates if necessary:
Provided that where for any reason the appropriate government has not reviewed the
minimum rates of wages fixed by it in respect of any scheduled employment within any
interval of five years nothing contained in this clause shall be deemed to prevent it from
reviewing the minimum rates after the expiry of the said period of five years and revising
them if necessary and until they are so revised the minimum rates in force immediately
before the expiry of the said period of five years shall continue in force.
(b) What do you understand by the term ‘Industrial establishment’ under the Payment of Wages
Act, 1936?
Answer:
According to Section 2(ii) of the Payment of Wages Act, 1923, "industrial or other establishment"
means any –
(a) tramway service or motor transport service engaged in carrying passengers or goods or
both by road for hire or reward;
(aa) air transport service other than such service belonging to or exclusively employed in the
military naval or air forces of the Union or the Civil Aviation Department of the Government
of India;
(b) dock wharf or jetty;
(c) Inland vessel mechanically propelled;
(d) mine quarry or oil-field;
(e) plantation;
(f) workshop or other establishment in which articles are produced adapted or manufactured
with a view to their use transport or sale;
(g) establishment in which any work relating to the construction development or

maintenance of buildings roads bridges or canals or relating to operations connected with
navigation irrigation or to the supply of water or relating to the generation transmission and
distribution of electricity or any other form of power is being carried on;
(h) any other establishment or class of establishments which the Central Government or a
State Government may having regard to the nature thereof the need for protection of
persons employed therein and other relevant circumstances specify by notification in the
Official Gazette.
SECTION - C
Study Note 13 – Types, Promotion, Formation of Company
Question 17:
(a) What is Shelf Prospectus? Explain it with relevant provisions.
Answer:
Shelf Prospectus [Section 31]
(1) Any class or classes of companies, as the Securities and Exchange Board may provide by
regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first
offer of securities included therein which shall indicate a period not exceeding one year as
the period of validity of such prospectus which shall commence from the date of opening
of the first offer of securities under that prospectus, and in respect of a second or
subsequent offer of such securities issued during the period of validity of that prospectus, no
further prospectus is required.
(2) A company filing a shelf prospectus shall be required to file an information memorandum
containing all material facts relating to new charges created, changes in the financial
position of the company as have occurred between the first offer of securities or the
previous offer of securities and the succeeding offer of securities and such other changes as
may be prescribed, with the Registrar within the prescribed time, prior to the issue of a
second or subsequent offer of securities under the shelf prospectus.
Provided that where a company or any other person has received applications for the
allotment of securities along with advance payments of subscription before the making of
any such change, the company or other person shall intimate the changes to such
applicants and if they express a desire to withdraw their application, the company or other
person shall refund all the monies received as subscription within fifteen days thereof.
(3) Where an information memorandum is filed, every time an offer of securities is made under
sub - section (2), such memorandum together with the shelf prospectus shall be deemed to
be a prospectus.
Explanation: — For the purposes of this section, the expression "shelf prospectus" means a
prospectus in respect of which the securities or class of securities included therein are issued
for subscription in one or more issues over a certain period without the issue of a further
prospectus.
(b) Can company registered under the Companies Act, 2013 commence business of banking in
India? Comment.
Answer:
No, "company registered" under the Companies Act, 2013 or any act prior to it cannot
commence business of banking in India. As per the RBI Act, it is mandatory for a bank to get
itself registered with the RBI This registration authorizes it to conduct its business as a bank .For the
registration with the RBI, a company incorporated under the Companies Act, 2013 or any act
prior to it and desirous of commencing business of banking, should have an initial minimum paid
-up capital of ` 200 crore which is to be raised to ` 300 crore within three years of
commencement of business. The promoters' contribution shall be a minimum of 40% of the paid -
up capital of the bank at any point of time. This promoters' contribution of 40% of the initial
capital shall be locked in for a period of five years from the date of licensing of the bank.
Question 18:
(a) Ayush Company limited at a general meeting of members of the company passes an
ordinary resolution to buy-back 30% of its equity share capital. The articles of the company
empower the company for buy-back of shares. The company further decides that the
payment for buy-back be made out of the proceeds of the company’s earlier issue of
equity shares. With reference to the provisions of Companies Act, 2013 comment on the
following:
(i) Whether the company’s proposal is in order?
(ii) Would there be any difference if the company decides to buy-back 20% of equity
share capital, in place of 30%?
Answer:
As per section 68, where the buy-back is authorized by passing a Special Resolution, the
following limits would be applicable:
1. The buy-back shall not exceed 25% of aggregate of paid-up capital and free reserves
2. The buy-back of equity shares in any FY shall not exceed 25% of its total paid-up equity
capital in that FY.
Again, where the buy-back is authorized by passing a resolution in a Board Meeting only, the
buy back shall not exceed 10% of the aggregate of paid-up equity capital and free reserves.
In the given case,
(i) The proposal of the company to buy-back its shares is not valid, since the company has
passed an Ordinary Resolution in place of a Special Resolution. It also proposed to buy-
back 30% of the equity share capital which exceeds the statutory ceiling of 25% of total
paid up equity capital. Again the company proposes to buy-back out of the proceeds of
an earlier issue of same kind of shares, which is prohibited.
(ii) The decision to buy back 20% of equity share capital shall also not be valid, since buy-back
passing an Ordinary Resolution is violative of Sec 68 and the company proposes to buy-
back out of the proceeds of an earlier issue of same kind of shares, which is prohibited.
(b) What is the 'doctrine of constructive notice'? Explain with case law.
Answer:
A company being an artificial person acts through the instrumentality of its agents/authorized
representatives. The sphere or gamut of permissible activities of a company is specified by its
Memorandum of Association. The memorandum and articles of association of a company,
when registered, become public documents and can be inspected by anyone on payment of
nominal fee to the Registrar of Companies. Therefore, every person who intends to entering into
a contract with a company has the means of ascertaining and is consequently presumed to
know, not only the exact powers of the company but also the extent to which these powers
could be delegated to the directors, and of any limitations placed upon the exercise of these
powers. In other words, every person dealing with the company is deemed to have a
"constructive notice" of the contents of its memorandum and articles. In fact, he is regarded not
only as having read those documents but also as having understood them according to their
proper meaning [Griffith v. Paget, (1877) Ch. D.517]. For example, if the articles provide that a bill
of exchange to be effective must be signed by two directors, a person dealing with the
company must see that it so signed; otherwise he cannot claim under it. Consequently, if a
person enters into a contract which is beyond the powers of the company, as defined in the
memorandum or outside the limits set on the authority of the directors, he cannot as a general
rule acquire any right under the contract against the company [Mohony v. East Holyfrod Mining
Co. (1875) L.R7HL. 869]. The concept of constructive notice was established in Kotla
Venkataswami v. Ram Murti AIR (1932) All 141.
Question 19:
(a) Ruby Company Limited is in the process of issuance of prospectus. Kindly enlist the items
that are to be disclosed in their prospectus.
Answer:
The items that are to be stated in prospectus are as follows:
1. Details of the company, officers, bankers, trustees, underwriters and such other persons as
may be prescribed;
2. Date of opening and closing of the issue;
3. Declaration about the issue of allotment letters and returns within the prescribed time;
4. Details of bank account and details of all money is utilized and unutilized monies out of the
previous issue;
5. Details about underwriting of the issue;
6. Consent of the directors, auditors, bankers to the issue, expert‘s opinion etc.,
7. Authority for the issue and the details of the resolution passed;
8. Procedure and time schedule for allotment and issue of securities;
9. Capital structure of the company;
10. Main objects of the public offer, terms of the present issue and such other particulars as may
be prescribed;
11. Main objects and present business of the company, the location of company, schedule of
implementation of the project;
12. Details of litigation or legal action pending or taken by Ministry or Department of the
Government or a statutory authority against ht promoter during last five years immediately
preceding the year of the issue of prospectus;
13. Details of default and non-payment of statutory dues etc.,
14. Details of directors including their appointment and remuneration; their details such name,
designation, DIN, the nature of interest;
15. Source of promoters‘ contribution shall be disclosed;
(b) What may be the sources of funds for buy-back of shares?
Answer:
Sources of funds for buy-back of shares:
Under section 68 (1) of the Companies Act, 2013 a company can purchase its own shares or
other specified securities. The purchase should be out of:
(i) its free reserves: or
(ii) the securities premium account: or
(iii) the proceeds of the issue of any shares or other specified securities.
However, buy-back of any kind of shares or other specified securities cannot be made out of the
proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
'Specified securities' includes employees' stock option or other securities as may be notified by
the Central Government from time to time. [Explanation (1) under Section, 68].
Question 20:
(a) Can a non-profit organisation be registered as a company under the Companies Act, 2013?
If so, what procedure does it have to adopt?
Answer:
Registration of a non-profit organisation as a company:
According to section 8 (1) of the Companies Act, 2013, the Central Government may allow a
person or an association of persons to be registered as a Company under the Companies Act if
it has been set up for promoting commerce, arts, science, sports, education, research, social
welfare, religion, charity, protection of environment or any such other useful object and intends
to apply its profits or other income in promotion of its objects. However, such company has to
prohibit payment of any dividend to its members.
Procedure: An association of persons intending to carry any or all or some of the activities
mentioned in section 8(1) as mentioned above, has to apply to the Central Government seeking
its permission for being set up as a company under the Act. The Central Government if satisfied
on the above may by the issue of a licence in such manner as may be prescribed and on such
conditions as it may deem fit, allow such association to be registered as a limited company
under section 8(1) without the addition of word ―Limited‖ or words "Private Limited" as the case
may be, to its name.
After the issue of the licence by the Central Government, an application must be made to the
Registrar in the prescribe form after which the Registrar will register the association of persons as
a company under section 8(1). Under section 8(2) a company registered under section 8(1) as
above, shall enjoy all the privileges and be subject to all the obligations of a limited company.
This licence issued by the Central Government is revocable, and on revocation the Registrar
shall put the words 'Limited' or 'Private Limited' against the company's name in the Register. But
before such revocation, the Central Government must give the company a written notice of its
intention to revoke the licence and provide an opportunity lo it to be represented and heard in
the matter.
(b) Restrictions in alteration of Memorandum. Comment.
Answer:
Section 13(8) provides that a company, which has raised money from public through prospectus
and still has any unutilized amount out of the money so raised, shall not change its objects for
which it raised the money through prospectus unless a special resolution is passed by the
company. The special resolution shall be published in the newspapers, one in English and one in
vernacular language, which is in circulation at the place where the registered office of the
company is situated and shall also be placed on the web site of the company, if any, indicating
the justification for such change. The dissenting shareholders shall be given an opportunity to exit
by the promoters and shareholders having control in accordance with the regulations to be
specified by SEBI.
Rule 29 provides that the change of name shall not be allowed to a company which has
defaulted in filing its annual returns or financial statements or any document due for filing with
the Registrar or which has defaulted in repayment of matured deposits or debentures or interest
on deposit or debentures.
An application shall be filed in Form No. INC-24 along with the fee for change in the name of the
company and a new certificate of incorporation in Form No. INC-25 shall be issued to the
company consequent upon the change.
Question 21:
(a) What are the procedures that have to be followed for signing of Memorandum and Articles?
Answer:
Rule 13 provides for signing of memorandum and articles. The Memorandum and articles shall
be signed in the following manner:
 The memorandum and articles of association of the company shall be signed by each
subscriber to the memorandum. The name, address, description and occupation, if any, are
to be added. One witness shall attest the signature of the subscriber. The witness also is to
sign and furnish his full details.
 The witness shall state that –―I witness to subscriber/subscriber(s) who has/have subscribed
and signed in my presence (date and place to be given); further I have verified his or their
Identity details for their identification and satisfied myself of his/her/their identification
particulars filled in‖.
 Where a subscriber to the memorandum is illiterate, he shall affix his thumb impression or
mark which shall be described as such by the person, writing for him, who shall place the
name of the subscriber against or below the mark and authenticate by his own signature
and he shall also write against the name of the subscriber, the number of shares taken by
him;
 Such person shall also read and explain the contents of the memorandum and articles of
association to the subscriber and make an endorsement to that effect on the
memorandum and articles of the association;
 Where the subscriber is a body corporate, the memorandum and articles of association
shall be signed by director, officer or employee of the body corporate duly authorized in this
behalf by a resolution of the board of directors of the body corporate.
 Where the subscriber is an LLP, it shall be signed by a partner of the LLP, duly authorized by a
resolution approved by all the partners of the LLP. In either case, the person so authorized
shall not, at the same time, be a subscriber to the memorandum and articles of association;
 Where the subscriber is a foreign national residing outside India-
 in a country in any part of the Commonwealth , his signatures and address on the
memorandum and articles of association and proof of identity shall be notarized by a
Notary Public in that part of the Commonwealth;
 in a country which is a party to the Hague Apostille Convention, 1961, his signatures and
address on the memorandum and articles of association and proof of identity shall be
notarized before the Notary Public of the Country and be duly apostillised in
accordance with the Hague Convention;
 in a country outside the commonwealth and not a party to the Hague Apostille
Convention, 1961, his signatures and address shall be notarized before the Notary
Public of that country and the certificate of the Notary Public shall be authenticated by
a Diplomatic or Consular Officer empowered in this behalf .
 visited in India and intended to incorporate a company, in such cases the

incorporation shall be allowed if, he/she is having a valid Business Visa.
(b) Define the term 'Small Company' as contained in the Companies Act, 2013.
Answer:
SMALL COMPANY:
Under Section 2(85) of the Companies Act, 2013, "small company means a company, other than
a public company:-
(i) having PAID-UP SHARE CAPITAL not exceeding fifty lakh rupees or such higher amount as
may be prescribed which shall not be more than five crore rupees; or
(ii) having TURNOVER as per its last profit and loss account not exceeding two crore rupees or
such higher amount as may be prescribed which shall not be more than twenty crore
rupees.
EXCEPTIONS: This section shall not apply to:

(A) a holding company or a subsidiary company;
(B) a company registered under section 8, or
(C) a company or body corporate governed by any special Act.
Study Note 13 – Directors
Question 22:
(a) Discuss the code of professional conduct that needs to be followed by Independent
Directors with respect to the following:
(i) Guidelines of Professional Conduct
(ii) Role and Functions
(iii) Duties
Answer:
Adherence to Code by Independent Directors and fulfilment of their responsibilities in a

professional and faith" manner will promote confidence of the investment community,
particularly Minority Shareholders, Regulators and Company in the institution of Independent
Directors.
The Company and Independent Directors shall abide by the provisions specified in Schedule IV,
which are as under:
(i) Guidelines of Professional Conduct: An Independent Director shall -

1. uphold ethical standards of integrity and probity,
2. act objectively and constructively while exercising his duties,
3. exercise his responsibilities in a bonafide manner in the interest of the Company,
4. devote sufficient time and attention to his professional obligations for informed and
balanced decision-making,
5. not allow any extraneous considerations that will vitiate his exercise of objective
independent judgment in thfj paramount interest of the Company as a whole, while
concurring in or dissenting from the collective judgment of the Board in its decision-making,
6. not abuse his position to the detriment of the Company or its Shareholders or for the
purpose of gaining direct or indirect personal advantage or advantage for any associated
person,
7. refrain from any action that would lead to loss of his independence,
8. where circumstances arise which make an Independent Director lose his independence,
the Independent Director must immediately inform the Board accordingly,
9. assist the Company in implementing the best Corporate Governance Practices.
(ii) Role and Functions: The Independent Directors shall -
1. help in bringing an independent judgment to bear on the Board's deliberations especially

on issues of strategy, performance, risk management, resources, key appointments and
standards of conduct,
2. bring an objective view in the evaluation of the performance of Board and Management,
3. scrutinise the performance of Management in meeting agreed goals and objectives and
monitor the reporting of performance,
4. satisfy themselves on the integrity of financial information and that financial controls and the
systems of risk management are robust and defensible,
5. safeguard the interests of all Stakeholders, particularly the Minority Shareholders,
6. balance the conflicting interest of the Stakeholders,
7. determine appropriate levels of remuneration of Executive Directors, KMP and Senior

Management and have a prime role in appointing and where necessary recommend
removal of Executive Directors, KMP and Senior Management,
8. moderate and arbitrate in the interest of the Company as a whole, in situations of conflict
between Management and Shareholder's interest.
(iii) Duties: The Independent Directors shall -
1. undertake appropriate induction and regularly update and refresh their skills, knowledge and
familiarity with the Company,
2. seek appropriate clarification or amplification of information and, where necessary, take

and follow appropriate professional advice and opinion of outside experts at the expense
of the Company,
3. strive to attend all Meetings of the Board of Directors and of the Board Committees of which
he is a Member,
4. participate constructively and actively in the Committees of the Board in which they are
Chairpersons or Members,
5. strive to attend the General Meetings of the Company,
6. where they have concerns about the running of the Company or a proposed action,
ensure that these are addressed by the Board and, to the extent that they are not resolved,
insist that their concerns are recorded in the Minutes of the Board Meeting,
7. keep themselves well informed about the Company and the external environment in which
it operates,
8. not to unfairly obstruct the functioning of an otherwise proper Board or Committee of the
Board,
9. pay sufficient attention and ensure that adequate deliberations are held before approving
Related Party Transactions and assure themselves that the same are in the interest of the
Company,
10. ascertain and ensure that the Company has an adequate and functional Vigil Mechanism
and to ensure that the interests of a person who uses such mechanism are not prejudicially
affected on account of such use,
11. report concerns about unethical behaviour, actual or suspected fraud or violation of the
Company's code of conduct or ethics policy,
12. acting within his authority, assist in protecting the legitimate interests of the Company,
Shareholders and its employees,
13. not disclose confidential information, including Commercial Secrets, Technologies,

Advertising and Sales Promotion Plans, Unpublished Price Sensitive Information, unless such
disclosure is expressly approved by the Board or required by law.
(b) Directors are agents of the company. Comment.
Answer:
The Company can act only through Directors, and so the relationship between the Company
and the Director is that of Principal and Agent. Contract entered into by a person as a Director
of a Company, will be binding on the Company. However, Directors are not Agents of Members
of the Company.
Directors have personal liability. They would be personally liable under the following
circumstances:
 Director acts in his own name,
 Director enters into an agreement / contract which does not state clearly as to whether the
Director signing in his personal capacity or in his representative capacity as an Agent of the
Company.
Rights of the Company:

 Contract executed by the Director in excess of his authority, is binding on the Company.
However, the Company may claim damages from the Director for breach of implied warranty
of authority.
 When Directors act properly on behalf of the Company, they do not incur personal liability,
they do not exceed their powers
Question 23:
(a) X Ltd. entered into a contract with M and Co. Ltd. for purchase of raw materials of ` 2,50,000
at the prevailing market rate. The director of X Ltd., Mr. B, was holding shares of the value of
1% of the paid up capital of M and Co. Ltd. Another Director of X Ltd. Mr. C was holding
shares of the value of 1.5% of the paid up capital of M and Co. Ltd. Mr. B at the beginning of
the year, gave a general notice to X Ltd. that he was interested in M and Co. Ltd,
Mr. B claims that he had given notice to X Ltd. as required under the Companies Act, 2013
and that his holding being only 1% is within the limit under the Companies Act, 2013.
Answer:
As per section 184(2), every director who is any way, directly or indirectly, interested in a
contract or arrangement shall disclose the nature of his interest. However, section 184(2) shall
not apply to a contract or arrangement entered into between two companies, where any of
the directors of the one company or two or more of them together holds or hold not more than
2% of the paid up share capital of the other company.
If the aggregate shareholding of two or more directors in the other company exceeds 2% of the
paid up share capital of the other company, all such directors shall make a disclosure as
required under section 184(2), irrespective of the fact that individual shareholding of each of the
directors is not more than 2% of the paid up share capital of the other company.
Section 184(1) requires every director to disclose the nature of his concern or interest (along with
the shareholding, if applicable) in any company, body corporate, association of individuals or
firm. Such disclosure is to be made by the director in the first Board meeting in which he
participates as a director, the first Board in every financial year and the first Board meeting held
after any change in the interest or concern takes place.
In the present case, the aggregate shareholding of Mr. B and Mr. C is more than 2% of the paid
up share capital of M and Co., and so section 184(2) has become applicable. Accordingly, Mr.
B and Mr. C, both, are required to disclose the nature of their interest (viz. their shareholding in M
and Co. Ltd.) in the Board meeting of X Ltd. in which the contract or arrangement between X
Ltd. and M and Co. Ltd. is first discussed.
The requirements specified under section 184(2) is independent of the requirement of section
184(1). In other words, even where a director has disclosed his concern or interest as per section
184(1), he is still required to disclose his concern or interest in each and every contract or
arrangement covered under section 184(2), although such contract or arrangement is with a
company or body corporate in respect of which disclosure of interest was already given by him
in terms of section 184(1).
The general notice given by Mr. B in terms of section 184(1) is not a sufficient compliance of the
requirements of section 184(2), and so Mr. B has contravened the provisions of section 184(2).
Also, Mr. C has not disclosed his concern or interest in the Board meeting in which the contract
or arrangement is first discussed, and so, Mr. C has also contravened the provisions of section
184(2).
Consequences of contravention of section 184(2) shall be as follows:

 Mr. B and Mr. C shall vacate the office of director held by them (Section 167).
 As per Section 184(4), Mr. B and Mr. C shall be punishable with -
(a) imprisonment upto 1 year; or
(b) fine which shall not be less than `50,000 but which may extend to ` 1 lakh; or
(c) both. .
 The contract or arrangement entered into by X Limited shall be voidable at the option of X
Limited [Section 184(3)].
(b) Provisions for entering into contracts that by One person Company. Comment.
Answer:
The provisions of section 193 of the Companies Act, 2013 are explained as follows:
1. Applicability of section 193

Section 193 applies where -
(a) the company is a One Person Company;

(b) it enters into a contract with its sole member; and
(c) the sole member is also the director of the company.
2. Legal requirements
(a) The contract entered into between the company and the sole member shall be in
writing.
(b) If the contract is not in writing, the company shall ensure that the terms of the contract
are contained in a memorandum or are recorded in the minutes of the first Board
meeting held next after entering into such contract.
3. Non-applicability of section 193

Section 193 shall not apply where a contract is entered into by the company in the ordinary
course of its business.
4. Duty of the company to inform the Registrar

(a) Where a contract is entered into by One Person Company and recorded in the minutes
of the Board meeting in accordance with the provisions of this section, the company
shall inform the Registrar about such contract.
(b) Such information shall be given to the registrar within 15 days of the date of approval
by the Board of Directors.
Section 193 shall apply to One Person Company, irrespective of the fact as to whether it is
limited by shares or by guarantee.
Question 24:
(a) A company sold one of its flats to one of the directors and received 50% of the price in cash
and agreed to receive the balance in installments. Would u consider this as a loan granted
to director?
Answer:
As per section 185 of the Companies Act, 2013, no company shall, directly or indirectly, give any
loan to a director.
In the given case, the debt arose not out of an advance but out of a transaction of sale of a flat
by the company to its director.
The company gave time to the director to pay a part of the purchase price.
The essential requirement of a 'loan' is the advance of money upon the understanding that it
shall be returned back and it may or may not carry interest. Where a company sells a flat to one
of its directors and receives half the price in cash and agrees to receive the balance in
installments, the transaction amounts to a credit sale; it does not amount to even an 'indirect
loan'.
The word 'indirectly' used in section 185 of the Companies Act, 2013 only means that company
shall not give a loan to a director through the agency of one or more intermediaries. The word
'indirectly' cannot be read as converting 'what is not a loan' into 'a loan'.
Therefore, in the given case, there is no contravention of Section 185 of the Companies Act,
2013.
(b) Decide in the light of the provisions of the Companies Act, 2013, the validity and extent of
powers of Board of Directors and the procedure to be complied with in the following matters:
Donation of ` 5 lakhs to a political party registered with the appropriate authority.
Answer:
As per section 182 of the Companies Act, 2013, a company shall not make a political
contribution unless all the following conditions are satisfied:
(a) The company is not a Government company.

(b) The company has been in existence for 3 or more financial years.
(c) The aggregate amount of political contribution in a financial year shall not exceed 7.5%
of average net profits during immediately preceding 3 financial years.
(d) The Board shall make a political contribution only by passing a resolution at a Board meeting.
(e) The company shall disclose in its profit and loss account the amount of political
contribution and the name of the political party or the person to whom such amount has
been contributed.
In the given case, the Board shall be entitled to make the political contribution of Rs. 5 lakh only
if -
(a) the company has been in existence for 3 financial years;

(b) the average net profits of the company during immediately preceding 3 financial years is
equal to or more than ` 66,66,667 (i.e. 5,00,000 × 100/7.5); and
(c) the resolution approving the political contribution is passed at a Board meeting;
The Board shall ensure that adequate disclosures are made in the profit and loss account.
Question 25:
(a) Z was appointed as director of the company in an annual general meeting. He took over
the office and carried on his functions as director. Subsequently, it was found that there were
some irregularities in voting and hence the appointment was declared invalid. Would the
act done by Z, while in office as director, be binding upon the company?
Answer:
The provisions relating to validity of acts of directors are contained in section 176. The provisions
of section 176 are discussed below in detail:
Section 176 seeks to give protection to the company and third parties where certain acts are
done by a director in good faith and without notice that these are done wrongly or illegally.
Thus, section 176 validates the bona fide acts of de facto directors. These provisions may be
explained as follows:
1. Acts of a director - Validated

No act done by a person as a director shall be deemed to be invalid, notwithstanding that it
was subsequently noticed that –
(a) his appointment was invalid by reason of any defect or disqualification; or

(b) his appointment was terminated by virtue of any provision contained in the Act or in the
articles.
2. Acts of managing director - Not validated

Acts done by a director in his capacity as managing director are not validated under
section 176. Accordingly, where a managing director ceased to hold his office, all his
subsequent acts were held to be invalid. It was not an irregular exercise of power, but
exercise of power by a person who had no authority at all [Varkey Souriar v Keraleeya
Banking Co. Ltd. AIR 1957 Ker97].
3. Acts of a director - Not validated in certain cases

In the following cases, the acts of a director shall not be valid:
(a) where his appointment is illegal or there is no appointment at all;
(b) where his appointment has been shown to the company as invalid or terminated, i.e.
where such defect comes into the knowledge of the company, all subsequent acts
done by such a director shall be invalid;
(c) where the acts of a director are ultra vires the Companies Act, 2013.
4. Acts of a chairman - Not validated

The provision of validity of acts is not applicable to chairman. Therefore, the resolutions
passed by casting vote of chairman are not valid, if his appointment is invalid.
5. Action by third parties - When permissible?

Persons who deal with the directors after having notice of the defect or disqualification of
the directors are not protected by section 176. A person cannot take advantage of the
protection given by the section if he is aware of some defect or disqualification.
Where an appointment of a managing director, whole-time director or manager is not

approved by the company at a general meeting, no prior act done by him shall be deemed
to be invalid [Section 196(5)].
(b) Board meetings were held on 24th November, 2014 and 15th December, 2014. Mr. Rameshwar,
who was the chairman of these two Board meetings died on 20th December, 2014, without
signing the minutes. How should the minutes be signed and by whom?
Answer:
As per section 118, the minutes of a Board meeting may be signed by the chairman of the said
meeting or the chairman of the next succeeding meeting. The minutes shall be prepared and
signed within 30 days of the conclusion of the Board meeting.
In the present case, the minutes of the meeting held on 24.11.2014 could be signed either by the
chairman of the meeting held on 24.11.2014 or by the chairman of the next meeting held on
15.12.2014. Incidentally, the chairman of these two meetings is the same, i.e. Mr. Rameshwar, who
has died. The result is that the minutes of the two previous Board meetings, held on 24.11.2014 and
15.12.2014, have remained unsigned.
There is no legal provision covering the above situation. Therefore, it is advisable to convene a
Board meeting and appoint a chairman who shall be authorised to sign the minutes of both the
meetings held on 24.11.2014 and 15.12.2014.
(c) A Board meeting of PQR Limited was called to be held on 19.01.2015 at 3 pm at Shah
Auditorium, Delhi. However, due to lack of quorum, the meeting could not be held. Discuss the
consequences.
Answer:
As per section 174(4), if a Board meeting could not be held for want of quorum, then, unless the
articles of the company otherwise provide, the meeting shall automatically stand adjourned -
(a) to the same day in the next week, or if that day is a national holiday, till the next succeeding
day, which is not a national holiday;
(b) at the same time;

(c) at the same place.
In the instant case, the Board meeting could not be held for want of quorum, and so the provisions
of section 174(4) shall become applicable. In the next week, same day happens to be a national
holiday (viz. 26.01.2015), and so, the adjourned Board meeting cannot be held on 26.01.2015. The
next succeeding day which is not a public holiday is 27.01.2015. Therefore, the adjourned Board
meeting shall be held on 27.01.2015 at 3 pm at Shah Auditorium.
For absence of information in the question, it has been assumed that the articles of the company
do not contain any provision with respect to the consequences where a Board meeting is not held
for want of quorum.
Question 26:
(a) Referring to the provisions of the Companies Act, 2013, examine the validity of the following:
On the request of bank providing financial assistance the Board of directors of PQR Limited decides
to appoint on its Board Mr. Peter, as nominee director. Articles of Association of the company do not
confer upon the Board of Directors any such power. Further, there is no agreement between
the company and the bank for any such nomination.
Answer:
As per section 161(3) of the Companies Act, 2013, the Board may appoint any person as a director
nominated by any institution in pursuance of the provisions of any law for the time being in force or
of any agreement. The provisions of section 161(3) are subject to any provision contained in the
articles of the Company.
In the given case, no agreement has been entered into between PQR Limited and the bank
providing the financial assistance with respect to appointment of nominee director. Also, no
provision contained in any law for the time being in force authorises the appointment of nominee
director. Further, the articles of the company do not confer any power on the Board to appoint the
nominee directors. Thus, the appointment of Mr. Peter as nominee director is not valid.
(b) Mr. Sachin was appointed as an additional Director of Conservative Finance Ltd. w.e.f. 1st
October, 2014 in a casual vacancy by way of a circular resolution passed by the Board of
Directors. The next annual general meeting of the company was due on 31st March, 2015, but
the same was not held due to delay in the finalisation of the accounts. Some of the
shareholders of the company have questioned the validity of the appointment of Mr. Sachin
and his continuation as additional director beyond 31st March, 2015. Advise the company on
the complaints made by the shareholders.
Answer:
The given problem relates to sections 161(1) and 161(4) of the Companies Act, 2013.
The Legal Position

Additional Directors [Section 161(1) of the Companies Act, 2013]:
 The Board may appoint the additional directors in pursuance of the provisions of section 161(1).
 The Board may, in its discretion, appoint the additional directors whenever it deems fit.
 The appointment of additional directors may be made by the Board either by passing a
resolution at a Board meeting or by passing a resolution by circulation.
 An additional director holds office upto the date of next annual general meeting. However, if
AGM is not held upto the last date for holding ASM as per the provisions of section 96, the
additional director shall vacate his office on the last day on which the AGM should have been
held.
Director filling a casual vacancy [Section 161(4) of the Companies Act, 2013]
 The Board is authorised to fill a casual vacancy arising in the office of a director appointed in
general meeting.
 The director filling a casual vacancy shall hold office only up to the date up to which the
director in whose place he is appointed would have held office if it had not been vacated.
 A casual vacancy cannot be filled by passing a resolution by circulation under section 175.
The given case

 The Board has appointed Mr. Sachin as an additional director in a casual vacancy.
 The appointment of Mr. Sachin has been made by passing a circular resolution.
 The last date for holding the annual general meeting was 31st March, 2015. The annual
general meeting has not been held till 31st March, 2015.
 So it is to be decided, whether appointment of Mr. Sachin is valid or not?; and if he can
continue after 31st March, 2015?
Analysis of the case

1. Neither section 161(1) nor section 161(4) authorises the Board to appoint an additional
director to fill the casual vacancy.
 If appointment of fAr. Sachin is made as an additional director, then, the provisions of
section 161(1) apply, and so such appointment cannot amount to filling a casual
vacancy.
 If Mr. Sachin is appointed to fill a casual vacancy, then, the provisions of section 161(4)
apply to him, and so Mr. Sachin shall not be an additional director.
 Thus, a combined reading of sections 161(1) and 161(4) makes it clear that the
appointment of Mr. Sachin as an additional director to fill the casual vacancy is not
possible at all.
2. Mr. Sachin has been appointed to fill the casual vacancy by passing a circular resolution.
Since, the appointment of a director filling a casual vacancy requires passing of a resolution
in a board meeting only, therefore, the appointment of Mr. Sachin is in contravention of
section 161(4), and is therefore, invalid.
Conclusion
 The complaint made by the shareholders is valid.
 The appointment of Mr. Sachin is not valid since it is in contravention of sections 161(1) and
161(4). Mr. Sachin cannot continue as a director after the date of annual general meeting,
since his very appointment is void ab initio.
SECTION - D
Study Note 14 – Ethics
Question 27:
(c) What is 'Business Ethics'?
Answer:
According to Andrew Crane ―Business ethics is the study of business situations, activities and
decisions where issues of right and wrong are addressed.
Raymond C. Baumhart contend – ―The ethics of business is the ethics of responsibility. The
businessman must promise that he will not harm knowingly‖.
Business ethics concerns itself with adhering to the social principles of the situations in which
business takes place. The analysis of this definition leads us to the following discussion.
Thus, Business Ethics (also called Corporate Ethics) is a form of applied ethics or professional
ethics that examines ethical principles and moral or ethical problems that arise in a business
environment. It applies to all aspects of business conduct, and is relevant to the conduct of
individuals and the entire organizations. It deals with morality in business environment. It involves
moral judgment based on understanding of the society. It extends beyond the legal questions
and involves moral judgment based on understanding of the society. It extends beyond the
legal questions and involves goodness and badness of an act.
(1) Business ethics refers to the application of everyday moral or ethical norms to business. It
requires an awareness of how the products and services of an organizations and the action
of its employees, can affect its stakeholders and society as a whole, either positively or
negatively.
(2) Ethics in business organization relates to a corporate culture of values, leadership program
and enforcement.
It is that set of principles or reasons which governs the conduct of business at the individual or
collective level by the application of ethical reasoning to specific business situations and
activities.
(d) What are circumstances leading to actual happening of threats for an Accounting
professionals working as Consultants or Auditors?
Answer:
Sl.
Types of threats Accounting professional working as Consultants or Auditors
No.
1. Self interest threat (i) A financial interest in a client.
(ii) Undue dependence on fees from a client.
(iii) Close business relationship with a client.
(iv) Fear of losing a client.
(v) Potential employment with a client.
(vi) Contingent fees relating to an assurance engagement.
2. Self review threat (i) Discovery of a significant error of the work of the professional.
(ii) Reporting on the operation of the designed financial systems.
(iii) Being a Director or Officer of the client.
(iv) Being employed by the client in a position to exert influence
over the subject-matter of the engagement.
3. Advocacy threat (i) Promoting shares in a Listed Entity of a client.
(ii) Acting as an advocate on behalf of client in litigation or
disputes with third parties
4. Familiarity threat (i) Close relationship with a Director or Officer of the client
(ii) Accepting gifts or preferential treatment from a client
5. Intimidation threat (i) Being threatened with litigation.
(ii) Fear of losing work from client.
(iii) Being threatened with replacement.
Question 28:
(a) ‘Fairness and honesty are the pillars of success in business’. Comment.
Answer:
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. At a minimum, business professionals and persons are expected to follow all applicable
laws and regulation. Even then, they are expected not to harm customers, employees, clients or
competitors knowingly through deception, 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.
Rivals of Microsoft, for example, accused the software giants of using unfair and monopolistic
practices to maintain market dominance with its Internet explorer browser.
These aforesaid examples show that fairness and honesty pay in the long run; they secure the
stability of the business and overall reputation in the business world. Therefore we may say that
fairness and honesty are the pillars of success in the business.
(b) What is meant by Conflicts Resolution Process? What steps should be taken to resolve the
conflict issues?
Answer:
A finance and accounting professional should determine the appropriate course of action and
weigh the consequences of each possible course of action. If the matter remains unresolved,
the professional should consult with other appropriate persons within the firm and if required,
with persons responsible for governance of the organisation (e.g. Board of Directors).
The following steps are suggested to resolve the issues:
(a) Documentation: He should document the substance of the issue and details of any
discussions held or decisions taken, concerning that issue.
(b) Legal Advice: If a significant conflict cannot be resolved, a professional may obtain advice
from the relevant professional body or legal advisors without breach of confidentiality.
(c) Withdrawal: If, after exhausting all relevant possibilities, the ethical conflict remains
unresolved, a professional should, where possible, refuse to remain associated with the
matter creating the conflict, withdraw from the engagement team or specific assignment or
resign from the employing organization.
Question 29:
(a) State the evolution of ethics.
Answer:
Social conduct has evolved along with the evolution of society. When our elders tell us ‗Do not
cheat‘, they are referring to a social code of conduct. Social conduct has developed in society
over hundreds of years. The codes of conduct have been passed down from generation to
generation, and there is a pattern to the evolution of such codes. Acceptable behaviour is
promoted and elevated as a social value, and unacceptable behaviour is rejected and
condemned. The laws of country are based on the customs or moral codes of its society.
Penalties are prescribed for bad actions, actions that contradict the established laws. The laws
are a measure against those people who cross the limits of the code of social conduct, and
ensure that good citizens are protected from the negative consequences of the law-breakers.
The object of the social codes of conduct is to maintain, promote and elevate harmonious
relationships.
(b) Explain two broad categories of safeguards created by business enterprise to eliminate
threats.
Answer:
It is important to have safeguards created by the Finance and Accounting profession, to identify
or deter unethical behavior. Such safeguards to eliminate or reduce threats may classified in two
broad categories:
 Safeguards created by the Finance and Accounting profession, Legislation or Regulation.
 Safeguards in the work environment.
(A) Safeguards created by the Finance and Accounting profession, Legislation or Regulation:
 Educational, training and experience requirements for entry into the profession.
 Continuing professional development requirements.
 Corporate Governance Regulations.
 Professional standards.
 Professional or regulatory monitoring and disciplinary procedures.
 External review of reports by a legally empowered third party.
(B) Safeguards in the work environment:

 The employing organization‘s ethics and conduct programs.
 Employing competent staff.
 Strong internal controls.
 Appropriate disciplinary processes.
 Leadership or cultivating ethical behavior to encourage employees to act in ethical
manner.
 Policies and procedures to implement and monitor the quality of employee
performance.
 Timely communication of organisation‘s policies and procedures.
 Employee training and education on policies and procedures.
 Encourage employees to communicate ethical issues without fear of retribution,
organisation‘s system of corporate overview.
Short Notes
Question 30:
Write short notes on:

(i) Points of a valid offer
Answer:
The following points are to be taken into account for a valid offer -
 The offer must be in clear, definite, complete and final terms.
 It should not be vague in terms;
 The offer must be communicated to the offeree. The offer becomes effective only when it
has been communicated to the offeree so as to give him an opportunity to accept or reject
the offer;
 The communication may be in writing or oral;
 The communication may be in expressed terms or in implied terms;
 The offer may be general or specific – if an offer is made to a specific person it is called
specific offer. Such offer can be accepted by such specific person; if an offer is made to
the world at large, it is a general offer. It can be accepted by any member of the general
public by fulfilling the condition laid down in the offer;
 Communication of offer is complete when it comes to the knowledge of the person to
whom it is made.
(ii) Exceptions to ‘Risk Prima Facie passes with the property’
Answer:
The rule regarding risk passes with the property enshrined in section 26 is subject to the following
exceptions:
(a) This rule of 26 will apply only if there is no agreement to the contrary. It is permissible for the
parties to provide in the agreement that although the property does not pass, the risk
passes and they may fix the point of time when it is to pass.
(b) Where delivery has been delayed through the fault of either party the buyer or the seller,
the goods are at the risk of the party at fault as regards any loss which might not have been
occurred but for such loss. The goods are at the risk of the party who is at fault in delay of
delivery.
(c) If there is a custom in that particular trade that the risk does not pass with property, in such a
case the risk will pass as per the custom.
(d) Risk and property may be separated by agreement between the parties. Section 40 of the
Act also provides that where the seller agrees to deliver the goods at his own risk at a distant
place from where they are, the buyer shall unless otherwise agreed, not take any risk of
deterioration in the goods incidental to the transit.
(iii) Inchoate stamped instruments
Answer:
Where one person signs and delivers to another a paper stamped in accordance with the law
relating to negotiable instruments for the time being in force in India and either wholly blank or
having written thereon an incomplete negotiable instrument, he thereby gives prima facie
authority to the holder thereof to make or complete, as the case may be, upon it a negotiable
instrument, for any amount specified therein and not exceeding the amount covered by the
stamp. The person so signing shall be liable upon such instrument, in the capacity in which he
signed the same, to any holder in due course for such amount provided that no person other
than a holder in due course shall recover from the person delivering the instrument anything in
excess of the mount intended by him to be paid there under.
(iv) Admission of new partner
Answer:
Admission of a partner is one of the modes of reconstitution of a partnership firm. A new partner
may be admitted in a partnership firm either for the increase of capital of the firm or to
strengthen the management of the firm. A new partner may be admitted with the consent of all
existing partners as per the provisions of the agreement of the firm. The new partner is entitled
the following rights-
 The right to share in the assets of the partnership firm; and
 The right to share the profits in the business.
The following are to be taken care of while admitting a new partner -

 Computation of new profit sharing ratio and sacrifice ratio;
 Accounting treatment of goodwill;
 Revaluation of assets and liabilities;
 Treatment of undisbursed profits and accumulated losses;
 Adjustment of capital accounts.
(v) Penalty for contravention of the provisions relating to hazardous process
Answer:
Section 96A provides that whoever fails to comply with or contraventions any of the provisions of
Section 41B, 41C or 41H or the rules made there under, shall, in respect of such failure or
contravention, be punishable with imprisonment for a term which may extend to seven years
and with fine which may extend to `2 lakhs and in case of the failure or contravention
continues, with additional fine which may extend to `5000/- for every day during which such
failure or contravention continues after the conviction for the first such failure or contravention. If
the failure or contravention continues beyond a period of one year after the date of conviction,
the offender shall be punishable with imprisonment for a term which may extend to ten years.
(vi) Dispute as to the amount of gratuity payable
Answer:
Section 7(4) provides that if there is a dispute as to the amount of gratuity payable to the
employee, the employer shall deposit the gratuity with the Controlling Authority. The controlling
authority shall, after due inquiry and after giving the parties to the dispute a reasonable
opportunity of being heard, determine the amount of gratuity payable to an employee. If as a
result of such inquiry any amount in excess of the amount deposited by the employer is found to
be payable, the controlling authority shall direct the employer to pay such amount as is in
excess of the amount deposited by him.
Then the Controlling Authority shall pay the amount of the deposit-
 to the applicant where he is the employee; or
 where the applicant is not the employee, to the nominee or heir of the employee if the
controlling authority is satisfied that there is no dispute as to the right of the applicant to
receive the amount of gratuity.
(vii) Features of National Pension System
Answer:
The National Pension System shall, on the commencement of this Act, have the following basic
features, namely:—
(a) every subscriber shall have an individual pension account under the National Pension
System;
(b) withdrawals, not exceeding twenty-five per cent of the contribution made by the subscriber,
may be permitted from the individual pension account subject to the conditions, such as
purpose, frequency and limits, as may be specified by the regulations;
(c) the functions of recordkeeping, accounting and switching of options by the subscriber shall
be effected by the central recordkeeping agency;
(d) there shall be a choice of multiple pension funds and multiple schemes:
Provided that—
(a) the subscriber shall have an option of investing up to hundred per cent of his funds in
Government Securities; and
(b) the subscriber, seeking minimum assured returns, shall have an option to invest his funds
in such schemes providing minimum assured returns as may be notified by the Authority;
(e) there shall be portability of individual pension accounts in case of change of employment;
(f) collection and transmission of contributions and instructions shall be through points of
presence to the central recordkeeping agency;
(g) there shall not be any implicit or explicit assurance of benefits except market-based
guarantee mechanism to be purchased by the subscriber;
(h) a subscriber shall not exit from the National Pension System except as may be specified by
the regulations; and
(i) at exit, the subscriber shall purchase an annuity from a life insurance company in
accordance with the regulations.
(viii) Payment of commission to any person in connection with the subscription to its securities
Answer:
Rule 13 provides that a company may pay commission to any person in connection with the
subscription or procurement of subscription to its securities, whether absolute or conditional,
subject to the following conditions:
 the payment of such commission shall be authorized in the company‘s articles of

association;
 the commission may be paid out of proceeds of the issue or the profit of the company or
both;
 the rate of commission paid or agreed to be paid shall not exceed, in case of shares, 5% of
the price at which the shares are issued or a rate authorized by the articles, whichever is
less, and in the case of debentures, shall not exceed 2.5% of the price at which the
debentures are issued, or as specified in company‘s articles, whichever is less;
 the prospectus of the company shall disclose the name of the underwriters, the rate and
amount of the commission payable to the underwriter and the number of securities which is
to be underwritten or subscribed by the underwriter absolutely or conditionally;
 commission shall not be paid to any underwriter on securities which are not offered to the
public for subscription;
 a copy of the contract for the payment of commission is delivered to the Registrar at the
time of delivery of the prospectus for registration.
(ix) Qualification of independent directors
Answer:
Rule 5 prescribes the qualification of independent directors. An independent director shall

possess appropriate skills, experience and knowledge in one or more fields of finance, law,
management, sales, marketing, administration, research, corporate governance, technical
operations or other disciplines to the company‘s business.
Section 149, further provides that an independent director shall not be entitled to any stock
option. He may receive remuneration by way of sitting fee and the reimbursement of expenses
for participation in the Board and other meetings and profit related commission as may be
approved by the members. An independent director shall not hold office for a term of office up
to five consecutive years on the Board of a company. He shall be eligible for re-appointment on
passing a special resolution by the company. The Board‘s report shall disclose the same. No
independent director shall hold office for more than two consecutive terms. He shall be eligible
for appointment after the expiration of three years of ceasing to become an independent
director. The provisions for retirement of directors shall not be applicable to independent
directors.
Independent directors may be selected from a data bank containing the details of persons who
are eligible and willing to act as independent directors by any agency as notified by the Central
Government. The appointment of independent director shall be approved by the company in
general meeting.
(x) Importance of ethics
Answer:
Ethics is a requirement for human life. It is our means of deciding a course of action. Without it,
our actions would be random and aimless. There would be no way to work towards a goal
because there would be no way to pick between a limitless numbers of goals. Even with an
ethical standard, we may be unable to pursue our goals with the possibility of success. To the
degree which a rational ethical standard is taken, we are able to correctly organize our goals
and actions to accomplish our most important values. Any flaw in our ethics will reduce our
ability to be successful in our endeavours.
A proper foundation of ethics requires a standard of value to which all goals and actions can be
compared to. This standard is our own lives, and the happiness which makes them liveable. This
is our ultimate standard of value, the goal in which an ethical man must always aim. It is arrived
at by an examination of man‘s nature, and recognizing his peculiar needs. A system of ethics
must further consist of not only emergency situations, but the day to day choices we make
constantly. It must include our relations to others, and recognize their importance not only to our
physical survival, but to our well - being and happiness. It must recognize that our lives are an
end in themselves, and that sacrifice is not only not necessary, but destructive.
Revisionary Test Paper_June 2018
Intermediate
Group I
Paper 5 : FINANCIAL ACCOUNTING
(SYLLABUS – 2016)
Objectives
1. (a) Multiple choice questions:
(i) In Hire Purchase system cash price plus interest is known as

(A) Capital value of asset
(B) Book value of asset
(C) Hire purchase price of asset
(D) Hire purchase charges
(ii) Which one is/ are the method/s of Accounting for Branches
(A) Final Accounts Method;
(B) Debtors Method and
(C) Stock and Debtors Method.
(D) All of the above
(iii) ___________________________ is similar to the Profit and loss A/c

(A) Income and Expenditure A/c
(B) Receipts and Payments A/c
(C) Balance Sheet
(D) None of the Above
(iv) Kuntal draws a bill on shyam for ` 7,000 kuntal endorsed it to Ram. Ram endorsed it to
Rahim. The payee of the bill will be:
(A) Kuntal
(B) Ram
(C) Shyam
(D) Rahim
(v) Bad debts are apportioned among departments in the proportion of

(A) Sales of each department
(B) Number of units sold each department
(C) Cost of sales of each department
(D) None of the above
(vi) Which of the following is not a Fundamental Accounting Assumption?

(A) Going Concern
(B) Consistency
(C) Accrual
(D) Materiality
(vii) ___________________ is equal to estimated selling price less the estimated costs of
completion and the estimated costs necessary to make the sale.
DoS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(A) Net Realisable value
(B) Cost of Conversion
(C) Cost of Purchase
(viii) _____________ are investments which are held beyond the current period as to sale or
disposal.
(A) Non-current Investments
(B) Current Investments
(C) Current Liabilities
(ix) An obligation which may or may not materialize is a/an _______________.

(A) Loss
(B) Asset
(C) Contingent Liability
(x) ________________ voucher denotes payment of cash.

(A) Cash Payment
(B) Cash Receipt
(C) Bank Payment
(xi) Which of the following is an example of Capital Expenditure?

(A) Inventory of raw materials, work-in-progress and finished goods;
(B) Insurance premium;
(C) Taxes and legal expenses;
(D) None of the above.
(xii) Which of the following errors is not disclosed by a Trial Balance?

(A) Errors of Omission
(B) Errors of Commission
(C) Compensating Errors
(xiii) ___________ is specially suited to mines, oil wells, quarries, sandpits and similar assets of a
wasting character.
(A) Depletion
(B) Depreciation
(C) Amortisation
(D) Delapidation
(xiv)The following account has a credit balance

(A) Plant and Equipment A/c
(B) Loans A/c
(C) Purchase A/c
(xv) From the following details estimate the capital as on 31.03.2017, Capital as on
01.04.2016 ` 4,10,000. Drawings ` 40,000, Profit during the year ` 50,000
(A) ` 4,10,000
(B) ` 4,50,000
(C) ` 4,20,000
(D) ` 4,00,000
(xvi)A and B purchased a piece of land for `30,000 and sold it for `60,000 in 2016. Originally
A had contributed `12,000 and B `8,000. The profit on venture will be
(A) `30,000
(B) `20,000
(C) `60,000
(D) Nil
(xvii) Ground Rent or Surface rent means

(A) Minimum Royalty payable
(B) Maximum Royalty payable
(C) Fixed rent payable in addition to minimum rent
(D) Rent recovered at the end of lease term
(xviii) AB Ltd. has signed at 31st December,2017 the Balance Sheet date, a contract where
the Total Revenue is estimated at `15 Crores and Total Cost is estimated at `20 Crores.
No work began on the contract. Is the Contractor required to give any accounting
effect for the ended 31st December,2017?
(A) Recognise expected loss of `5 Crores
(B) Recognize `15 Crores as Profit
(C) No entry
(xix)Which of the following item does not match with receipts and payments account?
(A) It is a summarized cash book
(B) Transactions are recorded in it on cash basis
(C) It records revenue transactions only
(D) It serves the purpose of a real account
(xx) Which of the following is/ are the basic features of a Joint Venture
(A) The profit or loss on joint venture is shared between the co-venturers in the agreed
ratio;
(B) The co-venturers may or may not contribute initial capital;
(C) The JV is dissolved once the purpose of the business is over;
(D) All of the above.
(b) Match the following:

1. Chronologically recording of A. Machinery A/c
transactions
2. Generally Accepted Accounting B. Recurring in Nature
Principles
3. Tangible Real A/c C. Journal
4. Revenue Receipts D. GAAP
5. Helps check the arithmetical E. Drawee
accuracy
6. Acceptance of Bills of Exchange F. Trial Balance
7. Dissolution of Firm G. AS - 10
8. Property, Plant and Equipment H. Realisation A/c
9. Amount of actual royalty over I. Tournament expenses
minimum rent
10. Not-for Profit Organizations J. Excess Working
Answer:

1. Chronologically recording of C. Journal
transactions
2. Generally Accepted Accounting D. GAAP
Principles
3. Tangible Real A/c A. Machinery A/c
4. Revenue Receipts B. Recurring in Nature
5. Helps check the arithmetical F. Trial Balance
accuracy
6. Acceptance of Bills of Exchange E. Drawee
7. Dissolution of Firm H. Realisation A/c
8. Property, Plant and Equipment G. AS - 10
9. Amount of actual royalty over J. Excess Working
minimum rent
10. Not-for Profit Organizations I. Tournament expenses
(c) Fill in the blanks:
(i) Revenue expenditure is incurred to earn revenue of the ___________ period.

(ii) The debts which may or may not be realized are called ___________debts.
(iii) The __________ __________ shows financial position of the business as on a particular
date.
(iv) ___________ _________is the combination of both the basis i.e. Cash as well as Accrual
basis.
(v) A transaction forgotten to be entered in books of accounts is an error of ___________.
(vi) In a Computerised Environment the processing of information will be by one or more
__________.
(vii) __________ represents an amount of cash, goods or any other assets which the owner
withdraws from business for his or her personal use.
(viii) Assets like brand value, copy rights, goodwill are known as _________ __________.
(ix) Rebate is given in case of _________ of a bill.
(x) Goods costing ` 4,00,000 sent out to consignee at cost + 25%. Invoice value of the
goods will be _________.
Answer:
(i) Current;
(ii) Doubtful;
(iii) Balance Sheet;
(iv) Hybrid/Mixed;
(v) Omission;
(vi) Computers;
(vii) Drawings;
(viii) Intangible Assets;
(ix) Retirement;
(x) `5,00,000.
(d) State whether the following statements are true or false:
(i) The excess of expense over income is called Profit.

(ii) Current Liability represents a potential obligation that could be created depending
on the outcome of an event.
(iii) The primary stage of accounting function is called Book-keeping.
(iv) In Dual Aspect Concept the assets represent economic resources of the business.
(v) According to AS-2 Inventories are held for sale in normal course of business.
(vi) Premium received on issue of shares is a revenue profit.
(vii) Depreciation is an actual loss.
(viii) Dishonour of a Bill means that the acceptor refuses to honour his commitment on due
date and payment of the bill on presentation does not take place.
(ix) Consignee is the person who sends goods to agents.
(x) Average Clause is a clause contained in a fire insurance policy.
Answer:
(i) False
(ii) False
(iii) True
(iv) True
(v) True
(vi) False
(vii) False
(viii) True
(ix) False
(x) True
Study Note 1 – Fundamentals of Accounting
Q2. (a) State with reasons the nature of expenditure or receipts in each of the following cases:
(i) Freight on new machine `5,000 and its installation cost `2,500.
(ii) Old Furniture sold for `800 (cost `4,000 but written down value `900).
(iii) `1,50,000 spent for increasing the sitting capacity of a cinema hall and `7,500 paid for
painting it.
(iv) Daily repairing cost of machineries of `5,000.
(v) Expenses incurred in connection with obtaining a licence for starting the factory were
` 30,000.
Answer:
(i) Both `5,000 and `2,500 are Capital Expenditure because —

 these are incidental to the acquisition and starting of operation of the machine.
 the earning capacity of the business will increase.
(ii) The cost price need not be considered. The loss on sale `100 (`900 – `800) is a revenue
loss to be debited to Profit/Loss Account. The sale price received `800 is a capital
receipt.
(iii) Increase of sitting capacity is a permanent improvement of the cinema hall. It will help
to increase the earning capacity. So it is a capital expenditure. Cost of painting is a
normal and regular expense. It is a revenue expense.
(iv) Daily repairing cost of machineries of `5,000 is to be treated as revenue expenses as it is
recurring in nature.
(v) ` 30,000 incurred in connection with obtaining a license for starting the factory is a
Capital Expenditure. It is incurred for acquiring a right to carry on business for a long
period.
(b) On 1st April, 2015 Bosco Ltd. purchased machines for `2,40,000 and on 31st September 2016 it
acquired additional machines at a cost of ` 40,000. On 30th June, 2017, one of the original
machines which cost `10,000 was found to have become obsolete and was sold as a scrap
for `1,000. It was replaced on the same date by a new machine costing `16,000.
Depreciation is to be provided @ 15% per annum on the basis of diminishing balance
method. Show machinery account for the first three years. The company closes its books on
31st March every year.
Answer:
Dr. Machinery Account Cr.
Date Particulars Amount Date Particulars Amount

(`) (`)
2015 2016
April 1 To, Bank A/c 2,40,000 March 31 By, Depreciation A/c 36,000
By Balance c/d 2,04,000
2,40,000 2,40,000
2016 2017
April 1 To, Balance b/d 2,04,000 March By Depreciation (30,600 33,600

Sept. To, Bank A/c 40,000 31 +3,000)
30 By Balance c/d 2,10,400
2,44,000 2,44,000
2017 2017
April 1 To Balance b/d 2,10,400 June 30 By Depreciation A/c 270
― By Bank A/c 1,000
June To Bank A/c 16,000 ― By Profit & Loss A/c
30
2018
March 31 By Depreciation A/c 32,278
― (30,478 + 1,800) 1,86,898
2,26,400 2,26,400
Computation of Loss on Sale of Machinery on 30.06.2017:
Written down value on 01.04.2017 `

= `10,000 – (1,500 + 1,276) 7,224
Depreciation from 01.04.2017 to 30.06.2017 @ 15% 270
6,954
Less: Sale Value 1,000
Loss on Sale 5,954
Balance of Machinery Account on 1st April 2017, excluding the w.d.v of the machinery sold
on 30th June,2017 = `( 2,10,400 – 7,225) = `2,03,175.
3. On July 1,2015, River Ltd. purchased a second – hand machinery for `20,000 and spent
` 3,000 on Re-conditioning it. On January 1,2016 , another machinery was purchased worth
`12,000. On July 30th, 2017, the machinery purchased on January 1,2016 was sold for
` 8,000.
Depreciation is written off @ 10% p.a on original cost. Accounts are closed on March 31 st
every year. Prepare Machinery Account for year ending 31st March 2017.
Answer:
Dr. Machinery Account Cr.

(`) (`)
2015 To, Bank A/c 23,000 2016 By, Depreciation A/c
July 1 (Machine-I) March,31 (Machinery-I)
(20,000+3,000) – ` 1,725 (for 9 mths)
2016 (Machinery-II)
Jan 1 To, Bank A/c 12,000 - ` 300 (for 3 mths) 2,025
(Machine-II)
By, Balance c/d
(Machinery-I)- `21,275 32,975
(Machinery-II)- 11,700
35,000 35,000
2016 To, Balance b/d 32,975 2017 By, Depreciation
April 1 Machine I- ` 21,275 March 31 (Machinery-I)- `2,300
Machine II- `11,700 (Machinery-II)- `1,200 3,500
By, Balance c/d

(Machinery-I)- ` 18,975
(Machinery-II)- ` 10,500 29,475
32,975 32,975
2017 To, Balance b/d 29,475 2017 By,Depreciation
April 1 Machine I- `18,975 July 30 (Machinery-II)
Machine II- `10,500 (3 months) 400
By, Bank A/c 8,000

By, P&L A/c 2,100
2017 By, Depreciation 2,300

March 31 (Machinery-I)-`2,300
By, Balance b/d 16,675

I- ` 16,675
29,475 29,475
4. (a) Rectify the following errors by passing necessary journal entries:

(i) Goods taken by the proprietor `3,000 for gift to his daughter were not recorded at all.
(ii) `3,000 received from Niraj against debts previously written off as bad debts have been
credited to his personal account.
(iii) Received interest `300, posted to loan account.
(iv) A cheque received from Vishal, a debtor, for `4,000 was directly received by the
proprietor who deposited it into his personal bank account.
Answer:
Books of ………….
Journal
Dr. Cr.
Date Particulars L. F. Amount Amount
` `
Drawings A/c Dr. 3,000
To Purchase A/c 3,000
[Goods taken by proprietor previously not
recorded, now rectified]
Niraj‘s A/c Dr. 3,000
To Trading A/c 3,000
[Niraj‘s A/c wrongly credited for amount received
against bad debts written of, now rectified]
Loan A/c Dr. 300
To Interest Received A/c 300
[Interest received wrongly credited to Loan A/c,
now rectified]
Drawings A/c Dr. 4,000
To Vishal‘s A/c [Debtors] 4,000
[Cheque from a Debtor directly received and
deposited into personal bank a/c by proprietor,
now adjusted]
(b) There was a difference in Trial Balance of Mr. S Basu, a trader, on 31st December, 2017
and the difference in books was carried to a Suspense Account and the books were closed.
Subsequently on going through the books, the following errors were located:
 ` 1,296 paid for Repairs to Motor Car was debited to Motor Car Account as ` 696.
 A sale of ` 1,400 to Utpal Das entered in the Sales Book as ` 4,100.
 A cash discount of ` 1,000 received was entered in the Cash Book but was not posted in
the ledger.
 ` 500 being Purchase Returns posted to the debit of Purchases Account.
 The Purchase of a machine on 1st April, 2016 for ` 23,000 was entered in the Purchases
Book.
 While carrying forward total of one page in Vikram Garg’s Account, the amount of
` 1,000 was written on the credit side instead of the debit side.
 A cheque of ` 6,192 received from Vivek Basu (after allowing her a discount of ` 92)
was endorsed to Arnab Ghosh in full settlement of ` 7,000. The cheque was finally
dishonoured but no entries were passed in the books.
Give the Journal entries to rectify the above and prepare the Suspense Account.
Answer:
Books of Subhayan Basu
Journal
Date Particulars L.F. Dr. Cr.
Amount Amount
(`) (`)
(i) Profit & Loss Adjustment A/c (Repairs) Dr. 1,296
To Motor Car A/c 696
To Suspense A/c 600
[Repairs to Motor Car ` 1,296 wrongly debited to Motor Car
A/c as 696, now rectified]
(ii) Profit & Loss Adjustment A/c (Sales) Dr. 2,700
To Suspense A/c 2,700
[A Sale of ` 1,400 entered in the Sales Book as ` 4,100 now
rectified]
(iii) Suspense A/c Dr. 1,000
To Profit & Loss Adjustment A/c (Discount Received) 1,000
[Cash discount received but not posted to the ledger, now
rectified]
(iv) Suspense A/c Dr. 1,000
To P&L A/c Adjustment A/c (Purchase ` 500 and 1,000
Purchase Returns ` 500)
[Purchase Returns posted to the debit of Purchase A/c, now
rectified]
(v) Machinery A/c Dr. 23,000
To Profit & Loss Adjustment A/c 23,000
[Purchase of Machine debited to Purchase A/c, now
rectified]
(vi) S. Debtors A/c Dr. 2,000
To Suspense A/c 2,000
[Page total of one Debtor A/c written on the side instead of
in the debit side, now rectified]
(vii) Vivek Basu A/c Dr. 6,284
*P/L Adjustment A/c (Disc. Recd.) Dr. 808
To Arnab Ghosh A/c 7,000
To P/L Adjustment A/c (Disc. Allowed) 92
[Endorsed cheque dishonoured, now recorded]
Notes:
* It is assumed that discount received at the time of endorsements are being disallowed/
cancelled.
** The entries have been made assuming that the Final Accounts have already been prepared.
Suspense Account
Dr. Cr.
Particulars ` Particulars `
To P/L Adjustment A/c (Disc. Recd.) 1,000 By P/L Adjustment A/c (Repairs) 600
To P/L Adjustment A/c (Purchase) 500 By P/L A/c (Sales) 2,700
To P/L Adjustment A/c (Purchase Return) 500 By Sundry Debtors A/c 2,000
To Difference in Books 3,300
5,300 5,300
Study Note 2: Accounting for Special Transactions
5. (a) R considered the debt of S as irrecoverable and wrote-off that debt of ` 1,200 as bad on
02.03.2016. On 30.6.2016, S paid cash ` 1,000 to R in full settlement of the account and on the
date further goods were sold to S invoiced at ` 3,120. S paid by a cheque of ` 1,000 and
accepted a bill of exchange for the balance of ` 2,120 at 2 months. R discounted the bill at
the bank for ` 2,040. The bill at maturity was returned to R as dishonoured, noting charge
being ` 5. Next day S accepted a fresh bill at one month and paid cash for the noting charge
and interest at 6%. A day before due date, S paid cash ` 640 and accepted another bill for
the balance sum at 3 months. After a month, thereafter, S, having become insolvent, paid a
compensation of 50 p. in the rupee.
Show the entries in the books of R.
Answer:
In the Books of R
Journal
Date Particulars L.F. Debit Credit
2016 ` `
March 2 Bad Debts A/c Dr. 1,200.00
To S‘s A/c 1,200.00
(Amount due to S written-off as bad)
June 30. Bank A/c Dr. 1,000.00
To Bad Debts Recovery A/c 1,000.00
(Amount recovered from S written-off as bad)
June 30 S‘s A/c Dr. 3,120.00
To Sales A/c 3,120.00
(Goods sold to S)
Bills Receivable A/c Dr. 2,120.00
To S‘s A/c 3,120.00
(cash and bill received from S)
Discount A/c Dr. 80.00
To Bills receivable A/c 2,120.00
(Bill discount by the bank)
Sept. 3. S‘s A/c Dr. 2,125.00
To Bank A/c 2,125.00
(Bill dishonoured by S, noting charge being `5)
Sept. 4. S‘s A/c Dr. 10.60
To Interest A/c 10.60
(Interest receivable from S on `2,120 @ 6% for 1
months)
Sept. 4. Bank A/c Dr. 15.60
To S‘s A/c 15.60
(Cash received from, S for interest and noting
charges)
Sept. 4. Bills Receivable A/c Dr. 2,120.00
To S‘s A/c 2,120.00
(Fresh bill drawn and accepted by S)
Oct. 7. S‘s A/c Dr. 2,120.00
(Bill dishonoured on maturity)
Oct. 7.
Bank A/c Dr. 640.00
To S‘s A/c 640.00
Oct. 7.
(Cash received from S as part payment)
Bills receivable A/c Dr. 1,480.00
To S‘s A/c 1,480.00
Nov. 7.
(Fresh bill drawn and accepted by S)
S‘s A/c Dr. 1,480.00
Nov. 7.
(Bill dishonoured as S became insolvent)
Bank A/c Dr. 740.00
Bad debts A/c Dr. 740.00
To S‘s A/c 1480.00
(Cash received from S @ 50 in the rupee and the
balance proved bad)
(b) Sunil owed Anil ` 80,000. Anil draws a bill on Sunil for that amount for 3 months on 1st April.
Sunil accepts it and returns it to Anil. On 15th April, Anil discounts it with CT Bank at a discount of 12%
p.a. On the due date the bill was dishonoured, the bank paid noting charges ` 100. Anil settles
the bank's claim along with noting charges in cash. Sunil accepted another bill for 3 months for the
amount due plus interest of ` 3,000 on 1st July. Before the new bill become due, Sunil retires the bill
with a rebate of ` 500. Show journal entries in books of Anil.
Answer:
Journal entries in the books of Anil
Date Particulars L.F. Dr.(`) Cr. (`)
April, 1 Bills Receivables A/c Dr. 80,000
To, Sunil's A/c 80,000
(Being acceptance by Sunil)
April, 15 Bank A/c Dr. 78,000
Discount A/c Dr. 2,000
To, Bills Receivables A/c 80,000
(Being discounting of the bill @ 12% p.a. & discounting
charges for 2.5 months)
June, 30 Sunil's A/c Dr. 80,100
To, Bank A/c 80,100
(Being dishonour of the bill & noting charges paid by bank)
June, 30 Bank A/c Dr. 80,100
To, Cash A/c 80,100
(Being cash paid to bank)
July, 1 Sunil's A/c Dr. 3,000
To, Interest A/c 3,000
(Being interest due from Sunil)
July, 1 Bills Receivables A/c Dr. 83,100
To, Sunil's A/c 83,100
(Being new acceptance by Sunil for ` 80,100 & interest of `
3,000)
July, 1 Bank A/c Dr. 82,600
Rebate A/c Dr. 500
To, Bills Receivables A/c 83,100
(Being the amount received on retirement of the bill)
6. (a) On 1st July, 2016 B. Dutta of Kolkata consigned 250 Computers costing ` 28,000 each to T.
Ramasami, Chennai. Expenses of ` 17,000 were met by the consignor. T. Ramasami spent
` 14,500 for clearance on 31st July, 2016 and selling expenses were ` 1,500 per computer as
and when the sale made by consignee. T. Ramasami sold on 4th September, 2016, 150
computers at ` 40,000 per computer and again on 21st September, 75 computers at
` 42,500.
Mr. Ramasami was entitled to a commission of `1,500 per computer sold plus one-fourth of
the amount by which the gross sale proceeds less total commission there on exceeded a
sum calculated at the rate of ` 35,000 per computer sold. T. Ramasami sent the account
sale and the amount due to B. Dutta on 30th September, 2016 by bank demand draft. You
are required to show the consignment account and T. Ramasami's account in the books of
B. Dutta.
Answer:
Books of B. Dutta of Kolkata
Consignment Account
Dr. Cr.
(`) (`)
01.07.16 To Goods Sent on 70,00,000 04.09.16 By T. Ramasami (Sales) 60,00,000
01.07.16 Consignment A/c 21.09.16 By T. Ramasami (Sales) 31,87,500
31.07.16 To Bank (Exp.) A/c 17,000 30.09.16 By Stock on
04.09.16 To T. Ramasami 14,500 Consignment A/c 7,03,150
21.09.16 (Clearance Exp.)
30.09.16 To T. Ramasami (Selling Exp.) 2,25,000
30.09.16 To T. Ramasami (Selling Exp.) 1,12,500
To T. Ramasami 5,32,500
(Commission)
To Profit & Loss A/c 19,89,150
98,90,650 98,90,650
T. Ramasami (Chennai) Account
Dr. Cr.
(`) (`)
04.09.13 To Consignment A/c 60,00,000 31.07.13 By Consignment A/c (Clearance 14,500
21.09.13 To Consignment A/c 31,87,500 04.09.13 Exp.)
21.09.13 By Consignment A/c (Selling Exp.) 2,25,000
30.09.13 By Consignment A/c (Selling Exp.) 1,12,500
30.09.13 By Consignment A/c (Commission) 5,32,500*
By Bank A/c 83,03,000
91,87,500 91,87,500
Working Notes:
(i) Calculation of Commission

Let ‗x‘ be total commission
x = (225 x 1,500) + ¼[60,00,000 + 31,87,500 – x – 1 (35,000 x 225)
x = 3,37,500 + ¼ (91,87,500 – x – 78,75,000)
x
x = 3,37,500 + 3,28,125 –
4
5
x = 6,65,625
4
x = 532500*
(ii)
Valuation of stock on consignment

Particulars `
250 – 150 – 75 = 25 computers @ ` 28,000 7,00,000
25 1,700
Add: Consignor‘s Expenses = 17,000 x
250
25 1,450
Add: Share of consignee‘s Clearing Exp. 14,500 x
250
Value of unsold stock 7,03,150
(b) Mr. G of Bombay sent 100 T.V. sets to Mr. K of Chandigarh on consignment basis. The cost
price of each set was ` 5,000. Mr. G paid ` 100 for Cartage, ` 1,500 for Railway Freight and
` 400 for Insurance Premium.
Mr. G drew a bill payable after 2 months for ` 50,000. After it was duly accepted by Mr. K by
way of advance remittance against the consignment, Mr. G discounted the bill for ` 49,900.
Mr. K paid ` 600 for Landing Charges, ` 100 for Clearing, ` 300 for Carriage to Godown, ` 500
for Godown Rent. ` 200 for Carriage to Customers, ` 360 for Insurance of Godown and ` 100
for Advertisement. He sold 10 sets for cash @ 5,400 each and 80 sets @ ` 5,500 each on
credit but could not realize the sale proceeds of 2 sets.
Mr. K was entitled to receive 4% ordinary commission and 1% del credere commission. The
net amount due from Mr. K was received in time.
Prepare the Consignment Account and Mr. K Account in the books of Mr. G.
Also show the necessary accounts in the books of Mr. K.
Answer:
Books of Mr. G
Consignment to Chandigarh Account
Dr. Cr.
To Goods sent on Consignment A/c 5,00,000 By Mr. K (Total sales) A/c 4,94,000
To Bank A/c : [10 × 5,400 + 80 × 5,500]
Cartage 100 By Stock of Consignment A/c 50,300
Railway Freight 1,500
Insurance 400
To Mr. K A/c :
Landing Charges 600
Clearing Charges 100
Carriage to Godown 300
Godown Rent 500
Carnage to Customers 200
Insurance of Godown 360
Advertisement 100
To Mr. K A/c :
Ordinary Commission [4% of 19,760
4,94,000]
Del Credere [1% of 4,94,000] 4,940
To Profit & Loss (Profit on Consignment) 15,440
5,44,300 5,44,300
Mr. K Account
Dr. Cr.
(`) (`)
To Consignment to Chandigrah 4,94,000 By Bill Receivable A/c (Advance) 50,000
A/c
By Consignment to Chandigarh A/c
Expenses 2,160
Commission 24,700
By Bank-Balance Received 4,17,140
4,94,000 4,94,000
Working Notes:
A. The Discount on Bill `100 has been considered as a general financial expense/loss. If it is
considered as incidental to this consignment, it may be charged to Consignment Account.
But in no case it should be considered for stock valuation.
B. Valuation of Unsold Stock

Qty. `
(T.V. Sets)
Goods Consigned 100 5,00,000 [Cost Price]
+ Non-Recurring Expenses :
(a) Paid by Consignor [Cartage + Railway Freight + 2,000
Insurance]
(b) By Consignee [Landing Charges + Clearing Exp. + 1,000
Carriage to Godown]
100 5,03,000
Qty of stock [Sent - Sold] 10 5,03,000 ×10
Value = 100
Market Price → Assumed higher = 50,300
C. As Del Credere Commission is paid to consignee, no special entry for credit sales and no
entry for Bad Debts are required in Mr. G's [Consignor's] books.
D. No entry needed in consignee's books for goods sent to him, consignor's expenses, bill
discounted by consignor and unsold stock.
Books of Mr. K [Consignee]

Mr. G Account
Dr. Cr.
To Bill Payable A/c 50,000 By Bank (Cash Sales) A/c 54,000
To Bank-Expenses 2,160 By Consignment Debtors A/c 4,40,000
(Credit Sales) [5,500 × 80]
To Commission [19,760 + 24,700
4,940]
To Bank-Balance Sent 4,17,140
4,94,000 4,94,000
Consignment Debtors Account

Dr. Cr.
To Mr. G A/c 4,40,000 By Bad Debts A/c [2 × 5,500] 11,000
By Bank-Balance Realised A/c [5,500 × 4,29,000
80]
4,40,000 4,40,000
Commission Account
Dr. Cr.
To Bad Debts A/c 11,000 By Mr. G A/c 24,700
To Profit & Loss A/c 13,700
24,700 24,700
7. (a) Amal and Bina entered into a joint venture for guaranteeing the subscription at par of
1,00,000 shares of ` 10 each of a Joint Stock Company. They agree to share profit and losses
in the ratio of 2 : 3. The terms with the company are 4½% commission in cash and 6,000
shares of the company as fully paid-up.
The public took up 88,000 of the shares and the balance share of the guaranteed issue are
taken up by Amal and Bina who provide cash equally. The commission in cash is taken by
partners in the ratio of 5:4.
The entire shareholding of the joint venture is then sold through brokers – 25% price of ` 9.
50% at a price of ` 8.75; 15% at a price of ` 8.50 and the remaining 10% are taken over by
Amal and Bina equally at ` 8 per share. The sale proceeds of the shares are taken by the
partners equally.
Prepare a Joint Venture Memorandum Account and the separate accounts of Amal and
Bina in the books of Bina and Amal, respectively, showing the adjustment of the final
balance between Amal and Bina.
Ignore interest and income-tax.
Answer:
Memorandum Joint Venture Account
Dr. Cr.
` `
? To Amal (Cost of 60,000 ? By Amal (Commission) 25,000
Shares) 60,000 Bina (Commission) 20,000
,, Bina (Cost of Shares) ,, Amal (Sale Proceeds) 71,100
,, Profit to Joint Bina (Sale Proceeds) 71,100
Venture ,, Amal (Shares taken) 7,200
Amal 32,640 81,600 Bina (Shares taken) 7,200
Bina 48,960
2,01,600 2,01,600
In the books of Amal

Joint Venture with Bina
Dr. Cr.
` `
? To Bank – Cost of Shares 60,000 ? By Bank – Commission 25,000
,, Share of Profit 32,640 ,, Bank – Sale Proceeds 71,100
,, Bank – final settlement 10,660 ,, Shares taken 7,200
1,03,300 1,03,300
In the books of Bina

Joint Venture with Amal
Dr. Cr.
` `
? To Bank – Cost of Shares 60,000 ? By Bank – Commission 20,000
,, Share of Profit 48,960 ,, Bank – Sale Proceeds 71,100
,, Shares taken 7,200
,, Bank – Final settlement 10,660
1,08,960 1,08,960
Workings:
A. Purchase of Shares
(1,00,000 – 88,000) = 12,000 @ ` 10 = ` 1,20,000 provided by Amal and Bina equally i.e.,
` 60,000 each.
B. Calculation of Sales
6,000 Shares taken as Commission
12,000 shares purchase
Entire share-holding 18,000
Particulars `
25% of 18,000 = 4,500 shares @ 9.00 = 40,500
50% of 18,000 = 9,000 shares @ 8.75 = 78,750
15% of 18,000 = 2,700 shares @ 8.50 = 22,950
1,42,200 x ½ = ` 71,100 made by Amal and Bina each.
C. Commission in Cash
1,00,000 Shares @ ` 10 = ` 10,00,000 x 4½% = ` 45,000 to be taken by Amal and Bina in the
ratio 5:4.
D. Unsold Shares taken equally by Amal and Bina

10% of 1,800 shares @ ` 8.00 = ` 14,400 x ½ = ` 7,200 each.
(b) AA and BB entered into a Joint Venture for sale of notebooks. The following information is
provided to you -
• AA purchased 16,000 Notebooks at `20 each. He sent 9,000 Notebooks to BB and incurred
Transport Charges `6,000. AA sold 5,000 Notebooks at `36, 1,500 Notebooks at `40, and
400 Notebooks at `42. The balance notebooks could not be sold since they were in
damaged condition.
• BB received 9,000 Notebooks and sold 8,000 Notebooks at `36. Of the balance
Notebooks, 200 were in damaged condition and considered non-saleable. BB took over
the remainder good notebooks at an agreed price of `22 each.
• Shop Expenses incurred by the parties were - AA `64,000, BB`88,000.
• Out of sale by BB, a customer for 500 Notebooks paid only 60% of the amount. Further
enquiry revealed that nothing was realizable from him. Prepare the Memorandum Joint
Venture Account in the above case. Also show, along with relevant Journal Entries - (a)
Joint Venture with BB A/c, in AA's books, and (b) Joint Venture with AA A/c, in BB's
books.
Answer:
Memorandum Joint Venture Account
Dr. Cr.
To Purchase Cost (16,000 x `20) 3,20,000 By Sales:
To Transportation Charges 6,000 AA
To Shop Expenses (64,000 + 88,000) To 1,52,000 (5,000 x 36) + (1,500 x 40) + 2,56,800
Bad Debts (500 x `36 x 40%) 7,200 (400 x 42)
To Profit trfd to AA 38,600 BB (8,000 x `36) 2,88,000
BB 38,600 77,200 By Books taken over by BB 17,600
(9,000 - 8,000 - 200) x `22
Total 5,62,400 Total 5,62,400
Note: Each Co-Venturer may prepare the Memorandum JV A/c, to ascertain the profit on JV.
In the books of AA
Journal Entries
Particulars Dr. Cr.
` `
1. Joint Venture with BB A/c Dr. 3,90,000
To, Bank A/c 3,90,000
(Being 16,000 Notebooks purchased at `20 each
i.e. `3,20,000 + Cost of Transport `6,000 + Own
Shop Expense `64,000)
2. Bank A/c Dr. 2,56,800
To Joint Venture with BB A/c 2,56,800
(Being sale of notebooks (5,000×36)+(1,500×40) +
(400×42)]
3. Joint Venture with BB A/c Dr. 38,600
To, Profit and Loss A/c 38,600
(being own share of profit on Joint Venture
recognized)
4. Bank A/c Dr. 1,71,800
To, Joint Venture with BB A/c 1,71,800
(Being final settlement received from BB, on
completion of Joint Venture)
2. Joint Venture with BB Account
Dr. Cr.
To Bank A/c (Expenses incurred) 3,90,000 By Bank A/c - Sales Collections 2,56,800
To Profit & Loss A/c (Share of Profit) 38,600 By Bank A/c - final settlement 1,71,800
received
Total 4,28,600 Total 4,28,600
In the books of BB
1. Journal Entries
Particulars Dr. Cr.
1. Joint Venture with AA A/c Dr. 88,000
To Bank A/c 88,000
(Being Own Shop Expenses `88,000)
2. Bank A/c Dr. 2,80,800
To Joint Venture with AA A/c 2,80,800
[Being sale of notebooks (8,000 Notebooks x `36) less
Uncollected Amount Bad Debts (500 notebooks x `36 x
40%)]
3. Notebook Stock A/c Dr. 17,600
To Joint Venture with AA A/c 17,600
(Being 800 notebooks taken over at `22 each)
4. Joint Venture with AA A/c Dr. 38,600
To Profit and Loss A/c 38,600
(Being own share of profit on JV recognized)
5. Joint Venture with AA A/c Dr. 1,71,800
To Bank A/c 1,71,800
(Being final settlement paid to AA, on completion of JV)
2. Joint Venture with AA Account
Dr. Cr.
To Bank A/c (Expenses incurred) 88,000 By Bank A/c - Sales Collections 2,80,800
To Profit & Loss A/c (Share of Profit) 38,600 By Bank A/c – taken over 17,600
To Bank A/c (Final Settlement paid) 1,71,800
2,98,400 2,98,400
8. (a) On 29th August, 2016 the godown of a trader caught fire and a large part of the stock of
goods was destroyed. However, goods costing `1,08,000 could be salvaged incurring fire
fighting expenses amounting to `4,700. The trader provides you the following additional
information :
`
Cost of stock on 1st April, 2015 7,10,500
Cost of stock on 31st March, 2016 7,90,100
Purchases during the year ended 31st March, 2016 56,79,600
Purchases from 1st April, 2016 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from
1st April, 2016 to the date of fire 41,000
Cost of goods withdrawn by trader for personal use from
1st April, 2016 to the date of fire 2,000
Sales for the year ended 31sl March, 2016 80,00,000
Sales from 1sl April, 2016 to the date of fire 45,36,000
The insurance company also admitted fire fighting expenses. The trader had taken the fire
insurance policy for `9,00,000 with an average clause. Calculate the amount of the claim
that will be admitted by the insurance company.
Answer:
Memorandum Trading Account
for the period 1s' April, 2016 to 29th August 2016
Dr. Cr.
Date Particulars ` Date Particulars `

To Opening Stock 7,90,100 By Sales
45,36,000
To Purchases 33,10,700 By Closing stock
Less: Advertisement (41,000) ,, (Bal. fig.) 8,82,600
8,82,600
Less: Advertisement
Drawings (2,000) 32,67,700
To Gross Profit [30% of
To Gross Profit [30% of sales refer 13,60,800
working Note]
54,18,600 54,18,600
Statement of Insurance Claim

Particulars `
Value of stock destroyed by fire 8,82,600

Less: Salvaged Stock (1,08,000)
Add : Fire Fighting Expenses 4,700
Insurance Claim 7,79,300
Note: Because (policy amount is more than claim amount). Average clause will not apply. Hence,
claim amount of only `7,79,300 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2016
Date Particular ` Date Particular `

To Opening Stock 7,10,500 By Sales 80,00,000
To Purchases 56,79,600 By Closing stock 7,90,100
To Gross Profit 24,00,000
87,90,100 87,90,100
Rate of Gross profit in 2015 – 16
[(Gross profit /Sales) × 100] = (24,00,000/80,00,000) × 100 = 30%
(b) Ramasankar & 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,
2015 and as a result of which sales were seriously affected for a period of 3 months. Trading
and Profit & Loss A/c of Ramasankar & Sons for the year ended on 31st March, 2015 is given
below:
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
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 01.04.2015 to
30.06.2015 were ` 3,36,000, ` 2,14,000, ` 51,000 and ` 12,000 respectively.
(b) Other Sales figure were as follows :

`
From 01.04.2014 to 30.06.2014 3,00,000
From 01.07.2014 to 30.09.2014 3,20,000
From 01.07:2015 to 30.09.2015 48,000
(c) Due to decrease in the material cost, Gross Profit during 2015-16 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.
Answer:
Claims for loss of stock

Memorandum Trading Account
Dr. Cr.
` `
To, Opening Stock 1,85,000 By Sales 3,36,000
To Purchases 2,14,000 By, Closing Stock 2,26,800
(Bal. Fig.)
To Wages 51,000
To Manufacturing expenses 12,000
To Gross Profit @ 30% on sales 1,00,800
(W.N.)
5,62,800 5,62,800
Claim for loss of stock will be limited to `2,10,000 only which is the amount of insurance policy
and no average clause will be applied.
Loss of Profit:
(a) Short Sales:

Sales from 1st July 2014 to 30th Sept.2014 `3,20,000
Add: 12% rise in 2015-16 over 2014-2015
(April-June `3,36,000 instead of `3,00,000) `38,400
`3,58,400
Less: Actual Sales from 1st July,2015 to 31st Sept 2015 ` (48,000)
Short Sales `3,10,400
(b) Gross Profit ratio

Net Profit + insured Standing Charges (2014 - 2015)
×100
Sales (2014 - 2015)
`60,000 + `1,56,000
100 18%
`12,00,000
Add: Expected rise due to decline in material cost 5%
Hence, Gross Profit Ratio 23%
(c) Loss of Gross Profit

23% on Short Sales `3,10,400 = `71,392
(d) Annual Turnover (12 months to 1st July,2015)
Sales for April 2014-March,2015 `12,00,000

Less: From 1.4.2014 to 30.6.2014 ` (3,00,000)
`9,00,000
Add: 12% increasing trend `1,08,000
`10,08,000
Add: From 1.4.2015 to 30.6.2015 `3,36,000
`13,44,000
Gross profit on annual turnover @ 23% `3,09,120
(e) Amount allowable in respect of additional expenses
Least of following
(i) Actual Expenses `1,98,000

(ii) Gross Profit on sales during indemnity period 23% of `48,000 `11,040
Gross profit on annual (adjusted) Turnover
(iii) × Additianal Expenses
Gross profit as above + Uninsured Charges
3,09,120
×1,98,000 `1,74,316
3,51,120
Least i.e. `11,040 is admissible
Claim
Loss of Gross profit `71,392
Add: Additional expenses `11,040
`82,432
Insurance claim for loss of profit will be of `82,432 only.
Working Note:
Rate of Gross Profit in 2014-15
Gross Profit
×100
Sales
3,00,000
×100 = 25%
12,00,000
In 2015-16 Gross Profit is expected to increase by 5% as a result of decline in material cost,

hence the rate of Gross Profit for loss of Stock is taken at 30%
Study Note 3 : Preparation of Financial Statements of Profit Oriented Organisation
9. On 31.12.2016, Sundry Debtors and Provision for Bad Debts are ` 50,000 and ` 5,000
respectively. During the year 2015, ` 3,000 are bad and written off on 30.9.2017, an amount
of ` 400 was received on account of a debt which was written off as bad last year on
31.12.2017, the debtors left was verified and it was found that sundry debtors stood in the
books were ` 40,000 out of which a customer Mr. X who owed ` 800 was to be written off as
bad.
Prepare Bad Debt Account. Provision for Bad Debt Account. Assuming that some
percentage should be maintained for provision for bad debt as it was on 31.12.2016.
Show also how it will appear in Profit & Loss Account. and Balance Sheet.
Answer:
In the books of ……….

Dr. Bad Debt Account Cr.
Date Particulars Amount Date Particulars Amount (`)
(`)
2017 To, Sundry Debtors A/c 3,000 2017 By, Provision for Bad Debt 3,800
Sept. 30 Dec. 31 A/c
Dec. 31 To, X A/c. 800
3,800 3,800
Dr. Provision for Bad Debt Account Cr.

Date Particulars Amount (`) Date Particulars Amount (`)
2017 To, Bad Debt A/c 3,800 2017 By, Balance b/d 5,000
Dec. 31 ― Balance c/d 3,920 Dec. 31
[10% on ` 39,200, ― Profit & Loss A/c 2,720
(` 40,000 - ` 800)] -for the provision
required
7,720 7,720
Workings : Calculation of ‗%‘ of Provision for bad debts —

(5,000/50,000 × 100) = 10%
Profit & Loss Account (Extract)
Dr. For the year ended 31.12.2014 Cr.
Particulars Amount Amount Particulars Amount Amount
(`) (`) (`) (`)
To, Bad Debts 3,400 By Bad Debts Recovery 400
A/c
‖ Provision for Bad Debts:
Existing 5,000
Less: Provision Required 3,920 1,080
Balance Sheet (Extract)

As at 31.12.2015
Liabilities Amount (`) Assets Amount (`) Amount (`)
Sundry Debtors 40,000
Less: Bad Debts 800
39,200
Less: Provision for Bad 3,920 35,280

Debts
10. Jamnadas provides you with the following T. B. as on 31st March 2016
Particulars Debit (`) Credit (`)
Stock as on 1st April 13 35,000
Depreciation 5,000
Accumulated depreciation 40,000
Fixed asset 50,000
Loss on sale of fixed asset 8,000
Investments 1,25,000
Profit on sale of investments 80,000
Sales at 20% gross margin 800,000
Purchases 7,50,000
Customers’ accounts 1,00,000 20,000
Creditors’ accounts 5000 60,000
Expenses 42,000
Discount 18,000 12,000
Particulars Debit (`) Credit (`)
Commission 50,000 80,000
Amounts due to principals 8,000
Amounts due from dealers 75,000
Deposits with Principals 1,00,000
Deposits from dealers 1,50,000
Cash 7,000
Income on investments 5,000
Interest on deposits with Principals 12,000
Interest on deposits from dealers 18,000
Prepaid/outstanding expenses
As on 31st March 2013 7,000 13,000
As on 31st March 2014 9,000 6,000
Fixed deposits with bank 2,00,000
Interest on fixed deposits with bank 20,000
Drawings/Capital 60,000 3,00,000
Banks 58,000
Total 16,64,000 16,64,000
The cost of fixed assets sold is ` 30,000, accumulated depreciation being ` 9,000.
Prepare the financial statements. Also, separately show Accumulated depreciation Account, and
Expenses Account.
Answer:
Dr. Accumulated Depreciation Account Cr.

(`) (`)
31-Mar-16 To, Asset (sold) 9,000 1- Apr-15 By Balance b/d (balancing 44,000
31-Mar-16 To, Balance c/d 40,000 figure)
31 -Mar-16 By P & L (depreciation) 5,000
49,000 49,000
By balance b/d 40,000
Dr. Expenses Account Cr.
Date Particulars Amount (`) Date Particulars Amount (`)
1-Apr-15 To, Balance (pre paid) 7,000 1- Apr-15 By, Balance b/d (due) 13,000
31-Mar-16 To, Cash paid 45,000 31-Mar-16 By, P & L A/c (42,000- 36,000
(balancing figure) 13,000+7,000)
31-Mar-16 To, Balance b/d (due) 6,000 31-Mar-16 By, Balance c/d (pre 9,000
paid)
58,000 58,000
1-Apr-17 To Balance b/d (pre 9,000 1-Apr-17 By, Balance b/d (due) 6,000
paid)
Dr. Trading Account for the year ended 31st March 2016 Cr.
Opening stock Sales 8,00,000

Finished goods 35,000
Purchases 7,50,000
Closing stock:
Gross Profit c/d (8,00,000×20%) 1,60,000 Finished goods (Balance in fig.) 1,45,000
9,45,000 9,45,000
Dr. Profit and Loss Account for the year ended 31st March 2016 Cr.
Administrative expenses - Gross Profit b/d 1,60,000
Expenses 36,000 Profit on sale of investment 80,000
Depreciation 5,000 Discount received 12,000
Loss on sale of fixed asset 8,000 Commission received 80,000
Discount allowed 18,000 Income from investments 5,000
Commission given 50,000 Interest deposits with principals 12,000
Interest on deposits to dealers 18,000 Interest bank deposits 20,000
Net profit 2,34,000
3,69,000 369,000
Sales 8,00,000
Gross margin on sales @ 20% 1,60,000
Cost of goods sold 6,40,000
Goods available for sale 7,85,000 (this is op stock 35,000 + purchases 750,000)
Hence, closing stock should be 1,45,000 (785,000- 640,000)
Now, the balance sheet is given below.
Balance Sheet as on 31st March 2016
Liabilities Amount Amount Assets Amount Amount
(`) (`) (`) (`)
Jamnadas‘s Capital 3,00,000 Fixed Assets: 80,000
Less: Drawings (60,000) Less: Acc. Dep for sold (30,000)
Add: Net Profit for the year 2,34,000 4,74,000 Balance of assets 50,000
Depreciation opening 44,000
Long term Liabilities: Less: Acc Dep for sold (9,000)
Current Liabilities: Add for the year 5,000
Sundry creditors 60,000 Net Acc. Dep 40,000
Advance from Customers 20,000 Net fixed Asset 10,000
Dues to Principals 8,000
Bank overdraft 58,000 Investments 1,25,000
Outstanding expenses 6,000
Deposits from dealers 1,50,000 Current Assets:
Stocks 1,45,000
Sundry debtors 1,00,000
Deposits with 1,00,000

Principals
Cash in hand 7,000
Fixed deposit with 2,00,000

Bank
Dues from dealers 75,000
Advance to suppliers 5,000
Prepaid expenses 9,000
7,76,000 7,76,000
Please carefully interpret the balances given. Customer balances are in debit as well as credit
column. While debit indicates Debtor and credit means advances received from customers.
Same logic will apply to suppliers, commission, discounts. Computation of closing stock was very
important in this case.
Study Note 4: Preparation of Financial Statement of Not-for Profit Organisation
11. From the following data, prepare an Income and Expenditure Account for the year ended
31st December, 2016, and Balance Sheet as at that date of the Ganesh Hospital:
Receipts and Payments Account
for the year ended 31 December, 2016
Receipts ` ` Payments ` `
To Balance b/d By Salaries:
Cash 800 (` 7,200 for 2015) 31,200
Bank 5.200 6,000 By Hospital Equipment 17,000
To Subscriptions: By Furniture purchased 6,000
For 2015 5,100 By Additions to 50,000

Building
For 2016 24,500 By Printing and 2,400
For 2017 2,400 Stationery
To Government Grant: By Diet expenses 15,600
For building 80,000 By Rent and rates
For maintenance 20,000 (` 300 for 2017) 2,000
Fees from sundry By Electricity and
water
patients 4,800 charges 2,400
To Donations (not to be 8,000 By office expenses 2,000
capitalised) By Investments 20,000
To Net collections from By Balances:
benefit shows 6,000 Cash 1,400
Bank 6,800 8,200
1.56,800 1,56,800
Additional information : `
Value of building under construction as on 31.12.2016 1,40,000
Value of hospital equipment on 31.12.2016 51,000
Building Fund as on 1.1.2016 80,000
Subscriptions in arrears as on 31.12.2015 6,500
Investments in 8% Govt, securities were made on 1st July, 2016.
Answer:
Ganesh Hospital
Income & Expenditure Account
for the year ended 31 December, 2016
Expenditure ` Income `
To Salaries 24,000 By Subscriptions 24,500
f
To Diet expenses 15,600 By Govt. Grants (Maintenance) 20,000
To Rent & Rates 1,700 By Fees, Sundry Patients 4,800
To Printing & Stationery 2,400 By Donations 8,000
To Electricity & Water-charges 2,400 By Benefit shows (net 6,000
collections)
To Office expenses 2,000 By Interest on Investments 800
To Excess of Income over
expenditure transferred to 16,000
Capital Fund
64,100 64,100
Balance Sheet as at 31st Dec, 2016
Liabilities ` ` Assets ` `
Capital Fund: Building:
Opening balance 49,300 Opening balance 90,000
Excess of Income Addition 50,000 1,40,000
Over Expenditure 16,000 65,300 Hospital Equipment:
Building Fund: Opening balance 34,000
Opening balance 80,000 Addition 17,000 51,000
Add:Govt. Grant 80,000 1,60,000 Furniture 6,000
Subscriptions Investments-
received in advance 2,400 8% Govt. Securities 20,000
Subscriptions receivable 1,400
Accrued interest 800
Prepaid expenses 300
(Rent)
Cash at Bank 6,800

Cash in hand 1,400
2.27,700 2.27,700
Working Notes:
(1) Balance Sheet as at 31st Dec, 2015

Liabilities ` Assets `
Capital Fund Building 90,000
(Balancing Figure) 49,300 Equipment 34,000
Building Fund 80,000 Subscription Receivable 6,500
Creditors for Expenses: 7,200 Cash at Bank 5,200
Salaries payable Cash in hand 800
1,36,500 1,36,500
(2) Building `
Balance on 31st Dec. 2016 1,40,000
Paid during the year (50,000)
Balance on 31st Dec. 2015 90,000
(3) Equipment
Paid during the year (17,000)
(4) Subscription due for 2015
Receivable on 31st Dec. 2015 6,500
Received in 2016 (5,100)
Still Receivable for 2015 1,400
12. The following is the Income and Expenditure Account of GREEN CITY CLUB for the year
ended March 31, 2015.
(Amount in `)
Particulars Particulars
To Salaries 4,80,000 By Subscriptions 13,00,000
To Rent 1,20,000 By Entrance Fees 2,00,000
To Printing & Stationery 30,000 By Contribution for Annual 1,60,000
Dinner
To Travelling Expenses 60,000 By Profit on Annual Sports 20,000
To Annual Dinner Expenses 1,40,000
To Secretary’s Honorarium 1,20,000
To General Expenses 60,000
To Interest and Bank Charges 18,000
To Audit Fees 20,000
To Books & Periodicals 30,000
To Depreciation 25,000
To Excess of Income over 5,77,000
Expenditure
16,80,000 16,80,000
The Income and Expenditure Account has been prepared after the following adjustments:
`
Subscription Outstanding on 31.03.2014. 1,20,000
Subscription received in Advance on 31.03.2014. 90,000
Subscription Outstanding on 31.03.2015 80,000
Subscription received in Advance on 31.03.2015 1,40,000
Salaries Outstanding at the beginning of the year and at the end of the year were
`40,000 and `30,000 respectively.
Audit fees for the year (2014-15) has not been paid. Previous year’s audit fee `15,000 was
paid during the year.
The club’s Assets on 31st March, 2014 were as follows:

`
Freehold Land 10,00,000
Sport Equipments 2,60,000
At the end of the year, after depreciation the equipments amounted to ` 2,70,000. Bank
Loan of ` 1,00,000 as on 31st March, 2014 was still due at the end of the current year. On
31st March, 2015. Cash as Bank amounted to ` 6,97,000.
You are required to prepare:

(i) The Receipts and Payments Account for the year ended 31st March, 2015 and
(ii) Balance Sheet as on 31.03.2015.
Answer:
GREEN CITY CLUB
Receipts and Payments Account
For the year ended 31st March, 2015
Dr. Cr.
Receipts Amount Payments Amount
(`) (`)
To Balance b/d (Balancing Figure) 45,000 By Salaries (4,80,000-30,000) 4,50,000
To Subscription (Working Note-3) 13,90,000 By Outstanding salaries for 13- 40,000
14
To Entrance Fees 2,00,000 By Rent 1,20,000
To Contribution for Annual Dinner 1,60,000 By Printing & Stationery 30,000
To Excess of Annual Sports Meet 20,000 By Travelling Expenses 60,000
Receipts over expenditure
By Annual Dinner Expenses 1,40,000
By Secretary‘s Honourarium 1,20,000
By General Expenses 60,000
By Interest and Bank Charges 18,000
By Outstanding Audit Fees for 15,000

13-14
By Books and Periodicals 30,000
By Sports Equipment (working 35,000
Note-2)
18,15,000 18,15,000
Alternative Solution —
If a separate Salary Account is opened
Dr. Salary Account Cr.

To Bank A/c (Bal fig.) 4,90,000 By Balance b/d(O/S) 40,000
To Balance c/d (O/S) 30,000 By Income & Expenditure 4,80,000
A/c (given)
5,20,000 5,20,000
Receipts and Payments account

Dr. For the year ended 31st March, 2015 Cr.
Receipts ` Payments `
To Balance b/d (Bal fig.) 45,000 By Salaries 4,90,000
To Subscription 13,90,000 By Rent 1,20,000
To Entrance Fees 2,00,000 By Printing & Stationery 30,000
To Contribution for Annual 1,60,000 By Travelling Expenses 60,000
Dinner
To Profit on Annual Sports 20,000 By Annual Dinner 1,40,000
Expenses
By Secretary‘s 1,20,000
Honorarium
By General Expenses 60,000
By Interest and Bank 18,000
Charges
By Outstanding Audit 15,000
Fees
By Books and Periodicals 30,000
By Sports Equipment 35,000
18,15,000 18,15,000
Balance Sheet as on 31st March 2015

Liabilities Amount Amount Assets Amount Amount
(`) (`) (`) (`)
Capital Fund 11,80,000 Freehold land 10,00,000
Add: Excess of Income 5,77,000 17,57,000 Sports equivalent 2,95,000
over Expenditure
Bank Loan 1,00,000 Less: Depreciation 25,000 2,70,000
Outstanding Salaries 30,000 Subscription in 80,000
Arrear
Outstanding audit fees 20,000 Cash at Bank 6,97,000
Subscription in advance 1,40,000
20,47,000 20,47,000
Working Notes:
1. Opening Balance of Capital Fund
Balance Sheet as on 31st March, 2014

Liabilities Amount (`) Assets Amount (`)
Capital Fund (Balancing Figure) 11,80,000 Freehold land 10,00,000
Bank Loan 1,00,000 Sports equivalent 2,60,000
Outstanding Salaries 40,000 Subscription in Arrear 1,20,000
Outstanding audit fees 15,000 Cash at Bank 45,000
Subscription in advance 90,000
14,25,000 14,25,000
2. Sports Equipment purchased during 2014-15

Sports Equipment Account
Dr. Cr.
To Balance b/d 2,60,000 By Depreciation 25,000
To Bank A/c - Purchase 35,000 By Balance C/d 2,70,000
2,95,000 2,95,000
3. Statement showing collection of subscription during 2014-15

Subscription for 2014-15 13,00,000
Add: Subscription outstanding on 31.03.2014 1,20,000
Add: Subscription received in advance on 31.03.2015 1,40,000 2,60,000
15,60,000
Less: Subscription outstanding on 31.03.2015 80,000
Less: Subscription received in advance on 31.03.2014 90,000 1,70,000
13,90,000
Study Note 5: Preparation of Financial Statements from Incomplete Records
13. Laxman does not maintain proper books of account. However, he maintains a record of his
bank transactions and is also to give the following information from which you are requested
to prepare his final accounts for the year 2016:
Particulars 01.01.2016 31.12.2016

(`) (`)
Debtors 1,02,500 ?
Creditors ? 46,000
Stock 50,000 62,500
Bank Balance ? 52,000
Fixed Assets 7,500 9,000
Details of his bank transactions were as follows:

Particulars `
Received from Debtors 3,40,000
Additional Capital Brought in 5,000
Sale of Fixed Assets (Book value ` 2,500) 1,750
Paid to Creditors 2,80,000
Expenses Paid 50,250
Personal Drawings 24,000
Purchase of Fixed Assets 5,000
No cash transactions took place during the year. Goods are sold at cost plus 25%. Cost of
goods sold was ` 2,60,000.
Answer:
Laxman
Trading and Profit and Loss Account for the year ended 31st December, 2016
Dr. Cr.
To Opening Stock 50,000 By Sales A/c (Note 6) 3,25,000
To Purchases (Note 7) 2,72,500 By Closing Stock 62,500
To Gross Profit (c/d) 65,000
3,87,500 3,87,500
To Expenses 49,250 By Gross Profit b/d 65,000
To Depreciation on Fixed Assets 1,000
To Loss on Sale of Fixed Assets 750
To Net Profit c/d 14,000
65,000 65,000
Balance Sheet of Lucky as at 31st December, 2016

Capital Account: Fixed Assets 9,000
Opening Balance (Note 5) 1,71,000 Stock 62,500
Add: Capital Introduced 5,000 Debtors (Note 3) 87,500
Add: Net Profit 14,000 Bank 52,000
1,89,000
Less: Drawings 25,000
1,65,000
Creditors 46,000
2,11,000 2,11,000
Working Notes:
(1) Bank Account
Dr. Cr.
To Balance b/d (Balancing figure) 64,500 By Creditors A/c 2,80,000
To Debtors A/c 3,40,000 By Expenses A/c 49,250
To Capital A/c 5,000 By Drawings A/c 25,000
To Fixed Assets A/c (Sale) 1,750 By Fixed Assets A/c (Purchase) 5,000
By Balance c/d 52,000
4,11,250 4,11,250
(2) Fixed Assets Account

Dr. Cr.
To Balance b/d 7,500 By Bank A/c 1,750
To Bank A/c 5,000 By Loss on Sale of Fixed Assets A/c 750
By Depreciation A/c (Balancing figure) 1,000
By Balance c/d 9,000
12,500 12,500
(3) Debtors Account

Dr. Cr.
To Balance b/d 1,02,500 By Bank A/c 3,40,000
To Sales A/c (Note 6) 3,25,000 By Balance c/d (Balancing figure) 87,500
4,27,500 4,27,500
(4) Creditors Account

Dr. Cr.
To Bank A/c 2,80,000 By Balance b/d (Balancing figure) 53,500
To Balance c/d 46,000 By Purchases A/c (Note 7) 2,72,500
3,26,000 3,26,000
(5) Balance Sheet as at 31st January, 2016
Dr. Cr.
Capital (Balancing figure) 1,71,000 Fixed Assets 7,500
Creditors (Note 4) 53,500 Debtors 1,02,500
Stock 50,000
Bank (Note 1) 64,500
2,24,500 2,24,500
(6) Calculation of Sales

Cost of goods sold 2,60,000
Profit 25% 65,000
Sales 3,25,000
(7) Purchases:
Opening Stock + Purchases – Closing Stock = Cost of Goods Sold

Or, Purchases = Cost of Goods Sold – Opening Stock + Closing Stock
Or, Purchases = `2,60,000 - `50,000 + `62,500 = `2,72,500
14. The details of Assets and Liabilities of Mr. 'A' as on 31-3-2015 and 31-3-2016 are as follows:
31-3-2015 31-3-2016
` `
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000
Sundry Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
Liabilities:
Loans 90,000 70,000
Sundry Creditors 50,000 80,000
Mr. 'A' decided to provide depreciation on building by 2.5% and furniture by 10% for the
period ended on 31-3-2016. Mr. 'A' purchased jewellery for `24,000 for his daughter in
December 2015. He sold his car on 30-3-2013 and the amount of `40,000 is retained in the
business. You are required to :
(i) Prepare statement of affairs as on 31-3-2015 & 31-3-2016.
(ii) Calculate the profit received by 'A' during the year ended 31-3-2016.
Answer:
1. Statement of Affairs (`)
Capital & Liabilities 31.3.15 31.3.16 Assets 31.3.15 31.3.16

Capital (Bal. Fig.) 2,41,200 4,40,700 Fixed assets:
Non-current liabilities Furniture 50,000 45,000
loan" 90,000 70,000 Building 1,00,000 97,500
Current liabilities Current Assets:
creditors 50,000 80,000 Stock 1,00,000 2,50,000
Debtors 60,000 1,10,000
Cash 11,200 13,200
Bank 60,000 75,000

Total 3,81,200 5,90,700 Total 3,81,200 5,90,700
Computation of Profit:
Capital Account
Dr. Cr.
To Drawing (Jewellery) 24,000 By Balance b/d 2,41,200
To Balance C/d 4,40,700 By Additional Capital
(Sale of Car.) 40,000
By Profits for the year
(Bal. Fig.) 1,83,500
4,64,700 4,64,700
Study Note 6: Partnership
15. P, Q and R were in partnership sharing profits and losses in the ratio of 3 : 2 : 1. The Balance
Sheet as on 31.3.2016 is as under :
Liabilities Amount Assets Amount
` `
Capital – P 60,000 Machinery 80,000
Capital - Q 50,000 Furniture 15,000
Capital – R 40,000 Motor Car 30,000
Sundry Creditors 72,000 Stock 50,000
Bank Loan 30,000 Sundry Debtors 60,000
Other Liabilities 20,000 Cash at Bank 37,000
2,72,000 2,72,000
P retired on 1.9.2016 and the partnership deed provided inter alia that in the event of
admission, retirement or death of a partner, the assets and liabilities are to be revalued and
that goodwill of the firm is to be computed on the basis of 2 years purchase of the correct
profit of the last 4 years.
During the period he drew `30,000, interest on drawings @ 6% p.a.
It is discovered that the accounts required adjustments owing to certain mistakes in earlier
years. On 1.10.2013 repairs to machinery for ` 6,000 had been wrongly debited to the
Machinery Account, and on 1.4.2014 a piece of furniture, whose book value was `2,000 was
disposed of for `800 but the proceeds were wrongly credited to Sales Account. The partners
had been charging depreciation on all fixed assets at 10% p.a. on the reducing balance
system on a time basis. Profits for the last four years without adjusting the above mentioned
mistakes were as follows:
2012-13 `20,000; 2013-14 `24,000; 2014-15 `32,000; 2015-16 `36,000.
Revaluation on the date of retirement was:
Machinery- `90,000; Furniture- `10,000; Motor car - `22,000.
Partner will also be given proportionate share of profits based on the last year’s profit.
Determine the amount to be paid to the retiring partner.
Answer:
Statement showing computation of the amount to be paid to the retiring partner:
Particulars Amount(`)
Capital 60,000
Share of Loss on revaluation (808)
3 26,440
Proportionate share of goodwill [`52,880 × ]
6
Proportionate share of last year‘s profit - [`36,693 × 7,644
3 5
 ]
6 12
Drawings (30,000)
6 5 1 (375)
Interest on Drawings[`30,000 ×   ]
100 12 2
Amount to be paid to the retiring partner 62,901
Workings:
A.
Dr. Revaluation Account Cr.
To, Motor Car A/c 8,000 By, Machinery A/c 14,617
To, Furniture A/c 5,000
To, Partner‘s Capital 1,617
A/c
(P-` 808; Q-` 539; R-`
270)
14,617 14,617
B. Ascertainment of Adjusted Profits
2012-13 2013-14 2014-15 2015-16
` ` ` `
Profits without adjustment 20,000 24,000 32,000 36,000
Less : Repairs previously capitalised (–)
6,000
Add : Depreciation wrongly charged on the above (+) 300 (+) 570 (+) 513
Less : Sale of Furniture wrongly credited to Sales (–) 800
Less : Loss on sale of Furniture not recorded (–) 1,200
(` 2,000 – 800)
Add : Depreciation on Furniture wrongly provided (+) 200 (+) 180
Adjusted Profits 20,000 18,300 30,770 36,693
C. Ascertainment of the Value of Goodwill and its Adjustment

Aggregate adjusted profits for 4 years: ` 1,05,763; Average Profits — `1,05,763 / 4 = ` 26,440.
Goodwill at 2 years‘ purchase of average profit = ` 52,880 (` 26,440 × 2).
16. L and H are partners of the firm LH & Co., from 1.4.2013. initially both of them contributed
`2,00,000 each as capital. They did not contribute any capital thereafter. They maintain
accounts of the firm on mercantile basis. They were sharing profits and losses in the ratio of 5:4.
After the accounts for the year ended 31.03.2017 were finalized, the partners decided to share
profits and losses equally with effect from 01.04.2013.
It was also discovered that in ascertaining the results in the earlier years certain adjustments,
details of which are given below, had not been noted.
Year ended 31st March 2014 2015 2016 2017

` ` ` `
Profit as per accounts prepared and 2,80,000 5,20,000 6,40,000 7,20,000
finalized
Expenses not provided for (as at 31st 60,000 40,000 72,000 48,000
March)
Incomes not taken into account (as at 36,000 30,000 24,000 42,000
31st March)
The partners decided to admit C as a partner with effect from 01.04.2017. It was decided that C
would be allotted 20% share in the form and he must bring 20% of the combined capital of L and
H.
Following is the Balance Sheet of the firm as on 31.03.2017 before admission of C and before
adjustment of revised profits between L and H.
Balance Sheet of LH & Co. as at 31.03.2017
Capital Accounts: Plants and machinery 1,20,000
L 4,23,000 Cash in hand 20,000
H 3,03,000 Cash at bank 10,000
Sundry Creditors 4,54,000 Stock in trade 6,20,000
Sundry debtors 4,10,000
11,80,000 11,80,000
(i) Profit and Loss Adjustment Account;
(ii) Capital Account of the partners; and
(iii) Balance Sheet of the firm after the admission of C.
Answer:
Profit and Loss Adjustment Account
Dr. Cr.
To Expenses not provided 2,20,000 By, Income not considered (for 1,32,000
(year 2014-2017) years 2014-2017)
By, Partners‘ Capital Account
(Loss)
L 44,000
H 44,000
2,20,000 2,20,000
Note: It is assumed that expenses and incomes not taken into account in earlier years were fully
ignored.
Partners’ Capital Account

Dr. Cr.
Particulars L H C Particulars L H C
` ` ` ` ` `
To P& L Adjustment 44,000 44,000 --- By, Balance b/d 4,23,000 3,03,000 ---
A/c
To H A/c 1,20,000 --- --- By L A/c --- 1,20,000 ---
To Balance c/d 2,59,000 3,79,000 1,27,600 By Cash A/c --- --- 1,27,600
4,23,000 4,23,000 1,27,600 4,23,000 4,23,000 1,27,600
Balance Sheet of LH & Co.

As on 01.04.2017
(After admission of C)
Capital Account : Plant and Machinery 1,20,000
L 2,59,000 Sundry Debtors 4,10,000
H 3,79,000 Stock in Trade 6,20,000
C 1,27,600 Accrued Income 1,32,000
Sundry Creditors 4,54,000 Cash in Hand 1,47,600
Outstanding Expenses 2,20,000 (20,000+1,27,600)
Cash at Bank 10,000
14,39,600 14,39,600
Working Notes:
1. Calculation of Profit and Loss distributed among partners
Profit for the year ended 31.03.2014 `2,80,000

31.03.2015 `5,20,000
31.03.2016 `6,40,000
31.03.2017 `7,20,000
Total profit `21,60,000
Particulars L H Total
` ` `
Profit shared in old ratio i.e. 5:4 12,00,000 9,60,000 21,60,000
Profit to be shared as per new ratio i.e. 1:1 10,80,000 10,80,000 21,60,000
Excess / (Deficit) Share 1,20,000 (1,20,000)
L to be debited by `1,20,000 and H to be credited by `1,20,000.
2. Capital brought in by C
Capital to be brought in by C must be equal to 20% of the combined capital of L and H
Capital of L (4,23,000 – 44,000 – 1,20,000) `2,59,000

Capital of H (3,03,000 – 44,000 + 1,20,000) `3,79,000
Combined Capital `6,38,000
20% of the combined capital brought in by C (20% of `6,38,000) =`1,27,600.
17. 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,2015 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 to `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 net profit before charging interest on drawings
but after making all other appropriations.
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, 2015 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,2015.
Answer:
Profit and Loss Appropriation Account

For the year ended on 31st March,2015
To General Reserve 22,240 By Net Profit (As per W.N. 1) 2,25,000
To Salaries to partners By Interest on drawings (Refer
Good 28,800 W.N. 3)
Better 19,200 Good 1,040
Best 21,600 69,600 Better 770
To Interest on Capital Best 600 2,410
Good 10,200
Better 6,600
Best 7,320 24,120
To Commission to partners
Good 18,000
Better 10,281
(Refer W.N. 4)
Best 22,500 50,781
To Partners‘ Capital A/cs
(profit)
Good 20,223
Better 13,482
Best 26,965 60,669
2,27,410 2,27,410
Working Notes:
1. Profit and Loss Account

Dr. Cr.
To Salary (Firm‘s Accounting) 24,000 By Profit 2,76,000
To Commission (Firm‘s 27,000
Accountant) (W.N.2)
To Net Profit transferred to P&L 2,25,000
Appropriation A/c
2,76,000 2,76,000
2. Commission of Firm’s Accountant
[Profit after salary of Firm‘s Accountant/112%]×12%

= [(2,76,000 - 24,000)/112%] × 12% = `27,000
3. Interest on Drawings
Particulars `
Good (at the beginning of every month) 1,040
(`2,000 × 6.5 × 8%)
Better (at the end of every month) (`1,750 × 5.5 × 8%) 770
Best (at the middle of every month) (`1,250 × 6 × 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]
× 15%
Commission to Better = `[2,25,000 – 22,240 – 24,120 – 69,600 – 18,000 – 22,500] × 15%
= `68,540 × 15%
= `10,281.
18. Q, R, S, and T are sharing profits and losses in the ration 5:5:4:2. Frauds committed by S during
the year were found out and it was decided to dissolve the partnership on 31 st March 2016
when their Balance Sheet was as under:
Capital Building 1,20,000
Q 90,000 Stock 85,500
R 90,000 Investments 29,000
S --- Debtors 42,000
T 35,000 Cash 14,500
General reserve 24,000 S 15,000
Trade Creditors 47,000
Bills Payables 20,000
3,06,000 3,06,000
Following information is given to you:
(i) A cheque for `4,300 received from debtors was not recorded in the books and was
misappropriated by S.
(ii) Investments costing `5,400 were sold by S at `7,900 and the funds transferred to his
personal account. This sale was omitted from the firm’s books.
(iii) A creditors agreed to take over investments of the book value of `5,400 at 8,400. The
rest of the creditors were paid off at a discount of 2%.
(iv) The other asets realized as follows:
Building 105% of book value
Stock `78,000
Investments The rest of investments were sold at a profit of `4,800
Debtors The rest of the debtors were realized at a discount of 12%
(v) The bills payable were settled at a discount of `400.

(vi) The expenses of dissolution amounted to `4,900.
(vii) It was found out that realization from S’s private assets would only be `4,000.
Prepare the necessary Ledger Accounts.
Answer:
Realisation Account
Dr. Cr.
To Building 1,20,000 By Trade creditors 47,000
To Stock 85,500 By Bills payable 20,000
To Investment 29,000 By Cash
To Debtors 42,000 Building 1,26,000
To Cash –creditors paid 37828 Stock 78,000
To Cash – expenses 4,900 Investments 23,000
To Cash – bills payable 19,600 Debtors 33,176 2,60,176
(20,000 – 400)
To Partners‘ Capital A/cs By Debtors – unrecorded 4,300
Q 171 By Investments – unrecorded 7,900
R 171
S 137
T 69 548
3,39,376 3,39,376
Cash Account
Dr. Cr.
To Balance b/d 14,500 By Realisation – creditors paid 37,828
To Realisation By Realisation – bills payable 19,600
Assets realized
Building 1,26,000
Stock 78,000
Investments 23,000
Debtors 33,176 2,60,176
To S‘s Capital A/c 4,000 By Realisation – expenses 4,900
By Capital Account
Q 90,528
R 90,528
T 35,292 2,16,348
2,78,676 2,78,676
Partners’ Capital Accounts

Dr. Cr.
Particulars Q R S T Particulars Q R S T
To Balance b/d 15,000 By Balance b/d 90,000 90,000 - 35,000
To Debtors – 4,300 By General Reserve 7,500 7,500 6,000 3,000
misappropriation
To Investment – 7,900 By Realization profit 171 171 137 69
misappropriation
To S‘s capital A/c 7,143 7,143 2,777 By Cash A/c 4,000
(W.N. 4)
To Cash A/c 90,528 90,528 35,292 By Q‘s Capital A/c 7,143
By R‘s Capital A/c 7,143
By, t‘s Capital A/c 2,777
97,671 97,671 27,200 38,069 97,671 97,671 27,200 38,069
Working Notes:
1. Amount paid to creditors
Book Value `47,000

Less: creditors taking over investments `(8,400)
`38,600
Less: Discount @ 2% `(772)
`37,828
2. Amount received from sale of investments

Book Value `29,000
Less: misappropriation by S (5,400)
`23,600
Less: Taken over by a creditor (5,400)
`18,200
Add: Profit on sale of investments 4,800
`23,000
3. Amount received from debtors

Book Value `42,000
Less: Unrecorded receipt (4,300)
`37,700
Less: Discount @ 12% (4,524)
`33,176
4. Deficiency of S
Balance of capital as on 31st March 2016 `15,000
Debtors – misappropriation 4,300
Investment – misappropriation `7,900
`27,200
Less: Realisation Profit (137)
General reserve `(6,000)
Contribution from private assets `(4,000)
Net deficiency of capital `17,063
This deficiency of `17,063 in S‘s capital account will be shared by another partners Q, and T
in their capital ratio of 90:90:35 by
Accordingly,
Q‘s share of deficiency = `[17,063 × (90/215)] = `7,143
R‘s share of deficiency = `[17,063 × (90/215)] = `7,143
T‘s share of deficiency = `[17,063 × (35/215)] = `2,777
19. X, Y and Z are in partnership sharing Profits and Losses in the ratio 2: 2: 1. Partnership deed
provides that all the partners are entitled to interest @ 9% per annum on fixed capital of
` 10,00,000 contributed in profit sharing ratio. Z is entitled for 10% commission of net profit
after such commission, for special performance.
On 01.09.2014, it was decided to retire X on health grounds and admit A, the son of X as
partner with 1/5th share in Profit and Loss: other decisions taken on this date were as follows:
(i) Firm’s fixed capital to be raised to `15,00,000 and partners to maintain fixed capital in
profit sharing ratio and, interest on capital shall be paid @ 10% per annum from
01/09/2014.
(ii) No commission to be paid to Z from 01.09.2014.
(iii) Goodwill is assessed at `3,00,000.
(iv) X was paid `2,50,000 in cash on retirement.
(v) Balance claim payable to X was to be credited to A’s fixed capital account and
current account.
(vi) Profit for the accounting year 2014-15 before interest on capital, Z’s commission was
` 9,00,000.
(i) Profit and Loss Appropriation A/c of the firm for the year ended 31st March, 2015.
(ii) Partners Current A/cs.
Answer:
Profit & Loss Appropriation Account
for the year ending 31st March, 2015
Dr. Cr.
Particulars For the period For the period
1.04.14 01.09.14 01.04.14 1.09.14
to to to to
31.08.14 31.03.15 31.08.14 31.03.15
` ` ` `
To Interest on Capital 37,500 87,500 By Net Profit 3,75,000 5,25,000
To Z‘s Commission 30,682 (Before interest &
Commission)
To Tran. to Current A/c
X 1,22,727 ---
Y 1,22,727 2,33,333
Z 61,364 1,16,667
A --- 87,500
3,75,000 5,25,000 3,75,000 5,25,000
Partners’ Current Account

Dr. Cr.
Particulars X Y Z A Particulars X Y Z A
` ` ` ` ` ` ` `
From 1.4.14 By X‘s Capital 4,00,000 --- --- ---
to 31.8.14 (transfer)
To X‘s --- 80,000 40,000 --- By Interest on 15,000 15,000 7,500 ---
Capital Capital
To Bank 2,50,000 --- --- --- By --- --- 30,682 ---
Commission
To A‘s 3,00,000 --- --- --- By Y‘s Capital 80,000 --- --- ---
Capital
To A‘s 1,07,727 --- --- --- By Z‘s Capital 40,000 --- --- ---
Current
To Balance --- 57,727 59,546 --- By P/L 1,22,727 1,22,727 61,364 ---
c/d Appropriate
A/c
From 1.9.14 6,57,727 1,37,727 99,546 --- 6,57,727 1,37,727 99,546 ---
to 31.3.15
To Y‘s --- --- --- 40,000 By Balance --- 57,727 59,546 ---
Capital b/d
To Z‘s --- --- --- 20,000 By X‘s Current --- --- --- 1,07,727
Capital A/c
To Balance --- 3,77,727 2,19,546 1,52,727 By A‘s --- 40,000 20,000 ---
c/d Capital A/c
By Interest on --- 46,667 23,333 17,500
Capital
By P/L --- 2,33,333 1,16,667 87,500
Appropriate
A/c
--- 3,77,727 2,19,546 2,12,727 --- 3,77,727 2,19,546 2,12,727
Working Notes:
A. New Profit Sharing Ratio:

A‘s share = 1/5
Y‘s share = 1 – 1/5 = 4/5 × 2/3 = 8/15
Z‘s share = 4/5 × 1/3 = 4/15
Hence, New Sharing Ratio of Y, Z & A is 8 : 4 : 3
B. Adjustment of Goodwill:
At the time of retirement of X
Particulars X (`) Y (`) Z (`)
Goodwill as per old ratio 2 : 2 : 1 1,20,000 1,20,000 60,000
Less: Goodwill in Y & Z 2 : 1 --- 2,00,000 1,00,000
Net 1,20,000 (Cr.) 80,000 (Dr.) 40,000 (Dr.)
At the time of admission of A Y Z A

Goodwill in 2 : 1 2,00,000 1,00,000 ---
Less: Goodwill in new ratio (8:4:3) 1,60,000 80,000 60,000
Net 40,000 (Cr.) 20,000 60,000 (Dr.)
(Cr.)
C. Interest on Partner’s Capital

For 1.04.14 to 31.08.14 on fixed capital of X, Y & Y (2 : 2 : 1)
X – (10,00,000 × 2/5 )× 9/100 × 5/12 = 4,00,000 × 9/100 × 5/12 = ` 15,000
Y – 4,00,000 × 9/100 × 5/12 = ` 15,000
Z – (10,00,000 × 1/5) × 9/100 × 5/12 = 2,00,000 × 9/100 × 5/12 = ` 7,500
Total Interest for first 5 months = `37,500
For 01.09.14 to 31.03.15 on Fixed Capital of Y = 15,00,000 × 3/15 = 3,00,000
Interest on Y‘s Capital = 8,00,000 × 10/100 × 7/12 = ` 46,667

Z‘s Capital = 4,00,000 × 10/100 × 7/12 = ` 23,333
A‘s Capital = 3,00,000 × 10/100 × 7/12 = ` 17,500
Total Interest = ` 87,500.
D. Z’s Commission:
Particulars `
Profit for the period 1.04.14 to 31.08.14 = 9,00,000 × 5/12 = 3,75,000
Less: Interest on Capital 37,500
Profit before Commission 3,37,500
Z‘s Commission = 3,37,500 × 10/110 = ` 30,682
E. Distribution of Profit among Partners:

X (`) Y (`) Z (`) A (`)
Profit for first 5 months:
3,75,000 – 37,500 – 30,682 = 3,06,818
Among X, Y and Z in the ratio 2 : 2 : 1 1,22,727 1,22,727 61,364 ---
Profit for last 7 months:
5,25,000 – 87,500 = 4,37,500 among Y, Z & A in --- 2,33,333 1,16,667 87,500
the ratio 8 : 4 : 3
Study Note 7 – Self Balancing Ledger
20. (a) From the following prepare General Ledger Adjustment 'account in Debtors Ledger and
Debtors Ledger adjustment in General Ledger:
Balance as on 1.4.2016
Debit balances in Debtors Ledger 2,46,200
Credit balances in Debtors Ledger 3,400
Transactions during the month of April, 2016
Credit sales 9,74,900
Sales return 21,700
Cash received from debtors 8,62,100
Discount allowed to debtors 39,200
Bills receivable received from debtors 51,200
Bills receivable dishonoured 3,500
Bills payable given to suppliers 27,000
Credit balance in Debtors ledger on 30.4.2016 5,200
Answer:
In Debtors Ledger
General Ledger Adjustment Account
Dr. Cr.
1.04.16 To Balance b/d 3,400 1.04.16 By Balance, b/d 2,46,200
1.04.16 To Debtors Ledger to By Debtors Ledger
to Adjustment A/c: 30.04.16 Adjustment A/c:
30.04.16 Sales Return' 21,700 Credit sales 9,74,900
Cash Received 8,62,100 B/R dishonoured 3,500
Discount allowed 39,200 30.04.16 By Balance c/d (given) 5,200
B/R Received 51,200
To Balance c/d
(balancing figure) 2,52,200
12,29,800 12,29,800
In General Ledger
Debtors Ledger Adjustment Account
Dr. Cr.
1.4.16 To Balance b/d 2,46,200 1.04.16 By Balance b/d 3,400
1.04.16 To General 1.04.16 By General
to ledger to ledger adjust-
30.04.16 adjustment A/c: 30.4.16 ment A/c:
Sales 9,74,900 Sales return 21,700
B/R dishonoured 3,500 Cash received 8,62,100
30.04.16 To Balance c/d 5,200 30.04.16 Discount allowed 39,200
B/R received 51,200
By Balance c/d (Bal. 2,52,200
fig-)
12,29,800 f2,29,800
(b) The balance on the Sales Ledger Control Account of Quick Ltd. on Sept. 30,2016 amounted to
` 9,700 which did not agree with the net total of the list of Sales Ledger Balance on that date.
Errors were found and the appropriation adjustments when made balanced the books. The
errors were:
(i) A Bad Debt amounting to `850 had been written-off in the sales ledger, but had not
been posted to the Bad Debts Account, or entered in Control Account.
(ii) An item of goods sold to Amar for `450 had been entered once in the Day Book but
posted to his account twice.
(iii) No entry had been made in the Control Account in respect of the transfer of a debit of
`260 from Kumar’s Account in the Sales Ledger to his account in the purchase ledger.
(iv) The Discount Allowed column in the Cash Book had been under cast by `280.
You are required to give the journal entries, where necessary, to rectify these errors,
indicating whether or not any control accounts is affected, and to make necessary
adjustments in the Sales Ledger Control Account bringing down the balance.
Answer:
Journal
Date Particulars L.F. Debit (`) Credit (`)
2016
Sept. 30
Bad Debts A/c Dr. 850
To, Sales Ledger Control A/c 850
(Bad Debts written-off without
recording in general ledger, now
rectified.)
Amar‘s Account should be credited by ----
`450. ----
It will not affect Control Account.
Purchase Ledger Control A/c Dr. 260
(Transfer of debit of Kumar‘s Account
to Purchase Ledger , not recorded,
now rectified.)
Discount Allowed A/c Dr. 280
(Discount allowed account undercast,
now rectified.)
In General Ledger
Sales Ledger Control Account
Dr. Cr.
` `
2016 2016 By Bad Debts A/c 850
Sept. 30 To Balance b/d 9,700 Sept. 30 By, Transferred
(Purchases Ledger 260
Control) A/c 280
By, Discount Allowed A/c 8,310
By, Balance c/d
9,700 9,700
Oct. 1 To, Balance c/d 8,310
Study Note 8: Royalties
21. A Ltd. obtain from S.S. Ltd. a lease of some coal-bearing land, the terms being a royalty of
` 15 per ton of coal raised subject to a minimum rent of ` 1,50,000 p.a. with a right of
recoupment of short-working over the first four years of the lease. From the following details,
show (i) Short-working Account, (ii) Royalty Account and (iii) S.S. Ltd. Account in the books
of A. Ltd.
Year Sales (Tons) Closing Stock (Tons)
` `
2012 4,000 600

2013 7,000 800
2014 9,600 1,200
2015 11,200 1,000
2016 16,000 1,600
Answer:
Workings:
[Coal raised i.e., Production = Sales + Closing Stock – Opening Stock.]
Year Sales + Closing Stock - Opening Stock = Net Production
2012 4,000 + 600 - Nil = 4,600
2013 7,000 + 800 - 600 = 7,200
2014 9,600 + 1200 - 800 = 10,000
2015 11,200 + 1000 - 1200 = 11,000
2016 16,000 + 1600 - 1000 = 16,600
In the books of A. Ltd.
Memorandum Royalty Statement
Year Quantity Rate Royalty Minimu Short Recoupment Short working Short working Payment
m Rent working carried Transferred to to
` ` ` ` ` forward P&L A/c or Landlord
` lapsed `
`
2012 4,600 15 69,000 1,50,000 81,000 --- 81,000 --- 1,50,000
2013 7,200 15 1,08,000 1,50,000 42,000 --- 1,23,000 --- 1,50,000
2014 10,000 15 1,50,000 1,50,000 --- --- 1,23,000 --- 1,50,000
2015 11,000 15 1,65,000 1,50,000 --- 15,000 --- 1,08,000 1,50,000
2016 16,600 15 2,49,000 1,50,000 --- --- --- --- 2,49,000
Dr. S. S. Ltd. (Landlord) Account Cr.

` `
2012 To Bank A/c 1,50,000 2012 By Royalty A/c 69,000

‖ Short-working A/c 81,000
1,50,000 1,50,000
2013 To Bank A/c 1,50,000 2013 By Royalty A/c 1,08,000

‖ Short-working A/c 42,000
1,50,000 1,50,000
1,50,000 1,50,000

To Short-Working A/c 15,000
1,65,000 1,65,000
2,49,000 2,49,000
Dr. Short-Working Account Cr.

` `
2012 To S. S. Ltd. A/c 81,000 2012 By Balance c/d 81,000

(Landlord)
81,000 81,000
2013 To Balance b/d 81,000 2013 By Balance c/d 1,23,000

‖ S. S. Ltd. A/c 42,000
(Landlord)
1,23,000 1,23,000
2014 To Balance b/d 1,23,000 2014 By Balance c/d 1,23,000
1,23,000 1,23,000
2015 To Balance b/d 1,23,000 2015 By S. S Ltd. (Landlord) A/c 15,000

‖ Profit and Loss A/c 1,08,000
1,23,000 1,23,000
Dr. Royalty Account Cr.

` `
2012 To S. S. Ltd. A/c 69,000 2012 By Profit & Loss A/c 69,000
2013 To S. S. Ltd. A/c 1,08,000 2013 By Profit & Loss A/c 1,08,000
22. Vasu took a mine on lease from Vamsi at a royalty of `12,500 a year. Each year’s excess of
minimum rent over royalties is recoverable during the first three years of lease. In the event
of strike and minimum rent not being reached, it was provided that the actual royalties
earned for the year would fulfill all rental obligations.
The output for the first four years was as follows:
1st year – 2000 tons
2nd year – 2500 tons
3rd year – 4000 tons
4th year – strike (2400 tons)
Royalty is `4 per ton.
Prepare Royalties Account, Short workings account and Vamsi account in the books of
Vasu.
Answer:
Royalties Table
Year Output in Royalties Minimum Short Surplus Short Short Amount paid
tons @ 4 per Rent Workings workings workings in to landlord
ton recouped recouped
transfer to P/L
A/c
1 2,000 8,000 12,500 4,500 - - - 12,500 (MR)
2 2,500 10,000 12,500 2,500 - - - 12,500 (MR)
3 4,000 16,000 12,500 - 3,500 3,500 3,500 12,500 (R-
SWR)
4 2,400 9,600 9,600 - - - - 9,600 (R)
(Strike)
In the Books of Vasu (Lessee)

Dr. Royalties Account Cr.
` `
1st year To Vamsi A/c 8,000 1st year By Production A/c 8,000
8,000 8,000
2nd Year To Vamsi A/c 10,000 2nd Year By Production A/c 10,000
10,000 10,000
3rd Year To Vamsi A/c 16,000 3rd Year By Production A/c 16,000
16,000 16,000
4th Year To Vamsi A/c 9,600 4th Year By Production A/c 96,000
9,600 9,600
Dr. Short Workings Account Cr.

` `
1st year To Vamsi A/c 4,500 1st year By bal c/d 4,500
(arrival)
4,500 4,500
2nd Year To Bal b/d 4,500 2nd Year By Bal c/d 7,000
To Vamsi A/c 2,500
(arrival)
7,000 7,000
3rd Year To Bal b/d 7,000 3rd Year By Vamsi (recovered ) 3,500
By P/L A/c (irrecauped) 3,500
7,000 7000
Dr. Vamsi Account (Lessor) Cr.

` `
1st year To Bank A/c 12,500 1st year By Royalties A/c 8,000
By Short working a/c 4,500
12,500 12,500
2nd Year To Bank A/c 12,500 2nd Year By Royalties A/c 10,000
By Short working a/c 2,500
12,500 12,500
3rd Year To Short workings 3rd Year By Royalties A/c 16,000
recovered a/c 3,500
To Bank 12,500
16,000 16,000
4th year To Bank A/c 9,600 4th year By Royalties a/c 9,600
9,600 9,600
Study Note 9: Hire-Purchase and Installment System
23. On 1st January 2016, Amir purchased from Salman a plant valued at `7,45,000; payment to
be made by four semi-annual instalments of `2,10,000 each; interest being charged at 5%
per half year. Amir paid the first instalment on 1st July 2016 but failed to pay the next. Salman
repossessed the plant on 4 January 2017. On 5 January 2017, after negotiation, Amir was
allowed to retain the plant of which the original cash price was `3,90,000 and he was to bear
the loss on the remainder which was taken over by Salman on that date for `3,75,000.
Salman waived the interest after 31 December 2016. Another agreement was signed for
payment of the balance amount.
Required: Show ledger accounts the necessary records in the books of Amir charging
depreciation at 10% per annum half yearly on the written down value.
Answer:
Machinery Account
Dr. Cr.
` `
1.1.2016 To, Salman‘s A/c 7,45,000 30.6.2016 By, Depreciation A/c 37,250
By, Balance c/d 7,07,750
7,45,000 7,45,000
1.7.2016 To, Balance b/d 7,07,750 31.12.201 By, Depreciation A/c 35,388
6
By, Balance c/d 6,72,362
7,07,750 7,07,750
1.1.2017 To, Balance b/d 6,72,362 5.1.2017 By, Salman‘s A/c 3,75,000
To, P&L A/c (Bal.Fig.) 54,613 By, Balance c/d 3,51,975
(3,75,000-3,20,387)
7,26,975 7,26,975
Salman’s Account
Dr. Cr.
` `
30.6.2016 To, Balance c/d 7,82,250 1.1.2016 By Plant on Hire 7,45,000
Purchase A/c
By, Interest A/c 37,250
[`7,45,000 × 5%]
7,82,250 7,82,250
1.7.2016 To, Bank A/c 2,10,000 1.7.2016 By Balance A/c 7,82,250
31.12.201 31.12.201 By, Interest A/c 28,613
6 6 [`5,72,250 × 5%]
8,10,863 8,10,863
5.1.2017 To, Machinery A/c 3,75,000 1.1.2017 By, Balance b/d 6,00,863
To, Balance c/d 2,25,863
6,00,863 6,00,863
Working Note:
Particulars Repossessed Retained

(`) (`)
A. Cash Price of the Plant 3,55,000 3,90,000
B. Less: depreciation @ 10% for 6 months (17,750) (19,500)
C. Book Value 3,37,250 3,70,500
D. Less: Depreciation @ 10% for 6 months (16,863) (18,525)
E. Book Value 3,20,387 3,51,975
24. Mr. M purchased a machinery from Mr. N on hire purchase basis on the following terms:
(a) Cash Price — `10,00,000

(b) Cash Down Payment — 25%
(c) Four annual equal instalments of `2,50,000 each to be paid at the end of each year.
Compute the payment of interest pertaining to each accounting year assuming that the
sales were made uniformly throughout the year.
Answer:
If the sales take place uniformly throughout the year, the average period over which the
price will remain unpaid in the first year will be only six months.
Statement showing the interest pertaining to each year
A B C D E F
Year Amount Period of Product Ratio = `2,50,000 × E/300
ended on used use Amount of Interest for
(Months) each accounting year
31.12.2013 10,00,000 6 60,00,000 60 50,000
31.12.2014 10,00,000 6 60,00,000
7,50,000 6 45,00,000 105 87,500
31.12.2015 7,50,000 6 45,00,000
5,00,000 6 30,00,000 75 62,500
31.12.2016 5,00,000 6 30,00,000
2,50,000 6 15,00,000 45 37,500
31.12.2017 2,50,000 6 15,00,000 15 12,500
Total 300 2,50,000
Study Note 10: Branch and Departmental Accounts
25. (a) Give the journal entries in the books of Head Office to rectify or adjust the following:
(i) Goods sent to Branch `12,000 stolen during transit. Branch manager refused to accept
any liability.
(ii) Branch paid `15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March, 2016, the Head Office dispatched goods to the Branch invoiced at
`25,000 which is not received by Branch till 31st March,2016.
(iv) A remittance of `10,000 sent by the branch on 30th March,2016, received by the Head
Office on 1st April,2016.
(v) Head Office made payment of `25,000 for purchase of goods by Branch and wrongly
debited its own purchase account.
Answer:
Particulars Dr. Cr.

Amount Amount
` `
(i) Loss of goods due to theft during transit A/c Dr. 12,000
To, Purchases A/c 12,000
(Being goods lost on account of theft during
transit)
(ii) Salaries A/c Dr. 15,000
To, Branch A/c 15,000
(Being salary paid by the branch for H.O
employee)
(iii) No entry in the books of Head Office for goods
sent to branch not received by branch till 31 st
March,2016
(iv) Cash in Transit A/c Dr. 10,000
To, Branch A/c 10,000
(Being remittance by branch not received by
31st March, 2016)
(v) Branch A/c Dr. 25,000
To, Purchases A/c 25,000
(Being rectification of entry for payment for
goods purchased by branch wrongly debited
to purchase account)
(b) Following is the information of the Odisha branch of Superb Ltd., New Delhi for the year
ended 31st March,2016:
(1) Goods are invoiced to the branch at cost plus 20%

(2) The sale price is cost plus 50%
(3) Other information:
Stock as on 01.04.2015 `2,20,000
Goods sent during the year `11,00,000
Sales during the year `12,00,000
Expenses incurred at the branch `45,000
Ascertain:
(i) The profit earned by the branch during the year
(ii) Branch stock reserve in respect on unrealized profit.
Answer:
Calculation of Profit earned by the branch

In the books of Odisha Branch
Trading Account
Dr. Cr.
To Opening Stock 2,20,000 By, Sales 12,00,000
To Goods received by Head 11,00,000 By Closing Stock 3,60,000
Office (refer W.N)
To Expenses 45,000
To Gross profit 1,95,000
15,60,000 15,60,000
(iii) Stock reserve in respect of unrealized profit

=`3,60,000 × (20/120) =`60,000
Working Note:
Cost Price `100
Invoice Price `120
Sale Price `150
Calculation of closing stock at invoice price

Opening stock at invoice price 2,20,000
Goods received during the year at invoice price 11,00,000
13,20,000
Less: Cost of goods sold at invoice price (9,60,000)
Closing Stock 3,60,000
Sales = `12,00,000
Less: Profit 1
12,00,000   4,00,000
3
Cost of Goods Sold `8,00,000
Cost of goods sold at invoice price = `8,00,000 × 120% = `9,60,000
Note: it is assumed that all figures given in the questions is at invoice price.
(c) A Head Office sends goods to its Branch at selling price which is arrived at faster adding
33 1/3% to cost price and all expenses are met by the Branch out of remittance from
Head Office. All collections by Branch are sent to Bank in the account of Head Office.
The following particulars are available in respect of the Branch for the year ended 31st
March, 2016:
`
Stock as on 31st March, 2015 (At selling Price) 32,000
Goods from H.O 1,80,000
Cash sales paid into Bank 1,30,680
Credit Sales 38,400
Debtors (on 31st March, 2015) 8,540
Cash collections from Debtors sent to Bank 36,340
Expenses 24,200
Deficiency in Branch Stock on actual stock taking 600
You are required to show the necessary accounts in the books of Head office recording
the above transactions for the year ended 31st March 2016.
Answer:
In the Books of Head Office
Dr. Branch Stock Account Cr.

` `
To Balance b/f 32,000 By Bank (Cash Sales) 1,30,680
By Branch debtors (credit
sales) 38,400
To Goods sent to branch 1,80,000 By Stock Deficiency 600
By balance c/f 42,320
2,12,000 2,12,000
Dr. Goods Sent to Branch Account Cr.

` `
To Branch Stock adj. A/c 45,000 By Branch Stock A/c 1,80,000
To Trading A/c (B/F) 1,35,000
1,80,000 1,80,000
Dr. Branch Stock Adjustment Account Cr.

` `
To Stock Deficiency (load) 150 By Balance b/f 8,000
(load on opening stocks)
To Branch P/L A/c (B/F) 42,270 By Goods sent to branch 45,000
To Balance c/f
(load on closing stock) 10,580
53,000 53,000
Dr. Branch Debtors Account Cr.

` `
To Balance b/f 8,540 By Bank (collection) 36,340
To Branch Stock A/c (Sales) 38,400 By Balance c/f (bal. fig) 10,600
46,940 46,940
Dr. Stock Deficiency Account Cr.
` `
To Branch Stock A/c 600 By Stock Adjustment A/c 150
By Branch P/L A/c (Bal. fig) 450
600 600
Dr. Branch Profit & Loss Account Cr.

` `
To Branch expenses 24,200 By Stock Adjustment A/c 42,270
To Stock Deficiences 450
To general P/L A/c (Bal. fig) 17,620
42,270 42,270
26.(a) A firm has two departments- Cloth and Ready-Made clothes department. The cloths are
made by the firm itself out of cloth supplied by the cloth department at its usual selling
price. From the following figures, prepare departmental Profit and Loss Account for the
year 2016:
Cloth Ready-made
Department clothes
Department
Opening Stock 1,44,000 28,800
Purchases 10,80,000 14,400
Sales 12,00,000 3,60,000
Transfer to Ready-made clothes department 2,40,000 —
Expenses –Manufacturing — 40,800
Expenses- selling 24,000 2,400
Closing Stock 1,80,000 36,000
The stocks in the ready-made clothes department may be considered as consisting of

80% cloth and the rest as expenses. The cloth department made a gross profit of 25% in
2015. General expenses of the business as a whole came to ` 1,08,000.
Answer :
Dr. Departmental Profit & Loss Account for the year 2016 Cr.
Particulars Clothes Ready- Particulars Clothes Ready-
made made
clothes clothes
` ` ` `
To Opening Stock 1,44,000 28,800 By Sales 12,00,000 3,60,000
By Ready-made
To Purchases 10,80,000 14,400 department 2,40,000 __
(transfer)
To Cloth Department
— 2,40,000
(Transfer)
By Closing stock 1,80,000 36,000
To Manufacturing
expenses — 40,800
To Gross Profit c/d 3,96,000 72,000
16,20,000 3,96,000 16,20,000 3,96,000
To General Expenses 86,400 21,600 By Gross Profit b/d 3,96,000 72,000
(ratio of sales 24:6) By Stock 5,760 —
To Selling Expenses 24,000 2,400
To Stock Reserve 7,920 —
(closing)
To Net Profit 2,83,440 48,000
4,01,760 72,000 4,01,760 72,000
Working Notes:
(i) Opening stock Reserve
Cost of cloth in ready-made department
80% of ` 28,800 ` 23,040
Gross Profit @ 25% ` 5,760
(ii) Gross Profit Rate in cloth department in 2014

Gross Pr ofit 3,96,000
 100 or,  100 = 27.5%
Sales 14,40,000
(iii) Stock Reserve on closing stock in 2012 : 27.5% of ` 36,000 × 80% = ` 7,920.
Alternatively, stock reserve may be charged to combined Profit and Loss Account.
(b) The proprietors of Dhoora Departmental store wish to ascertain approximately separate net
profits of their two particular departments A and B for the year ended 31 st March, 2017. It is
not possible to take stock on that date. However, normal rates of Gross Profit (before
charging direct expenses) for the department concerned were 40% and 30% on sales
respectively. There are six departments in the stores. The following figures were extracted
from the books for the year ending 31st March, 2017:
Department A Department B
(`) (`)
Stock (April 1, 2014) 3,00,000 2,80,000
Sales 14,00,000 12,00,000
Purchases 9,00,000 7,20,000
Direct Expenses 1,83,000 2,84,000
The total indirect expenses of all the six departments for the period were `3,60,000. These
expenses (except one-third which is to be divided equally) are to be charged in proportion
to departmental sales. The total sales of the other departments were `14,00,000. The Manager
of each department is also entitled to a commission of 2 % on the turnover of his department.
Prepare Departmental Trading and Profit& Loss Account in columnar form for the year ending
31st March,2017 making a stock reserve of 5% for each department on the estimated value of
stock on 31st March,2017.
Answer:
Departmental Trading and Profit & Loss Account
For the year ending 31st March, 2017
(` in ‗000)
Particulars Dept. A Dept. B Total Particulars Dept. A Dept. B Total
(`) (`) (`) (`) (`) (`)
To Opening Stock 300 280 580 By Sales 1,400 1,200 2,600
To Purchases 900 720 1,620 By Closing Stock 360 160 520
To Direct Exp. 183 284 467 (Balancing Figure)
To G.P. C/d 377 76 453
1,760 1,360 3,120 1,760 1,360 3,120
To Indirect Exp. By G.P. b/d 377 76 453
-Equal Allocation: 20 20 40 By Net Loss -- 48 48
-Sales basis Allocation 84 72 156
To Manager‘s 28 24 52
commission @ 2% on
Sales
To Stock Reserve @ 5% 18 8 26
on Closing Stock
To Net Profit 227 -- 227
377 124 501 377 124 501
Working Notes:
A. Gross profit before direct expenses:

A (`) B (`)
A – 40% of `14,00,000 5,60,000 ---
B – 30% of `12,00,000 --- 3,60,000
Less: Direct Expenses 1,83,000 2,84,000
Net Gross Profit 3,77,000 76,000
B. Allocation of Indirect Expenses:

Equal Allocation – 3,60,000 × 1/3 = 1,20,000 × 1/6 = ` 20,000 for each department.
Sales Basis – Sales Ratio for A, B and other 4 departments = 14,00,000 : 12,00,000 : 14,00,000 or
7 : 6 : 7.
Indirect expenses for this basis = 3,60,000 × 2/3 = ` 2,40,000.
Share of Dept. A = 2,40,000 × 7/20 = ` 84,000
Share of Dept. B = 2,40,000 × 6/20 = ` 72,000.
Study Note 11 – Computerised Accounting System
27. (a) Discuss the salient features of Computerised Acoounting System.
Answer:
Computer information system environment exists when one or more computer(s) of any type or
size is (are) involved in the processing of any information, whether those computers are
operated by the entity or by a third party.
A computerised accounting environment will therefore have the following salient features:
1. The processing of information will be by one or more computers.

2. The computer or computers may be operated by the entity or by a third party.
3. The processing of financial information by the computer is done with the help of one or
more computer softwares.
4. A computer software includes any program or routine that performs a desired function or
set of functions and the documentation required to describe and maintain that program or
routine.
5. The computer software used for the accounting system may be an acquired software or
may be developed specifically for the business.
6. Acquired software may consist of a spread sheet package or may be prepackaged
accounting software.
27. (b) List the significances of computerised accounting system.
Answer:
Significance of computerised accounting system

• The speed with which accounts can be maintained is several fold higher;
• Automatic Correct Balancing of Ledger Accounts;
• Automatic Tailied Trial balance unless some mistake is made while recording the opening
balance;
• Automatic Income Statement;
• Automatic Balance Sheet.
Study Note 12 – Accounting Standards
Q.28 (a) Draft the Accounting Policies to be disclosed in the financial statement for Inventories.
Answer: Inventories are valued as under:
Poultry for livestock breeding At cost

Raw Materials and packing materials At cost or net realizable value, whichever
is lower
Work-in-progress At cost or net realizable value, whichever
is lower
Finished Goods At cost or net realizable value, whichever
is lower
Stores and spares At cost
By products At estimated selling price
28. (b) MM Ltd. sold its building to NN Ltd. for `120 lakhs on 30.09.2015 and gave possession of the
property to NN Ltd. However, documentation and legal formalities are pending. Due to this,
the company has not recorded the sale and has shown the amount received as an advance.
The book value of the building is `50 lakhs as on 31st March,2016. Do you agree with this
treatment/ if do not agree, explain the reasons with reference to the the accounting standard.
Answer:
Principles of prudence, substance over form and materiality should be looked into, to ensure
true and fair consideration in a transaction.
The economic reality and substance of the transaction is that the reights and beneficial
interest in the property has been transferred although legal title has not been transferred.
Hence, MM Ltd. should record the sale and recognize the profit of `70 lakhs in its financial
statements for the year ended 31st March, 2016; value of building should be removed
balance sheet. Therefore the treatment given by the company is not correct.
28. (c) In a production process, normal waste is 5% of input. 7500 MT of input were put in process
resulting in a wastage of 450 MT. Cost per MT of input is `1,000. The entire quantity of waste is
on stock at the year end. If waste has Nil realizable value. What is the cost per unit.
Answer:
As per AS 2 , abnormal amounts of waste materials, labour or other production costs are
excluded from cost of inventories and such costs are recognized as expenses in the period in
which they are incurred.
In this case, normal waste is 375 MT and abnormal waste is 75MT. Cost per unit (`1000 × 7500)
÷ 7125 = ` 1052.63.
The cast of 375 MT will be included in determining the cost of inventories (finished goods) at
the year-end. The cost of abnormal waste amounting to `78,947.25 (75 MT × `1052.63) will be
charges in the profit and loss statement.
Cost per unit = 7500 × `1000/7125 = `1052.63
29. (a) Can PT Ltd. a wire netting company, while valuing its finished stock at the yearend include
interest on Bank Overdraft as an element of cost, for the reason that overdraft has been taken
specifically for the purpose of financing current assets like inventory and for meeting day to
day working expenses?
Answer:
As per AS 2 "Valuation of Inventories", cost of inventories comprise of all cost of purchase,

cost of conversion and other costs incurred in brining the inventories to their present location
and condition.
Interest and other borrowing costs are usually considered as overheads that don't
contribute to bringing the inventories to their present location and condition. Therefore, the
proposal of PT Ltd. to include interest on bank over draft as a element of cost is not
acceptable. Interest on bank overdraft will not form part of cost of production.
29. (b) Mukta Ltd. purchased a machinery costing `2,50,000 for its manufacturing operations
and paid shipping costs of `40,000. Mukta Ltd. spent an additional amount of `20,000 for
testing and preparing the machine for use. What should Mukta Ltd. record as the cost of
the machinery?
Answer:
As per AS – 10, the cost of Property, Plant and Equipments should comprise its purchase
price and any attributable cost of bringing the asset to its working condition for its
intended use. In this case the cost of machinery includes all expenditures incurred in
acquiring the asset and preparing it for use. Cost includes the purchase price, freight and
handling charges, insurance cost on the machine while in transit, cost of special
foundations, and costs of assembling, installation and testing. Therefore the cost to be
recorded is `3,10,000 (`2,50,000 + `40,000 + `20,000).
29. (c) Om Ltd. uses horses to transport material from one place to another place on hilly area
where construction activity is going on. It purchases horses worth `80,000 for transporting
material on 01.04.2016. Useful life of horses was estimated 5 years, therefore company
decided to write off depreciation on horses as per SLM over 5 years. Comment.
Answer
The treatment followed by the company is not correct as per AS – 10, this excluded
biological assets from scope of AS – 10. Therefore, depreciation accounting is not
applicable to Live Stock.
30. (a) A firm of contractors obtain a contract for construction of a bridge across river Hindan.
The following details are available in the records kept for the year ended 31 st March, 2017.
Particulars ` in lakhs
Total Contract Price 2,000
Work Certified 1,400
Work Not Certified 400
Estimated Further Cost to Completion 700
Progress Payment: Received 1,000
To be Received 200
The firm seeks your advice and assistance in the presentation of accounts keeping in
view the requirements of AS - 7.
Answer:
Amount to be disclosed as per Disclosure Requirements of AS - 7
Particulars ` in Lakhs
A Additions during the year

Cost Incurred during the year (1,400 + 400) 1,800
Revenue recognized during the year (2,000 x 1,400)/2,500 1,120
Total [A] 2,920

B Deductions during the year
Expenses recognized during the year (Work certified) 1,400
Expected loss [ (` 1,400 lakhs + ` 400 lakhs + ` 700 220
lakhs) `2,000 lakhs] - [` 1,400 lakhs - ` 1,120]
Total [B] 1,620
C Balance [A - B] As per disclosure requirement of AS - 7 1,300
D Progress Billings 1,200
E Amount due from customers for contract work [D - E ] 100
F Progress payment received 1,000
G Retentions [ D – F ] 200
30. (b) An amount of `9,90,000 was incurred on a contract work upto 31.03.2017. Certificates
have been received to date to the value of `12,00,000 against which `10,80,000 has been
received in cash. The cost of work done but not certified amounted to `22,500. It is estimated
that by spending an additional amount of `60,000 (including provision for contingencies) the
work can be completed in all respects in another two months. The agreed contract price of
work is `12,50,000. Compute a conservative estimate of the profit to be taken to the Profit and
Loss Account as per AS – 7.
Answer 30 (a):
As per AS – 7 when the outcome of a construction contract can be estimated reliably,

contract revenue and contract costs associated with the construction contract should be
recognised as revenue and expenses respectively by reference to stage of completion of
the contract activity at the reporting date.
Thus, estimated profit amounting `1,88,571 should be recognised as revenue in the Statement
of Profit and Loss.
Particulars `
Expenditure incurred upto 31.03.2015 9,90,000
Estimated additional expenses (including provision for contingency) 60,000
A. Estimated Cost 10,50,000
B. Contract Price 12,50,000
C. Total estimated profit [(A-B)] 2,00,000
D. Percentage of Completion (9,90,000/10,50,000)×100 94.29%
Computation of estimate of the profit to be taken to Profit and loss Account:
= Total estimated profit × (Expenses incurred till 31.03.2015/ Total estimated cost)
= 2,00,000 × (9,90,000/10,50,000) = `1,88,571.
30. (c) Write short note on Effect of Uncertainties on Revenue Recognition.
Answer :
Para 9 of AS 9 on ―Revenue Recognition‖ deals with the effect of uncertainties on

Revenue Recognition. The Para states:
(i) Recognition of revenue requires that revenue is measurable and at the time of sale
or the rendering of the service it would not be unreasonable to expect ultimate
collection.
(ii) Where the ability to assess the ultimate collection with reasonable certainty is lacking
at the time of raising any claim, e.g., for escalation of price, export incentives, interest
etc. revenue recognition is postponed to the extent of uncertainty involved. In such
cases, it may be appropriate to recognize, revenue only when it is reasonably certain
that the ultimate collection will be made. When there is uncertainty as to ultimate
collection, revenue is recognized at the, time of sale or rendering of service even,
though payments are made by installments.
(iii) When the uncertainty relating to collectability arises subsequent to the time of sale
or rendering of the service, it is more appropriate to make a separate provision to
reflect the uncertainty rather than to adjust the amount of revenue originally
recorded.
(iv) An essential criterion for the recognition of revenue is that the consideration
receivable for the sale of goods, the rendering of services or from the use by others
of enterprise resources is reasonably determinable. When such consideration is not
determinable within reasonable limits; the recognition of revenue is postponed.
(v) When recognition of revenue is postponed due to the effect of uncertainties, it is
considered as revenue of the period in which it is properly recognized.
30. (d) On 25th September, 2015, PA Limited obtained advertisement rights to World Cup Hockey
Tournament to be held in Nov/Dec, 2017 for ` 1,040 lakhs.
They furnish the following information:
1. The company obtained the advertisements for 70% of available time for ` 1,400 lakhs
by 30th September, 2017.
2. For the balance time they got bookings in October, 2017 for `480 lakhs.
3. All the advertisers paid the full amount at the time of booking the advertisements.
4. 40% of the advertisements appeared before the public in Nov. 2017 and balance 60%
appeared in the month of December, 2017.
You are required to calculate the amount of profit/loss to be recognized for the month
November and December, 2017 as per Accounting Standard-9.
Answer:
As per AS 9 in a transaction involving the rendering of services, performance should be

measured either under the completed service contract method or under the
proportionate completion method, whichever relates the revenue to the work
accomplished. Further, AS 9 states that revenue from advertising should be recognized
when the service is completed. The service as regards advertisement is deemed to be
completed when the related advertisement appears before the public.
In the given problem, 40% of the advertisement appeared before the public in November, and
balance 60% in December.
Calculation of Total Profit
Particulars `
Advertisement for 70% of available time obtained 30th September,2017 1,400
Advertisement for 30% of available time obtained by October, 2017 480
Total 1,880
Less: Cost of advertisement rights (1,040)
Profit 840
The profit amounting ` 840 lakhs should be apportioned in the ratio of 40 :60 for the months
of November and December, 2017. Thus, the company should recognise ` 336 lakhs
(i.e.`840 lakhs x 40%) in November, 2017 and rest `504 lakhs (i.e. ` 840 lakhs x 60%) in
December, 2017.

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Revisionary Test Paper_June2018

(b) Match the following:

1. (D), 2. (E) 3. (B), 4. (C), 5. (A),

1. ABC analysis is not based on the concept of selection inventory management.

1. Store Ledger is kept and maintained in _______________.

1. Cost Office; 2. 9.08; 3. Time; 4. Production overhead + Costing P/L A/c;

(a) Calculation of Economic Order Quantity

2 ×10,000 units × ` 200

Economic Order Quantity:

2AO 2 × 26,000 × 500

(i) Re-order Level:

(ii) Re-order Quantity

(iii) Maximum level of Stock:

(vi) If the supplier is willing to supply 1,500 units at a discount of 5%

Output by experienced workers in 60,000 hours = (60,000/10) = 6,000 units

Other details are as under-

(`4,40,000/`50,00,000)x100 (`16,88,000/`80,00,000) x100

(i) Cost of department S1to department P1 and P2 equal and

All materials are used in Department P1 only.

You are required to:

A (4,000 x 2 hrs x ` 72) 5,76,000 5,80,000

*Refer Working Note - 3

Total 3,51,000 2,78,000

Basic Rules for Classification of Costs

Month Batch Output Material Labour Overheads Total

Labour is paid at the rate of ` 2 per hour.

Sales value (3,000 x ` 15) ` 45,000

Abnormal Wastage Account

Abnormal Effectives Account

To Costing Profit and 8,098

Statement showing Cost for each element

Profit 33-1/3 on cost 5,400 5,400

Joint Product and By-Product

Answer 16: Working Notes:

Q17. The following information relates to a bus operator:

Cost of the bus ` 18,00.000

Q17. Answer: Working Notes

Statement showing the Operating Cost per Passenger-km

You are required to find out:

Total amount to 2,56,64,062

*20% of hire charges of room or 25% of cost.

Total sales per annum : 365 day x ` 1,00,000 = ` 3,65,00,000

Profitability of Sports Centre:

Four methods of Computing Profit:

Materials purchased ` 1,00,000

Note 1: Calculation of escalation

Fixed cost = ` 1,20,000

(b) Reduction in fixed expenses product-wise

Q23. From the following figures find the break-even volume:

Product Production(units) Labour hours of Estimated total production

(ii) Statement showing the estimated profitability of most profitable mix

Statement showing profit from each strategy

1 26,400* ` 46 # ` 12,14,400 ` 8,00,000 `4,14,400

(c) Reduction in profit is anticipated at 20%

By putting the values in (i) we get

Existing profit (i.e. y) = ` 10,439

Percentage of existing profit to cost of sales = (10,439 ÷ 24,561) x 100 = 42.5%

(ii) Anticipated cost of sales is as under

Material = 1.10 x ` 9,825 = ` 10,808

(3) Total Sales Variance = Actual Sales - Budgeted Sales