CAPII Suggested Dec2015

Advanced Accounting
Suggested Answer
Roll No……………. Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages - 14
Time Allowed - 3 Hours
Attempt all questions. Working notes should form part of the answer.
1. Grand Limited is in the hands of Receiver, Mr. L for debenture holders who hold a
charge on all the assets except uncalled capital. The following statement shows the
position as regards creditors as on 31st Ashadh 2072:
Liabilities Amount Assets Amount
(Rs.) (Rs.)
Share Capital Rs.360,000 in - Cash in hand of the
shares of Rs.60 each, Rs.30 receiver, Mr.L 270,000
paid up Property, machinery
First debentures 300,000 and Plant etc cost
Second debentures 600,000 Rs.390,000 estimated
Unsecured creditors 450,000 at 150,000
Charged under
debenture 420,000
Uncalled capital 180,000
Deficiency 750,000
1,350,000 1,350,000
Mr. A holds first debentures of Rs.300,000 and second debentures of Rs.300,000. He
is also an unsecured creditor for Rs.90,000. Mr. B holds second debenture of
Rs.300,000 and is an unsecured creditor for Rs.60,000.
The following scheme of reconstruction is proposed and approved:
a) Mr. A is to cancel Rs.210,000 of the total debt owing to him, to advance
Rs.30,000 in cash and to take first debentures (in cancellation of those already
issued to him) for Rs.510,000 in settlement of all his claims.
b) Mr. B is to accept Rs.90,000 in cash in satisfaction of all claims by him.
c) Unsecured creditors (other than Mr. A and Mr. B) are to accept four shares of
Rs.7.5 each fully paid in satisfaction of 75% of every Rs.60 of their claim. The
balance of 25% is to be postponed and to be payable at the end of three years
from the date of the Court‘s approval of the scheme. The nominal share capital is
to be increased accordingly.
d) Uncalled capital is to be called up in full and Rs.52.50 per share cancelled, thus
making the shares of Rs.7.5 each.
Assuming that the company keeps sectional ledgers, give necessary journal
entries and the balance sheet of the company before and after the scheme has been
carried into effect.
Question 1. Solution
Before passing the necessary journal entries, it would be better to make regular balance sheet since the
statement does not provide the clear position. It does not include figures for share capital and, on the
assets side, it includes ―Uncalled Capital‖ which should not be included. The balance sheet below
provides the correct figure of deficiency.
Balance Sheet as on 31st Ashad 2072 (before Reconstruction)

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Share Capital 6,000 shares of 1,80,000 Cash in hand of the Receiver, 2,70,000
Rs.60 each, Rs.30 paid up Mr.L
First debentures 3,00,000 Property, Machinery and
Second Debentures 6,00,000 Plant at cost (Refer Working 3,90,000
Unsecured Creditors 4,50,000 Note 1) 8,70,000
Deficiency
15,30,000 15,30,000
Journal Entries
31st First Debentures Dr. 3,00,000

Ashad Second Debentures Dr. 3,00,000
2072 Unsecured Creditors A/c Dr. 90,000
To Mr. A‘s A/c 6,90,000
(Total amount due to Mr.A transferred to his account)
31st Second Debentures A/c Dr. 3,00,000

Ashad Unsecured Creditors A/c Dr. 60,000
2072 To Mr. B‘s A/c 3,60,000
(Total amount due to Mr.B transferred to his account)
31st Bank A/c Dr. 30,000

Ashad To Mr. A‘s A/c 30,000
2072 (The amount paid by Mr. A under the approved scheme of
reconstruction.)
31st Mr. A‘s A/c Dr. 7,20,000

Ashad To First Debentures A/c (New) 5,10,000
2072 To Reorganization A/c 2,10,000
(The issue of First Debenture worth Rs.5,10,000 to Mr. A in full
satisfaction of his claims, the balance of Rs.2,10,000 credited to
Reorganization A/c in accordance with the scheme)
31st Mr. B‘s A/c Dr. 3,60,000

Ashad To Bank A/c 90,000
2072 To Reorganization A/c 2,70,000
(The payment of Rs.90,000 to Mr. B in full satisfaction of his claims
in accordance with the scheme)
31st Unsecured Creditors A/c Dr. 2,25,000

Ashad To Share Capital A/c 1,50,000
2072 To Reorganization A/c 75,000
(The issue of Rs.7.50 fully paid shares to unsecured creditors in
accordance with the sanctioned scheme,
Refer Working Note 2 for full details)
31st Bank A/c Dr. 1,80,000

Ashad To Share Capital A/c 1,80,000
2072 (The balance on shares (Rs.30 per share) called up in accordance
with the scheme.)
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31 Share Capital A/c Dr. 3,15,000
Ashad To Reorganization A/c 3,15,000
2072 (The cancellation of Rs.52.50 per share on 6,000 shares in
accordance with the scheme.)
31st Reorganization A/c Dr. 8,70,000

Ashad To Profit and Loss A/c 8,70,000
2072
Balance Sheet as on 31st Ashad 2072 (After Reconstruction)

Share Capital 26,000 shares of 1,95,000 Fixed Assets:
Rs.7.5each fully paid up Property, Machinery and 3,90,000
Secured Loans Plant at cost
First debentures 5,10,000 Current Assets:
Current Liabilities and Provisions Cash and Bank Balance 3,90,000
Sundry Creditors 75,000
7,80,000 7,80,000
Working Note:
1. Property plant and equipment has been shown at cost rather than realizable value
because the company will continue to do the business. The true deficiency of
Profit and Loss Account is Rs.8,70,000.
2. Four shares of Rs.7.5 fully paid (Rs.30 in all) given to those who have claim of
Rs.60 each i.e. 50% is being paid in the form of shares and 25% is being
cancelled and 25% being postponed. Hence against the total claim of Rs.3,00,000
(other than Mr. A and Mr. B), Rs.1,50,000 will be given in the form of shares, Rs.
75,000 will be cancelled and balance Rs.75,000 will be postponed. No entry is
required for postponement.
2.
a) Following information as at second quarter ending 2071 were drawn from the
records of Shivam Bank Limited as under:
Loans outstanding for: Amount (Rs.)
Up to 3 months 1,868,420
More than 3 months but not more than 6 months 11,720
More than 6 months but not more than 12 months 262
More than 12 months 2,032
Total 1,882,434
Following additional information relating to previous quarter ending were
extracted from the records of the bank:
Paid up equity share capital 161,016
Statutory general reserve 163,632
Retained earnings 96,657
General loan loss provisions 18,497
Exchange equalization reserve 25,919
Un-audited current year cumulative profit 33,185
Deferred revenue expenses 2,668
The bank is in the process of preparing the documents for quarterly reporting. As
a reporting and compliance officer of the bank you are required to calculate
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movement in loan loss provision amount. The bank has also provided a Term loan
of Rs. 125,000 to a Party during the period under review.
b) Amar, Binod, Chandra and Dev were in partnership sharing profits and losses in
the ratio 3:3:2:2. The Balance Sheet of the partners as on 31st Ashadh 2072 was as
under:
Capital and Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital accounts Cash at bank 2,000
Amar 20,000 Sundry debtors 16000
Binod 15,000 35,000 Less: Provision for
Amar‘s loan 10,000 bad debts 500 15,500
Sundry creditors 15,500 Stock 10,000
Furniture and fittings 4,000
Trade marks 7,000
Capital accounts
Chandra 16,000
Dev 6,000 22,000
60,500 60,500
On 31st Ashadh 2072, the partnership firm was dissolved and Binod was
appointed to realize the assets and pay off the liabilities. He was entitled to
commission @ 5% on amounts finally paid to other partners as capital. He was
also to bear the expenses on realization. The assets realized as follows:
Sundry debtors 11,000
Stock 8,000
Furniture and fittings 1,000
Trade Marks 4,000
Creditors were paid in full; in addition, a contingent liability for bills receivable
discounted materialized to the extent of Rs. 2,500. Also there was a joint life
policy of Rs.30,000 which was surrendered for Rs.3,000. Expenses of realization
amounted to Rs.500. Chandra was insolvent but a sum of Rs.3,700 was recovered
from his estate.
You are required to write up the Cash Account, Realization Account and Partners
Capital accounts to close the books of the firm.
Question 2.(A) Solution

As per provisions of the Directive 3 of Unified Directives, a bank can provide a credit up
to 25% of its core capital to single party. This limit is called as Single Obligor Limit
(SOL). While calculating the SOL core capital of previous quarter shall be taken as base.
In case any excess credit has been provided by the bank, additional 100% provision shall
be made for such excess credit amount. Before calculating the provision amount, SOL of
the bank shall be tested upon.
Computation of SOL and credit amount in excess of SOL
Particulars Amount Rs.
Core Capital:
Paid up Equity Share Capital 161,016
Statutory General Reserve 163,632
Retained Earnings 96,657
Un-audited current year cumulative profit 33,185
Less: Deferred Revenue Expenses (2,668)
Total Core Capital 451,822
Single Obligor Limit (25% of Core Capital) 112,956
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Loan to a Single Party 125,000
Loan in Excess of SOL 12,044
Now, we compute the loan loss provision amount as per provisions of the Directive 2 of
the NRB.
Computation of Loan Loss Provision Amount
Due for Categories Loan Provision Provision
Amount Rate Amount
Not due or <=3 Months Pass 1,868,420 1% 18,684
>3 Months but <=6 Months Substandard 11,720 25% 2,930
>6 Months but <=1 Year Doubtful 262 50% 131
>1 Year Loss 2032 100% 2,032
Total 1,882,434 23,777
Additional Provision for 12,044
Loan in excess of SOL
Total Provision Amount 35,821
Shivam Bank Limited

Movement in Provision Amount
For Second Quarter of Fiscal Year 2071/72
Particulars Amount
Opening Provision Amount 18,497
Closing Provision Amount 35,821
Movement (addition during the Quarter) in Provision Amount 17,324
Question 2.(B) Solution

Cash Book
Date Particulars Amount Date Particulars Amount
2072 2072
31/3 To balance b/d 2,000 31/3 By Sundry Creditors 15,500
31/3 To Realization A/c 27,000 31/3 By Realization A/c 2,500
Assets realized 31/3 By Amar‘s Loan A/c 10,000
31/3 To Chandra's Capital A/c 3,700 31/3 By Amar‘s Capital A/c 11,219
31/3 To Binod‘s Capital A/c 3,600 31/3 By Binod‘s Capital A/c 9,081
31/3 To Amar‘s Capital A/c 3,600
31/3 To Dev‘s Capital A/c 8,400
48,300 48,300
Realization Account
Date Particulars Amount Date Particulars Am
oun
t
2072 2072
31/3 To Sundry Assets 31/3 By Provision for Baddets 500
Sundry Debtors 16,000 31/3 By Cash
Stock 10,000 31/3 Sundry Debtors 11,000
Furniture fittings 4,000 Stock 8,000
Trade Marks 7,000 37,000 Furnitures etc 1,000
Trade Marks 4,000
31/3 To Cash (Bill Discounted) 2,500 Joint Life Policy 3,000 27,
By Net Loss Transferred to: 000
Amar's Capital A/c 3,600
Binod's Capital A/c 3,600
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Chandra's Capital A/c 2,400
Dev‘s Capital A/c 2,400
12,
000
39,500 39,
500
Partners' Capital Account
Particulars Amar Binod Particulars Amar Binod
To Realization A/c 3,600 3,600 By balance b/fd 20,000 15,000
To Chandra‘s Capital A/c 8,400 6,300 By Cash A/c 3,600 3,600
(Deficiency written off) By Amar‘s Capital A/c - 381
To Binod‘s Capital A/c 381 - (5% Commission on
(Commission) Rs.7,619)
To Cash 11,219 9,081
23,600 18,981 23,600 18,981
Partners' Capital Account
Particulars Chandra Dev Particulars Chandra Dev
To balance b/fwd 16,000 6,000 By Cash 3,700 8,400
To Realization 2,400 2,400 By Amar‘s Capital A/c 8,400 -
By Binod‘s Capital A/c 6,300 -
18,400 8,400 18,400 8,400

Working Notes
1. Since Dev has a debit balance in his capital account on the date of dissolution, he is not
required to bear any proportion of loss due to Chandra‟s insolvency. Only Amar and Binod has
to bear the loss in the ratio of their capital i.e. 4:3.
2. The commission payable to Binod is 5% on the amount paid to the partners as capital. Only
Amar receives such an amount. That comes to Rs.8,000 not counting the commission payable to
Binod. The commission is 8,000X5/105 i.e Rs.381. or 11600*5/105
3. The actual expenses of realization have been assumed to be paid by Binod privately. If the firm
pays the amount, the amount will be debited to Binod‟s capital and credited to cash. In such a
case, the amount finally paid to Binod comes to Rs.8,581.
3.
a) On 2068.04.01, Samuels acquired a car on Hire Purchase System from Nelson &
Co., agreeing to pay 4 annual installments of Rs 120,000 each payable at the end
of each year. There is no down payment. Interest is charged @ 20 % per annum
and is included in the annual installments.
Answer the followings:
i) Show the account of Nelson & Co. for all the years in the books of Samuels.
ii) What amount Samuels would require to pay if he buys the car on cash?
b) What are the issues, with which accounting standards deal?

c) Following are the ratios relating to the trading activities of an organization:
Debtor's velocity 3 month
Stock Velocity 6 months
Creditor's velocity 2 months
Gross Profit Ratio 20%
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Gross profit for the year ended 31 March 2015 was Rs. 5,00,000. Stock as on
31st March 2015 was Rs. 20,000 more than it was on 1st April 2014. Bills payable
and receivable were Rs. 36,667 and Rs. 60,000 respectively.
Ascertain the figures of:
i) Sales
ii) Debtors
iii) Creditors; and
iv) Stock
d) Explain Recognition of Premium Income in the Insurance Company.
Question 3(a) Solution

Computation of interest and principe
Date of Installment Calculation Towards Towards

Installment Amount Interest Cash Price
Ashadh end, 1,20,000 20/120 x Rs.1,20,000 20,000 100,000
2072
Ashadh end, 1,20,000 36,667 83,333
2071 20/120 x Rs.(1,00,000 + 1,20,000)
Ashadh end, 1,20,000 20/120 x Rs.(1,00,000 + 83,333 + 50,556 69,444
2070 1,20,000)
Ashadh end, 1,20,000 20/120 x Rs.(1,00,000 + 83,333 + 69,444 + 62,130 57,870
2069 1,20,000)
Total 4,80,000 169,352 310,648
Dr. Nelson &Co. Cr.

Ashadh To Bank 120,000 Ashadh By Car A/c 310,648
end, 2069 To Bal c/d 252,778 end, 2069 By Interest A/c 62,130
372,778 372,778
Ashadh To Bank 120,000 Ashadh By Bal b/d 252,778
303,333 303,333
220,000 220,000
end, 2072 end, 2072 By Interest A/c 20,000
120,000 120,000
Samuels would require to pay Rs. 3,10,648 if he buys the car on cash.
Question 3(b) Solution
Accounting Standards deal with the issues of

i) Recognition of events and transactions in the financial statements,
ii) Measurement of these transactions and events,
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iii) Presentation of these transactions and events in the financial statements in a manner
that is meaningful and understandable to the reader, and
iv) Disclosure requirements which should be there to enable the public at large and the
stakeholders and the potential investors in particular, to get an insight into what these
financial statements are trying to reflect and thereby facilitating them to take prudent
and informed business decisions.
Question 3(c) Solution

Rs. 000
1) Gross profit 500

Rate of Gross profit 20%
Sales Rs.500 x 100/20 2,500
2) Sales 2,500
Debtor's velocity 3 months
Accounts receivable as on 31st March 2015
Rs. 2,500/4 625
Less: Bills receivable 60
Trade Debtors 565
3) Purchases:
Cost of sales = (Sales- Gross profit) = ( Rs. 2,500 – Rs. 500 ) 2,000
Increase in stock 20
Purchase for the year 2,020
Accounts payable as on 31st March 2015 = Rs. 2,020 /6 = 336.667

Less: Bills payable 36.667
Creditors 300
4) Cost of goods sold 2,000

Stock Velocity 6 months
Average stock = Rs. 2,000/2 = 1,000
Let opening stock be = x
Then, closing stock = x + 20
Twice the average stock or Rs. 1,000 X 2 = 2x + 20
Or 2x = 1,980 = x= 990
Opening Stock = Rs. 990
Closing Stock = Rs. 990 + 20 = Rs. 1,010
Question 3(d) Solution (edited)

As per Section 27 of the Insurance Act 2049, no Insurer shall hold the insurance risk of any
category of insurance business until it receives the premium of the insurance to be obtained
by it. It shall be deemed that the insurer has undertaken the insurance Business only after
receiving the insurance premium by it for holding the risk.
Provided that, if any practical difficulty arises due to any reason for paying the amount in a
lump sum, the section shall not be deemed to be prohibited to issue an Insurance Policy on
the guarantee of a bank of the Nepal Government relating to the payment of the outstanding
amount within a specified period.
The Re-insurance premium income shall be recognized on accrual basis
OR
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Premium income should be accounted for on cash basis. However, if the premium received
relates to the risk covered for the later period, then premium income shall be recognized in
period to which it relates. Insurance premium received for more than one year, should be
apportioned and premium relating to current year should be recognized as income, remaining
portion should be recognized as deposits and recognized as income in next years.
Re-insurance premium for re-insurance accepted, should be accounted for on accrual basis.
4.
a) On 01.04.2071, Mr. M. Pandey purchased 5,000 equity shares of Rs 100 each in
Jyoti Bikash Bank Ltd. @ Rs 120 each from a broker, who charged 2 %
brokerage. He incurred 50 paisa per Rs 100 as cost of shares transfer stamps. On
31-01-2072 bonus was declared in the ratio of 1:2. Before and after the record
date of bonus shares, the shares were quoted at Rs 175 per share and Rs 90 per
share respectively. On 31-03-2072, Mr. M. Pandey sold bonus shares to a broker,
who charged 2% brokerage.
Show the Investment Account in the books of Mr. M. Pandey, who held the
shares as Current Assets and closing value of investments shall be made at cost or
market value whichever is lower.
b) The Balance Sheet of Zee Limited as on 31st Ashadh 2071 is given below:
Capital and Liabilities Amount Assets Amount
(Rs.) (Rs.)
Issued and paid up capital Freehold Property 200,000
20,000 equity shares of Rs.10 each 200,000 Stock in trade 120,000
Profit and Loss A/c 180,000 Sundry debtors 100,000
% Debentures 120,000 Cash and bank balances 180,000
Sundry Creditors 100,000
600,000 600,000
It was resolved at the annual general meeting :
i) to pay dividend of 10%
ii) To issue one bonus share for every 4 shares held.
iii) To give the existing shareholders the option to buy one of Rs.10 share @
Rs.14 for every four shares held prior to bonus distribution.
iv) To repay the debentures at the premium of 4%.
All the shareholders took up the option in (3) above. You are required to pass
necessary journal entries to give effect to the above transactions.
c) Describe the term Capital Account in the context of accounting system.
Question 4(A) Solution

In the books of Mr. M. Pandey
Investment Account
For the year ended 31st Ashad, 2072
Date Particulars Nominal Cost Rs. Date Particulars Nominal Cost Rs.
Value Value
Rs. Rs.
1.4.2071 To Bank 5,00,000 6,15,000 31.03.2072 By Bank 2,50,000 2,20,500
A/c A/c
31.1.2072 To Bonus 2,50,000 - 31.03.2072 By 5,00,000 4,10,000
Shares Balance
c/d
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31.03.2072 To PL A/c 15,500
7,50,000 6,30,500 7,50,000 6,30,500
Working Notes:
1. Cost of equity shares purchased on 1.04. 2071

= Cost +Brokerage + Cost of Transfer Stamps
= 5,000* Rs. 120+ 2% of Rs. 6,00,000+ ½ % of Rs. 6,00,000
= Rs. 6,15,000
2. Sale proceeds of equity share sold on 31.03. 2072
= Sales Price-Brokerage
=2,500* Rs. 90-2% of Rs. 2,25,000
=Rs. 2,20,500
3. Profit on sale of bonus shares on 31.03. 2072
=Sales proceeds – Average cost
Sales proceeds = Rs. 2,20,500
Average Cost= Rs. ( 6,15,000* 2,50,000/7,50,000)
= Rs. 2,05,000
Profit = Rs. 2,20,500- Rs. 2,05,000 = 15,500.
4. Valuation of equity shares on 31.03. 2072
Cost = Rs. (6,15,000* 5,00,000/7,50,000)= Rs. 4,10,000 i.e. Rs. 82 per share
Market Value = 5,000 shares * Rs. 90 = Rs 4,50,000
Closing stock of equity share has been valued at Rs. 4,10,000 i.e. cost being lower
than the market value.
Question 4(B) Solution

Journal Entries
Profit and Loss Appropriation A/c Dr. 20,000

To Dividend Payable A/c 20,000
(Transfer of 10% dividend on Rs.2,00,000 equity shares to
Dividend payable account.)
Dividend Payable A/c Dr. 20,000

To Bank A/c
(Dividend Paid to the shareholders) 20,000
Profit and Loss Appropriation A/c Dr. 50,000

To Bonus to equity shareholders A/c 50,000
(Bonus payable to equity shareholders.)
Bonus to Equity shareholders A/c Dr. 50,000

To Equity Share Capital A/c 50,000
(Allotment of 5000 equity shares of Rs.10 each as bonus shares
to the equity shareholders.)
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Bank A/c Dr. 70,000

To Equity Share Capital A/c 50,000
To Shares Premium A/c 20,000
(Allotment of 5,000 equity shares of Rs.10 each at Rs.4 per share
premium on right basis.)
Share Premium A/c Dr. 4,800

To Premium on Redemption of Debentures A/c 4,800
(Premium on redemption of debentures charged to Share
Premium A/c)
12% Debentures A/c Dr. 1,20,000

Premium on Redemption of Debentures A/c Dr. 4,800
To Debenture holders A/ 1,24,800
(Amount payable on redemption of debentures along with the
premium)
Debenture holders A/c Dr. 1,24,800

To Bank A/c 1,24,800
(Being amount due to the debenture holders paid off)
Question 4(C) Solution

Capital account is a general ledger account which shows owners investment plus net income from the
firms operations, less net losses (if any) from operations less withdrawals of funds by the owners for
personal use.
The components of the capital account vary as per the types of the business entity. The component of
capital account in case of proprietorship and partnership entity, are same as defined above. However in
case of company, the component of capital account includes:
 Funds contributed by shareholders
 Retained earnings
 Reserves representing appropriation of retained earnings.
The balance of capital accounts has generally a credit balance and is reported in the balance sheet as an
owner‘s equity.
5.
a) Vikas Electronics is a manufacturer of LED television sets since 2 years. It deals
in both via its dealers and retail trade via its showroom located at 15 different
places across the country. Vikas electronics has just received an order from a
newly established hotel for supply of 50 pieces of 32 inches LED sets and 100
pieces of 42 inches LED sets. Vikas electronics entered into the agreement 3
months ago and all LED sets has already been supplied to the hotel. However, the
hotel management has found serious flaws on 25 pieces of 32 inches LED sets
and 30 pieces of 42 inches LED sets. Since the warranty period of the televisions
sets had not expired, the hotel management has decided to return the damaged sets
to Vikas electronics. Vikas electronics seeks your advice as to how to recognize
the revenue for this transaction. Advice the management.
b) The Written Down Value of Property, Plant & Equipment of Prudence
International Pvt. Ltd. as on Ashadh end, 2072 was Rs. 2,000,000. The company
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decided to revalue its Property, Plant & Equipment on Ashadh end, 2072. This is
the first instance when the company has gone for any revaluation of assets.
With reference to NAS; explain the financial impact on account of revaluation of
Property, Plant & Equipment on (i) Reserves & Surplus and (ii) Profit & Loss
Account if:
i) Property, Plant & Equipment is revalued at Rs. 2,500,000.
ii) Property, Plant & Equipment is revalued at Rs. 1,600,000.
c) A National Finance Company Ltd. recognized Rs. 5 lakhs, on accrual basis,
income from dividend during the year 2071/72, on shares of the face value of Rs.
25 lakhs held by it in Everest Bank Ltd. as at 31st Ashadh, 2072. Everest Bank
Ltd. proposed dividend @ 20% on 25th Shrawan, 2072. However, dividend was
declared on 30th Ashoj 2072. Financial Statement of the National Finance
Company was approved on 15th Kartik, 2072 by the Board of Directors of the
company. Please state with reference to relevant Nepal Accounting Standard
whether the treatment accorded by National Finance Company Ltd. is in order.
Revenue from the sale of goods shall be recognized when all the following conditions have
been satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the
goods;
(b) the entity retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the
entity; and
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
In this case since the warranty period has not expired for LED sets and the hotel management has
returned the sets, it seems that agreement of sales contains a condition of returning the goods if there is
defective in product within warranty period. It means that risk and reward of ownership still lies with
Vikash Electronics till warranty period. So revenue should not be recognized on damaged sets.
As per Para 70 of NAS 27 'Nepal Accounting Standard on Property, Plant & Equipment‟:
On Increase on A/c of Revaluation:
If an asset's carrying amount is increased as a result of a revaluation:
- the increase shall be credited directly to equity under the heading of Revaluation Surplus.
-However, the increase shall be recognized in profit or loss to the extent that it reverses a
revaluation decrease of the same asset previously recognized in profit or loss.
-Hence, in case of revaluation of property, plant & equipment to Rs. 2,500,000; Rs. 500,000
shall be credited directly to equity under Revaluation Surplus.
On Decrease: on A/c of Revaluation:

If an asset's carrying amount is decreased as a result of a revaluation:
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-the decrease shall be recognized in profit or loss.
-However, the decrease shall be debited directly to equity under heading of revaluation surplus to
the extent of any credit balance existing in the revaluation surplus in respect of that asset.
-Hence, in case of revaluation of property, plant & equipment to Rs. 1,600,000; Rs. 400,000
shall be recognized in Profit & Loss A/c.
Para 30 of NAS 7 "Revenue Recognition" states that dividends shall be recognized when the
shareholder's right to receive payment is established. Thus, an investment in shares dividend
income is not recognized in the statement of Profit and Loss Account until the right to receive
dividend is established.
In the given case, the dividend is proposed on 25th Shrawan, 2072, while it was declared on 30th
Ashoj 2072. Hence, the right to receive dividend is established on 30th Ashoj 2072 only.
Therefore, on applying the provisions stated in the standard, income from dividend on shares
should be recognized by National Finance Company Ltd. in the financial year 2072/73 only.
Therefore, the recognition of income from dividend of Rs. 5 lakhs, on accrual basis, in the
financial year 2071/72 is not in accordance with NAS 7.
6. Write short notes on:

a) Timing differences and permanent differences as per NAS -9
b) Capital adequacy ratio.
c) Realization concept
d) Exchange equalization fund
Timing differences and Permanent differences as per NAS -9.
Temporary differences are differences between the carrying amount of an asset or

liability in the balance sheet and its tax base. Temporary differences may be either:
(a) Taxable temporary differences, which are temporary differences that will result in
taxable amounts in determining taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is recovered or settled; or
(b) Deductible temporary differences, which are temporary differences that will result in
amounts that are deductible in determining taxable profit (tax loss) of future periods
when the carrying amount of the asset or liability is recovered or settled.
The tax base of an asset or liability is the amount attributed to that asset or liability
for tax purposes.
In current practices, companies, in general, prepare books of accounts as per
Companies Act, generating Accounting Profit/Loss. Accounting income and taxable
income for a period are seldom the same.
Permanent differences are those which arise in one period and do not reverse
subsequently. For e.g. an income exempt from tax or an expense that is not allowable
as a deduction for tax purposes.
Timing differences are those which arise in one period and are capable of reversal in
one or more subsequent periods. For e.g. Depreciation, Provision for expenses etc.
Capital adequacy ratio is a measure of a bank‘s capital. It is expressed as a percentage of a bank‘s risk
weighted credit exposure. It is also known as ―Capital to Risk Weighted Assets Ratio (CAAR). This
ratio is used to protect depositors and promote the stability and efficiency of financial system.
It is calculated as:
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CAR = Tier I capital + Tier II Capital
Risk weighted assets
 Tier I capital is core capital which includes equity capital and disclosed reserves.
 Tier II capital is supplementary capital which includes items such as revaluation reserves,
undisclosed reserves, hybrid instruments and subordinated term debts.
 Risk weighted assets is banks assets or off balance sheet exposure weighted according to risk.

Realization concept in accounting, also known as revenue recognition principle, refers to
the application of accruals concept towards the recognition of revenue (income). Under
this principle, revenue is recognized by the seller when it is earned irrespective of
whether cash from the transaction has been received or not. In case of sale of goods,
revenue must be recognized when the seller transfers the risks and rewards associated
with the ownership of the goods to the buyer. This is generally deemed to occur when the
goods are actually transferred to the buyer. Where goods are sold on credit terms, revenue
is recognized along with a corresponding receivable which is subsequently settled upon
the receipt of the due amount from the customer. In case of the rendering of services,
revenue is recognized on the basis of stage of completion of the services specified in the
contract. Any receipts from the customer in excess or short of the revenue recognized in
accordance with the stage of completion are accounted for as prepaid income or accrued
income as appropriate.
Question 6(D) Solution

Section 45 the Bank and Financial Institution Act, 2063 requires that every Bank
Financial Institution which has obtained a license to deal in foreign exchange must
maintain a Exchange Equalization Fund. The bank and financial institution must transfer
25% of the revaluation profit earned as a result of changes in the exchange rates of
foreign currencies other than the Indian currency every year at the end of the same fiscal
year to the exchange equalization fund. The amount credited to the Exchange
Equalization Fund may not be spent or transferred for any purpose other than the
adjustment of losses resulting from the devaluation of foreign currencies without the
approval of the Nepal Rastra Bank.
Audit & Assurance

Suggested
Total No. of Questions- 7 Total No. of Printed Pages- 8

Attempt all questions.
1. As an auditor, give your opinion with explanations on the following cases:

a) A company has 10 vehicles with carrying amount of 5 crores. The company has
purchased a new machinery worth Rs 8 croreby exchanging with its 10 used vehicles
and making further payment of Rs 2 crores in cash. The company management
derecognizes vehicles from its financial statements and recognizes machinery at Rs 7
crores (5 crores plus 2 crores).
b) A company‘s financial year ends on 31 March 2015 for group accounting purpose.
Due to devastating earthquake in the month of April 2015, the company‘s factory
building with carrying amount of Rs 5 crores was totally destroyed. The board of
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director authorized the financial statements for issue on 30June 2015. The financial
statements include the destroyed building at Rs 5 crore although the Notesto account
makes appropriate disclosure about the earthquake and the destruction of the factory
building.
c) PQR limited has computed the cost of the inventory using last in fast out (LIFO)
method and the value comes to Rs 2 crores (if the cost of the inventory is computed as
per first in first out formula, its cost will be Rs 2.5 crores). Net realizable Value of the
stock is Rs 2.25 crores. Since the policy of the company is to present inventory at
lower of cost or NRV, the company has presented inventory in the financial statement
at Rs 2 crores, being the lowest.
d) A company purchased a plant at the cost of Rs 10 crores on 1 Srawan 2066 and the
company is charging depreciation on straight line basis over 10 years useful life
assuming there will be no scrap. In the year 2071/72 the company decides to charge
depreciation as per written down value method @ 10%. The company management
considers this as the change in accounting estimate and accordingly considers the
effect due to the change prospectively; i.e. depreciation charged in the year 2071/72 is
Rs 50 lakh and no adjustment in retained earnings and carrying amount of machinery.
Answer
a) The company has acquired new machinery by exchanging with used vehicles and making
further payment of Rs 2 croresin cash. As per NAS 16, the assets acquired in such case shall be
recognized at the fair which is Rs 8 crore in this case. So, Machinery should be recognized at Rs
8 crores. Since 2 Crores has been paid in cash, disposal of vehicle should be recognized at Rs 6
crore thereby resulting into gain of Rs 1 crore on disposal of vehicle because the carrying
amount of vehicle in the books of the company is Rs 5 crore. Hence the treatment of
recognizing new machinery at Rs 7 crore and not recognizing gain of Rs 1 croreon disposal of
vehicle by the management does not seem to be appropriate in accordance with NAS 16.
b) Earthquake occurred in the month of April 2015 which is after the end of the accounting year
(31 March 2015) and before the date when the financial statements are authorized for issue (30
June 2015). Hence it is an event after reporting period. Since this event does not provide further
evidence of the condition existed at the end of reporting period (31 March 2015) and it indicates
the conditionthat arose after the reporting period, it is a non-adjusting event. So, the carrying
value of the destroyed factory building need not be adjusted in the financial statements and
appropriate disclosure in the Notes to account seems to be in line with NAS 10.
c) As per NAS 2, cost of inventories should be assigned as per first in first out or weighted average
formula. Determining the cost as per last in first out is not allowed. So, despite the fact the cost
of inventories of PQR will be more if FIFO is used than if LIFO is used, the cost should be
determined as per FIFO. Hence the cost of inventory shall be taken as 2.5 crore in the given
case instead of 2 crore as per LIFO. Since NRV of the inventory is 2.25 crores, lower than the
cost, inventory shall be presented at Rs 2.25 crores in the financial statements.
d) As per NAS 8,
Accounting policies are the specific principles, bases, conventions, rules and practices applied
by an entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a

liability, or the amount of the periodic consumption of an asset, that results from the assessment
of the present status of, and expected future benefits and obligations associated with, assets and
liabilities. Examples of estimate provided in the standard includes the useful lives of, or
expected pattern of consumption of future economic benefits embodied in depreciable assets.
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Straight line method or written down value method of depreciation reflects the estimate of
useful life and expected pattern of consumption of future economic benefits from depreciable
assets. Hence change of depreciation method from straight line to WDV is the change in
accounting estimate and not the change in accounting policy. So, the effect of the change
considered by the management in the preparation of the financial statements seems to be
appropriate.
2. Answer the following:

a) Explain ‗Assurance Report‘ as an element of assurance.
b) Explain the circumstances when work of the internal audit function cannot be used by
External Auditor.
c) ‗Doing a statutory audit is full of risk. `Narrate the factors which cause the risk.
Answer
a) Assurance engagement is an engagement in which a practitioner auditor expresses a conclusion

designed to enhance the degree of confidence of the intended users other than the responsible party
about the outcome of the evaluation or measurement of a subject matter against criteria.
The practitioner auditor provides a written report containing a conclusion that conveys the
assurance obtained about the subject matter information. NSAs, NSREs and NSAEs establish basic
elements for assurance reports. In addition, the practitioner considers other reporting
responsibilities, including communicating with those charged with governance when it is
appropriate to do so. In an assertion-based engagement, the practitioner's conclusion can be
worded either:
In terms of the responsible party's assertion (for example: "In our opinion the responsible party's
assertion that internal control is effective, in all material respects, based on XYZ criteria, is fairly
stated"); or
Directly in terms of the subject matter and the criteria (for example: "In our opinion internal
control is effective, in all material respects, based on XYZ criteria").
In a direct reporting engagement, the practitioner's conclusion is worded directly in terms of the
subject matter and the criteria.In a reasonable assurance engagement, the practitioner expresses the
conclusion in the positive form, for example: "In our opinion internal control is effective, in all
material respects, based on XYZ criteria." This form of expression conveys "reasonable
assurance."
Having performed evidence gathering procedures of a nature, timing and extent that were
reasonable given the characteristics of the subject matter and other relevant engagement
circumstances described in the assurance report, the practitioner has obtained sufficient appropriate
evidence to reduce assurance engagement risk to an acceptably low level. In a limited assurance
engagement, the practitioner expresses the conclusion in the negative form, for example, "Based
on our work described in this report, nothing has come to our attention that causes us to believe
that internal control is not effective, in all material respects, based on XYZ criteria."
This form of expression conveys a level of "limited assurance" that is proportional to the level of
the practitioner's evidence-gathering procedures given the characteristics of the subject matter and
other engagement circumstances described in the assurance report.
b) The external auditor‘s evaluation of whether the internal audit function of organizational status
and relevant policies and procedures adequately support the objectivity of the internal auditors, the
level of competence of the internal audit function, and whether it applies a systematic and disciplined
approach may indicate that the risks to the quality of the work of the function are too significant and
therefore it is not appropriate to use any of the work of the function as audit evidence.
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Consideration of the factors of NSA 610 individually and in aggregate is important because an
individual factor is often not sufficient to conclude that the work of the internal audit function cannot be
used for purposes of the audit. For example, the internal audit function‘s organizational status is
particularly important in evaluating threats to the objectivity of the internal auditors.
If the internal audit function reports to management, this would be considered a significant threat to the
function‘s objectivity.
This is because of the possibility that the engagement team will use the results of the internal audit
service without properly evaluating those results or without exercising the same level of professional
skepticism as would be exercised when the internal audit work is performed by individuals who are not
members of the firm.
c) An independent audit whether performed in terms of relevant statutory legislation or in terms of

the engagement, the auditor has to be reasonably satisfied as to whetherthe information contained in the
underlying accounting records and other source datais reliable for the preparation of financial
statements. Since the entire process of auditing is based on the assessment of judgements made by the
management of theentity as well as evaluation of internal controls, the audit suffers certain
inherentrisks. Factors which can such risk in conducting an audit are discussed below:
(i) Exercising judgement on the part of the auditor: The auditor‘s work involvesexercise of judgement,
for example, in deciding the extent of audit procedures andin assessing the reasonableness of the
judgements and estimates made bymanagement in preparing the financial statements.
(ii) Nature of audit evidence: The auditor normally relies upon persuasive evidenc erather than
conclusive evidence. Even in circumstances where conclusive evidenceis available, the cost of
obtaining such an evidence may far exceed the benefits.
(iii) Inherent limitations of internal control: Internal control can provide only reasonable, but not
absolute, assurance on account of several inherent limitations such as potential for human error,
possibility of circumstances of control through collusion, etc.
On account of above, it is quite nature that an audit suffers from control risk on account of inherent
limitations of internal control risk and detection risk on account oftest nature of audit and judgement
and estimates involved in formulating accounting policies.
3. Give your comments on the following:
a) The financial statement of Sagarmatha Ltd. for the fiscal year 2070/71 has been
approved by its Board of Directors on 1 Kartik 2071; auditor has issued his audit
report on 25 Aswin 2071.
b) The management of Sathi Limited suggested for quick completion of the statutory
audit that it would give its representation about the receivables in terms of their
recoverability. The management also acknowledged to the auditors that the
management would give their representation after scrutinizing all accounts diligently
and they own responsibility for any errors in these respects. They wanted auditors to
complete the audit checking all other important areas except receivables. The auditor
certified the account clearly indicating in his report the fact of reliance he placed on
representation of the management.
c) Organo Pvt. Ltd., manufacturing noodles, has valued at the year end its closing stock
of packed finished goods for which firm sales contracts have been received, at
realizable value inclusive of profit and cash incentive. As at the year end, the
ownership of the goods has not been transferred to the buyers.
Answer
a) Per NSA 700 , the auditor should date the report as of the completion date of the audit. This
informs the reader that the auditor has considered the effect on the financial statements and on
the reports of events and transactions of which the auditor become aware and that occurred up
to that date. Since the auditor`s responsibility is to report on the financial statements as prepared
and presented by management, the auditor should not date the report earlier than the date on
which the financial statements are signed or approved by Board of Directors.
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b) The management of Sathi Limited wants the auditor to carry out audit on all areas, except on
area of receivables. There cannot be any restriction on scope of audit in case of statutory audit.
The management representation, according to NSA 580, cannot substitute other audit evidence
that the auditor could reasonably expect to be available to the auditor.
The audit evidence for checking receivables – say, invoices, debt acknowledgement documents,
receipts, statement of accounts, confirmations etc., are available evidences which auditor is duty
bound to verify.
Just because management had owned responsibility for the correctness of its evaluation of
receivables, the auditor cannot shirk his responsibility. This is negligence on his part if he relies
on the management representation without assessing the corroborative available evidences.
c) Valuation of Inventories: NAS 2 requires that inventories should be valued as lower of cost and
Net realizable value(NRV). A departure from the general principle can be made if the NAS is
not applicable or having regard to the nature of industry. NAS 2 also states that (a) work in
progress arising under construction contracts, including directly related service contracts (b)
work in progress arising in the ordinary course of business of service providers;(c) shares,
debentures and other financial instruments held as stock-in-trade; and (d) producers‘ inventories
of livestock, agricultural and forest products are measured as NRV based on established
practices. In the given case the sale is assumed under a forward contract but the goods are not of
a nature covered by the above exceptions taking into account the facts the closing stock of
finished goods should have been valued at cost, as it is lower than the realizable value (as it
includes profit). Further, sale cash incentives should not be included for valuation purposes.
The policy adopted by the Organo Pvt. Ltd. for valuing its closing stock of inventory of finished
goods on selling price plus sale incentives is not correct. The statutory auditor should give a
qualified report.
a) Your CA firm has been allotted with Information Systems Audit of one of the reputed
Commercial Bank of Nepal. How would you assess the reliability of internal control
system in computerized information system?
b) Mr. Abhyudaya has been appointed as an Auditor of Kashvi Enterprises. After
appointment, the books of Kashvi Enterprises have been destroyed by earthquake.
State the extensive procedures to be followed for audit in such scenario.
c) What do you mean by the term 'Sufficient Appropriate Audit Evidence'? State various
factors that help the auditor to ascertain as to what is sufficient appropriate audit
evidence.
Answer
a) For evaluating the reliability ofinternal control system in CIS, the auditor would consider the
followings:-
 That authorised, correct and complete data is made available for processing.
 That it provides for timely detection and corrections of errors.
 That in case of interruption due to mechanical, power or processing failures,the system restarts
without distorting the completion of entries and records.
 That it ensures the accuracy and completeness of output.
 That it provides security to application softwares & data files against fraud etc.
 That it prevents unauthorised amendments to programs.
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b) The scenario is guided by the audit of incomplete records. Audit of incomplete records are
generally required under the following two circumstances.
(i) When accounts have been maintained on single entry basis or
(ii) Accounting record may be destroyed by fire, flood etc. or seized by government authorities.
The auditor may be required to follow extensive procedures, which include:

(a) obtain list of records available
(b) Ensure that management reconstructs/compile records to the extent possible.
(c) Perform compliance procedure to assess whether internal control system is in operation.
(d) Vouch transactions in books of accounts with appropriate evidence.
(e) Examine system of custody of cash receipts, cheque book etc.
(f) Conduct surprise verification of cash & inventory.
(g) Verify fixed assets by physical verification.
(h) Formulate appropriate audit opinion.
A disclaimer of opinion may be necessary if any restriction on scope of audit is enforced.
c) The auditor shall design and perform audit procedures that are appropriate in the circumstances
for the purpose of obtaining sufficient appropriate audit evidence. NSA 500 on ‗Audit Evidence‘
further expounds this concept. According to it, the sufficiency and appropriateness of audit evidence
are interrelated.
Sufficiency is themeasure of the quantity of audit evidence. The quantity of audit evidence needed is
affected by the auditor‘s assessment of the risks of misstatement (the higher the assessed risks, the more
audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the
quality, the less may be required). Obtaining more audit evidence, however, may not compensate for its
poor quality.
Appropriateness is the measure of the quality of audit evidence; that is, it srelevance and its reliability
in providing support for the conclusions on which the auditor‘s opinion is based. The reliability of
evidence is influenced by its source and by its nature, and is dependent on the individual circumstances
under which it isobtained.
NSA 330 requires the auditor to conclude whether sufficient appropriate audit evidence has been
obtained. Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an
acceptably low level, and thereby enablethe auditor to draw reasonable conclusions on which to base
the auditor‘s opinion,is a matter of professional judgment. Further, NSA 200 contains discussion of
such matters as the nature of audit procedures, the timeliness of financial reporting, andthe balance
between benefit and cost, which are relevant factors when the auditorexercises professional judgment
regarding whether sufficient appropriate audit evidence has been obtained.
In general the various factors which may influence the auditor‘s judgment as to what is sufficient and
appropriate audit evidence are as under:
 Degree of risk of misstatements which may be affected by factors such as the nature of items,
adequacy of internal control, nature and size of businesses carried out by the entity, situations
which may exert an unusual influence on management and the financial position of the entity.
 The materiality of the item.
 The experience gained during previous audits.
 The results of auditing procedures, including fraud and errors which may have been found.
 The type of information available.
 The trend indicated by accounting ratios and analysis.
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a) Elephant Bank Ltd. is the "A" Class Commercial Bank. As per audited financial
statement of FY 2071/72 , its gross loan is Rs. 50,000 million and its gross deposit is
Rs. 63,000 million. The Annual General Meeting of the bank for FY 2071/72 was
conducted on 12 Aswin 2072. The auditor for FY 2072/73 has been appointed by the
bank with audit fees (other than other audit related expenses) of Rs. 1,100,000.
Comment.
b) Is there any conflict of interest if the engagement auditor prepares financial regulation
and internal control system of the same client ?
c) Raman & Associates is the audit firm of registered auditor (B Class). He has carried
out the audit of Prabhu Ltd. for FY 2071/72. The Total Assets or Liabilities of Prabhu
Ltd. for FY 2071/72 as per Financial Statement is Rs. 650 million. Comment.
Answer
a) The decision of 194th Meeting of the Council of the Institute of the Chartered Accountants of
Nepal (ICAN), the minimum fees for listed public financial institutions has been prescribed
which is applicable for appointments made from 1 Shrawan 2072. The fees should be
determined based on Gross Loan or Deposit whichever is higher of immediately preceding year
as follows:
Loan or Deposit Amount (Rs.) Minimum Audit Fees (Rs.)

Exceeding 100,000 Million 25 Lakh
Minimum 01 Lakh
Further it has been mentioned that audit fee of the "A" Class Commercial Bank should not be
less than Rs. 10 Lakh.
In view of the aforesaid council decision, the minimum audit fee (other than other audit related
expenses) of the Elephant Bank Ltd. should be Rs. 20 Lakh since its gross deposit is exceeding
Rs. 50,000 million as of 31 Asadh 2072.
Accordingly decision made by AGM of Elephant Bank Ltd. for audit fees for FY 2072/73 is
not consistent with decision of 194th Meeting of the Council of the Institute of the Chartered
Accountants of Nepal (ICAN).
b) It will not be treated as conflict of interest only on the ground that financial regulation and
internal control system has been prepared by the Auditor. Though auditor has to assess the
effectiveness of such imposed system during the course of audit. Accordingly the chances of
excusing by the auditor on the lapses of implementation of those system observed during
auditing process could not be ruled out which will impair the very efficiency and independence
of the auditor. Hence chances of arising the situation of conflict of interest have been existed in
such circumstances.
c) As per the Rule 53 of the Nepal Chartered Accountants Regulations 2061 (as amended) ; the
limit (threshold) for audit of entities based on volume of total assets or total liabilities has been
prescribed unlimited amount for CA member and upto Rs. 600 million , Rs.150 million and Rs.
20 million for B, C & D class members respectively.
In view of the above amended rule of the ICAN Regulation 2061, Raman & Associates, being B
class audit firm is not eligible for carrying out the audit of Prabhu Ltd. for FY 2071/72 , since
total assets or total liabilities of the company exceeds the prescribed limit of Rs. 600 million.
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6. Write short notes on the following:

a) Detection risk
b) Date of auditor‘s report
c) Materiality
d) Going concern
Answer
a) Detection Risk: It is the risk that the auditor will not detect a misstatement that exists in an
assertion that could be material, either individually or when aggregated with other
misstatements. Detection risk is a function of the effectiveness of an audit procedure and of its
application by the auditor.
b) Date of Auditor’s Report: The auditor should date the audit report no earlier than the date on
which the auditor has obtained sufficient appropriate audit evidence on which to base the
opinion on the financial statements. Sufficient appropriate audit evidence should include
evidence that the entity‘s complete set of financial statements has been prepared and that those
with the recognized authority have asserted that they have taken responsibility for them.
c) Materiality: Information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements. Materiality depends
on the size of the item or error judged in the particular circumstances of its omission or
misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary
qualitative characteristic which information must have if it is to be useful. The assessment of
what is material is a matter of professional judgment. The auditor should consider materiality
and its relationship with audit risk when conducting an audit.
d) Going Concern: The going concern assumption is a fundamental principle in the preparation of
financial statements. Under the going concern assumption, an entity is ordinarily viewed as
continuing in business for the foreseeable future with neither the intention nor the necessity of
liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations.
Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize
its assets and discharge its liabilities in the normal course of business.
7. Distinguish between:
a) Qualified report and adverse report
b) Reserves and provisions
Answer
a) Points of difference between Qualified Report and Adverse Report:
1. A qualified opinion should be expressed when the auditor concludes that an unqualified opinion
cannot be expressed but that the effect of any disagreement with management is not so material
and pervasive as to require an adverse opinion, or limitation on scope is not so material and
pervasive as to require a disclaimer of opinion. An adverse opinion should be expressed
when a effect of a disagreement is so material and pervasive to the financial statements that the
auditor concludes that the qualification of the report is not adequate , to disclose the
misleading or incomplete nature of the financial statement.
2. In qualified report, auditor`s reservation generally written as "subject to or except for, we report
that the financial statements shows the true & fair view". Whereas in case of adverse report, the
auditor states that " the financial statements do not present a true and fair view of the state of
affairs and working results".
3. In qualified report, auditor gives an opinion subject to certain reservations whereas in the case
of adverse report the auditor concludes that on the basis of his examination he is not satisfied
with the affirmation made in the financial statements.
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b) Points of difference between Reserves & Provisions:
1. Reserve is an appropriation of profit whereas provision is a charge against Profit.

2. Reserves are not intended to meet any liability, contingency or diminution in the value
of assets. Provisions are made to provide for depreciation, renewal or a known liability or a
disputed claim.
3. Reserves cannot be created unless there is a profit except revaluation reserve and
capital subsidy. Provisions must be created whether or not there is profit.
4. Reserves are generally optional except in certain situations – Capital Redemption
reserve, Debenture Redemption Reserve, Declaration of dividend higher than 10%
etc. Provisions are not optional and have to be made as per generally accepted accounting
principles.
5. Reserves are shown on the liability side. Provisions for depreciation and provision for
doubtful debts are shown as deduction from respective assets. Provision for liability is
shown on the liability side.
Corporate & Other Laws

Suggested Answer
Total No. of Questions - 7 Total No. of Printed Pages -14

1. Answer the following questions:
a) The Annual General Meeting of Nirman Engineering Pvt. Ltd. with
more than 2/3 majority passed resolution directing the Boards of
Directors to carry on the business of manufacturing high voltage
turbines in joint venture with Benjamin Electrical Accessories Ltd. The
majority of the Directors opposed this resolution and they disapprove
the resolution. Advise the directors about the validity of their action.
b) Blue Sky Air Public Company is a leading airways company with
notable profits. The majority of shareholders have intended to convert
their company into a private limited company, but no idea about the
relevant legal provisions; therefore, the company wants your advice.
Advise them on the issue of conversion of a public limited company into
a private limited company under the provisions of the Companies Act,
2063.
c) XYZ Pvt. Ltd. has classified and issued shares with different rights
amending its memorandum of association and articles of association,
but some of the shareholders are not satisfied with the classification.
What are the provisions to obtain shareholders rights in share back?
Explain referring the provisions of the Companies Act, 2063.
d) Mr. ‘A’, a director of Palpasa Private Limited unable to attend the 10th
AGM of the company and in his place appoints Mr. 'B' porxy to attend
the AGM in the capacity of the director. Is the appointment of proxy
valid? How? Explain what quorum is required for holding a general
meeting of the Private Company under the provisions of the Companies
Act, 2063?
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e) Kanchanjanga Public Company, having its registered office in
Kathmandu, calls its Annual General Meeting at Kathmandu. A notice
mentioning the place, date and agenda were published by the company
in Himalayan Times on 15th Oct. 2015, calling the meeting will be held
on 8th Nov. 2015. No other public notice was made by the company for
its Annual General Meeting. Seven percent of the shareholders of the
company attended the meeting in person and decided on the agenda.
Considering that the meeting was not an adjourned meeting, state your
findings on the following issues referring to the provisions of the
Companies Act, 2063.
i) Irregularities committed by the company on entire proceedings
mentioned above.
ii) Validity of the resolutions passed by the meeting.
Answer:
a) The division of powers between the board of directors and the company in general
meeting depended in the case of registered companies entirely on the construction of
the articles of association and that, where powers had been vested in the board of
directors, the general meeting could not interfere with their exercise. Hence, the
directors were entitled to refuse to carry out a joint venture agreement adopted by
resolution in general meeting. Thus, in Shaw & Sons Ltd. v. Shaw, [1935]2 K. B 113,
a resolution of the general meeting disapproving the commencement of an action by the
directors was held to be a nullity.
A company is a legal entity distinct alike from its shareholders and its directors. Some
of its powers may, according to its articles, be exercise by directors; certain powers may
be reserved for the shareholders in general meeting. If powers of management are
vested in the directors, they and they alone can exercise these powers. In line with the
contemporary modern Companies Laws, section 95(1) of the Nepalese Companies Act,
2063 requires subject to provisions contained in this Act and the articles of association
and the decisions of the general meeting, the directors shall manage all transactions
exercise powers and perform duties of the company through the Board of Directors
collectively.
In this case, the board of directors is not bound to implement or follow the resolution
though it has been passed by the general meeting by more than 2/3 majority of the
shareholders of Nirman Engineering Pvt. Ltd. to carry on the business of manufacturing
high voltage turbines in joint venture with Benjamin Electrical Accessories Ltd.. As the
business of the company rest on the powers of the board of directors, it can not be
usurped by the general meeting.
b) Blue Sky Air Pvt. if wants to convert it into a public company, must proceed with
Section 14 of the Companies Act, 2063. As this Section 14 under different clauses has
stated the provisions for the conversion of a public company into a private company.
Sub-section 1 of section 14 of this Act reads thus:
In the following circumstance, a public company shall be converted into a private
company:
 If the number of shareholders of the public company becomes less than seven,
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 If the public company fails to maintain its paid-up capital under section 11 or the
paid-up capital as referred to in section 11 is not maintained because of reduction in
capital pursuant to section 57. Provided, however, that this provision shall not apply
to the company as referred to in sub-section (2) of section 11.
In the event of occurrence of a circumstance as referred to in sub-section (1) above, the
concerned public company shall make necessary amendments to its memorandum and
articles of association and convert it into a private company within six months. After
making the necessary amendments in the memorandum and articles of association, the
company, within 30 days after the making of such amendment, shall make an application
to the Office of the Company Registrar (CRO) with the prescribed fees for being
converted into a private company. The CRO on the receipt of an application shall
mention in the company register the contents of conversion of such company into a
private company and give a company conversion certificate within sixty days. Pursuant
to section 14(5) of this Act, all the assets and liabilities of the public company so
converted shall devolve on the successor Blue Sky Air private Ltd. company.
c) Section 30 of the Companies Act, 2063 has provided shares with different rights of
shareholders. Also it has explained the procedures to get back their rights in shares. This
section has not provided the authority to the company management to alter the rights in
shares of the shareholders of any particular class in a manner to adversely affect the rights of
the shareholders of any other class. Pursuant to section 30(2) of this Act, approval of the
shareholders of any particular class shall be required to make any alternative in the right of
those shareholders.
Pursuant to sub section (3) of the above section if the shareholders of XYZ Pvt. Ltd.
representing at least ten percent share of any particular class who are not satisfied with a
decision to make alteration in the rights attached to the shares of that class pursuant to sub-
section (2) of this section file a petition in the court to have the decision to make such
alteration void, the decision made to make alteration in the rights of the shareholders of such
class shall not be enforced unless and until otherwise decided or ordered by the court.
Pursuant to section 30(4) of this Act, a petition shall be made pursuant to sub-section (3)
above within thirty days after the decision made to make alteration in the rights attached to the
shares of any particular class; and any decision as referred to in sub-section (2) above shall not
be enforced pending the expiration of that time limit.
Pursuant section 30(5) of this Act if it appears that alteration in the rights conferred to the
shareholders of the class concerned is prejudicial to the rights of the petitioner shareholders,
the court may quash the decision made on the alteration in the rights of the shareholders of that
class.
In pursuance to section 30(6) of this Act the board of directors shall submit a proposed
resolution on the alteration in the rights of the shareholders of any particular class pursuant to
sub-section (2) above to the general meeting of the shareholders of the concerned class; and
such resolution has to be adopted as a special resolution by the general meeting.
Pursuant section 30(7) of this Act, notwithstanding anything contained elsewhere in this
Section, in privatizing a company fully or partly owned by the Government of Nepal, as a
shareholder, in accordance with the prevailing law on privatization, the Government of
Nepal may have special voting right in making decision on the following matters, as
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provided in the articles of association, so long as the investment to the Government of Nepal
is retained in such company:
(a) In making decision on a resolution to relinquish the title to an undertaking pursuant to

Clause (a) of Sub-section (1) of Section 105,
(b) In making decision on voluntary liquidation of the company,
(c) In making decision to amalgamate the company into another company.
d) A proxy is an instrument in writing executed by a shareholder authorizing another person to

attend a meeting and to vote on his behalf in his absence. Section 71 of the Companies Act,
2063 provides every shareholder, who is entitled to attend and vote, a statutory right to
appoint another person as his proxy to attend and vote for him. But the proxy so appointed
has no right of audience, i.e. he cannot speak.
But in this case, the issue is related to Mr. ‗A‘s directorship, but not to his
shareholdership, because he can not exercise both rights at a time He is entitled to exercise
his authority of director only once he is elected as a director from shareholders for the term.
As a director he can only exercise his legal rights or authority to perform only right /correct/
valid functions conferred by the Companies Act, 2063.
In the above case, Mr. ‗A‘ as a director of Palpasa Private Limited is unable to attend the
AGM, he can not appoint his proxy to attend, cast vote in that AGM in his behalf pursuant
to section 70(2) of this Act. If any issue arises in the AGM with the interest of the director
(such as appointment, depart from the official post, transfer, wages, allowance, bonus etc.),
no one can attend as a director or through proxy. Therefore, Mr. ‗A‘ being a director of the
company he himself cannot attend the AGM or can not appoint proxy on behalf of him to
attend the AGM and cast vote in his behalf. The appointment of proxy is invalid pursuant
to section 68 of the Companies Act, 2063 also, because this section requires every director
of a company must always be present at the AGM as far as possible except only in the case
of force meajure.
As concern of quorum required for the general meeting of the private company, it is as per
mentioned in the articles of association of the company under provision of Section 73 (1) of
the Companies Act, 2063.
e)
i) Kanchanjanga Public Company, as a legal entity must follow the legal procedures for
convening its Annual General Meeting (AGM) pursuant to the Companies Act, 2063. The
notice must be given by the proper authority which would normally be the Board of
Directors following proper procedures.
Accordingly, in pursuance to Section 67 (2) of the Companies Act, 2063 a general meeting
of a public company may be called by giving not less than 21 days prior notice in writing
with mentioning the place, date and agenda of AGM, at least two times general notice in
the national daily news paper which is mandatory.
In this case only one time notice was published, i.e. only on 15th Oct. 2015 calling the
meeting will be held on 8th November 2015. At least another notice was not published in
any national daily newspaper. So there is a mistake on the part of this company not to
publish another public notice.
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Further, only seven percent out of total of the shareholders of the company attended in the
meeting. As per the legal provision under Section 73 of this Act, there must be at least three
shareholders of the total shareholders representing more than fifty percent out of total
distribution of the shares of the company. If the quorum is less, then the entire proceedings
of the company cannot go ahead by the meeting. It becomes a mistake of procedure for
AGM.
So, firstly, there is an irregularity committed by the Company for not issuing at least
another notice calling for AGM, so it is an invalid AGM.
ii) Secondly, in above case, only seven percent shareholders were present in the meeting,
whereas, as legal provision under Section 73(2) of the Act, unless the section provides for a
large number at least three members or shareholders must represent more than fifty percent
of total allotted shares by personally presenting or by proxy in the case of this public
company. Therefore, the meeting was invalid for the want of required quorum. Hence the
meeting was against the legal provision, the resolutions so passed were invalid for that
reason.
Note: 7% of the shareholders of the company attended can be considered as valid or
invalid as per reasonable assumption of the examinees.

a) Nepal Rastra Bank has earned huge amount as net profit during the
year 2071-72. How the management of Nepal Rastra Bank allocate the
net profit of the bank? Explain.
b) Nepal Rastra Bank(NRB) is a bankers’ bank of the country. Explain
how NRB controls the advances by Commercial Banks and other
Financial Institutions in Nepal?
c) Mr. Chij Kumar received a B/E by the process of endorsement which is
not yet accepted by the acceptor from Ramesh Kanta of Rs. 20,000/-.
Mr. Chij Kumar for the settlement of his account delivers the same bill
to Nelson stating the word ‘Not Negotiable’. But Mr. Nelson with
negligence endorsed it to Mr. Bhuwan reject to accept it. Considering
all the fact given above, answer the following questions with reasons:
i) Can Bhuwan be made liable to all the prior parties to Negotiable
Instrument?
ii) What procedure is to be fallowed for declaring the negotiable
instrument dishonored by non-acceptance?
Answer:
a) Section 41 of Nepal Rastra Bank (NRB) Act, 2058 has explained the procedures of
allocation of net profit of the bank as follows:
(1) In case NRB makes a profit in any fiscal year, the allocation and use of such profit
shall be made in accordance to the following priority:-
(a) Unless five percent of the total monetary liability of NRB shown in the balance
sheet is met, an amount equal to five percent of the net profit of each year shall be
allocated from the profit and kept in the monetary liability fund. The amount deposited
in the monetary liability fund shall be used only for the purpose of fulfilling the
financial liability of NRB.
(b) An amount prescribed by NRB not less than ten percent of the net profit of NRB
shall be allocated in the general reserve fund established by NRB.
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(c) While allocating an amount in the general reserve fund pursuant to Clause (b)
above, an additional amount shall be appropriated to cover the capital expenses
referred to in the annual budget of NRB.
(d) The amount equal to the revaluation profit shall be kept in the revaluation reserve
fund.
(e) The Board of directors (BOD) shall, having appropriated the amounts referred to in
Clauses (a), (b), (c) and (d), appropriate the remaining profit in other funds as may be
necessary and pay the remaining amount to the Government of Nepal.
(2) The amount allocated to general reserve fund pursuant to sub-section 1 Clause (b)
and (c) shall be used only for the purpose of recovering the loss.
b) One of the most important functions of Nepal Rastra Bank (NRB) is to work as
regulator and supervisor of financial system. The financial system in Nepal includes
also the functioning of Commercial Banks, Development Banks, and Financial
Institutions. NRB derives its regulating powers for Nepalese Banking System from the
provisions of the Nepal Rastra Bank 2058 and The Banks and Financial Institution Act
(BAFIA), 2063. The objectives of these functions are to protect the interest of the
depositors and maintain the safety and soundness of the banking and financial system
of the country.
Section 80 of the Nepal Rastra Bank Act 2058 prescribes the provision regarding the
credit control system. According to it the bank may issue the directives from time to
time to commercial banks and financial institutions on the credit control. It will be the
duty of commercial banks and financial institutions to be abide by such directives in
this respect.
In respect of the credit control, NRB can adopt various measures as follows:
 Bank rate operation
 Liquidity ratio: i.e. Statutory liquidity ratio and cash reserve ratio.
 Open market operation
 Credit deposit ratio variation
c)
i) In view of the above fact of the case Mr. Bhuwan be made liable to all the
prior parties to Negotiable Instrument. Because Mr. Bhuwan is a drawee and
he has not accepted the BE. The BE is dishonoured by non-acceptance. So
he will be liable to the prior parties on the ground of dishonor of BE by non-
acceptance.
ii) The holder in due course can file a suit against the prior parties liable to pay in his
own name under the privileges of the legal provision of holder in due course.
BE will be dishonoured in the following grounds:
a) By non-acceptance of the BE
b) By non-payment of the BE
The non-acceptance of BE by drawee renders the BE dishonoured under Sec. 64 of
the NI Act 2034.
Accordingly, under Section 66 of the Act, Notice of dishonored to be given by holder
thereof to all other parties related to such instrument.
According to Sec/ 67 such notice of dishonor is to be given to all related parties in
their place of business or residence by post. Under Sec. 71 the facts of dishonor can
be caused to be noted by Notary Public. Under Sec. 72 the facts of dishonor may be
taken by Certifying it by Notary Public.
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Note: The answer may marked by considering logical assumption with legal
basis.
a) Financial statements were prepared and passed by the board of
directors of Biratnagar Hydropower Ltd. and sent them to the press to
be printed out. An employee of the press in service used this inside
information by buying call options on Biratnagar Hydropower
Company’s stock, resulting in profits of over NRs. 3 million. An action
was taken against him as he had committed an insider dealing. It was
claimed that he did not owe a fiduciary duty, so that he did not commit
fraud by purchasing shares. Give your answer:
i) What is insider dealing?1
ii) Is the employee of the press could be considered as insider?
iii) Is he committed an offence of insider dealing?
b) Under what circumstances the Insurance Board may revoke the
permission to operate a collective investment scheme? Explain
referring the provisions of Securities Act, 2063.
Answer:
a)
a. Pursuant to Section 91 of the Securities Act, 2063, it is illegal share trading by

employees of a company where they have used confidential price-sensitive
information for their own gain or the gain of their associates. It is a trading in
securities whilst in possession of price-sensitive information which is not available
to the person with whom one is contracting or to other participants in the securities
in the market at the relevant time. The following dealings are called as insider
trading and prohibited:
b. ealing of price-affected securities as an agent or principal
c. Procuring directly or indirectly the acquisition or disposal of securities by any other
person.
d. Encouraging another person to deal in the price-affected securities.
e. Disclosing the information otherwise than in the proper performance of the
functions of his employment, office or profession to another person.
i) The employee of a press may amount as an insider because he is in such a position to
obtain inside information regarding the securities of company which was not published
for the public yet and he may commit an offence of insider dealing as prohibited by the
Securities Act, 2063. In United States v. Carpenter (1986) the U.S. Supreme Court
convicted the journalist on the grounds that he had misappropriated information
belonging to his employer, the Wall Street Journal.
ii) In this case, the employee has committed an offence of insider trading who has
obtained insider information in the proper performance of the functions of his
employment. Similarly, the employee of the press has obtained the price affecting
information which he should not use for his own benefits.
b) Section 74(1) of the Securities Act, 2063 has explained the conditions when the Securities
Board may revoke the permission granted under Section 72 of this Act to operate a collective
investment scheme as follows:
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(a) In the event of failure to fulfill the necessary terms and conditions of operation in a satisfactory
manner,
(b) In the event that it is not appropriate to continue such a scheme upon considering the interest of
participants,
(c) In the event of violation of this Act or the Rules or Bye-laws framed under this Act or
provision of any false details to the Securities Board in respect of a scheme by the scheme
manager and the depository.
(2) In revoking the permission pursuant to Clause (b) of Sub-section (1) above, the Securities
Board may hold necessary inquiry with the manager, depository, and director related with
such scheme or relevant employee. (1 marks)
(3) In revoking the permission given to operate a scheme pursuant to Sub-section (1) above,
the Securities Board may, having regard to the investment and return of investors, get that
scheme to be operated by any other scheme manager or get accounts settled or cleared by
refunding the investment and return of the investors of such scheme. (1 marks)
(4) The procedures required to be followed in closing the operation of the scheme and settling
or clearing the accounts by the order of the Securities Board shall be as prescribed. (1 marks)
Note: where the answer is given simply as incorrect pass marks i.e. 2 marks
If it is explained with justification normal marks to be given.
a) Mr. John Lee, an American national has intended to invest $ 10, 00,000 in a
Nepalese hydropower company. He wants to know the dispute settlement
process between the foreign investor and Nepalese investor. Advise him as
to the dispute settlement process under the Foreign Investment and
Technology Transfer Act, 2049. 5
b) What are the functions, duties and power of Industrial Promotion Board
under the Industrial Enterprises Act, 2049? Discuss. 5
Answer:
a) Foreign Investment and Technology Transfer Act (FITTA), 2049 has prescribed the
provision regarding dispute settlement process.
Section 7 of this Act provides the process or manner of deciding the dispute which may
arise between a foreign investor or a national investor or a industry. Sub section (1) of
this section states that if there is any dispute relating to foreign investment between the
foreign investor, national investor or the concerned industry, the concerned parties shall
be required to settle the dispute by the mutual consultation in the presence of the
Department of Industries.(1.5marks)
If the dispute cannot be solved by mutual consultation, as per sub-section (1) above, it
shall be settled by referring the matter to arbitration according to the prevailing
arbitration rule of the United Nations Commission on International Trade Law
(UNICITRAL), pursuant to section 7(2) of this Act. .(1.5marks)
Pursuant to section 7(3) of this Act the arbitration shall be held in Kathmandu and the
law of Nepal shall be applicable in the arbitration.( 1marks)
Sub-section (4) of this section has given freedom to the parties to adopt due procedure
as above regarding to the settlement of dispute in relation to the foreign investment in
industries in Nepal. Therefore, notwithstanding anything contained in sub sections (1),
(2) and (3) of this section, the parties of dispute on foreign investment may adopt
provisions of foreign investment agreement for the settlement of the dispute. (
1marks)
b) Section 13 of Industrial Enterprises Act, 2049 has defined the functions, duties, and
power of Industrial Promotion Board as follows:(0.5marks)
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(a) To render necessary cooperation in formulating and implementing policies, laws and
regulations pertaining to the industrialization of the country.
(b) To give guidelines in attaining the objectives of liberal, open and competitive
economic policies pursued by the country so as to make the industrial sector
competitive.
(c) To maintain coordination between the policy level and the implementation level of
the industrial policy.
(d) To cause to follow the ways and means for the prevention of the environmental
pollution by putting more emphasis on the avoidance of effects on the environment
and the public health.
(e) To make recommendation to Government of Nepal for the inclusion of any industry
in the classification of industries.
(f) To make recommendation to Government of Nepal to introduce changes in the
Areas mentioned in Annex-3 by making evaluation thereof from time to time.
(g) To give directives to the concerned body after making enquires into the application
submitted by any industry complaining that the industry has not received the
facilities and concessions to be made available by the committee.
(h) Other functions, duties and power of the Industrial Promotion Board shall be as prescribed.
(4.5marks)

a) An Insurance Board was formed under Section 3 of the Insurance Act,
2049 where Mr. Kishor Rai was appointed as chairperson. He as a newly
appointed chairperson asked you to submit a note on the procedures how
the meeting of Insurance Board is held as per section 5 of this Act. Explain
it. 5
b) The workers of Padma Garments Pvt. Ltd. objected the decision of its
manager regarding the bonus to be distributed to them. The workers
sought your advice about what action they could take against the company.
Suggest them also about the legal provisions for the settlement of dispute of
the bonus under the Bonus Act, 2030. 5
c) What are the duties and responsibilities of an ICAN member performing
accounting profession under Nepal Chartered Accountants Act, 1997?
Explain. 5
Answer:
a) Pursuant to section 3 of the Insurance Act 2049, an Insurance Board is constituted in
order to systematize, regularize, develop and regulate insurance business in Nepal. For
discharging such functions regular meetings of the Insurance Board are held and
decisions are made.(0.5marks)
Accordingly, Section 5 of the Insurance Act has prescribed procedures for holding
meeting and reaching to decision of the Insurance Board. Such procedures of the
meeting are as follows: .(0.5+4 marks)
(1) The meeting of the Insurance Board shall be held on the date, time and venue as
prescribed by the Chairperson.
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(2) The meeting of the Insurance Board shall be held at least eight times per year and
not less than twice within three months.
(3) The meeting of the Insurance Board shall be presided by the Chairperson. In the
case of his/her absence, the meeting shall be presided by the person selected from
among the Members themselves.
(4) The quorum for the meeting of the Insurance Board shall be fulfilled in the presence
of fifty percent Member of the total Members of the Insurance Board.
(5) The opinion of majority shall prevail in the meeting of the Insurance Board and in
case of tie, the chair person may cast decisive vote.
(6) The decision of the Insurance Board shall be certified by the Secretary.
(7) Other procedures relating to the meeting of the Insurance Board shall be as
determined by the Insurance Board itself
b) The Bonus Act, 2030 assures bonus to the employees out of the profits earned by an
enterprise. The Act has also made legal provisions for the settlement of disputes which
may a rise between the employees and management. Section 16 (1) of this Act provides
that if any dispute arises between employee and management with respect to the bonus,
the Labour Office shall resolve such dispute by negotiations having invited both the
parties. If the dispute could not be resolved by negotiation as above the Labour Office
shall ask to the concerned enterprise and employees to produce necessary documents
and statements of accounts and shall give a decision on the basis of such documents and
statements, pursuant to section 16(2) of this Act. When such decision is given by the
Labour Office, the party who is dissatisfied with the decision may appeal to the Labour
Court within 35 days of receipt of such notice and the decision made by the Labour
Court shall be final for the matter. (4marks)
Therefore, the workers of Padma Garments Pvt. Ltd. shall have to follow the
procedures as mentioned above to settle the dispute regarding the payment of bonus.
(1marks)
c) The duties and responsibilities of an ICAN member performing accounting profession
have been provided under section 34 of Nepal Chartered Accountants Act, 2053 (which
are referred as Code of Conduct of ICAN members) are as follows: (0.5marks)
 No member shall carry out auditing in collaboration by way of partnership or
otherwise with any person who has not obtained the accountancy practitioner
certificate of his/her class.
 No member shall make any kind of partnership in the audit fees or remuneration
received or earned by, or sharing in the profits made by, that member with any person
other than a person who has obtained membership of the ICAN nor shall he or she
give commission, brokerage etc. from the professional fees which he or she has
received or earned to any person including a person who has obtained membership.
 No member shall, show fear, terror, swank or influence, whether directly or
indirectly, to any person in order to get business of accountancy practice.
 No member shall supply or disclose any information and explanation which he or she
has got in the course of his or her business to any person other than the person who
employs him or her and the person to whom he or she is compelled by the laws in
force to supply or disclose such information and explanation.
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 No member having obtained the professional certificate shall certify any financial
returns or make any kind of report without making examination and verification by
himself or herself or his or her partner or employee.
 While making any kind of report or certifying any financial returns of an organization
in which he or she or his or her partner has interest, a member having obtained the
professional certificate shall also clearly set down that he or she or his or her partner
has such interest.
 A member having obtained the professional certificate shall clearly show any material
details known to him or her in order to actually reflect any financial statements
certified by him or her or shall also clearly mention the false details or explanations,
if any, inherent in the financial statements certified by him or her, to the best of his or
her information.
 No member having obtained the professional certificate shall base the remuneration to
which he or she is entitled for his or her work on a percentage of profits or on any
other uncertain result.
 No member shall knowingly or recklessly mention any false matter in any notice,
explanation or statement required to be given to any office or department of
Government of Nepal or any organization.
 No member shall carry out auditing of an organization for which he or she has served,
prior to the expiry of at least three years of his or her retirement from the service of
that organization.
 No member having obtained the professional certificate shall accept his or her
appointment as an auditor of any organization without ascertaining that the
procedures required by the laws in force for appointment as an auditor have been
fulfilled.
(0.75 for each point up to 6 points.)
a) State the legal provisions envisaged under the Audit Act, 2048 for the audit
of corporate bodies substantially owned by the Government of Nepal. 5
b) Explain, the cases not covered by the doctrine of frustration, under the
Contract Act, 2056? 5
c) The management of Sangrilla Development Bank has distributed welfare
fund of the bank to their staff on prorata basis of their salary. Comment on
its legality. 5
Answer:
a) Corporate body whose more than fifty percent shares or assets are owned by the
Government of Nepal is called the corporate bodies substantially owned by the
Government of Nepal. Section 7(1) of the Audit Act, 2048 provides that the audit of
the corporate bodies substantially owned by the Government of Nepal shall be done in
accordance with the prevailing laws relating to such body. Under sub-section (2) of
this Act, the Auditor General shall be consulted while appointing an auditor for
auditing of such corporate bodies and the matters to the principles of audit shall be
followed as prescribed by the Auditor General. Pursuant to section 7(4) of this Act a
copy of the report shall be delivered at the Office of the Auditor General by the
concerned organisation. When the report is submitted, the Auditor General may in
pursuance to section 7(5) of this Act issue directives in respect of the irregularities
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observed in the report and it shall be the duty of concerned body to abide by such
directives. ( 1 marks for concept, 1 marks each for 7(1), 7(2), 7(4) and 7(5).)
b) It is hard rule of the law of contract that each party to a contract shall fulfill his/her
obligation under the contract (section 74 of the Nepalese Contract Act, 2056). "He that
agrees to do an act must do it or pay damages for not doing it" is the general rule of the
law of contract. Thus, unless the performance becomes absolutely impossible, a person
is bound to perform any obligation which he has undertaken. This type of impossibility
of performance is covered by the Doctrine of Frustration and under section 79(1) and
(2) of this Act, as under: (1) In case it becomes impossible to execute a contract as a
result of fundamental change in the situation prevailing at the time of signing the
contract, the work under the contract need not be performed. Without prejudice to the
generality of sub section (1) above, fundamental change shall be deemed to have come
in the situation prevailing at this time of signing the contract in any of the following
circumstances (section 79(2) of the above Act): (1 marks for concept)
a. In case the contract becomes illegal and it cannot be executed;

b. In case it becomes impossible to execute the contract due to emergency of such
situations as war, floods, landslides, fire, earthquakes, and volcanic eruptions, which
are beyond the control of human beings (force meajure);
c. In case any thing essential for executing the contract is destroyed or damaged, or no
londer exists, or can not be obtained;
d. In case the contract has been signed with a provision to provide services on the basis of
efficiency, skill or talent, and the person providing such service dies or losses his/her
senses or becomes incapable of performing the contract because of physical or mental
disability.
( 0.5 for each point = 2 marks)
But besides these occurrences or legal exemptions no one can claim any other
exemption from performance of contract under section 79(3) of Nepalese Contract
Act, 2056. Pursuant to this section, notwithstanding anything contained in section
79(2) of this Act, fundamental changes shall not be deemed to have come in the
situation prevailing at the time of signing the contract in any of the following
circumstances:
a) In case it becomes difficult to perform the contract;
b) In case profit margin is low or loss is expected;
c) In case any party to a contract is dependent upon any third party who is not a party
to the contract for performing the contract, if the thirds party commits a mistake or
becomes unfit;
d) In the event of strikes and lockouts;
e) In case it becomes necessary to pay additional tax, fee or other revenue;
f) In case the contract has been signed with several objectives and only some of them
cannot be fulfilled. (05 for each point upto 2 marks)
Hence, the cases as provided under section 79(3) of Nepalese Contract Act, 2056 are
the cases not covered by the Doctrine of Frustration.
c) Section 13 of the Bonus Act, 2030 has defined the Welfare Fund of the Company. As per this
section, seventy percent of the residuary amount after distribution of bonus from the allocated
amount for bonus pursuant to Section 5 shall be deposited with the Welfare Fund established
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in accordance with Section 37 of the Labour Act, 2048 and remaining thirty percent shall be
deposited with the National Level Welfare Fund, established by the Government of Nepal for
the interest of the employees of the enterprises.
(2) The operation of the welfare funds as provided for in Sub-section (1) above shall be in
participation of employees as prescribed.
Labour Rules, 2050 has clearly defined the nature and its utilization as follows in Rules 13 and
14:
Rule 13 addresses the creation of the Welfare Fund as follows:
(1) A Welfare Fund has to be created by the Enterprise pursuant to Section 37 of the Act, for
the interests and welfare activities of the workers or employees. (2) Seventy percent of the
amount remained after distribution of the bonus allocated pursuant to Section 5 of the Bonus
Act, 2030 shall have to be deposited in the Fund created under Sub-rule (1) above. (3) The
amount to be remained in the Welfare Fund shall be deposited upon opening an account in a
Commercial Bank.(4) The Welfare Fund shall be operated under the direct control and
guidance of Labour Relations Committee. The account of the Fund shall be operated by the
joint signatures of two members designated by the Labour Relations Committee. (2.5 marks)
Rules 14 defines the use of this Fund as follows:
(1) The Labour Relations Committee may spend the amount deposited in the Welfare Fund for
the interests and welfare of the workers or employees in the following activities:
(a) In case it is required to provide immediate financial assistance on account of being sick or
falling in accident to workers or employees or any members of their family, (b) For making
necessary arrangement for providing education to workers or employees or their children, (c)
For making arrangement for sport, entertainment, library, club etc. for workers or employees,
(d) For lending on reasonable rate in case of extraordinary situation to workers or employees,
(e) For spending on relief activities to workers or employees in case of emergency situation
like natural calamities, (f) For spending on other welfare activities leading to the collective
interests of the workers or employees.
(2) Notwithstanding anything mentioned in Sub-rule (1) above, the Enterprise, having partial or
full ownership of the Government of Nepal shall have to take prior approval of the
Department of Labour while spending from the Welfare Fund in the welfare activities leading
to collective welfare of workers or employees, by making an action plan thereof. (3) The
workers or employees are not entitled to spend or distribute among themselves the amount
deposited in the Welfare Trust for the purpose other than mentioned in Sub-rule (1) above.
Hence, the distribution of the amount of Welfare Fund by Sangrilla Development Bank its staff
on prorate basis of their salary is illegal on the above grounds. ( 2.5 marks)
7. Write short notes on the followings: (2×5=10)

a) Distinguish between Promissory Note and Bill of Exchange.
b) Identify those activities which are deemed as offenses under the BAFIA 2063.
Answer:
a) Difference Between Bill of Exchange and Promissory Note as given
bellow:(5marks)
S. N. Bill of Exchange S. N. Promissory Note
1 A bill of exchange contains an order to 1 Promissory note contains a promise to
pay pay
2 The primary liability is that of the 2 The primary liability is that of the
drawee after he has accepted the bill; maker who signs the note.
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the drawer‘s liability is secondary.
3 A bill can be drawn payable to bearer, 3 A promissory note cannot be made
provided it is not payable on demand. payable to bearer.
4 Bills of exchange are sometimes drawn 4 In the case of promissory note, the
in sets; the position is not the same in necessity for acceptance does not arise
the case of promissory note. since the maker of the note is already
liable upon it.
5 It cannot be drawn conditionally, but it 5 A promissory note can never be
can be accepted conditionally with the conditional.
consent of the holder.
6 In the case of a bill of exchange, notice 6 These are unnecessary in respect of a
of dishonour, noting and protesting are promissory note.
required to prove dishonor,
(1for each points up to 5 marks)
b) Section 70 of the Banks and Financial Institutions Act (BAFIA), 2063 has defined those acts
which are deemed offenses, are as follows: (0.5marks)
(a) Carrying on the financial transactions without obtaining a license under this Act or
in contravention of the conditions of the license or accepting deposits or supplying
credit or issuing debentures or other financial instruments in violation of this Act or
the orders or directives issued under this Act or paying or obtaining interest in
contravention of the term prescribed by the Rastra Bank or dealing in foreign
exchange in contravention of this Act or the laws in force or the orders or directives
issued under this Act;
(b) Failure of any officer who is responsible for maintaining the secrecy of the financial
transactions, accounts, records, ledgers, books and other accounts related
documents of the licensed institution pursuant to this Act or the orders or directives
issued under this Act to maintain such secrecy;
(c) Violation by any one of this Act or any order or directive issued under this Act,
other than that mentioned in Clause (a) or (b).(4.5marks)
Financial Management
Suggested Answer
Total No. of Questions – 7 Total No. of Printed Pages –16
Time Allowed – 3 Hours

Working notes should form part of the answer. Make assumptions wherever necessary.
1. A team of investors has recently established „We Care‟ Hospital in Kathmandu. They
plan to buy a CT Scan Machine and are considering two different brands with similar
features. Following information is available regarding the Machines:
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Cost of Life of Maintenance Cost (Rs.) Rate of

Brand Machine Machine Year 1-5 Year 6-10 Year 11-15 Depreciation
(Rs.) (SLM)
XYZ 600,000 15 years 20,000 28,000 39,000 4%
ABC 450,000 10 years 31,000 53,000 - 6%
Book value of both of machines will be dropped by 1/3rd of purchase price in the first
year and thereafter will be depreciated at the rates given in table above.
Alternatively, the machine of Brand ABC can also be taken on rent, to be returned
back to the owner after use, on the following terms and conditions:
 Annual rent shall be paid in the beginning of each year and for the first year it
shall be Rs. 102,000.
 Annual Rent for the subsequent 4 years shall be Rs. 102,500.
 Annual Rent for the final five years shall be Rs. 109,950.
 Rent agreement can be terminated by the hospital by making a payment of
Rs. 100,000 as penalty. This penalty would be reduced by Rs. 10,000 each year of
the period of rental agreement.
The cost of capital of the hospital is 12%.
Required:
a) Advise which brand of CT-Scan Machine should be acquired assuming that the
use of machine shall be continued for a period of 20 years. Consider book value
as scrap value.
b) Which of the option is most economical, if machine is likely to be used for a
period of 5 years only?
Answer 1
Since the life span of each machine is different and time span exceeds the useful lives of each model,
we should use Equivalent Annual Cost method to decide which brand should be chosen.
(i) If machine is used for 20 years
Present Value of cost if machine of Brand XYZ is purchased
Period Cash Outflow (Rs.) PVF @12 % Present Value
0 6,00,000 1.000 6,00,000
1-5 20,000 3.605 72,100
6-10 28,000 2.045 57,260
11-15 39,000 1.161 45,279
15 (64,000) 0.183 (11,712)
762,927
Rs. 64,000 is residual value, calculated as
=600,000-(1/3 of 600,000)-(4% of 600,000×14 yrs) = Rs. 64,000
PVAF for 15 years is 6.811
Equivalent Annual Cost (Rs.)= 762,927/6.811=Rs. 112,014
Present Value of cost if machine of Brand ABC is purchased
0 450,000 1.000 450,000
1-5 31,000 3.605 111,755
6-10 53,000 2.045 108,385
10 (57,000) 0.322 (18,354)
651,786
Rs. 57,000 is residual value, calculated as:
=450,000-(1/3 of 450,000)-(6% of 450,000×9 yrs) =Rs. 57,000
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PVAF for 10 years is 5.65
Present Value of cost if machine of Brand ABC is taken on Rent
0 102,000 1.000 102,000
1-4 102,500 3.037 311,293
5-9 109,950 2.291 251,895
665,188
PVAF for 1-10 years is 5.65
Decision: Since Equivalent Annual Cash Outflow is least in case of purchase of Machine
Brand XYZ, the same should be purchased.
(ii) If machine is used for 5 years
(a) Scrap value of Machine of Brand XYZ
=Rs. 600,000-Rs. 200,000-Rs. 600,000 x 0.04 x 4 =Rs. 304,000
(b) Scrap value of Machine of Brand ABC
=Rs. 450,000-Rs. 150,000-Rs. 450,000 x 0.06 x 4 =Rs. 192,000
Present Value of cost if machine of Brand XYZ is purchased
0 600,000 1.000 600,000
1-5 20,000 3.605 72,100
5 (304,000) 0.567 (172,368)
499,732
Present Value of cost if machine of Brand ABC is purchased
0 450,000 1.000 450,000
1-5 31,000 3.605 111,755
5 (192,000) 0.567 (108,864)
452,891
Present Value of cost if machine of Brand ABC is taken on Rent

0 102,000 1.000 102,000
1-4 102,500 3.037 311,293
5 50,000 0.567 28,350
441,643
Decision: Since Cash outflow is least in case of lease of Machine of brand ABC,
so same should be taken on Rent
2.
a) Creative Security Pvt. Ltd., a trading company of fire extinguishers and security
products, is seeking working capital finance (loan collateral and inventory
hypothecation) from one of the "A" Class Licensed Financial Institutions. With
bank funding, the directors of the company would be able to withdraw temporary
funds injected by them, which has remained for the last 12 months with
stipulation of 18% interest. Nonetheless, the company desires to obtain finance
maintaining Debt- Equity Ratio after finance as 2:1 and Loan - Collateral ratio as
160% of carrying amount of Property Plant and Equipment (PPE). The extracts of
financial statements as on Kartik 30, 2072 were as under:
Statement of Financial Position as on Kartik 30, 2072
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Assets Rs. Million (M)
Non-Current Assets
PPE (Opening Carrying Amount Rs. 14.9 M) 14.30
Current Assets:
Inventories 25.27
Trade and Other Receivables 9.04
Advances, Deposits and Prepayments 4.10
Cash and Cash Equivalents 1.07
Total Assets 53.78
Equity and Liability
Equity Attributable to Owners:
Share Capital (Rs. 100 per share) 6.00
Share Premium 2.00
Retained Earnings 13.49
Total Equity 21.49
Non-Current Liabilities:
Long-Term Borrowings 12.31
Current Liabilities:
Trade and Other Payables 4.23
Borrowings from Directors 14.50
Other Liabilities 1.25
Total Liabilities 32.29
Total Equity and Liabilities 53.78
Statement of Comprehensive Income for the period (Shrawan to Kartik, 2072)
Particulars Rs. Million (M)
Revenue 68.52
Cost of Sales (49.30)
Gross Profit 19.22
Operating Expenses (6.10)
Finance Costs (1.26)
Profit before Tax 11.86
Income Tax Expense (Provisioned and 100% deposited) (2.97)
Profit for the Period 8.89
Assume interest rate as 9.5% per annum payable on a quarterly basis, variable
portion of cost of sales as 80% and operating expenses as 20%, depreciation as
12% on WDV basis and tax rate as 25%.
Required:
i) Calculate the degree of operating leverage, debt - equity ratio and maximum
loans that can be sought by the company.
ii) What does the degree of operating leverage signify to the company? Present
calculations for your justification, if any.
iii) In case the company's trade moves proportionately throughout the year and
the company repays, at the end of the year, 10% of existing long term loan
outstanding with interest accrued on all loans, what is the expected Debt
Service Coverage Ratio?
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b) "Banks and financial institutions are considered as highly leveraged institutions."
Do you agree with this statement?
Answer 2 (a)
i. Refer WN 1,2 & 3
Contribution
Degree of Operating Leverage = Margin
EBIT
Rs. 27.86
= M = 2.12 times
Rs. 13.12
M
Debt
Debt Equity Ratio =
Equity
Rs. 12.31
= M = 0.57 times
Rs. 21.49
M
Maximum Loans that can be sought by the company
Per Debt Equity Ratio Rs. In Millions
Present Equity 21.49
Maximum Debt limit (2 times of Equity) 42.98
Existing Debt 12.31
Maximum Debt 30.67
Per Loan Collateral Ratio

Present Carry Amount of PPE 14.30
Maximum Debt limit (160% of Present Carrying Amount of
PPE) 22.88
Existing Debt 12.31
Maximum Debt 10.57
Since, the lowest loan available per two criteria is Rs.10.57M, which is also lower
than the current outstanding of director's loan, the maximum debt that can be sought
by the Company is Rs.10.57M itself.
Working Notes:
1. Total Variable Costs and Fixed Cost
Components Variable (Rs. Calculation Fixed Calculation

In Millions) (Rs. In
Millions)
80% of Rs.49.30 M 20% of Rs.49.30
Cost of Sales (39.44) (9.86) M
Operating Expenses (1.22) 20% of Rs.6.10 M (4.88) 80% of Rs.6.10 M
Total Variable Costs (40.66) (14.74)
2. Contribution Margin
Rs. In
Particulars Millions
Sales Revenue 68.52
Variable Cost (40.66)
Contribution Margin 27.86
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3. EBIT calculation (Rs. in Millions)
Sales =68.52
VC =(40.66)
CM =27.86
FC =(14.74)
EBIT =13.12
ii) The degree of operating leverage of the Company signifies that for 100% rise in
Contribution Margin, there shall be a rise of 212% in the EBIT.
(Rs. in Millions)
Particulars 4 Months 100% Growth
Sales Revenue 68.52 137.04
Variable Cost (40.66) (81.32)
Contribution Margin 27.86 55.72
Fixed Cost (14.74) (14.74)
Earnings Before Interest and Tax 13.12 40.98
Rs.40.98
Growth in EBIT = M -1
Rs.13.12
M
= 212%
iii) Calculation of expected Debt Service Coverage Ratio (Refer WN 4 &5)

Loans Repaid 1.23
Interest Paid 3.18
Total Repayment of Interest and Principal 4.41

Profit Before Tax (Working Note 5) 36.18
Add: Depreciation (Rs. 14.9 × 12%) 1.79
Add: Finance Costs (Working Note 4) 3.18
Less: Income Tax Expenses (9.05)
Cash Profit before Interest 32.10
Cash Profit before interest

Debt Service Coverage Ratio (DSCR) =
Total Repayment of Interest and principal
Rs. 32.10 M
=
Rs. 4.41 M
= 7.28 times
Working Notes:
4 Annualized Finance Costs

Particulars Loan Outstanding Interest Finance Cost
(Rs. In Millions) Rate (Rs. In Millions)
- Existing Long Term Loan 12.31 9.5% 1.17
- New Borrowings 10.57 9.5% 0.67
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- Director's Loan before New 18%
14.5 0.87
Borrowings
- Reminder of Director's Loan 3.93 18% 0.47
Total 3.18
5 Annualized Statement of Comprehensive Income
Revenue 205.56
Cost of Sales (147.90)
Gross Profit 57.66
Operating Expenses (18.30)
Finance Costs (Working Note 1) (3.18)
Profit before Tax 36.18
Income Tax Expense (Provisioned and 100% deposition) (9.05)
Profit for the Period 27.13
Answer 2 (b)
Banks and financial institutions are highly leveraged institutions and therefore the
highly regulated institutions in the world. The balance sheet size of any bank and
financial institution is predominantly covered by deposits and loans while the
shareholders equity covers mere 8 to 15% of the balance sheet size. The capital
adequacy ratio criteria based on the credit, market and operations risks that require
the maintenance of 8 to 12% capital of total risk weighted assets substantiate this fact.
With Such a high leverage ratio BFI are able to generate healthy profit/ROE as seen I
the market even by being within the constraints/regulation of NRB.
3.
a) RPG Enterprises has been operating its manufacturing facilities till Aasadh end
2072 on a single shift working with the following cost structure:
Per Unit (Rs.)
Cost of Material 6
Wages (out of which 40% is fixed) 5
Overheads (out of which 80% is fixed) 5
Profit 2
Selling Price 18
Sales during 2071/72 : Rs. 432,000.
As at Ashadh end 2072 the company held:
(Rs.)
Stock of raw materials (at cost) 36,000
Work- in- progress (valued at prime cost) 22,000
Finished goods (valued at total cost) 72,000
Sundry debtors 108,000
In view of increased market demand, it is proposed to double production by
working at extra shift. It is expected that a 10% discount will be available from
suppliers of raw materials, in view of increased volume of business. Selling price
will remain the same. The credit period allowed to customers will remain
unaltered. Credit availed from suppliers will continue to remain at the present
level, i.e. 2 months. Lag in payment of wages and expenses will continue to
remain half a month.
Required:
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Assess the additional working capital requirements, if the policy to increase
output is implemented.
b) What are the functions of debt securitization?
Answer 3(a)
WN. 1) Sales in Units 2071/072

Sales
=
Selling price per unit
432000
= = 24000
18
2) Stock of Raw Materials in Units on Ashadh end 2072
Value of stock 36000 6000
= =
cost per unit 6 Units
3) Stock of Work-in-Progress in Units on Ashadh end 2072

Value of WIP 22000 2000
= =
prime cost per unit 11 Units
4) Stock of Finished Goods in Units on Ashadh end 2072

Value of Finished Stock 72000 4500
= =
total cost per unit 16 Units
5) Statement of cost at single shift and double shift working

` 24000 Units 48000 Units
Per Unit Total Per Unit Total
Rs. Rs. Rs. Rs.
Raw materials 6.00 144,000 5.40 259,200
Wages - Variables 3.00 72,000 3.00 144,000
Fixed 2.00 48,000 1.00 48,000
Overheads- Variables 1.00 24,000 1.00 48,000
Fixed 4.00 96,000 2.00 96,000
Total cost 16.00 384,000 12.40 5, 95,200
Profit 2.00 48,000 5.60 268,800
18.00 432,000 18.00 864,000
Comparative Statement of Working Capital Requirement

Single Shift Double Shift
Unit Rate Amount Unit Rate Amount
(Rs) (Rs)
Current Assets:
Inventories -
Raw
Materials 6000 6.00 36,000.00 12000 5.40 64,800.00
Work-in-
Progress 2000 11.00 22,000.00 2000 9.40 18,800.00
Finished
Goods 4500 16.00 72,000.00 9000 12.40 111,600.00
Sundry Debtors 6000 18.00 108,000.00 12000 18.00 216,000.00
Total Current Assets
(A) 238,000.00 411,200.00
Current Liabilities:
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Creditors for Materials 4000 6.00 24,000.00 8000 5.40 43,200.00
Creditors for Wages 1000 5.00 5,000.00 2000 4.00 8,000.00
Creditors for Expenses 1000 5.00 5,000.00 2000 3.00 6,000.00
Total Current
Liabilities (B) 34,000.00 57,200.00
Working Capital :
(A) - (B) 204,000.00 354,000.00
Less : Profit included
in Debtors 6000 2.00 12,000.00 12000 5.60 67,200.00
192,000.00 286,800.00
Increase in Working Capital Requirement is (Rs. 286,800 - Rs. 192,000) Rs. 94,800
Notes:
(i) The quantity of materials in process will not change due to double shift working since work
started in the first shift will be completed in the second shift.
(ii) The valuation of work-in-progress based on prime cost as per the policy of the company is as
under.
Single Shift Double Shift
(Rs.) (Rs.)
6.00 5.40
3.00 3.00
2.00 1.00
11.00 9.40
Answer 3(b)
Functions of Debt Securitization
It is a mode of financing wherein securities are issued on the basis of a package of assets
(called Asset Pool). In this method recycling funds, assets generating steady cash flows are
packaged together and against this asset pool, market securities can be issued.
i) File Origination Function: A borrower seeks a loan from a lending institution (finance
company or bank). The credit worthiness of the borrower is evaluated and the loan is
sanctioned. A contract is signed between the parties, with repayment schedule spread
over the life of the loan. The lender is called the Originator, to whom the loan constitutes
an asset (receivable).
ii) The Pooling Function: The Originator (Lender) clubs together similar loans or
receivables, to create an underlying pool of assets. This pool is transferred in favour of a
SPV (Special Purpose Vehicle), which acts as a trustee for the investor. Once the assets
are transferred, they are held in the Originators' portfolios.
iii) The Securitization Function: Now the SPV issues securities on the basis of the asset
pool. The securities carry a coupon and an expected maturity which can be asset based or
mortgage based. These are generally sold to investors through merchant bankers.
4.
a) The following information is available for your perusal:
Present book value of a firm's capital structure is: (Rs.)
Debentures of Rs. 100 each 800,000
Preference shares of Rs. 100 each 200,000
Equity shares of Rs. 10 each 1,000,000
2,000,000
All these securities are traded in the capital markets at recent prices of:
Debentures: Rs. 110, Preference shares: Rs. 120 and Equity shares: Rs. 22.
Anticipated external financing opportunities are as follows:
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i) Rs. 100 per debenture redeemable at par: 20 years maturity, 8% coupon rate,
4% floatation costs, sale price Rs. 100.
ii) Rs. 100 preference share redeemable at par: 15 years maturity, 10% dividend
rate, 5% floatation costs, sale price Rs. 100.
iii) Equity shares: Rs. 2 per share floatation costs, sale price Rs. 22.
In addition, the dividend expected on the equity share at the end of the year is Rs.
2 per share; the anticipated growth rate in dividends is 5% and the firm has the
practice of paying all its earnings in the form of dividend. The corporate tax rate
is 50%.
Required:
Determine the weighted average cost of capital of the firm using (i) book value
weights, and (ii) market value weights.
b) What are the advantages of raising funds by issuing equity shares?
Answer 4(a)
Calculation of Cost of Capital of Individual Components of Capital
(i) Cost of Debentures before tax
(100-96)
8+
20 8 + 0.20
= = = 0.0837 or 8.37%
(100+96) 98
2
Cost of Debentures after tax
= 8.37 (1-0.50) = 4.18%
Alternate: I(1-t)
(ii) Cost of Preference Shares
(100-95)
10 +
15 10 + 0.33 or
= = = 0.1059
(100+95) 97.5 10.59%
2
(iii) Cost of Equity
D 2
= +g = + 0.05 = 0.15 or 15%
NP 22-2
(i) Computation of WACC based on book value weights
Book Value Weights on Specific Total

Source of Capital (Rs.) Total Capital Cost Cost
Debentures (Rs. 100 each) 800,000 0.40 0.0418 0.0167
Preference Shares (Rs. 100 each) 200,000 0.10 0.1059 0.0106
Equity Shares (Rs. 10 each) 1,000,000 0.50 0.1500 0.0750
2,000,000 1.00 0.1023
Cost of Capital = 10.23%
(ii) Computation of WACC based on market value weights
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Book Value Weights on Specific Total
Source of Capital (Rs.) Total Capital Cost Cost
Debentures (Rs. 110 each) 880,000 0.2651 0.0418 0.01108
Preference Shares (Rs. 120 each) 240,000 0.0723 0.1059 0.00766
Equity Shares (Rs. 22 each) 2,200,000 0.6626 0.1500 0.09939
3,320,000 1.0000 0.11813
Cost of Capital = 11.81%

Answer 4(b)
Following are the some of the advantages of raising funds by issue of equity
shares:
 Permanent source of finance. No liability for cash outflows associated
with its redemption.
 Demonstrate financial base (Capital adequacy) of the company and
helps in borrowing power of the company.
 No legal obligation to pay dividends.
 Can be raised further shares by making a right issue.
5.
a) Mr. Liberal, an established Development Planning Consultant, was approached by
the officer of N Investment Banking Ltd. for his wealth management. Mr. Liberal
is currently aged exactly 57 years and is planning to retire from his profession
after the age of 60. He is currently living with his wife and a daughter, who is
settled in US. He wants to set aside some funds and let the Investment Bank
manage his funds for guaranteed return from 61st year for at least 10 years for his
and his wife's living.
Mr. Liberal estimates the requirement of Rs. 120,000 per month to cover up his
living from the 1st year of retirement. The officer of the Investment Bank has
offered 3 schemes of which he has chosen fixed income scheme with 0% risk and
yields 10% interest per annum compounded annually during the entire scheme
period from the beginning of 61st birthday till 70th birthday while 9.5%
compounded quarterly from the beginning of deposit till the end of 60th birthday.
The proceeds by the Investment Bank are paid in lump-sums and at the beginning
of every year. Ignore management fees of Investment Bank and taxation.
Required:
What is the amount Mr. Liberal needs to deposit at the Investment Bank as of
today under the scheme? Present your calculations on Rs. in thousands.
b) The Investment Analytics Division of R Investment Bank presented the following
forecast pertaining to share price and dividend of X Bank Ltd., an "A" Class
Licensed Institution, during its regular performance review meeting for the
current financial year 2072-73:
Economic Share Price (Rs.) Dividend (Rs.)

Conditions High Low Average
High Growth 350 300 325 22
Expansion 310 280 295 18
Stagnation 280 250 265 13
Decline 230 200 215 10
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The Bank has recently declared dividend of Rs. 13 per share and is currently
trading at Rs. 265 per share in the Nepal Stock Exchange. Due to the ongoing
political stalemate and the aftermath of recent mega earthquake, the Analytics
Division has estimated higher probability for the stagnant economic conditions
and lower probability for the high growth conditions. The probability estimates
are presented as under:
Economic Conditions Probability
High Growth 10%
Expansion 20%
Stagnation 60%
Decline 10%
Required:
Calculate and evaluate the expected rate of return and the riskiness of shares of X
Bank Ltd.
c) MNP Limited has made plans for the year 2015-16. It is estimated that the
company will employ total assets of Rs. 25 lakh. Thirty percent of the assets
would be financed by debt at an interest rate of 9% p.a. The total direct cost for
the year are estimated at Rs. 15 lakh and all other operating expenses are
estimated at Rs. 240,000. The sales revenue are estimated at Rs. 2,250,000. The
tax rate is 25%.
Required: Calculate
i) Return on assets
ii) Assets turnover
iii) Return on equity
Answer 5(a)
i) 10% is the discount rate which is Mr. Liberal's yield after retirement.
Amount Mr. Liberal needs to deposit at the Investment Bank is Rs. 7,346.70 K. as below:
Total Present Value of Annuity Due @ 10% for 10 yrs. 6.761
Rs. In '000
Annual Payment (120,000×12) 1,440.00
Total Sum at the beginning of 61st Birthday 9,735.84
Annual Interest Rate = 9.50%

Quarterly Compounded Annual Interest Rate = (1+9.5%/4)4 - 1
= 9.84%
Age Beginning Balance Interest Closing Balance
60th 8,863.66 872.18 9,735.84
59th 8,069.61 794.05 8,863.66
58th 7,346.70 722.91 8,069.61
Interest is calculated as:
60th yr = 9735.84× 0.0984 =Rs. 872.18 ('000) and so on...

1.0984
Answer 5(b)
a.
Tables showing calculation of Expected Rate of Return
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Table -1
Economic Share Price Dividend Expected Expected Return
Conditions High Low Average Dividend Capital Gain
Return %
1 2 3 4 5 6=5/CP 7=(4- 8=6+7
CP)/CP
High Growth 350 300 325 22 8.30% 22.64% 30.94%
Expansion 310 280 295 18 6.79% 11.32% 18.11%
Stagnation 280 250 265 13 4.91% 0% 4.91%
Decline 230 200 215 10 3.77% -18.87% -15.10%
Note: Here, current market price is considered as cost price( C P) to the investment bank.
Table -2
Economic Conditions Return Probability Expected Return
1 2 3 4=2×3
High Growth 30.94% 10% 3.09%
Expansion 18.11% 20% 3.62%
Stagnation 4.91% 60% 2.95%
Decline -15.10% 10% -1.51%
Total 8.15%
The expected return of share is 8.15%; however, the total return is anticipated to vary
between -15.10% under the adverse condition to 30.94% under the most favorable
condition. The expected return is the average return of share computed by adjusting
probabilities for various economic conditions.
The riskiness of Share is based on the following formula:
n
ơ2 = ∑ [ RI - E(R)]2 × PI
I=1
Where;
RI = Return on various economic conditions,
E(R) = Expected Rate of Return
PI = Probability of various economic conditions
Economic Return Expected Differences Square of Probability Expected
Conditions Return in Return Difference Variance
1 2 3 4=2-3
High Growth 30.94% 8.15% 22.79% 5.19% 10% 0.52%
Expansion 18.11% 8.15% 9.96% 0.99% 20% 0.19%
Stagnation 4.91% 8.15% -3.24% 0.10% 60% 0.06%
Decline -15.10% 8.15% -23.25% 5.40% 10% 0.54%
Total 1.31%
ơ2 = 1.31%
ơ
√
= 1.31% = 11.44%
The share's average dispersion is 10.89% which is considered high and therefore a risky
investment for share investors. Considering the low expected rate of return and high
standard deviation, rational investors will look into other better alternatives.
Answer 5(c)
Calculation of net profit
Rs.
Sales revenue 2,250,000
Direct costs 1,500,000
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Gross profit 750,000
Operating expenses 240,000
EBIT 510,000
Interest (9% x 7,50,000) 67,500
EBT 442,500
Taxes at 25 % 110,625
PAT 331,875
(i) Return on Assets = EBIT (1- t) / Total Assets

= (510,000 x 0.75) / 2,500,000
=15.30 %
Alternate: EBIT/Total Assets=20.40%
(ii) Assets Turnover ratio = Sales/ assets

= 2,250,000/2,500,000 = 0.9 times
(iii) Return on Equity = PAT/Equity
= 331,875/ (2,500,000-750,000)
= 331,875/1,750,000
=18.96%
a) Social cost benefit analysis
b) Reverse takeover
c) Financial tapering
d) Financial leverage
Answer 6(a)
Social cost benefit analysis is the method of evaluating the use of public fund. It
considers monetary as well as non-monetary returns.
Large amount of public fund is committed every year for various public projects.
Analysis of such projects has to be done with reference to social costs and benefits. Such
projects are not merely considered based on commercial returns, instead considered for
various social returns in the form of employment generation, access to market, increase in
life styles, access to basic requirements such as health, education, drinking water. So,
such projects are analyzed based on what social benefits that particular project will
provide. Based on such returns decision as to whether to implement projects or not is
made by the competent authorities.
Answer 6(b)
A reverse takeover or reverse merger takeover (reverse IPO) is the acquisition of a public
company by a private company so that the private company can bypass the lengthy and
complex process of going public. The transaction typically requires reorganization of
capitalization of the acquiring company.
Sometimes, it might be possible that a company continuously trades as a public company
but has no or very little assets and what remains only its internal structure and shareholders.
This type of merger is also known as "back door listing".
Reverse merger brings following benefits to acquiring private company:
 Easy capital market accessibility
 Less time consuming and less cost for becoming public
 Benefits of tax on carry forward losses of acquired company
This concept is yet to be implemented in Nepalese Capital Market as no such publicly
traded company has been acquired by the private company till date.
Answer 6(c)
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The word tapering in financial terms is increasingly being used to refer to the reduction of
the Federal Reserve's quantitative easing, or bond buying program. Tapering activities is
primarily aimed at interest rates and investors' expectations of what those rates will be in
the future. These can include conventional central bank activities, such as adjusting the
discount rate or reserve requirements, or more unconventional ones, such as quantitative
easing (QE).
Central banks can employ a variety of policies to improve growth, and they must balance
short-term improvements in the economy with longer-term market expectations. If the
central bank tapers its activities too quickly, it may send the economy into a recession. If it
does not taper its activities, it may lead to high inflation.
Tapering is best known in the context of the Federal Reserve's quantitative easing program.
In reaction to the 2007 financial crisis, the Federal Reserve began to purchase assets with
long maturities to lower long-term interest rates. This activity was undertaken to entice
financial institutions to lend money, and it began when the Federal Reserve purchased
mortgage-backed securities.
Answer 6(d)
Financial Leverage may be defined as "the use of funds with a fixed cost in order to
increase earnings per share". In other words, it is the use of company funds on which it
pays a limited return. Financial leverage involves the use of funds obtained at a fixed cost
in the hope of increasing the return to common stockholders.
Degree of the financial leverage is the ratio of the percentage increase in earnings per share
(EPS) to the percentage increase in earnings before interest and taxes(EBIT).
Percentage increase in EPS

Degree of Financial leverage = ---------------------------------------
Percentage increase in EBIT
or
EBIT
Financial leverage = -------------------
EBIT-Interest
7. Distinguish between:
a) GDRs and ADRs
b) Inflation bonds and Floating rate bonds
c) Factoring and Bills discounting
d) Replacement value and Market value
Answer 7(a)
Finance can be raised by, Global Depositary Receipts (GDRs) Foreign Currency Convertible
Bonds (FCCBs) and pure debt bonds. However, GDRs and FCCB's are more popular. GDRs do
not carry voting rights and hence there is no dilution of control.
Global Depository Receipts (GDRs)
 A Depository Receipt (DR) is basically a negotiable certificate denominated in US
Dollars that represents a non- US company publicly traded local currency (Nepalese
Rupee) Equity share.
 DRs are created when the local currency shares of Nepalese company are delivered to the
depository's local custodian bank, against which the depository bank issues DRs in US
Dollars.
 These DRs may be freely traded in the overseas market like any other Dollar
denominated security through either a foreign stock exchange or through over the
Counter (OTC) market or among the restricted groups like qualified institutional buyers.
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GDRs with warrants are more attractive than plain GDRs in view of additional value of
attached warrants.
American Depository Receipts (ADRs):
Depository Receipts issued by a company in the USA are known As ADRs. Such receipts
have to be issued in accordance with the provisions stipulated by the Securities Exchange
Commission (SEC) of the USA which is the regulatory body like the SEBON in Nepal.
Since the conditions laid down by the SEC are stringent, Nepalese companies have chosen
the indirect route to tap the vast American financial market through private placement of
GDRs listed in London and Luxembourg Stock Exchanges.
Answer 7(b)
Inflation Bonds are the bonds in which interest rate is adjusted for inflation. Thus, the
investor gets interest which is free from the effects of inflation. For example, if the interest
rate is 3 percent and the inflation rate is 6 percent, the investor will get 9 percent in total.
Floating rate bonds, as name suggests, are the bonds where the interest rate is not fixed and is
allowed to float depending upon the market conditions. This is an ideal instrument which can
be resorted to by the issuer to hedge themselves against the volatility in the interest rates.
This has become more popular as a money market instrument and being issued by the
financial institutions.
Answer 7(c)
The factoring and bills discounting are both means available for short term finance;
nevertheless they are different to each other in terms of:
Responsibility: In factoring it is the factor that usually assumes the responsibility of
collecting the bills while in bills discounting the drawer assumes the responsibility of
collecting the bills and pays the proceeds. Factoring is more associated with the management
of book debts while bill discounting is related to borrowing from commercial bank.
Risk of Credit: Bills discounting is always of recourse type i.e., drawer assumes the credit
risk and not the drawee bank, while factoring can be either with or without recourse. In case
of recourse, the factor does not assume credit risk and it is the company that owns receivables
assumes the credit risk.
Facility of finance: In bills discounting, there is only a provision of finance, while in
factoring, the factor provides other facilities like sales ledger maintenance, collection etc. in
addition to the finance facility.
Negotiability: The discounted bills may be re-discounted several times before they mature for
payment where as it is not possible to negotiate in case of factoring.
Accounting: Transactions in the factoring are off balance sheet items as the amount of
receivables and bank credit are not presented in the balance sheet, whereas bills discounting
are presented in the "Loans and Advances" head of the balance sheet.
Answer 7d)
Replacement Value is a amount that a company would be required to spend if it were to replace its
existing assets in its current condition. It is difficult to find cost of assets currently being used by the
company replacement value and is also likely to ignore the benefits of intangibles and the utility of
existing assets.
Market Value of an assets or securities is the current price at which the assets or the security is
being sold or bought in the market. Market value per share is expected to be higher than the book
value per share of profitable, growing firms. A number of factors influence the market value per
share, and therefore, it shows wide fluctuations. What is important is the long term trend in the
market value per share.
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Cost & Management Accounting
Suggested Answer
Total No. of Questions: 6 Total No. of Printed Pages - 12
All questions are compulsory. Working notes should form part of the answer.
Make assumptions wherever necessary.
1. Caltech Co. is experiencing a shortage of the highly skilled labour that it uses to
produce its only product, the ―Olsen‖. It wishes to prepare budgets for the year
ending 31st December 2015. The standard cost card for the Olsen for 2015 and other
relevant information are given below.
Cost per unit
(Rs.)
Direct material A (6 kg Rs. 2 per kg) 12.00
Skilled labour (2 hours Rs. 25 per hour) 50.00
Unskilled labour (4 hours Rs. 15 per hour) 60.00
Prime cost 122.00
Variable production overhead (6 hours Rs. 5 per hour) 30.00
Fixed production overhead (6 hours Rs. 4 per hour) 24.00
Standard full cost of production 176.00
Notes relevant to budget preparation:
 Direct material A is freely available.
 20 skilled workers are employed. Each is contracted to work for 40 hours per
week for 48 weeks per year and in addition will work overtime, up to a
maximum of 8 hours per week, for a premium of 50% per hour.
 There is no shortage of unskilled labour and all of their hours will be paid at
basic rate.
 The standard fixed overhead absorption rate was set based upon 150,000
standard labour hours per year.
 The Olsen will be sold at Rs. 250 per unit, and demand at this price is estimated
to be 30,000 units per annum.
 Caltech Co. carries no inventory of raw materials or finished goods at any time.
Required:
a) Construct a budget for skilled labour for the year ending 31st December 2015,
assuming that the maximum amount of overtime is worked. Your budget should
show basic hours, overtime hours, basic pay and overtime premium paid.
b) Assuming that the principal budget factor for Caltech Co. is 46,080 skilled
labour hours, and that the company wishes to maximize its profits, calculate the
following budgeted figures for the year ending 31st December 2015:
i) Production in units;
ii) Unskilled labour (in hours and Rs.);
iii) Direct material usage (in kg and Rs.);
iv) Sales (in units and Rs.).
c) Prepare a budgeted income statement for the year ending 31st December 2015.
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d) Suggest four ways by which a company could overcome shortages of skilled
labour.
Answer
(a) Skilled labour budget:
Basic hours (20 workers x 40 hours per week x 48 weeks per year) 38,400 hours
Overtime hours (20 workers x 48 weeks per year x 8 hours) 7,680 hours
Total hours 46,080 hours
Rs.
Basic pay (46,080 hours x Rs.25 per hour) 1,152,000
Overtime premium (7,680 hours x Rs.25 per hour x 50%) 96,000
Total Rs.1,248,000
(b) Budgets for the year ending 31st December 2015
(i) Production budget

Production (46,080 hours ÷ 2 skilled hours per unit) 23,040 units
(ii) Unskilled labour budget
Basic hours (23,040 units x 4 hours per unit) 92,160 hours

Basic pay (92,160 hours x Rs.15 per hour) Rs.1,382,400
(iii) Direct material
Material usage (23,040 units x 6 kg per unit) 138,240 kg

Material cost (138,240 kg x Rs.2 per unit) Rs.276,480
(iv) Sales budget
Units (from above) 23,040 units

Revenue (23,040 units x Rs.250 per unit) Rs.5,760,000
(c) Income statement

Rs.
Sales revenue (from (iv) above) 5,760,000
Direct labour
Skilled (from (a) above) (1,248,000)
Unskilled (from (ii) above) (1,382,400)
Direct material (from (iii) above) (276,480)
Variable overhead (w1) (691,200)
Fixed overhead absorbed (w2) (552,960)
Under absorbed fixed overhead (w3) (47,040)
Profit Rs.1,561,920
Working 1 46,080 skilled hours ÷ 2 hours x 6 hours x Rs.5 per hour

Working 2 46,080 skilled hours ÷ 2 hours x 6 hours x Rs.4 per hour
Working 3 (150,000 hours – 138,240 hours) x Rs.4 per hour = Rs.47,040
(d) Overcoming labour shortages:
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Labour shortages could be overcome by
– Recruiting more skilled labour, possibly by offering higher wages

– Training more skilled workers
– Investing in equipment to improve the productivity of skilled employees
– Using unskilled labour to perform the simpler elements of the skilled labour‘s work
– Subcontracting (outsourcing) some of the work to other manufacturers.
2.
a) In a factory bonus system, bonus hours are credited to the employees in the
proportion of time taken, which time saved bears to time allowed. Jobs are
carried forward from one week to another. No overtime is worked and payment
is made in full for all units worked on, including those subsequently rejected.
From the following information you are required to calculate for each employee:
i) The bonus hours and amount of bonus earned;
ii) The total wage costs; and
iii) The wages cost of each good unit produced.
Particulars Worker A Worker B Worker C
Basic rate per hour Rs. 10 Rs. 16 Rs. 12
Units produced 2,600 2,200 3,600
Time allowed for 100 units 2 hours 30 minutes 3 hours 1 hour 30 minutes
Time taken 52 hours 75 hours 48 hours
Rejects 100 units 40 units 400 units
b) The production department of factory furnishes the following information for the
month of March 2015:
Amount in (Rs.)
Materials used 54,000
Direct wages 45,000
Overheads 36,000
Labour hours worked 36,000
Hours of machine operation 30,000
For an order executed by the department during a particular period, the relevant
information was as under:
Materials used 6,00,000
Direct wages 3,20,000
Labour hours worked 3,200
Machine hours worked 2,400
Calculate the overhead charges chargeable to the job by the following methods:
i) Direct materials cost percentage rate
ii) Labour hour rate; and
iii) Machine hour rate
c) A shop floor supervisor of a small factory presented the following cost for Job
no. 421 to determine selling price.
Per unit (Rs.)
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Material 70
Direct Wages 18 hrs. @ Rs. 2.50 (Dept. X 8 hours; Dept. Y6
hours; Dept. Z 4 hours) 45
Chargeable Expenses (Special stores items) 5
120
Add: 33 1/3% for Overheads 40
Total Cost 160
Analysis of the Profit/Loss Account for 2014 shows the following:

(Amount in Rs.)
Material used 150,000 Sales less
Direct Wages: Returns 250,000
Dept. X 10,000
Dept. Y 12,000
Dept. Z 8,000 30,000
Special stores items 4,000
Overheads:
Dept. X 5,000
Dept. Y 9,000
Dept. Z 2,000 16,000
Total Cost 200,000
Gross Profit c/d 50,000
250,000 250,000
Selling Expenses 20,000
Net Profit 30,000 Gross Profit b/c 50,000

50,000 50,000
It is also noted that average hourly rates for the three departments X, Y, Z are similar.
Required:
i) Draw up a job cost sheet.
ii) Calculate the entire revised cost using 2014 actual figures as basis.
iii) Add 20% to total cost to determine selling price.
2a)Answer
The computation is shown in the following table:
Statement showing Bonus and Wage cost per unit
Units produced 2,600 2,200 3,600
Rejects 100 units 40 units 400 units
Good units 2,500 units 2,160 units 3,200 units
Time allowed for 100 units 2 hrs 30 3 hrs 1 hrs 30
minutes minutes
Total time allowed 65 hours 66 hours 54 hours
Time taken 52 hours 75 hours 48 hours
Time saved [Time allowed- 13 hours - 6 hours
Time taken]
Basic rate per hour Rs. 10 Rs. 16 Rs. 12
Statement showing Bonus and Cost per unit
Basic wages Rs. 520 Rs. 1,200 Rs. 576
Bonus* Rs. 104 - Rs. 64
Total wage cost Rs. 624 Rs.1,200 Rs. 640
Wages cost per unit of good Rs. 0.25 Rs. 0.56 Rs. 0.20
units produced#
#Wages cost per unit of good unit is computed by dividing the total wages cost by the
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good units.
*Bonus is computed as follows:
The Bonus is to be paid in the proportion of time taken which the time saved bears to the
time allowed. For A, the time saved is 13 hours while the time allowed is 65 hours. This
means that the proportion of time saved to time allowed is 13/65=1/5 hours and hence
the bonus is 1/5th of the basic wages i.e. `104.
For B, there is no time saved and hence he is not entitled for any bonus.
For C, time saved is 6 hours while the time allowed is 54 hours which means that the
time saved is 1/9th.
2b)Answer
(i) Direct material cost percentage rate= (overheads/ direct material) x 100
=(Rs. 36,000/54,000) x100 =66.67%
Materials used on the order Rs. 6,00,000, so overhead will be @ 66.67% =
R4,00,000.
(ii) Labour hour rate=Overhead/Direct labour hours
=36,000/36,000 = Rs.1
Overheads will be @ Rs. 1= 3,200 hrs x 1= Rs.3,200
(iii) Machine hour rate=Overhead/Machine hours
= Rs. 36,000/30,000 = Rs.1.2
Overheads will be Rs.1.2 per hour x 2,400 hours = Rs. 2,880
2c)Answer
In order to prepare the job cost sheet, the overhead rates of different departments will have
to be first determined on the basis of previous year's figures. The rates are as follows:
FACTORY OVERHEAD RATES
Deptts
. X Y Z
(i) Overheads Rs. 5,000 Rs. 9,000 Rs. 2,000
(ii) Direct Labour Hours = Total Wages/Hourly Rates 4,000 4,800 3,200
(iii) Rate per hour (i) ÷ (ii) 1.25 1.875 .625
COST SHEET OF JOB NO421

Particulars Rate Hrs. Amount
Material `70.00
Direct Wages: Deptt. X ` 2.50 8hrs. 20.00
Deptt. Y 2.50 6 hrs. 15.00
Deptt. Z 2.50 4 hrs 10.00
Chargeable Expenses 5.00
Prime Cost 120.00
Overheads Deptt. X 1.250 8 hrs. 10.00
Deptt. Y 1.875 6 hrs 11.25
Deptt. Z .625 4 hrs 2.50
Total Cost .
Add: Profit 20% of Total Cost 143.75
Selling Price 28.75
172.50
3.
a) Xinhau Petrochemicals Nepal Ltd. purchases crude oil from China and processes
it into more refined products Such as Liquefied Petroleum Gas (LPG), Fuel oil
and Gasoline commonly known as Petrol. For the month of December 2015, the
company purchased crude oil for Rs. 800,000, conversion costs incurred were
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Rs. 1,200,000 upto the split–off point, at which time two salable products were
produced, LPG and Fuel oil. Fuel oil could be further processed into Gasoline.
Production and other relevant information for the month of December 2015 are
as follows.
Production Sales Sales price per ton
LPG 2,400 tons 2,400 tons Rs. 1,000
Fuel oil 1,600 tons ------ -------
Gasoline 1,000 tons 1,000 tons Rs. 4,000
The full production of Fuel oil was further processed at an incremental cost of
Rs. 400,000 to yield 1,000 tons of Gasoline. There were no by-product or scrap
from this further processing of Fuel oil. The company did not have any opening
and closing stocks of any of above products for December 2015.
As there is very active market for Fuel oil, the company could have sold its entire
production for December 2015 at Rs. 1,500 per ton.
You are required to calculate:
a) How the joint cost of Rs. 2,000,000 would be allocated between LPG and Fuel
oil under each of the methods viz. (i) sales value at split off (ii) physical
measure (tons) and (iii) estimated net realizable value?
b) The gross margin percentage of (i) LPG and (ii) Gasoline under the three
methods given in (a) above.
c) Indo Petro Ltd. offers to purchase 1,600 tons of Fuel oil in January 2016 at Rs
1,500 per ton. This would mean that no Gasoline would be produced in that
month. Will the acceptance of the offer affect the operating income of Xinhau
Petrochemicals Nepal Ltd. for January 2016?
b) Trisha Construction Ltd., who prepares its account on 31st December each year,
commenced a contract on 1st April 2014. The costing records concerning the said
contract reveal the following information on 31st December, 2014;
Rs.
Materials charged to site 258,100
Labour engaged 560,500
Foremen‘s salary 79,300
Plants costing Rs. 260,000 had been on site for 146 days. Their working life is
estimated at 7 years and their final scrap value at Rs. 15,000. A supervisor, who
is paid Rs. 4,000 p.m., has devoted approximately three-fourths of his time to
this contract. The administrative and other expenses amount to Rs. 140,000.
Materials in hand at site on 31st December, 2014 cost Rs. 25,400. Some of the
material costing Rs. 4,500 was found unsuitable and was sold for Rs. 4,000 and a
part of the plant costing Rs. 5,500 (on 31.12.2014) unsuited to the contract was
sold at a profit of Rs. 1,000.
The contract price as originally negotiated was Rs. 2,200,000 but it was accepted
by the contractor for Rs. 2,000,000. On 31st December, 2014, two thirds of the
contract was completed. Architect‘s certificate had been issued covering 50% of
the contract price and Rs. 750,000 had so far been paid on account.
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Prepare contract account and state how much profit or loss should be included in
the financial accounts to 31st December, 2014. Workings should be clearly given.
Depreciation is charged on time basis.
Also prepare the Contractee‘s account and show how these accounts should appear in
the balance sheet as on 31st December, 2014.
3a)Answer
(a) Xinhau Petrochemicals Nepal Ltd.
Statement of allocation of joint cost
LPG Fuel oil
(i) On the basis of sales value at split off:
Units (tons) 2,400 1,600
Price per unit (Rs.) 1,000 1,500
Sales value at split off stage 24,00,000 24,00,000
Allocation of Joint processing cost (1:1) 10,00,000 10,00,000
(ii) On the basis of Physical measure:

Units (tons) 2,400 1,600
(ii) On the basis of Net realizable value:

Units (tons) 2,400 1,000
Sales value 24,00,000 40,00,000
Further processing cost -------- (4,00,000)
Net realizable value 24,00,000 36,00,000
(b) Statement of Gross profit margin

LPG Gasoline
Sales (tons) 2,400 1,000
Sales value(A) 24,00,000 40,00,000
(i) On the basis of sales value at split off

Allocation of Joint processing cost 10,00,000 10,00,000
Further processing cost -------- 4,00,000
10,00,000 14,00,000
Gross Profit (B) 14,00,000 26,00,000
Gross profit margin (B/A x 100) 58.33% 65%
(ii) On the basis of Physical measure:

12,00,000 12,00,000
Gross Profit (B) 12,00,000 28,00,000
Gross profit margin (B/A x 100) 50% 70%
(iii) On the basis of Net realizable value:

8,00,000 16,00,000
Gross Profit (B) 16,00,000 24,00,000
Gross profit margin (B/A x 100) 66.67% 60%
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(c) Statement of evaluation of Indo Petro Ltd.'s offer.
Incremental gain:
Saving in further processing cost Rs. 4,00,000
Incremental loss:
Loss of sales (Rs. 40,00,000 – Rs. 24,00,000) (Rs. 16,00,000)
Net incremental loss (Rs. 12,00,000)
Acceptance of the offer will reduce the operating income of Xinhau Petrochemicals
Nepal Ltd. for January 2016 by Rs. 12,00,000.
3b)Answer
Trisha Construction Ltd.
Contract Account
(For the period of 9 months: between 1st April and 31st Dec. 2014)
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Materials 2,58,100 By Materials at site 25,400
To Labour engaged 5,60,500 By Materials sold 4,000
To Foremen‘s salary 79,300 By Profit & Loss A/c 500
To Supervisor‘s salary (W.N. 1) 27,000 (Loss on material sale)
To Depreciation of plant (W.N.2) 14,000 By Cost of work done c/d 10,49,000
To Administrative and other
expenses 1,40,000
10,78,900 10,78,900
To Cost of work done b/d 10,49,000 By Work-in-Progress
To Notional Profit c/d 2,13,250 Work certified 10,00,000
Work uncertified (W.N.3) 2,62,250
12,62,250 12,62,250
To Profit & Loss A/c (W.N.4) 1,06,625 By Notional Profit b/d 2,13,250
To Profit Reserve 1,06,625
2,13,250 2,13,250
Profit transferred to P & L A/c = 2/3 × Rs. 2,13,250 × Cash received / Work Certified
= 2/3 × Rs. 2,13,250 × Rs. 7,50,000/Rs. 10,00,000
= Rs. 1,06,625
Contractee‘s Account
Dr. Cr.
Rs. Rs.
To Balance c/d 7,50,000 By Cash 7,50,000
Balance Sheet
As on 31st December, 2014 (extracts)
Liabilities Amount Assets Amount Amount
Rs. Rs. Rs.
Profit & Loss A/c (W.N.4) 1,07,125* Work-in-Progress
Work Certified 10,00,000
Work Uncertified 2,62,250
12,62,250
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Less : Reserve 1,06,625
11,55,625
Less: Cash Received 7,50,000 4,05,625
Material at site 25,400
Plant at site (W.N.5) 2,40,500*
Working Notes :
1. Supervisor‘s Salary = ¾ × (9 months × Rs. 4,000) = Rs. 27,000
2. Depreciation of Plant = Rs. 2,60,000 Rs.15,000 × 146 = Rs.14,000
7 Years 365
3. Cost of Work Uncertified:
Cost of 2/3rd of the Contract is Rs. 10,49,000
Hence the Cost of the Contract is Rs. 10,49,000 × 3/2 = Rs. 15,73,500.
The cost of 50% of the Contract, which has been completed and certified by the Architect is Rs.
7,86,750 (Rs. 15,73,500 ÷ 2).
The Cost of Work Uncertified = Cost of work done - Cost of Work Certified is
= Rs. 10,49,000 – Rs. 7,86,750
= Rs. 2,62,250
4. Profit & Loss Acccount

Rs. Rs.
To Contract A/c 500 By Contract A/c 1,06,625
(Loss on the sale of (Profit transferred)
material) To Balance c/d 1,07,125* By Profit on the Sale of Plant 1,000
1,07,625 1,07,625
5. Plant Account
Dr. Cr.
Rs. Rs.
To Balance b/d 2,60,000 By Current A/c (Depreciation) 14,000
To P & L A/c 1,000 By Cash Sale 6,500
(Profit on Sale of Plant) By Balance c/d 2,40,500*
2,61,000 2,61,000
Note : Plant A/c can also form part of Contract A/c.

Note: If ledger is not prepared but figure correct then ok.
4.
a) A Pharmaceuticals company produces formulations having a shelf life of one
year The company has an opening stock of 15,000 boxes on 1st January , 2015
and expects to produce 65,000 boxes as was in the just ended year of 2014
.Expected sale would be 75,000 boxes. Costing department has worked out
escalation in cost by 25% on variable cost and 10% on fixed cost for the year
2015. Fixed costs are estimated at Rs. 1,430,000. New price announced for 2015
is Rs. 50 per box. Variable cost of the opening stock is Rs. 20 per box.
Required:
i) To find out break -even volume for the year 2015, and
ii) To estimate the profits that would be realised on the sale during 2015.
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b) Sales Managers of two companies compare notes and find that their sales
turnover for last year was the same viz, Rs. 10 lakhs and the profits they made
also were the same being 10% of turnover. In one company the fixed cost were
double the variable costs while in the other, it was quite opposite -the variable
costs were double the fixed costs. As an accountant, do you think that they are
equally profitable? If not, discuss their relative vulnerability to market
conditions.
4a)Answer
(i) This product has a shelf life of one year hence the company will first dispose of the opening
stock as on 1st January 2015. This would give a contribution of Rs 4.50 lakhs {i,e
15,000×(Rs.50-Rs 20)}.
The fixed cost for the year is estimated to Rs. 14.30 lakhs. Hence, the balance fixed cost to be
recovered amount to Rs 9.80 lakhs (i,e , Rs 14,30,000-Rs 4,50,000).
Variable cost would go up by 25% in 2015. The variable cost for the year 2015 would therefore
be Rs 20×1.25=Rs.25. Thus , new contribution from selling price of Rs.50 would amount to Rs.
25 per box.
The sales volume(in units) required to recover the balance of fixed costs would therefore be :
9,80,000÷25=39,200 boxes
The Break- even point for the year would therefore be at a production of:
15,000+39,200=54,200 Boxes.
(ii) Total fixed Cost =Rs 14.30 lakhs

Production =65,000 boxes
Fixed Cost per Box =Rs. 22
This is higher by 10% compared to 2014.The element of fixed cost per box included in opening
stock on Jan 1, 2015 would therefore be Rs 20.
The price break -up per box is as follows:
Opening stock Current production
Variable Cost 20 25
Fixed Cost 20 22
Profit Margin 10 3
Selling Price 50 50
Profit on sale of 75,000 boxes during 2015 would be as follows :-
For 15,000 boxes @Rs 10 Rs 1,50,000
For 60,000 boxes @Rs 3 Rs 1,80,000
For 75,000 boxes Rs 3,30,000
4b)Answer
STATEMENT OF PROFITABILITY
(Rs in lakhs)
Company x Company y
Sales 10 10
Less: Variable Costs 3 6
Contribution 7 4
Less: Fixed Costs 6 3
Profits 1 1
P/V Ratio 70% 40%

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Break -even point 8.57 7.5
Margin of Safety 14.3% 25%
It is clear from the above analysis that the Company X and Company Y are not equally profitable.
Company X has a higher P/V Ratio as compared to company Y. But at the same time ,its fixed costs are
also high .As a result company X is more vulnerable to market fluctuations as compared to company Y.
For example if the sales fall by 20% the company X will suffer a loss of Rs 40,000 while company Y
will still make a profit of Rs 20,000. This shows that a company with a low fixed cost and high variable
cost is less vulnerable to market fluctuations as compared to a company with low variable costs and
high fixed costs.
Working Notes:
(i) Computation of Variable Cost for Company X
Let the variable costs for company X be 'X'
Fixed costs for company X will be 2X
Total costs=9 lakhs
Hence X+2X=9 lakhs
or X=3 lakhs.
The Fixed costs in company X will therefore be Rs. 6 lakhs.
(ii) Computation of Variable Costs for company Y
Let the variable costs of Y be 'Y'
The fixed Cost will be 0.5 Y
Total Costs= 9 lakhs.
Hence, Y+0.5Y= 9lakhs.
or Y=6 lakhs.
In Company Y, the Variable Costs are therefore Rs. 6 lakhs and Fixed Costs are Rs. 3 lakhs.
5. Express your views

a) There is no difference between idle capacity and excess capacity. Do you agree?
How idle capacity costs are treated in cost accounting?
b) What are the limitations of break-even chart?

5a)Answer
Idle capacity is different from excess capacity. Idle capacity is a part of the capacity of a
plant, machine or equipment which cannot be effectively utilized in production. It is the
difference between the practical or normal capacity and capacity utilization based on sales.
Idle Capacity refers to temporary idleness of available resources due to irregular
interruptions. Excess capacity results either from managerial decision to retain larger
production capacity or from unbalanced equipment or machinery within departments.
Excess capacity refers to that portion of practical capacity which is available but no attempt
is made for its utilization for strategic or other reasons.
Idle capacity costs can be treated in product costing in following ways:
a. if idle capacity is due to avoidable reasons, it should be charged to Profit and Loss
Account.
b. if idle capacity is due to unavoidable reasons, as supplementary overhead rate may be
used to recover the costs and charges to the production capacity utilized.
c. if idle capacity is due to seasonal factor, it should be charged to the cost of production
by inflating overhead rates.
5b)Answer
The break –even charge is a graphical representation of cost-volume profit relationship.
Limitations of break-even chart is as follows:
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a. The variable cost line need not necessarily be a straight line because of the poosibility of
operation of law of increasing returns or law of decreasing returns.
b. The selling price will not be constant factor. Any increase or decrease in output is likely
to have an influence on the selling price
c. When a number of products are produced, separate break-even charts will be have to be
calculated. This poses a problem of apportionment of fixed expenses to each product.
d. Break –even charts ignore the capital employed in business which is one of the
important guiding factors in the determination of profitability.

a) Continuous stock taking is complementary to the perpetual inventory system
b) Sunk costs
c) Circumstances under which cost audit is ordered
d) Operation costing
6a)Answer
Under Perpetual Inventory system, a continuous record of receipt and issue of material is
maintained by the stores department. In other words, in this system, stock control cards or bin
cards and the stores ledger show clearly the receipts, issues and balance of all items in stock at all
times. This system facilitates planning of production and ensures that production is not interrupted
for want of materials and stores.
Continuous Stock taking means physical verification of stores items on a continuous basis to reveal
the position of actual balances. Such a verification is conducted round the year, thus covering each
item of store twice or thrice. Any discrepancies, irregularities or shortages brought to the notice, as
a result of continuous stock verification are reported to the appropriate authorities for initiating
necessary rectification measures. This system works as a moral check as stores staff and acts as a
deterrent to dishonesty.
A perpetual inventory system is usually supported by a programme of continuous stock taking.
That is continuous stock taking is complementary to the perpetual inventory system. Sometimes
the two terms are considered synonymous but it is not so. The success of the perpetual inventory
system depends upon the maintenance and upto date writing up of (i) the stores ledger and (ii)
bincards/stock control cards, Continuous stock taking, ensures the veracity of figures shown by the
above records.
6b)Answer
These costs are the costs of resources already acquired which will be unaffected by choices
between various alternatives. These are historical costs, which are incurred in the past and not
relevant to the particular decision making problem, being considered. While considering the
replacement of plant, the depreciated book value of the old asset is irrelevant as the amount is a
sunk cost, which is to be written off at the time of replacement. Another example of Sunk cost
is that of development cost already incurred..
6c)Answer
(i) Price Fixation: The need for fixation of retention price in case of materials of national
importance like steel, cement, salt, sugar etc. may cause a necessity for cost audit.
(ii) Cost variation within an industry: Cost audit may be necessary to find the reasons for such
differences within the same industry.
(iii)Inefficient Management- Where a factory is run inefficiently and uneconomically, cost
auditmay be warranted to save the organisation.
(iv) Tax assessment- where a duty or tax is levied on products based on cost of production, the
levying authorities may ask for cost audit to determine the correct cost of production.
6d)Answer
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It is defined as the refinement of process costing. It is concerned with the determination of the cost of
each operation rather than the process. In those industries where a process consists of distinct
operations, the method of costing applied or used is called operation costing. Operation costing offers
better scope for control. It facilitate the computation of unit operation cost at the end of each operation
by dividing the total operation cost by total input units. It is the category of the basic costing method,
applicable, where standardized goods or services result from a sequence of repetitive and more or less
continuous operations, or processes to which costs are charged before being averaged over the units
produced during the period. The two costing methods included under this head are process costing and
service costing.
Business Communication
Suggested Answer
Roll No……………. Maximum Marks – 50
Time Allowed – 1.5 Hours
All questions are compulsory.

Section -'A'
1. Read the following case carefully and answer the questions given below:
Amit Amatya, a PhD scholar in International Business Communication is requested
by a reputed multinational company for preparing and presenting a paper in their
annual celebration on 'promoting intercultural communication in the diverse
workplace'. The administration director of the company has also informed Mr
Amatya that conflicts usually arise in their workplace without any apparent reason.
According to the director, no significant attention was paid towards communication
aspect in the beginning, but they have come to realize now that the main cause of the
usual conflicts in the operational level is lack of proper communication among the
staff, who represent different cultural and national backgrounds.
Mr Amatya is provided with the required data, and is requested to suggest some
important strategies through the presented paper to promote intercultural
communication in the company. From a preliminary survey Mr Amatya has found
that the company has more than one hundred employees having at least twelve
nationalities. He is now expecting to learn more about the codes they use while they
are in work and the approach they take while they make decisions.
Questions:
a) Mr Amatya is expecting to learn from the company administration more about
the codes the staff use while they are in work and the approach they take while
they make decisions. Now, write an e-mail on behalf of Mr Amatya to the
administration director asking about the information that he is expecting to learn.
b) In this specific context, what strategies of intercultural communication do you
think will be involved and discussed in the presentation of Mr Amayta?
c) Do you believe that conflicts arise in the workplace due to the lack of proper
communication? What can be done to overcome such conflicts?
Answer:
a)
From: [email protected]
To: [email protected]
Sub: general information
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Dear Mr. Agrawal,

I received what you wrote about the current situation of your diverse workforce.
I'm working on the same paper that I'm asked to present at the annual ceremony.
I'd be much pleased if you sent me some information about the variety of code
you and your staffs use during work, and about the approach you adopt while
making important decisions. Please, make it clear whether you use multiple
languages, or international codes, or any others. Similarly, please also mention
whether you involve your staff in the important in-house decisions or not. If you
do so, which approach do you adopt?
Regards,
Amit Amatya
b) The researches have pointed out that intercultural communication in the diverse
workplace can be managed as an organizational asset with some specific
efforts and strategies. In order to reduce the misunderstandings caused by work
place diversity, cross cultural communication networks need to be established.
The followings are some of the important strategies that can be adopted for the
management of the cultural diversity in a workplace, and that can be involved
and discussed in the presentation:
 Promoting cross-cultural relationship between/among people of diverse
cultures working in diverse work situation, each respecting each other‘s
cultural norms and values,
 Changing traditional cultural perceptions incompatible with the changing
needs of today with the help of frequent meetings and training programs,
 Allowing different languages for official work. Cultures of even minorities
need to be acknowledged,
 Conducting seminars, workshops, etc. to familiarize people with each other,
 Building cohesive multi-cultural work teams, and
 Creating a corporate culture that can accommodate diversity to maximize the
potential of the workforce.
c) Obviously, conflicts arise in the workplace due to the lack of proper

communication systems and channels in an organization. Communication is one
of many causes of conflict in a workplace. In the multicultural context as in the
given case, lack of proper communication may create very serious
misunderstandings and conflicts among the co-workers. However, conflicts can
be managed with the help of appropriate skills and strategies. Firstly,
intercultural communication should be made easy and effective in the diverse
workplace. Similarly, people need to be trained not only about verbal
communication tools but also about nonverbal and paralinguistic ones.
Additionally, values, beliefs and practices of each culture should be equally
acknowledged in order to overcome such conflicts. International code can also be
much useful. Stories, songs, videos, etc. can be exposed to the people so that
they can understand each other‘s cultures, values and practices.
2. Your friend is going for an interview. What suggestions will you give him / her for
better performance?
Answer:
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The following are few tips that would help him give a better performance in an
interview: (Examinees may write any ten of the following points, or any other
significant points.)
 Be well prepared.
 Brush up your subject and general knowledge.
 Memorize your resume.
 Know about the company.
 Dress appropriately.
 Be smart, clean, and well groomed.
 Carry a briefcase or neat folder containing all relevant papers.
 Show up 10 – 15 minutes early. In case you feel you may get delayed, callup and
inform.
 When you meet your interviewer(s), shake their hands confidently.
 Stay calm, don not fidget or twiddle your thumb.
 Be polite.
 Never chew gum or smoke during the interview.
 Be yourself, be honest.
 Show a real interest in the job.
 Be aware of all the answering techniques.
 Do not answer a question you did not understand; ask for clarification first.
 Speak clearly using positive words/phrases such as enjoy, enthusiastic,positive
attitude, excellence, striving to be my best, etc.
 Appropriately use the top five: non‐verbal eye contact, facial expression,posture,
gestures, and space.
 In the end, restate your interest in the job.
 Smile and say ‗thank you‘.
 Tell them how you look forward to seeing them again.
 Shake hands firmly.
 Tell them how much you enjoyed the interview.
3. What are the important points to remember while writing for an international audience?
Answer:
Start and finish with courtesy - In many cultures, building a good relationship is
more important than any other part of business communication. So be polite and
courteous, especially in openings and closings.
Use short, one-idea sentences - You‘re less likely to create a grammatically
confusing sentence if it‘s short and has only one idea in it.
Beware of using metaphors - People who speak little English often take metaphors
literally and get confused. Avoid writing ‗The market in your area has a lot of low-
hanging fruit‘ or ‗We‘ve been doing some blue-sky thinking‘.
Prefer one precise word over a few short ones - Prefer one precise word, such as
‗meet‘, over two short words, such as ‗run into‘. Those combinations of small words
are difficult for international readers to understand, especially if they take each of the
two words literally. ‗The problem should blow over in a week‘ might confuse
someone (‗Is it windy?‘); whereas ‗The problem should pass in a week‘ will work
better.
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Avoid double negatives - In some languages, a double negative is a very strong ‗no‘.
If you write ‗The visit was not unproductive‘, your reader might think the visit was a
disaster.
Avoid humor - What our culture finds funny could easily be offensive in another
culture. Also, remember that puns usually mean nothing to someone who is
unfamiliar with English.
Use one word to name one thing - Pick one word to name something, and stick with
it. For example, if you say ‗report‘, don‘t add in ‗paper‘, ‗research‘, or ‗document‘
for elegant variation. You‘ll only confuse your reader.
Write in proper nouns rather than ‗she‘ or ‗her‘ - Use names more than pronouns.
Write ‗Please give the report to Shyam, not ‗Please give it to him‘. An international
reader could have trouble working out what ‗it‘ refers to and who ‗him‘ is.
Write dates in full - Write dates in full to avoid confusion, for example, write 6
February 2011, not 06/02/11 or 02/06/11.
4. Major strategies for organizing information in the analytical reports commonly
include focusing on conclusions, focusing on recommendations, and focusing on
logical arguments. Critically examine the relevance of each of these organizational
strategies of analytical reports.
Answer:
Three Major strategies for organizing information in analytical reports are (1)
focusing on conclusions (2) focusing on recommendations and (3) focusing on
arguments. When one is writing an analytical report for those audiences who are
receptive in nature, information can be organized focusing on writer's conclusions
and judgments based on experience and research. The audiences are likely to trust
such judgments or conclusions, and may agree with the writer. The report can be
structured around those conclusions and findings, using a direct approach. However,
focusing directly on conclusions does have potential drawbacks. It may make
everything the writer says seem too simple and personified. The audiences can have
reservations about the writer's conclusions.
When the analytical report is more concerned to what ought to be done in a

particular situation than to what is existing, the report can be structured focusing on
recommendations. According to this approach recommendations will be unfolded
directly by following different steps of analysis and different modes of conclusions.
The report writer needs to be much sensible of whether the recommendations would
invite any risk in the business in future. Reports can be organized focusing on
arguments, too. Instead of drawing clear conclusions and recommendations the
report may also present certain logical analysis of specific situations along with
many different alternative ideas, solutions or options. More scientific approach is
adopted in such type of organization strategy. When the report aims at collaborative
and persuasive issues, the focusing on arguments approach would be more suitable.
However, this strategy may create certain confusions among the options. So, it seems
better if the writer gives specification for each argument or option in the report.
5. Briefly explain any FOUR of the following:
a) Internal- operational communication
b) Conflict and its possible benefits
c) Proxemics
d) Group communication
e) Executive summary
Answer:
a) Internal-operational communication is a structured communication that takes
place within an organization that directly relates to achieving the organization‘s
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work goal. It is built into organizations plan of operation. Most of the company
information might have been stored in central database such as organization‘s
MIS from where all employees may access the necessary information.
For example, a supervisor makes some decisions regarding the daily operations
which have to be passed to the employees. The information may be sent in the
form of letter, email, memo, and so on. When such information is transmitted to
the employees, it can be an instance of internal-operational communication.
b) Conflict is a familiar phenomenon. When interests clash, the result is conflict.

According to a survey, mangers are likely to spend about 20 percent of their time
dealing with conflict. In traditional organizational structure, conflict is more
common. In democratic or participatory style of management, it does not arise
much.
Though people often take conflict as negative, sometimes it may bring positive
outcomes. If managed properly, conflict may be turned into opportunity. Conflict
is considered a fuel for change. It helps us realize our lacking. It may also foster
creativity helping us think out of the box. It may also create a pressure for higher
quality decision making. As we all know smooth sea does not make a skilled
mariner, conflict, if handled properly, may produce desired outcome in an
organization. Poor communication, incompatible goals, different interests, lack
of resources, struggle over values etc. may cause conflict. If we recognize the
real cause behind conflict, we may be able to develop better relations.
c) Proxemics is the study of our use of personal space. This nonverbal language
may differ from culture to culture but it has a great significance. Edward Hall
says ―Cultures differ substantially in their use of personal space.‖
Distance Description Voice
Intimate Touching to 18 Inches Private situation with whisper

people who are
emotionally Close.
Personal 18 inches to 4 Feet Handshake Distance. Soft voice
Social 4 to 12 feet Distance between Full voice

customers and people.
Public 12 feet Teacher in a classroom. voice
d) Group communication is an interchange by participants in an activity. It involves

exchange of ideas, feelings, emotions, data and all forms of information, which
are mutually understood by all participants,
Group communication is interactive in nature; hence it elicits a constant feedback
process among members by way of seeking and receiving clarifications among
them.
It enables all uncertainties to be removed from the subject of communication and
it unifies the group members making them cohesive and in agreement with one
another.
e) Typically, an executive summary will

 be possibly 5-10% or so of the length of the main report
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 be written in language appropriate for the target audience
 consist of short and concise paragraphs
 start with a summary
 be written in the same order as the main report
 only include material present in the main report
 make recommendations
 provide a justification
 have a conclusion
 be able to be read separately from the main report
 sometimes summarize more than one document
Marketing
Suggested Answer
Roll No……………. Maximum Marks – 50
Time Allowed – 1.5 Hours
All questions are compulsory.

Section -'B'
6. Read the following case and answer the questions given below:
‘Holiday at home’: Managing a media campaign
Because of the strong Australian dollar and the growing number of low-cost airlines, more and
more Australians were flying to Asia for their holidays. To encourage Australians to ‗holiday at
home‘, a large advertising budget was given to the Department of Tourism. The marketing
manager, wanting get the campaign running quickly, split the department into teams-one team
for television, another for radio, a third for print media, a fourth for online advertisements and a
final group for outdoor. At the end of two weeks, the groups were asked to present their
proposals. Each team had come up with different ideas but none fitted within the allocated
budget. The manager looked over the plans and had no idea what to do but they were so
different that it was impossible to fairly compare one against another—and integrating the
campaigns into a whole looked impossible. The Marketing Manager had no choice but to set the
proposals aside and start again, looking at the campaign as a whole. Trying to rush things and
failure to take an integrated approach had ended up delaying the progress instead of making it
easier.
a) On the basis of above case, analyze the objective of the media campaign?
b) Was the step taken by marketing manager correct? Give your opinion.
Answer 6(A)
The main objective of the media campaign should be to encourage the Australians to spend their
holidays in their own country. As mentioned in the above case, more and more Australians
were flying to Asia for their holidays because of the strong Australian dollar and growing
number of low-cost airlines. Strong Australian dollar indicates strong economic condition or
purchasing power of the Australians and low-cost airlines definitely motivates them to visit
Asia which indicates challenges to Department of tourism. Thus, to discourage them to visit
outside Australia and to enjoy the increasing purchasing power of Australians, because of the
strong Australian dollar, it was inevitable to retain them within the country. So, the objective of
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the media campaign should be promoting domestic tourism i.e. encouraging Australians to
spend their holidays in their own country.
Answer 6(B)
The step taken by marketing manager was not correct. For quick campaign, marketing manager
has divided the department into various teams on the basis of media. But the fact is, each
medium has its own merits and demerits. If each team works separately, idea generated for one
medium cannot work for other media. There is also possibility of conflicts among the teams for
resources and implementation of their own ideas. So, marketing manager must focus on
integrated marketing communication for better coordination and effective utilization of
resources. They must follow steps of developing effective communication i.e. identifying target
audience, determining communication objectives, designing message, allocating budget and
only selection of media. Mere selection of media and creation of ideas by different team
independently is not appropriate for effective promotion.
7.
a) Discuss the meaning of marketing mix and its role in marketing decision
making.
b) Show your acquaintance with the term marketing environment? Describe the
demographic environments of marketing in Nepalese context.
Answer 7(A)
Marketing mix is the combination of the four major components that comprise a
company's marketing program. Marketing mix is the core of marketing program.
Marketing mix includes major components and supporting components. Major
components include product, price, promotion, and place; while supporting
components include process, people and physical evidence.
The main role of marketing mix in marketing decision making includes –
i. Help identifying the right product to the customers that can satisfy the expected
needs and expectations of the target customers;
ii. Help setting the best price for the product that can be affordable and acceptable
to the target customers;
iii. Help communicating the target customers about the products through the right
promotion tools such as advertising, publicity, sales promotion, personnel
selling, and public relations;
iv. Help distributing goods to the right place where the target customers want to buy
the products;
v. Help providing the required services at right time;
vi. Help developing relation with the customers so that the customers can deal with
the marketer friendly without any hesitation;
vii. Help maintaining the internal environment of the organization in an attractive
way so that it can motivate the customers in visiting the office premises
repeatedly and buy goods from the organization;
Answer 7(B)
A company‘s marketing environment consists of all the factors and forces outside marketing
that affect marketing management‘s ability to build and maintain successful relationships with
target customers. Successful companies know the vital importance of constantly watching and
adapting to the changing environment. As we move into the twenty-first century, both the
customers and marketers wonder what the future will bring. The environment continues to
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change rapidly. More than any other group in the company, marketer must be trend trackers and
opportunity seekers.
According to Professor Philip Kotler, ―marketing environment comprises all the actors and
forces outside marketing that affect marketing management‘s ability to develop and maintain
successful transactions with its target customers.‖
The marketing environment surrounds and impacts upon the organization. There are two key
perspectives on the marketing environment, namely the macro environment and the micro
environment.
Demography is the study of human population in terms of size, density, location, age, gender,
race, occupation, and other statistics. The demographic environment is of major interest to
marketers because it involves people and people make up markets.
The world population is growing at an explosive rate. It now totals more than 6.3 billion and
will exceed 8.2 billion by the year 2030. The world‘s large and highly diverse population poses
both opportunities and challenges.
The explosive world population growth has major implications for business. A growing
population means growing human needs to satisfy. Depending on purchasing power, it may also
mean growing market opportunities. Thus marketers keep close track of demographic trends
and developments in their markets, both at home and abroad. They track changing age and
family structures, geographic population shifts, educational characteristics and population
diversity
Demographic environment is one of the major forces of Nepalese marketing environment which
includes size, growth and distribution of population, age mix, urbanization and migration.
Population limits the size of the market. According to 2011 census, total population of our
country is 264, 94, 504 showing population growth rate of 1.35 per annum. Similarly, total
number of households in the country is 54,27, 302. Of the total population, terai constitutes
50.27% and hills and mountain constitute 43% and 6.73% respectively. Among the five
development region central development region has the highest population (36.45%) and far
western development region records the lowest i.e.9.63%. According to 2011 census, population
density at national level is 180 per square kilometer. The highest population density (4416 per
square kilometer) is found in Kathmandu district and lowest in Manang district which is 3 per
square kilometer. Similarly, fastest decadal population growth rate is found in Kathmandu
district (61.23%) and least in Manang (-31.80%)
Nepal is a country of young population. Among the total population 43% belongs to under 15
years of age and working age population aged 15 to 59 years are 57% of the total population.
Rate of urbanization is very slow in our country. According to 2011 census, urban population is
45,23820 which constitutes 17% of the total population. Recently, Nepal Government has
declared new municipalities. Number of municipalities in the country has reached 199.
Migration is the worldwide trend and Nepal is not the exception. The migration of Nepalese
people mountains and hills to terai and rural to suburban and urban area is increasing day by
day. Migration of Nepalese youth for foreign employment is also increasing. Market has shifted
with the shift in population.
8.
a) Explain the meaning and process of market segmentation.
b) Differentiate consumer buying from organizational buying
Answer 8(A)
Market segmentation is a process of dividing the total market for a good or service into several
smaller, internally homogeneous groups. It is based on customer oriented philosophy. No
marketer can satisfy the needs of all customers by developing single marketing mix. The
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essence of segmentation is that the members of each group are similar with respect to the factors
that influence demand. In segmentation, we first identify the wants of customers within a
submarket and then decide if it is practical to develop a marketing mix to satisfy those wants.
According to Philip Kotler, ―Market segmentation is the subdividing of a market into
homogeneous subsets of customers, where any subset may conceivable be selected as a market
target to be reached with a distinct marketing mix.‖
Market segmentation is a systematic process which can be explained as follows:
i. Market survey: Without better information, market segmentation is not possible. Market
survey is conducted to obtain better information about the market characteristics. In
market survey information such as customers‘ need, taste, preferences, product usage
rate and pattern, demand size, loyalty status, brand awareness etc are collected.
ii. Segment identification: After market survey, collected information are analyzed by
using mathematical and statistical tools. Factors affecting market demand are classified
into major and minor factors. Homogeneous groups of customers are clustered to
identify market segments.
iii. Segment profiling: Appropriate variables for segmentation are identified. Variables may
be demographic, geographic, psychographic or behavioral variables. Operating variables
and purchase related variables can also be used for industrial market segmentation.
Each identified segment is profiled in terms of similarities and dissimilarities in the
market demand and consumer characteristics. At the end of this stage, the decision
makers have various alternative market segments.
iv. Segment selection: After the careful evaluation, company will select one or more
segments as per their marketing strategy. Selected segment is considered as target
market. While evaluating and selecting, firms should consider segment attractiveness,
desired market coverage, organizational objectives and resources, government rules and
regulation etc.
Answer 8(B)
There are certain fundamental differences between consumer buying and organizational buying,
they are as follow:
i. In case of consumer buying, demand is created from insight of the individual‘s mind,
while demand is derived for organisational buying.
ii. Demand for consumer products is elastic, while demand for business products is
inelastic i.e., there is very little change in demand in response to price change.
iii. Demand in consumer buying is less fluctuating while demand is widely fluctuating for
organisational buying.
iv. Consumer buying is not regulated by law. The individual customers can buy goods
whenever required. In case of organizational buying, it is a regulatory purchase i.e.,
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organizations buy goods according to the government and organization‘s laws, rules and
regulations.
v. In case of consumer buying, consumers may be less informed about the goods; while in
case of organizational buying, buyers are well informed about what they are buying.
vi. Consumer buying decision may be frequently changing. Organizational buying decision
aims at a long-term relation with suppliers. Organizations generally do not frequently
change their suppliers.
vii. Consumer buying involves frequent purchases; while organizational buying involves
infrequent purchase. Organizations do not buy goods frequently as an individual buyer
does.
9.
a) Describe the meaning of branding and the reasons for branding a product.
b) What is advertising? Explain the main features of advertising.
Answer 9(A)
Branding is a process of determining and using a brand name or a legal term to the newly
manufactured product that help identifying and differentiating product in the market; it also
helps protecting the interesting of the manufacturer against duplication or brand piracy in the
market. Branding may involve not only the name or legal term; it also involves special design,
colors, symbol, or the combination of all these elements.
Most manufacturers or marketers do branding their products for the following reasons _
 To differentiate a firm's products from those of competitors;
 To make convenience in shopping;
 Brands refer the prestige of the manufacturers, sellers; and also give prestige to the
consumers when they use popular brands;
 To legally protect the company;
 To identify the exact market for their products;
 To assure regular satisfaction to the customers;
 To symbolize as a quality product;
 To reduce price comparisons.
Answer 9(B)
Advertising is any paid form of non-personal communication, usually delivered through mass
media or tools by an identified sponsor. It involves a variety of media including radio,
television, newspapers, magazines, motion pictures, brochures and booklets, posters and
leaflets, audio-visual materials, symbols and logos, directories, etc.
The distinct features of advertising include –
i. It is a Mass Communication
ii. It is Informative in Action
iii. It is a Persuasive Act
iv. It is a Competitive Act
v. It is a Paid Form of Communication
vi. It has an Identified Sponsor
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vii. It is Non-personal Presentation
10. Briefly explain the following:

a) Meaning of distribution
b) Relationship marketing
c) Innovative product.
d) Economic factors affecting the consumer buying decision.
e) Psychological pricing
Answer 10(A)
Distribution includes all the various activities the company undertakes to make the product
accessible and available to target customers. It involves the marketing channel and physical
distribution. Marketing channel makes the product available to the customers. Physical
distribution makes the product accessible to the channel members and customers. Distribution is
also called the ―the other half of marketing.‖ It fulfills the gap between the producer and
consumer
Answer 10(B)
Relationship marketing is one of the emerging concept of modern marketing. Relationship
marketing is building long term mutually satisfying relations with customers in order to earn
and retain their long term loyalty. In relationship marketing, customer is regarded as a partner in
creating value. Relationship marketing is a long term partnership between marketer and
customer. Both parties collaborate on identifying needs and designing marketing mix for
customer satisfaction and organizational goal achievement.
Answer 10(C)
Today's business firms should develop and offer new product to retain in the hyper competitive
market. New product may be in the form of modified product, improved product and innovative
product. Innovative products are those products which are developed and introduced in the
market for the first time, not previously sold by any firm. Development of innovative products
involves high costs, risks, efforts and time required for profitability of the company.
Answer 10(D)
Economic factors affecting the buying decision of the buyer includes –
i. Level of Personal Income
ii. Income of Other Members of the Family
iii. Expectation of Income in Future
iv. Availability of Liquid Assets
v. Availability of Credit Facility to the Consumer
vi. Past-Expenditure Habits
Answer 10(E)
Psychological pricing is one of the popular pricing strategy which encourages emotional buying.
It influence buyers to perceive the price favorably. Psychological pricing includes prestige
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pricing, odd-even pricing, psychological discounting, customary pricing and promotional
pricing. 99 pricing is one of the example of psychological pricing.
Income Tax & VAT

Suggested

Marks
Attempt all questions. Working note should form part of the answer.
2.
a) Mrs. Indira Dahal was retired on 1st Magh, 2071 after completing 22 years of
private banking service from Kathmandu. She submits the following details with
respect to her employment for the Income Year 2071/72.
i) Monthly salary Rs. 35,000

ii) Two months' salary is provided for dress and festival, one month for each.
iii) She has obtained overtime allowance of Rs. 20,000
iv) The bank deducts 10 % from her salary and contributes 20 % of her salary to
an approved retirement fund.
v) She has car facility from the office for all purpose. Expenses Rs. 1,000 per
month and salary of the driver of Rs. 12,000 per month were paid by the
bank.
vi) Compensation received as per Employee Rule Rs. 100,000
vii) Insurance premium paid by Employer on her behalf, Rs. 25,000 that include
Rs. 12,000 for her policy and Rs. 13,000 for her son's policy.
viii) The bank makes payment equivalent one month salary to the employees
who work for full 12 months during the years.
ix) The bank has provided her with accommodation facility on leased house for
which 2 % of salary was deducted. Actual rent paid by the bank was Rs.
35,000 per year.
x) On the retirement, she has entitled to receive gratuity amount equivalent to
one month salary for each year services.
xi) The company paid bonus to her equivalent to two month's salary related to
the Income Year 2071/72 on 20th Aswin 2072.
She has only income from this employment and opted for single. You are
required to assess income from employment and her tax liability. 10
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Solution
Calculation of Assessable Income and Net tax liability of Mrs. Indira for FY
2071/72.
Particulars Notes Amount in Rs.
Salary (35,000 x 6)
210,000
Festival allowance
35,000
Dress allowance
35,000
Overtime allowance
20,000
Contribution to Provident Fund (PF)
21,000
Vehicle facility (0.5 % of 210,000) 1
1,050
Compensation
100,000
Insurance Premium 2
25,000
One months' salary (note entitled as she has worked
-
only for 6 months
Accommodation facility (2% of 210,000) 3
4,200
Bonus not related to this income year 4 -
Assessable Income 451,250
Less:
Deductible Amount against contribution to PF , lower
(42,000)
of
i) Actual Contribution
42,000
ii) 1/3rd of Assessable Income
150,417
iii) Maximum Limit 3,00,000
Taxable Income 409,250
Deduction against Insurance premium lower of :-
(12,000)
i) Actual payment
12,000
ii) Maximum Limit
20,000
Calculation of Tax Liability
Up to Rs. 250,000 @1%
2,500
Next Rs. 100,000 @, 15%
15,000
Balance (Rs. 47,250 @ 25%)
11,813
Total Tax Liability 29,313
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Less: 10% tax credit for women having income from employment
only when opted as an individual 2,931
Net tax liability 26,381
Total Gratuity for 22 Years
770,000
Less: Gratuity Till Chaitra 19, 2058 exempt from tax
(315,000)
Taxable Gratuity
455,000
TDS Rate when paid by employer 15%
Tax Liability on Gratuity 68,250
Total Tax Liability for Mrs. Indira Dahal 94,631
Notes:
1. Car expense and driver's salary is not taxable income.
2. Premium paid by the bank is a taxable income and deduction only is allowed to the tax payer, and
her son is not the tax payer natural person.
3. Rent paid by the bank and deduction from salary are irrelevant for assessment of her income, only
2 % of salary is considered as a perquisite as per the income tax act.
4. Bonus is taxable in FY 2072/73 and not in 2071/72.
b) An accounting firm owned by Amber Poudel maintains its books of account on

cash basis. Mr. Poudel submitted his financial information for the financial year
2071-72 as follows:
Receipts Amount in Payments Amount in

(Rs.) (Rs.)
To, Opening cash/bank By, office expenses 75,000
balance. 60,000
To, Consultancy fees-gross 648,000 By, salary to staff 425,000
To, Book writing fee 1,700,000 By, Life Insurance policy
26,000
To, Bank Loan @ 10 % 600,000 By, Purchase of furniture
90,000
To, Sale of old journals 12,000 By, Office Rent 500,000
To, Lottery prize 150,000 By, Interest Exp. 60,000
To, Paper checking from 200,000 By, Water & Electricity
T.U. Expenses
125,000
To. Part time lecture 135,000 By, Purchase of journals
4,000
By, Transportation Expenses
100,000
By, Closing cash/bank bal.
2100,000
3,505,000 3,505,000
Additional information:
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i) Salary expenses include salary paid to a staff for last three years amounted to
Rs. 125,000 and advance salary given to another staff amounted to Rs.
25,000.
ii) Opening WDV of furniture was Rs. 170,000 and during the year additional
furniture was purchase during the end of Jestha, 2072.
iii) Consultancy fee received includes advance from Paban Limited Rs. 125,000.
iv) Office Rent paid includes payments for financial 2072-73, 2073-74 & 2074-
75
v) Fifty percent of loan used for personal purpose by Mr. Poudel.
Required: (5+5=10)
Compute the taxable income and tax liability of accounting firm owned Mr.
Poudel for the financial year 2071-72.
Solution
b) Computation of taxable income of Mr. Poudel for the financial year 2071-72:
Particulars Amount in Rs.

A. Inclusive taxable Income:
1. Consultancy fees 648,000
2. Book writing fee 1,700,000
3. Sale of old journals 12,000
4. Paper checking from TU 200,000
Total Taxable Receipt (A)
2,560,000
Less: Allowable deduction
office expenses 75,000
salary to staff - (Allowed on cash basis) 425,000
Office Rent- (Allowed on cash basis) 500,000
Interest Exp. (50% only) 30,000
Water & Electricity Exp 125,000
Purchase of journals 4,000
Transportation Exp 100,000
Depreciation (Rs. 170,000+1/3 of Rs.
50,000
90,000) x 25 %
Total Expense (B)
1,309,000
Total Assessable income from
Business/Prof.(A-B) 1,251,000
Add: Income from employment
135,000
Total Assessable income
1,386,000
Less: Life Insurance premium Max. 20,000
(20,000)
Taxable Income
1,366,000
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Total taxable income

1,366,000
Tax on first 300,000 @ 0 % -
Next Rs. 100,000 @ 15 % 15,000
Balance Rs. 831,000 @ 25 % 241,500
Total Tax liability
256,500
Notes
1. It is assumed that lottery prize is paid by resident and so it is final withholding tax as winfall gain
2. Part time lecture is considered as regular income and included in calculation and as it is not
“patake.”
2.
a) Mr. Pravan has got retirement on Ashadh end, 2072 from government service
after completing 12 years. The approved and unapproved retirement fund has
providing 10 percent interest rate on its contribution. The interest is providing
monthly basis.
He has received statements from these funds, that statements show the following
balances as on first Shrawan, 2072.
Approved fund: 1,500,000 including total interest of Rs. 300,000
Unapproved fund: Rs. 800,000 including total interest of Rs. 150,000
He came with you for the payment of the balance amount on 30th Ashoj, 2072.
Assume you are the finance officer; calculate the TDS on these payments and
mention why have you deducted the TDS? 5
b) Smriti works in a private school at monthly salary of Rs. 30,000 for financial
year 2072/73. She is paid Dashain allowance of Rs. 20,000. Her contribution to
approved retirement fund is Rs. 40,000 per annum. She has already paid medical
insurance of Rs. 25,000 and life insurance premium of Rs. 15,000 for the year.
She incurs Rs. 3,000 for purpose of transportation to and fro school from her
residence, and also pays Rs. 5,000 for baby care of her young child so that she
could work in school. The school pays Rs. 6,000 school fee of her elder child per
month. Calculate the tax liability assume individual. 5
c) XYZ Pvt. Ltd. has taken the extension of time for the submission of Income Tax
Return for the Income Year 2070.71 as per section 98 of Income Tax Act, 2058
till Poush end 2071. The company submitted the Income Tax Return on Magh
09, 2071 instead of Poush end. The amount to be included in income, as per
section 7, was Rs. 5 million and the deductible expense was Rs. 4 million. Since
the company has taken the extension till Poush end there is delay of nine days
only and the amount of fees to be paid under Section 117(1) (ga) is for nine days
only and shall be on the basis of net income i.e. on Rs. 1 million. Comment on
the claim of the company referring the provisions of the Act. 5
d) Mr. Ram had purchased land and private building on 2065.07.04 for Rs. 2.8
million. He sold such property for Rs. 5.2 million on 2071.08.15. Answer the
followings mentioning the relevant provisions of Income Tax Act/Rules. 5
i) Calculate capital gain and tax thereon. Can Ram claim such tax as advance
tax?
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ii) What shall be your answer if such property was purchased on 2060.04.15 and
Mr. Ram has been residing continuously?
iii) Will your answer be different if such property was purchased on 2069.04.15
and sold for Rs. 2.9 million?
Answer a) As per section 65 of Income Tax Act, 2058, in case lump sum payment from approved
retirement fund, 50 % or Rs. 5 lakhs whichever is higher shall be deducted from the
retirement payments, the remaining amount shall be treated as the profit made by the person
from the disposal of his non-business taxable property. Further, as per section 88(1), 5 %
TDS shall be deducted from the payment from approved fund.
In case of payment from unapproved retirement fund, 5 % TDS shall be applicable on the
gain of contributed amount as per section 88(2).
Calculation of TDS
Particulars Approved fund Unapproved Fund Rs.

Rs.
Balance as on 1st Shrawan 1,500,000 8,00,000
Interest Shrawan to Ashoj @10 % 0 0
Total amount 1,500,000 0

Less deduction 50 % 750,000 0
Taxable Amount 750,000 150,000 (total interest,
i.e. gain)
TDS @ 5 % 37,500.00 7,500
Note: As Mr. Pravan got retirement on Ashadh end, 2072, interest is calculated till Ashadh end only.
b)
Calculation of Tax Liability of Smriti
Particulars Amount in Rs Notes
Annual Salary 360,000

Payment of Tution Fee by School 72,000
Dashain Allowance 20,000
Total Assessable Income 452,000
Less Contribution to Approved Retirement
(40,000) Note 1
Fund
Less: Deduction for Medical Insurance (20,000) Note 2
Less: Deduction for Life Insurance (15,000) Note 2
Taxable Income for tax calculation 377,000
1st Rs. 250000 1% 2,500
Next Rs. 100,000 15% 15,000
Balance on Rs. 27,000 25% 6,750
Total Tax Liability 24,250
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Less 10% Tax Credit (2,425) Note 3
Net Tax Liability 21,825
Notes
1. Contribution to Approved Retirement Fund is deductible up to 1/3rd of Assessable Income or Rs.
300,000 or Actual Contribution whichever is lower.
2. Medical insurance premium paid by a natural person is deductible up to Rs. 20,000 from FY
2072/73. Life Insurance premium is available for deduction up to Rs. 20,000.
3. Female employees are entitled to 10% tax credit if they only have remuneration income and opt as
individual.
c)
In case a person fails to submit Income Tax Return as per Section 96(1), the fees shall be
charged as follows;
i. In case the person falls under the category as specified under Section 4(4), the fees shall be Rs.
100 per month of delay.
ii. For other tax payers, the fees shall be higher of 0.1% of the 'assessable income' or Rs. 100 per
month of delay. The word 'assessable income' means the income derived after the inclusion of
all the amount to be included in income and before any allowed deduction.
A part of a month shall be treated as delay of one month for this section.
Particulars Amount (Rs)

Amount to be included in Income is Rs. 5 million
Amount that can be allowed as deduction Rs. NIL
For the purpose of section 117(1)(ga) assessable income Rs. 5 million
Period of fees to be charged (Kartik to Magh) 4 months
Fees as per Section 117(1)(ga) [Rs. 5 million ×0.1%/12×4) Rs. 1,667
Note: If the Income Tax Return was submitted within the extended time, the fees under Section
117(1)(ga) would not have been charged. But if it is not submitted with in the extended time the amount
of fees under Section 117(1)(ga) shall have to be charged after three months from the end of Income
Year.(i.e. from the date upto which statutory time limit is provided by the Act.)
Hence, the contention of the company is incorrect.
d)
Section 2(da) and 95ka(3) of Income Tax Act, 2058 provides the following provisions.
Section 95ka(3)
In case any natural person disposes land and private building, the gain on such disposal is subject to
advance tax and Land Revenue Office (Malpot Karyalaya) shall have to collect such tax at the time
of registration as follows;
(ka) In case of disposal of non-business chargeable asset (land and building) owned for five years or
more at the rate of 2.5%.
(kha) In case of disposal of non-business chargeable asset (land and building) owned for less than five
years at the rate of 5%.
Section 2(da)(2)
'Non-business chargeable asset' means asset other than following land and building;
In case of natural person,
- if the owner of the private building has owned the building continuously for a period of
10 years or more; and
- he has resided in the building for a period of 10 years or more continuously or
intermittently.
Section 2(da)(4)
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'Non-business chargeable asset' means asset other than following land and building;
In case of natural person, if the disposal of land, land and building and private building is for
less than Rs. 3 million.
Accordingly,
i. The Capital Gain of Rs. (5.2 million - 2.8million) = Rs. 2.4 million is subject to advance tax at
the rate of 2.5% i.e. Rs. 60,000 which shall be collected by Land Revenue Office (Malpot
Karyalaya) at the time of registration and the amount of Rs. 60,000 can be claimed as advance
tax while submitting Income Tax Return by Mr. Ram.
ii. The property shall not be considered as non-business chargeable asset under Section 2(da)(2)
and hence, no capital gain tax is charged on such transfer.
iii. The property shall not be considered as non-business chargeable asset under Section 2(da)(4)
and hence, no capital gain tax is charged on such transfer.
3.
State whether following statements are true or false with appropriate provision of
Income Tax Act, 2058: (5×2=10)
a) Progressive Income Tax rate is only applicable to entire income of resident

natural person.
b) If tax-exempt entities are unable to submit their financial statement within the
stipulated time limit, fee of 0.1% per annum on income shall be levied.
c) TDS applicable on payment of vehicle hired by resident person to vehicle
provider registered in VAT is 1.5%.
d) Tax exemption has been increased for annual interest income up to of Rs. 25,000
from Rs. 10,000 in the amount deposited to the microcredit institutions, rural
development banks, postal saving bank, and cooperatives in the rural area.
e) Finance Act, 2072 has introduced mandatory requirement to submit income
returns for the natural person with yearly income exceeding Rs. 4 million.
Answer
a) True, progressive income tax rate is applicable to income of resident natural
person. However, there are certain income of individual natural person which are
based on presumptive basis.
b) True, as per section 117 (1Gha), If tax-exempt entities are unable to submit their
financial statement within the stipulated time limit, fee of 0.1% per annum on
income as specified on financial statement without any deduction submitted to
IRD shall be levied.
c) True, as per section 88(5), TDS applicable on payment of vehicle hire by resident
person to vehicle provider registered in VAT is 1.5%.
d) True, as per section 11 (2 ka), Tax exemption has been increased for annual
interest income up to Rs 25,000 from Rs. 10,000 in the amount deposited to the
microcredit institutions, rural development banks, postal saving bank, and
cooperatives in the rural area
e) True, as per section 97 (2), finance Act 2072 has introduced mandatory
requirement to submit income returns for the natural person with yearly income
exceeding Rs 4 million.
4.
Define the followings with reference to Income Tax Act, 2058: (2×5=10)
a. Permanent establishment
b. Residential status of an individual
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Answer
a) As per section 2(aab) "Permanent establishment" means a place where any person carries on a
business fully or partly, and this term includes the following place:
(1) A place where any person carries on a business fully or partly, through any agent except a general
agent who acts independently in the ordinary course of carrying on business,
(2) A place where any person's main equipment or main machinery is situated or used or installed,
(3) One or more than one place in any country where any person has delivered technical, professional
or consultancy service through an employee or in any other manner for more than ninety days at
one or several times in a period of any twelve months, or
(4) A place where any person is involved in a construction, installation or establishment project and has
carried out supervisory works of that project for a period of ninety days or more.
b) The residential status of an individual is determined as below:

 If an individual stays in Nepal for 183 days or more in a period of consecutive 365 days
 If normal place of abode is in Nepal
 If the person in an employee of Nepal Government
Normal place of abode is clarified by Income Tax Directives to mean place where economic activities
of a person is concentrated.
If the person is not resident in an income year, he is regarded as non-resident.
5.
(a)
Liza enterprise, a dealer of Toyota cars in Nepal, imported 5 cars for the Value @ US $
50,000 on 12 Jestha, 2072. The payment was made through the Maya Bank Ltd. on
exchange rate of 1 US$ = Rs. 103.60. Others information are as follows:
 Transportation cost upto Calcutta, India : @ US $ 2,000 (Payment made to
transporter @ Rs. 102.40 per US $)
 Marine insurance paid to Nepal Insurance Company Ltd. Rs. 33,900
 Transportation cost from Calcutta to Birgunj Custom Office IRs. 24,000
 Driver's salary for the transportation from Birgunj to Kathmandu @ Rs.
6,000
 Petrol cost from Birgunj to Kathmandu Rs. 9,040 with tax invoice
 The custom duty is 80 %, ignore the excise duty and other taxes, duties
 The company sells the cars adding 12 % on above cost.
 Opening VAT account: Rs. 34,000 payable and it has no opening stocks.
 The exchange rate published by Nepal Rastra bank on the day of clearing the
cars at custom: Buying rate is Rs. 102.40 per US $ and selling rate is Rs.
103.00 per US$
You are required to calculate the VAT payable/receivable on the following situations:
(Ignore Import Service Fee): (6+4=10)
i) The Enterprise has used a car for own business and sold the remaining
cars during the month.
ii) The Enterprise sold 4 cars and one remains in stock. Round up the
fraction.
(b)
M/S Prakarti Limited is a VAT registered company and registered with company
Registrar's Office in Nepal. The company is producing equal number of both vat
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exempted & vat attractive goods on each day of production. The company has following
transaction during the month of Baishakh, 2072:
Opening VAT credit Rs. 125,000
Sales:
Vat exempted sales Rs. 4,000,000
Vat attractive sales Rs. 6,000,000
The company exports 59 % of vat attractive and vat exempted sales
Purchases of raw materials Rs. 6,000,000
Other office expenses incurred Rs. 450,000
Cost of soft drinks for office party Rs. 200,000
Purchase of car Rs. 2,500,000
Purchase of two wheeler Rs. 225,000
Purchase of petrol for car & two wheeler Rs. 185,000
The given purchases & expenses are excluding applicable vat. Other office
expenses include one invoice of Rs. 100,000 pertaining to the period of Chaitra
2070.
Required: (2+3+4+1=10)
i) Compute the VAT payable on sales, VAT paid on purchase & expenses
incurred by the company and VAT credit available to the company.
ii) Compute VAT refundable if any under the provision of VAT Act, 2052.
Answer a)
i) Used a car for the business and sold 4 cars
Opening VAT Rs. 0 (Opening payable VAT paid during the month)
Output VAT for 4 cars (WN 2) Rs. 56,51,048 (14,12,762*4)
Input VAT for 4 cars (WN 1 & 2) Rs. 50,29,980 {(12,56,507+780+208)*4}
Input VAT for a car Rs. 5,02,915 {(12,56,507+780)*40%}
VAT Payable (Output-input) Rs. 1,18,153
Note
VAT credit on petrol purchase is not available for the car used in business and 40 % credit is
allowed for VAT paid on purchase of car as per Rule 41 of Value Added Tax Rules, 2053.
ii) Sold 4 cars and remains one in stock
Opening VAT Rs. 0 (Opening payable VAT paid during the month)
Output VAT for 4 cars (WN 2) Rs. 56,51,048 (14,12,72*4)
Input VAT for 5 cars (WN 1 & 2) Rs. 62,87,475 {(12,56,507+780+208)*5}
VAT receivable (Input-Output) Rs. 6,36,427
Working Notes (WN)

WN 1
Calculation of per unit VAT paid at Custom
Particulars Amount (Rs.)
Imported cost 51,50,000 (50,000*103)
Insurance 6,000 (33,900/5=6,780/1.13)
Transportation upto Calcutta 2,06,000 (2000*103)
Transportation Calcutta to custom 7,687(24,000/5= 4,800*1.6015)
Transaction value 53,69,687
Custom duty @ 80 % 42,95,750
Taxable value 96,65,437
VAT @ 13 % 12,56,507
WN 2
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Calculation of per unit cost, sales price and VAT
Particulars Amount (Rs). VAT (Rs.)
Imported cost 51,80,000 (50,000*103.60)
Insurance 6,000 (33,900/5=6,780/1.13) 780
Transportation upto Calcutta 2,06,000 (2000*103)
Transportation Calcutta to custom 7,687 (24,000/5= 4,800*1.6015)
Custom Duty and VAT (WN 1) 42,95,750 12,56,507
Driver's salary 6,000
Petrol cost 1,600 (9,040/5=1,808/1.13) 208
Total Cost 97,03,037 12,57,495
Profit addition 11,64,365 (12 % on 97,03,037)
Selling price per unit 1,08,67,402 14,12,762
b) a. (i) . Statements showing VAT payable
a. (i) VAT Payable for the month of Baishak 2072 VAT payable (Rs.)
VAT exempt
i) VAT exempted sales (Rs. 4,000,000) under Schedule-1 -
ii) VAT attractive Sales:
- VAT attractive sales-Export vat @ 0 % levied - (59 % of
Rs. 6,000,000) 3,540,000* 0 % -
- VAT attractive sales-Local vat @ 13 % levied - (41% of
Rs. 6,000,000) 2,460,000/100*13 319,800
Total VAT Payable 319,800
a. (ii) . Statements showing VAT paid on purchases & expenses incurred:
Particulars VAT Paid (Rs.)
Purchases of raw materials Rs. 6,000,000 6,000,000/100*13= 780,000 780,000
Other office expenses incurred Rs. 450,000 450,000/100*13=58,500 58,500
Cost of soft drinks for office party Rs. 200,000 200,000/100*13=26,000 26,000
Purchase of car Rs. 2,500,000 2,500,000/100*13=325,000 325,000
Purchase of two wheelers Rs. 225,000 225,000/100*13=29,250 29,250
Purchase of petrol for car & two wheelers Rs.
185,000 185000/100*13=24,050 24,050
Total VAT paid on purchases & expenses 1,242,800
a. (iii). Statement showing VAT credit available to the company:

Particulars VAT credit available (Rs.)
Opening VAT credit 125,000
Purchases of raw materials 780,000/100*.60 468,000
{(450000-100000)/100*13}
Other office expenses incurred *0.60 27,300
Cost of soft drinks for office party (No credit under Rule 41) -
Purchase of car (325,000/100*60) * 0.40 78,000
Purchase of two wheeler 29,250/100*60 17,550
Purchase of petrol for car & two wheeler (No credit under Rule -41) -
Total VAT credit available for set off 715,850
Working Notes
i. VAT paid for consumption of beverages and motor spirit as per rule-41
ii. VAT paid on four wheelers only 40 % of the taxable amount available for input Tax credit
(ITC).
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iii. VAT credit cannot be taken on invoice raised before 12 month from the date of invoice issued.
b. Statements showing VAT payable/(refundable) available to the company

Particulars Amount (Rs.)
i. Total VAT payable on sales 319,800
ii. Total VAT credit available 715,850
Net VAT payable/(Refundable) (396,050)
As per Section 24(4) of Value Added Tax Act, 2052, notwithstanding anything mentioned in sub-
section (2) or (3), a registered person whose export sale for a month is 40 percent or more of the
person‘s total sale for a month, the person may file an application for refund of excess amount that
remains after adjustment against any amount payable by the person, that is to be adjusted under section
17 following the procedures mentioned in the preceding part of this section.
Since company export sales during the month of Baishak 2072 is more than 40 % of total sales, the
company is eligible to apply for refund of Rs. 396,050 during the month of Jestha 2072.
Working Note
VAT attractive Sales x 100
Proportionate VAT attractive sales =
Total Sales
= Rs. 6,000,000 x 100
Rs. 10,000,000
= 60 %
6.
(a)
Mr. John entered to Nepal via Birgunj with his family on 1st Aswin 2072 and visited so
many places in Nepal. The detail of few expenses incurred in Nepal by Mr. John & his
family members are as follows:
ii) Amount paid to tour operator for family tour package amounted to Rs.
339,000 including Rs. 39,000 applicable VAT.
iii) Mr. John purchase one laptop costing Rs. 100,000 and paid applicable VAT
on it.
iv) Mr. John Paid to Hotel in Kathmandu for cost of lodging, foods & other
services Rs. 226,000 including Rs. 26,000 VAT.
v) Mr. John with his family visited orphanage home in Kathmandu and donated
a fridge costing Rs. 50,000 and paid applicable VAT on it.
At the time of departure from Tribhuvan International Airport, Kathmandu, Mr. John
submitted all vat invoices to the counter of IRD and Mr. John is carrying the laptop
purchased in Nepal along with all his other belongings.
Advise Mr. John how much VAT refund he will get. 5
(b)
As per the provisions of Value Added Tax Act, the tax officer has to complete the
assessment within 4 years from date of submission of VAT return. A VAT Registrant
destroyed the VAT records on expiry of above-mentioned period. On inspection, the tax
officer imposed a fine under section 29 stating the reason that the company did not
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(86)
produced the record for his inspection. The company wants to apply for administrative
review and seeks your advice in this regard. Please give your advice. 5
(c)
PQR Pvt. Ltd., a company registered under VAT and submitting the return on monthly
basis. It has submitted the tax return on Jestha 25, 2072 for the month of Baisakh 2072.
Also, the amount of tax was Rs. 100,000 and it has paid via 'Account Payee' Cheque
dated Jestha 25, 2072. The Cheque got cleared on Jestha 26, 2072. Is it considered as
payment of tax within due date as pet Act/Rules?
Will your answer be the same if the company paid via 'Account Payee' Cheque
guaranteed by bank (good for payment Cheque) and the Cheque got cleared on Jestha
27, 2072? 5
(d)
Horizon Pvt. Ltd. located at Chitawan, has following taxable sales and purchases
without VAT in 2072. Can the Pvt. Ltd. claim the refund in Kartik return? If yes, how
much?
Month Sales (Rs.) Purchase (Rs.)
Baishakh 400,000 600,000
Jestha 300,000 400,000
Ashadh 500,000 550,000
Shrawan 600,000 700,000
Bhadra 400,000 450,000
Aswin 800,000 700,000
Kartik 700,000 500,000 5
Answer
(a)
As per section 25ka, if a foreign tourist visiting Nepal and returning by air purchases taxable goods of
more than twenty five thousand rupees and takes them with him or her, the tax paid on such goods shall
be refunded in accordance with the procedures specified by the Department. But service charge of 3%
shall be deducted on such amount.
Mr. John will not get refund of VAT paid on goods & services consumed in Nepal. Accordingly, the
amounts paid to tour operator, hotel and donation of fridge to orphanage home are not eligible to get
refund.
However, Mr. John is leaving by air from internal airport and posses laptop costing more than twenty
five thousand rupees is eligible to claim refund. Mr. John had paid Rs. 13,000 VAT on purchase of
laptop, so Mr. John will get only Rs. 12,610 (i.e. Rs. 13,000 less 3% on Rs. 13,000) which is after
deducting applicable service charges of 3%.
(b)
Section 20(4) of Value Added Tax Act 2052 provides for the assessment by tax officer within the
prescribed time limit of four years from the date of filing of the tax return. However, the maintenance
of VAT records has been provided in Rule 23 of VAT Rules, 2053. As per Rule 23(7) of Value Added
Tax Rules, 2053 a registered person must keep safely the records kept under this rule for six years.
This is the responsibility of the taxpayer to maintain the records for the period mentioned in the Act.
The taxpayer in the question destroyed the records before the time limit the tax officer has rightly
imposed penalty under the Act. The Tax officer is correct in his action and there is no meaning in filing
for administrative review.
(c)
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(87)
As per Section 19(1) of Value Added Tax Act, 2052, a taxpayer shall have to pay the tax for each tax
period within twenty five days of the end of the tax period.
Accordingly,
PQR Pvt. Ltd. paid the tax on Jestha 25, 2072 which is within the due date and is in compliance of
Section 19(1). But the payment via "Account Payee" cheque cannot be considered as the payment under
Act/Rules. The cheque got cleared on Jestha 26, 2072 which is beyond the due date. Hence, this shall
be considered as non-payment of tax on due date and the taxpayer is liable for interest, penalty and
additional charges as per act. [ 2 mark for this conclusion]
In case, tax is paid within the time-limit as mentioned under Section 19(1) by a cheque guaranteed by a
bank (good for payment cheque), it shall be deemed to be paid on the date of receipt by the Office of
such cheque guaranteed by the bank (good for payment cheque) as per Section 19(7). Hence, the
company has paid the amount on Jestha 25, 2072 via "Account Payee" cheque guaranteed by bank
(good for payment cheque) it shall be considered as payment within due date even if the cheque got
realized after two days i.e. on Jestha 27, 2072.
(d)
Calculation of Output/input VAT and Credit/Debit amount
Monthly Cumulative
Output
Month Sales Rs. Purchase Rs. Input Tax Rs. Tax Credit Tax Credit
Tax Rs.
Rs. Rs.
Baishak 400,000 600,000 52,000 78,000 (26,000) (26,000)
Jestha 300,000 400,000 39,000 52,000 (13,000) (39,000)
Ashad 500,000 550,000 65,000 71,500 (6,500) (45,500)
Shrawan 600,000 700,000 78,000 91,000 (13,000) (58,500)
Bhadra 400,000 450,000 52,000 58,500 (6,500) (65,000)
Aswin 800,000 700,000 104,000 91,000 13,000 (52,000)
Kartik 700,000 500,000 91,000 65,000 26,000 (26,000)
As per Section 24(3) of Value Added Tax Act, 2052 a registered person may file an application to a tax
officer for a lump sum refund, as prescribed, for an excess remaining amount that remains after taking
tax credit for a consecutive period of six months under this section.
For Kartik VAT return, last continuous six is Jestha, there is continuous credit of Rs. 26,000 since
Baishak. Company can claim a refund of Rs. 26,000 in Kartik.
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Advanced Accounting

Balance Sheet as on 31st Ashad 2072 (before Reconstruction)

31st First Debentures Dr. 3,00,000

31st Second Debentures A/c Dr. 3,00,000

31st Bank A/c Dr. 30,000

31st Mr. A‘s A/c Dr. 7,20,000

31st Mr. B‘s A/c Dr. 3,60,000

31st Unsecured Creditors A/c Dr. 2,25,000

31st Bank A/c Dr. 1,80,000

31st Reorganization A/c Dr. 8,70,000

Balance Sheet as on 31st Ashad 2072 (After Reconstruction)

Question 2.(A) Solution

Shivam Bank Limited

Question 2.(B) Solution

18,400 8,400 18,400 8,400

b) What are the issues, with which accounting standards deal?

Question 3(a) Solution

Date of Installment Calculation Towards Towards

Dr. Nelson &Co. Cr.

Question 3(b) Solution

Accounting Standards deal with the issues of

Question 3(c) Solution

1) Gross profit 500

Accounts payable as on 31st March 2015 = Rs. 2,020 /6 = 336.667

4) Cost of goods sold 2,000

Question 3(d) Solution (edited)

Question 4(A) Solution

1. Cost of equity shares purchased on 1.04. 2071

Question 4(B) Solution

Profit and Loss Appropriation A/c Dr. 20,000

Dividend Payable A/c Dr. 20,000

Profit and Loss Appropriation A/c Dr. 50,000

Bonus to Equity shareholders A/c Dr. 50,000

Bank A/c Dr. 70,000

Share Premium A/c Dr. 4,800

12% Debentures A/c Dr. 1,20,000

Debenture holders A/c Dr. 1,24,800

Question 4(C) Solution

Question 5(A) Solution

Question 5(B) Solution

On Decrease: on A/c of Revaluation:

6. Write short notes on:

Temporary differences are differences between the carrying amount of an asset or

Question 6(C) Solution

Question 6(D) Solution

Audit & Assurance

Total No. of Questions- 7 Total No. of Printed Pages- 8

Time Allowed - 3 Hours

1. As an auditor, give your opinion with explanations on the following cases:

A change in accounting estimate is an adjustment of the carrying amount of an asset or a

2. Answer the following:

a) Assurance engagement is an engagement in which a practitioner auditor expresses a conclusion

c) An independent audit whether performed in terms of relevant statutory legislation or in terms of

The auditor may be required to follow extensive procedures, which include:

A disclaimer of opinion may be necessary if any restriction on scope of audit is enforced.

Loan or Deposit Amount (Rs.) Minimum Audit Fees (Rs.)

6. Write short notes on the following:

b) Points of difference between Reserves & Provisions:

1. Reserve is an appropriation of profit whereas provision is a charge against Profit.