PRIME ACADEMY 31st SESSION MODEL EXAM - IPCC – ACCOUNTING QUESTION PAPER ACTG No. of Pages: 5 No of Questions: 6
All are compulsory
Total Marks: 100 Time Allowed: 3 Hrs
1. (i) (ii)
(iii) (iv) (v) (vi) (vii)
(viii)
(ix)
(x)
Shiv Ram Ltd.issued 1,500 ,16%debentures of Rs.100 each at a discount of 5%.on Jan 1st ,2009 repayable by equal drawings in four years. Show discount on issue of debentures account over the period. Mr.X and Mr.Y are partners sharing profits in the ratio of 5:3 with capital of Rs.2,50,000 and RS.2,00,000 respectively .Mr.Z was admitted on the terms that he would payRs.50,000 as capital and Rs.16,000 as goodwill for 1/5th share of profits. Find the balance of capital accounts after admission of Mr.Z List the items of inflows from financing activity. Mention the two categories of investments defined by AS-13 and also state their valuation principles. What is covered as inventory by AS-2. What is contract revenue as defined by AS-7? During the current year 2009-2010,X limited made the following expenditure relating to plant building: Routine Repairs Rs.1,00,000 Repairing Rs.4,00,000 Partial replacement of roof tiles Rs. 50,000 Substantial improvements to the electrical wiring system which will increase efficiency Rs.10,00,000. What is the amount to be capitalized. Suppose salaries paid during 2009 was Rs.23,000.Find out the amount to be debited to the profit and loss account if Salaries unpaid on 31st Dec 2008 was Rs.1,400 Salaries prepaid on 31st Dec.was Rs , 400 Salaries unpaid on Dec 2008 was RS.1,800 And Salaries prepaid on Dec.2009 was RS. 600. Mr.Ganesh purchased a truck on hire purchase system .As per the terms he is required to pay Rs.70,000 down ,Rs.53,000 at the end of first year ,Rs.49,000 at the end of second year and Rs.55,000 at the end of the third year. Interest is charges at 10% p.a..Calculate the total cash price of the truck. What is purchase consideration as defined by AS-14. (2 x10 = 20 Marks)
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2. Zed Ltd. presents to you the following balance sheet and income statement: Balance Sheet
Equity Share Capital Retained Earnings 12% Debentures Trade Creditors Outstanding Expenses Fixed Asset at cost Provision for Depreciation Investments Inventories Trade Debtors Provision for bad debts Cash in hand and at Bank Underwriting commission
As on 31st March 2009 As on 31st March 2010 Rs Rs 10,00,000 10,00,000 8,30,000 9,46,000 6,00,000 5,00,000 1,02,500 1,21,700 21,800 27,400 25,54,300 25,95,100 24,00,000 (8,00,000) 2,50,000 4,13,300 1,60,000 (8,000) 1,34,200 4,800 25,54,300
26,00,000 (9,80,000) 1,00,000 5,07,100 1,80,000 (9,000) 1,93,400 3,600 25,95,100
Profit and loss Account for the year ended 31st March, 2010 Rs Sales 36,40,200 Cost of Goods sold (18,60,000) Compensation received in Lawsuit 55,000 Interest received on Investments 21,000 Profit on sale of investments 7,500 Sundry operating expenses (7,83,500) Interest on Debentures (66,000) Provision for Bad Debts (1,000) Provision for Depreciation (1,80,000) Underwriting Commission, Written off (1,200) Net profit before tax 8,32,000 Tax for the year paid 4,16,000 Net Profit after Tax 4,16,000 Prepare Zed Ltd’s cash flow statement for the year ended 31st March, 2010 using (1)the direct method and (2)the indirect method. Zed Ltd. Informs you that debentures have been redeemed at par. (16 Marks)
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3. The following are the balance sheet of Strong Limited and Small Limited as at 31st December, 2009 Liabilities
Strong Ltd Rs
Small Ltd Rs
Share Capital Equity sh. Of the face value of Rs 10 each Reserves Secured loans 10% Debentures Current Liabilities Trade Creditors
Assets
Fixed Assets at cost less depreciation 1,20,000 Current Assets
1,50,000 95,000
10,000 Stock Trade Debtors 20,000 Balance at Bank
47,000
32,000
Strong Ltd Rs 1,40,000
Small Ltd Rs 75,000
42,000 30,000 80,000
47,000 50,000 10,000
2,92,000 1,82,000 2,92,000 Strong Limited agreed to absorb Small Limited as on 31st December 2009 on the following terms:
1,82,000
(1) Strong Limited agreed to repay 10% Debentures of Small Limited (2) Strong Limited to revalue its Fixed Assets at Rs 1,95,000 to be incorporated in the books (3) Shares of both companies to be valued on net Assets Basis after considering Rs 50,000 towards value of goodwill of Small Limited. (4) The cost of absorption of Rs 3,000 are met by Strong Limited. You are required to : (a)Calculate the ratio of exchange of shares (b)Give Journal Entries in the books of Strong Limited and, (c)Construct the Bank Account to arrive at the balance on absorption. (16 marks) 4. (a) From the following information, you are required to work out the claim under the Loss of Profits Insurance Policy. 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11)
Cover-Gross Profit-Rs 75,000 Indemnity period-6 months Damage-due to fire accident on 28th December-Accounting year ends on 31st December. Net profit plus all standing charges in the prior accounting year Rs 1,12,500. Standing charges uninsured Rs 18,750. Turnover of the last accounting year was Rs 3,75,000.The rate of gross profit being 25%. The annual turnover ,namely the turnover for 12 months immediately preceding the fire Rs 3,90,000. As a consequence of fire there was a reduction in certain insured standing charges at the rate of Rs 18,750 per annum. The standard turnover Rs 1,95,000 Increased cost of working during the period of indemnity was Rs 15,000 Turnover during the period of indemnity was Rs 75,000 and out of this turnover of Rs 60,000 was maintained due to increased cost of working. (10 Marks)
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(b) Prepare total accounts from the following particulars in the three ledgers: Rs 1,740 23,880 29,240 480
Jan 1, 2009 Balance on bought ledger(Dr) Balance on bought ledger(Cr) Balance on sales ledger(Dr) Balance on sales ledger(Cr) Jan 31, 2009 Purchases Purchases Returns Sales Sales Returns Cash received from customers Discount allowed thereon Cash paid to suppliers
Rs 1,32,360 5,120 1,74,980 2,340 1,52,420 5,640 1,16,860
Rs Discount Received thereon Cash paid to customers Bills Receivable Bills payable Bills Receivable dishonoured Bought ledger balances(Dr) Sales ledger balances(Cr)
3,320 260 8,240 4,500 500 1,540 36,700 (6 Marks)
5. (a) On 1st April, 2009 Anand held 20,000 fully paid equity shares of Rs 10 each in P Ltd. appearing in Anand’s books at Rs 3,05,500. On 1stjune, 2009 he acquired 5,000 more equity shares in the company at an all inclusive cost of Rs 17 per share. On 30thjune, 2009 P Ltd. announced a bonus issue at the rate of one fully paid equity share of Rs 10 for every five shares held. Anand received the bonus shares on 4thAugust, 2009. P Ltd. Also made the right issue the terms being as follows: (1) The issue would entitle the shareholders to subscribe to one equity shares of Rs 10 in the company for every three share held as on 9th august, 2009;the new shares would be issued as premium of Rs 5 per share, the whole amount being payable by 30th September, 2009. (2) The share holders would be entitled to renounce their entitlement either wholly or in part to outsiders. Anand exercised his option under the issue for 50%of his entitlements and sold the balance of his rights to another person @ Rs 1.50 per share. P Ltd. Declared a dividend at the rate of 20% for the year ended 31st March , 2009. Anand received the dividend on 3rd October 2009. On 1st December 2009 Anand sold 15,000 equity shares and received a net sum of Rs 2,62,500. Prepare Investment Account in Anand’s ledger for the year ended 31st March, 2010.Usage cost method. (8 Marks)
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(b) A, B and C are partners sharing profits and losses in the ratio of 2 : 3 : 5. On 31st March 2010 their Balance sheet was as follows: Balance Sheet Liabilities Capitals: A 40,000 B 42,000 C 50,000 Creditors Bills Payable Profit and Loss A/c
Rs
1,32,000 68,000 32,000 14,000
2,46,000 They admit D into partnership on the following terms:
Assets Cash Bills receivable Furniture Stock Debtors Investments Machinery Goodwill
Rs 22,000 20,000 28,000 44,000 46,000 32,000 34,000 20,000 2,46,000
1) 2) 3) 4) 5) 6)
Furniture, investments and machinery to be deprecated by 15%. Stock is revalued at Rs 48,000. Goodwill to be valued at Rs 26,000. Outstanding rent amounted to Rs1,800. Prepaid salaries Rs 800. D to bring Rs 32,000 towards capital for 1/6 share and other partners to re-adjust their capital accounts on the basis of their profit sharing ratio. 7) Adjustments of capitals to be made by cash. Prepare Revaluation Account, Partner’s Capital Accounts, Cash Accounts and Balance Sheet of the new firm. (8 Marks) 6. Answer the following: a) What are the advantages of using an ERP. b) Explain the procedures to be adopted for charging depreciation in cases where additions or extensions are made to a capital asset. c) Show The Profit &Loss extract in the books of a contractor in respect of the following data: Rs.000’s Contract price (fixed) Cost incurred to date Estimated cost to complete
600 390 260
d) What are the major considerations that should be kept in mind in determination and selection of accounting policies. (4 x 4=16 Marks)
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PRIME ACADEMY 31st SESSION MODEL EXAM - IPCC – ACCOUNTING SUGGESTED ANSWERS
1. (i) Total amount of discount on issue of debentures = Rs (1,50,000 / 100) * 5 = Rs 7,500 The total discount of Rs 7,500 is to be written off in proportion to the debentures outstanding at the beginning of each year. This outstanding balance will be as follows: 2009 2010-(Rs 1,50,000 – 37,500)
= Rs 1,50,000 = Rs 1,12,500
2011-(Rs 1,12,500 – 37,500) = Rs 75,000 2012-(Rs 75,000 – 37,500) = Rs 37,500 Out standing balance ratio = 1,50,000 : 1,12,500 : 75,000 : 37,500 = 4:3:2:1 Therefore amount to be written off each year will be: 2009-(Rs 7,500 * 4/10) 2010-(Rs 7,500 * 3/10) 2011-(Rs 7,500 * 2/10) 2012-(Rs 7,500 * 1/10)
= Rs 3,000 = Rs 2,250 = Rs 1,500 = Rs 750
(ii) 2,60,000:2,06,000:50,000 (iii) Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preferences share capital in the case of company) and borrowings of the enterprise. Examples include issues of shares / Debentures, redemption of Debentures / preferences shares, Payment of dividends and payment of interest (other than interests paid by financial institutions). (iv) Current investment-valued at cost or fair value which ever is lower. Long term investments-valued at cost (v) Inventories as Assets held a. For sale in the ordinary course of business or b. In the process of production for such sale or c. In the form of materials or supplies to be consumed in the production process or in rendering of services.
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(vi) Contract revenue should comprise: a. The initial amount of revenue agreed in the contract; and b. Variations in contract work, claims and incentive payments to the extent that it is probable that they will result in revenue and they are capable of being reliably measured. (vii) Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e. g., an increase in capacity. Hence in the given case repairs amounting Rs. 5Lakhs and partial replacement of roof tiles should be charged to profit and loss statement. Rs. 10Lakhs incurred for substantial improvement to be electrical writing system which will increase efficiency should be capitalized. (viii) Rs.23,200 is to be transferred to profit and loss account (ix) Ratio of interest and amount due = Rate of interest / 100 + Rate of interest = 10 / 110 = 1/11 Calculation of interest and cash price No. of Amount due at the time Interest installments of installment 3rd 55,000 1/11 of Rs 55,000 = Rs 5,000 nd 2 *99,000 1/11 of Rs 99,000 = Rs 9,000 1st **1,43,000 1/11 of Rs 1,43,000 = Rs 13,000 Total cash price= Rs 1,30,000 + 70,000(down payment) = Rs 2,00,000 *Rs50,000 + 2nd instalment of Rs49,000 = Rs
Cast price Rs. 50,000 90,000 1,30,000
99,000
**Rs90,000 + 1st instalment of Rs 53,000 = Rs 1,43,000. (x) The term purchase consideration is the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company. 2. Direct Method: Zed Ltd. Cash Flow Statement for the year ended 31st March, 2010 Rs Cash Flows from Operating Activities Cash receipts from customers Cash paid to suppliers and employees Cash inflow from operations Income Tax paid
36,20,200 (27,12,500) 9,07,700 (4,16,000) 4,91,700
Cash flow from extraordinary item: Compensation received in law suit Net cash from operating activities PRIME / ME31 / IPCC
Rs
55,000 5,46,700 7
Cash Flow from investing Activities Purchase of fixed assets Sale proceeds of investments Interest received on investments* Net cash used in investing activities Cash flows from Financing Activities Redemption of debentures at par Interest on debentures paid* Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents as on 31st March, 2009 (Opening Balance) Cash and cash equivalents as on 31st March, 2010 (Closing Balance)
(2,00,000) 1,57,500 21,000 (21,500) (1,00,000) (66,000) (3,00,000) (4,66,000) 59,200 1,34,200 1,93,400
Working Notes (1) Rs Calculation of cash receipts from customers: Sales Add: Trade debtors as on 31st march, 2009
36,40,200 1,60,000 38,00,200 1,80,000 36,20,200
Less: Trade debtors as on 31st march, 2010
(2)Calculation of cash paid to suppliers and employees: Cost of goods sold Add: sundry operating expenses
18,60,000 7,83,500 26,43,500 5,07,100 1,02,500 21,800 32,74,900
Add: Inventory as on 31st March, 2010 Trade creditors as on 31st March 2009 Outstanding Expenses as on 31st March 2009 Less: Inventory as on 31st March 2009 Trade creditors as on 31st March 2010 Outstanding Expenses as on 31st March 2010
(3) Fixed Assets purchased during the year: Fixed Assets at cost on 31st March 2010 Less: Fixed Assets at cost on 31st March 2009
(4)Sale proceeds of Investments Cost of investments sold(Rs 2,50,000 – Rs 1,00,000) Add: Profit on sale of investment PRIME / ME31 / IPCC
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4,13,300 1,12,700 27,400
5,62,400 27,12,500
26,00,000 24,00,000 2,00,000
1,50,000 7,500
1,57,500 (5)Calculation of dividends paid: Retained earnings as on 31st March 2009 Add: Net profit for the year ended 31st March 2010
8,30,000 4,16,000 12,46,000 9,46,000 3,00,000
Less: Retained earnings as on 31st March 2010 Dividends paid (2)INDIRECT METHOD Rs Cash flow from operating activities Net profit before income tax and extra-ordinary item Adjustments for: Depreciation Provision for bad debts Under writing commission amortised Profit on sale of investments Income from investments Interest on debentures Operating profit before working capital changes Adjustments for: Increase in inventory Increase in trade debtors Increase in trade creditors Increase in outstanding expenses Cash inflow from operations Income tax paid Cash flow from extra-ordinary item: Compensation received in lawsuit Net cash from operating activities Cash flows from investing activities Purchase of fixed assets Sale proceeds of investments Interest received on investments Net cash used in investing activities Cash flows from financing activities Redemption of debentures at par Interest on debentures paid Dividends paid Net cash used if financing activities Net increase in cash and cash equivalents cash and cash equivalents as on 31st March 2009(opening balance) cash and cash equivalents as on 31st March 2010(closing balance)
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Rs
7,77,000 1,80,000 1,000 1,200 (7,500) (21,000) 66,000 9,96,700 (93,800) (20,000) 19,200 5,600 9,07,700 (4,16,000) 4,91,700 55,000 5,46,700 (2,00,000) 1,57,500 21,000 (21,500) (1,00,000) (66,000) (3,00,000) (4,66,000) 59,200 1,34,200 1,93,400
Working Notes (1) Net profit before income tax and extra-ordinary item: Net profit before income tax Less: Compensation received in lawsuit
Rs 8,32,000 55,000 7,77,000
3. Computation of ratio of exchange of shares (A)Assets: Fixed asset (at cost less depreciation) Goodwill Stock Trade debtors Bank Balance A Liabilities: 10% Debentures Trade creditors B Net Worth(A – B) Number of shares Intrinsic value of share
Strong Ltd Rs
Small Ltd Rs
1,95,000 42,000 30,000 80,000 3,47,000
75,000 50,000 47,000 50,000 10,000 2,32,000
47,000 47,000
20,000 32,000 52,000
3,00,000 15,000 Rs 20
1,80,000 12,000 Rs 15
Number of shares to be issued by Strong Ltd to Small Ltd is equal to Rs 1,80,000 / Rs 20 = 9,000 shares. Therefore exchange ratio = 9,000 / 12,000 = 3:4. Date 2009 Dec31
Particulars Fixed assets A/C Goodwill A/C Stock A/C Trade debtors A/C Bank A/C To 10% Debenture holders A/C (Note 1) To trade creditors A/C Liquidator of Small Ltd A/C To Equity share capital A/C (Being the different asset and liabilities taken over from small Ltd as per the agreement dated…) Liquidator of Small Ltd A/C To Equity share capital To Share premium A/C
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LF Dr. Rs
Cr. Rs 75,000 50,000 47,000 50,000 10,000 20,000 32,000 1,80,000 90,000
1,80,000 90,000 90,000
(Being purchase consideration discharged by issue of 9,000 Equity share of Rs10 each at a premium of Rs 10 per share) Goodwill A/C To bank A/C (Being payment of cost of absorption)
3,000 3,000
Cash Account Dr Date 2009
Cr Particulars To balance b/d
Dec31
Rs Date 80,000 2009
To sundries- taken over from small Ltd
10,000 Dec31
Particulars By Goodwill A/C (cost of absorption) By balance c/d
Rs 3,000 87,000
90,000 Working note: (1)it is assumed that strong Ltd will pay debenture holder on a subsequent date.
90,000
4. a) Calculation of short sales: Rs. Standard turnover
1,95,000
Turnover during the indemnity period
75,000
Short sales
1,20,000
Calculation of Rate of gross profit = Net profit + all standing charges – uninsured standing charges / Sales of last accounting year =(Rs. 1,12,500 –Rs. 18,750) / Rs 3,75,000 * 100 =25% Amount of claim:
Loss of profit on short sales of Rs 1,20,000 @ 25% Add: Increased cost of working: Actual amount of increased cost Gross profit @ 25% on turnover for 12 months Immediately preceding the date of fire (3,90,000 * 25%) Gross profit as above plus uninsured standing charges(97,500 + 18,750) PRIME / ME31 / IPCC
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Rs 30,000 15,000 97,500 1,16,250
Claim for increased cost of working(15,000 * 97,500/1,16,250) (Gross profit @ 25% on additional sales of Rs 60,000 due to increased Cost 60,000 * 25% =15000 is more than Rs 12,580, so claim admissible is Rs 12,580) Less: Saving in standing charges for ½ year(18,750 * ½)
12,580
42,580 9,375 33,205
Application of average clause: Uninsured / Gross profit on preceding 12 month sales * Amount of claim = Rs 75,000 / 25% of 3,90,000 * 33,205 =Rs 75,000 / Rs 97,500 * 33,205 =Rs 25,542. Therefore claim for loss of profit to be lodged is Rs 25,542.
b) General Ledger Debtors Ledger Adjustment A/C Date Particulars 2009 Jan 1 To balance b/d Jan 31 To General Ledger Adjustment A/C Sales Cash Bills receivable (dishonoured) To Balance c/d (Balancing figure)
Rs Date Particulars 2009 29,240 Jan 1 By balance b/d Jan 31 By General Ledger Adjustment A/C 1,74,980 Sales Returns 260 Cash 500 Bills receivable Discount 840 By Balance c/d 2,05,820
Rs 480 2,340 1,52,420 8,240 5,640 36,700 2,05,820
Creditors Ledger Adjustment A/C Date Particulars 2009 Jan 1 To balance b/d Jan 31 To General Ledger Adjustment A/C Purchase Returns Cash Discount PRIME / ME31 / IPCC
Rs Date Particulars 2009 1,740 Jan 1 By balance b/d Jan 31 By General Ledger Adjustment A/C 5,120 Purchases 1,16,860 3,320 12
Rs 23,880 1,32,360
Bills Payable To Balance c/d (Balancing figure)
4,500 26,240 1,57,780
By Balance c/d
1,540 1,57,780
Debtors Ledger General Ledger Adjustment A/C Date 2009 Jan 1 Jan 31
Particulars
Rs
To balance b/d To Debtors Ledger Adjustment A/C Sales Returns Cash Bills receivable
Date 2009 480 Jan 1 Jan 31
2,340 1,52,420 8,240
Discount To Balance c/d (Balancing figure)
5,640 36,700
Particulars By balance b/d By Debtors Ledger Adjustment A/C Sales Cash Bills receivable (dishonoured)
Rs 29,240 1,74,980 260 500
By Balance c/d
2,05,820
840 2,05,820
Creditors Ledger General Ledger Adjustment A/C Date 2009 Jan 1 Jan 31
Particulars To balance b/d To Creditors Ledger Adjustment A/C Purchases
To Balance c/d
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Rs
Date Particulars 2009 23,880 Jan 1 By balance b/d Jan 31 By Creditors Ledger Adjustment A/C 1,32,260 Purchase Returns Cash Discount Bills Payable 1,540 To Balance c/d (Balancing figure) 1,57,780
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Rs 1,740 5,120 1,16,860 3,320 4,500 26,240 1,57,780
5. a) Investment Account Equity Shares in P. Ltd. Dr Date 2009 Apr 1
Particulars
No.
Income
20,000
Principal Date Account Rs 2009 3,05,500 ?
Rs To Balance b/fd
June 1 Aug 4
To Bank To Bonus Shares
5,000 5,000
85,000 --- Oct 3
Sept 30
To BankSubscription to 50% of rights shares To Profit & Loss A/CProfit on sale To Profit & Loss Account
5,000
75,000 Dec 1
Dec 1 2010 Mar 31
Balance b/d
No.
Income Rs
By BankSale of rights By BankDividend for 1996-97 By BankSale
40,000 15,00 0
2,62,500
40,000 40,000
20,000
2010 Mar 31
By Balance c/d
20,00 0
2,56,000
5,36,000
35,00 0
40,000
2,56,000
Working Notes: (1) Calculation of profit on sale of 15,000 shares: Amount paid for 35,000 shares: (305500+85000+75000) Less: Amount received on sale of rights
Rs
Rs 4,65,500
7,500
Dividend for 2008-09 on shares purchased on 1st June 2009 Cost of 35,000 shares Sale proceeds of 15,000 shares Less: Cost of 15,000 shares= Rs 4,48,000 * 15,000 / 35,000 Profit
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10,000
70,500
35,000 2010 Apr 1
Particulars
Cr Principal Account Rs 7,500
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10,000
17,500 4,48,000 2,62,500 1,92,000 70,500
5,36,000
(2) Calculation of value of closing stock of 20,000 shares: Cost of 35,000 shares as calculated in (1)above=Rs 4,48,000 Hence cost of 2,000 shares= Rs 4,48,000 * 20,000/35,000=Rs 2,56,000 Cost per share = Rs 2,56,000 / 20,000 = Rs 12,809. Assuming that the market price of the shares is higher than the cost closing stock will be shown at cost price I e., Rs 2,56,000. b) Revaluation Account Particulars
Amount Rs. 1,800 4,200 4,800 5,100
To Outstanding Rent To Furniture To investments To Machinery
Particulars
Amount Rs. 4,000 800
By Stock By Prepaid Salaries By Loss transferred to: A’s Capital A/C 2,220 B’s Capital A/C 3,330 C’s Capital A/C 5,550
11,100 15,900
15,900 Partners’ Capital Account (A, B, C) Particulars To Revaluation A/C To cash A/C To Balance c/d
A Rs. 2,220 9,780
B Rs. 3,330 -
32,000 48,000 44,000 51,330
C Rs. Particulars 5,550 By balance b/d - By P & L A/c (Profit) 80,000 By Goodwill A/C By cash A/C 85,550
A Rs. B Rs. C Rs. 40,000 42,000 50,000 2,800 4,200 7,000 1,200 1,800 3,000 - 3,330 25,550 44,000 51,330 85,550
D’s Capital Account Particulars To Balance c/d
Particulars To Balance b/d To B’s Capital A/C To C’s Capital A/C To D’s Capital A/C
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Amount Rs. 32,000 32,000
Particulars By Cash A/C
Cash Account Amount Particulars Rs. 22,000 By A’s Capital A/C 3,330 By balance c/d 25,550 32,000 82,880 15
Amount Rs. 32,000 32,000
Amount Rs. 9,780 73,100 82,880
Balance sheet of the new firm as on 31st March 2010 Liabilities Amount Assets Rs. Creditors 68,000 Cash Bills Payable 32,000 Bills Receivable Outstanding Rent 1,800 Debtors Capitals: Stock A 32,000 Prepaid Salaries B 48,000 Investments C 80,000 Furniture D 32,000 1,92,000 Machinery Goodwill 2,93,800
Amount Rs. 73,100 20,000 46,000 48,000 800 27,200 23,800 28,900 26,000 2,93,800
Working Notes: (1)Calculation of new profit sharing ratio Old ratio= 2:3:5 D’s share= 1/6 Remaining share= 1 – 1/6 = 5/6 New profit sharing ratio of A= 5/6 * 2/10 = 2/12 B= 5/6 * 3/10 = 3/12 C= 5/6 * 5/10 = 5/12 D= 1/6 or 2/12 New Profit sharing Ratio = 2:3:5:2 (2)Increase in the value of Goodwill by Rs 6,000 is divided among the old partners in their old ratios (3) The full value of Goodwill is shown in the balance sheet (4) On the basis of D’s capital contribution for 1/6th share the total capital of the reconstituted firm should be Rs 32,000 * 6 = Rs 1,92,000. This is divided among the partners in their new profit sharing ratio of 2:3:5:2. A=1,92,000 * 2/12 = 32,000 B=1,92,000 * 3/12 = 48,000 C=1,92,000 * 5/12 = 80,000 D=1,92,000 * 2/12 = 32,000 6. a) Advantages of using an ERP The Advantages of using an ERP for maintaining accounts are as follows PRIME / ME31 / IPCC
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(1) Standardized process and procedures: An ERP is a generalized package which covers most of the common functionalities of any specific module. (2) Standardized Reporting: Majority of the desired reports are available in an ERP package. These reports are Standardized across industry and are generally acceptable to the users, (3) Duplication of data entry is avoided as it is an integrated package (4) .Greater information is available through the package.
b) Additions or extensions The procedures to be adopted for charging depreciation in cases where additions or extensions are made to a capital asset, are Where extension or addition becomes an integral part of an existing asset a)ascertain remaining amortised amount including incremental cost (say x) b)Depreciate x over the remaining useful life c)For, practical consideration apply identical rate of depreciation as applicable to original asset c)
Where extension or addition results is an asset with (1)a separate identity and (2)can be used even after the original asset is disposed of a)determine the incremental amortized amount (say y) b)determine useful life c)Amortise y over useful life.
Rs 000 390 260 650 60% 360 50 30 20
A. Cost incurred to date B. Estimate of cost to completion C. Estimated total cost D. Degree of completion A/C E. Revenue Recognised (60% of 600) Total foreseeable loss(650 – 600) Less: Loss for current year(E – A) Expected loss to be recognized immediately Profit and Loss A/C
Rs Rs To construction cost 390 By contract price 360 To provision for loss 20 By Net Loss 50 410 410 d) An enterprise has therefore to exercise scruples care in selection and application of accounting principles and methods such a selection is guided by three major considerations. (a) Prudence Prudence is the inclusion of a degree of calculation in the exercise of judgements needed in making estimates required under conditions of uncertainity. PRIME / ME31 / IPCC
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By exercising prudence an enterprise does not recognized only when realised though not necessarily in cash. However all known losses are anticipated and provided. (b) Substance over form If information is to represent faithfully the transactions or events, it is essential that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. (C) Materiality The relevance of information is affected by its materiality.Information is material if its misstatement i. e, omission of erroneous statement, could influence the economic decisions taken by the user based on such financial statements should disclose all material items i. e. knowledge of which might influence the decision of the user of financial statements. Other qualitative characteristics of accounting information such as (1)relevance (2)neutrality (3) Completeness (4)reliability are equally critical to users in order that financial statements are meaningful in the selection and adoption of accounting policies these aspects should also be kept in view.
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PRIME ACADEMY 31st SESSION MODEL EXAM - IPCC – LAW ETHICS AND COMMUNICATIONS QUESTION PAPER LWEN No. of Pages: 4 No of Questions: 16
Total Marks: 100 Time Allowed: 3 Hrs All are compulsory PART – I
1. a) M agreed on Monday to sell his property to N by a written agreement which stated “that this offer to be left open until Saturday 10 a.m.” In the meantime on Wednesday, M enters into a contract to sell the property to O. N, who was sitting in the next room, hears about the deal between M and O. On Friday, N accepts the offer and delivers to M the letter of acceptance. Is N’s acceptance valid? Give reason. (5 Marks) b) State With reasons whether the following statements are correct or incorrect i. A person is deemed to have accepted the special terms / conditions in a contract, if they are communicated to him in some reasonable manner. ii. A hires a carriage of B and agrees to pay Rs. 500 as hire charges. The carriage is unsafe, though B is unaware of it. A is injured and claims compensation for injuries suffered by him. B is not liable to compensate. (2 Marks) c)
Examine whether the following constitute a contract of “Bailment” under the provisions of the Indian Contract Act, 1872. C, D and E 1 mark each i. A parks his car at a parking lot, locks it and keeps the keys with himself. ii. Seizure of goods by Customs Authorities
(1 Mark)
d) “A” intending to deceive “B” falsely represents that five hundred maunds of indigo are made annually at A’s factory and thereby induced ‘B’ to buy the factory: a. This agreement is valid b. This Contract is voidable at the option of ‘A’ c. This Contract is voidable at the option of ‘B’ d. This contract is void (1 Mark)
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e) A draws a bill on B, who accepts it without consideration. He endorses the bill to C for valuable consideration. On due date when C presents the bill to B for payment, B contends absence of consideration. Decide the case. (1 Mark) 2.
a) A Company was incorporated on 6th October, 2003. The certificate of incorporation of the Company was issued by the Registrar on 12thOctober, 2003. The Company on 10thOctober, 2003 entered into a contract which created its contractual liability. The Company denies from the said liability on the ground that the Company is not bound by the contract entered into prior to issuing certificate of incorporation. Decide whether the Company can be exempted from the said contractual liability. (5 Marks) b) Though six out of seven signatures to the Memorandum of Association of a company were forged, the company was registered and the Certificate of Incorporation issued. Can the registration of the company be challenged subsequently on the ground of forged signatures? (5 Marks)
3.
In an accounting year, a Company to which the Payment of Bonus Act, 1965 applies, suffered heavy losses. The Board of Directors of the said Company decided not to give Bonus to the employees. The employees of the Company move to the Court for relief. Decide whether the employees will get relief. (5 Marks)
4.
‘A’ Signs as a maker the blank Stamp paper and gives it to ‘B’ and authorizes to fill it as a note for Rs. 500, to secure an advance which ‘C’ is to make to ‘B’. ‘B’ fraudulently fills it as a note for Rs. 2,000 payable to ‘C’ who has in good faith advance Rs. 2,000. Decide whether ‘C’ is entitled to recover the amount, and if so, up to what extent? (5 Marks) Under the provisions of the payment of Gratuity Act, 1972 an employee in his nomination distribute the amount of gratuity payable to him amongst more than one nominee. Is it permissible under the payment of Gratuity Act.? Explain. (5 Marks)
5.
6.
An Executive Committee is to be constituted to assist the Central Board under the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952. State the composition of such Executive Committee. (5 Marks)
7.
The object clause of the Memorandum of RSP Private Ltd., Bangalore authorized to do trading in fruits and vegetables. The Company, however, entered into a Partnership with Mr. A and traded in steel and incurred liabilities to Mr. A. The Company, subsequently, refused to admit the liability to A on the ground that the deal was ‘Ultra Vires’ the company. Examine the validity of the company’s refusal to admit the liability to A. Give reasons in support of your answer. (5 Marks)
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8.
DSC Ltd. holds 40% of the total equity shares in Goodluck Ltd. The Board of Directors of Goodluck Ltd. (incorporated on 1.1.2005) decided to raise the paid up Equity Share Capital by issuing further shares and also decided not to offer any shares to DSC Ltd. on the ground that it was already holding a high percentage of shares in Goodluck Ltd. Articles of Association of Goodluck Ltd. provides that the new shares be offered to the existing shareholders of the company. On 1.3. 2009 new shares were offered to all the shareholders excepting DSC Ltd. Examine the validity of decision of the Board of Directors of Goodluck Ltd. (5 Marks)
9.
M/s. Maxima Limited ows Mr. Suresh Rs. 1,000. On becoming this debt payable, the Company offered Mr. Suresh 10 shares of Rs. 100/- each in full settlement of the debt. The said shares were fully paid and were allotted to Mr. Suresh. Examine the validity of allotment in the light of the provisions of the Companies Act, 1956. (5 Marks)
10.
M/s. Narmadha Ltd. issued a notice for holding of its Annual General Meeting on 7th November, 2009. Notice was posted to Members on 16th October, 2009. Some of the Members alleged that Company had not complied with the Act as regards period of Notice and as such Meeting was not validly called. Decide: a) Whether the meeting has been validly called? b) If there is a shortfall in the number of days by which Notice falls short of Statutory Requirement, state and explain by how many days Notice fall short of Statutory Requirement? c) Can the shortfall, if any, be condoned? (5 Marks)
PART – II 11. a) Explain the importance of ethical behaviour at the workplace. b) Explain the meaning of Ethical Dilemmas.
(5 Marks) (5 Marks)
12. What are the aspects to be considered in creating an ethical accounting environment in the business house? 13. State with reasons whether the following statements are correct or incorrect: a) Fairness and honesty are the pillars of success in the business. b) There is no difference between ethics and morals.
(5 Marks)
(5 Marks)
PART – III 14.
a) What are the merits and demerits of grape-vine form of Communication? (5 Marks)
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b) M/s. SQR Pvt. Limited wants to hold Annual General Meeting on 20th September, 2010 to discuss the matter only relating to ordinary business. Draft a Notice for the Annual General Meeting. (5 Marks) 15. Prepare Chairman’s speech to be given at Annual General Meeting. For this purpose, take some facts on notional basis. (5 Marks) 16. A Partnership firm was constituted by X, Y and Z. X, the partner of the firm expressed his desire to retire from the partnership firm by mutual consent. Draft a “Partnership Retirement Deed”. (5 Marks)
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PRIME ACADEMY 31st SESSION MODEL EXAM - IPCC – LAW ETHICS AND COMMUNICATIONS SUGGESTED ANSWERS 1. a) (i) Acceptance is made before revocation of the offer by M and well (ii) The time specified by M in his letter of offer. (iii)Overhearing by N does not amount to a valid revocation by M. (iv) Hence N’s acceptance is valid. (v) The treatment would be difference if, before acceptance by N, M had formally communicated his revocation to him. b)
c)
(i) Correct (ii) Incorrect (i) No. Mere custody of goods does not mean possession. Leading case: Kaliaperumal pillai vs Visalakshmi (ii) Yes. The possession of goods is transferred to the Customs authorities. (Section 148 is applicable)
d) (c) e) B is liable to pay to C who is holder in due course. 2.
a) The Company came into existence on the date of incorporation stated on the certificate. The contract entered into by the Company before the issue of certificate of incorporation shall be binding up on the Company. The date of issue of certificate is immaterial. The Company cannot be exempted from the contractual liability in this case. b) As per Section 35, Certificate of Incorporation is a conclusive evidence. So, in the given case, Registration cannot be challenged.
3.
i. Minimum Bonus shall be paid to the employees irrespective of losses of the Establishment. ii. Where the Bonus liability is negligible as compared to the losses suffered, then the Company should not be relieved of its liability to pay minimum Bonus u/s 10. iii. It is only the appropriate Government that is authorized to exempt any Establishment or class of Establishment from the payment of minimum Bonus. iv. Hence, the Company has to pay minimum Bonus irrespective of its Huge losses, unless having regard to its financial position and
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Other circumstances, the appropriate Government exempts it from the payment of minimum Bonus. 4. i. Estoppel: The given case constitutes an Inchoate Stamped Instrument. As per Sec.20 a person who gives another person, possession of his signature on blank stamped paper prima facie authorizes the latter as his agent to fill it up and give to the world the instrument as accepted by him. The principle is one of estoppel. ii. Analysis: In the given case, ‘A’ is estopped from setting up B’s fraud since ‘A’ has effectively authorized ‘B’ to fill up any amount covered by the stamp, on that instrument. Thus ‘C’ is entitled to recover Rs. 2,000 from ‘A’ because ‘C’ has obtained it as a Holder in due course. 5.
Gratuity is paid to the employee. But, if the services of the employee is terminated due to the death of employee, this amount is to be paid to his successors. To avoid any type of complications and controversies in such payment, the employee can made nomination. Every employee, who has completed 1 year of service, shall make nomination for the purpose of the second proviso to Sec. 4(1). Such nomination shall be made within such time in such form and in such manner, as may be prescribed. An employee may in his nomination, distribute the amount of gratuity payable to him under this Act amongst more than one nominee. If an employee has a family at the time of making a nomination, the nomination shall be made in favour of one or more members of his family, and any nomination made by such employee in favour of a person, who is not a member of his family shall be void. If at the time of making a nomination the employee has no family, the nomination may be made in favour of any person(s). But if the employee subsequently acquire a family, such nomination shall forthwith become invalid and the employee shall made within such time as may be prescribed, a fresh nomination in favour of one or more members of his family. Subject to the provision of Sec. 6(3) or 6(4), A nomination may be modified by an employee at any time, after giving to his employer a written notice in such form and in such a manner as may be prescribed. If a nominee predeceases the employee, the interest of the nominee shall revert to the employee, who shall a fresh nomination, in the prescribed form, in respect of such interest. Every nomination, fresh nomination or alteration of nomination, as the case may be, shall be sent by the employee to his employer, who shall keep the same in his safe custody.
6. Composition of the Committee a) The Central Government has the power to constitute an Executive Committee. b) Executive Committee shall consist of 13 members. PRIME / ME31 / IPCC
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c) The members of the Executive Committee are selected out of the members of the Central Board. i. Chairman - appointed by the Central Government ii. 2 persons - representatives of the Central Government iii. 3 persons - representatives of the State Government iv. 3 persons - representatives of the employers v. 3 persons - representatives of the employees vi. Central Provident Fund Commissioner as a member. 7. A company has power to do the following acts: a) The act is authorized by the memorandum (i.e. Express Power) b) The act is incidental for the attainment of its objects (i.e. Implied Power) If the company does some another act, then it is ultra vires the company. According to the doctrine of ultra vires, such acts are void ab-initio. (Leading case: Ashbury Railway Carriage Company v Riche) In the given case M/s. RSP Pvt. Ltd. is authorized to trade directly on fruits and vegetables. It has no power to enter into a partnership for Iron and Steel with Mr. A. Such act can never be treated as ‘express’ or ‘implied’ powers to the company. As per ‘Doctrine of Constructive Notice’, Mr. A is deemed to be aware of the lack of powers of M/s. RSP Pvt. Ltd. So, Mr. A cannot enforce liability against M/s. RSP Pvt. Ltd. This conclusion is supported by the decision reported in the case of ‘The Ganga Mata Refinery Company (Pvt.) Ltd. v CIT) 8.
1. Provisions of Companies Act: i. Right of Pre-Emption: Existing shareholders have the right of pre-emption u/s 81 i.e. any further issue of shares after a specified period should be first offered to them. ii. Issue to Outsiders: Shares can be issued to outsiders only if they are issued within the specified period or when issued after the time limit, by way of Resolution passed at the General Meeting. 2. Court Ruling: A Company can be restrained from not offering any shares to its existing shareholders, when the Articles of Association provides for offer of new issue to them. Gas Meter Co. Ltd. vs. Diaphragm and General Leather Ltd.
3.
Analysis and Conclusion: (a) Since the issue is made after 4 years of incorporation, provisions of Section 81 is attracted and therefore DSC Ltd. is entitled to be offered to subscribe for the shares. (b) Goodluck Ltd. by not offering to DSC Ltd. has violated the provisions of Companies Act, 1956 and also the requirement contained in its Articles of Association. Therefore, decision of the Board is invalid. (c) Also, Goodluck Ltd. cannot take a decision not to allot shares to DSC Ltd. unless the same is approved in the General Meeting.
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9. As per the Section 75 of the Companies Act, 1956 when shares are allotted to a person by a company, payment may be made (i) in cash, or (ii) in kind (with the consent of company). CASH here does not necessarily mean the current coin of the country. It means such transaction as would in an action at law for calls, support a plea of payment. So, such allotment is valid. 10. Issue Validity of Meeting
Shortfall in Notice
Condonation of delay
11.
Discussion a.) 21 clear days Notice of an Annual General Meeting must be given b) If Notice is sent by post, it shall be deemed to have been received on expiry of 48 hours from the time of its posting. c) For working out clear 21 days, day of Notice and day of Meeting shall be excluded. a)Where Notice is sent by post, it must have been sent at least 25 days before the date of Meeting b) Notice should have been posted on 14.10.2009; while actually it is posted on 16.10.2009. a)An Annual General Meeting called at a Notice shorter than 21 clear days shall be valid if consent is accorded thereto by all the Members entitled to vote thereat. b) Hence, if all the Members of the Company approve to shorter notice, shortfall may be condoned.
Conclusion 21 clear days notice has not been served and the meeting is, therefore, NOT validly convened.
Notice falls short by 2 days.
Shortfall can be condoned by the Members.
a) An organization, whether a business or a government agency, is first and foremost a human society. If an employer does not take steps to create a work place where the employees have a clear and common understanding of what is right and wrong, and feels free to discuss and ask question about ethical issues and report violations, significant problems could arise, including: i. ii. iii. iv. v.
Increased risk of employees making unethical decisions. Increased tendency of employees to report violation to outside regulatory authorities (whistle blowing) because they lack internal forum. Inability to recruit and retain top people. Diminished reputation in the industry and the community. Significant legal exposure and loss of competitive advantage in the market place. And thus from the above problems, it is clear that how important is ethical behavior at work place.
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b) In many cases, Business interests come into conflict with moral values. Businessmen are faced with moral and ethical dilemmas while making a choice from various alternatives. The ethical dilemmas are highly complex and there are no clear guidelines to resolve the conflict. Ethical behaviour creates goodwill and reputation that expand opportunities for profit. While competing for customers and workers, the company with a reputation for ethical behaviour has an edge over others which are considered unethical.
12.
A sound ethical environment is necessary for ensuring ethical behaviour on the part of members of the organization The following actions can be helpful for creating an ethical environment. 1. Awareness of Responsibilities: All employees should be made aware of their legal and ethical responsibilities. Top Management should initiate policies to train and motivate employees towards ethical behaviour Employees should be encouraged to report cases of frauds, manipulations, misappropriations, etc. 2. Open Communication System: There must be an open communication system in the organization. This communication system help the Employees to communicate frauds, mismanagement or any other form of non-routine detrimental behaviour, without the fear of being fired. This may be in the form of a helpline comprising of senior members of the Company, who are available for guidance on any moral, legal or ethical issues that an employee of the company may face. 3. Fair Treatment to Whistle Blowers: A Whistle Blower is an employee / person who reports fraud, mismanagement or unethical practices to the appropriate level of management. Fair treatment and appreciation of Whistle Blowers is necessary to check fraud. People in an organization hesitate to blow whistle due to fear of victimization. Top Management must ensure fair treatment to whistle blowers to assure and encourage them. This would help to check fraud and other unethical practices.
13.
a) Correct. Fairness and honesty are at the heart of business ethics. Businessperson are expected not harm customer, employees, clients or competitors knowingly through deception, misrepresentation, coercion or discrimination. One aspect of fairness and honesty is related to disclosure or potential harm caused by the product use. Another aspect of fairness relates to competition, sometimes gain control over market by using questionable practices that harm competition and business too. So, we can conclude that the fairness and honesty are pillars of success in the business.
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b) Incorrect. The root word for ethics is the Greek “ethos” meaning character while the root word of moral is latin “Mos” meaning “custom”. Character and custom, however, provide two very different standards for defining what is right and wrong. Character is personal attribute, while custom is defined by a group overtime. People have character societies have customs. Another way to look at the distinction is to say that morals are accepted from an authority (culture, religion etc.) while ethics are accepted because they follow from personally accepted principles. So there is a vast distinction between ethics and moral and hence the statement is FALSE. 14. a) The network or pathway in informal communication is known as grapeline. In the context of an organization the flow of information in informal communication is called, ‘grapevine’ because of the origin and direction of the flow of these messages cannot be easily fraud. The merits and demerits of grapevine form of communication are as follows: Merits: i. ii. iii. iv.
Speed: Speed in the most removable fast since there is no formed barriers and no stopping. Support System: A grapevine is an informal support system development by employees within an organization. It ways them closer and gives man immense satisfaction. Feedback: The managers get to income the reason of must subordinate. Thus feedback is quick. Employees attitudes and reactions to plans and policies can be ascertained by managers through informal and interactions. Psychological Satisfaction: The grapevine gives immense psychological to the workers and strengthens their solidarity. It drawn them nearly to each other and thus keeps the organization intact as a social entity. It builts team spirit among the employees.
Demerits: i. ii. iii.
iv.
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Less credible: A grapevine is less credible than a formal channel of communication. It cannot be taken seriously as involves only a mouth. Leakage: Information may get leaked at the wrong time the word ‘open secret’ in an organization can often be attributable to such take. Incomplete and distorted information: The information passed through the grapevine does not carry complete information nor does it reveal the complete picture. The reason for this is that information transmitted through the grapevine carry rumors and distorted facts. Adverse effect on reputation: The grapevine often gives a distorted picture of the actual situation and spread rumors, loose talks about responsible people leaving an adverse effect on the image of the organization.
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b)
SQR PRIVATE LIMITED NOTICE NOTICE is hereby given that the TWENTY-SEVENTH ANNUAL GENERAL MEETING of the members of the Company will be held on Monday, the 20th September, 2010 at 1.00 a.m. at the Registered Office of the Company at………. to transact the following business:1. 2. 3. 4.
To consider and adopt the Profit & Loss Account for the Corporate Financial Year ended 31st March, 2010 and the Balance Sheet as at that date and the Reports of the Directors and Auditors thereon. To declare a dividend on equity shares. To appoint a Director in place of Mr. ‘X’, who retires by rotation and being eligible, offers himself for re-appointment. To appoint M/s. ‘Y’ , retiring Auditors as Auditors of the Company, to hold office from the conclusion of this meeting until the conclusion of the next Annual General Meeting of the Company and to fix their remuneration. By Order of the Board of Directors Sd/-
Place: Date:
Company Secretary
NOTES: A MEMBER ENTITLED TO ATTEND AND VOTE IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTE INSTEAD OF HIMSELF AND THE PROXY NEED NOT BE A MEMBER. PROXIES IN ORDER TO BE VALID MUST BE RECEIVED BY THE COMPANY NOT LESS THAN 48 HOURS BEFORE THE MEETING. CHAIRMAN SPEECH
15. Ladies and Gentlemen,
I am very thankful to get the privilege to welcome you to 28th Annual General Meeting of your Company. I am feeling pleasure to say that the performance of your company is beyond the expectations, like – 1. Gross Turnover for the year 2009-10 grew by 25% to Rs. 5050 crores, besides a cut through competition in the market. 2. Government increased the rate of excise duty on our products, but even then the pre-tax profit increased by 20% and post-tax profit by 18% 3. Earnings Per Share for the year is Rs.8 (increased by 50%) 4. During the last five years, the net worth of company is increased by 10% amounting to Rs. 6580 Billion. PRIME / ME31 / IPCC
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You will be very happy to know that on the basis of turnover, your company is now among the top ten companies of India. I am sure that the strategic progress of the businesses in your Company’s portfolio is a source of satisfaction to shareholders. Your Company has made substantial investments in technology and innovation. Brand building at the national and international level was the main target of the year. It is due to your continued trust in your Company that your Company’s brands today account for three of the top five brands in the country. The progress made in strategy implementation and the resultant financial performance have further aspired us to make a larger contribution to the Indian society. Corporate Social Responsibilities: The Indian business is integrating with the global market. So, there is a great need for responsible business conduct for global competitiveness. In line with this thought, your Company is engaged to involve its consumers as partners in progress by bundling CSR. Other Social Initiatives Your Company’s social initiatives in the vicinity of its operating locations are centered around three main areas--a) natural resource management, which includes wasteland, watershed and agriculture development; b) sustainable livelihoods, comprising genetic improvement in livestock and women’s economic empowerment; and c) community development, with focus on primary education and health and sanitation. Conclusion The journey of the past decade has been most rewarding for your Company’s world-class employees and for me personally. The real transformation lies in their capabilities, their commitment to stay the course of a challenging strategic path, and their willingness to go the distance in their quest for enduring value for the nation and for shareholders. In the unfolding era of new opportunities and new challenges, I seek your support on their behalf, as always. Thanks for your attention. CHAIRMAN
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16.
Any partner may, at any time during the subsistence of the partnership, retire from the firm giving at least one month notice of his intension of doing so. Partnership Retirement Deed This must be executed on a stamp paper of appropriate value and copy sent to registrar of firms along with the prescribed form duly completed. The execution of retirement deed results in a reconstitution of the firm. X, Y and Z were carrying on business in partnership and whereas X having expressed his desire to retire the partnership firm by mutual consent., the terms of retirement are hereby agreed as follows: i. X will retire from the partnership effective from close of business on 31st March 09 ii. The firm is free to continue the business with all the assets and liabilities and use the same firm name with the remaining partners. iii. The continuing partners (Y, Z) release X of all the debts and allegation including taxes due from the firm on the date of this deed to third parties. iv. The parties hereby agree to execute even other document that may be necessary to give effect to the partnership retirement agreement.
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PRIME ACADEMY 31st SESSION MODEL EXAM IPCC – COST ACCOUNTING AND FINANCIAL MANAGEMENT QUESTION PAPER CGLT No. of Pages: 5 No of Questions: 7
Total Marks: 100 Time Allowed: 3 Hrs All are compulsory Working notes should form part of the answers
1. Answer any five of the following: (i) What are the objectives of cost accounting. (ii) Calculate efficiency, and activity ratio from the following data : Capacity ratio = 75% Budgeted output = 6000 units Actual output = 5000 units Standard Time per unit = 4 hours (iii) Distinguish between cost control and cost reduction. (iv) What are the main advantage of cost plus contracts. (v) A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution margins per unit are Rs. 40 for J and Rs. 20 for K. Fixed costs are Rs. 6,16,000 per month. Compute the break-even point. (vi) What are three major essentials of a good cost accounting system. (5x3=15 Marks) 2. Mega Company has just completed its first year of operations. The unit costs on a normal costing basis are as under : Rs. Direct material 4 kg @ Rs. 4 = 16.00 Direct labour 3 hrs @ Rs. 18 = 54.00 Variable overhead 3 hrs @ Rs. 4 = 12.00 Fixed overhead 3 hrs @ Rs. 6 = 18.00 100.00 Selling and administrative costs: Variable Rs. 20 per unit Fixed Rs. 7,60,000 During the year the company has the following activity : Units produced = 24,000 PRIME / ME31 / IPCC
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Units sold = 21,500 Unit selling price = Rs. 168 Direct labour hours worked = 72,000 Actual fixed overhead was Rs. 48,000 less than the budgeted fixed overhead. Budgeted variable overhead was Rs. 20,000 less than the actual variable overhead. The company used an expected actual activity level of 72,000 direct labour hours to compute the predetermine overhead rates. Required: (i) Compute the unit cost and total income under : (a) Absorption costing (b) Marginal costing. (ii) Under or over absorption of overhead. (iii) Reconcile the difference between the total income under absorption and marginal costing. (18 Marks) 3. a)
XP Ltd. furnishes you the following information relating to process II. (i) Opening work-in-progress—NIL (ii) Units introduced 42,000 units @ Rs. 12 (iii) Expenses debited to the process : Rs. Direct material 61,530 Labour 88,820 Overheads 1,76,400 (iv) Normal loss in the process = 2% of input. (v) Closing work-in-progress—1200 units Degree of completion — Materials 100% Labour 50% Overhead 40% (vi) Finished output—39500 units (vii) Degree of completion of abnormal loss : Material 100% Labour 80% Overhead 60% (viii) Units scraped as normal loss were sold at Rs. 4.50 per unit, (ix) All the units of abnormal loss were sold at Rs. 9 per unit.
Prepare: a) Statement of equivalent production. b) Statement showing the cost of finished goods, abnormal loss and closing work-in-progress. c) Process II account and abnormal loss account. (10 Marks) b) The following information is available from the cost records of Vatika & Co. For the month of August, 2009 : Material purchased 24,000 kg Rs. 1,05,600 PRIME / ME31 / IPCC
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Material consumed 22,800 kg Actual wages paid for 5,940 hours Rs. 29,700 Unit produced 2160 units. Standard rates and prices are : Direct material rate is Rs. 4.00 per unit Direct labour rate is Rs. 4.00 per hour Standard input is 10 kg. for one unit. Standard requirement is 2.5 hours per unit. Calculate all material and labour variances for the month of August-2009. 4.
(9 Marks)
Answer any three of the following : (i) Standard Time for a job is 90 hours. The hourly rate of Guaranteed wages is Rs. 50. Because of the saving in time a worker a gets an effective hourly rate of wages of Rs. 60 under Rowan premium bonus system. For the same saving in time, calculate the hourly rate of wages a worker B will get under Halsey premium bonus system assuring 40% to worker. (ii) Explain briefly, what do you understand by Operating Costing. How are composite units computed ? (iii) The following information relating to a type of Raw material is available : Annual demand 2000 units Unit price Rs. 20.00 Ordering cost per order Rs. 20.00 Storage cost 2% p.a. Interest rate 8% p.a. Lead time Half-month Calculate economic order quantity and total annual inventory cost of the raw material. (iv) List the eight functional budgets prepared by a business. (3x3=9 marks)
5. Answer any five of the following : (i) (ii) (iii) (iv) (v)
What are the limitations of Financial ratios. What do you understand by Business Risk and Financial Risk ? Differentiate between Factoring and Bills discounting. Distinguish Financial Management and Financial Accounting. Y Ltd. retains Rs. 7,50,000 out of its current earning. The expected rate of return to the shareholders. If they had invested the funds elsewhere is 10%. The brokerage is 3% and the shareholders came in 30% tax bracket. Calculate the cost of retained earning. (vi) From the informations given below calculate the amount of Fixed assets and Proprietor's fund. Ratio of fixed assets to proprietors fund = 0.75 Net working capital = Rs. 6,00,000 (5x2=10 Marks)
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6.
Y’s profit and loss statement for the year ended 31 March 2010 and balance sheet as at 31 March 2010 and 31 March 2009 were as follows: Y – profit and loss statement for the year ended 31st March 2010 Rs.’000 Rs.’000 Sales revenue 360 Raw materials consumed (35) Staff costs (47) Depreciation (59) Loss on disposal (9) (150) Operating profit 210 Interest payable (14) Profit before tax 196 Income tax expense (62) Profit after tax 134 Y – Balance sheet is as follows: Non-current assets Cost Depreciation Current assets Inventory Trade receivables Bank Capital and reserves Share capital Share premium Retained earnings Non-current Liabilities Long-term loans Current liabilities Trade payables Income tax
Rs. ‘000 31.3.2010
Rs. ‘000 31.3.2009
798 (159) 639
780 (112) 668
12 33 24 69 708
10 25 28 63 731
180 18 358 556
170 12 257 439
100
250
6 46 52 708 During the year, the entity paid Rs. 45,000 for a new piece of machinery. A dividend of Rs. 33,000 was paid during the year. PRIME / ME31 / IPCC
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3 39 42 731
Requirement Prepare a statement of cash flows for Y for the year ended 31 March 2010 in accordance with the requirements. (20 Marks) 7. Answer any three of the following: (i) Explain the two basic functions of Financial Management. (ii) Explain the following terms: a) Ploughing back of profits b) Desirability factor. (iii) What do you understand by Weighted average cost of Capital? (iv) There are two firms P and Q which are identical except P does not use any debt in its capital structure while Q has Rs. 8,00,000, 9% debentures in its capital structure. Both the firms have earning before interest and tax of Rs. 2,60,000 p. a. and the capitalisation rate is 10%. Assuming the corporate tax of 30%, calculate the value of these firms according to MM Hypothesis. (3x3=9 Marks)
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PRIME ACADEMY 31st SESSION MODEL EXAM IPCC – COST ACCOUNTING AND FINANCIAL MANAGEMENT SUGGESTED ANSWERS 1. (I) OBJECTIVES OF COST ACCOUNTING The main objectives of Cost Accounting are as follows: i. Ascertainment of cost. ii. Determination of selling price. iii. Cost control and cost reduction. iv. Ascertaining the profit of each activity. v. Assisting management in decision-making. (II) Capacity ratio = 75% =
AT w ------BT ATw ---------6000 x 4
ATw = 24000 x 75% = 18000 hrs ST 5000 X 4 Efficiency ratio = ---- = ---------- x 100 = 111.11% ATw 18000 Activity ratio
ST 20000 = ---- = -------- x 100 = 83.33% BT 24000
Here ST = Standard time for actual output ATw = Actual time worked BT = Budgeted time.
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(III) Cost Reduction, may be defined "as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product." Cost reduction should not be confused with Cost control. Cost saving could be a temporary affair and may be at the cost of quality. Cost reduction implies the retention of the essential characteristics and quality of the product and thus it must be confined to permanent and genuine savings in the cost of manufacture, administration, distribution and selling, brought about by elimination of wasteful and inessential elements from the design of the product and from the techniques carried out in connection therewith. In other words, the essential characteristics and quality of the products are retained through improved methods and techniques and thereby a permanent reduction in unit cost is achieved. The definition of cost reduction does not, however, include reduction in expenditure arising from reduction in taxation or similar Government action or the effect of price agreements. (IV) Advantages of Cost-plus Contracts: Such contracts have number of advantages for the contractor and the contractee. Advantages to Contractor i. All costs are fully covered. There is no risk of loss due to price changes and under estimation of costs, ii. There are no bargaining hassles. iii. There is an automatic escalation clause so that cost increases are recovered, iv. Profit is known in advance, v. Work of preparing tenders and quotations gets simplified. Advantages of Contractee i. Contractee pays only the reasonable price based on actual cost incurred, ii. No bargaining hassles, iii. Contractee gets the benefit of fall in price of materials and wage rates, etc. (V) Break up point in case of multi product firm Fixed Cost BEP = ----------------------------------= Overall Contribution per unit
616000 -----------------------------31.428571/- (W.N.1)
= 19600 Units per month W.N. (1) Overall contribution per unit Product J K
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Contribution per unit 40/20/-
7
Sales Mix 4 units 3 units 7
Contribution X Sales Mix 160 60 220
Overall Contribution per unit =
Σ Contribution x Sales Mix -------------------------------Σ Sales Mix 220 = ----- = 31.428571 /7
(VI) Essentials of a good Cost Accounting System: The essential features, which a good Cost Accounting System should possess, are as follows: i.
Cost Accounting System should be tailor-made, practical, simple and capable of meeting the requirements of a business concern.
ii.
The data to be used by the Cost Accounting System should be accurate; otherwise it may distort the output of the system.
iii.
Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting.
iv.
The Cost of installing and operating the system should justify the results.
v.
The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details.
2. (i) Profit & Loss A/c under absorption costing Rs. To D. Material 3,84,000 By Sales (215000 units @ 168/- p.u.) (24000 units @ 16/- per unit) ” D. Labour 12,96,000 ” Over recovery of fixed overhead (24000 units @ 54/- per unit) ” Variable overhead absorbed 2,88,000 ” Closing Stock ” Fixed overhead absorbed 4,32,000 (100/- x 2500 units) ” Selling & Admn. Overhead 4,30,000 Variable (21500 units @ 20/- p.u.) 7,60,000 Fixed ” Under recovery of 20,000 variable overhead 3,00,000 ” Net Income 39,10,000 Profit & Loss A/c under marginal costing Rs. To D. Material 3,84,000 By Sales ” D. Labour 12,96,000 ” Closing Stock ” Variable overhead (Actual) 3,08,000 (82.8333/- x 2500 units) ” Fixed overhead (Actual) 3,84,000 ” Selling & Admn. OH 4,30,000 Variable PRIME / ME31 / IPCC
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Rs. 36,12,000 48,000 2,50,000
39,10,000 Rs. 36,12,000 2,07,083
Fixed ” Net Income
7,60,000 2,57,083 38,19,083
38,19,083
Budgeted Fixed overhead = 72000 labours hours x 6/- per hour = 432000/Actual Fixed overhead = 432000/- - 48000 /- = 383000/Fixed overhead absorbed = units produced x fixed oh per unit = 24000 x 18/- = 432000 /Budgeted variable overhead = 72000 labour hours @ 4/- per hour = 288000 /Actual variable overhead = 288000/- + 20000 /- = 308000 /Cost per unit under absorption costing Rs. D. Material 16.00 D. Labour 54.00 Variable Overhead 12.00 Fixed Overhead 18.00 Total Cost 100.00 Cost per unit under Marginal costing Rs. D. Material 16.00 D. Labour 54.00 Variable overhead 12.83 308000/-------------2400 units Total Cost
82.83
(ii) Under or over absorption of overhead (a) Variable Overhead (Actual) 308000/” ” (Absorbed) 288000/Under recovery = 20000/(b) Fixed overhead (Actual) = ” ” (Absorbed) = Over recovery =
384000/432000/48000/-
(iii) Reconciliation statement between profit under absorption costing & marginal costing Profit as per marginal costing 257083 /Add : under valuation of Clo. Stock in marginal costing 42917/Profit as per absorption costing ---------300000 /-
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3. (a) Statement showing equivalent production Particulars Total Material Rs. % Qty Rs.
Labour %
Qty Rs.
(i) Opening WIP (ii) Units in produced, completed & transferred process III (iii) Normal Loss (iv) Abnormal Loss (v) Closing WIP
NIL 39500
-100%
-39500
-100%
-39500
840 460 1200
-100% 100%
-460 1200
-80% 50%
-368 600
Equivalent Production
42000
41160
%
Overhead Qty Rs. -100% --
-39500 --
60% 40%
276 480 40256
40468
Statement showing cost per unit of each element of material, labour & overhead Material Labour Rs. Rs. Total Material Cost including 565530 88820 additional material (Rs.) Less : Scrap value of Normal Loss 3780 -[840 units @ 4.5/- per unit] 561750 88820 Equivalent Production 41160 40468 Cost per unit 13.647959/2.1948205/-
-176400 40256 4.3819554/-
Statement showing cost of finished goods, abnormal loss closing WIP Particulars Finished Goods Abnormal Loss Rs. Rs. D. Material 539094/6278/(39500 x 13.647959) (460 x 13.6479) D. Labour 86695/807/(39500 x 2.1948) (368 x 2.1948/-) Overhead 173087/1210/(39500 x 4.3819/-) (276 x 4.3819/-) 798876/8295/-
Closing WIP Rs. 16378/(1200 x 13.6479/-) 1318/(600 x 2.1948/-) 2103/(480 x 4.3819/19799/-
Process II account Particulars
Qty
To D. Material ” Other Material ” D. Labour ” Overhead
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Qty 42000 ---42000
Amount Rs. 504000 61530 88820 176400 830750
10
Particulars By Normal Loss ” Abnormal Loss ” Finished Goods a/c ” Closing WIP
Overhead Rs. 176400
840 460 39500 1200 42000
Amount Rs. 3780 8295 798876 19799 830750
To Process II a/c ” Profit & Loss a/c (B/F)
4155
Abnormal Loss account Rs. Rs. 8295 By Cash a/c (460 units @ 9/- p.u.) 4140
------8295 ------3 (b) Material Variances (Assuming Partial plan) SP x SQ SP x SM Rs. Rs. 4 x (10 x 2160) 4 x 22800 = 86400/= 91200/-
-------8295 ------SP x AQ used Rs. 4 x 22800 = 91200/-
AP x AQ used Rs. 4.4 x 22800 = 100320
SP = Standard Price of material per kg = 4/SQ = Standard Quantity for actual output = 10 kg x 2160 units = 21600 k.g. AQ used = Actual Quantity used = 22800 k.g. Rs. 105600 AP = Actual Price of Material per K.g. = -------------24000 k.g. = 4.4/- per k.g. SM=Total Actual quantity used in standard mix ratio= 22800 k.g. (because there is only one material given in the question) Material Cost variance = (SP x SQ) – (AP x AX used) = 86400/- - 100320/- = 13920 /- (A) Material Price variance = (SP x AX used) – (AP x AQ used) = 91200/- - 100320/- = 9120/- (A) Material usage variance = (SP x SQ) – (SP x AQ used) = 86400 – 91200 = 4800/- (A) Material Mix Variance = (SP x SM) - (SP X AQ used) = 91200 – 91200 = NIL Material yield variance = (SP X SQ) – (SP X SM) = 86400 – 91200 = 4800 /- (A) Labour variance SR X ST SR X SM 4 x (2.5 x 2160) 4 x 5940 = 21600/= 23760/-
SR X ATW 4 x 5940 = 23760/-
SR X ATP 4 x 5940 = 23760/-
AR X ATP 29700/-
Here, SR = Standard rate of labour per hour AT = Actual rate of labour per hour ST = Standard time for actual output ATw = Actual time worked. ATp = Actual time paid for SM = Total Actual time worked in standard mix ratio. Note : - (1) It is assumed that ATp = ATw (2) In this question only one type of labour is there therefore SM = ATw.
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SR = 4/- per hour ST = 2.5 hours per unit x 2160 units = 5400 hours ATp = ATw = SM = 5940 hours Labour cost variance = (SR x ST) – (AR x ATp) = 21600 – 29700 = 8100/- (A) Labour rate variance = (SR x ATp) – (AR x ATp) = 23760 – 29700 = 5940/- (A) Labour Idle time variance = (SR x ATw) – (SR x ATp) = NIL Labour Mix Variance = (SR x SM) – (SR x ATw) = NIL Labour Efficiency Variance = (SR x ST) – (SR x SM) = 21600 – 23760 = 2160 (A) 4. (I)
Time Allowed = 90 hours Time taken = x hours (Assumed) Time saved = 90 – x Total Earning of the worker under Rowan System Total = Time wages + Bonus Earning TT 60x = (X x 50) + ---- x TS x Guaranteed wages per hour TA X 60 x = 50 x + ---- x (90 – x) x 50 90 2
x
10x = 50
50 x ------90
2
50x ------ = 50x – 10x 90 2 50x = 40x X 90 40x X 90 x = -----------50 2 Hence x = 72 x Hence x = 72 hours TT = Time Taken (Hours) TA = Time Allowed ( ” ) TS = Time Saved ( ” ) 2
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Total earning of the worker under halsey scheme (40%) For the same savings in time Total Earning = Time wages + Bonus = Time wages + 50% of time saved x Guaranteed wages = (50% x 72 hours) + 50% [18 hours x 50/-] = 3600/- + 450/- = 4050 /Total Earning Hourly Earning of worker B = ----------------TT 4050 /= --------- = 56.25/72 hrs (I) MEANING OF OPERATING COSTING : It is a method of ascertaining costs of providing or operating a service. This method of costing is applied by those undertakings which provide services rather than production of commodities. The emphasis under operating costing is on the ascertainment of cost of services rather than on the cost of manufacturing a product. This costing method is usually made use of by transport companies; gas and water works departments, electricity supply companies, canteens, hospitals, theatres, schools, etc. Composite units i.e, tonnes Kms, quintal Kms. etc may be computed in two ways i. Absolute (Weighted average) tonnes-kms., quintal kms., etc: Absolute (weighted) tonnes kms, are the sum total of tonnes kms., arrived at by multiplying various distances by respective load quantities carried. ii. Commercial (simple average) tonnes Kms., quintal Kms etc: Commercial (simple average) tonnes Kms., are arrived at by multiplying total distance kms., average load quantity. (II)
2AB -----C A = Annual Consumption = 2000 units assuming consumption ratio of finished goods & Raw material is 1:1 B= Ordering Cost per order = 20/C = Carrying cost per unit per annum = (2% + 8%) of Purchase price = 10% of Rs. 20/- = 2/- per unit p.a. Economic order quantity = Whole Root of
2AB 2 X 2000 x 20 (III) EOQ = Whole Root ------ = Whole root ---------------- = 200 units C 2 Total Annual Inventory cost of Raw Material = Inventory Purchase cost + Inventory Holding Cost + Inventory Carrying Cost = 40000/- + 200/- +200/- = 40400/Inventory Purchase Cost = 2000 units @ 20/- p.u. = 40000/PRIME / ME31 / IPCC
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AB 2000 X 20 ” ” Holding Cost = --------- = --------------EOQ 200 = 200/EOQ x C 200 units x 2/” ” Carrying Cost = ---------- = ----------------2 2 = 200/(IV) List of eight functional budgets prepared by a business are – 1. 2. 3. 4. 5. 6. 7. 8. 5.
Sales Budget Production Budget Production Cost Budget Raw Material Consumption Budget Raw Material Purchase Budget Direct Labour Budget Factory/Manufacturing Overheads Budget Administration Overheads Budget etc.
(I) Limitations of Financial ratios a) Financial statements do not represent a complete picture of the business, but merely a collection of facts which can be expressed in monetary terms. These may not refer to other factors which affect performance. b) Over use of ratios as controls on managers could be dangerous, in that management might concentrate more on simply improving the ratios than on dealing with the significant issues. For example, the return on capital employed can be improved by reducing assets rather than increasing profits. c) Ratios are interconnected. They should not be treated in isolation. The effective use of ratios, therefore, depends on being aware of all these limitations and ensuring that, following comparative analysis, they are used as a trigger point for investigation and corrective action rather than being treated as meaningful in themselves. (II) Business Risk: It is concerned with the operation of any firm. The cost structure of the any firm gives rises to business risks because of the existence of fixed nature of costs. Financial Risk: It indicates the effects on earnings by rise of fixed cost funds. It refers to the use of debt in the capital structure. Financial risk arises when a firm deploys debt funds with fixed charge.
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(III) Factoring
Bills discounting
1. It is also called ‘Invoice factoring’. 2. In this, the parties are viz., client, factor and debtor. 3. It is broad in scope. 4. It is management of book debts. 5. Maximum time is 6 months. 6. Grace time is not given. 7. Bad debts protection is given for extra commission. 8. There is no specific Act. 9. Settlement : No such provision. 10. Provision of advance payment on book debts is available.
1. It is also called ‘Invoice discounting’. 2. In this, the parties are : drawer, drawee and payee. 3. It is narrow in its scope. 4. It is a sort of borrowing from commercial banks. 5. Maximum time is 3 months. 6. Grace time is 3 days. 7. Protection is allowed for del credre commission. 8. Negotiable Instruments Act applies. 9. Settlement : Notary public. 10. No such provision is available.
(IV) Difference between Financial Management and Financial Accounting : Just as production and sales are major functions in an enterprise, finance too is an independent specialized function and it is well knit with other functions. Financial management is a separate management area. In many organizations accounting and finance functions are clubbed and the finance function is often considered as part of the functions of the Accountant. But the Financial management is something more than an art of accounting and book keeping in the sense that, accounting function discharges the function of systematic recording of transactions relating to the firm’s transactions in books of account and summarizing the same for presenting in financial statements viz, Profit and loss account and Balance sheet, Funds flow and Cash flow statements. The finance manager will make use of the accounting information in analysis and review of the firm's business position in decision making. In addition to the analysis of financial information available from the books of account and records of the firm, a Finance manager uses the other methods and techniques like capital budgeting techniques, statistical and mathematical models and computer applications in decision making to maximize the value of the firm's wealth and value of the owners' wealth. In view of the above, finance function is a distinct and separate function rather than simply an extension of accounting function. Financial management is the key function, many firms prefer to centralize the function to keep constant control on the finances of the firm. Any inefficiency in Financial management will be concluded with a disastrous situation. But, as far as, the routine matters are concerned, the finance function could be decentralized with adoption of responsibility accounting concept. It is advantageous to decentralize accounting function on to speedup the process of information. But since the accounting information is used in taking financial decisions, proper controls should be exercised on accounting function in processing of accurate and reliable information to the needs of the firm. The centralization or decentralization if accounting and finance functions mainly depend on the attitude of the top level management.
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(V) Cost of Retained Earnings: Kr x Retained Earnings Kr = (D – I) (1 – t) Where Kr = Cost of Retained Earnings D = Opportunity Cost of Capital = 10% I = Incidental cost = 3% t = tax rate = 30% Kr = (10% - 3%) x (1 - 0.30) = 4.9 % Cost of Retained Earnings : Kr x Retained Earnings = 4.9% x Rs. 7,50,000 = Rs. 36,750 (VI) Proprietor Fund = Fixed Assets + Working Capital Fixed Assets ---------------= 0.75 Proprietor Fund Fixed Assets -------------------------------= 0.75 Fixed Assets + Working Capital Fixed Assets -------------------------------= 0.75 Fixed Assets + Rs. 6,00,000 0.75 Fixed Assets + Rs. 4,50,000 = Fixed Assets Therefore Fixed Assets = Rs. 4,50,000 = Rs. 18,00,000 0.25 Proprietor Fund = Fixed Assets + Working Capital = 18,00,000 + 6,00,000 = Rs. 24,00,000
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6. Y – Statement of cash flows for the year ended 31st March 2010 Rs. ‘000
Rs. ‘000
Cash flow from operating activities Adjustments for Depreciation Loss on sale of plant Interest payable Operating profit before working capital changes Inventory – increase Receivables – increase Payables – increase Cash generated from operations Interest paid Income taxes paid Net cash from operating activities
196 59 9 14 278 (2) (8) 3 271 (14) (55) ______
202
Cash flows from investing activities Purchase of non-current assets Proceeds of sale of plant Net cash used in investing activities
(45) 6 ______
(39)
Cash flows from financing activities Proceeds of issue of shares Repayments of loans Dividends paid Net cash used in financing activities Net increase/decrease in cash and cash equivalents Cash and cash equivalents at 1 April 2009 Cash and cash equivalents at 31 March 2010 Working notes Taxation Rs. ’000 Balance due at 31 March 2009 Add: tax charge for the year to 31 March 2010
(167) (4) 28 24
39 62 ______ 101 (46) ______ 55
Less: tax liability at 31 March 2010 Tax paid during year Non-current assets – cost Rs.’000 Balance at 31 March 2009 PRIME / ME31 / IPCC
16 (150) (33) ______
780 17
Add: machinery purchased
45 ______ 825 (798) ______ 27
Less: balance at 31 March 2010 Disposal in the year Non-current assets – depreciation Rs.’000 Balance at 31 March 2009 Add: charge for the year Less: balance at 31 March 2010 Depreciation on disposal Receipts from sales of non-current tangible assets Rs.’000 Cost (calculated above) Depreciation (calculated above) Written-down value Loss on sale Proceeds from sale
112 59 ______ 171 (159) ______ 12 27 (12) ______ 15 (9) ______ 6
7.
(I) TWO BASIC FUNCTIONS OF FINANCIAL MANAGEMENT: 1. Procurement of funds : - Procurement of fund includes followings:i. Identification of finance sources. ii. Cultivating sources of funds and raising funds. iii. Determination of finance mix. iv. Allocation of profit between dividends and retention of profits i.e. internal fund generation. 2. Utilisation of funds :- Effective utilisation of fund is one of most important work under financial management because in present developed financial system procurement of fund is more easy then its effective utilisation.
(II)
a) Ploughing back of profits: It is a management tool under which management does not distribute the whole of the profits earned during an year to the owners of capital but it retains a part of it to be utilized in future for financing the schemes of development & betterment of the company and/or meeting the special fixed or working capital requirements of the concern. It is the best device to finance the schemes of expansion, modernization and betterment for an existing company. Ploughing back or re-investment of profits is an aspect of sound financial management. It raises no problem or complication as does borrowings either from the banks or the public. The reserves may be built up during a
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continuous spell of prosperous period by following the conservative dividend policy and without touching the capital structure of the company and may be used during emergency. It will help the company during depression however serious. According to this device, a part of the total earnings may be transferred to various reserves eg General Reserve, Repair and Renewal Reserve fund etc. Sometimes secret reserves are created by the directors without the knowledge of the shareholders to make the financial position of the company sound. b)Desirability factor : - It is also called Profitability Index. The desirability factor is the present value of an anticipated future cash inflows divided by the initial outlay. A project is acceptable if its desirability if equal to or more than one. When more than one project proposals are evaluated, for selection of one among them, the project with higher desirability factor will be selected. Mathematically, desirability factor can be expressed as follows: Present value of cash inflows Present value of cash outflows Advantages 1. This methods also uses time value of money concept 2. It is a better project evaluation technique than NPV. Disadvantages 1. If fails as a guide to resolve capital rationing when projects are indivisible 2. Sometimes project with a lower desirability factor chosen generates cash flows in such a way that another new project can be started within one or two years and the total NPV exceeds the NPV of the project with maximum desirability factor. The desirability factor approach cannot be used indiscriminately without examining other type of alternatives of projects. (III)
Weighted average cost of capital: The composite or overall cost of capital of a firm is the weighted average of the costs of various sources of funds. Weights are taken to be the proportion of each source of funds in the capital structure. The weight to be used can be either book value weights or market value weights. While taking financial decisions this overall or weighted cost is used. For calculating WAC following steps should be followed:Step. 1. Calculate individual cost of capital as above. Step. 2. Calculate Weights: Weights for How to calculate 1. Equity Capital Equity capital / Total capital employed 2. Retained earning Retained earning/Total capital employed 3. Preference share Preference share / Total capital employed 4. Loans, debenture, deposit Loan, debenture, deposit/Total Capital employed. Step. 3. WAC = Step 1 X Step 2 (Individual for each items) Note: One may consider market value of capital instead of books value of calculating weights but normally book value is taken. If we take market value then market value is taken for numerator and denominator both. But market value is taken only when question is required.
(IV) Value of unlevered firm = Value of equity PRIME / ME31 / IPCC
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Earnings available for equity shareholders = -------------------------------------------------------Equity Capitalisation rate
1,82,000 (WN 1) = --------------------- = 18,20,000 10%
Value of levered firm = Value of unlevered firm + Value of Debt (tax rate) = 18,20,000 + (8,00,000 X 30%) = 20,60,000 WN 1 – Calculation of Earnings available for equity shareholders EBIT 2,60,000 Less : Interest -------------EBT 2,60,000 Less : Tax @ 30% 78,000 -----------EAT 1,82,000
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PRIME ACADEMY 31st SESSION MODEL EXAM - IPCC – INCOME TAX, SERVICE TAX & VAT QUESTION PAPER IXVS No. of Pages: 4 No of Questions: 8
All are compulsory
Total Marks: 100 Time Allowed: 3 Hrs
Working notes should form part of the answers 1. Shri Sairam working as Senior Manager Marketing in Baba Enterprises furnishes the following details for the year ended 31.03.2010. Basic Salary Rs.25,000 pm DA(50% for retirement benefits) Rs.22,000 pm Commission as a % of turnover of the company 0.25% (Turnover of the company – Rs.75 Lacs) Bonus Rs.75,000 Gratuity Rs.35,000 Own Contribution to R.P.F Rs.36,000 Employer contribution to RPF 12% of Basic Salary Interest Credited in the R.P.F Account @15% P.A Rs.15,000 Gold Ring worth Rs.25000 was given by Employer on his 25th Wedding anniversary. Laptop purchased on 02.04.09 by the company for Rs.85000 and was given to him for personal use. Interest Received from two FD’s Rs. 6,850 Dividend from shares of Indian Co Rs. 8,260 Interest from debentures (Indian Companies) Rs. 5,825 Cheque paid for LIC Premium Rs.75,850 Mediclaim Premium paid(Father Senior Citizen not dependant) Rs.22,000 Investment in 6 years NSC Bonds Rs.30,000 Donation to approved institution u/s 80G Rs.12,000 Donation to Prime Minister’s National Relief Fund Rs. 5,000 Donation to Electoral Trust Rs. 7,000 Compute the total income and tax payable thereon for A.Y. 2010-11 (20 Marks) 2. Answer any two of the following (a) Mr.Osama is a foreign citizen, since 1989. He comes to Chennai every year in the month of August 2009 for 105 days. Find out the residential status for AY 2010-11. It is also known that he is not a person of Indian Origin. Will the answer be different if the Grand Mother of Mrs.Y was born in Lahore, Pakistan? Test the residential staus if Mr.Osama was born in Chennai. Test the residential status if Mr.Osama was born in Karachi in 1939. PRIME / ME31 / IPCC
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(b) Discuss whether the following persons are “Specified Employee” or not. i. Karthik is employed by Mathura Ltd. He is a Whole Time Director in the Company. ii. Sandhiya is employed by TCS Ltd. She gets a salary of Rs.55,000(Basic – 35000, Bonus -20000) iii. Prakash is Employed by ABC Ltd. He holds 21% Equity Sharecapital in that company. (c) Arun sold his vacant site on 21.09.2009 for Rs.700,000. It was acquired by him on 01.10.1994 for Rs.150,000. The State Stamp valuation authority fixed the value of Site at the time of transfer @ Rs.1,300,000. Compute the capital gains in the hands of Arun and state your reasons with relevant provisions of Income Tax Act. (2x6= 12 Marks) 3. Mr.Rahul Dravid has a house property situated in Bengaluru which consists of two units. Unit A has 60% floor area, whereas unit B has 40% floor area. Unit A was self-occupied by Rahul for 8 months and w.e.f.1-12-2009, it was let out for Rs.12,000 per month, Unit B was also meant for self occupation but ot was also let out w.e.f 1-10-2009 for Rs.9,000 per month. The other particulars of the house property were as under: Municipal Taxes Paid Insurance Premium Interest on Money Borrowed
Rs.55,000 Rs. 8,000 Rs.25,000
Mediclaim Insurance on life of Rahul’s Father being a senior citizen amounted to Rs.25,000 Compute Income from House property for the Assessment year 2010-11. (9 Marks) 4. Answer any three of the following: i. What is Profit in Lieu of Salary and under what head it is chargeable to tax? ii. Explain the term “Business Connection”. Why is it relevant from the point of Income Tax? iii. What are the provisions for return of loss? Are there any consequences of belated filing of Return of Loss? iv. What are the due dates and installments of Advance Tax to be paid by Non-Corporate Assesses? (3x3= 9 Marks) 5. Answer the following: i. Who is liable to make e-payment of Service Tax? What is the due date for e-payment? ii. Explain the term “Abatement” in Service Tax. iii. M/s ABC Enterprises are appointed as sub-contractors by M/s S Ltd for assembly of ATM Machines. Is M/s ABC Enterprises liable for Service Tax? iv. Who are Service Tax Return Preparers? (4x2= 8 Marks)
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6. a. Mr.Rajnikanth , owns a Marriage Hall which provides use of the Hall for various functions and also arranges for Catering Services. Following details are available: Hall Rent received during the year 2009-10 Rs.1,230,000 Amount received for Temporary Occupation of hall for a Dance Rs. 50,000 Programme Catering Charges collected in 2009-10 Rs. 985,000 Reimbursement of Electricity and Generator Charges Rs. 120,000 Calculate the Value of Taxable Service and Service tax theron, under the category of Mandap Keeper Service. (8 Marks) b. Answer the following: (i) Does Service Tax Law provide exemption to Small Service Providers? If yes what is the quantum of Exemption? (ii) Explain Service Tax Liability for Commercial training or Coaching Service. (iii) What are the methods for adjustment of Excess Amount paid towards Service Tax Liability? (3x3 = 9 Marks) 7. Answer the following: (a) What are the different variants of Value Added Tax? (b) What are the circumstances in which VAT Registration is cancelled? (c) Under VAT system there is no Compulsory Assessment at the end of each year. Do you agree? (d) What is the Composition Scheme under VAT? (4x2= 8 Marks) 8. (a) M/s K & Co, Manufacturer sells goods to Mr.G, a Distributor for Rs.90,000(Excluding VAT). Mr.G sells goods to Mr.Srikanth, a wholesale dealer for Rs.100,000. The Wholesale dealer sells the goods to a retailer for Rs.120,000. Compute the Tax Liability, Input Credit availed and Tax payable by the Manufacturer, distributor, Wholesale Dealer and retailer under Invoice Method assuming VAT Rate @ 12.5%. (8 Marks) (b) Answer the following: i. Explain Input Tax Credit under VAT System for Capital Goods. ii. Explain the concept of Central Value Added Tax. iii. What are the records to be maintained under VAT system? (3x3 = 9 Marks) PRIME / ME31 / IPCC
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PRIME ACADEMY 31st SESSION MODEL EXAM - IPCC – INCOME TAX, SERVICE TAX & VAT SUGGESTED ANSWERS 1. Computation of Income of Shri Sairam for the A.Y.2010-11 Particulars Income from Salaries:
Amount(Rs.)
Basic Salary (25000 X 12) DA (22000 X 12) Commission (7,500,000 X 0.25%) Bonus Gratuity (Received during the service) Employer Contribution to RPF (Exempt up to 12%) Interest on RPF (Note 2)(Rs.15000/15%*5.5%) Gift of Gold Ring Laptop given for use (10% of 85,000) Gross Salary Deduction u/s 16 Chargeable Salary Income from Other Sources:
300,000 264,000 18,750 75,000 35,000 Exempt 5,500 25,000 8,500 731,750 Nil 731,750
FDR Interest Dividend on Shares (Exempt u/s 10(34)) Debenture Interest Income under other sources GROSS TOTAL INCOME (A) Less: Deductions: U/s 80C (RPF 36,000 + LIC Premiun 75,850+ NSC 30,000) (Restricted to Max.100,000) U/s 80D – Mediclaim Premium – (Max.Rs.20000) U/s 80 G – Note 3 U/s 80GGB (Donation to Electoral Trust) Total Taxable Income Computation of Tax Liability : Tax on Total Income (140000*10%+200000*20%+106,425*30%) Add : Surcharge Add: Education Cess @ 2% Add: S & H E Cess @ 1% TAX LIABILITY (B) (Rounded off)
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Amount(Rs.)
6850 Nil 5825 12,675 744,425 100,000 20,000 11,000 7,000
138,000 606,425
85,328 Nil 1707 853
4
87,888 87,890
Note 1: Interest on RPF exempted up to 9.5% Note 2: Deduction u/s 80G: Gross Total Income Less: Deductions other than 80G
: 7,44,425 : 1,27,000 ------------: 6,17,425 : 61,743 : 12,000 : 6,000
Adjusted Gross Total Income(AGTI) Limit : 10% of AGTI Donations to Approved institutions Allowed Deduction 50% of 12000 Add: Donation to Prime Minister’s National Relief Fund :
5,000 ------------
TOTAL
11,000
2. a) Mr. Osama comes to India every year for 105 days. For the years 2005-06, 2006-07, 2007-08 and 2008-09 – Total stay in India – 105x4 = 420 Days Conditions as per Sec. 6(1) a) Stay in India for 182 days or more during previous year – Not Satisfied b) Stay in India for 60 days or more during Previous Year and 365 days or more during 4 years immediately preceding the Previous Year – Satisfied Hence Osama is a resident under Income Tax Act. To find out whether he is Ordinarily Resident or Not Ordinarily Resident following additional conditions to be satisfied: 1) Resident in India in at least two out of ten previous years immediately preceding the relevant previous year - Yes it is Satisfied by Sec.6(1) 2) Stay in India for 730 Days or more during 7 years immediately preceding the relevant Previous Year – Yes it is Satisfied as he stays in India for 105x7 = 735 Days Hence Mr. Osama is Resident and Ordinarily Resident u/s 6(6) of Income Tax Act. The above test is applied considering Mr.Osama is not a person of Indian Origin. However if Mr.Osama is known to a person of Indian origin then the 2nd Condition of Sec.6(1) needs to be tested as below: In case of Indian Citizien or a person of Indian Origin who comes on a visit to India, an exception to Sec.6(1) applies where the requirement of 60 days stay in previous year is substituted with 182 Days. Accordingly Mr.Osama will be a Non- Resident if he happens to be a person of Indian Origin. In light of above: PRIME / ME31 / IPCC
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a) If Grand Mother of Mr.Osama was born in Lahore – He becomes a person of Indian Origin and hence will be a NON RESIDENT b) If Mr.Osama was born in Chennai – He becomes an Indian Citizen and hence will be subject to above exception and accordingly a NON RESIDENT c) If Mr.Osama was born in Karachi in 1939 i.e. Undivided India - he will become a person of Indian Origin and hence again will be NON RESIDENT b) i.
An employee who is a director in the employer company at any time during the previous year is a specified employee of the company in which he is a Director. Accordingly Mr.Karthik is a Specified Employee of Mathura Ltd. for the purpose of Income Tax Act. ii. An employee drawing a Salary (without including non-monetary payments) of more than Rs.50,000 is a specified Employee. As the salary drawn is Rs.55,000, Sandhiya is a specified employee of TCS Ltd. for the purpose of income Tax Act. iii. An employee who has substantial interest in the Employer Company at any time during the previous year is a specified employee of the company in which he has substantial interest. Substantial Interest is established when the employee is a beneficial owner of equity shares carrying 20 percent or more voting power in the Employer Company. Accordingly Mr.Prakash is a Specified Employee of ABC Ltd as he holds 21 percent shares. C) Computation of Capital Gains of Arun: Particulars Sale Proceeds (Note 1) Less: Indexed Cost of Acquisition (150,000X632/259) Long Term Capital Gains
Amount(Rs.) 1,300,000 366,023 933,936
Note 1: As per Sec.50C, when the Sale Consideration in case of Sale of Land or Building or both, is less than the value adopted by any authority of a State Government for the purpose of payment of Stamp Duty, the valuation adopted for stamp duty purpose will be deemed to be the Sale Consideration. Since the stamp duty valuation is Rs.1,300,000/- as compared to the actual sale proceeds of Rs.700,000/-; the former value is considered. 3. Income from House Property of Mr.Rahul Dravid for the A.Y.2010-11 Unit A: a) Expected Rent (12000*12) b) Actual Rent Received (12000*4) Gross Annual value Less : Municipal Taxes paid (60% of 55,000) Net Annual Value
PRIME / ME31 / IPCC
Rs. 144,000 48,000 144,000 33,000 111,000
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Less : Deduction u/s 24 a) Standard deduction @ 30% of NAV b) Interest on borrowed capital (60% of 25,000)
33,300 15,000 ----------
Income From Unit A
48,300 62,700
Unit B: a) Expected Rent (9000*12) b) Actual Rent Received (9000*6) Gross Annual value Less : Municipal Taxes paid (40% of 55,000) Net Annual Value Less : Deduction u/s 24 a) Standard deduction @ 30% of NAV b) Interest on borrowed capital (60% of 25,000) Income From Unit B
Rs. 108,000 54,000 108,000 22,000 86,000 25,800 10,000 ------------
35,800 50,200
Note : 1. Insurance Premium paid for house Property and Mediclaim are not relevant for computation of Income from House Property 2. In the above question both house properties are part of the year self-occupied and part of the year let out. Hence benefit of self-occupation for residential purposes shall not be allowed due to the provisions of Sec.23(3). In this case annual value of both the house properties shall be determined as per Sec.23(1) 3. In the absence of information actual rent is taken as Expected Rent. 4.
1. Profits in lieu of Salary is defined by Sec.17(3). These payments are made to an employee in lieu of Salary even of these payments have no connection with the profits of the employer. It is taxable under the head income from Salaries u/s 17(1)(iv). These kinds of payments include: a. Compensation for loss of employment or modification of employment terms b. Payment from Unrecognized provident fund or Superannuation fund c. Payment under keyman insurance policy d. Payment before joining or after retirement 2. Business Connection involves a relation between a business carried on by a Non-resident which yields profits or gains and some activity in India which contributes to the earning of these profits or gains. A business connection can arise between a non-resident and a resident if both of them carry on business and if the non-resident earns income through such a connection.
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Business connection is important from the point of view of Tax Incidence in India. According to Sec.9(1)(i) an income from business connection even though arising outside India is deemed to accrue or arise in India. 3. As per Sec.139(3), a Return of Loss can also be filed within the due dates mentioned u/s 139(1). The return of loss should be filed in the prescribed form and within the time allowed u/s 139(1). In case of delayed filing of Return of loss following losses cannot be carried forward: a. Business Loss – speculative or otherwise. b. Capital Loss c. Loss from the activity of owning and maintaining race horses. 4. All the assesses (other than companies), are liable to pay advance tax, in three installments during each financial year and the due date of each installment and the amount of such Installment is as specified in Table below: Instalment Due Date On or before the 15th September Not less than thirty per cent of such advance tax. On or before the 15th December Not less than sixty per cent of such advance tax, as reduced by the amount, if any, paid in the earlier installment. On or before the 15th March The whole amount of such advance tax as reduced by the amount or amounts, if any, paid in the earlier installment or installments: It is also provided that any amount paid by way of advance tax on or before the 31st day of March shall also be treated as advance tax paid during the financial year ending on that day for all the purposes of this Act. 5.
1. The Central Board of Excise and Customs has made electronic payment of service tax compulsory from April 1, 2010, for those who have in 2009-2010 paid a total service tax of Rs 10 lakhs or more, including the amount paid by utilization of Cenvat credit. Prior to the notification No.1/2010, the electronic payment option was available only to those who had paid a service tax of Rs 50 lakh or more including utilization of Cenvat credit. The service provider who pays the service tax online will also have to file the half-yearly service tax return electronically through the ACES (Automation of Central Excise and Service Tax) platform from April 1. If the assessee is an individual or proprietary firm or partnership firm, the tax is payable on quarterly basis within 6 days from the end of quarter in case of e-payment except in March. Service tax is payable by other assessee’s by 6th of the month following the month in which payments are received toward value of taxable services except in March [rule 6(1) of Service Tax Rules].
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2. Abatement stands for concession in service tax. Here service tax is not imposed on full value of service but on part of service e.g. if invoice for servicing is to be raised for Rs.1000.00 and abatement of 75% allowed (e.g. in GTA Services) then service tax will be imposed only on Rs.250.00. There are many services where abatement is allowed, but in such cases no cenvat or input tax credit will be allowed. 3. M/s ABC enterprises are sub-contractors for M/s S Ltd. A Sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor. Accordingly in the present case the work involving assembly of machines will attract service tax and it will be payable on the service charges billed to main contractor. 4. "Service Tax Return Preparer" means any individual who has been issued a Service Tax Return Preparer Certificate and a unique identification number under clause (9) of paragraph 4 of Service Tax Return Preparer Scheme by the Partner Organization to carry on the profession of preparing the returns of income in accordance with the provisions of Service Tax Return Preparer Scheme, 2009. The Service Tax Return Preparer shall(a) prepare the return with due diligence; (b) affix his signature on the return prepared by him; (c) furnish the return (d) hand over a copy of the return to the person whose return is prepared and furnished by him; (e) retain a copy of the acknowledgment of having furnished the return;
6. a. Computation of Value of Taxable Service and Tax Payable of Mr.Rajnikanth Particulars Hall Rent Received (taxable u/s 65(105)(m)) Temporary occupation of Hall for Dance(taxable u/s 65(105)(m)) Catering Charges Reimbursement of Electricity and Generator Charges – not taxable Total Value of Service Less : Abatement @ 40% Taxable Value of Service Service Tax including Cess @ 10.3% PRIME / ME31 / IPCC
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Amount (Rs.) 1,230,000 50,000 985,000 Nil 2,265,000 906,000 1,359,000 139,977
b.
(i)
Yes. As per Notification no.6/2005 dated 01.03.2005, Service tax is fully exempt in respect of taxable services of aggregate value not exceeding Rs.1,000,000/- in any financial year. The exemption is however, subject to certain conditions. This exemption was introduced w.e.f. 01.04.2005. Some exceptions: a. The above exemption is not available if taxable service provided by person under Brand name or trade name whether registered or not or of another person. b. The above exemption is not available on value of taxable service where tax has been paid by the assessee as recipient of the service like in case of GOODS transport agency, exemption is not available to consignee /consignor.
(ii)
Sec.65(26) and Sec.65(27) of the Finance Act provide for taxability of services rendered by Commercial Training or Coaching Centre. Commercial Training or coaching centre is defined as any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the sports, with or without issuance of certificate and includes coaching or tutorial classes but does not include pre-school coaching and training or establishment which issues any certificate or diploma or degree or educational qualification recognized by law for the time being in force. As per Sec.65(105)(zzc) scope of taxable service for a commercial coaching or training centre will include any service provided or to be provided to any person by a commercial training or coaching centre in relation to commercial training or coaching.
(iii)
Where an assessee has paid to the credit of Central government any amount in excess of the amount required to be paid toward service tax liability for a month or quarter, as the case may be, the assessee may adjust such excess amount paid by him against his service tax liability for the succeeding month or quarter, as the case may be. a. Self adjustment of excess credit will not be allowed in case of reasons involving interpretation of law, taxability, classification, valuation or applicability of any exemption notification. b. Excess amount paid or adjusted should not exceed Rs.100, 000 for the relevant month or quarter. c. Adjustment can be made only in the succeeding month or quarter. d. The details of self adjustment should be intimated to the Superintendent of Central Excise within a period of 15 days from the date of such adjustment.
7. a) The variant of Value Added Tax are as follows: 1) 2) PRIME / ME31 / IPCC
Gross Product Variant: In this variant the tax is levied on all sales and deduction allowed for tax paid on all inputs including Capital Inputs. Income Variant : In this variant tax is levied on all sales with set-off for tax paid on inputs and only depreciation allowed on Capital Inputs. 10
3)
Consumption Variant: Tax is levied on all sales with deduction for tax paid on all business inputs including capital goods.
b) In following circumstances VAT Registration can be cancelled: 1) Discontinuance of Business 2) Disposal of Business 3) Transfer of business to a new location 4) Annual turnover of manufacturer or trader dealing in designated goods or services falling below the specified amount. c) Agree. Under VAT system there is no Compulsory Assessment at the end of each year. In fact the assessment part is simplified under VAT System. The VAT liability is self assessed by the dealer himself in terms of submission of returns upon setting off the tax credit, return forms etc. If no specific notice is issued proposing departmental audit of books of account of the dealer within the time limit specified in the Act, the dealer will be deemed to have been self assessed on the basis of the returns submitted by him. d) Any dealer who effects, second and subsequent sales of goods within the Union Territory and whose total turnover under VAT and CST combined is less than Rupees 50 lakhs can avail the compounding option and pay tax at 0.50% of his taxable turnover instead of the rates specified in the schedules. The permission of the assessing authority has to be obtained in order to avail the compounding option. Moreover, if in a year the turnover of a dealer who has exercised compounding option exceeds Rs 50 lakhs, the permission so granted will be automatically revoked and he has to pay Tax at the rates mentioned in the schedule from the next tax period onwards. 8. a) Computation of Tax Liability, Input Credit availed and Tax Payable under Invoice Method: Stage Particulars VAT Liability VAT Credit Tax Payable (Rs.) (Rs.) to Govt (Rs.) 1. K&Co, Manufacturer sells to Mr.G 11,250 Nil 11,250 Distributor Rs.90,000 (90000*12.5%) 2. G, The distributor sells to Srikanth, 12500 11250 750 wholesaler Rs.100,000 (100000*12.5%) (tax paid at first stage) 2500 3. Srikanth sells to retailer at 15000 12500 Rs.120000 (Tax paid at 2nd stage) Tax liability of retailer has not been computed as the Sale Value to ultimate consumer is not furnished.
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b) Salient features of Input Tax Credit for Capital Goods under VAT System are as follows: i. A dealer has to purchase Capital Goods or create capital assets himself by purchasing materials for Capital Assets. Normally all these items are taxable and declare has to pay sales tax on purchase of above goods. ii. Normally under VAT System the dealer should get full credit for tax paid on such purchases, more particularly when the basic principle is to avoid the cascading effect. However if the input credit is not allowed in full then certainly, to an extent of disallowance the principle of VAT gets defeated. iii. As per the white paper the State Governments are allowed to provide the set off of tax paid on capital goods on a staggering basis at the most in 36 installments. This is subject to the policy of individual states. Accordingly the set off varies from state to state and is allowed on submission of proof for tax payment on capital goods. Central Value Added Tax: At the Central level, at the time of independence, India inherited a system of commodity taxes in which excise duties were levied on about a dozen articles yielding a small proportion of total tax revenue to the centre. Following independence the rates were raised, the base was enlarged and more and more items were brought into its net. Over time, there was a speedy extension of excise duties. It was not only levied on finished goods but also covered raw materials, capital goods and Intermediate goods. As of now the structure of tax is on the CENVAT scheme where the tax credit is allowed for specified excise duties, service tax and VAT. The concept of this scheme works on the value added tax system where cascading effect of taxes paid is avoided. At present the CENVAT Scheme is governed by CENVAT Credit Rules, 2004. Records to be maintained under VAT system: a. Purchase Records b. Sales Records c. VAT Account d. Separate record for any exempt Sale e. Copies of all invoices issued, in serial number f. Copies of all credit and debit notes issued, in chronological order g. All purchase invoices, copies of customs clearances, receipts for payment of customs duties h. Details of amount of tax charged on each sale or purchase i. Total of output tax and input tax in each period and a net total of the tax payable or the excess carried forward, as the case may be, at the end of each month j. Details of goods manufactured and delivered from the factory of the taxable person. PRIME / ME31 / IPCC
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