CA Inter RTP Nov 2018 Small PDF

PAPER – 1: ACCOUNTING
PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

FOR NOVEMBER, 2018 EXAMINATION
A. Applicable for November, 2018 examination
I. Companies Act, 2013
Relevant Sections of the Companies Act, 2013 notified up to 30th April, 2018 will be
applicable for November, 2018 Examination.
II. Notification dated 13th June, 2017 to exempt startup private companies from
preparation of Cash Flow Statement as per Section 462 of the Companies Act 2013
As per the Amendment, under Chapter I, clause (40) of section 2, new exemption has
been provided to a startup private company besides one person company, small
company and dormant company. Accordingly, a startup private company is not
required to include the cash flow statement in the financial statements.
Thus the financial statements, with respect to one person company, small company,
dormant company and private company (if such a private company is a start-up), may
not include the cash flow statement.
B. Not applicable for November, 2018 examination
Non-Applicability of Ind ASs for November, 2018 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February, 2015, for compliance by certain class of companies. These
Ind AS are not applicable for November, 2018 Examination.
PART – II: QUESTIONS AND ANSWERS
QUESTIONS
Financial Statements of Companies

Preparation of Statement of Profit and Loss Statement and Balance Sheet
1. (a) You are required to prepare a Balance Sheet as at 31 st March 2018, as per Schedule
III of the Companies Act, 2013, from the following information of Mehar Ltd .:
Particulars Amount Particulars Amount
(`) (`)
Term Loans (Secured) 40,00,000 Investments (Non-
current) 9,00,000
Trade payables 45,80,000 Profit for the year 32,00,000
© The Institute of Chartered Accountants of India

2 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018
Other advances 14,88,000 Trade receivables 49,00,000

Cash and Bank Balances 38,40,000 Miscellaneous Expenses 2,32,000
Staff Advances 2,20,000 Loan from other parties 8,00,000
Provision for Doubtful
Provision for Taxation 10,20,000
Debts 80,000
Securities Premium 19,00,000
Loose Tools 2,00,000 Stores 16,00,000
General Reserve 62,00,000 Fixed Assets (WDV) 2,26,00,000
Capital Work-in- progress 8,00,000 Finished Goods 30,00,000
Additional Information:-
1. Share Capital consist of-
(a) 1,20,000 Equity Shares of ` 100 each fully paid up.
(b) 40,000, 10% Redeemable Preference Shares of ` 100 each fully paid up.
2. The company declared dividend @ 5% of equity share capital. The dividend
distribution tax rate is 17.304%. (15% CDT, surcharge 12%, Education Cess
2% and SHEC @ 1% )
3. Depreciate Assets by ` 20,00,000.
(b) PQ Ltd., a non-investment company has been incurring losses for the past few years.
The company provides the following information for the current year:
(` in lakhs)
Paid up equity share capital 180
Paid up preference share capital 30
Reserves (including Revaluation reserve ` 15 lakhs) 225
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
Application money pending allotment 1080
Accumulated losses not written off 30
Investments 270
PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate
the amount of maximum remuneration that can be paid to him as per provisions of
Companies Act, 2013, if no special resolution is passed at the general meeting of the

PAPER – 1 : ACCOUNTING 3
company in respect of payment of remuneration for a period not exceeding three

years.
Cash flow statement
2. The Balance Sheet of Harry Ltd. for the year ending 31 st March, 2018 and 31st March, 2017
were summarised as follows:
2018 (`) 2017 (`)
Equity share capital 1,20,000 1,00,000
Reserves:
Profit and Loss Account 9,000 8,000
Current Liabilities:
Trade Payables 8,000 5,000
Income tax payable 3,000 2,000
Declared Dividends 4,000 2,000
1,44,000 1,17,000
Fixed Assets (at W.D.V) :
Building 19,000 20,000
Furniture & Fixture 34,000 22,000
Cars 25,000 16,000
Long Term Investments 32,000 28,000
Current Assets:
Inventory 14,000 8,000
Trade Receivables 8,000 6,000
Cash & Bank 12,000 17,000
1,44,000 1,17,000
The Profit and Loss account for the year ended 31 st March, 2018 disclosed:
`
Profit before tax 8,000
Income Tax (3,000)
Profit after tax 5,000
Declared Dividends (4,000)
Retained Profit 1,000

Further Information is available:

1. Depreciation on Building ` 1,000.
2. Depreciation on Furniture & Fixtures for the year ` 2,000.
3. Depreciation on Cars for the year ` 5,000. One car was disposed during the year
for ` 3,400 whose written down value was ` 2,000.
4. Purchase investments for ` 6,000.
5. Sold investments for ` 10,000, these investments cost ` 2,000.
You are required to prepare Cash Flow Statement as per AS-3 (revised) using indirect
method.
Profit or Loss prior to Incorporation
3. Roshani & Reshma working in partnership, registered a joint stock company under the
name of Happy Ltd. on May 31 st 2017 to take over their existing business. The summarized
Profit & Loss A/c as given by Happy Ltd. for the year ending 31 st March, 2018 is as under:
Happy Ltd.
Profit & Loss Account for the year ending March 31, 2018
Particulars Amount (`) Particulars Amount (`)
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Depreciation 19,250
To Rent 38,400
To Audit fees (Company
12,000
Audit)
To Net Profit 1,33,350
Total 4,50,000 Total 4,50,000
You are required to prepare a Statement showing allocation of expenses and calculation
of pre-incorporation and post- incorporation profits after considering the following
information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ` 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ` 14,000 for a sale made in 2014-15 has been
deducted from bad debts mentioned above.

(iv) Total sales were ` 18,00,000 of which ` 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1 st Oct. 2017 for which rent was
` 2,400 per month.
Accounting for Bonus Issue
4. Following is the extract of the Balance Sheet of Xeta Ltd. as at 31 st March, 2017:
`
Authorised capital:
50,000 12% Preference shares of ` 10 each 5,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Securities premium 1,00,000
Profit and Loss Account 6,00,000
On 1st April, 2017, the Company has made final call @ ` 2 each on 2,70,000 equity shares.
The call money was received by 20 th April, 2017. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
You are required to give necessary journal entries in the books of the company and prepare
the extract of the balance sheet as on 30 th April, 2017 after bonus issue.
Right issue
5. Zeta Ltd. has decided to increase its existing share capital by making rights issue to its
existing shareholders. Zeta Ltd. is offering one new share for every two shares held by
the shareholder. The market value (cum-right) of the share is ` 360 and the company is
offering one right share of ` 180 each to its existing shareholders. You are required to
calculate the value of a right. What should be the ex-right value of a share?
Redemption of preference shares
6. The following are the extracts from the Balance Sheet of Meera Ltd. as on
31st December, 2017.
Share capital: 60,000 Equity shares of `10 each fully paid – ` 6,00,000; 1,500 10%
Redeemable preference shares of ` 100 each fully paid – `1,50,000.

Reserve & Surplus: Capital reserve – ` 75,000; Securities premium – ` 75,000; General
reserve – ` 1,12,500; Profit and Loss Account – ` 62,500
On 1st January 2018, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilisation of reserve.
You are required to prepare necessary Journal Entries including cash transactions in the
books of the company.
Redemption of Debentures
7. The summarized Balance Sheet of Spices Ltd. as on 31 st March, 2018 read as under:
`
Liabilities:
Share Capital: 9,000 equity shares of ` 10 each, fully paid up 90,000
General Reserve 38,000
Debenture Redemption Reserve 35,000
12% Convertible Debentures : 1,200 Debentures of ` 50 each 60,000
Unsecured Loans 28,000
Short term borrowings 19,000
2,70,000
Assets:
Fixed Assets (at cost less depreciation) 72,000
Debenture Redemption Reserve Investments 34,000
Cash and Bank Balances 86,000
Other Current Assets 78,000
2,70,000
The debentures are due for redemption on 1 st April, 2018. The terms of issue of debentures
provided that they were redeemable at a premium 10% and also conferred option to the
debenture holders to convert 40% of their holding into equity shares at a predetermined
price of ` 11 per share and the balance payment in cash.
Assuming that:
(i) Except for debentureholders holding 200 debentures in aggregate, rest of them
exercised the option for maximum conversion,
(ii) The investments realized ` 56,000 on sale,
(iii) All the transactions were taken place on 1st April, 2018
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.

You are required to

(a) Redraft the Balance Sheet of Spices Ltd. as on 01.04.2018 after giving effect to the
redemption.
(b) Show your calculations in respect of the number of equity shares to be allotted and
the cash payment necessary.
Investment Accounts
8. Akash Ltd. had 4,000 equity share of X Limited, at a book value of ` 15 per share (face
value of ` 10 each) on 1st April 2017. On 1 st September 2017, Akash Ltd. acquired 1,000
equity shares of X Limited at a premium of ` 4 per share. X Limited announced a bonus
and right issue for existing shareholders.
The terms of bonus and right issue were -
(1) Bonus was declared, at the rate of two equity shares for every five equity shares held
on 30th September, 2017.
(2) Right shares are to be issued to the existing shareholders on 1 st December, 2017.
The company issued two right shares for every seven shares held at 25% premium.
No dividend was payable on these shares. The whole sum being payable by
31st December, 2017.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly
or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold
the remaining rights for ` 8 per share.
(5) Dividend for the year ended 31 st March 2017, at the rate of 20% was declared by the
company and received by Akash Ltd., on 20th January 2018.
(6) On 1st February 2018, Akash Ltd., sold half of its shareholdings at a premium of ` 4
per share.
(7) The market price of share on 31.03.2018 was ` 13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended
31st March, 2018 and determine the value of share held on that date assuming the
investment as current investment. Consider average cost basis for ascertainment of cost
for equity share sold.
Insurance Claim for loss of stock
9. On 27th July, 2017, a fire occurred in the godown of M/s. Vijay Exports and most of the
stocks were destroyed. However goods costing ` 5,000 could be salvaged. Their fire
fighting expenses were amounting to ` 1,300.
From the salvaged accounting records, the following information is available relating to the
period from 1.4.2017 to 27.7.2017:

1. Stock as per balance sheet as on 31.3.2017 ` 63,000

2. Purchases (including purchase of machinery costing ` 10,000 ` 2,92,000
3. Wages (including wages paid for installation of machinery ` 53,000
` 3,000)
4. Sales (including goods sold on approval basis amounting to ` 4,12,300
` 40,000. No approval has been received in respect of 1/4 th of the
goods sold on approval)
5. Cost of goods distributed as free sample ` 2,000
Other Information:
(i) While valuing the stock on 31.3.2017, ` 1,000 had been written off in respect of
certain slow moving items costing ` 4,000. A portion of these goods were sold in
June, 2017 at a loss of ` 700 on original cost of ` 3,000. The remainder of these
stocks is now estimated to be worth its original cost.
(ii) Past record shows the normal gross profit rate is 20%.
(iii) The insurance company also admitted fire fighting expenses. The Company had taken
the fire insurance policy of ` 55,000 with the average clause.
You are required to compute the amount of claim of stock destroyed by fire, to be lodged
to the Insurance Company. Also prepare Memorandum Trading Account for the period
1.4.2017 to 27.7.2017 for normal and abnormal items.
Hire Purchase Transactions
10. The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car
being ` 2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the
end of the second year. The hire vendor valued the two cars at cash price less 30%
depreciation charged under it diminishing balance method.
(d) The hire vendor spent ` 10,000 on repairs of the cars and then sold them for a total
amount of ` 1,70,000.
You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor.

Departmental Accounts
11. The following balances were extracted from the books of M/s Division. You are required
to prepare Departmental Trading Account and Profit and Loss account for the year ended
31st December, 2017 after adjusting the unrealized department profits if any.
Deptt. A Deptt. B
` `
Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
General expenses incurred for both the departments were ` 1,25,000 and you are also
supplied with the following information: (a) Closing stock of Department A ` 1,00,000
including goods from Department B for ` 20,000 at cost of Department A. (b) Closing stock
of Department B ` 2,00,000 including goods from Department A for ` 30,000 at cost to
Department B. (c) Opening stock of Department A and Department B include goods of the
value of ` 10,000 and ` 15,000 taken from Department B and Department A respectively
at cost to transferee departments. (d) The rate of gross profit is uniform from year to year.
Branch Accounting
12. Pass necessary Journal entries in the books of an independent Branch of M/s TPL Sons,
wherever required, to rectify or adjust the following transactions:
(i) Branch paid ` 5,000 as salary to a Head Office Manager, but the amount paid has
been debited by the Branch to Salaries Account.
(ii) A remittance of ` 1,50,000 sent by the Branch has not received by Head Office on
the date of reconciliation of Accounts.
(iii) Branch assets accounts retained at head office, depreciation charged for the year
` 15,000 not recorded by Branch.
(iv) Head Office expenses ` 75,000 allocated to the Branch, but not yet been recorded
by the Branch.
(v) Head Office collected ` 60,000 directly from a Branch Customer. The intimation of
the fact has not been received by the Branch.
(vi) Goods dispatched by the Head office amounting to ` 50,000, but not received by the
Branch till date of reconciliation.
(vii) Branch incurred advertisement expenses of ` 10,000 on behalf of other Branches,
but not recorded in the books of Branch.
(viii) Head office made payment of ` 16,000 for purchase of goods by branch, but not
recorded in branch books.

Accounts from Incomplete Records

13. The following information relates to the business of ABC Enterprises, who requests you to
prepare a Trading and Profit & Loss A/c for the year ended 31st March, 2017 and a Balance
Sheet as on that date.
(a) Assets and Liabilities as on:
in `
1.4.2016 31.3.2017
Furniture 60,000 63,500
Inventory 80,000 70,000
Sundry Debtors 1,60,000 ?
Sundry Creditors 1,10,000 1,50,000
Prepaid Expenses 6,000 7,000
Outstanding Expenses 20,000 18,000
Cash in Hand & Bank Balance 12,000 26,250
(b) Cash transaction during the year:
(i) Collection from Debtors, after allowing discount of ` 15,000 amounted to
` 5,85,000.
(ii) Collection on discounting of Bills of Exchange, after deduction of discount of
` 1,250 by bank, totalled to ` 61,250.
(iii) Creditors of ` 4,00,000 were paid ` 3,92,000 in full settlement of their dues.
(iv) Payment of Freight inward of ` 30,000.
(v) Amount withdrawn for personal use ` 70,000.
(vi) Payment for office furniture ` 10,000.
(vii) Investment carrying annual interest of 6% were purchased at ` 95 (200 shares,
face value ` 100 each) on 1st October 2016 and payment made thereof.
(viii) Expenses including salaries paid ` 95,000.
(ix) Miscellaneous receipt of ` 5,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounte d to
` 1,00,000. Of these, bills of exchange of ` 20,000 were endorsed in favour of
creditors. An endorsed bill of exchange of ` 4,000 was dishonoured.
(d) Goods costing ` 9,000 were used as advertising material.
(e) Goods are invariably sold to show a gross profit of 20% on sales.

(f) Difference in cash book, if any, is to be treated as further drawing or introduction of

capital by proprietor of ABC enterprises.
(g) Provide at 2% for doubtful debts on closing debtors.
Partnership Accounts: Dissolution of Partnership
14. A, B and C are in partnership sharing profits and losses in the ratio of 5:4:4. The Balance
Sheet of the firm as on 31st March, 2018 is as below:
Liabilities ` Assets `
A’s Capital 1,20,000 Factory Building 1,93,280
B’s Capital 80,000 Plant and Machinery 1,30,200
C’s Capital 1,00,000 Trade Receivables 43,200
B’s Loan 36,000 Inventories 99,120
Trade Payables 1,32,000 Cash at Bank 2,200
4,68,000 4,68,000
On Balance Sheet date, all the three partners have decided to dissolve their partnership.
The partners decided to distribute amounts as and when feasible and for this purpose they
appoint C who was to get as his remuneration 1% of the value of the assets realised other
than cash at bank and 10% of the amount distributed to the partners.
Assets were realised piecemeal as under:
`
First instalment 1,49,200
Second instalment 1,38,602
Third instalment 80,000
Last instalment 56,000
Dissolution expenses were provided for estimated amount of ` 24,000

The trade payables were were settled finally for ` 1,27,200
You are required to prepare a statement showing distribution of cash amongst the partners
by "Highest Relative Capital Method".
Framework for Preparation and Presentation of Financial Statements
15. (a) Explain in brief, the alternative measurement bases, for determining the value at
which an element can be recognized in the Balance Sheet or Statement of Profit and
Loss.

(b) Mohan started a business on 1 st April 2017 with ` 12,00,000 represented by 60,000
units of ` 20 each. During the financial year ending on 31 st March, 2018, he sold the
entire stock for ` 30 each. In order to maintain the capital intact, calculate the
maximum amount, which can be withdrawn by Mohan in the year 2017-18 if Financial
Capital is maintained at historical cost.
Accounting Standards
AS 2 Valuation of Inventories
16. (a) A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is
required. The company provides you following information for the year ended
31st March, 2017.
` Per unit
Raw Material X
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80
Additional Information:
(i) Total fixed overhead for the year was ` 4,00,000 on normal capacity of 20,000
units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was ` 2,400
units.
You are required to calculate the total value of closing stock of Raw Material X and
Chemical Y according to AS 2, when
(i) Net realizable value of Chemical Y is ` 800 per unit
(ii) Net realizable value of Chemical Y is ` 600 per unit
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
(b) While preparing its final accounts for the year ended 31 st March, 2017, a company
made provision for bad debts @ 5% of its total debtors. In the last week of February,
2017 a debtor for ` 20 lakhs had suffered heavy loss due to an earthquake; the loss
was not covered by any insurance policy. In April, 2017 the debtor became a

bankrupt. Can the company provide for the full loss arising out of insolvency of the
debtor in the final accounts for the year ended 31 st March, 2017? You are required to
advise the company in line with AS 4.
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Polices
17. (a) The Accountant of Mobile Limited has sought your opinion with relevant reasons,
whether the following transactions will be treated as change in Accounting Pol icy or
not for the year ended 31 st March, 2017. You are required to advise him in the
following situations in accordance with the provisions of AS 5
(i) Provision for doubtful debts was created @ 2% till 31 st March, 2016. From the
Financial year 2016-2017, the rate of provision has been changed to 3%.
(ii) During the year ended 31 st March, 2017, the management has introduced a
formal gratuity scheme in place of ad-hoc ex-gratia payments to employees on
retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a
period of 5 years. From current year, the useful life of furniture has been
changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organization. Such employees will get
pension of ` 20,000 per month. Earlier there was no such scheme of pension in
the organization.
(v) During the year ended 31st March, 2017, there was change in cost formula in
measuring the cost of inventories.
AS 10 Property, Plant and Equipment
(b) ABC Ltd. is installing a new plant at its production facility. It provides you the following
information:
`
Cost of the plant (cost as per supplier's invoice) 31,25,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Initial Operating losses before commercial production 3,75,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants used for advice on the acquisition of the plant 6,50,000

You are required to compute the costs that can be capitalised for plant by ABC Ltd.,
in accordance with AS 10: Property, Plant and Equipment.
AS 11 The Effects of Changes in Foreign Exchange Rates
18. (a) (i) Classify the following items as monetary or non-monetary item:
Share Capital
Trade Receivables
Investment in Equity shares
Fixed Assets.
(ii) Exchange Rate per $
Goods purchased on 1.1.2017 for US $ 15,000 ` 75
Exchange rate on 31.3.2017 ` 74
Date of actual payment 7.7.2017 ` 73
You are required to ascertain the loss/gain for financial years 2016-17 and 2017-
18, also give their treatment as per AS 11.
AS 12 Government Grants
(b) A specific government grant of ` 15 lakhs was received by USB Ltd. for acquiring the
Hi-Tech Diary plant of ` 95 lakhs during the year 2014-15. Plant has useful life of 10
years. The grant received was credited to deferred income in the balance sheet. During
2017-18, due to non-compliance of conditions laid down for the grant, the company had
to refund the whole grant to the Government. Balance in the deferred income on that
date was ` 10.50 lakhs and written down value of plant was ` 66.50 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of
plant and the amount of depreciation to be charged during the year 2017 -18 in
profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost
of the plant during 2014-15 assuming plant account showed the balance of ` 56
lakhs as on 1.4.2017?
You are required to explain in the line with provisions of AS 12.
AS 13 Accounting for Investments
19. (a) M/s Active Builders Ltd. invested in the shares of another company (with an intention
to hold the shares for short term period )on 31st October, 2016 at a cost of ` 4,50,000.
It also earlier purchased Gold of ` 5,00,000 and Silver of ` 2,25,000 on 31st March,
2014.
Market values as on 31 st March, 2017 of the above investments are as follows:
Shares ` 3,75,000; Gold ` 7,50,000 and Silver ` 4,35,000

You are required explain how will the above investments be shown in the books of
account of M/s Active Builders Ltd. for the year ending 31 st March, 2017 as per the
provisions of AS 13?
AS 16 Borrowing costs
(b) A company incorporated in June 2017, has setup a factory within a period of 8 months
with borrowed funds. The construction period of the assets had reduced drastically due
to usage of technical innovations by the company. Whether interest on borrowings for
the period prior to the date of setting up the factory should be capitalized although it
has taken less than 12 months for the assets to get ready for use. You are required to
comment on the necessary treatment with reference to AS 16.
AS 17 Segment Reporting
20 (a) Calculate the segment results of a manufacturing organization from the following
information:
Segments A B C Total
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue 1,10,000
(allocated in 5 : 4 : 2 basis)
Revenue from transactions with
other segments
Transaction from B 1,00,000 50,000 1,50,000
Transaction from C 10,000 50,000 60,000
Transaction from A 25,000 1,00,000 1,25,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses 77,000
Expenses on transactions with
other segments
Transaction from B 75,000 30,000
Transaction from C 6,000 40,000
Transaction from A 18,000 82,000
AS 22 Accounting for Taxes on Income
(b) Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in
the second year of its operation. Depreciation timing difference resulting in a tax
liability in year 1 and 2 is ` 1,000 lakhs and ` 2,000 lakhs respectively. From the
third year it is expected that the timing difference would reverse each year by ` 50
lakhs. Assuming tax rate of 40%, you are required to compute to the deferred tax
liability at the end of the second year and any charge to the Profit and Loss account.

SUGGESTED ANSWERS
1. (a) Balance Sheet of Mehar Ltd. as at 31 st March, 2018

Note `
I EQUITY AND LIABILITIES:
(1) (a) Share Capital 1 1,60,00,000
(b) Reserves and Surplus 2 98,64,424
(2) Non-current Liabilities
Long term Borrowings- 40,00,000
Terms Loans (Secured)
(3) Current Liabilities
(a) Trade Payables - 45,80,000
(b) Other current liabilities 3 20,03,576
(c) Short-term Provisions (Provision for taxation) 10,20,000
Total 3,74,68,000
II ASSETS
(1) Non-current Assets
(a) Fixed Assets:
(i) Tangible Assets 4 2,06,00,000
(ii) Capital WIP 8,00,000
(b) Non- current Investments 9,00,000
(2) Current Assets:
(a) Inventories 5 48,00,000
(b) Trade Receivables 6 48,20,000
(c) Cash and Cash Equivalents 38,40,000
(d) Short-term Loans and Advances 7 17,08,000
Total 3,74,68,000
Notes to accounts
(` )
1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of ` 100 each 1,20,00,000

40,000 10% Redeemable Preference

Shares of 100 each 40,00,000 1,60,00,000
2. Reserves and Surplus
Securities Premium Account 19,00,000
General reserve 62,00,000
Profit & Loss Balance
Opening balance
Profit for the period 32,00,000
Less: Miscellaneous Expenditure
written off (2,32,000)
29,68,000
Less: Appropriations
Dividend (10,00,000)
Dividend distribution tax (2,03,576) 17,64,424 98,64,424
3. Other current liabilities
Loan from other parties 8,00,000
Dividend 10,00,000
Dividend Distribution tax [W.N] 2,03,576 20,03,576
4. Tangible assets
Fixed Assets
Opening balance 2,26,00,000
Less: Depreciation (20,00,000)
Closing balance 2,06,00,000
5. Inventories
Finished Goods 30,00,000
Stores 16,00,000
Loose Tools 2,00,000 48,00,000
6. Trade Receivables
Trade receivables 49,00,000
Less: Provision for Doubtful Debts (80,000) 48,20,000
7. Short term loans & Advances
Staff Advances 2,20,000
Other Advances 14,88,000 17,08,000

Working Note:
Calculation of Dividend distribution tax
(i) Grossing-up of dividend:
`
Dividend distributed by Mehar Ltd.
Equity shares dividend 6,00,000
Preference share dividend 4,00,000 10,00,000
Add: Increase for the purpose of grossing up of dividend
10,00,000 x [15 /(100-15)] 1,76,470
Gross dividend 11,76,470
(ii) Dividend distribution tax @ 17.304% 2,03,576

(b) Calculation of effective capital and maximum amount of monthly remuneration
(` in lakhs)
Paid up equity share capital 180
Paid up Preference share capital 30
Reserve excluding Revaluation reserve (225-15) 210
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
570
Less: Accumulated losses not written off (30)
Investments (270)
Effective capital for the purpose of managerial remuneration 270
Since PQ Ltd. is incurring losses and no special resolution has been passed by the
company for payment of remuneration, managerial remuneration will be calculated on
the basis of effective capital of the company, therefore maximum remuneration
payable to the Managing Director should be @ ` 60,00,000 per annum*.
*If the effective capital is less then 5 Crore, limit of yearly remuneration payable
should not exceed ` 60 lakhs as per Companies Act, 2013.

2. Harry Ltd.
Cash Flow Statement
for the year ended 31 st March, 2018
` `
Cash flows from operating activities
Net Profit before taxation 8,000
Adjustments for:
Depreciation (1,000 + 2,000 +5,000) 8,000
Profit on sale of Investment (8,000)
Profit on sale of car (1,400)
Operating profit before working capital changes 6,600
Increase in Trade receivables (2,000)
Increase in inventories (6,000)
Increase in Trade payables 3,000
Cash generated from operations 1,600
Income taxes paid (2,000)
Net cash generated from operating activities (A) (400)
Cash flows from investing activities
Sale of car 3,400
Purchase of car (16,000)
Sale of Investment 10,000
Purchase of Investment (6,000)
Purchase of Furniture & fixtures (14,000)
Net cash used in investing activities (B) (22,600)
Cash flows from financing activities
Issue of shares for cash 20,000
Dividends paid* (2,000)
Net cash from financing activities(C) 18,000
Net decrease in cash and cash equivalents (A + B +C) (5,000)
Cash and cash equivalents at beginning of period 17,000
Cash and cash equivalents at end of period 12,000

* Dividend declared for the year ended 31 st March, 2017 amounting ` 2,000 must have
been paid in the year 2017-18. Hence, it has been considered as cash outflow for
preparation of cash flow statement of 2017-18.
Working Notes:
1. Calculation of Income taxes paid
`
Income tax expense for the year 3,000
Add: Income tax liability at the beginning of the year 2,000
5,000
Less: Income tax liability at the end of the year (3,000)
2,000
2. Calculation of Fixed assets acquisitions
Furniture & Fixtures (`) Car (`)
W.D.V. at 31.3.2018 34,000 25,000
Add back: Depreciation for the year 2,000 5,000
Disposals — 2,000
36,000 32,000
Less: W.D.V. at 31. 3. 2017 (22,000) (16,000)
Acquisitions during 2016-2018 14,000 16,000
3. Pre-incorporation period is for two months, from 1st April, 2017 to 31 st May, 2017.
10 months’ period (from 1 st June, 2017 to 31st March, 2018) is post-incorporation period.
Statement showing calculation of profit/losses for pre and post incorporation
periods
Pre-Inc Post-Inc
` `
Gross Profit 50,000 4,00,000
Bad debts Recovery 14,000
64,000 4,00,000
Less: Salaries 24,000 1,20,000
Audit fees - 12,000
Depreciation 3,000 16,250
Sales commission 2,000 16,000
Bad Debts (49,000 + 14,000) 7,000 56,000
Interest on Debentures  36,000

Rent 4,000 34,400

Net Profit 24,000 1,09,350
Working Notes:
(i) Calculation of ratio of Sales
Sales from April to September = 6,00,000 (1,00,000 p.m. on average basis)
Oct. to March = ` 12,00,000 (2,00,000 p.m. on average basis)
Thus, sales for pre-incorporation period = `2,00,000
post-incorporation period = ` 16,00,000
Sales are in the ratio of 1:8
(ii) Gross profit, sales commission and bad debts written off have been allocated in pre
and post incorporation periods in the ratio of Sales.
(iii) Rent, salary are allocated on time basis.
(iv) Interest on debentures is allocated in post incorporation period.
(v) Audit fees charged to post incorporation period as relating to company audit.
(vi) Depreciation of ` 18,000 divided in the ratio of 1:5 (time basis) and ` 1,250 charged
to post incorporation period.
(vii) Bad debt recovery of ` 14,000/- is allocated in pre-incorporation period, being sale
made in 2014-15.
(viii) Rent
(` 38,400 – Additional rent for 6 months) `
[38,400- 14,400 (2,400 x 6)] = 24,000
1/4/17 -31/5//17 (2,000 x 2) = 4,000
1/6/17 -31/3/18 – [(2,000 x 10) +14,400] = 34,400
38,400
4. Journal Entries in the books of Xeta Ltd.
` `
1-4-2017 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000

(For final calls of ` 2 per share on 2,70,000

equity shares due as per Board’s Resolution
dated….)
20-4-2017 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares
received)
Securities Premium A/c Dr. 1,00,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c Dr. 2,15,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30 th April, 2017 (after bonus issue)
`
Authorised Capital
50,000 12% Preference shares of `10 each 5,00,000
4,00,000 Equity shares of `10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of `10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ `10 each were issued by way of
bonus)
Reserves and surplus
Profit and Loss Account 3,85,000
5. Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares x
Issue Price) / (Existing Number of shares + Number of
Right shares)
= (` 360 x 2 Shares + ` 180 x 1 Share) / (2 + 1) Shares
= ` 900 / 3 shares = ` 300 per share.

Value of right = Cum-right value of the share – Ex-right value of the

share
= ` 360 – ` 300 = ` 60 per share.
Hence, any one desirous of having a confirmed allotment of one share from the company
at ` 180 will have to pay ` 120 (2 shares x ` 60) to an existing shareholder holding 2
shares and willing to renounce his right of buying one share in favour of that person.
6. In the books of Meera Limited
Journal Entries
Date Particulars Dr. (`) Cr. (`)
2018
Jan 1 10% Redeemable Preference Share Capital Dr. 1,50,000
A/c
Premium on Redemption of Pref. shares Dr. 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemption
transferred to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of Pref. 15,000
Shares
(Being adjustment of premium on redemption)
General Reserve A/c Dr. 1,12,500
Profit & Loss A/c Dr. 37,500
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
Note: Securities premium and capital reserve cannot be utilized for transfer to Capital
Redemption Reserve.

7. Spices Ltd.
Balance Sheet as on 01.04.2018
Figures as at the
Particulars Note No. end of current
reporting period
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,10,000
(b) Reserves and Surplus 2 91,000
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans 28,000
(3) Current Liabilities
(a) Short-term borrowings 19,000
Total 2,48,000
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 72,000
(2) Current assets
(a) Cash and cash equivalents 98,000
(b) Other current assets 78,000
Total 2,48,000
Notes to Accounts
`
1 Share Capital
11,000 Equity Shares of ` 10 each 1,10,000
(Out of above, 2000 shares issued to debentures
holders who opted for conversion into shares)
2 Reserve and Surplus
General Reserve 38,000
Add: Debenture Redemption Reserve transfer 35,000
73,000
Add: Profit on sale of investments 22,000
95,000

Less: Premium on redemption of debentures (1,200 x ` 5) (6,000) 89,000

Securities Premium Account (2,000 x ` 1) 2,000
91,000
Working Notes:
(i) Calculation of number of shares to be allotted `
Total number of debentures 1,200
Less: Number of debentures not opting for conversion (200)
1,000
40% of 1,000 400
Redemption value of 400 debentures (400 x ` 55) ` 22,000
Number of Equity Shares to be allotted 22,000/11 = 2,000 shares of ` 10 each.
(ii) Calculation of cash to be paid `
Number of debentures 1,200
Less: Number of debentures to be converted into equity shares (400)
800
Redemption value of 800 debentures (800 × ` 55) ` 44,000
(iii) Cash and Bank Balance `
Balance before redemption 86,000
Add: Proceeds of investments sold 56,000
1,42,000
Less: Cash paid to debenture holders (44,000)
98,000
8. Investment Account-Equity Shares in X Ltd.
Date No. of Dividend Amount Date No. of Dividend Amount
shares shares
` ` ` `
2017 2018
April 1 To Balance 4,000 - 60,000 Jan. 20 By Bank 8,000 2,000
b/d (dividend)
Sept 1 To Bank 1,000 - 14,000 Feb. 1 By Bank 4,000 56,000
Sept.30 To Bonus 2,000 — Mar. 31 By Balance c/d 4,000 42,250
Issue
Dec.1 To Bank 1,000 - 12,500
(Right)

2018
Feb. 1 To Profit & 13,750
Loss A/c
Mar.31 To Profit &
Loss A/c
(Dividend 8,000
income)
8,000 8,000 1,00,250 8,000 8,000 1,00,250

April. 1 To Balance 4,000 42,250
b/d
Working Notes:
1. Cost of shares sold — Amount paid for 8,000 shares
`
(` 60,000 + ` 14,000 + ` 12,500) 86,500
Less: Dividend on shares purchased on 1 st Sept, 2017 (2,000)
Cost of 8,000 shares 84,500
Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14/-) 56,000
Profit on sale 13,750
* For ascertainment of cost for equity shares sold, average cost basis has been
applied.
2. Value of investment at the end of the year
Closing balance will be valued based on lower of cost (` 42,250) or net realizable
value (`13 x 4,000). Thus investment will be valued at ` 42,250.
3. Calculation of sale of right entitlement
1,000 shares x ` 8 per share = ` 8,000
Amount received from sale of rights will be credited to P & L A/c as per AS 13
‘Accounting for Investments’.
4. Dividend received on investment held as on 1 st April, 2017
= 4,000 shares x ` 10 x 20%
= ` 8,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1 st Sep. 2017
= 1,000 shares x ` 10 x 20% = ` 2,000 will be adjusted to Investment A/c

Note: It is presumed that no dividend is received on bonus shares as bonus shares

are declared on 30 th Sept., 2017 and dividend pertains to the year ended 31.3.2017.
9. Memorandum Trading Account for the period 1 st April, 2017 to 27 th July, 2017
Normal Abnormal Total Normal Abnormal Total
Items Items Items Items
` ` ` ` ` `
To Opening 60,000 4,000 64,000 By Sales 4,00,000 2,300 4,02,300
stock (W.N. 3)
(W.N.5)
To Purchases 2,80,000 - 2,80,000 By Loss - 700 700
( W.N. 1)
To Wages 50,000 - 50,000 By Goods 8,000 - 8,000
(W.N. 4) on
Approval
( W.N. 2)
To Gross 80,000 - 80,000 By Closing 62,000 1,000 63,000
profit stock (Bal.
@ 20% fig.)
4,70,000 4,000 4,74,000 4,70,000 4,000 4,74,000
Statement of Claim for Loss of Stock

`
Book value of stock as on 27 th July, 2017 62,000
Add: Abnormal Stock 1,000
Less: Stock salvaged (5,000)
Loss of stock 58,000
Add: Fire fighting expenses 1,300
Total Loss 59,300
Amount of claim to be lodged with insurance company
Policy value
= Loss x
Value of stock on the date of fire
= ` 59,300 x (55,000/ 63,000) = ` 51,770 (rounded off)
Working Notes:
1. Calculation of Adjusted Purchases
`
Purchases 2,92,000

Less: Purchase of Machinery (10,000)

Less: Free samples (2,000)
Adjusted purchases 2,80,000
2. Calculation of Goods with Customers
Approval for sale has not been received = ` 40,000 X 1/4 = ` 10,000.
Hence, these should be valued at cost i.e. (` 10,000 – 20% of ` 10,000)
= ` 8,000
3. Calculation of Actual Sales
Total Sales ` 4,12,300
Less: Approval for sale not received (1/4 X ` 40,000) ` 10,000
Actual Sales ` 4,02,300
4. Calculation of Wages
Total Wages ` 53,000
Less: Wages for installation of machinery ` 3,000
` 50,000
5. Value of Opening Stock
Original cost of stock as on 31st March,2018
= ` 63,000 + 1,000 (Amount written off)
= ` 64,000.
10.
`
(i) Price of two cars = ` 2,00,000 x 2 4,00,000
Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
30
Less: Depreciation for the second year = ` 2, 80,000 x 84,000
100
Agreed value of two cars taken back by the hire vendor 1,96,000
(ii) Cash purchase price of one car 2,00,000
Less: Depreciation on ` 2,00,000 @20% for the first year 40,000
Written drown value at the end of first year 1,60,000
Less: Depreciation on ` 1,60,000 @ 20% for the second year 32,000

Book value of car left with the hire purchaser 1,28,000

(iii) Book value of one car as calculated in working note (ii) above 1,28,000
Book value of Two cars = ` 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in 1,96,000
working note (i) above
Hence, loss on cars taken back = ` 2,56,000 – ` 1,96,000 = ` 60,000
(iv) Sale proceeds of cars repossessed 1,70,000
Less: Value at which Cars were taken back ` 1,96,000
Repair ` 10,000 2,06,000
Loss on resale 36,000
11. Departmental Trading and Profit and Loss Account of M/s Division
For the year ended 31 st December, 2017
Deptt. A Deptt. B Deptt. A Deptt. B
` ` ` `
To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000
To Purchases 6,50,000 9,10,000 By Closing
To Gross profit 4,00,000 7,50,000 stock 1,00,000 2,00,000
11,00,000 17,00,000 11,00,000 17,00,000
To General Expenses 50,000 75,000 By Gross 4,00,000 7,50,000
(in ratio of sales) profit
To Profit ts/f to general 3,50,000 6,75,000
profit and loss
account
4,00,000 7,50,000 4,00,000 7,50,000
General Profit and Loss Account

` `
To Stock reserve required (additional) By Profit from:
Stock in Deptt. A Deptt. A 3,50,000
50% of (` 20,000 - ` 10,000) (W.N.1) 5,000 Deptt. B 6,75,000
Stock in Deptt. B
40% of (` 30,000 - ` 15,000) (W.N.2) 6,000
To Net Profit 10,14,000
10,25,000 10,25,000

Working Notes:
1. Stock of department A will be adjusted according to the rate gross profit applicable to
department B = [(7,50,000 ÷ 15,00,000) х 100] = 50%
2. Stock of department B will be adjusted according to the gross profit rate applicable to
department A = [(4,00,000 ÷ 10,00,000) х 100] = 40%
12. Books of Branch
Journal Entries
Amounts `
Dr. Cr.
(i) Head Office Account Dr. 5,000
To Salaries Account 5,000
(Being rectification of salary paid on behalf of Head
Office)
(ii) No entry in Branch Books is required.
(iii) Depreciation A/c Dr. 15,000
To Head Office Account 15,000
(Being depreciation of assets accounted for)
(iv) Expenses Account Dr. 75,000
(Being allocated expenses of Head Office recorded)
(v) Head Office Account Dr. 60,000
To Debtors Account 60,000
(Being adjustment entry for collection from Branch
Debtors directly by Head Office)
(vi) Goods in-transit Account Dr. 50,000
(Being goods sent by Head Office still in-transit)
(vii) Head Office Account Dr. 10,000
To expenses Account 10,000
(Being expenditure incurred, wrongly recorded in
books)
(vii) Purchases account A/c Dr. 16,000
(Being purchases booked)

13. Trading and Profit and Loss Account of ABC enterprise

` `
To Opening Inventory 80,000 By Sales 6,08,750
To Purchases 4,56,000 By Closing inventory 70,000
Less: For advertising (9,000) 4,47,000
To Freight inwards 30,000
To Gross profit c/d 1,21,750
6,78,750 6,78,750
To Sundry expenses 92,000 By Gross profit b/d 1,21,750
To Advertisement 9,000 By Interest on investment 600
To Discount allowed – (20,000 x 6/100 x ½)
Debtors 15,000 By Discount received 8,000
Bills Receivable 1,250 16,250 By Miscellaneous income 5,000
To Depreciation on 6,500
furniture
To Provision for 1,455
doubtful debts
To Net profit 10,145
1,35,350 135,350
Balance Sheet as on 31 st March, 2017
Liabilities Amount Assets Amount
` ` ` `
Capital as on 1,88,000 Furniture (w.d.v.) 60,000
1.4.2016 Additions during the
Less: Drawings (91,000) year 10,000
97,000 Less: Depreciation (6,500) 63,500
Add: Net Profit 10,145 1,07,145 Investment (200 x 95) 19,000
Sundry creditors 1,50,000 Interest accrued 600
Outstanding 18,000 Closing inventory 70,000
expenses Sundry debtors 72,750
Less: Provision for

doubtful debts 1,455 71,295

Bills receivable 17,500
Cash in hand and at 26,250
bank
Prepaid expenses 7,000
2,75,145 2,75,145
Working Notes:
(1) Capital on 1 st April, 2016
Balance Sheet as on 1 st April, 2016
Liabilities ` Assets `
Capital (Bal.fig.) 1,88,000 Furniture (w.d.v.) 60,000
Creditors 1,10,000 Closing Inventory 80,000
Outstanding expenses 20,000 Sundry debtors 1,60,000
Cash in hand and at bank 12,000
Prepaid expenses 6,000
3,18,000 3,18,000
(2) Purchases made during the year
Sundry Creditors Account
` `
To Cash and bank A/c 3,92,000 By Balance b/d 1,10,000
To Discount received A/c 8,000 By Sundry debtors A/c 4,000
To Bills Receivable A/c 20,000 By Purchases A/c 4,56,000
To Balance c/d 1,50,000 (Balancing figure)
5,70,000 5,70,000
(3) Sales made during the year
`
Opening inventory 80,000
Purchases 4,56,000
Less: For advertising (9,000) 4,47,000
Freight inwards 30,000
5,57,000

Less: Closing inventory (70,000)

Cost of goods sold 4,87,000
Add: Gross profit (25% on cost) 1,21,750
6,08,750
(4) Debtors on 31 st March, 2017
Sundry Debtors Account
` `
To Balance b/d 1,60,000 By Cash and bank A/c 5,85,000
To Sales A/c 6,08,750 By Discount allowed A/c 15,000
To Sundry creditors A/c By Bills receivable A/c 1,00,000
(bill dishonoured) 4,000 By Balance c/d (Bal. fig.) 72,750
7,72,750 7,72,750
(5) Additional drawings by proprietors of ABC enterprises
Cash and Bank Account
` `
To Balance b/d 12,000 By Freight inwards A/c 30,000
To Sundry debtors A/c 5,85,000 By Furniture A/c 10,000
To Bills Receivable A/c 61,250 By Investment A/c 19,000
To Miscellaneous income A/c 5,000 By Expenses A/c 95,000
By Creditors A/c 3,92,000
By Drawings A/c
[` 70,000 + ` 21,000) 91,000
(Additional drawings)]
By Balance c/d 26,250
6,63,250 6,63,250
(6) Amount of expenses debited to Profit and Loss A/c
Sundry Expenses Account
` `
To Prepaid expenses A/c 6,000 By Outstanding expenses A/c 20,000
(on 1.4.2016) (on 1.4.2016)
To Bank A/c 95,000 By Profit and Loss A/c 92,000
(Balancing figure)

To Outstanding expenses By Prepaid expenses A/c

A/c (on 31.3.2017) 18,000 (on 31.3.17) 7,000
1,19,000 1,19,000
(7) Bills Receivable on 31 st March, 2017

Bills Receivable Account
` `
To Debtors A/c 1,00,000 By Creditors A/c 20,000
By Bank A/c 61,250
By Discount on bills receivable A/c 1,250
By Balance c/d (Balancing figure) 17,500
1,00,000 1,00,000
Note: All sales and purchases are assumed to be on credit basis.
14. Statement showing distribution of cash amongst the partners
Trade B’s A ( `) B ( `) C (` )
Payable Loan
Balance Due 1,32,000 36,000 1,20,000 80,000 1,00,000
Including 1st
Instalment amount
with the firm
` (2,200 + 1,49,200) 1,51,400
Less: Dissolution
expenses provided (24,000)
for
1,27,400
Less: C’s
remuneration of 1%
on assets realized
(1,49,200 x 1%) (1,492)
1,25,908
Less: Payment
made to Trade 1,25,908 1,25,908
Payables
Balance due NIL 6,092
2nd instalment 1,38,602
realised

Less: C’s (1,386)

remuneration of 1% 1,37,216
on assets realized
(1,38,602 x 1%)
Less: Payment
made to Trade (1,292) (1,292)
Payables
Transferred to P& L 4,800
A/c
1,35,924
Less: Payment for (36,000) 36,000
B’s loan A/c
Amount available for
distribution to 99,924 NIL
partners
Less: C’s
remuneration of 10% (9,084)
of the amount
distributed to
partners (99,924 x
10/110)
Balance to be
distributed to 90,840
partners on the
basis of HRCM
Less: Paid to C (4,000) (4,000)
(W.N.)
86,840 96,000
Less: Paid to A and (36,000) (20,000) (16,000)
C in 5:4 (W.N.)
Balance due 50,840 1,00,000 80,000 80,000
Less: Paid to A, B &
C in 5:4:4 50,840 (19,554) 15,643 (15,643)
Nil
Amount of 3rd 80,000 80,446 64,357 64,357
instalment
Less: C’s
remuneration of 1%
on assets realized
(80,000 x 1%) (800)
79,200

Less: C’s
remuneration of 10%
of the amount
distributed to
partners (79,200 x (7,200)
10/110)
72,000
Less: Paid to A, B, C
in 5:4:4 for (W.N.) (72,000) (27,692) 22,154 (22,154)
nil 52,754 42,203 42,203
Amount of 4th and 56,000
last instalment
Less: C’s
remuneration of 1%
on assets realized
(56,000 x 1%)
(560)
55,440
Less: C’s
remuneration of 10%
of the amount
distributed to
partners (55,440 x
10/110) (5,040)
Less: Paid to A, B 50,400
and C in 5:4:4
(19,384) 15,508 (15,508)
Loss suffered by 33,370 26,695 26,695
partners
Working Note:
(i) ` 2,200 added to the first instalment received on sale of assets represents the Cash
in Bank
(ii) The amount due to Creditors at the end of the utilization of First Instalment is ` 6,092.
However, since the creditors were settled for ` 1,27,200 only the balance ` 1,292
were paid and the balance ` 4,800 was transferred to the Profit & Loss Account.
(iii) Highest Relative Capital Basis
A B C
` ` `
Balance of Capital Accounts (1) 1,20,000 80,000 1,00,000

Profit sharing ratio 5 4 4

Capital Profit sharing ratio 24,000 20,000 25,000
Capital in profit sharing
ratio taking B’s Capital as base (2) 1,00,000 80,000 80,000
Excess of A’s Capital and C’s Capital 1-2) =(3) 20,000 Nil 20,000
Again repeating the process
Profit sharing ratio 5 4
Capital Profit sharing ratio 4,000 5,000
Capital in profit sharing
ratio taking A’s Capital as base (4) 20,000 16,000
Excess of C’s Capital (3-4)=(5) nil 4,000
Therefore, firstly `4,000 is to be paid to C, then A and C to be paid in proportion of
5:4 up to ` 36,000 to bring the capital of all partners A, B and C in proportion to their
profit sharing ratio. Thereafter, balance available will be paid in the profit sharing
ratio 5:4:4 to all partners viz A, B and C.
15. (a) The Framework for Recognition and Presentation of Financial statements recognizes
four alternative measurement bases for the purpose of determining the value at which
an element can be recognized in the balance sheet or statement of profit and loss.
These bases are: (i)Historical Cost; (ii)Current cost (iii) Realizable (Settlement) Value
and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets
are recorded at an amount of cash or cash equivalent paid or the fair value of
the asset at the time of acquisition. Liabilities are generally recorded at the
amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are
carried out at the amount of cash or cash equivalent that would have to be paid
if the same or an equivalent asset was acquired currently. Liabilities are carried
at the undiscounted amount of cash or cash equivalents that would be required
to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the
amount of cash or cash equivalents that could currently be obtained by selling
the assets in an orderly disposal. Liabilities are carried at their settlement values;
i.e. the undiscounted amount of cash or cash equivalents paid to satisfy the
liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present
value of future net cash flows generated by the concerned assets in the normal
course of business. Liabilities under this convention are carried at present value

of future net cash flows that are expected to be required to settle the liability in
the normal course of business.
(b)
Particulars Financial Capital Maintenance at
Historical Cost (`)
Closing equity
18,00,000 represented by cash
(` 30 x 60,000 units)
Opening equity 60,000 units x ` 20 = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (18,00,000 – 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw ` 6,00,000 as the
maximum amount
16. (a) (i) When Net Realizable Value of the Chemical Y is ` 800 per unit
NRV is greater than the cost of Finished Goods Y i.e. ` 660 (Refer W.N.)
Hence, Raw Material and Finished Goods are to be valued at cost.
Value of Closing Stock:
Qty. Rate (`) Amount (`)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
(ii) When Net Realizable Value of the Chemical Y is ` 600 per unit
NRV is less than the cost of Finished Goods Y i.e. ` 660. Hence, Raw Material
is to be valued at replacement cost and Finished Goods are to be valued at NRV
since NRV is less than the cost.
Value of Closing Stock:
Qty. Rate (`) Amount (`)
Raw Material X 1,000 300 3,00,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,40,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X `
Cost Price 380

Add: Freight Inward 40

Unloading charges 20
Cost 440
Chemical Y `
Materials consumed 440
Direct Labour 120
Variable overheads 80
Fixed overheads (`4,00,000/20,000 units) 20
Cost 660
(b) As per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’,
adjustment to assets and liabilities are required for events occurring after the balance
sheet date that provide additional information materially affecting the determination
of the amounts relating to conditions existing at the Balance Sheet date.
A debtor for ` 20,00,000 suffered heavy loss due to earthquake in the last week of
February, 2017 which was not covered by insurance. This information with its
implications was already known to the company. The fact that he became bankrupt
in April, 2017 (after the balance sheet date) is only an additional information related
to the condition existing on the balance sheet date.
Accordingly, full provision for bad debts amounting ` 20,00,000 should be made, to
cover the loss arising due to the insolvency of a debtor, in the final accounts for the
year ended 31st March 2017. Since the company has already made 5% provision of
its total debtors, additional provision amounting ` 19,00,000 shall be made
(20,00,000 x 95%) for the year ended 31 st March, 2017.
17 (a) (i) In the given case, Mobile limited created 2% provision for doubtful debts till
31st March, 2016. Subsequently in 2016-17, the company revised the estimates
based on the changed circumstances and wants to create 3% provision. Thus
change in rate of provision of doubtful debt is change in estimate and is not
change in accounting policy. This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that
differ in substance from previously occurring events or transactions, will not be
considered as a change in accounting policy. Introduction of a formal retirement
gratuity scheme by an employer in place of ad hoc ex-gratia payments to
employees on retirement is a transaction which is substantially different from the
previous policy, will not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate
and is not a change in accounting policy.

(iv) Adoption of a new accounting policy for events or transactions which did not
occur previously should not be treated as a change in an accounting policy.
Hence the introduction of new pension scheme is not a change in accounting
policy.
(v) Change in cost formula used in measurement of cost of inventories is a change
in accounting policy.
(b) According to AS 10 on Property, Plant and Equipment, the costs which will be
capitalized by ABC Ltd.:
`
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants’ fees 6,50,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Total cost of Plant 46,60,000
Note: Operating losses before commercial production amounting to ` 3,75,000 will
not be capitalized as per AS 10. They should be written off to the Statement of Profit
and Loss in the period they are incurred.
18. (a) (i)
Share capital Non-monetary
Trade receivables Monetary
Investment in equity shares Non-monetary
Fixed assets Non-monetary
(ii) As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign
currency transactions should be recorded by applying the exchange rate on the
date of transactions. Thus, goods purchased on 1.1.2017 and corresponding
creditor would be recorded at ` 11,25,000 (i.e. $15,000 × ` 75)
According to the standard, at the balance sheet date all monetary transactions
should be reported using the closing rate. Thus, creditors of US $15,000 on
31.3.2017 will be reported at ` 11,10,000 (i.e. $15,000 × ` 74) and exchange
profit of ` 15,000 (i.e. 11,25,000 – 11,10,000) should be credited to Profit and
Loss account in the year 2016-17.
On 7.7.2017, creditors of $15,000 is paid at the rate of ` 73. As per AS 11,
exchange difference on settlement of the account should also be transferred to
Profit and Loss account. Therefore, ` 15,000 (i.e. 11,10,000 – 10,95,000) will
be credited to Profit and Loss account in the year 2017-18.

(b) As per para 21 of AS 12, ‘Accounting for Government Grants’, “the amount refundable
in respect of a grant related to specific fixed asset should be recorded by reducing
the deferred income balance. To the extent the amount refundable exceeds any such
deferred credit, the amount should be charged to profit and loss statement.
(i) In this case the grant refunded is ` 15 lakhs and balance in deferred income is
` 10.50 lakhs, ` 4.50 lakhs shall be charged to the profit and loss account for
the year 2017-18. There will be no effect on the cost of the fixed asset and
depreciation charged will be on the same basis as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then,
para 21 of AS 12 states that the amount refundable in respect of grant which
relates to specific fixed assets should be recorded by increasing the book value
of the assets, by the amount refundable. Where the book value of the asset is
increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset. Therefore, in this case,
the book value of the plant shall be increased by ` 15 lakhs. The increased cost
of ` 15 lakhs of the plant should be amortized over 7 years (residual life).
Depreciation charged during the year 2017-18 shall be (56+15)/7 years =
` 10.14 lakhs presuming the depreciation is charged on SLM.
19. (a) As per AS 13 ‘Accounting for Investments’, if the shares are purchased with an
intention to hold for short-term period then investment will be shown at the realizable
value. In the given case, shares purchased on 31 st October, 2016, will be valued at `
3,75,000 as on 31st March, 2017.
Gold and silver are generally purchased with an intention to hold it for long term period
until and unless given otherwise. Hence, the investment in gold and silver (purchased
on 31st March, 2014) shall continue to be shown at cost as on 31 st March, 2017 i.e.,
` 5,00,000 and ` 2,25,000 respectively, though their realizable values have been
increased.
Thus the shares, gold and silver will be shown at ` 3,75,000, ` 5,00,000 and
` 2,25,000 respectively and hence, total investment will be valued at ` 11,00,000 in
the books of account of M/s Active Builders for the year ending 31 st March, 2017 as
per provisions of AS 13.
(b) As per para 3.2 to AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended use or sale.
Further, Explanation to the above para states that what constitutes a substantial
period of time primarily depends on the facts and circumstances of each case.
However, ordinarily, a period of twelve months is considered as substantial period of
time unless a shorter or longer period can be justified on the basis of facts and
circumstances of the case. In estimating the period, time which an asset takes,

technologically and commercially, to get it ready for its intended use or sale is
considered.
It may be implied that there is a rebuttable presumption that a 12 months period
constitutes substantial period of time.
Under present circumstances where construction period has reduced drastically due
to technical innovation, the 12 months period should at best be looked at as a
benchmark and not as a conclusive yardstick. It may so happen that an asset under
normal circumstances may take more than 12 months to complete. However, an
enterprise that completes the asset in 8 months should not be penalized for its
efficiency by denying it interest capitalization and vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and
effort capturing immaterial interest cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a
qualifying asset. The interest on borrowings for the same shall be capitalised
although it has taken less than 12 months for the asset to get ready to use.
20. (a) Calculation of segment result
Segments A B C Total
` ` ` `
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue 50,000 40,000 20,000 1,10,000
Revenue from transactions with
other segments
Transaction from B 1,00,000 50,000 1,50,000
Transaction from A 25,000 1,00,000 1,25,000
Total segment revenue as per
AS 17 (A) 6,60,000 4,15,000 2,70,000 13,45,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses 35,000 28,000 14,000 77,000
Expenses on transactions with
other segments
Transaction from B 75,000 30,000 1,05,000
Transaction from A 18,000 82,000 1,00,000

Total segment expenses as per

AS 17 (B) 4,16,000 2,36,000 2,01,000 8,53,000
Segment result (A-B) 2,44,000 1,79,000 69,000 4,92,000
(b) As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income”,
deferred tax in respect of timing differences which originate during the tax holiday
period and reverse during the tax holiday period, should not be recognized to the
extent deduction from the total income of an enterprise is allowed during the tax
holiday period as per the provisions of sections 10A and 10B of the Income -tax Act.
Deferred tax in respect of timing differences which originate during the tax holiday
period but reverse after the tax holiday period should be recognized in the year in
which the timing differences originate. However, recognition of deferred tax assets
should be subject to the consideration of prudence. For this purpose, the timing
differences which originate first should be considered to reverse first.
Out of ` 1,000 lakhs depreciation, timing difference amounting ` 400 lakhs (` 50
lakhs x 8 years) will reverse in the tax holiday period and therefore, should not be
recognized. However, for ` 600 lakhs (` 1,000 lakhs – ` 400 lakhs), deferred tax
liability will be recognized for ` 240 lakhs (40% of ` 600 lakhs) in first year. In the
second year, the entire amount of timing difference of ` 2,000 lakhs will reverse only
after tax holiday period and hence, will be recognized in full. Deferred tax liability
amounting ` 800 lakhs (40% of ` 2,000 lakhs) will be created by charging it to profit
and loss account and the total balance of deferred tax liability account at the end of
second year will be ` 1,040 lakhs (240 lakhs + 800 lakhs).

PAPER – 2: CORPORATE AND OTHER LAWS
PART – I: ANNOUNCEMENTS STATING APPLICABILITY

FOR NOVEMBER, 2018 EXAMINATIONS
Applicability for November, 2018 examinations
The Study Material (July 2017 edition) is updated for all amendments till 30 th April, 2017. Further,
all relevant amendments/ circulars/ notifications etc. in the Company law part for the period
1st May 2017 to 30th April, 2018 are mentioned below:
Relevant Legislative amendments from 1 st of May 2017 to 30th April, 2018
The Companies Act, 2013/ Corporate Laws
Sl. Amendments Relevant Amendments Pg no.* Earlier Law
No. related to
1. Enforcement In the Companies (Acceptance of 5.4 (xviii) any
of the Deposits) Rules, 2014, amount received
Companies In rule 2, in sub-rule (1), in clause by a company
(Acceptance (c), in sub-clause (xviii), after the from Alternate
of Deposits) words “Domestic Venture Capital Investment
Amendment Funds” the words “Infrastructure Funds, Domestic
Rules, 2017 Investment Trusts” shall be Venture Capital
Vide inserted. Funds and
Notification Mutual Funds
G.S.R. 454 (E) registered with
dated 11 th the Securities
May, 2017 in and Exchange
exercise of Board of India in
powers accordance with
conferred by regulations
section 73 and made by it.
73 read with
469(1) and
469(2).
2. Exemptions to The Central Government amends 7.51 Such other place
Government the Notification G.S.R. 463(E), as the Central
Companies dated 5th June 2015, whereby Government may
Vide Exceptions, Modifications and approve in this
Notification Adaptations were provided in case behalf.
G.S.R. 582(E) of Government companies.
Dated 13 th Following is the amendments:
June, 2017 In sub-section (2) of section 96, for
the words "such other place as the
Central Government may approve

in this behalf”, the words “such

other place within the city, town or
village in which the registered office
of the company is situate or such
other place as the Central
Government may approve in this
behalf” shall be substituted.”.
Insertion of Paragraph 2A in the principal notification G.S.R.
463(E), dated 5 th June 2015:
The aforesaid exceptions, modifications and adaptations (i.e. as given
in Notification G.S.R. 463(E), dated 5th June 2015 and Notification
G.S.R. 582(E) Dated 13th June, 2017) shall be applicable to a
Government company which has not committed a default in filing of its
financial statements under section 137 of the Companies Act or annual
return under section 92 of the said Act with the Registrar.
3. Exemptions to The Central Government amends
Private the Notification G.S.R. 464(E),
Companies dated 5th June 2015 whereby
Vide Exceptions, Modifications and
Notification Adaptations were provided in case
G.S.R. 583(E) of Private companies. Following
Dated 13TH are the amendments:
June, 2017
(1) In Chapter I, Clause (40) of 1.9 Provided that
section 2. the financial
For the proviso, the following shall statement, with
be substituted, namely:- Provided respect to One
that the financial statement, with Person
respect to one person company, Company, small
small company, dormant company company and
and private company (if such dormant
private company is a start-up) may company, may
not include the cash flow not include the
statement; cash flow
Explanation. - For the purposes of statement
this Act, the term „start-up‟ or
“start-up company” means a private
company incorporated under the
Companies Act, 2013 or the
Companies Act, 1956 and
recognised as start-up in
accordance with the notification
issued by the Department of

PAPER – 2: CORPORATE AND OTHER LAWS 3
Industrial Policy and Promotion,

Ministry of Commerce and Industry.
(2) In Chapter V, clauses (a) to (e) 5.6 Clause (a) to (e)
of sub-section (2) of section 73, of Section 73
shall not apply to a private provides
company- conditions for
(A) which accepts from its acceptance of
members monies not exceeding deposits from
one hundred per cent. of aggregate members.
of the paid up share capital, free Notification
reserves and securities premium dated 5th June,
account; or 2015, provided
(B) which is a start-up, for five that Clause (a)
years from the date of its to (e) of Sub-
incorporation; or section 2 of
(C) which fulfils all of the following Section 73 shall
conditions, namely:- not apply to
private
(a) which is not an associate or a
Companies
subsidiary company of any other
which accepts
company;
from its
(b) if the borrowings of such a members
company from banks or financial monies not
institutions or any body corporate is exceeding one
less than twice of its paid up share hundred per
capital or fifty crore rupees, cent, of
whichever is lower; and aggregate of the
(c) such a company has not paid up share
defaulted in the repayment of such capital and free
borrowings subsisting at the time of reserves, and
accepting deposits under this such company
section: shall file the
Provided that the company referred details of monies
to in clauses (A), (B) or (C) shall file so accepted to
the details of monies accepted to the Registrar in
the Registrar in such manner as such manner as
may be specified. may be
specified.
(3) In Chapter VII, clause (g) of 7.11 clause (g) of
sub-section (1) of section 92, shall sub-section (1)
apply to private companies which of section 92 is
are small companies, namely:- read as
“remuneration of

“(g) aggregate amount of directors and

remuneration drawn by directors;” key managerial
personnel”
(4) In Chapter VII, proviso to sub- 7.12 (4) However, in
section (1) of section 92, relation to One
For the proviso, the following Person
proviso shall be substituted, Company and
namely:- small company,
“Provided that in relation to One the annual
Person Company, small company return shall be
and private company (if such signed by the
private company is a start-up), the company
annual return shall be signed by the secretary, or
company secretary, or where there where there is
is no company secretary, by the no company
director of the company.”. secretary, by the
director of the
company.
(5) Section 143(3)(i), shall not 10.24 (5) Section
apply to a private company:- 143(3)(i)
(i) which is a one person provides-
company or a small company; or whether the
which has turnover less than company has
rupees fifty crores as per latest adequate
audited financial statement or# internal financial
which has aggregate borrowings controls system
from banks or financial institutions in place and the
or anybody corporate at any point operating
of time during the financial year effectiveness of
less than rupees twenty five crore." such controls;
Insertion of Paragraph 2A in the principal notification G.S.R.
464(E), dated 5 th June 2015:
The aforesaid exceptions, modifications and adaptations shall be
applicable to a Private company which has not committed a default in
filing of its financial statements under section 137 or annual return
under section 92 of the said Act with the Registrar.
#4. Corrigendum Ministry of Corporate Affairs vide Referred In Section
vide corrigendum stated that for the in point 143(3)(i)(ii)
Notification words “statement or” to read as no. 3 there were the
S.O. 2218(E) “statement and” under section above words
dated 13th July 143(3)(i). “statement or”
2017 with which has been

respect to the replaced with

Notification the word
G.S.R. 583(E) “statement and”
Dated 13 TH through this
June, 2017 notification.
5. Enforcement The Central Government hereby 10.6 Earlier Rule 5(b)
of the amends the Companies (Audit and stated that -all
Companies Auditors) Rules, 2014. private limited
(Audit and companies
Auditors) Through this amendment rule, in having paid up
Second Rule 5(b), for the word “twenty”, the share capital of
Amendment word “fifty” shall be substituted. rupees 20 crore
Rules, 2017 or more;
Vide
Notification
G.S.R. 621(E)
dated 22 nd
June 2017 in
exercise of
powers
conferred by
section 139.
6. Clarification Notification No. G.S.R. 583(E) - For the purposes
regarding dated 13th June, 2017 stated that of clause (i) of
applicability of requirements of reporting under sub-section (3)
exemption section 143(3)(i) read Rule 10 A of of sectlon 143,
given to the Companies (Audit and for the financial
certain private Auditors) Rules, 2014 of the years
companies Companies Act 2013 shall not commencing on
under section apply to certain private companies. or after 1st April,
143(3)(i) vide Through issue of this circular, it is 2015, the report
circular no. hereby clarified that the exemption of the auditor
08/2017 dated shall be applicable for those audit shall state about
25th July 2017 reports in respect of financial existence of
statements pertaining to financial adequate internal
year, commencing on or after 1st financial controls
April, 2016, which are made on or system and its
after the date of the said operating
notification. effectiveness:
Provided that
auditor of a
company may

voluntarily
include the
statement
referred to in this
rule for the
financial year
commencing on
or after 1st April,
2014 and ending
on or before 31st
March, 2015.
7. Clarification Notification No. G.S.R. 583(E) - For the purposes
regarding dated 13th June, 2017 stated that of clause (i) of
applicability of requirements of reporting under sub-section (3)
exemption section 143(3)(i) read Rule 10 A of of section 143,
given to the Companies(Audit and Auditors) for the financial
certain private Rules, 2014 of the Companies Act years
companies 2013 shall not apply to certain commencing on
under section private companies. Through issue or after 1st April,
143(3)(i) vide of this circular, it is hereby clarified 2015, the report
circular no. that the exemption shall be of the auditor
08/2017 dated applicable for those audit reports in shall state about
25th July 2017 respect of financial statements existence of
pertaining to financial year, adequate internal
commencing on or after 1st April, financial controls
2016, which are made on or after system and its
the date of the said notification. operating
effectiveness:
Provided that
auditor of a
company may
voluntarily
include the
statement
referred to in this
rule for the
financial year
commencing on
or after 1st April,
2014 and ending
on or before 31st
March, 2015.

8. Enforcement In the Companies (Acceptance of 5.8 Provided that a

of the Deposits) Rules, 2014, in rule 3, in private company
Companies sub-rule (3), for the proviso, the may accept from
(Acceptance following shall be substituted, its members
of Deposits) namely:- monies not
Second “Provided that a Specified IFSC exceeding one
Amendment Public company and a private hundred per cent
Rules, 2017 company may accept from its of aggregate of
Vide members monies not exceeding the paid up
Notification one hundred per cent. of aggregate share capital,
G.S.R. of the paid up share capital, free free reserves
1172(E) dated reserves and securities premium and securities
19th account and such company shall premium
September, file the details of monies so account and
2017 in accepted to the Registrar in Form such company
exercise of DPT-3. shall file the
powers Explanation.—For the purpose of details of monies
conferred by this rule, a Specified IFSC Public so accepted to
section 73 and company means an unlisted public the Registrar in
73 read with company which is licensed to such manner as
469(1) and operate by the Reserve Bank of may be
469(2). India or the Securities and specified.
Exchange Board of India or the
Insurance Regulatory and
Development Authority of India
from the International Financial
Services Centre located in an
approved multi services Special
Economic Zone set-up under the
Special Economic Zones Act, 2005
(28 of 2005) read with the Special
Economic Zones Rules, 2006:
Provided further that the maximum
limit in respect of deposits to be
accepted from members shall not
apply to following classes of private
companies, namely:—
(i) a private company which is a
start-up, for five years from the date
of its incorporation;
(ii) a private company which fulfils
all of the following conditions,
namely:—

(a) which is not an associate or a

subsidiary company of any other
company;
(b) the borrowings of such a
company from banks or financial
institutions or any body corporate is
less than twice of its paid up share
capital or fifty crore rupees,
whichever is less ; and
(c) such a company has not
defaulted in the repayment of such
borrowings subsisting at the time of
accepting deposits under section
73:
Provided also that all the
companies accepting deposits shall
file the details of monies so
accepted to the Registrar in Form
DPT-3.”.
9. Vide The Central Government hereby 1.20 Earlier not
notification appoints the 20 th September, 2017 notified
S.O. 3086(E) as the date on which proviso to
dated 20 th clause (87) of section 2 of the said
September Act shall come into force.
2017
10. Companies Following sections of the Companies
(Amendment) Act, 2013 have been amended by the
Act, 2017 Companies (Amendment) Act, 2017
with effect from 26th January, 2018
[Notification S.O. 351 (E)] and from
9th February, 2018 [Notification S. O.
630 (E)]
1. In section 2 of the Companies
Act, 2013 (hereinafter referred to
as the principal Act)-
Enforcement Date: 9 th February,
2018
(i) for clause (28), the following 1.7 Cost
clause shall be substituted, accountant
namely:— means a cost
'(28) "Cost Accountant" means a accountant as
cost accountant as defined in defined in

clause (b) of sub-section (1) of clause (b) of

section 2 of the Cost and Works sub-section (1)
Accountants Act, 1959 and who of section 2 of
holds a valid certificate of practice the Cost and
under sub-section (1) of section 6 Works
of that Act; Accountants
Act, 1959 and
who holds a
valid certificate
of practice
under sub-
section (1) of
section 6 of
that Act.
(ii) in clause (30), the following 1.8 –
proviso shall be inserted, namely: (The proviso is
"Provided that— (a) the newly inserted)
instruments referred to in Chapter
III-D of the Reserve Bank of India
Act, 1934; and (b) such other
instrument, as may be prescribed
by the Central Government in
consultation with the Reserve Bank
of India, issued by a company, shall
not be treated as debenture;";
(iii) in clause (41), in the first 1.9 -
proviso, after the word "subsidiary", which is a
the words "or associate company" holding
shall be inserted; company or a
subsidiary of a
company
incorporated
outside India
(The words are
newly inserted)
(iv) in clause (46), the following 1.11 -
Explanation shall be inserted, (The
namely:- Explanation is
'Explanation.—For the purposes of newly inserted)
this clause, the expression
"company" includes any body
corporate;';

(v) clause (49) shall be omitted 1.11 (49) Interested

director means
a director who
is in any way,
whether by
himself or
through any of
his relatives or
firm, body
corporate or
other
association of
individuals in
which he or any
of his relatives
is a partner,
director or a
member,
interested in a
contract or
arrangement,
or proposed
contract or
arrangement,
entered into or
to be entered
into by or on
behalf of a
company;
This definition
is relevant for
section 174
relating to
quorum for
meetings of the
Board of
Directors, for
section 184
relating to
disclosure of
interest by
directors and
also for section
188 relating to

related party
transactions of
the Companies
Act, 2013.
(vi) in clause (51),- 1.11 (iii) the whole-
time director;
(a) in sub-clause (iv), the word (iv) the Chief
"and" shall be omitted; Financial
Officer; and
(b) for sub-clause (v), the following (v) such other
sub-clauses shall be substituted, officer as may
namely:- "(v) such other officer, not be prescribed;
more than one level below the
directors who is in whole-time
employment, designated as key
managerial personnel by the
Board; and
(vi) such other officer as may be
prescribed;"
(vii) in clause (57), for the words 1.12 ……the
"and securities premium account", aggregate value
the words ", securities premium of the paid-up
account and debit or credit balance share capital
of profit and loss account," shall be and all reserves
substituted created out of
the profits and
securities
premium
account, after
deducting the
aggregate…..
(viii) in clause (71), in sub-clause 1.15 –
(a), after the word "company;", the (The word is
word "and" shall be inserted; newly inserted)
(ix) in clause (72), in the proviso, 1.16 -
in clause (A), after the words “State Provided that no
Act”, the words “other than this Act institution shall
or the previous company law” shall be so notified
be inserted; unless—
(A) it has been
established or

constituted by or
under any
Central or State
Act;
(The words are
newly inserted)
(x) in clause (76), for sub-clause 1.17 (viii) any
(viii), the following sub-clause shall company which
be substituted, namely:— is—
"(viii) any body corporate which (A) a holding,
is— (A) a holding, subsidiary or subsidiary or
an associate company of such an associate
company; company of
(B) a subsidiary of a holding such company;
company to which it is also a or
subsidiary; or (B) a subsidiary
(C) an investing company or the of a holding
venturer of the company;"; company to
Explanation.—For the purpose of which it is also
this clause, “the investing company a subsidiary;
or the venturer of a company”
means a body corporate whose
investment in the company would
result in the company becoming an
associate company of the body
corporate.
(xi) in clause (85)- 1.20 For (a)
(a) in sub-clause (i), for the words paid-up share
"five crore rupees", the words "ten capital of which
crore rupees" shall be substituted; does not exceed
fifty lakh rupees
or such
higher amount
as may be
prescribed
which shall not
be more than
five crore
rupees; or
(b) in sub-clause (ii),- For (b)
(A) for the words "as per its last turnover of
profit and loss account", the words which as per its

"as per profit and loss account for last profit and
the immediately preceding financial loss account
year" shall be substituted; does not exceed
(B) for the words "twenty crore two crore rupees
rupees", the words "one hundred or such higher
crore rupees" shall be substituted; amount as may
be prescribed
which shall not
be more than
twenty crore
rupees:
(xii) for clause (91), the following 1.21 (91) Turnover
clause shall be substituted, means the
namely:- aggregate
'(91) "turnover" means the gross value of the
amount of revenue recognised in realisation of
the profit and loss account from the amount made
sale, supply, or distribution of from the sale,
goods or on account of services supply or
rendered, or both, by a company distribution of
during a financial year;'. goods or on
account of
services
rendered, or
both, by the
company
during a
financial year;
Note: There is
in ambiguity in
definition. So,
there is a need
for amendment
in this
definition.
Further, the
change in
definition is
pending in the
Companies
(Amendment)
Bill, 2016.

2. After section 3 of the principal 2.4 -

Act, the following section shall be (The section is
inserted, namely:- newly inserted)
"3A. If at any time the number of
members of a company is reduced,
in the case of a public company,
below seven, in the case of a
private company, below two, and
the company carries on business
for more than six months while the
number of members is so reduced,
every person who is a member of
the company during the time that it
so carries on business after those
six months and is cognisant of the
fact that it is carrying on business
with less than seven members or
two members, as the case may be,
shall be severally liable for the
payment of the whole debts of the
company contracted during that
time, and may be severally sued
therefor.".
2018
3. In section 4 of the principal Act, 2.11 Upon receipt
in sub-section (5), for clause (i), the of an
following shall be substituted, application, the
namely:- Registrar may,
"(i) Upon receipt of an application on the basis of
under sub-section (4), the Registrar information
may, on the basis of information and documents
and documents furnished along furnished along
with the application, reserve the with the
name for a period of twenty days application,
from the date of approval or such reserve the
other period as may be prescribed: name for a
Provided that in case of an period of sixty
application for reservation of name days from the
or for change of its name by an date of the
existing company, the Registrar application.
may reserve the name for a period

of sixty days from the date of

approval."
Enforcement Date: 26 th January,
2018
4. In section 21 of the principal Act, 2.35 (ii) an officer
for the words "an officer of the of the company
company", the words "an officer or duly authorised
employee of the company" shall be by the Board in
substituted this behalf.
2018
5. In section 35 of the principal Act, 3.22 -
in sub-section (2), after clause (b), To be inserted in
the following clause shall be Point (2) after
inserted, namely:- point (b)
"(c) that, as regards every
misleading statement purported to
be made by an expert or contained
in what purports to be a copy of or
an extract from a report or valuation
of an expert, it was a correct and
fair representation of the
statement, or a correct copy of, or
a correct and fair extract from, the
report or valuation; and he had
reasonable ground to believe and
did up to the time of the issue of the
prospectus believe, that the person
making the statement was
competent to make it and that the
said person had given the consent
required by sub-section (5) of
section 26 to the issue of the
prospectus and had not withdrawn
that consent before delivery of a
copy of the prospectus for
registration or, to the defendant's
knowledge, before allotment
thereunder.".
2018

6. In section 47, in sub-section (1), 4.6 In Point (i), the

for the words, figures and brackets following may be
"provisions of section 43 and sub- added,
section (2) of section 50", the “Subject to
words, figures and brackets the provisions of
"provisions of section 43, sub- section 43, sub-
section (2) of section 50 and sub- section (2) of
section (1) of section 188" shall be section 50 and
substituted. sub-section (1)
Enforcement Date: 9 th February, of section 188,”
2018
7. In section 53 of the principal 4.10 For (i)
Act,- Any share
(i) in sub-section (2), for the words issued by a
"discounted price", the word company at a
"discount" shall be substituted; discounted
price shall be
Enforcement Date: 9 th February, void.
2018
7. In section 53 of the principal 4.10 For (ii): -
Act,-
(ii) after sub-section (2), the
following sub-section shall be
inserted, namely:-
"(2A) Notwithstanding anything
contained in sub-sections (1) and
(2), a company may issue shares at
a discount to its creditors when its
debt is converted into shares in
pursuance of any statutory
resolution plan or debt restructuring
scheme in accordance with any
guidelines or directions or
regulations specified by the
Reserve Bank of India under the
Reserve Bank of India Act, 1934 or
the Banking (Regulation) Act,
1949.".
2018


Act,- (c) to any
(i) in sub-section (1), in clause (c), persons, if it is
for the words "of a registered valuer authorised by a
subject to such conditions as may special
be prescribed", the words and resolution, ….. is
figures "of a registered valuer, determined by
subject to the compliance with the the valuation
applicable provisions of Chapter III report of a
and any other conditions as may be registered
prescribed" shall be substituted; valuer subject to
such conditions
Enforcement Date: 9 th February, as prescribed
2018 ………
8. In section 62 of the principal 4.22 For (ii)
Act,- The notice of
offer of shares
(ii) for sub-section (2), the following shall be
sub-section shall be substituted, despatched
namely:- through
"(2) The notice referred to in sub- registered post
clause (i) of clause (a) of sub- or speed post
section (1) shall be dispatched or through
through registered post or speed electronic
post or through electronic mode or mode to all the
courier or any other mode having existing
proof of delivery to all the existing shareholders at
shareholders at least three days least three days
before the opening of the issue.". before the
opening of the
issue.
2018
9. In section 76A of the principal (a) 5.14 For (a)
Act,- the company
(a) in clause (a), for the words, “one …..shall not be
crore rupees”, the words “one crore less than one
rupees or twice the amount of crore rupees
deposit accepted by the company, but which may
whichever is lower” shall be extend to ten
substituted; crore rupees;
and


2018
9. In section 76A of the principal For (b)
Act,- 5.15 every officer
…….with
(b) in clause (b),- imprisonment
(i) for the words "seven years or which may
with fine", the words "seven years extend to seven
and with fine" shall be substituted; years or with
fine which shall
(ii) the words "or with both" shall
not be less than
be omitted
twenty-five lakh
rupees but which
Enforcement Date: 9 th February, may extend to
2018 two crore
rupees, or with
both
10. In section 100 of the principal 7.52 -
Act, in sub-section (1), the following (The proviso is
proviso shall be inserted, namely:- newly inserted)
"Provided that an extraordinary
general meeting of the company,
other than of the wholly owned
subsidiary of a company
incorporated outside India, shall be
held at a place within India.".
Enforcement Date: 9th February,
2018
11. In section 101 of the principal 7.19 The proviso to
Act, in sub-section (1), for the section 101(1)
proviso, the following proviso shall also states that
be substituted, namely:- a shorter notice
"Provided that a general meeting may also be
may be called after giving shorter given with the
notice than that specified in this consent of 95
sub-section if consent, in writing or per cent of the
by electronic mode, is accorded members
thereto- entitled to vote.
(i) in the case of an annual general Generally
meeting, by not less than ninty-five meetings need
per cent. of the members entitled to to be called by
vote thereat; and giving a notice
of 21 clear

(ii) in the case of any other general days. However,

meeting, by members of the they can be
company- called on a
(a) holding, if the company has shorter notice
a share capital, majority in number if, 95 per cent of
of members entitled to vote and the members
who represent not less than ninety- entitled to vote
five per cent. of such part of the in that meeting
paid-up share capital of the give their
company as gives a right to vote at consent in
the meeting; or writing or by
(b) having, if the company has electronic
no share capital, not less than mode.
ninety-five per cent. of the total It is also
voting power exercisable at that important to
meeting: note that only
Provided further that where any the
member of a company is entitled to requirement as
vote only on some resolution or regards the
resolutions to be moved at a length of the
meeting and not on the others, notice being 21
those members shall be taken into days, is
account for the purposes of this dispensed with
sub-section in respect of the former by such
resolution or resolutions and not in consent of not
respect of the latter.". less than 95 per
cent of the
members
2018
entitled to vote
at such
meeting and
not the
necessity to
call and hold
such meeting.
Act, in sub-section (1), the following
proviso shall be inserted, namely:-
"Provided that any item of business
required to be transacted by means
of postal ballot under clause (a),
may be transacted at a general
meeting by a company which is

required to provide the facility to

members to vote by electronic
means under section 108, in the
manner provided in that section.".
2018
13. In section 123 of the principal 8.4
Act,-
(a) in sub-section (1)- (i) For point (A)

(i) in clause (a),- (c) out of both
(A) for the words "both; or", the (a) and (b); or
word "both:" shall be substituted;
(B) the following proviso shall
be inserted, namely:- For point (B): -
"Provided that in computing profits The proviso is
any amount representing newly inserted
unrealised gains, notional gains or
revaluation of assets and any
change in carrying amount of an
asset or of a liability on
measurement of the asset or the
liability at fair value shall be
excluded; or";

2018
13. In section 123 of the principal 8.4 For (ii)
Act,- Where a
company, …….
it in previous
(ii) in the second proviso, for the years and
words "transferred by the company transferred by
to the reserves", the words the company to
"transferred by the company to the the reserves,
free reserves" shall be substituted; such declaration
of dividend ……
with prescribed
2018
rules. [Second
Proviso to
section 123(1)]

13. In section 123 of the principal 8.6 According to

Act,- section 123(3),
the Board of
(b) for sub-section (3), the following Directors of a
sub-section shall be substituted, company may
namely:- declare interim
dividend during
any financial
"(3) The Board of Directors of a year out of the
company may declare interim surplus in the
dividend during any financial year profit and loss
or at any time during the period account and
from closure of financial year till out of profits of
holding of the annual general the financial
meeting out of the surplus in the year in which
profit and loss account or out of such interim
profits of the financial year for dividend is
which such interim dividend is sought to be
sought to be declared or out of declared.
profits generated in the financial
year till the quarter preceding the
date of declaration of the interim
dividend: Provided that in case the
company has incurred loss during
the current financial year up to the
end of the quarter immediately
preceding the date of declaration of
interim dividend, such interim
dividend shall not be declared at a
rate higher than the average
dividends declared by the company
during immediately preceding three
financial years.".
2018
Act,- Provided that
the court or the
(i) in sub-section (1), in the ……or any other
proviso,- statutory
(a) after the words "regulatory body regulatory body
or authorities concerned", the or authority
concerned and
shall take into

words "or any other person consideration

concerned" shall be inserted; the
(b) after the words "the body or representations,
authority concerned", the words "or if any, …….,
the other person concerned" shall Securities and
be inserted; Exchange Board
or the body or
authority
concerned
2018
before passing
any order under
this section.
(The words are
newly inserted)
14. In section 130 of the principal 9.13
Act,- For (ii) –
(This sub-
(ii) after sub-section (2), the section is newly
following sub-section shall be inserted)
inserted, namely:-
"(3) No order shall be made under
sub-section (1) in respect of re-
opening of books of account
relating to a period earlier than
eight financial years immediately
preceding the current financial
year: Provided that where a
direction has been issued by the
Central Government under the
proviso to sub-section (5) of section
128 for keeping of books of account
for a period longer than eight years,
the books of account may be
ordered to be re-opened within
such longer period."
Enforcement Date: 9th February,
2018
15. In section 136 of the principal 9.30 As per the
Act,- amendment the
(i) in sub-section (1),- word Without
(a) the words and figures "Without prejudice to the
prejudice to the provisions of provisions of
section 101," shall be omitted;

Enforcement Date: 9 th February, section 101,"

2018 shall be omitted
15. In section 136 of the principal -
Act,- (The proviso is
(i) in sub-section (1),- newly inserted)
(b) in the first proviso, for the words

"Provided that", the following shall
be substituted, namely:-
"Provided that if the copies of the
documents are sent less than
twenty-one days before the date of
the meeting, they shall,
notwithstanding that fact, be
deemed to have been duly sent if it
is so agreed by members-
(a) holding, if the company has
a share capital, majority in number
entitled to vote and who represent
not less than ninety-five per cent. of
such part of the paid-up share
capital of the company as gives a
right to vote at the meeting; or
(b) having, if the company has
no share capital, not less than
ninetyfive per cent. of the total
voting power exercisable at the
meeting:
Provided further that";
2018
15. In section 136 of the principal 9.31 Related to point
Act,- (ii) on Page 9.31
(i) in sub-section (1),-
(c) in the second proviso, for the
words "Provided further", the
words, "Provided also" shall be
substituted;


2018
15. In section 136 of the principal 9.31 (iii) Subsidiary
Act,- Companies:
(i) in sub-section (1),- Every
company
(d) for the fourth proviso, the having a
following provisos shall be subsidiary or
substituted, namely:— subsidiaries
shall,—
'Provided also that every listed
company having a subsidiary or (1) place
subsidiaries shall place separate separate
audited accounts in respect of each audited
of subsidiary on its website, if any: accounts in
respect of each
Provided also that a listed company
of its
which has a subsidiary
subsidiary on
incorporated outside India (herein
its website, if
referred to as "foreign subsidiary")-
any;
(a) where such foreign
(2) provide a
subsidiary is statutorily required to
copy of
prepare consolidated financial
separate
statement under any law of the
audited
country of its incorporation, the
financial
requirement of this proviso shall be
statements in
met if consolidated financial
respect of each
statement of such foreign
of its
subsidiary is placed on the website
subsidiary, to
of the listed company;
any
(b) where such foreign shareholder of
subsidiary is not required to get its the company
financial statement audited under who asks for it.
any law of the country of its
incorporation and which does not
get such financial statement
audited, the holding Indian listed
company may place such
unaudited financial statement on its
website and where such financial
statement is in a language other
than English, a translated copy of
the financial statement in English
shall also be placed on the
website.’;


2018
newly inserted)
(ii) in sub-section (2), the following Add the proviso
proviso shall be inserted, namely:- in point (iv)
"Provided that every company
having a subsidiary or subsidiaries
shall provide a copy of separate
audited or unaudited financial
statements, as the case may be, as
prepared in respect of each of its
subsidiary to any member of the
company who asks for it."

2018
16. In section 140 of the principal 10.15 (d) If the
Act, in sub-section (3), for the auditor does not
words "fifty thousand rupees", the ……. with fine
words "fifty thousand rupees or the which shall not
remuneration of the auditor, be less than `
whichever is less," shall be 50,000 but which
substituted. may extend to `
5 Lacs.
2018
17. In section 141 of the principal 10.22 (9) any person
Act, in sub-section (3), for clause whose
(i), the following clause shall be subsidiary or
substituted, namely:- associate
‘(i) a person who, directly or company or
indirectly, renders any service any other form
referred to in section 144 to the of entity, is
company or its holding company or engaged as on
its subsidiary company. the date of
Explanation.—For the purposes of appointment in
this clause, the term "directly or consulting and
indirectly" shall have the meaning specialised
services as

assigned to it in the Explanation to provided in

section 144.’. section 144

2018
18. In section 143 of the principal 10.23 (c) Access to
Act,- record of all its
(i) in sub-section (1), in the proviso, subsidiaries:
for the words "its subsidiaries", at The auditor of a
both the places, the words "its ……. the records
subsidiaries and associate of all its
companies" shall be substituted; subsidiaries in
so far as it
relates to the
consolidation of
2018
its financial
statements with
that of its
subsidiaries.
18. In section 143 of the principal 10.24 (9) whether the
Act,- company has
(ii) in sub-section (3), in clause (i), adequate
for the words "internal financial internal
controls system", the words financial
"internal financial controls with controls
reference to financial statements" system in place
shall be substituted; and the
operating
effectiveness of
such controls;
2018
18. In section 143 of the principal 10.36 The provisions
Act,- of section 143
(iii) in sub-section (14), in clause shall mutatis
(a), for the words "cost accountant mutandis apply
in practice", the words "cost to the cost
accountant" shall be substituted accountant in
practice
conducting cost
audit under
2018
section 148.


Act,- The words shall
(i) in sub-section (2),- be inserted in
(a) after the words "five lakh point (iii) (a)
rupees", the words "or four times
the remuneration of the auditor,
whichever is less" shall be inserted;

2018
19. In section 147 of the principal 10.33 and
Act,-
(i) in sub-section (2),- (2) Fine which
(b) in the proviso, for the words shall not be
"and with fine which shall not be less than Rs. 1
less than one lakh rupees but which lac but which
may extend to twenty-five lakh may extend to
rupees", the words "and with fine Rs. 25 Lacs
which shall not be less than fifty
thousand rupees but which may
extend to twenty-five lakh rupees or
eight times the remuneration of the
auditor, whichever is less" shall be
substituted;

2018
19. In section 147 of the principal 10.33 (2) pay for
Act,- damages to the
(ii) in sub-section (3), in clause (ii), company,
for the words "or to any other statutory bodies
persons", the words "or to members or authorities or
or creditors of the company" shall to any other
be substituted; persons for loss
arising out of
incorrect ….
audit report.
2018
(iii) in sub-section (5), the following newly inserted)
proviso shall be inserted, namely:-

"Provided that in case of criminal

liability of an audit firm, in respect
of liability other than fine, the
concerned partner or partners, who
acted in a fraudulent manner or
abetted or, as the case may be,
colluded in any fraud shall only be
liable.".

2018
20. In section 148 of the principal 10.34 (iv) The cost
Act,- audit shall be
(i) in sub-section (3),- conducted by a
(a) for the words "Cost Accountant Cost
in practice", the words "cost Accountant in
accountant" shall be substituted; practice who
shall be …… by
Enforcement Date: 9 th February, the members in
2018 such manner as
may be
prescribed.
20. In section 148 of the principal 10.35 Here, the
Act,- expression “cost
(i) in sub-section (3),- auditing
(b) in the Explanation, for the words standards” mean
"Institute of Cost and Works such standards
Accountants of India", the words as are issued by
"Institute of Cost Accountants of the Institute of
India" shall be substituted; Cost and Works
Accountants of
Enforcement Date: 9 th February, India,
2018 constituted
under the Cost
and Works
Accountants
Act, 1959, with
the approval of
the Central
Government.

20. In section 148 of the principal 10.35 (x) The report

Act,- on the audit of
(ii) in sub-section (5), in the cost records
proviso, for the words "cost shall be
accountant in practice", the words submitted by the
"cost accountant" shall be cost
substituted accountant in
practice to the
Enforcement Date: 9 th February, Board of
2018 Directors (BoD)
of the company.
11. Amendment in In exercise of the powers conferred 9.7 Replace the
the notification by clauses (a) and (b) of sub- footnote
number section (1) and subsection (2) of ‘Section 129
G.S.R. 463(E) section 462 of the Companies Act, shall not apply to
dated the 5th 2013, the Central Government, in the Government
June, 2015 the interest of public amends the companies to
vide notification of the Government of the extent of
Notification India in the Ministry of Corporate application of
no. S.O. Affairs number G.S.R. 463(E) Accounting
802(E) dated dated the 5th June, 2015 namely:— Standard 17
23rd February, In the said notification, in the (Segment
2018 Table, for serial number 8 and Reporting) to
entries relating thereto, the the companies
following serial number and entries engaged in
shall be respectively substituted, defence
namely:- production.
“In Chapter IX, Section 129- Shall
not apply to the companies
engaged in defence production to
the extent of application of relevant
Accounting Standard on segment
reporting”.
12. Enforcement The Central Government appoints 9.14 -
of sub-section the 21st March, 2018 as the date on (The said sub –
(3) and (11) of which the provisions of sub- sections have
Section 132 of sections (3) and (11) of section 132 been notified)
the of the said Act shall come into
Companies force.
Act, 2013 vide
Notification
No. S.o.

1316(E) dated
21st March,
2018
13. ‘Reservation Rule 9: Reservation of name 2.11 -
of Name of An application for reservation of (This Rule may
Company’ name shall be made through the read with
web service available at respect to point
Notification www.mca.gov.in by using [form (iv) Requirement
G.S.R. 284(E) RUN](Reserve Unique Name) for reservation of
dated 23 rd along with fee as provided in the the name of the
March, 2018 Companies (Registration offices company)
and fees) Rules, 2014, which may
either be approved or rejected, as
the case may be, by the Registrar,
Central Registration Centre after
allowing re--submission of such
application within fifteen days for
rectification of the defects, if any.
*Page No. of the Study material (New study material) with reference of relevant provisions
PART – II : QUESTIONS AND ANSWERS
QUESTIONS
COMPANY LAW
The Companies Act, 2013
1. Prakhar Ltd. intends to raise share capital by issuing Equity Shares in different stages over
a certain period of time. However, the company does not wish to issue prospectus each
and every time of issue of shares. Considering the provisions of the Companies Act, 2013,
discuss what formalities Prakhar Ltd. should follow to avoid repeated issuance of
prospectus?
2. Earth Ltd., a Public Company offer the new shares (further issue of shares) to persons
other than the existing shareholders of the Company. Explain the conditions when shares
can be issued to persons other than existing shareholders. Discuss whethe r these shares
can be offered to the Preference Shareholders?
3. Examine the validity of the following with reference to the relevant provisions of the
Companies Act, 2013:
(i) The Board of Directors of Shrey Ltd. called an extraordinary general meeting upon
the requisition of members. However, the meeting was adjourned on the ground that
the quorum was not present at the meeting. Advise the company.

(ii) Mary Ltd is a listed company having turnover of ` 1200 crores during the financial
year 2016-17. The CSR committee of the Board formulated and recommended a
CSR project which was approved by the Board. The company finalised the project
under its CSR initiatives which require funds @ 5 % of average net profit of the
company for last three financial years. Will such excess expense be counted in
subsequent financial years as a part of CSR expenditure? Advise the company.
4. Examine the validity of the following decisions of the Board of Directors with reference of
the provisions of the Companies Act, 2013.
(i) In an Annual General Meeting of Vrinda Ltd. having share capital, 80 members
present in person or by proxy holding more than 1/10 th of the total voting power,
demanded for poll. The chairman of the meeting rejected the request on the ground
that only the members present in person can demand for poll.
(ii) In an annual general meeting, during the process of poll, the members who earlier
demanded for poll want to withdraw it. The chairman of the meeting rejected the
request on the ground that once poll started, it cannot be withdrawn.
5. Growmore Limited’s share capital is divided into different classes. Now, Growmore Limited
intends to vary the rights attached to a particular class of shares. Explain the provisions of
the Companies Act, 2013 to Growmore Limited as to obtaining consent from the
shareholders in relation to variation of rights.
6. Heavy Metals Limited wants to provide financial assistance to its employees, to enable
them to subscribe for certain number of fully paid shares. Considering the provision of the
Companies Act, 2013, what advice would you give to the company in this regard?
7. Lemon & Company, Chartered Accountants a Limited Liability Partnership firm with CA. L,
CA. M and CA. N as partners, is the statutory auditor of a listed company M/s Big Limited
for past 6 years as on 01.04.2014.
CA.M is also a partner in other Chartered Accountant firm Dew & Company, Chartered
Accountants. Advise under the provisions of the Companies Act, 2013 :
(1) Upto how many years can Lemon & Company continue as statutory auditors of M/s
Big Limited?
(2) What shall be the cooling-off period for Lemon & Company with respect to M/s Big
Limited?
(3) Can Dew & Company; be appointed as statutory auditors of M/s Big Limited and it's
another listed subsidiary M/s Dark Limited during such cooling-off period?
(4) Can Lemon & Company be appointed as internal auditors of M/s Big Limited and it's
another listed subsidiary M/s Dark Limited, during such cooling-off period?
8. Mrs. Sita, wife of CA. ‘Arjun' the statutory auditor of Stellar Builders Limited, acquired
shares in the company for a face value of `75000/- on 15th March, 2018. CA. ‘Arjun’, issued
his audit report on 25 th April, 2018. Examine the validity of this transaction under the

Companies Act, 2013. Would your answer be different if face value of the shares have
been ` 150000/- (market value ` 95000/-)?
9. The Board of Directors of Sindhu Limited wants to make some changes and to alter some
Clauses of the Articles of Association which are to be urgently carried out, which include
the increase in Authorized Capital of the company, issue of shares, increase in borrowing
limits and increase in the number of directors.
Discuss about the provisions of the Companies Act, 2013 to be followed for alteration of
Articles of Association.
10. The directors of Element Ltd. want to voluntary revise the Financial statements of the
company. They have approached you to state to them the provisions of the Companies
Act, 2013 regarding voluntary revision of financial statements.
OTHER LAWS
The Indian Contract Act, 1872
11. Explaining the provisions of the Indian Contract Act, 1872, answer the following:
(i) A contracts with B for a fixed price to construct a house for B within a stipulated time.
B would supply the necessary material to be used in the construction. C guarantees
A’s performance of the contract. B does not supply the material as per the agreement.
Is C discharged from his liability?
(ii) C, the holder of an over due bill of exchange drawn by A as surety for B, and accepted
by B, contracts with X to give time to B. Is A discharged from his liability?
12. Mr. Avinash wanted a loan for expanding his business, from ABC Bank. Mr. Avinash has
pledged the stock of his business to obtain the loan from bank. However, the expansion of
business did not reap the desired results and Mr. Avinash was not able to repay the loan.
Now, ABC bank wants to retain the stock for adjustment of their loan. Advise, ABC Bank
whether they can retain the stock for the adjustment of their loan and also for payment of
interest. Give your answer as per the provisions of the Contract Act, 1872.
The Negotiable Instruments Act, 1881
13. A bill of exchange has been dishonoured by non- payment. Now, Mr. Sandip, the holder
wants a certificate of protest for such a dishonoured bill. Advise, Mr. Sandip whether he
can get the certificate of protest. Also, advise him regarding the provisions of Protest for
better security.
The General Clauses Act, 1897
14. Mr. Ram, an advocate has fraudulently deceived his client Mr. Shyam, who was taking his
expert advise on taxation matters. Now, Mr. Ram is liable to a fine for acting fraudulently
both under the Advocates Act, 1961 as well as the Income Tax Act, 1961. State the
provision as to whether his offence is punishable under the both the Acts, as per the
General Clauses Act, 1897.

Interpretation of Statutes, Deeds and Documents

15. The ‘Statute should be read as a Whole’. Explain the statement.
SUGGESTED ANSWERS/HINTS
1. Shelf prospectus means a prospectus in respect of which the securities or class of

securities included therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus
(1) According to Section 31 of the Company Act, 2013 any class or classes of companies,
as the Securities and Exchange Board may provide by regulations in this behalf, may
file a shelf prospectus with the Registrar at the stage—
(A) of the first offer of securities included therein which shall indicate a period not
exceeding one year as the period of validity of such prospectus which shall
commence from the date of opening of the first offer of securities under that
prospectus, and
(B) in respect of a second or subsequent offer of such securities issued during the period
of validity of that prospectus, no further prospectus is required.
(2) The other formalities related to such repeated/subsequent issue of shares- A
company filing a shelf prospectus shall be required to file an information
memorandum containing all material facts relating to new charges created, changes
in the financial position of the company as have occurred between the first or previous
offer of securities and the succeeding offer of securities and such other changes as
may be prescribed, with the Registrar within the prescribed time, prior to the issue of
a second or subsequent offer of securities under the shelf prospectus .
Thus, Prakhar Ltd. can follow the above provisions and can issue a shelf prospectus.
2. Issue of Further Shares: Section 62 (1) (a) of the Companies Act, 2013 provides that if,
at any time, a company having a share capital proposes to increase its subscribed capital
by the issue of further shares, such shares should be offered to the existing equity
shareholders of the company as at the date of the offer, in proportion to the capital paid up
on those shares.
However, certain exceptions have been provided in the Companies Act, 2013 when such
further shares of a company may-be offered to other persons as well. These are as under-
(a) Under section 62 (1) (b) issue of further shares may be offered to employees under
a scheme of employees’ stock option subject to a special resolution passed by the
company and subject to such conditions as may be prescribed.
(b) Under section 62 (1) (c) such shares may be offered to any persons, if it is authorised
by a special resolution, either for cash or for a consideration other than cash, if the
price of such shares is determined by the valuation report of a registered valuer,

subject to the compliance with the applicable provisions of Chapter III and any other
conditions as may be prescribed.
(c) if any equity shareholder to whom the shares are offered in terms of section 62 (1)
(a) as described above, declines such offer, the Board of Directors may dispose of
the shares in such manner as is not disadvantageous to the shareholders or to the
company.
Preference Shareholders: From the wordings of Section 62 (1) (c), it is quite clear that
these shares can be issued to any persons who may be preference shareholders as well
provided such issue is authorized by a special resolution of the company and are issued
on such conditions as may be prescribed.
3. (i) According to section 100 (2) of the Companies Act 2013, the Board of directors
must convene a general meeting upon requisition by the stipulated minimum number
of members.
As per Section 103 (2) (b) of the Companies Act, 2013, if the quorum is not present
within half an hour from the appointed time for holding a meeting of the company, the
meeting, if called on the requisition of members, shall stand cancelled. Therefore, the
meeting stands cancelled and the stand taken by the Board of Directors to adjourn it,
is not proper.
(ii) In terms of Section 135(5) of the Companies Act, 2013, the Board of every company
to which section 135 is applicable, shall ensure that the company spends, in every
Financial year at least 2 per cent of average net profits of the company made during
the three immediately preceding financial years, in pursuance of its CSR policy. There
is no provision for carry forward of excess expenditure to the next year(s). The words
used in the section are 'at least'. Therefore, any expenditure over 2% would be
considered as voluntary higher spending. Hence, such excess expense will not be
counted in subsequent financial years as a part of CSR expenditure.
4. Section 109 of the Companies Act, 2013 provides for the demand of poll before or on the
declaration of the result of the voting on any resolution on show of hands. Accordingly law
says that:-
Order of demand for poll by the chairman of meeting: Before or on the declaration of
the result of the voting on any resolution on show of hands, a poll may be ordered to be
taken by the Chairman of the meeting on his own motion, and shall be ordered to be taken
by him on a demand made in that behalf:-
(a) In the case a company having a share capital, by the members present in person or
by proxy, where allowed, and having not less than one-tenth of the total voting power
or holding shares on which an aggregate sum of not less than five lakh rupees or
such higher amount as may be prescribed has been paid-up; and

(b) in the case of any other company, by any member or members present in person or by
proxy, where allowed, and having not less than one tenth of the total voting power.
Withdrawal of the demand: The demand for a poll may be withdrawn at any time by the
persons who made the demand.
Hence, on the basis on the above provisions of the Companies Act, 2013:
(i) The chairman cannot reject the demand for poll as poll can be demanded by the
members present in person or by proxy. subject to provision in the articles of
company.
(ii) The chairman cannot reject the request of the members for withdrawing the demand
of the Poll.
5. According to section 48 of the Companies Act, 2013-
(1) Variation in rights of shareholders with consent: Where a share capital of the
company is divided into different classes of shares, the rights attached to the shares
of any class may be varied with the consent in writing of the holders of not less than
three-fourths of the issued shares of that class or by means of a special resolution
passed at a separate meeting of the holders of the issued shares of that class,—
(a) if provision with respect to such variation is contained in the memorandum or
articles of the company; or
(b) in the absence of any such provision in the memorandum or articles, if such
variation is not prohibited by the terms of issue of the shares of that class:
Provided that if variation by one class of shareholders affects the rights of any other
class of shareholders, the consent of three-fourths of such other class of shareholders
shall also be obtained and the provisions of this section shall apply to such variation.
(2) No consent for variation: Where the holders of not less than ten per cent of the
issued shares of a class did not consent to such variation or vote in favour of the
special resolution for the variation, they may apply to the Tribunal to have the variation
cancelled, and where any such application is made, the variation shall not have effect
unless and until it is confirmed by the Tribunal:
Provided that an application under this section shall be made within twenty-one days
after the date on which the consent was given or the resolution was passed, as the
case may be, and may be made on behalf of the shareholders entitled to make the
application by such one or more of their number as they may appoint in writing for the
purpose.
6. Under section 67 (2) of the Companies Act, 2013 no public company is allowed to give,
directly or indirectly and whether by means of a loan, guarantee, or security, any financial
assistance for the purpose of, or in connection with, a purchase or subscription, by any
person of any shares in it or in its holding company.

However, section 67 (3) makes an exception by allowing companies to give loans to their
employees other than its directors or key managerial personnel, for an amount not
exceeding their salary or wages for a period of six months with a view to enabling them to
purchase or subscribe for fully paid-up shares in the company or its holding company to
be held by them by way of beneficial ownership.
It is further provided that disclosures in respect of voting rights not exercised directly by
the employees in respect of shares to which the scheme relates shall be made in the
Board's report in such manner as may be prescribed.
Hence, Heavy Metals Ltd can provide financial assistance upto the specified limit to its
employees to enable them to subscribe for the shares in the company provided the shares
are purchased by the employees to be held for beneficial ownership by them.
However, the directors or key managerial personnel will not be eligible for such assistance.
7. According to Section 139 (2) of the Companies Act, 2013,
I. Listed companies and other prescribed class or classes of companies (except one
person companies and small companies) shall not appoint or re-appoint an audit firm
as auditor for more than two terms of 5 consecutive years.
II. An audit firm which has completed its term (i.e. two terms of five consecutive years)
shall not be eligible for re- appointment as auditor in the same company for five years
from the completion of such term.
III. Further, as on the date of appointment no audit firm having a common partner or
partners to the other audit firm, whose tenure has expired in a company immediately
preceding the financial year, shall be appointed as an auditor of the same company
for a period of five years.
IV. For the purpose of the rotation of auditors, in case of an auditor (whether an individual
or audit firm), the period for which the individual or the firm has held off ice as auditor
prior to the commencement of the Act shall be taken into account for calculating the
period of 5 consecutive years or 10 consecutive years, as the case may be.
Applying the above provisions,
(1) Lemon & Company can continue as statutory auditors of M/s Big Limited for 4 more
years from 1.4.2014, i.e. they can continue in office only till 31.3.2018.
(2) The cooling- off period shall be of 5 years.
(3) Dew & Company cannot be appointed as a statutory auditor of M/s Big Limited during
the cooling – off period of Lemon & Company, as CA. M is the common partner in
both Lemon & Company and Dew & Company.
However, Dew & Company can be appointed as a statutory auditor of M/s Dark
Limited (a listed subsidiary of M/s Big Limited), during the cooling – off period.
(4) As per Section 138 (1) of the Companies Act, 2013, every listed company and other
prescribed class of companies, shall be required to appoint an internal auditor, who

shall either be a chartered accountant or a cost accountant, or such other professional

(which may be either an individual or a partnership firm or a body corporate) as may
be decided by the Board to conduct internal audit of the functions and activities of the
company.
Accordingly, M/s Lemon & Company can be appointed as an internal auditors of M/s
Big Limited and in its subsidiary M/S Dark Limited (a listed company). The provision
of cooling off period as given under Section 139 of the Companies Act, 2013, shall
not be applicable on the Internal auditors.
8. As per Section 141(3)(d)(i) of the Companies Act, 2013, a person who, or his relative or
partner is holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company, shall not be
appointed as an auditor of the company.
However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative
of an auditor may hold securities in the company of face value not exceeding rupees one
lakh.
In the given case Mrs. Sita, wife of CA. Arjun acquired shares in Stellar Builders Limited,
in which he was a statutory auditor on 15 th March, 2018. Since, the securities held by Mrs.
Sita is within the prescribed limit of ` 1 lakh, such a transaction is valid.
Yes, the answer will be different in case where the face value of acquired shares is
` 1,50,000. Then in that case:
(i) Corrective action to maintain the limit specified (i.e., 1 lac) shall be taken by the
auditor within 60 days of such acquisition, or
(ii) Auditor has to vacate his office.
9. Alteration in Articles of Association: Section 14 of the Companies Act, 2013, vests
companies with power to alter or add to its articles. The law with respect to alteration of
articles is as follows:
(1) Alteration by special resolution: Subject to the provisions of this Act and the
conditions contained in its memorandum, if any, a company may, by a special
resolution alter its articles.
(2) Filing of alteration with the registrar: Every alteration of the articles and a copy of
the order of the Tribunal approving the alteration, shall be filed with the Registrar,
together with a printed copy of the altered articles, within a period of fifteen days in
such manner as may be prescribed, who shall register the same.
(3) Any alteration made shall be valid: Any alteration of the articles registered as above
shall, subject to the provisions of this Act, be valid as if it were originally contained in
the articles.
(4) Alteration noted in every copy: Every alteration made in articles of a company shall
be noted in every copy of the articles, as the case may be. If a company makes any

default in complying with the stated provisions, the company and every officer who is
in default shall be liable to a penalty of one thousand rupees for every copy of the
articles issued without such alteration. [Section 15]
10. (1) Preparation of revised financial statement or revised report on the approval of
Tribunal: If it appears to the directors of a company that—
(a) the financial statement of the company; or
(b) the report of the Board,
do not comply with the provisions of section 129 or section 134, they may prepare
revised financial statement or a revised report in respect of any of the three preceding
financial years after obtaining approval of the Tribunal on an application made by the
company in such form and manner as may be prescribed and a copy of the order
passed by the Tribunal shall be filed with the Registrar:
Tribunal to serve the notice: Provided that the Tribunal shall give notice to the
Central Government and the Income tax authorities and shall take into consideration
the representations, if any, made by that Government or the authorities before
passing any order under this section:
Number of times of revision and recast: Provided further that such revised
financial statement or report shall not be prepared or filed more than once in a
financial year:
Reason for revision to be disclosed: Provided also that the detailed reasons for
revision of such financial statement or report shall also be disclosed in the Board's
report in the relevant financial year in which such revision is being made.
(2) Limits of revisions: Where copies of the previous financial statement or report have
been sent out to members or delivered to the Registrar or laid before the company in
general meeting, the revisions must be confined to—
(a) the correction in respect of which the previous financial statement or report do
not comply with the provisions of section 129 or section 134; and
(b) the making of any necessary consequential alternation.
(3) Framing of rules by the Central Government in relation to revised financial
statement or director's report: The Central Government may make rules as to the
application of the provisions of this Act in relation to revised financial statement or a
revised director's report and such rules may, in particular—
(a) make different provisions according to which the previous financial statement
or report are replaced or are supplemented by a document indicating the
corrections to be made;
(b) make provisions with respect to the functions of the company's auditor in relation
to the revised financial statement or report;
(c) require the directors to take such steps as may be prescribed.

11. (i) According to Section 134 of the Indian Contract Act, 1872, the surety is discharged
by any contract between the creditor and the principal debtor, by which the principal
debtor is released or by any act or omission of the creditor, the legal consequence of
which is the discharge of the principal debtor.
In the given case, B does not supply the necessary material as per the agreement.
Hence, C is discharged from his liability.
(ii) According to Section 136 of the Indian Contract Act, 1872, where a contract to give
time to the principal debtor is made by the creditor with a third person and not with
the principal debtor, the surety is not discharged.
In the given question the contract to give time to the principal debtor is made by the
creditor with X who is a third person. X is not the principal debtor. Hence , A is not
discharged.
12. According to section 173 of the Indian Contract Act, 1872, the pawnee may retain the
goods pledged, not only for payment of the debt or the performance of the promise, but for
the interest, of the debt, and all necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged.
Hence, ABC Bank can retain the stock of business of Mr. Avinash, not only for adjustment
of the loan but also for payment of interest.
13. Protest: According to section 100 of the Negotiable Instruments Act,1881, when a
promissory note or bill of exchange has been dishonored by non-acceptance or non-
payment, the holder may, within a reasonable time, cause such dishonor to be noted and
certified by a notary public. Such certificate is called a protest.
Protest for better security: When the acceptor of a bill of exchange has become
insolvent, or his credit has been publicly impeached, before the maturity of the bill, the
holder may, within a reasonable time, cause a notary public to demand better security of
the acceptor, and on its being refused may, with a reasonable time, cause such facts to be
noted and certified as aforesaid. Such certificate is called a protest for better security.
Thus, Mr. Sandip can get the certificate of protest by following the above provisions.
14. “Provision as to offence punishable under two or more enactments” [Section 26]:
Where an act or omission constitutes an offence under two or more enactments, then the
offender shall be liable to be prosecuted and punished under either or any of those
enactments, but shall not be punished twice for the same offence.
Thus, Mr. Ram shall be liable to punished under the Advocates Act, 1961 or the Income
Tax Act, 1961, but shall not be punished twice for the same offence.

15. ‘Read the Statute as a Whole’: It is the elementary principle that construction of a statute
is to be made of all its parts taken together and not of one part only. The deed/ statute
must be read as a whole in order to ascertain the true meaning of its several clauses, and
the words of each clause should be so interpreted as to bring them into harmony with other
provisions – if that interpretation does no violence to the meaning of which they are
naturally susceptible. And the same approach would apply with equal force with regard to
Acts and Rules passed by the legislature.
One of the safest guides to the construction of sweeping general words is to examine other
words of like import in the same enactment or instrument to see what limitations must be
imposed on them. If we find that a number of such expressions have to be subjected to
limitations and qualifications and that such limitations and qualifications are of the same
nature, that circumstance forms a strong argument for subjecting the expression in dispute
to a similar limitation and qualification.

PAPER – 3: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Material Cost
1. Rounak Ltd. is the manufacturer of monitors for PCs. A monitor requires 4 units of Part-M.
The following are the details of its operation during 20X8:
Average monthly market demand 2,000 Monitors
Ordering cost ` 1,000 per order
Inventory carrying cost 20% per annum
Cost of Part ` 350 per part
Normal usage 425 parts per week
Minimum usage 140 parts per week
Maximum usage 710 parts per week
Lead time to supply 3-5 weeks
COMPUTE from the above:
(i) Economic Order Quantity (EOQ). If the supplier is willing to supply quarterly 30,000
units of Part-M at a discount of 5%, is it worth accepting?
(ii) Reorder level
(iii) Maximum level of stock
(iv) Minimum level of stock.
Employee Cost
2. A job can be executed either through workman A or B. A takes 32 hours to complete the
job while B finishes it in 30 hours. The standard time to finish the job is 40 hours.
The hourly wage rate is same for both the workers. In addition workman A is entitled to
receive bonus according to Halsey plan (50%) sharing while B is paid bonus as per Rowan
plan. The works overheads are absorbed on the job at ` 7.50 per labour hour worked. The
factory cost of the job comes to ` 2,600 irrespective of the workman engaged.
INTERPRET the hourly wage rate and cost of raw materials input. Also show cost against
each element of cost included in factory cost.
Overheads: Absorption Costing Method
3. Sree Ajeet Ltd. having fifteen different types of automatic machines furnishes information
as under for 20X8-20X9
(i) Overhead expenses: Factory rent ` 1,80,000 (Floor area 1,00,000 sq. ft.), Heat and
gas ` 60,000 and supervision ` 1,50,000.

(ii) Wages of the operator are ` 200 per day of 8 hours. Operator attends to one machine
when it is under set up and two machines while they are under operation.
In respect of machine B (one of the above machines) the following particulars are
furnished:
(i) Cost of machine `1,80,000, Life of machine- 10 years and scrap value at the end of
its life ` 10,000
(ii) Annual expenses on special equipment attached to the machine are estimated as
` 12,000
(iii) Estimated operation time of the machine is 3,600 hours while set up time is 400 hours
per annum
(iv) The machine occupies 5,000 sq. ft. of floor area.
(v) Power costs ` 5 per hour while machine is in operation.
ESTIMATE the comprehensive machine hour rate of machine B. Also find out machine
costs to be absorbed in respect of use of machine B on the following two work orders
Work order- 1 Work order-2
Machine set up time (Hours) 15 30
Machine operation time (Hours) 100 190
Activity Based Costing
4. Family Store wants information about the profitability of individual product lines: Soft
drinks, Fresh produce and Packaged food. Family store provides the following data for the
year 20X7-X8 for each product line:
Soft drinks Fresh produce Packaged food
Revenues ` 39,67,500 ` 1,05,03,000 ` 60,49,500
Cost of goods sold ` 30,00,000 ` 75,00,000 ` 45,00,000
Cost of bottles returned ` 60,000 `0 `0
Number of purchase orders 360 840 360
placed
Number of deliveries received 300 2,190 660
Hours of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000
Family store also provides the following information for the year 20X7-X8:
Activity Description of activity Total Cost Cost-allocation base
Bottles returns Returning of empty ` 60,000 Direct tracing to soft
bottles drink line

PAPER – 3: COST AND MANAGEMENT ACCOUNTING 3
Ordering Placing of orders for ` 7,80,000 1,560 purchase orders

purchases
Delivery Physical delivery and ` 12,60,000 3,150 deliveries
receipt of goods
Shelf stocking Stocking of goods on ` 8,64,000 8,640 hours of shelf-
store shelves and on- stocking time
going restocking
Customer Assistance provided to ` 15,36,000 15,36,000 items sold
Support customers including
check-out
Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold)
to product lines on the basis of cost of goods sold of each product line. CALCULATE
the operating income and operating income as a % of revenues for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold) to
product lines using and activity based costing system, CALCULATE the operating
income and operating income as a % of revenues for each product line.
Cost Sheet
5. From the following data of Arnav Metallic Ltd., CALCULATE Cost of production:
Amount (`)
(i) Repair & maintenance paid for plant & machinery 9,80,500
(ii) Insurance premium paid for inventories 26,000
(iii) Insurance premium paid for plant & machinery 96,000
(iv) Raw materials purchased 64,00,000
(v) Opening stock of raw materials 2,88,000
(vi) Closing stock of raw materials 4,46,000
(vii) Wages paid 23,20,000
(viii) Value of opening Work-in-process 4,06,000
(ix) Value of closing Work-in-process 6,02,100
(x) Quality control cost for the products in manufacturing process 86,000
(xi) Research & development cost for improvement in production 92,600
process
(xii) Administrative cost for:
- Factory & production 9,00,000

- Others 11,60,000
(xiii) Amount realised by selling scrap generated during the 9,200
manufacturing process
(xiv) Packing cost necessary to preserve the goods for further 10,200
processing
(xv) Salary paid to Director (Technical) 8,90,000
Cost Accounting System
6. The financial books of a company reveal the following data for the year ended 31 st March,
20X8:
Opening Stock: (`)
Finished goods 625 units 53,125
Work-in-process 46,000
01.04.20X7 to 31.03.20X8
Raw materials consumed 8,40,000
Direct Labour 6,10,000
Factory overheads 4,22,000
Administration overheads (Production related) 1,98,000
Dividend paid 1,22,000
Bad Debts 18,000
Selling and Distribution Overheads 72,000
Interest received 38,000
Rent received 46,000
Sales 12,615 units 22,80,000
Closing Stock: Finished goods 415 units 45,650
Work-in-process 41,200
The cost records provide as under:
➢ Factory overheads are absorbed at 70% of direct wages.
➢ Administration overheads are recovered at 15% of factory cost.
➢ Selling and distribution overheads are charged at ` 3 per unit sold.
➢ Opening Stock of finished goods is valued at ` 120 per unit.
➢ The company values work-in-process at factory cost for both Financial and Cost Profit
Reporting.

Required:
(i) PREPARE a statements for the year ended 31 st March, 20X8. Show
➢ the profit as per financial records
➢ the profit as per costing records.
(ii) PREPARE a statement reconciling the profit as per costing records with the profit as
per Financial Records.
Contract Costing
7. A construction company undertook a contract at an estimated price of ` 108 lakhs, which
includes a budgeted profit of ` 18 lakhs. The relevant data for the year ended 31.03.20X8
are as under:
(` ‘000)
Materials issued to site 5,000
Direct wages paid 3,800
Plant hired 700
Site office costs 270
Materials returned from site 100
Direct expenses 500
Work certified 10,000
Work not certified 230
Progress payment received 7,200
A special plant was purchased specifically for this contract at ` 8,00,000 and after use on
this contract till the end of 31.02.20X8, it was valued at ` 5,00,000. This cost of materials at
site at the end of the year was estimated at ` 18,00,000 Direct wages accrued as on
31.03.20X8 was ` 1,10,000.
Required
PREPARE the Contract Account for the year ended 31 st March, 20X8.
Job Costing
8. A company has been asked to quote for a job. The company aims to make a net profit of
30% on sales. The estimated cost for the job is as follows:
Direct materials 10 kg @`10 per kg
Direct labour 20 hours @ `5 per hour
Variable production overheads are recovered at the rate of ` 2 per labour hour.

Fixed production overheads for the company are budgeted to be `1,00,000 each
year and are recovered on the basis of labour hours.
There are 10,000 budgeted labour hours each year. Other costs in relation to
selling, distribution and administration are recovered at the rate of `50 per job.
DETERMINE quote for the job by the Company.
Process Costing
9. From the following information for the month of January, 20X9, PREPARE Process-III cost
accounts.
Opening WIP in Process-III 1,600 units at ` 24,000
Transfer from Process-II 55,400 units at ` 6,23,250
Transferred to warehouse 52,200 units
Closing WIP of Process-III 4,200 units
Units Scrapped 600 units
Direct material added in Process-III ` 2,12,400
Direct wages ` 96,420
Production overheads ` 56,400
Degree of completion:
Opening Stock Closing Stock Scrap
Material 80% 70% 100%
Labour 60% 50% 70%
Overheads 60% 50% 70%
The normal loss in the process was 5% of the production and scrap was sold @ ` 5 per
unit.
(Students may treat material transferred from Process – II as Material – A and fresh
material used in Process – III as Material B)
Joint Products & By Products
10. In an Oil Mill four products emerge from a refining process. The total cost of input duri ng
the quarter ending March 20X8 is `1,48,000. The output, sales and additional processing
costs are as under:
Products Output in Litres Additional processing Sales value
cost after split off
(`) (`)
ACH 8,000 43,000 1,72,500

BCH 4,000 9,000 15,000

CSH 2,000  6,000
DSH 4,000 1,500 45,000
In case these products were disposed-off at the split off point that is before further
processing, the selling price per litre would have been:
ACH (`) BCH (`) CSH (`) DSH (`)
15.00 6.00 3.00 7.50
PRODUCE a statement of profitability based on:
(i) If the products are sold after further processing is carried out in the mill.
(ii) If they are sold at the split off point.
Service Costing
11. Sanziet Lifecare Ltd. operates in life insurance business. Last year it has launched a new
term insurance policy for practicing professionals ‘Professionals Protection Plus’. The
company has incurred the following expenditures during the last year for the policy:
Policy development cost `11,25,000
Cost of marketing of the policy `45,20,000
Sales support expenses `11,45,000
Policy issuance cost `10,05,900
Policy servicing cost `35,20,700
Claims management cost `1,25,600
IT cost `74,32,000
Postage and logistics `10,25,000
Facilities cost `15,24,000
Employees cost ` 5,60,000
Office administration cost `16,20,400
Number of policy sold- 528
Total insured value of policies- `1,320 crore
Required:
(i) CALCULATE total cost for Professionals Protection Plus’ policy segregating the costs
into four main activities namely (a) Marketing and Sales support, (b) Operations, (c)
IT and (d) Support functions.
(ii) CALCULATE cost per policy.
(iii) CACULATE cost per rupee of insured value.

Standard Costing
12. Aaradhya Ltd.manufactures a commercial product for which the standard cost per unit is
as follows:
(`)
Material:
5 kg. @ ` 4 per kg. 20.00
Labour:
3 hours @ `10 per hour 30.00
Overhead
Variable: 3 hours @ `1 3.00
Fixed: 3 hours @ `0.50 1.50
Total 54.50
During Jan. 20X8, 600 units of the product were manufactured at the cost shown below:
(`)
Materials purchased:
5,000 kg. @ `4.10 per kg. 20,500
Materials used:
3,500 kg.
Direct Labour:
1,700 hours @ ` 9 15,300
Variable overhead 1,900
Fixed overhead 900
Total 38,600
The flexible budget required 1,800 direct labour hours for operation at the monthly activity
level used to set the fixed overhead rate.
COMPUTE:
(a) Material price variance, (b) Material Usage variance; (c) Labour rate variance; (d)
Labour efficiency variance; (e) Variable overhead expenditure variance; (f) Variable
overhead efficiency variance; (g) Fixed overhead expenditure variance; (h) Fixed overhead
volume variance; (i) Fixed overhead capacity variance; and (j) Fixed overhead efficiency
variance.
Also RECONCILE the standard and actual cost of production.

Marginal Costing
13. A company sells its product at ` 15 per unit. In a period, if it produces and sells 8,000
units, it incurs a loss of ` 5 per unit. If the volume is raised to 20,000 units, it earns a profit
of ` 4 per unit. CALCULATE break-even point both in terms of rupees as well as in units.
Budget and Budgetary Control
14. Gaurav Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh
(HH) for the year 20X8-X9. The company’s policy is to hold closing stock of finished goods
at 25% of the anticipated volume of sales of the succeeding month. The following are the
estimated data for two products:
Minimax (MM) Heavyhigh (HH)

Budgeted Production units 1,80,000 1,20,000
(`) (`)
Direct material cost per unit 220 280

Direct labour cost per unit 130 120
Manufacturing overhead 4,00,000 5,00,000
The estimated units to be sold in the first four months of the year 20X8-X9 are as under
April May June July
Minimax 8,000 10,000 12,000 16,000

Heavyhigh 6,000 8,000 9,000 14,000
PREPARE production budget for the first quarter in month-wise

Miscellaneous
15. (a) DISCUSS the essential features of a good cost accounting system.
(b) EXPLAIN the difference between Cost Control and Control Reduction.
(c) DEFINE Controllable Cost and Uncontrollable Cost.
(d) DISTIGUISH between job and batch costing.

SUGGESTED HINTS/ANSWERS
1. (1) A = Annual usage of parts = Monthly demand for monitors × 4 parts × 12 months
= 2,000monitors × 4 parts × 12 months = 96,000units
O = Ordering cost per order = ` 1,000/- per order
C1 = Cost per part =` 350/-
i C1 = Inventory carrying cost per unit per annum
= 20% × ` 350 = ` 70/- per unit, per annum
Economic order quantity (EOQ):
2AO 2  96,000 units `1,000
E.O.Q = =
iC1 `70
= 1,656 parts (approx.)
The supplier is willing to supply 30,000 units at a discount of 5%, therefore cost of
each part shall be `350 – 5% of 350 = `332.5
Total cost (when order size is 30,000 units):
= Cost of 96,000 units + Ordering cost + Carrying cost.
 96,000 units  1
= (96,000 units × ` 332.50) +  × ` 1,000  + (30,000 units × 20% ×
 30,000 units  2
` 332.50)
= `3,19,20,000 + `3,200* + `9,97,500= `3,29,20,700
Total cost (when order size is 1,656 units):
 96,000 units  1
= (96,000 units × `350) +  × ` 1,000  + (1,656 units × 20% × `350)
 1,656 units  2
= `3,36,00,000 + `57,970* + `57,960 = `3,37,15,930
Since, the total cost under the supply of 30,000 units with 5% discount is lower than
that when order size is 1,656 units, therefore the offer should be accepted.
Note: While accepting this offer consideration of capital blocked on order size of
30,000 units has been ignored.
*Order size can also be taken in absolute figure.
(2) Reorder level
= Maximum consumption × Maximum re-order period

= 710 units × 5 weeks = 3,550 units

(3) Maximum level of stock
= Re-order level + Reorder quantity – (Min. usage × Min. reorder period)
= 3,550 units + 1,656 units – (140 units × 3 weeks) = 4,786 units.
(4) Minimum level of stock
= Re-order level – Normal usage × Average reorder period
= 3,550 units – (425 units × 4 weeks) = 1,850 units.
2. Calculation of :
1. Time saved and wages:
Workmen A B
Standard time (hrs.) 40 40
Actual time taken (hrs.) 32 30
Time saved (hrs.) 8 10
Wages paid @ ` x per hr. (`) 32x 30x
2. Bonus Plan:
Halsey Rowan
Time saved (hrs.) 8 10
Bonus (`) 4x 7.5x
 8 hrs  ` x   10 hrs 
 2   40 hrs  30hrs  ` x
   
3. Total wages:
Workman A: 32x + 4x = ` 36x
Workman B: 30x + 7.5x = ` 37.5x
Statement of factory cost of the job
Workmen A (`) B (`)
Material cost (assumed) y y
Wages (shown above) 36x 37.5x
Works overhead 240 225
Factory cost (given) 2,600 2,600
The above relations can be written as follows:
36x + y + 240 = 2,600 (i)

37.5x+ y+ 225 = 2,600 (ii)

Subtracting (i) from (ii) we get
1.5x – 15 = 0
Or, 1.5 x = 15
Or, x = ` 10 per hour
On substituting the value of x in (i) we get y = ` 2,000
Hence the wage rate per hour is ` 10 and the cost of raw material is ` 2,000 on the job.
3. Sree Ajeet Ltd.
Statement showing comprehensive machine hour rate of Machine B
(`)
Standing Charges:
Factory rent {(` 1,80,000/1,00,000 sq. ft.) × 5,000 Sq. ft.} 9,000
Heat and Gas (` 60,000/15 machines) 4,000
Supervision (` 1,50,000/ 15 machines) 10,000
Depreciation [(` 1,80,000 – ` 10,000)/ 10 years] 17,000
Annual expenses on special equipment 12,000
52,000
Fixed cost per hour (` 52,000/ 4,000 hrs.) 13/-
Set up rate Operational rate

Per hour (`) Per hour (`)
Fixed cost 13.00 13.00
Power -- 5.00
Wages 25.00 12.50
Comprehensive machine hour rate per hr. 38.00 30.50
Statement of ‘B’ machine costs
to be absorbed on the two work orders
Work order-1 Work order-2
Hours Rate Amount Hours Rate Amount
` ` ` ` `
Set up time cost 15 38 570 30 38 1,140
Operation time cost 100 30.5 3,050 190 30.5 5,795
Total cost 3,620 6,935

4. (i) Statement of Operating income and Operating income as a percentage of

revenues for each product line
(When support costs are allocated to product lines on the basis of cost of goods sold
of each product)
Soft Fresh Packaged Total
Drinks Produce Foods
(`) (`) (`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS): (B) 30,00,000 75,00,000 45,00,000 1,50,00,000
Support cost (30% of COGS): (C) 9,00,000 22,50,000 13,50,000 45,00,000
(Refer working notes)
Total cost: (D) = {(B) + (C)} 39,00,000 97,50,000 58,50,000 1,95,00,000
Operating income: E= {(A)-(D)} 67,500 7,53,000 1,99,500 10,20,000
Operating income as a percentage 1.70% 7.17% 3.30% 4.97%
of revenues: (E/A) × 100)
Working notes:
1. Total support cost:
(`)
Bottles returns 60,000
Ordering 7,80,000
Delivery 12,60,000
Shelf stocking 8,64,000
Customer support 15,36,000
Total support cost 45,00,000
2. Percentage of support cost to cost of goods sold (COGS):
Total support cost
= 100
Total cost of goods sold
` 45,00,000
  100 = 30%
`1,50,00,000
3. Cost for each activity cost driver:
Activity Total cost Cost allocation base Cost driver rate
(`)
(1) (2) (3) (4) = [(2) ÷ (3)]
Ordering 7,80,000 1,560 purchase orders `500 per purchase order

Delivery 12,60,000 3,150 deliveries `400 per delivery

Shelf-stocking 8,64,000 8,640 hours `100 per stocking hour
Customer support 15,36,000 15,36,000 items sold `1 per item sold
(ii) Statement of Operating income and Operating income as a percentage of

revenues for each product line
(When support costs are allocated to product lines using an activity -based costing
system)
Soft Fresh Packaged Total
drinks Produce Food
(`) (`) (`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Bottle return costs 60,000 0 0 60,000
Ordering cost* 1,80,000 4,20,000 1,80,000 7,80,000
(360:840:360)
Delivery cost* 1,20,000 8,76,000 2,64,000 12,60,000
(300:2190:660)
Shelf stocking cost* 54,000 5,40,000 2,70,000 8,64,000
(540:5400:2700)
Customer Support cost* 1,26,000 11,04,000 3,06,000 15,36,000
(1,26,000:11,04,000:3,06,000)
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income C: {(A)- (B)} 4,27,500 63,000 5,29,500 10,20,000
Operating income as a % of 10.78% 0.60% 8.75% 4.97%
revenues
* Refer to working note 3

5. Calculation of Cost of Production of Arnav Metallic for the period…..
Particulars Amount (`)
Raw materials purchased 64,00,000
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000)
Material consumed 62,42,000
Wages paid 23,20,000

Prime cost 85,62,000

Repair and maintenance cost of plant & machinery 9,80,500
Insurance premium paid for inventories 26,000
Insurance premium paid for plant & machinery 96,000
Quality control cost 86,000
Research & development cost 92,600
Administrative overheads related with factory and production 9,00,000
1,07,43,100
Add: Opening value of W-I-P 4,06,000
Less: Closing value of W-I-P (6,02,100)
1,05,47,000
Less: Amount realised by selling scrap (9,200)
Add: Primary packing cost 10,200
Cost of Production 1,05,48,000
Notes:
(i) Other administrative overhead does not form part of cost of production.
(ii) Salary paid to Director (Technical) is an administrative cost.
6. (i) Statement of Profit as per Financial records
(for the year ended March 31, 20X8)
(`) (`)
To Opening stock of 53,125 By Sales 22,80,000
Finished Goods
To Work-in-process 46,000 By Closing stock of 45,650
finished Goods
To Raw materials consumed 8,40,000 By Work-in-Process 41,200
To Direct labour 6,10,000 By Rent received 46,000
To Factory overheads 4,22,000 By Interest received 38,000
To Administration overheads 1,98,000
To Selling & distribution 72,000
overheads
To Dividend paid 1,22,000

To Bad debts 18,000

To Profit 69,725
24,50,850 24,50,850
Statement of Profit as per Costing records

(for the year ended March 31,20X8)
(`)
Sales revenue (A) 22,80,000
(12,615 units)
Cost of sales:
Opening stock 75,000
(625 units ×` 120)
Add: Cost of production of 12,405 units 21,63,350
(Refer to working note 2)
Less: Closing stock (`174.39 × 415 units) (72,372)
Cost of goods sold (12,615 units) 21,65,978
Selling & distribution overheads
(12,615 units ×` 3) 37,845
Cost of sales: (B) 22,03,823
Profit: {(A) – (B)} 76,177
(ii) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit
as per financial records)
(`) (`)
Profit as per Cost Accounts 76,177
Add: Administration overheads over absorbed 83,550
(` 2,81,550 – ` 1,98,000)
Opening stock overvalued 21,875
(` 75,000 – ` 53,125)
Interest received 38,000
Rent received 46,000

Factory overheads over recovered

(` 4,27,000 – ` 4,22,000) 5,000 1,94,425
2,70,602
Less: Selling & distribution overheads under recovery 34,155
(` 72,000 – ` 37,845)
Closing stock overvalued ( ` 72,372 – ` 45,650) 26,722
Dividend 1,22,000
Bad debts 18,000 (2,00,877)
Profit as per financial accounts 69,725
Working notes:
1. Number of units produced
Units
Sales 12,615
Add: Closing stock 415
Total 13,030
Less: Opening stock (625)
Number of units produced 12,405
2. Cost Sheet
(` )
Raw materials consumed 8,40,000
Direct labour 6,10,000
Prime cost 14,50,000
Factory overheads 4,27,000
(70% of direct wages)
Factory cost 18,77,000
Add: Opening work-in-process 46,000
Less: Closing work-in-process 41,200
Factory cost of goods produced 18,81,800
Administration overheads
(15% of factory cost) 2,81,550
Cost of production of 12,405 units 21,63,350
(Refer to working note 1)

Cost of production per unit:

TotalCost of Pr oduction ` 21,63,350
   `174.39
No.of unitsproduced 12,405 units
7. Contract Account for the year ended 31 st March, 20X8

(`’000) (`’ 000)
To Material issued to site 5,000 By Material at site 1,800
To Direct wages 3,800 By Material returned 100
Add: Outstanding wages 110 3,910 By Work-in-progress:
To Plant hire 700 - Value of work 10,000
certified
To Site office cost 270 - Work uncertified 230
To Direct expenses 500
To Depreciation (special plant) 300
To Notional profit c/d 1,450
12,130 12,130
8. Determination of quotation price for the job

Cost (`)
Direct Material (10kg × `10) 100
Direct Labour (20hrs × `5) 100
Variable production overhead (20hrs × `2) 40
 `1,00,000  200
Fixed Overhead   20 hours 
 10,000 budgeted hours 
Other costs 50
Total costs 490
Net profit is 30% of sales, therefore total costs represent 70% (` 490 × 100) ÷ 70 = ` 700
price to quote for job.
To check answer is correct; profit achieved will be ` 210 (` 700 - ` 490)
= ` 210 ÷ ` 700 = 30%

9. Statement of Equivalent Production

Process III
Equivalent Production
Input Output Material-A Material-B Labour &
Units Units
Details Particulars Overhead
% Units % Units % Units
Opening 1,600 Work on Op. WIP 1,600 - - 20 320 40 640
WIP
Process-II 55,400 Introduced & 50,600 100 50,600 100 50,600 100 50,600
Transfer completed during
the month
Normal loss (5% 2,640 - - - - - -
of 52,800 units)
Closing WIP 4,200 100 4,200 70 2,940 50 2,100
Abnormal Gain (2,040) 100 (2,040) 100 (2,040) 100 (2,040)
57,000 57,000 52,760 51,820 51,300
Working note:
Production units = Opening units + Units transferred from Process -II – Closing Units
= 1,600 units + 55,400 units – 4,200 units
= 52,800 units
Statement of Cost
Cost (`) Equivalent Cost per
units equivalent
units (`)
Material A (Transferred from previous process) 6,23,250
Less: Scrap value of normal loss (2,640 units × ` 5) (13,200)
6,10,050 52,760 11.5627
Material B 2,12,400 51,820 4.0988
Labour 96,420 51,300 1.8795
Overheads 56,400 51,300 1.0994
9,75,270 18.6404

Statement of apportionment of Process Cost

Amount Amount
(`) (`)
Opening WIP Material A 24,000
Completed opening Material B (320 units × ` 4.0988) 1311.62
WIP units-1600
Wages (640 units × ` 1.8795) 1202.88
Overheads (640 units × ` 1.0994) 703.62 3,218.12
Introduced & 50,600 units × ` 18.6404 9,43,204.24
Completed- 50,600
units
Total cost of 52,200 9,70,422.36
finished goods units
Closing WIP units- Material A (4,200 units × 48,563.34
4,200 ` 11.5627)
Material B (2,940 units × ` 4.0988) 12,050.47
Wages (2,100 units × ` 1.8795) 3,946.95
Overheads (2,100 units × 2,308.74
` 1.0994)
66,869.50
Abnormal gain units - (2,040 units × ` 18.6404) 38026.42
2,040
Process III A/c
Particulars Units Amount (`) Particulars Units Amount (`)
To Balance b/d 1,600 24,000 By Normal loss 2,640 13,200
To Process II A/c 55,400 6,23,250 By Finished 52,200 9,70,422.36
goods
To Direct material 2,12,400 By Closing WIP 4,200 66,874.06*
To Direct wages 96,420
To Production 56,400
overheads
To Abnormal gain 2,040 38,026.42
59,040 10,50,496.42 59,040 10,50,496.42
* Difference in figure due to rounding off has been adjusted with closing WIP

10. (i) Statement of profitability of the Oil Mill (after carrying out further processing)
for the quarter ending 31st March 20X8.
Products Sales Value Share of Additional Total cost Profit
after further Joint cost processing after (loss)
processing cost processing
ACH 1,72,500 98,667 43,000 1,41,667 30,833
BCH 15,000 19,733 9,000 28,733 (13,733)
CSH 6,000 4,933 -- 4,933 1,067
DSH 45,000 24,667 1,500 26,167 18,833
2,38,500 1,48,000 53,500 2,01,500 37,000
(ii) Statement of profitability at the split off point
Products Selling Output in Sales value share of joint profit at split
price of units at split off cost off point
split off point
ACH 15.00 8,000 1,20,000 98,667 21,333
BCH 6.00 4,000 24,000 19,733 4,267
CSH 3.00 2,000 6,000 4,933 1,067
DSH 7.50 4,000 30,000 24,667 5,333
1,80,000 1,48,000 32,000
Note: Share of Joint Cost has been arrived at by considering the sales value at split
off point.
11. (i) Calculation of total cost for ‘Professionals Protect Plus’ policy
Particulars Amount (`) Amount (`)
1. Marketing and Sales support:
- Policy development cost 11,25,000
- Cost of marketing 45,20,000
- Sales support expenses 11,45,000 67,90,000
2. Operations:
- Policy issuance cost 10,05,900
- Policy servicing cost 35,20,700
- Claims management cost 1,25,600 46,52,200
3. IT Cost 74,32,000
4. Support functions
- Postage and logistics 10,25,000
- Facilities cost 15,24,000

- Employees cost 5,60,000

- Office administration cost 16,20,400 47,29,400
Total Cost 2,36,03,600
Total cost `2,36,03,600
(ii) Calculation of cost per policy = = = `44,703.79
No.of policies 528
Total cost ` 2.36 crore

(iii) Cost per rupee of insured value = = = ` 0.0018
Total insured value ` 1,320 crore
12. (a) Material price variance:
= (Standard price – Actual Price) × Actual quantity
= (` 4 – ` 4.10) × 5,000 = ` 500 Adv.
(b) Material usage variance:
= (Std. quantity for actual output – Actual qtty.) × Std. price
= (600 × 5 – 3,500) × 4 = ` 2,000 Adv.
(c) Labour Rate Variance:
= (Standard rate – Actual rate) × Actual hours
= (`10 – `9) × 1,700 = ` 1,700 Fav.
(d) Labour Efficiency Variance:
= (Standard hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × `10
= ` 1,000 Fav.
(e) Variable Overhead Expenditure Variance
= (Actual Hours × Standard Rate) – Actual Overhead
= (1,700 ×` 1) – ` 1,900
= ` 200 Adv.
(f) Variable Overhead Efficiency Variance:
= Std. hours for actual output – Actual hours) × Std. rate
= (600 × 3 – 1,700) × `1 = `100 Fav.
(g) Fixed Overhead Expenditure Variance:
= (Budgeted overhead – Actual overhead)
= (1,800 × 0.50 – 900) = Nil

(h) Fixed Overhead Volume Variance:

= (Std. hours for actual output – Budgeted hours) × Std. rate
= (600 × 3 – 1,800) × ` 0.50 = Nil
(i) Fixed Overhead Capacity Variance:
= (Budgeted hours – Actual Hours) × Standard rate
= (1,800 – 1,700) × ` 0.50 = ` 50 Adv.
(j) Fixed Overhead Efficiency Variance:
= (Std. hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × ` 0.50 = ` 50 Fav.
Verification: (`) (`)
Overhead recovered: 600 units @ `4.50 2,700
Actual Overhead:
Variable 1,900
Fixed 900 2,800
100 Adv.
Variable expenditure variance 200 Adv
Variable Efficiency variance 100 Fav.
Fixed expenditure variance Nil
Fixed overhead volume variance Nil
100 Adv.
Reconciliation Statement
Standard Cost: 600 units @ `54.50 32,700
Actual Cost: 38,600
Less: Material Stock at standard cost: 6,000 (32,600) 100 Fav.
(1,500 × `4)
Variances: Adv. (`) Fav. (`)
Material price 500
Material usage 2,000
Labour rate 1,700
Labour efficiency 1,000
Variable expenditure 200

Variable efficiency 100

Total 2,700 2,800 100 Fav.
13. We know that S – V = F + P (S - Sales, V - Variable cost, F - Fixed cost and P - Profit/loss)
 Suppose variable cost = x per unit
Fixed Cost = y
When sales is 8,000 units, then
15  8,000 - 8,000 x = y - 40,000.................... (1)
When sales volume raised to 20,000 units, then
15  20,000 - 20,000 x = y + 80,000.............. (2)
Or, 1,20,000 – 8,000 x = y – 40,000.............. (3)
And 3,00,000 – 20,000 x = y + 80,000.............. (4)
From (3) & (4) we get x = ` 5.
Variable cost per unit = ` 5
Putting this value in 3rd equation:
1,20,000 – (8,000  5) = y 40,000
or y = ` 1,20,000
Fixed Cost = ` 1,20,000
S  V 15  5 200 2
P/V ratio =   100   66 % .
S 15 3 3
Suppose break-even sales = x
15x – 5x = 1,20,000 (at BEP, contribution will be equal to fixed cost)
x = 12,000 units.
Or Break-even sales in units = 12,000
Break-even sales in rupees = 12,000 ` 15 = ` 1,80,000
14. Production budget of Product Minimax and Heavyhigh (in units)
April May June Total
MM HH MM HH MM HH MM HH
Sales 8,000 6,000 10,000 8,000 12,000 9,000 30,000 23,000

Add: Closing 2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750
Stock (25% of
next month’s
sale
Less: Opening 2,000* 1,500* 2,500 2,000 3,000 2,250 7,500 5,750
Stock
Production units 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000
*Opening stock of April is the closing stock of March, which is as per company’s policy
25% of next months sale.
Production Cost Budget
Rate (`) Amount (`)
Element of cost MM HH MM HH
(32,000 (25,000
units) units)
Direct Material 220 280 70,40,000 70,00,000
Direct Labour 130 120 41,60,000 30,00,000
Manufacturing Overhead
(4,00,000/ 1,80,000 × 32,000) 71,111
(5,00,000/ 1,20,000 × 25,000) 1,04,167
1,12,71,111 1,01,04,167
15. (a) The essential features, which a good cost and management accounting system
should possess, are as follows:
(i) Informative and simple: Cost and management accounting system should be
tailor-made, practical, simple and capable of meeting the requirements of a
business concern. The system of costing should not sacrifice the utility by
introducing meticulous and unnecessary details.
(ii) Accurate and authentic: The data to be used by the cost and management
accounting system should be accurate and authenticated; otherwise it may
distort the output of the system and a wrong decision may be taken.
(iii) Uniformity and consistency: There should be uniformity and consistency in
classification, treatment and reporting of cost data and related information. This
is required for benchmarking and comparability of the results of the system for
both horizontal and vertical analysis.
(iv) Integrated and inclusive: The cost and management accounting system
should be integrated with other systems like financial accounting, taxation,

statistics and operational research etc. to have a complete overview and clarity
in results.
(v) Flexible and adaptive: The cost and management accounting system should
be flexible enough to make necessary amendments and modification in the
system to incorporate changes in technological, reporting, regulatory and other
requirements.
(vi) Trust on the system: Management should have trust on the system and its
output. For this, an active role of management is required for the development
of such a system that reflect a strong conviction in using information for decision
making
(b)
Cost Control Cost Reduction
1. Cost control aims at 1. Cost reduction is concerned with
maintaining the costs in reducing costs. It challenges all
accordance with the standards and endeavours to better
established standards. them continuously
2. Cost control seeks to attain 2. Cost reduction recognises no
lowest possible cost under condition as permanent, since a
existing conditions. change will result in lower cost.
3. In case of cost control, 3. In case of cost reduction, it is on
emphasis is on past and present and future.
present
4. Cost control is a preventive 4. Cost reduction is a corrective
function function. It operates even when an
efficient cost control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.
(c) (i) Controllable Costs: - Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of
the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the
overheads are generally controllable by the shop level management.
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a
specified member of an undertaking are known as uncontrollable costs. For
example, expenditure incurred by, say, the tool room is controllable by the foreman
in-charge of that section but the share of the tool-room expenditure which is
apportioned to a machine shop is not to be controlled by the machine shop foreman.

(d) Distinction between Job and Batch Costing:

Sr. Job Costing Batch Costing
No
1 Method of costing used for non- Homogeneous products produced
standard and non- repetitive in a continuous production flow in
products produced as per customer lots.
specifications and against specific
orders.
2 Cost determined for each Job Cost determined in aggregate for
the entire Batch and then arrived at
on per unit basis.
3 Jobs are different from each other Products produced in a batch are
and independent of each other. Each homogeneous and lack of
Job is unique. individuality

PAPER 4: TAXATION
SECTION A: INCOME TAX LAW
PART I: STATUTORY UPDATE

The Income-tax law, as amended by the Finance Act, 2017, including significant notifications/
circulars issued upto 30th April, 2018, are applicable for November, 2018 examination. The
relevant assessment year for November, 2018 examination is A.Y.2018-19. The significant
notifications/circulars issued upto 30.04.2018, relevant for November, 2018 examination, but
not covered in the July 2017 edition of the Study Material, are given hereunder:
CHAPTER 2: RESIDENCE AND SCOPE OF TOTAL INCOME
Clarification regarding liability to income-tax in India of a non-resident seafarer receiving
remuneration in NRE (Non-Resident External) account maintained with an Indian Bank
[Circular No.13/2017, dated 11.04.2017 and Circular No.17/2017, dated 26.04.2017]
Income by way of salary, received by non-resident seafarers, for services rendered outside
India on-board foreign ships, is being subjected to tax in India for the reason tha t the salary
has been received by the seafarer into the NRE bank account maintained in India by the
seafarer. On receiving representations in this regard, the CBDT has examined the matter. It
noted that section 5(2)(a) of the Income-tax Act, 1961 provides that only such income of a non-
resident shall be subjected to tax in India that is either received or is deemed to be received in
India.
Accordingly, the CBDT has, vide this circular, clarified that that salary accrued to a non-resident
seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign
flag) shall not be included in the total income merely because the said salary has been credited
in the NRE account maintained with an Indian bank by the seafarer.
CHAPTER 4: HEADS OF INCOME
UNIT IV: CAPITAL GAINS
Long-term specified asset notified for the purpose of claiming exemption under section
54EC [Notification No. 47/2017, dated 08.06.2017 and Notification No. 79/2017, dated
08.08.2017]
Section 54EC provides exemption from chargeability of capital gain from the transfer of a long -
term capital asset where the assessee has invested the whole or any part of the capital gain in
a long-term specified asset. As per clause (ba) of Explanation to section 54EC “long term
specified asset” means any bond redeemable after three years and issued on or after 01.04.07
by the National Highways Authority of India (NHAI) or by the Rural Electrification Corporation
Limited (RECL) or any other bond notified by the Central Government in this behalf.
Accordingly, the Central Government has, vide these notifications, notified any bond
redeemable after three years and issued by the Power Finance Corporation Limited on or

after 15.06.17 or by the Indian Railway Finance Corporation Limited on or after 08.08.17 as
‘long-term specified asset’.
CHAPTER 4: HEADS OF INCOME
UNIT V: INCOME FROM OTHER SOURCES
Clarification regarding trade advance not to be treated as deemed dividend under section
2(22)(e) – [Circular No. 19/2017, dated 12.06.2017]
Section 2(22)(e) provides that "dividend" includes any payment by a company in which public
are not substantially interested, of any sum by way of advance or loan to a shareholder who
is the beneficial owner of shares holding not less than 10% of the voting power, or to any
concern in which such shareholder is a member or a partner and in which he has a substantial
interest or any payment by any such company on behalf, or for the individual benefit, of any
such shareholder, to the extent to which the company in either case possesses accumulated
profits.
The CBDT observed that some Courts in the recent past have held that trade advances in the
nature of commercial transactions would not fall within the ambit of the provisions of section
2(22)(e) and such views have attained finality.
In view of the above, the CBDT has, vide this circular, clarified that it is a settled position that
trade advances, which are in the nature of commercial transactions, would not fall within the
ambit of the word 'advance' in section 2(22)(e) and therefore, the same would not to be treated
as deemed dividend.
CHAPTER 7: DEDUCTIONS FROM GROSS TOTAL INCOME
Contributory Health Service Scheme notified for the purpose of section 80D [Notification
No. 9 /2018 dated 16-2-2018]
Under section 80D, a deduction to the extent of ` 25,000 (` 30,000, in case of resident senior
citizens) is allowed in respect of premium paid to effect or keep in force an insurance on the health
of self, spouse and dependent children or any contribution made to the Central Government Health
Scheme or such other health scheme as may be notified by the Central Government.
Accordingly, the Central Government has, vide this notification, notified the Contributory Health
Service Scheme of the Department of Atomic Energy, contribution to which would qualify for
deduction under section 80D.
CHAPTER 9: ADVANCE TAX, TAX DEDUCTION AT SOURCE AND INTRODUCTION
TO TAX COLLECTION AT SOURCE
Deduction of tax at source on interest income accrued to minor child, where both the
parents have deceased [Notification No. 05/2017, dated 29.05.2017]
Under Rule 31A(5) of the Income-tax Rules, 1962, the Director General of Income-tax (Systems)
is authorized to specify the procedures, formats and standards for the purposes of furnishing and

PAPER – 4: TAXATION 3
verification of, inter alia, the statements and shall be responsible for the day-to-day administration
in relation to furnishing and verification of the statements in the manner so specified.
The Principal Director General of Income-tax (Systems) has, in exercise of the powers delegated
by the CBDT under Rule 31A(5), specified that in case of minors where both the parents have
deceased, TDS on the interest income accrued to the minor is required to be deducted and
reported against PAN of the minor child unless a declaration is filed under Rule 37BA(2) that
credit for tax deducted has to be given to another person.
Deduction of tax at source on interest on deposits made under Capital Gains Accounts
Scheme, 1988 where depositor has deceased - Notification No. 08/2017, dated 13.09.2017
The Principal Director General of Income-tax (Systems) has, in exercise of the powers delegated by
the CBDT under Rule 31A(5), vide this notification, specified that in case of deposits under the
Capital Gains Accounts Scheme, 1988 where the depositor has deceased:
(i) TDS on the interest income accrued for and upto the period of death of the depositor is required
to be deducted and reported against PAN of the depositor, and
(ii) TDS on the interest income accrued for the period after death of the depositor is required to be
deducted and reported against PAN of the legal heir,
unless a declaration is filed under Rule 37BA(2) that credit for tax deducted has to be given to
another person.
No requirement to deduct tax at source under section 194-I on remittance of Passenger
Service Fees (PSF) by an Airline to an Airport Operator [Circular No. 21/2017, dated
12.06.2017]
Section 194-I requires deduction of tax at source at specified percentage on any income payable
to a resident by way of rent. Explanation to this section defines the term “rent” as any payment,
by whatever name called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any (a) land; or (b) building; or (c) land appurtenant to a building; or
(d) machinery; (e) plant; (f) equipment (g) furniture; or (h) fitting, whether or not any or all of
them are owned by the payee.
The primary requirement of any payment to qualify as rent is that the payment must be for the
use of land and building and mere incidental/minor/insignificant use of the same while providing
other facilities and service would not make it a payment for use of land and buildings so as to
attract section 194-I.
Accordingly, the CBDT has, vide this circular, clarified that the provisions of section 194-I shall
not be applicable on payment of PSF by an airline to Airport Operator.
Clarification regarding TDS on Goods and Services Tax (GST) component comprised in
payments made to residents [Circular No. 23/2017 dated 19.07.2017]
The CBDT had, vide Circular No. 1/2014 dated 13.01.2014, clarified that wherever in terms of
the agreement or contract between the payer and the payee, the service tax component

comprised in the amount payable to a resident is indicated separately, tax shall be deducted at
source on the amount paid or payable without including such service tax component.
In order to harmonize the same treatment with the new system for taxation of services under the
GST regime w.e.f. 01.07.2017, the CBDT has, vide this circular, clarified that wherever in terms of
the agreement or contract between the payer and the payee, the component of 'GST on services'
comprised in the amount payable to a resident is indicated separately, tax shall be deducted at
source on the amount paid or payable without including such 'GST on services' component.
GST shall include Integrated Goods and Services Tax, Central Goods and Services Tax, State
Goods and Services Tax and Union Territory Goods and Services Tax.
Further, for the purposes of this Circular, any reference to “service tax” in an existing agreement
or contract which was entered into prior to 01.07.2017 shall be treated as “GST on services”
with respect to the period from 01.07.2017 onward till the expiry of such agreement or contract.
Guidance on income-tax deduction from salaries under section 192 during the financial
year 2017-18 [Circular No. 29/2017, dated 05-12-2017]
This CBDT Circular contains the rates for deduction of income-tax from the payment of income
chargeable under the head “Salaries” during the financial year 2017-18 and explains certain
provisions of the Income-tax Act, 1961 and Income-tax Rules, 1962, including the broad scheme of
TDS from Salaries, persons responsible for deducting tax at source from Salaries and their duties,
computation of income under the head “Salaries” etc.
Students may read/download this circular by using the following link -
https://www.incometaxindia.gov.in/communications/circular/circular29_2017.pdf
CHAPTER 10: PROVISIONS FOR FILING RETURN OF INCOME AND SELF ASSESSMENT
Persons who are not required to quote Aadhar Number or Enrolment ID in application
form for allotment of PAN and in return of income [Notification No. 37/2017 dated
11.05.2017]
Section 139AA requires every person who is eligible to obtain Aadhar Number to mandatorily
quote Aadhar Number or Enrolment ID of Aadhar application form, on or after 1st July, 2017 in
the application form for allotment of PAN and in the return of income. However, this provision
shall not applicable to such person or class or classes of persons or any State or part of any
State as may be notified by the Central Government.
Accordingly, the Central Government has, vide this notification effective from 01.07.2017,
notified that the provisions of section 139AA relating to quoting of Aadhar Number would not
apply to an individual who does not possess the Aadhar number or En rolment ID and is:
(i) residing in the States of Assam, Jammu & Kashmir and Meghalaya;
(ii) a non-resident as per Income-tax Act, 1961;
(iii) of the age of 80 years or more at any time during the previous year;
(iv) not a citizen of India.

Income Tax Return Forms notified for Assessment Year 2018-19 [Notification No. 16/2018,
dated 3-4-2018]
The CBDT has notified Income-tax Return Forms (ITR Forms) for the Assessment Year
2018-19 vide this Notification. The ITR Forms and its applicability have been detailed below:
ITR Applicability
Form
No
1 A one page simplified ITR 1 (SAHAJ) can be filed by an individual who is resident
other than not ordinarily resident, having income from salaries, one house
property, income from other sources (interest etc.). and having total income upto
` 50 lakh.
2 Individuals and HUFs having not having income from business or profession shall be
eligible to file ITR 2.
3 Individuals and HUFs having income under the head “Profits and gains of
business or profession” have to file ITR 3.
4 ITR 4 (SUGAM) can be used by eligible assessees having presumptive income
from business or profession. Thus, eligible assessees having only presumptive
income under section 44AD, 44ADA or 44AE, under the head “Profits and gains
of business or profession” have to file return in ITR 4. In addition, they may have
salary income, income from house property and income from other sources
(excluding winnings from lottery and income from race horses, income taxable
under section 115BBDA and income of the nature referred to in section 115BBE).
Any person having agricultural income in excess of ` 5,000 cannot use ITR 4.
Further, a person claiming relief of foreign tax paid under section 90, 90A or 91
cannot use this form. Also, this form cannot be used by a resident having any
asset (including financial interest in any entity) located outside India or signing
authority in any account located outside India and by a resident having income
from any source outside India.
5 ITR 5 can be used by persons other than individual, HUF, company and person
filing Form ITR 7.
6 ITR 6 can be used by companies other than companies claiming exemption under
section 11.
7 ITR 7 can be used by persons including companies required to furnish return
under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) or 139(4E) or 139(4F).
All these ITR Forms are to be filed electronically. However, where return is furnished in ITR Form-1
(SAHAJ) or ITR-4 (SUGAM), the following persons have an option to file return in paper form:
(i) an Individual of the age of 80 years or more at any time during the previous year; or

(ii) an Individual or HUF whose income does not exceed five lakh rupees and who has not
claimed any refund in the Return of Income.
Amendments to the Tax Return Preparer Scheme, 2006 as notified u/s 139B [Notification
No. 4/2018, dated 19-01-2018]
Section 139B provides that for the purpose of enabling any specified class or classes of persons
in preparing and furnishing returns of income, the CBDT may, without prejudice to the provisions
of section 139, frame a Scheme, by notification in the Official Gazette, providing that such
persons may furnish their returns of income through a Tax Return Preparer (TRP) authorised to
act as such under the Scheme.
Accordingly, vide Notification No 358/2006 dated 28.11.2006, the CBDT had notified the “Tax
Return Preparer Scheme, 2006”. Later on, the said scheme was amended vide Notification No
84/2010 dated 22.11.2010. Vide this notification, the said scheme is further amended so as to
widen the scope of the Scheme. The amended portion is given in bold italics in the second
column below:
Particulars Contents
Applicability of the The scheme is applicable to all eligible persons.
scheme
Eligible person Any person being an individual or a Hindu undivided family.
Tax Return Preparer Any individual who has been issued a "Tax Return Preparer
Certificate" and a "unique identification number" under this
Scheme by the Partner Organisation to carry on the profession of
preparing the returns of income in accordance with the Scheme.
However, the following person are not entitled to act as TRP:
(i) any officer of a scheduled bank with which the assessee
maintains a current account or has other regular dealings.
(ii) any legal practitioner who is entitled to practice in any civil
court in India.
(iii) an accountant.
Educational An individual, who holds a bachelor degree from a
qualification for Tax recognised Indian University or institution, or has passed the
Return Preparers intermediate level examination conducted by the Institute of
Chartered Accountants of India or the Institute of Company
Secretaries of India or the Institute of Cost Accountants of
India, shall be eligible to act as TRP.
Preparation of and An eligible person may, at his option, furnish his return of income
furnishing the u/s 139 for any assessment year after getting it prepared through
Return of Income by a TRP:
the TRP

However, the following eligible persons (an individual or a HUF)

cannot furnish a return of income for an assessment year through
a TRP:
(i) who is carrying out business or profession during the
previous year and accounts of the business or profession for
that previous year are required to be audited under section
44AB or under any other law for the time being in force; or
(ii) who is not a resident in India during the previous year.
An eligible person cannot furnish a revised return of income for any
assessment year through a TRP unless he has furnished the
original return of income for that assessment year through such or
any other TRP.
Further, a return of income which is required to be furnished in
response to a notice under section 142(1)(i) or under section 148
or under section 153A cannot be prepared or furnished through
a TRP.
Note - The limit for gratuity notified under the Payment of Gratuity Act, 1972 has been
increased from ` 10 lakh to ` 20 lakh with effect from 29.3.2018.
PART II: QUESTIONS AND ANSWERS
QUESTIONS
1. Mr. Sahil, a citizen of India, serving in the Ministry of Human Resources in India, was transferred
to Indian Embassy in Germany on 15th March 2017. His income during the financial year 2017-
18 is given here under:
Particulars `
Rent from a house situated at Australia, received in Australia. Thereafter, 4,80,000
remitted to Indian bank account.
Interest accrued on National Saving Certificate 25,600
Interest on Post office savings bank account 3,200
Salary from Government of India 8,15,000
Foreign Allowances from Government of India 9,00,000
Mr. Sahil did not come to India during the financial year 2017-18. Compute his Gross Total
Income for the Assessment year 2018-19.

2. Mr. Charan grows paddy and uses the same for the purpose of manufacturing of rice in his
own Rice Mill. He furnished the following details for the financial year 2017-18:
- Cost of cultivation of 40% of paddy produce is ` 9,00,000 which is sold for ` 18,50,000.
- Cost of cultivation of balance 60% of paddy is ` 14,40,000 and the market value of
such paddy is ` 28,60,000.
- Incurred ` 3,60,000 in the manufacturing process of rice on the balance (60%) paddy.
The rice was sold for ` 38,00,000.
Compute the Business income and Agricultural Income of Mr. Charan for A.Y. 2018-19.
3. You are required to compute the income chargeable under the head Salaries in the hands
of Mr. Narayan for the assessment year 2018-19 from the following details pertaining to
the financial year 2017-18:
Particulars `
Basic salary 7,20,000
Dearness allowance 3,60,000
Commission 60,000
Entertainment allowance 7,500
Medical expenses reimbursed by the employer 25,000
Profession tax (of this, 50% paid by employer) 3,000
Health insurance premium paid by employer 9,000
Gift voucher given by employer on his birthday 15,000
Life insurance premium of Narayan paid by employer 42,000
Laptop provided for use at home. Actual cost of Laptop to employer
45,000
[Children of the assessee are also using the Laptop at home]
Employer company owns a motor car, which was provided to the
assessee, both for official and personal use. All repair and
maintenance expenses are fully reimbursed by the employer. No driver
was provided. (Engine cubic capacity less than 1.6 litres).
Annual credit card fees paid by employer [Credit card is not exclusively
5,000
used for official purposes]
4. Mr. Ranjan owns a shop whose construction got completed in August 2016. He took a loan
of ` 22 lakhs from Bank of Baroda on 1-8-2015 and had been paying interest calculated at
9% per annum.
During the financial year 2017-18, the shop was let out at a monthly rent of ` 45,000. He
paid municipal tax of ` 18,000 each for the financial year 2016-17 and 2017-18 on
25-5-2017 and 15-4-2018, respectively.

Compute income under the head 'House Property' of Mr. Ranjan for the Assessment year
2018-19, assuming that the entire amount of loan is outstanding on the last day of the
current previous year.
5. Mr. Chauhan is having a trading business and his Trading and Profit & Loss Account for
the financial year 2017-18 is as under:
Particulars Amount Particulars Amount
(`) (`)
To Opening stock 1,50,000 By Sales 2,70,00,000
To Purchase 2,49,00,000 By Closing stock 1,00,000
To Gross profit 20,50,000
Total 2,71,00,000 Total 2,71,00,000
Salary to employees (Including 5,00,000 By Gross Profit 20,50,000
Contribution to PF) b/d
Donation to Prime Minister Relief 1,00,000
Fund
Provision for bad debts 50,000
Bonus to employees 50,000
Interest on bank loan 50,000
Family planning expenditure 20,000
incurred on employees
Depreciation 30,000
Income-tax 1,00,000
To Net profit 11,50,000
Total 20,50,000 Total 20,50,000
Other information:
(i) He incurred expenditure on furniture & fixtures of ` 35,000, which is paid in cash on
25.7.2017 to M/s Décor World.
(ii) Depreciation allowable ` 40,000 [excluding depreciation on furniture & fixtures refer
in (i) above] as per Income-tax Rules, 1962.
(iii) No deduction of tax at source on payment of interest on bank loan has been made.
(iv) Out of salary, ` 25,000 pertains to his contributions to recognized provident fund which
was deposited after the due date of filing return of income. Further, employees
contribution of ` 25,000 was also deposited after the due date of filing return of income.
Compute business income of Mr. Chauhan for the Assessment Year 2018-19.

6. Mr. Sahu entered into an agreement with Mr. Devansh to sell his residential house located
at New Delhi on 27.07.2017 for ` 82,00,000. Mr. Devansh was handed over the possession
of the property on 16.12.2017 and the registration process was completed on 24.02.2018.
Mr. Devansh had paid the sale proceeds in the following manner;
(i) 25% through account payee bank draft on the date of agreement.
(ii) 50% on the date of the possession of the property.
(iii) Balance after the completion of the registration of the title of the property.
The value determined by the Stamp Duty Authority on 27.07.2017 was ` 92,00,000
whereas on 24.02.2018 it was ` 94,50,000.
Mr. Sahu had acquired the property on 01.04.2002 for ` 21,00,000. After recovering the
sale proceeds from Devansh, he purchased another residential house property in Navi
Mumbai for ` 35,00,000.
Cost Inflation Index for Financial Year(s)
2001-02 - 100
2002-03 - 105
2017-18 - 272
Compute the total income of Mr. Sahu for the Assessment Year 2018-19 and his net tax
liability/refund due for that year, assuming that he has earned income of ` 12,000 from
Savings Bank A/c and received income of ` 84,000 (Net of TDS) from lotteries. Assume
that the tax deductible at source, if any, on consideration for sale of residential house has
been deducted.
7. (a) Mr. Pranav has 15% shareholding in TRP(P) Ltd. (engaged in trading business of toys)
and has also 50% share in Pranav & Sons, a partnership firm. The accumulated profit of
TRP(P) Ltd. is ` 30 lakh. Pranav & Sons had taken a loan of ` 35 lakh from TRP(P) Ltd.
Examine whether the above loan can be treated as dividend as per the provisions of
the Income-tax Act, 1961.
(b) Discuss the taxability or otherwise in the hands of the recipients, as per the provisions
of the Income-tax Act, 1961:
(i) MNS Private Limited, a closely held company, issued 12,000 shares at ` 125
per share. (The face value of the share is ` 80 per share and the fair market
value of the share is ` 110 per share).
(ii) Mr. Arun received an advance of ` 56,000 on 11-09-2017 against the sale of his
house. However, due to non-payment of instalment in time, the contract has
cancelled and the amount of ` 56,000 was forfeited.
(iii) Mr. Nitin, transferred a house property to his son Mr. Raj without consideration.
The value of the house is ` 12 lacs as per the Registrar of stamp duty.

(iv) Mr. Tanmay gifted a refrigerator to his sister’s daughter Tannu on her marriage.
The fair market value of the refrigerator is ` 75,000.
8. Saharsh gifted ` 12 lakhs to his wife, Sandhya on her birthday on, 1st February, 2017.
Sandhya lent ` 6,00,000 out of the gifted amount to Karuna on 1st April, 2017 for six months
on which she received interest of ` 60,000. The said sum of ` 60,000 was invested in
shares of a listed company on 3rd October, 2017, which were sold for ` 85,000 on 30 th
March, 2018. Securities transactions tax was paid on such sale. The balance amount of
gift was invested on 1st April 2017, as capital by Sandhya in her new business. She suffered
loss of ` 25,000 in the business in Financial Year 2017-18.
In whose hands the above income and loss shall be included in Assessment Year
2018-19, assume that capital invested in the business was entirely out of the funds gifted
by her husband. Support your answer with brief reasons.
9. From following information furnished for the year ended 31-03-2018, compute the total
income of Mr. Arihant for A.Y. 2018-19 and show the items eligible for carry forward and
upto which assessment year:
Long-term capital gain from sale of urban land 2,30,000
Long-term capital loss on sale of shares (STT not paid) 85,000
Long-term capital loss on sale of listed shares in recognized stock 1,02,000
exchange (STT paid both at the time of acquisition and sale)
Loss from speculative business X 25,000
Income from speculative business Y 15,000
Loss from specified business covered under section 35AD 40,000
Income from salary 3,50,000
Loss from house property 2,20,000
Income from trading business 75,000
Following are details of unabsorbed depreciation and the brought forward losses:
(1) Unabsorbed depreciation of ` 11,000 pertaining to A.Y 2017-18.
(2) Losses from owning and maintaining of race horses pertaining to A.Y. 201 7-18
` 5,000.
(3) Brought forward loss from trading business ` 8,000 relating to A.Y.2014-15.
10. Mr. Anay manufactures toys in a factory located in Noida. His profit from the manufacture
of toys for Assessment year 2018-19 is ` 1.85 crore and total turnover is ` 18.70 crore.

On 1st April 2017, there were 100 employees engaged in his factory. Due to increase in
demand of his products, he employed 140 additional employees during the previous year
2017-18 comprises of:
(a) 15 casual employees employed on 15 th April 2017 till 31 st January 2018 on monthly
emolument of ` 22,000 per month
(b) 40 regular employees employed on 1 st May, 2017 on monthly emolument of ` 22,000
per month
(c) 25 contractual employees employed on 1 st July 2017 for 2 years on monthly
emolument of ` 15,000 per month
(d) 35 regular employees employed on 1st August, 2017 on monthly emolument of
` 30,000 per month
(e) 25 regular employees employed on 1st October, 2017 on monthly emolument of
` 22,000 per month
Compute the deduction under Section 80JJAA, if available to Mr. Anay for Assessment
year 2018-19, assuming that monthly emoluments were paid by use of ECS. The regular
and contractual employees participate in the recognised provident fund while casual
employees do not.
Would your answer be different if Mr. Anay is engaged in the manufacture of apparel? Examine.
[Note - Ignore the amount of deduction available under section 80JJAA to Mr. Anay, for
the employees employed in preceding previous years, while computing the deduction
under 80JJAA for the assessment year 2018-19]
11. You are required to compute the total income and tax liability of Mr. Anoop, a resident
individual aged 55 years, for the Assessment Year 2018-19 from the following information
shown in his Profit and Loss Account for the year ended 31 st March 2018:
(i) The net profit was ` 8,40,000.
(ii) Depreciation debited in the books of account was ` 1,05,000.
(iii) The following incomes were credited in the Profit & Loss Account:
(a) Interest on notified government securities ` 32,000
(b) Dividend from a foreign company ` 28,000.
(c) Gold chain worth ` 78,000 received as gift from his mother.
(iv) Interest on loan amounting to ` 82,000 was paid in respect of capital of ` 8,20,000
borrowed for the purchase of new plant & machinery which has been put to use on
12th April, 2018.
(v) General expenses included:
(a) An expenditure of ` 18,500 which was paid by a bearer cheque.

(b) Compensation of ` 4,500 paid to an employee while terminating his services in

business unit.
(1) Depreciation allowable as per Income-tax Act, 1961 was ` 1,16,000 [without
considering depreciation on new plant & machinery referred to in (iv) above] .
(2) He contributed the following amounts by cheque:
(a) ` 48,000 in Sukanya Samridhi Scheme in the name of his minor daughter Anya.
(b) ` 23,000 to the Clean Ganga Fund set up by the Central Government.
(c) ` 28,000 towards premium for health insurance and ` 2,500 on account of
preventive health check up for self and his wife.
(d) ` 35,000 on account of medical expenses of his father aged 82 years (no
insurance scheme had been availed on the health of his father).
12. Shurya Bank Ltd., a banking company to which the Banking Regulations Act, 1949 applies,
has paid interest of ` 7,000 to Mr. Bhuwan, a resident Indian, from its Lucknow branch and
` 8,000 from Kanpur branch. If the bank has not adopted core banking solutions, is tax
required to be deducted at source from such interest payments made on 31 -3-2018?
Examine the provisions of the Income-tax Act, 1961 in this regard.
Will your answer be different if the bank has adopted core banking solutions?
13. Mr. Shikhar, aged 52 years, provides you the following information and requests you to
determine his advance tax liability with due dates for the financial year 2017-18.
Estimated tax liability for the financial year 2017-18 ` 85,000
Tax deducted at source for this year ` 15,000
(i) Would your answer change if Mr. Shikhar is eligible for and has opted for presumptive
tax provisions under section 44AD and his tax liability is entirely on account of such
income (ignore TDS)?
(ii) What would be your answer if, instead of section 44AD, he is eligible for and has
opted for presumptive tax provisions under section 44AE?
14. When and at what rate, a seller is required to collect tax source on sale of motor vehicle.
Also, discuss whether tax is required to be collected at source on sale of motor vehicle by
manufacturers to dealers.
15. Mr. Atharv filed his return of income on 30th September, 2018 related to Assessment Year
2018-19. In the month of October 2018, his tax consultant found that the interest on fixed
deposit was omitted in the tax return. Can Mr. Atharv file a revised return?
Assume that the due date for furnishing return of income in his case, was 31st July, 2018
and the assessment was not completed till the month of October 2018.

SUGGESTED ANSWERS
1. Mr. Sahil is a non-resident for the A.Y.2018-19, since he was not present in India at any
time during the previous year 2017-18 [Section 6(1)].
As per section 5(2), a non-resident is chargeable to tax in India only in respect of following
incomes:
(i) Income received or deemed to be received in India; and
(ii) Income accruing or arising or income deemed to accrue or arise in India.
Computation of Gross Total Income of Mr. Sahil for A.Y. 2018-19
Particulars `
Salaries
Salary from Government of India 8,15,000
(Income chargeable under the head ‘Salaries’ payable by the
Government to a citizen of India for services rendered outside India is
deemed to accrue or arise in India under section 9(1)(iii). Hence, such
income is taxable in the hands of Mr. Sahil, a citizen of India, even
though he is a non-resident and rendering services outside India)
Foreign Allowances from Government of India Nil
[Any allowances or perquisites paid or allowed as such outside India by
the Government of India to a citizen of India for rendering service
outside India is exempt under section 10(7)].
Income from House Property
Rent from a house situated at Australia, received in Australia Nil
(Income from property situated outside India would not be taxable in India
in the hands of a non-resident, since it is neither accruing or arising in
India nor is it deeming to accrue or arise in India nor is it received in India)
Income from Other Sources
Interest accrued on National Savings Certificate is taxable 1 25,600
Interest on Post office savings bank account – exempt upto ` 3,500 Nil
Gross Total Income 8,40,600
1
It is assumed that Mr. Sahil follows mercantile system of accounting.

2. Computation of Business Income and Agriculture Income of

Mr. Charan for A.Y. 2018-19
Particulars Business Agricultural Income
Income
` ` `
Sale of Rice
Business income
Sale Proceeds of Rice 38,00,000
Less: Market Value of paddy (60%) 28,60,000
Less: Manufacturing expenses 3,60,000
5,80,000
Agricultural Income
Market value of paddy (60%) 28,60,000
Less: Cost of cultivation 14,40,000
14,20,000
Sale of Paddy
Agricultural Income
Sale proceeds of paddy produce (40%) 18,50,000
Less: Cost of cultivation 9,00,000
9,50,000
23,70,000
3. Computation of income chargeable under the head “Salaries” of Mr. Narayan for
A.Y. 2018-19
Particulars `
Basic Salary 7,20,000
Dearness allowance 3,60,000
Commission 60,000
Entertainment allowance 7,500
Medical expenses reimbursed by the employer is an exempt perquisite to
the extent of ` 15,000 [Clause (v) of proviso to section 17(2)]. Therefore, 10,000
` 10,000, being the reimbursement in excess of ` 15,000 is a taxable
perquisite.

Professional tax paid by the employer is a taxable perquisite as per 1,500

section 17(2)(iv), since it is an obligation of the employee which is paid
by the employer
Health insurance premium of ` 9,000 paid by the employer is an exempt Nil
perquisite [Clause (iii) of proviso to section 17(2)]
Gift voucher given by employer on Mr. Narayan’s birthday (entire amount 15,000
is taxable since the perquisite value exceeds ` 5,000) as per Rule 3(7)(iv)
[See Note below]
Life insurance premium of Mr. Narayan paid by employer is a taxable 42,000
perquisite as per section 17(2)(v)
Laptop provided for use at home is an exempt perquisite as per Rule Nil
3(7)(vii)
Provision of motor car (engine cubic capacity less than 1.6 litres) owned
by employer to employee for both official and personal purposes – 21,600
perquisite value would be ` 21,600 [`1,800 ×12] as per Rule 3(2)
Annual credit card fees paid by employer is a taxable perquisite as per
Rule 3(7)(v) since the credit card is not exclusively used for official 5,000
purposes.
Gross Salary 12,42,600
Less: Deductions under section 16
Entertainment allowance (deduction under section 16(ii) not Nil
allowable since Mr. Narayan is not a Government employee)
Professional tax paid allowable as deduction as per section 16(iii) 3,000
Income chargeable under the head “Salaries” 12,39,600
Note: As per Rule 3(7)(iv), the value of any gift or voucher received by the employee or by
member of his household on ceremonial occasions or otherwise from the employer shall
be determined as the sum equal to the amount of such gift. However, the value of any gift
or voucher received by the employee or by member of his household below ` 5,000 in
aggregate during the previous year would be exempt as per the proviso to Rule 3(7)(iv). In
this case, the gift voucher of ` 15,000 was received by Mr. Narayan from his employer on
the occasion of his birthday.
Since the value of the gift voucher exceeds the limit of ` 5,000, the entire amount of
` 15,000 is liable to tax as perquisite.
An alternate view possible is that only the sum in excess of ` 5,000 is taxable in view of
the language of Circular No.15/2001 dated 12.12.2001, which states that such gifts upto
` 5,000 in the aggregate per annum would be exempt, beyond which it would be taxed as
a perquisite. As per this view, the value of perquisite would be ` 10,000.

In such case, the gross salary and net salary would be, ` 12,37,600 and ` 12,34,600,
respectively.
4. Computation of income under the head “House Property” of Mr. Ranjan for A.Y.2018-19
Particulars ` `
2Gross Annual Value (` 45,000 x 12) 5,40,000
Less: Municipal taxes (See Working Note 1) 18,000
Net Annual Value (NAV) 5,22,000
Less: Deductions under section 24
(i) 30% of NAV 1,56,600
(ii) Interest on housing loan (See Working Note 2) 2,24,400
3,81,000
Income chargeable under the head “House Property” 1,41,000
Working Notes:
(1) Municipal taxes deductible from Gross Annual Value
As per proviso to section 23(1), municipal taxes actually paid by the owner
during the previous year is allowed to be deducted from Gross Annual Value.
Accordingly, only ` 18,000 paid on 25.05.2017 is allowed to be deducted from
Gross Annual Value, while computing income from house property of the
previous year 2017-18.3
(2) Interest on housing loan allowable as deduction under section 24
As per section 24(b), interest for the current year (` 22,00,000 x ` 1,98,000
9%)
Pre-construction interest
For the period 01.08.2015 to 31.03.2016
(` 22,00,000 x 9% x 8/12) = ` 1,32,000
` 1,32,000 allowed in 5 equal installments (` 1,32,000/5) from
P.Y. 2016-17 to P.Y. 2020-21 ` 26,400
` 2,24,400
3. Deduction under section 24(b), in respect of interest on housing loan for let out
property, fully allowed without any limit.
2
In the absence of information related to municipal value, fair rent and standard rent, the rent receivable has
been taken as the Gross Annual Value
3
The municipal tax of ` 18,000 paid on 15.4.2018 would be allowed as deduction while computing income
from house property of the previous year 2018-19.

5. Computation of Business Income of Mr. Chauhan for the A.Y. 2018-19

Particulars ` `
Net profit as per Profit and Loss Account 11,50,000
Add: Expenses not deductible
Donation to Prime Minister Relief Fund (Refer Note 1) 1,00,000
Provision for bad debts (Refer Note 2) 50,000
Family planning expenditure incurred on employees (Refer 20,000
Note 3)
Depreciation as per Profit and Loss Account 30,000
Income-tax (Refer Note 4) 1,00,000
Employer’s contribution to recognized provident fund 25,000 3,25,000
(Refer Note 5)
14,75,000
Less: Expense allowed
Depreciation as per Income-tax Rules, 1962 (Refer Note 6) 40,000
14,35,000
Add: Employee’s contribution included in income as per Section
2(24)(x) (Refer Note 7) 25,000
Business Income 14,60,000
Notes:-
(1) Donation to Prime Minister Relief Fund is not allowed as deduction from the business
income, since it is not incurred wholly and exclusively for business. It is allowed as
deduction under section 80G from the gross total income.
(2) Provisions for bad debts is allowable as deduction under section 36(1)(viia) (subject
to the limits specified therein) only in case of banks, public financial institutions, State
Financial Corporation and State Industrial Investment Corporation. Therefore, it is not
allowable as deduction in the case of Mr. Chauhan.
(3) Expenditure on family planning is allowed as deduction under section 36(1)(ix) only
to a company assessee. Therefore, such expenditure is not allowable as deduction
in the hands of Mr. Chauhan.
(4) Income-tax paid is not allowable as deduction as per the provisions of section
40(a)(ii).

(5) Since Mr. Chauhan’s contribution (Employer’s Contribution) to recognized provident

fund is deposited after the due date of filing return of income, the same is disallowed
as per provisions of section 43B, in computing business income of A.Y. 2018-19.
(6) As per second proviso to section 43(1), the expenditure for acquisition of asset, in
respect of which payment to a person in a day exceeds ` 10,000 has to be ignored
for computing actual cost, if such payment is made otherwise than by way of A/c
payee cheque/ bank draft or ECS. Accordingly, depreciation on furniture & fixtures
would not be allowed, since payment exceeding ` 10,000 (` 35,000 in this case) is
made in cash. Therefore, no adjustment is required to be made in the amount of
depreciation computed as per Income-tax Rules, 1962, since such amount does not
include depreciation on furniture & fixtures.
(7) Employee’s contribution is includible in the income of the employer by virtue of
Section 2(24)(x). The deduction for the same is not provided for as it was deposited
after the due date under the Provident Fund Act.
(8) TDS provisions under section 194A are not attracted in respect of payment of interest
on bank loan. Therefore, disallowance under section 40(a)(ia) is not attracted in this
case.
6. Computation of income chargeable under the head “Capital Gains” for A.Y. 2018-19
Particulars `
Capital Gains on sale of residential house
Actual sale consideration ` 82 lakhs
Value adopted by Stamp Valuation Authority ` 92 lakhs
Full value of sale consideration [Higher of the above] 92,00,000
[As per section 50C, in case the actual sale consideration declared by
the assessee is less than the value adopted by the Stamp Valuation
Authority for the purpose of charging stamp duty, then, the value
adopted by the Stamp Valuation Authority shall be taken to be the full
value of consideration.
In a case where the date of agreement is different from the date of
registration, stamp duty value on the date of agreement can be
considered provided the whole or part of the consideration is paid by
way of account payee cheque/bank draft or by way of ECS through bank
account on or before the date of agreement. In this case, since 25% of
` 82 lakhs was paid through account payee bank draft on the date of
agreement, stamp duty value on the date of agreement can be adopted
as the full value of consideration]
Less: Indexed cost of acquisition of residential house
[` 21 lakhs x 272/105] 54,40,000

Long-term capital gains [Since the residential house property was held
by Mr. Sahu for more than 24 months immediately preceding the date of its
transfer] 37,60,000
Less: Exemption under section 54 35,00,000
The capital gain arising on transfer of a long-term residential property shall
not be chargeable to tax to the extent such capital gain is invested in the
purchase of one residential house property in India within one year before
or two years after the date of transfer of original asset. ________
Long-term capital gains chargeable to tax 2,60,000
- Interest on Savings Bank A/c 12,000
- Income from lotteries [` 84,000 x 100/70] 1,20,000
[Under section 194B, tax @ 30% is required to be
deducted at source on lottery income at the time of
payment, if the amount exceeds ` 10,000] 1,32,000
Less: Deduction under Chapter VI-A: Under section 80TTA, in respect
of interest on Savings bank a/c, restricted to 10,000
Total Income 3,82,000
Tax Liability
Tax on total income of ` 2,000 i.e., excluding LTCG & lotteries income Nil
Tax on long-term capital gains @ 20% ` 12,000 (` 2,60,000 less
unexhausted basic exemption limit of ` 2,48,000 [` 2,50,000 - ` 2,000,
being total income excluding LTCG & income from lotteries] 2,400
Tax on income from lotteries @ 30% 36,000
38,400
Add: Education cess @ 2% 768
Add: Secondary and higher education cess @ 1% 384
Tax liability 39,552
Less: Tax deducted at source
- under section 194B on income from lotteries 36,000
- under section 194-IA on transfer of residential house (1% of
` 82,00,000) 82,000
Tax refundable 78,448

7. (a) Section 2(22)(e) provides that any payment by a company, not being a company in
which public are substantially interested, of any sum by way of advance or loan
- to a shareholder, being a person who is the beneficial owner of shares holding
not less than 10% of voting power, or
- to any concern in which such shareholder is a partner and in which he has a
substantial interest (i.e., he is beneficially entitled to not less than 20% of the
income of such concern)
is deemed as dividend, to the extent the company possesses accumulated profits.
In the present case, the loan given by TRP(P) Ltd. to Pranav & Sons, a partnership
firm would be deemed as dividend, since Mr. Pranav is the beneficial owner of 15%
shareholding in TRP(P) Ltd. and also has substantial interest in Pranav & Sons (as
he is beneficially entitled to 50% of the income of the firm).
However, the amount of loan would be deemed as dividend only to the extent TRP(P)
Ltd. possesses accumulated profits. Therefore, out of the loan of ` 35 lakhs given to
Pranav & Sons, only ` 30 lakhs, i.e., to the extent of accumulated profit of TRP(P)
Ltd., would be deemed as dividend.
(b)
S. Taxable / Reason
No. Not Taxable
(i) Taxable Since MNS Private Limited, a closely held company, issued
12,000 shares at a premium (i.e., issue price exceeds the face
value of shares), the excess of the issue price of the shares
over the fair market value would be taxable under section
56(2)(viib) in its hands under the head “Income from other
sources”.
Therefore, ` 1,80,000 [12,000 × ` 15 (` 125 – ` 110)] shall
be taxable as income in the hands of MNS Private Limited
under the head “Income from other sources”.
(ii) Taxable Any sum of money received as an advance or otherwise in the
course of negotiations for transfer of a capital asset would be
chargeable to tax under the head “Income from other
sources”, if such amount is forfeited and the negotiations do
not result in transfer of such capital asset [Section 56(2)(ix)].
Therefore, the amount of ` 56,000 received as advance would
be chargeable to tax in the hands of Mr. Arun under the head
“Income from other sources”, since it is forfeited on account of
cancellation of contract for transfer of house, being a capital
asset, due to non-payment of installment in time.

(iii) Not Taxable As per section 56(2)(x), immovable property received

without consideration by any person from his relative is not
taxable.
In the present case, since Mr. Nitin is the father of Mr. Raj,
` 12 lakhs, being the stamp duty value of house property
received, without consideration, would not be chargeable
to tax in the hands of Mr. Raj.
(iv) Not Taxable Refrigerator is not included in the definition of “property”, for
the purpose of taxability under section 56(2)(x) in the hands
of the recipient under the head “Income from other sources”.
Further, the same has been received by Tannu on occasion
of her marriage from her maternal uncle, being a relative.
Hence, ` 75,000, being the fair market value of refrigerator
received without consideration from a relative on the occasion
of a her marriage is not taxable in the hands of Tannu, even
though its value exceeds ` 50,000.
8. In computing the total income of any individual, there shall be included all such income as
arises directly or indirectly, to the spouse of such individual from assets transferred directly
or indirectly, to the spouse by such individual otherwise than for adequate consideration
or in connection with an agreement to live apart.
Interest on loan: Accordingly, ` 60,000, being the amount of interest on loan received by
Mrs. Sandhya, wife of Mr. Saharsh, would be includible in the total income of Mr. Saharsh,
since such loan was given by her out of the sum of money received as gift from her
husband.
Loss from business: As per Explanation 2 to section 64, income includes loss. Thus,
clubbing provisions would be attracted even if there is loss and not income.
Thus, the entire loss of ` 25,000 from the business carried on by Mrs. Sandhya would be
includible in the total income of Mr. Saharsh, since as on 1st April 2017, the capital invested
was entirely out of the funds gifted by her husband.
Short-term capital gain: The short-term capital gain of ` 25,000 (` 85,000, being the sale
consideration less ` 60,000, being the cost of acquisition) arising in the hands of
Mrs. Sandhya from sale of shares acquired by investing the interest income of ` 60,000
earned by her (from the loan given out of the sum gifted to her by her husband), would not
be included in the hands of Mr. Saharsh. Since securities transaction tax has been paid, such
short-term capital gain on sale of listed shares is taxable@15%
Income from the accretion of the transferred asset is not liable to be included in the hands
of the transferor and, therefore, such income is taxable in the hands of Mrs. Sandhya.

9. Computation of total income of Mr. Arihant for the A.Y. 2018-19

Particulars ` `
Salaries
Income from Salary 3,50,000
Less: Loss from house property set-off against salary
income as per section 71(3A), restricted to 2,00,000 1,50,000
Profits and gains of business or profession

Income from trading business 75,000
Less: Brought forward loss from trading business of A.Y.
2014-15 can be set off against current year income from
trading business, as per section 72(1), since the eight-year
time limit as specified under section 72(3), within which set- 8,000
off is permitted has not expired.
67,000
Less: Unabsorbed depreciation 11,000 56,000
Income from speculative business Y 15,000

Less: Loss from speculative business X to be set-off as per 15,000
section 73(1)
Loss from speculative business X to be carried forward to 10,000
A.Y.2019-20 as per section 73(2)
Capital Gains
Long term capital gain on sale of urban land 2,30,000
Less: Long term capital loss on sale of shares (STT not paid)
set-off as per section 70(3)] 85,000 1,45,000
Long-term capital loss of ` 1,02,000 on sale of listed shares
on which STT is paid both at the time of acquisition and sale
cannot be set-off against long-term capital gain on sale of
urban land since loss from an exempt source cannot be set-
off against profit from a taxable source.
Items eligible for carried forward to A.Y.2019-20
Particulars `
Loss from House Property 20,000
As per section 71(3A), Loss from house property can be set-off
against any other head of income to the extent of ` 2,00,000 only.

As per section 71B, balance loss not set-off can be carried forward to
the next year for set-off against income from house property of that
year. It can be carried forward for a maximum of eight assessment
years i.e., upto A.Y. 2026-27, in this case.
Loss from speculative business X 10,000
Loss from speculative business can be set-off only against profits from
any other speculation business. As per section 73(2), balance loss
not set-off can be carried forward to the next year for set-off against
speculative business income of that year. Such loss can be carried
forward for a maximum of four assessment years i.e., upto A.Y.
2022-23, in this case, as specified under section 73(4).
Loss from specified business under section 35AD 40,000
Loss from specified business under section 35AD can be set-off only
against profits of any other specified business. If loss cannot be so
set-off, the same has to be carried forward to the subsequent year for
set off against income from specified business, if any, in that year. As
per section 73A(2), such loss can be carried forward indefinitely for
set-off against profits of any specified business .
Loss from the activity of owning and maintaining race horses 5,000
Losses from the activity of owning and maintaining race horses
(current year or brought forward) can be set-off only against income
from the activity of owning and maintaining race horses. If it cannot
be so set-off, it has to be carried forward to the next year for set-off
against income from the activity of owning and maintaining race
horses, if any, in that year. It can be carried forward for a maximum of
four assessment years, i.e., upto A.Y.2021-22, in this case as
specified under section 74A(3).
10.
Computation of deduction under section 80JJAA
Mr. Anay is eligible for deduction under section 80JJAA since he is subject to tax audit
under section 44AB for A.Y.2018-19, as his total turnover from business exceeds ` 1
crore and he has employed “additional employees” during the P.Y.2017 -18.
Additional employee cost = [` 22,000 × 40 new regular employees × 11 months] +
[` 15,000 per month × 9 months × 25 new contractual employees]
= ` 96,80,000 + ` 33,75,000 = ` 1,30,55,000
Deduction under section 80JJAA = 30% of ` 1,30,55,000 = ` 39,16,500.

Working Note: Number of Additional employees employed during the P.Y.2017 -18
Particulars No. of additional
employees
Total number of additional employees employed during the 140
year
Less: Casual workmen employed on 15 th April 2017, who do 15
not participate in the recognised provident fund
Regular employees employed on 1 st August 2017, 35
since their total monthly emoluments exceed ` 25,000
Regular employees employed on 1st October 2017, for
a period of less than 240 days during the P.Y.2017-18 25 75
Total number of additional employees employed during the 65
P.Y.2017-18
Yes, the answer would be different, if Mr. Anay is engaged in the business of manufacture
of apparel. Since the number of days of employment in a year has been relaxed from 240
days to 150 days in case of apparel industry, wages paid to regular employees employed
on 1.10.2017 would also qualify for deduction under section 80JJAA for A.Y. 2018-19.
Additional employee cost = ` 1,30,55,000 + ` 33,00,000 (` 22,000 x 6 x 25)
= ` 1,63,55,000
Deduction under section 80JJAA = 30% of ` 1,63,55,000 = ` 49,06,500
11. Computation of total income of Mr. Anoop for the Assessment Year 2018-19
Particulars ` ` `
Profits and gains from business or
profession
Net profit as per profit and loss account 8,40,000
Less: Income credited to profit and loss
account but not taxable under this
head
Interest on notified government 32,000
securities
Dividend from foreign company 28,000
Gift of gold chain received from his
mother 78,000 1,38,000
7,02,000
Add: Depreciation debited in the books of
account 1,05,000
8,07,000

Add: Expenses debited to profit and loss

account but not allowable as
deduction
Interest on capital borrowed for
purchase of plant & machinery 82,000
[As per the proviso to section 36(1)(iii),
the interest on loan borrowed for
purchase of new asset which is not put
to use upto 31.3.2018 not allowable as
deduction. The said amount has to be
added to the cost of the asset 4. Since
the amount has been debited to profit
and loss account, it has to be added
back].
Expenditure in excess of ` 10,000 paid
by bearer cheque to be disallowed as
per section 40A(3) 18,500
Compensation paid to an employee on
termination of his services in the
business unit is allowable on the
grounds of commercial expediency.
Hence, no disallowance is attracted - 1,00,500
9,07,500
Less: Depreciation allowable under the 7,91,500
Income-tax Act, 1961 1,16,000
[Depreciation on new plant &
machinery would not be allowed, since
it was not put to use during the previous
year 2017-18]
Interest on notified Government Securities, -
exempt under section 10(15)
Dividend from foreign company [(not exempt 28,000
under section 10(34)]
Gift of gold chain received from his mother is
not taxable, since mother is a relative [clause
(I) of proviso to section 56(2)(x)] - 28,000
4 No depreciation is allowable on such amount since the asset was not put to use during the P.Y. 2017-18.

Less: Deductions under Chapter VI-A

Under section 80C
Deposit in Sukanya Samridhi Scheme 48,000
Under section 80D
Medical insurance premium
Self and wife ` 28,000 + ` 2,500
preventive health check up, subject to a
maximum of 25,000
Medical expenses of father, being a
very senior citizen, ` 35,000, since
there is no insurance policy in his name,
restricted to 30,000 55,000
Under section 80G
Donation to Clean Ganga Fund
(qualifies for 100% deduction) 23,000 1,26,000
Tax on total income @ 5% on ` 2,50,000
(` 5,00,000 less ` 2,50,000, being the basic
exemption limit) plus @20% on ` 1,93,500 (in 51,200
excess of ` 5,00,000)
Add: Education cess @2% 1024
Add: Secondary and higher education cess @1% 512
Tax Payable 52,736
Tax Payable (rounded off) 52,740
12. Tax is deductible @10% under section 194A in respect of interest credited or paid by a
banking company, if the same exceeds ` 10,000.
This threshold is with reference to interest credited or paid by a branch of the bank, where
the bank has not adopted core banking solutions.
On the other hand, if the bank has adopted core banking solutions, then, the threshold of
` 10,000 would apply in respect of the aggregate interest credited or paid by all the
branches of the bank.
Therefore, if Shurya Bank Ltd. has not adopted core banking solutions, it need not deduct
tax on interest of ` 7,000 and ` 8,000 paid by its Lucknow Branch and Kanpur Branch,
respectively, to Mr. Bhuwan, since the interest paid by each branch does not exceed
` 10,000.
However, if Shurya Bank Ltd. has adopted core banking solutions, it has to deduct tax at
source@10% on ` 15,000 (` 7,000 + ` 8,000) under section 194A, since the aggregate interest
paid by its Lucknow and Kanpur branches exceed ` 10,000.

13. Determination of Advance Tax Liability of Mr. Shikhar

Particulars `
Estimated tax liability for the financial year 2017-18 85,000
Less: Tax deducted at source 15,000
Tax payable 70,000
Due Date of Amount payable `
installment
On or before 15 th Not less than 15% of
June, 2017 advance tax liability 10,500
On or before 15 Not less than 45% of
th 21,000
September, 2017 advance tax liability less (` 31,500, being 45% of
amount paid in earlier ` 70,000 - ` 10,500)
installment
On or before 15 th Not less than 75% of 21,000
December, 2017 advance tax liability less (52,500, being 60% of
amount paid in earlier ` 70,000
installment(s) - ` 31,500)
On or before 15 Whole of the advance tax
th 17,500
March, 2018 liability less amount paid in (70,000, being 100% of
earlier installment(s) ` 70,000 - ` 52,500)
In case he is eligible for presumptive tax provisions under section 44AD and his entire tax
liability is on account of such income, he can pay his entire advance tax liability in one
installment on or before 15.3.2018, without attracting interest under sec tion 243C.
This benefit would, however, not be available if he is eligible for and has opted for
presumptive tax provisions under section 44AE, in which case he has to pay his advance
tax in four installments as indicated above, failing which interest under section 234C would
be attracted.
14. As per section 206(1F), every person, being a seller, who receives any amount as
consideration for sale of a motor vehicle of the value exceeding ` 10 lakhs, shall collect
tax from the buyer@1% of the sale consideration.
In case of sale of a motor vehicle, tax shall be collected at the time of receipt of such
amount.
The CBDT has, vide Circular No. 22/2016 dated 8.6.2016 and Circular No.23/2016 dated
24.6.2016, clarified that tax is required to be collected at source on all transactions of retail
sales and accordingly, it will not apply on sale of motor vehicles by manufacturers to
dealers/distributors.

15. As per section 139(5), if any person, having furnished a return under section 139(1), within
the due date or a belated return under section 139(4), discovers any omission or any wrong
statement therein, he may furnish a revised return at any time –
(a) before the end of the relevant assessment year or
(b) before the completion of assessment,
whichever is earlier.
For assessment year 2018-19, the belated return has to be furnished before 31 st March
2019 or before completion of assessment, whichever is earlier.
Since Mr. Atharv has filed his return after 31.7.2018, being the due date of filing return of
income under section 139(1) in his case, but before 31.3.2019/completion of
assessment, the said return is a belated return.
Thus, in the present case, Mr. Atharv can file a revised return, since he has found an
omission in the belated return filed by him for A.Y.2018-19 and assessment is yet to be
completed5 and 31.3.2019, being the end of A.Y.2018-19 has not elapsed.
5
As of October 2018

SECTION B: INDIRECT TAXES
QUESTIONS
(1) All questions should be answered on the basis of the position of GST law as
amended up to 30.04.2018.
(2) The GST rates for goods and services mentioned in various questions are
hypothetical and may not necessarily be the actual rates leviable on those goods
and services. Further, GST compensation cess should be ignored in all the
questions, wherever applicable.
1. M/s. Shri Durga Corporation Pvt. Ltd. is a supplier of goods and services at Kolkata. It
has furnished the following information for the month of February, 20XX:
Particulars Amount
(`)
(i) Intra-State sale of taxable goods including ` 1,00,000 received as 4,00,000
advance in January, 20XX, the invoice for the entire sale value is
issued on 15 th February, 20XX
(ii) Goods purchased from unregistered dealer on 20th February, 20XX 1,00,000
(Inter-State purchases are worth ` 30,000 and balance purchases
are intra-State)
(iii) Services provided by way of labour contracts for repairing a single 1,00,000
residential unit otherwise than as a part of residential complex (It is
an intra-State transaction)
(iv) Goods transport services received from a GTA. GTA is paying tax 2,00,000
@12% (It is an inter-State transaction)
Compute net GST liability (CGST, SGST or IGST, as the case may be) of M/s Shri Durga
Corporation Pvt. Ltd. for the month of February, 20XX.
Assume the rates of GST, unless otherwise specified, as under:
CGST 9%
SGST 9%
lGST 18%
Note:-
(i) The turnover of M/s. Shri Durga Corporation Pvt. Ltd. was ` 2.5 crore in the previous
financial year.
(ii) All the amounts given above are exclusive of taxes.

2. Cloud Seven Private Limited, a registered supplier, is engaged in the manufacture of

taxable goods. The company provides the following information pertaining to GST paid
on the purchases made/input services availed by it during the month of February, 20XX :
Particulars GST paid (`)
(i) Trucks used for the transport of raw material 1,20,000
(ii) Foods and beverages for consumption of employees
40,000
working in the factory
(iii) Inputs are to be received in five lots, out of which third
80,000
lot was received during the month
(iv) Membership of a club availed for employees working in
1,50,000
the factory
(v) Capital goods (out of five items, invoice for one item was
4,00,000
missing and GST paid on that item was ` 50,000)
(vi) Raw material (to be received in March, 20XX) 1,50,000
Determine the amount of input tax credit available with Cloud Seven Private Limited for the
month of February, 20XX by giving necessary explanations for treatment of various
items. All the conditions necessary for availing the input tax credit have been fulfilled.
3. M/s. Handsome and Likemi Company, a partnership firm at Mumbai is running a mobile
phone showroom. Along with mobile phone showroom, it is also engaged in providing
health and fitness services.
Turnover of the mobile phone showroom was ` 78 lakh and receipts of the health and
fitness service was ` 26 lakh in the preceding financial year.
(i) With reference to the provisions of the CGST Act, 2017, examine whether the firm
can opt for the composition scheme,
(ii) Will your answer change, if the turnover of the mobile phone showroom was ` 74
lakh and receipts of the health and fitness service was ` 18 lakh in the preceding
financial year?
(iii) If M/s. Handsome and Likemi Company obtain separate registration for their mobile
phone showroom & for health fitness centre, can it opt for composition scheme only
for mobile phone showroom?
4. Luv & Kush Pvt. Ltd. of Srinagar, Jammu & Kashmir engaged in the supply of gifts items
provides you the following details:-
S.No. Particulars Date
1. Commencement of the business of supplying goods 01.08.20XX
2. Turnover exceeds ` 10,00,000 on 15.08.20XX

3. Turnover exceeds ` 20,00,000 on 05.09.20XX

4. Application for registration made on 28.09.20XX
5. Registration certificate granted on 06.10.20XX
The company seeks your advice as to how it should raise revised tax invoices for
supplies made. Is there any specific provision for issuance of revised tax invoices to
unregistered customers? Explain.
5. Red Pepper Ltd., Delhi, a registered supplier, is manufacturing taxable goods. It provides
the following details of taxable inter-State supply made by it for the month of March,
20XX.
Particulars Amount in
(`)
List price of goods supplied inter-state (exclusive of taxes) 15,00,000
Subsidy received from Central Government for supply of taxable goods 2,10,000
to Government School.
Subsidy received from a NGO for supply of taxable goods to an old age 50,000
home
Tax levied by Municipal Authority 20,000
Packing charges 15,000
Late fee paid by the recipient of supply for delayed payment of invoice 6,000
The list price of the goods takes into account the two subsidies received. However, the
other charges/taxes/fee are charged to the customers over and above the list price.
Calculate the value of taxable supply made by M/s Red Pepper Ltd. for the month of
March, 20XX. Rate of IGST is 18%.
6. (i) Explain the meaning of the term “date of receipt of payment” as per section 13 of
the CGST Act, 2017.
(ii) List any four activities which shall be neither treated as supply of goods nor a
supply of services under the GST law.
7. Examine whether GST is payable in the following independent supply of services:
(i) Indiana Engineering College, a recognised educational institution, has conducted an
entrance test examination for various courses run by it and charged entrance fees
from the applicants.
(ii) Ramfal Lalaji, an agriculturist, has stored sugarcane in a warehouse. He has taken
fumigation services in the said warehouse from Gupta Pest Control Co. for which he
paid the consideration of ` 6,000.
8. (i) With reference to the provisions of GST law, briefly answer the following questions:-

(a) Income is received by Maharashtra Government from renting of immovable

property to Ganpati Morya Pvt. Ltd., registered in Maharashtra (Turnover of the
company was ` 18 lakh in the preceding financial year). Is GST payable in the
present case? If yes, who is liable to pay the same?
(b) Mr. Vivek Goyal, director of A2Z Pvt. Ltd. Company has received sitting fee
amounting to ` 1 lakh from A2Z Pvt. Ltd for attending the Board meetings.
(ii) Explain the meaning of the term “input tax” under section 2(62) of CGST Act, 2017.
9. (i) Discuss the circumstances where registration is liable to be cancelled.
(ii) Explain the order in which liability of taxable person has to be discharged under
GST laws.
10. Examine whether the activity of import of service in the following independent cases
would amount to supply under section 7 of the CGST Act, 2017?
(i) Miss Shriniti Kaushik received vaastu consultancy services for her residence
located at Bandra, Mumbai from Mr. Racheal of Sydney (Australia). The amount
paid for the said service is 5,000 Australian dollar.
(ii) Miss Shriniti Kaushik received vaastu consultancy services for her residence located at
Bandra, Mumbai from her brother, Mr. Varun residing in Sydney (Australia). Further,
Miss Shriniti did not pay any consideration for the said service.
(iii) Miss Shriniti Kaushik received vaastu consultancy services for her business
premises located at Bandra, Mumbai from her brother, Mr. Varun residing in Sydney
(Australia). Further, Miss Shriniti did not pay any consideration for the said service.
1. Computation of GST liability of M/s. Shri Durga Corporation Pvt. Ltd. for the month of
February, 20XX
Particulars Value of CGST SGST IGST
Supply (`) (`) (`)
Intra -State sale of taxable goods [Note-1] 4,00,000 36,000 36,000
Goods purchased from unregistered dealer on Nil Nil Nil
20th February, 20XX [Note-2]
Services rendered by way of labour contracts 1,00,000 9,000 9,000
for repairing a single residential unit otherwise
than as a part of residential complex [Note-3]
Goods transport services received from GTA 2,00,000 Nil
[Note-4]

Total GST liability for the month of February, 20XX 45,000 45,000 Nil
Less: Input tax credit available [Note-5] (` 2,00,000 x 12%) 24,000
Net GST liability for the month of February, 20XX 21,000 45,000 Nil
Notes:
1. Section 12 of CGST Act, 2017 read with Notification No. 66/2017 CT dated
15.11.2017 provides that the time of supply for all suppliers of goods (excluding
composition suppliers) is the time of issue of invoice, without any turnover limit.
Thus, liability to pay tax on the advance received in January, 20XX will also arise in
the month of February, when the invoice for the supply is issued.
2. All intra-State and inter-State procurements made by a registered person from
unregistered person have been exempted from reverse charge liability, without any
upper limit for daily procurements upto 30.06.2018*1. [Notification No. 8/2017 CT
(R) dated 28.06.2017 as amended and Notification No. 32/2017 IT(R) dated
13.10.2017 as amended]
3. Services by way of pure labour contracts of construction, erection, commissioning,
or installation of original works pertaining to a single residential unit otherwise than
as a part of a residential complex are exempt vide Notification No. 12/2017 CT(R)
dated 28.06.2017. Labour contracts for repairing are thus, taxable.
4. As per Notification No. 13/2017 CT(R) dated 28.06.2017, GST is payable by the
recipient on reverse charge basis on the receipt of services of transportation of
goods by road from a goods transport agency (GTA) provided such GTA has not
paid GST @ 12%. Since in the given case, services have been received from a GTA
who has paid GST @ 12%, reverse charge provisions will not be applicable.
5. Input tax credit is available for the services received from GTA. The input tax credit
of IGST can be used against IGST, CGST and SGST in the respective order vide
section 49(5) of CGST Act, 2017.
2. Computation of input tax credit (ITC) available with Cloud Seven Private Limited for
the month of February, 20XX
Particulars `
Trucks used for the transport of raw material [Note-1] 1,20,000
Foods and beverages for consumption of employees working in the factory Nil
[Note-2]
Inputs are to be received in five lots, out of which third lot was received Nil
during the month [Note-3]
*The above exemptions have been extended till 30.09.2018 vide Notification No. 12/2018 CT(R) dated
29.06.2018 and Notification No. 13/2018 IT(R) dated 29.06.2018.

Membership of a club availed for employees working in the factory [Note-4] Nil
Capital goods (out of five items, invoice for one item was missing and GST 3,50,000
paid on that item was ` 50,000) [Note-5]
Raw material to be received in March, 20XX [Note-6] Nil
Total ITC 4,70,000
Notes:-
1. ITC on motor vehicles is disallowed in terms of section 17(5) of the CGST Act, 2017,
except when they are used inter alia, for transportation of goods.
2. ITC on food or beverages is specifically disallowed unless the same is used for making
outward taxable supply of the same category or as an element of the taxable composite
or mixed supply- [Section 17(5)].
3. When inputs are received in instalments, ITC can be availed only on receipt of last
instalment- [Section 16(2)].
4. Membership of a club is specifically disallowed under section 17(5) of the CGST Act,
2017.
5. ITC cannot be taken on missing invoice. The registered person should have the
invoice in its possession to claim ITC [Section 16(2) of CGST Act, 2017] .
6. Input tax credit is available only upon the receipt of goods in terms of section 16(2)
of CGST Act, 2017.
3. A registered person, whose aggregate turnover in the preceding fina ncial year did not
exceed ` 1 crore [` 75 lakh in case of special category States except Jammu and
Kashmir and Uttarakhand], may opt for composition scheme vide section 10 of CGST
Act, 2017.
However, he shall not be eligible to opt for composition scheme if, inter alia, he is
engaged in the supply of services other than restaurant services.
(i) In the given case, since M/s Handsome and Likemi Company is engaged in supply
of health and fitness service, it is not eligible to opt for composition scheme
irrespective of its turnover in the preceding financial year.
(ii) The answer will remain the same i.e., M/s. Handsome & Likemi Company will not be
eligible to opt for composition scheme even with the change in the turnovers.
(iii) Where more than one registered persons are having the same Permanent Account
Number, the registered person shall not be eligible to opt for composition scheme
unless all such registered persons opt to pay tax under composition scheme.
Therefore, M/s. Handsome and Likemi Company will not be able to opt for
composition scheme only for mobile phone showroom as all the registrations under

the same PAN have to opt for composition scheme and since the supply of health
and fitness service is ineligible for composition scheme, supply of mobile phones
too becomes ineligible for composition scheme.
4. A supplier whose aggregate turnover in a financial year exceeds ` 20 lakh in a State/UT
[ ` 10 lakh in special category states except Jammu & Kashmir and Uttarakhand] is liable
to apply for registration within 30 days from the date of becoming liable to registration
(i.e., the date of crossing the threshold limit of ` 20 lakh/ ` 10 lakh) vide section 22 of
CGST Act, 2017.
Where the application is submitted within said period, the effective date of registration is
the date on which the person becomes liable to registration; otherwise it is the date of
grant of registration.
Every registered person who has been granted registration with effect from a date earlier
than the date of issuance of registration certificate to him, may issue revised tax invoices
in respect of taxable supplies effected during this period within 1 month from the date of
issuance of registration certificate.
In the given case, Luv & Kush Pvt. Ltd is located in Jammu & Kashmir, a special category
state. Though the turnover limit for special category states is ` 10 lakh, Jammu &
Kashmir has opted for turnover limit of ` 20 lakh for the purpose of registration. Thus,
since Luv & Kush Pvt. Ltd. has made the application for registration within 30 days of
becoming liable for registration, the effective date of registration becomes the date on
which the company becomes liable to registration i.e. 05.09.20XX.
Thus, Luv & Kush Pvt. Ltd. may issue revised tax invoices against the invoices already
issued during the period between effective date of registration (05.09.20XX) and the date
of issuance of registration certificate (06.10.20XX), within 1 month from 06.10.20XX.
Further, Luv & Kush Pvt. Ltd may issue a consolidated revised tax invoice in respect of
all taxable supplies made to unregistered dealers during such period. However, in case
of inter-State supplies made to unregistered dealers, a consolidated revised tax invoice
cannot be issued if the value of a supply exceeds ` 2,50,000.
5. Computation of value of taxable supply made by Red Pepper Ltd. for the month of
March, 20XX
Particulars `
List price of the goods 15,00,000
Add: Subsidy amounting to ` 2,10,000 received from Central NIL
Government
[Since subsidy is received from Government, the same is not
includible in the value in terms of section 15 of the CGST Act,
2017]
Subsidy received from NGO 50,000

[Since subsidy is received from a non-Government body, the

same is includible in the value in terms of section 15 of the CGST
Act, 2017]
Tax levied by the Municipal Authority 20,000
[Includible in the value as per section 15 of the CGST Act, 2017]
Packing charges 15,000
[Being incidental expenses, the same are includible in the value
as per section 15 of the CGST Act, 2017]
Late fees paid by recipient of supply for delayed payment
[Includible in the value as per section 15 of the CGST Act, 2017] 5,085
(assumed to be inclusive of taxes) [` 6,000 x 100/118] rounded
off
Value of taxable supply 15,90,085
6. (i) “Date of receipt of payment” in terms of section 13 of CGST Act, 2017 refers to the
(a) date on which the payment is recorded in the books of account of the entity
(supplier of service) that receives the payment, or
(b) the date on which the payment is credited to the entity’s bank account,
whichever is earlier.
(ii) Section 7(2)(a) of CGST Act, 2017 read with Schedule III specifies the activities or
transactions which shall be treated neither as a supply of goods nor a supply of
services:
1. Services by an employee to the employer in the course of or in relation to his
employment.
2. Services by any court or Tribunal established under any law for the time being
in force.
3. (a) Functions performed by the Members of Parliament, Members of State
Legislature, Members of Panchayats, Members of Municipalities and
Members of other local authorities;
(b) Duties performed by any person who holds any post in pursuance of the
provisions of the Constitution in that capacity; or
(c) Duties performed by any person as a Chairperson or a Member or a
Director in a body established by the Central Government or a State
Government or local authority and who is not deemed as an employee
before the commencement of this clause.
4. Services of funeral, burial, crematorium or mortuary including transportation of
the deceased.

5. Sale of land and, subject to paragraph 5(b) of Schedule II, sale of building.
6. Actionable claims, other than lottery, betting and gambling.
[Note:- Any four points may be mentioned.]
7. (i) Services provided by an educational institution by way of conduct of entrance
examination against consideration in the form of entrance fee are exempt from GST
vide Notification No. 12/2017 CT (R) dated 28.06.2017 as amended.
Since in the given case, services provided by Indiana Engineering College, an
educational institution are by way of conduct of entrance examination against
entrance fee, the same is exempt and thus, GST is not payable in this case.
(ii) Services by way of fumigation in a warehouse of agricultural produce are exempt
from GST vide Notification No. 12/2017 CT (R) dated 28.06.2017 as amended. In the
present case, since Gupta Pest Control Co. provides services by way of fumigation
in the warehouse of sugarcane [being an agricultural produce], said services are
exempt and GST is not payable on the same.
8. (i) (a) Notification No. 12/2017 CT (R) dated 28.06.2017 has inter alia exempted the
services provided by the State Government to a business entity with an
aggregate turnover of up to ` 20 lakh (` 10 lakh in case of a Special Category
States) in the preceding FY. However, the same shall not apply to services by
way of renting of immovable property.
In the given case, services by way of renting of immovable property is provided
by Maharashtra Government to Ganpati Morya Pvt. Ltd, registered in
Maharashtra. Therefore, the above exemption will not apply in this case even
though the turnover of the company was less than ` 20 lakh in the preceding
financial year. Thus, GST is payable in the given case.
Notification No. 13/2017 CT (R) dated 28.06.2017 as amended inter alia
provides that reverse charge is applicable in case of services supplied by the
State Government by way of renting of immovable property to a person
registered under the Central Goods and Services Tax Act, 2017. Thus, GST is
payable by Ganpati Morya Pvt. Ltd., being a registered person in the present
case.
(b) Notification No. 13/2017 CT (R) dated 28.06.2017 inter alia provides that GST
on supply of services by director of a company to the said company located in
the taxable territory is payable on reverse charge basis.
Therefore, in the given case, person liable to pay GST is the recipient of
services, i.e., A2Z Pvt. Ltd. Company.

(ii) As per section 2(62) of CGST Act, 2017, “input tax” in relation to a registered
person, means the central tax, State tax, integrated tax or Union territory tax
charged on any supply of goods or services or both made to him and includes —
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-section (3) and (4) of section 5 of
the IGST Act;
(d) the tax payable under the provisions of sub-section (3) and sub-section (4) of
section 9 of the respective SGST Act; or
(e) the tax payable under the provisions of sub-section (3) and sub-section (4) of
section 7 of the UTGST Act,
but does not include the tax paid under the composition levy.
9. (i) Section 29(1) of the CGST Act, 2017 provides that the proper officer may, either on
his own motion or on an application filed by the registered person or by his legal
heirs, in case of death of such person, cancel the registration, in such manner and
within such period as may be prescribed, having regard to the circumstances where:
(a) the business has been discontinued, transferred fully for any reason including
death of the proprietor, amalgamated with other legal entity, demerged or
otherwise disposed of; or
(b) there is any change in the constitution of the business; or
(c) the taxable person, other than the person registered under sub-section (3) of
section 25, is no longer liable to be registered under section 22 or section 24
Further, section 29(2) of the CGST Act, 2017 provides that the proper officer may
cancel the registration of a person from such date, including any retrospective date,
as he may deem fit, where,––
(a) a registered person has contravened such provisions of the Act or the rules
made thereunder as may be prescribed; or
(b) a person paying tax under section 10 has not furnished returns for three
consecutive tax periods; or
(c) any registered person, other than a person specified in clause (b), has not
furnished returns for a continuous period of six months; or
(d) any person who has taken voluntary registration under sub-section (3) of section
25 has not commenced business within six months from the date of registration;

or
(e) registration has been obtained by means of fraud, wilful misstatement or
suppression of facts
Further, the proper officer shall not cancel the registration without giving the person
an opportunity of being heard.
(ii) Section 49(8) of CGST Act, 2017 prescribes the chronological order in which the
liability of a taxable person has to be discharged:
(a) self -assessed tax and other dues for the previous tax periods have to be
discharged first.
(b) self -assessed tax and other dues for the current tax period have to be
discharged next.
(c) Once these two steps are exhausted, thereafter any other amount payable
including demand determined under section 73 or section 74 is to be discharged.
In other words, the liability if any, arising out of demand notice and adjudication
proceedings comes last. This sequence has to be mandatorily followed.
The expression “other dues” referred above mean interest, penalty, fee or any
other amount payable under the Act or the rules made thereunder.
10. (i) Supply, under section 7 of the CGST Act, 2017, inter alia,
• includes import of services for a consideration
• even if it is not in the course or furtherance of business.
Thus, although the import of service for consideration by Miss. Shriniti Kaushik is
not in course or furtherance of business, as the vaastu consultancy service has
been availed in respect of residence, it would amount to supply.
(ii) Section 7 of the CGST Act, 2017 read with Schedule I provides that import of
services by a taxable person from a related person located outside India, without
consideration is treated as supply if it is provided in the course or furtherance of
business.
In the given case, import of service without consideration by Miss Shriniti from her
brother – Mr. Varun [brother, being member of the same family, is a related person]
will not be treated as supply as it is not in course or furtherance of business.
(iii) Section 7 of the CGST Act, 2017 read with Schedule I provides that import of
services by a taxable person from a related person located outside India, without

consideration is treated as supply if it is provided in the course or furtherance of

business.
Thus, import of service without consideration by Miss Shriniti from her brother –
Mr. Varun (brother, being member of the same family, is a related person) will be
treated as supply as she receives vaastu consultancy service for her business
premises, i.e. in course or furtherance of business.
Note: GST law is in its nascent stage and has been subject to frequent
changes. Although many clarifications have been issued in the last six
months by way of FAQs or otherwise, many issues continue to arise on
account of varying interpretations on several of its provisions. Therefore,
alternate answers may be possible for the above questions depending upon
the view taken.

PAPER – 5: ADVANCED ACCOUNTING
PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

For November, 2018 EXAMINATION
A. Applicable for November, 2018 Examination

I. Applicability of the Companies Act, 2013 and other Legislative Amendments
The relevant notified Sections of the Companies Act, 2013 and legislative
amendments including relevant Notifications / Circulars / Rules / Guidelines issued
by Regulating Authority up to 30th April, 2018 will be applicable for November, 2018
Examination.
II. Maintenance of Statutory Liquidity Ratio (SLR)
Section 24 and Section 56 of the Banking Regulation Act, 1949 – Maintenance
of SLR and holdings of SLR in HTM category
It has been decided to reduce the SLR requirement of banks from 20.0 per cent of
their Net Demand and Time Liabilities (NDTL) to 19.5 per cent from the fortnight
commencing October 14, 2017 as announced in the Fourth Bi-monthly Monetary
Policy Statement, 2017-18 on October 04, 2017. The related notification is
DBR.No.Ret.BC.91/12.02.001/2017-18 dated October 4, 2017.
Currently, the banks are permitted to exceed the limit of 25 per cent of the total
investments under HTM category, provided the excess comprises of SLR securities
and total SLR securities held under HTM category are not more than 20.5 per cent of
NDTL. In order to align this ceiling on the SLR holdings under HTM category with the
mandatory SLR, it has been decided to reduce the ceiling from 20.5 per cent to 19.5
per cent in a phased manner, i.e. 20 per cent by December 31, 2017 and 19.5 per
cent by March 31, 2018.
As per extant instructions, banks may shift investments to/from HTM with the approval
of the Board of Directors once a year, and such shifting will normally be allowed at
the beginning of the accounting year. In order to enable banks to shift their excess
SLR securities from the HTM category to AFS/HFT to comply with instructions as
indicated in paragraph 3 above, it has been decided to allow such shifting of the
excess securities and direct sale from HTM category. This would be in addition to the
shifting permitted at the beginning of the accounting year, i.e., in the month of April.
Such transfer to AFS/HFT category as well as sale of securities from HTM category,
to the extent required to reduce the SLR securities in HTM category in accordance
with the regulatory instructions, would be excluded from the 5 per cent cap prescribed
for value of sales and transfers of securities to/from HTM category under paragraph
2.3 (ii) of the Master Circular on Prudential Norms for Classification, Valuation and
Operation of Investment Portfolio by Banks.

III. Maintenance of Cash Reserve Ratio (CRR)

Reserve Bank of India has decided to reduce the Cash Reserve Ratio (CRR) of
Scheduled Commercial Banks by 25 basis points from 4.25 per cent to 4.00 per cent
of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight
beginning February 09, 2013 vide circular DBOD.No.Ret.BC.76/ 12.01.001 /2012-13
dated January 29, 2013. The Local Area Banks shall also maintain CRR at 3.00 per
cent of its net demand and time liabilities up to February 08, 2013 and 4.00 per cent of
its net demand and time liabilities from the fortnight beginning from February 09, 2013.
Note: Chapter No.2, 13 and 14 have been revised and the revised chapters have been
web hosted at the BoS Knowledge Portal.
B. Not applicable for November, 2018 examination
I - Non-Applicability of Ind AS for November, 2018 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February, 2015, for compliance by certain class of companies. These
Ind AS are not applicable for November, 2018 Examination.
II- The Guidance Note on ‘Accounting for Depreciation in Companies in context of schedule
II to the Companies Act, 2013 is not applicable November 2018 Examination.
PART – II : QUESTIONS AND ANSWERS
QUESTIONS
Employee Stock Option Plans

1. (a) JKS Ltd. has its share capital divided into equity shares of ` 10 each. On 1.1.2018 it
granted 5,000 employee stock options at ` 30 per share, when the market price was
` 50 per share. The options were to be exercised between 15 th March, 2018 and
31st March, 2018. The employees exercised their options for 3,600 shares only and
the remaining options lapsed. The company closes its books on 31 st March every
year. You are required to prepare journal entries (with narration) as would appear in
the books of the company up to 31 st March, 2018.
(b) At the beginning of year 1, the enterprise grants 1,000 stock options to each member
of its sales team, conditional upon the employees remaining in the employment of the
enterprise for three years, and the team selling more than 50,000 units of a particular
product over the three-year period. The fair value of the stock options is ` 15 per
option at the date of grant.
During year 2, the enterprise increases the sales target to 1,00,000 units. By the end
of year 3, the enterprise has sold 55,000 units, and the stock options do not vest.

PAPER – 5 : ADVANCED ACCOUNTING 3
Twelve members of the sales team have remained in service for the three-year period.
You are required to examine and give comment in light of the relevant Guidance Note
that whether the company should recognise the expenses on the base of options
granted or not.
Also state will your answer differ if, instead of modifying the performance target, the
enterprise had increased the number of years of service required for the stock options
to vest from three years to ten years.
Buy Back of Securities
2. The following summarized Balance Sheet Pee Limited (a non-listed company) furnishes as
at 31st March, 2017:
` `
Equity & Liabilities
Share capital:
Authorised capital
2,50,000 Equity shares of ` 10 each fully paid up 25,00,000
5,000, 10% Preference shares of ` 100 each 5,00,000 30,00,000
Issued and subscribed capital:
3,000, 10% Preference shares of ` 100 each 3,00,000 27,00,000
(Issued two months back for the purpose of buy back)
Reserves and surplus:
Capital reserve 10,00,000
Revenue reserve 25,00,000
Securities premium 27,00,000
Profit and loss account 35,00,000 97,00,000
Current liabilities
Trade payables 13,00,000
Other current Liabilities 3,00,000 16,00,000
1,40,00,000
Assets
Tangible assets
Building 25,00,000
Machinery 31,00,000
furniture 20,00,000 76,00,000

Non-current Investments 30,00,000

Current assets
Inventory 12,00,000
cash and bank balance 15,00,000 34,00,000
1,40,00,000
On 1st April, 2017, the company passed a resolution to buy back 20% of its equity capital
@ ` 60 per share. For this purpose, it sold all of its investment for ` 25,00,000.
The company achieved its target of buy-back. You are required to:
(a) Give necessary journal entries and
(b) Give the Balance Sheet of the company after buy back of shares.
Differential rights
3. (a) Explain the meaning of equity shares with differential rights. Can preference shares
be also issued with differential rights?
(b) E, F, G and H hold Equity Capital in Alpha Co. in the proportion of 30:30:20:20. S,
T,U and V hold preference share capital in the proportion of 40:30:10:20. If the paid
up capital of the company is ` 120 Lakh and Preference share capital is ` 60 Lakh,
You are required to calculate their voting rights in case of resolution of winding up of
the company.
Underwriting of Shares
4. M/s. Abhi Ltd. issued 2,00,000 shares of ` 10 each at a premium of ` 20. The entire issue
was underwritten as follows:
Amit – 1,20,000 shares (Firm underwriting 10,000 shares)
Sumit – 50,000 shares (Firm underwriting 6,000 shares)
Lalit – 30,000 shares (Firm underwriting 4,000 shares)
Unmarked applications received by the company (excluding firm underwriting) were 25,000
shares.
The marked applications (excluding firm underwriting) were as follows:
Amit – 80,000 shares
Sumit – 35,000 shares
Lalit– 24,800 shares
Commission payable to underwriters is at 5% of the issue price. The underwriting contract
provides that credit for unmarked applications be given to the underwriters in proportion to

the shares underwritten and benefit of firm underwriting is to be given to individual

underwriters. You are required to :
(i) Calculate the liability of each underwriter (number of shares);
(ii) Compute the amounts payable to or due from underwriters; and
(iii) Prepare Journal Entries in the books of the company relating to underwriting.
Amalgamation of Companies
5. The financial position of two companies Alex Ltd. and Beta Ltd. as on 31st March, 2017
was as under:
Assets ALex Ltd. (`) Beta Ltd. ( `)
Goodwill 1,40,000 70,000
Building 8,40,000 2,80,000
Machinery 14,00,000 4,20,000
Inventory 7,00,000 4,90,000
Trade receivables 5,60,000 2,80,000
Cash at Bank 1,40,000 56,000
37,80,000 15,96,000
Liabilities ALex Ltd. (`) Beta Ltd. ( `)
Share Capital:
Equity Shares of ` 10 each 28,00,000 8,40,000
8% Preference Shares of ` 100 each 2,80,000 –
10% Preference Shares of ` 100 each – 2,80,000
General Reserve 1,96,000 1,96,000
Retirement Gratuity fund 1,40,000 56,000
Trade payables 3,64,000 2,24,000
37,80,000 15,96,000
Beta Ltd.is absorbed by Alex Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 8%
Preference Shares of Alex Ltd.
(b) Goodwill of Beta Ltd. is valued at ` 1,40,000, Buildings are valued at ` 4,20,000 and
the Machinery at ` 4,48,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be
created @ 7.5%.
(d) Equity Shareholders of Beta Ltd. will be issued Equity Shares of Alex Ltd. @ 5%
premium.

You are required to:

(a) Prepare necessary Ledger Accounts to close the books of Beta Ltd.
(b) Prepare the acquisition entries in the books of Alex Ltd.
(c) Also prepare the Balance Sheet after absorption as at 31st March, 2017.
Internal Reconstruction of a Company
6. The summarized balance sheet of Z Limited as on 31 st March, 2017 is as under:
Liabilities Amount in `
Share Capital:
9%, 20,000 Preference shares of ` 100 each fully paid up 20,00,000
Reserves and Surplus:
Profit and Loss Account (14,60,000)
Non-Current Liabilities:
10% Secured Debentures 16,00,000
Current Liabilities:
Interest due on Debentures 1,60,000
Trade Payables 5,00,000
Loan from Directors 1,00,000
Bank Overdraft 1,00,000
Provision for Tax 1,00,000
Total 81,00,000
Assets:
Non-Current Assets:
Fixed Assets:
(a) Tangible Assets:
Land & Buildings 30,00,000
Plant & Machinery 12,50,000
Furniture & Fixtures 2,50,000
(b) Intangible Assets:
Goodwill 10,00,000
Patents 5,00,000
Current Assets:
Trade Investments 5,00,000
Trade Receivables 5,00,000

Inventory 10,00,000
Discount on issue of debentures 1,00,000
Total 81,00,000
Note: Preference dividend is in arrears for last 2 years.
Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover ` 1,00,000
and ` 60,000 were also payable to Mr. Y and Mr. Z respectively as trade payable.
The following scheme of reconstruction has been agreed upon and duly approved.
(i) All the equity shares to be converted into fully paid equity shares of ` 5.00 each.
(ii) The Preference shares be reduced to ` 50 each and the preference shareholders
agreed to forego their arrears of preference dividends, in consideration of which 9%
preference shares are to be converted into 10% preference shares.
(iii) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt including
interest on debentures. Mr. Y and Mr. Z also agreed to pay ` 1,00,000 and ` 60,000
respectively in cash and to receive new 12% debentures for the balance amount.
(iv) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to forgo
their 50% claims.
(v) Directors also waived 60% of their loans and accepted equity shares for the balance.
(vi) Capital commitments of ` 3.00 lacs were cancelled on payment of ` 15,000 as
penalty.
(vii) Directors refunded ` 1,00,000 of the fees previously received by them.
(viii) Reconstruction expenses paid ` 15,000.
(ix) The taxation liability of the company was settled for ` 75,000 and was paid
immediately.
(x) The Assets were revalued as under:
Land and Building 32,00,000
Plant and Machinery 6,00,000
Inventory 7,50,000
Trade Receivables 4,00,000
Furniture and Fixtures 1,50,000
Trade Investments 4,50,000
You are required to prepare necessary journal entries for all the above-mentioned
transactions including amounts to be written off of Goodwill, Patents, Loss in Profit and
Loss account arid Discount on issue of debentures. And also, prepare Bank Account and
Reconstruction Account.

Liquidation of Company
7. Liquidation of YZ Ltd. commenced on 2 nd April, 2018. Certain creditors could not receive
payments out of the realisation of assets and out of the contributions from A list
contributories. The following are the details of certain transfers which took place in 2017
and 2018:
Shareholders No. of Date of Ceasing to be a Creditors remaining
Shares member unpaid and outstanding
transferred on the date of such
transfer
A 2,000 1st March, 2017 ` 5,000
P 1,500 1st May, 2017 ` 3,300
Q 1,000 1st October, 2017 ` 4,300
R 500 1st November, 2017 ` 4,600
S 300 1st February, 2018 ` 6,000
All the shares were of ` 10 each, ` 8 per share paid up. You are required to compute the
amount to be realized from the various persons listed above ignoring expenses and
remuneration to liquidator etc.
Financial Reporting of Insurance Companies
8. From the following information furnished to you by Bharat Insurance Co. Ltd., you are
required to prepare Journal entries relating to unexpired risk reserve and show in columnar
form “Unexpired Risks Reserve Account” for 2017.
(a) On 1.04.2016, it had reserve for unexpired risks amounting to ` 55 crores. It
comprised of ` 21 crores in respect of marine insurance business, ` 28 crores in
respect of fire insurance business and ` 6 crores in respect of miscellaneous
insurance business.
(b) Bharat Insurance Co. Ltd. creates reserves at 100% of net premium income in respect
of marine insurance policies and at 50% of net premium income in respect of fire and
miscellaneous income policies.
(c) During 2016 -17, the following business was conducted:
(` in crores)
Marine Fire Miscellaneous
Premium collected from:
(a) Insured in respect of policies issued 22.0 46.00 13.00
(Direct Business)

(b) Other insurance companies in

respect of risks undertaken:
Received during the year 11.5 9.2 5.5
Receivable – 01.04.16 7.0 3.0 1.5
Receivable – 31.03.17 4.0 1.0 1.0
Premium paid/payable to other insurance 7.5 5.3 8.0
companies on business ceded
Financial Reporting of Banking Companies
9. From the following information, calculate the amount of Provisions and Contingencies and
prepare Profit and Loss Account of ‘Supreme Bank Limited’ for the year ending
31st March, 2018:
Income ` in lakhs Expenditure ` in lakhs
Interest and discount 1,835 Interest expended 1,136
Interest accrued on Investments 8 Printing & stationery 18
Commission, exchange and 12 Repair & maintenance 2
brokerage
Profit on sale of investments 1 Payment to and 80
provision for employees
(salaries, bonus etc.)
Rent received 2 Other Operating 5
Expenses
` in lakhs
(i) Rebate on bills discounted to be provided for 3
(ii) Classifications of Advances:
Standard Assets 4,100
Sub-Standard Assets (fully secured) 380
Doubtful Assets not covered by security 155
Doubtful Assets covered by security
For 1 year 10
More than 1 year, but less than 2 years 18
More than 2 year, but less than 3 years 35
More than 3 year 22

Loss Assets 50
(iii) Make tax provision @ 35% of the profit.
(iv) Profit and Loss Account (Cr.) brought forward from the previous year 65
NBFCs
10. Lokraj Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring
consumer durables. The following information is extracted from its books for the year
ended 31st March, 2017:
Interest Overdue but recognized in Net Book Value of
Asset Funded Profit & loss A/c Assets outstanding
Period Overdue Interest Amount
(` in crore) (` in crore)
Washing Machines Upto 12 months 450.00 20,550.00
Air Conditioners For 24 months 25.25 675.00
Music systems For 30 months 15.25 225.00
Refrigerators For 21 months 60.15 1,050.00
Air purifiers Upto 12 months 18.25 980.00
LCD Televisions For 45 months 420.00 21,200.00
You are required to calculate the amount of additional provision to be made.
Mutual Funds
11. (a) A Mutual Fund has launched a new scheme “All Purpose Scheme”. The Mutual Fund
Asset Management Company wishes to invest 25% of the NAV of the Scheme in an
unrated debt instrument of a company Y Ltd. which has been paying above average
returns for the past many years. The promoters of the company seek your
professional advice in light of the Regulations of SEBI. You are required to examine
and give your opinion.
(b) Omega Mutual Fund is registered with SEBI and having its registered office at
Mumbai. The fund is in the process of finalizing the annual statement of accounts of
one of its open ended mutual fund schemes. From the information furnished below,
you are required to prepare a statement showing the movement of unit holders’ funds
for the financial year ended 31 st March, 2018.
` ’000
Opening Balance of net assets 18,00,000
Net Income for the year (Audited) 1,27,500

12,75,300 units issued during 2017-2018 1,44,750

11,28,450 units redeemed during 2017-2018 1,06,980
The par value per unit is ` 100
Valuation of Goodwill
12. From the following information relating to Radheshyam Ltd., you are required to calculate
the value of godddwill as per(a) equity approach and (b) long term fund approach.
(i) Current cost of capital employed ` 41,60,000
(ii) Profit earned after current cost adjustments ` 6,88,000
(iii) 12% long term loan ` 18,00,000
(iv) Normal rate of return:
On Equity capital employed 14%
On Long-term capital employed 12.5%
Consolidation financial statements
13 The Summarised Balance Sheet of X Ltd. and its subsidiary Y Ltd. as on 31 st March, 2017
are as follows:
Particulars Amounts as at 31 st March, 2017
X Ltd. Y Ltd.
(` in lakhs) (` in lakhs)
LIABILITIES
Share Capital:
Authorised 20,000 8,000
Issues and subscribed:
Equity share of ` 10 each, fully paid up 15,000 6,000
15% preference shares of ` 10 each, fully paid 4,000 1,000
up
General Reserves 2,500 1,450
Profit & Loss Account 2,750 1,250
Trade payables 1,646 1,027
25,896 10,727
ASSESTS
Land & Building 3,550 1,510
Plant & Machinery 5,275 3,600

Furniture & Fittings 1,945 655

Investment in Y Ltd.:
450 Lakh Equity share in Y Ltd. purchased on 1 st
April, 2016 6,800
Inventory 4,142 2,520
Trade Receivables 3,010 1,882
Cash and Bank Balance 1,174 560
25,896 10,727
The following information is also given to you
(a) 10% dividend on Equity shares was declared by Y Ltd. on 31 st March, 2016 for the
year ended 31 st March, 2016. X Ltd. credited the dividend received to its Profit &
Loss Account.
(b) Credit Balance of Profit & Loss account of Y Ltd. as on 1 st April, 2016 was ` 650
Lakhs.
(c) General Reserve of Y Ltd. stood at same ` 1,450 Lakhs as on 1 st April, 2016.
(d) Y Ltd.’s Plant & machinery showed a balance of ` 4,000 Lakh on 1st April 2016. At
the time of purchase of shares in Y Ltd., X Ltd. revalued Y’s Ltd. Plant & Machin ery
upward by ` 1,000 Lakh.
(e) Included in Trade Payables of Y Ltd. are ` 50 Lakh for goods supplied by X Ltd.
(f) On 31st March, 2017, Y’s ltd. inventory included goods for ` 150 lakhs which it had
purchased from X Ltd. X Ltd. sold goods to Y Ltd. at cost plus 25%.
You are required to prepare a Consolidated Balance Sheet of X Ltd. and its subsidiary Y
Ltd. as on 31st March, 2017 giving working notes.
Guidance Notes
14. R Ltd. is engaged in manufacture and sale of industrial and consumer products. One of its
division deals in Leasing of properties. This division is continuously engaged in leasing of
properties. The accountant showed the rent arising from leasing of properties as ‘other
income’ in the Statement of Profit and Loss. You are required to advise whether the
classification of the rental income made by the accountant is correct or not in light of
Schedule III to the companies Act, 2013?
Accounting standards
AS 7 Construction Contracts
15. (a) Uday Constructions undertake to construct a·bridge for the Government of Uttar
Pradesh. The construction commenced during the financial year ending 31.03.2018
and is likely to be completed by the next financial year. The contract is for a fixed

price of ` 12 crores with an escalation clause. You are given the following information
for the year ended 31.03.2018:
Cost incurred upto 31.03.2018 ` 4 crores
. Cost estimated to complete the contract ` 6 crores
Escalation in cost by 5% and accordingly the contract price· is increased by 5%.
You are required to ascertain the state of completion and compute the amount of
revenue and profit to be recognized for the year as per AS-7.
AS 9 Revenue Recognition
(b) Fashion Limited is engaged in manufacturing of readymade garments. They provide
you the following information on 31 st March, 2017:
(i) On 15th January, 2017 garments worth ` 4,00,000 were sent to Anand on
consignment basis of which 25% garments unsold were lying with Anand as on
31st March, 2017.
(ii) Garments worth ` 1,95,000 were sold to Shine boutique on 25th March, 2017
but at the request of Shine Boutique, these were delivered on 15th April, 2017.
(iii) On 1st November, 2016 garments worth ` 2,50,000 were sold on approval basis.
The period of approval was 4 months after which they were considered sold.
Buyer sent approval for 75% goods up to 31st December, 2016 and no approval
or disapproval received for the remaining goods till 31st March, 2017.
You are required to advise the accountant of Fashion Limited, the amount to be
recognised as revenue in above cases in the context of AS 9
AS 18 Related Party Transactions
16. (a) Sun Ltd. sold goods for ` 50 lakhs to Moon Ltd. during financial year ended 31st
March 2017 at normal selling price followed by Sun Ltd. The Managing Director of
Sun Ltd. holds 75% shares of Moon Ltd. The Chief accountant of Sun Ltd contends
that these sales need not require a different treatment from the other sales made by
the company and hence no disclosure is necessary as per the accounting standard.
You are required to examine and advise whether the contention of the Chief
Accountant correct?
AS 19 Leases
(b) ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being ` 10,00,000.
The economic life of the machine as well as the lease term is 4 years. At the end of
each year, ABC Ltd. pays ` 3,50,000. The lessee has guaranteed a residual value of
` 40,000 on expiry of the lease to the lessor. However, XYZ Ltd. estimates that the

residential value of the machinery will be ` 35,000 only. The implicit rate of return is
16% and PV factors at 16% for year 1, year 2, year 3 and year 4 are 0.8621, 0.7432,
0.6407 and 0.5523 respectively. You are required to calculate the value of machinery
to be considered by ABC Ltd. and the finance charges for each year.
AS 20 Earnings Per Share
17 The following information is available for TON Ltd. for the accounting year 2015-16 and
2016-17:
Net profit for `
Year 2015-16 35,00,000
Year 2016-17 45,00,000
No of shares outstanding prior to right issue 15,00,000 shares.
Right issue : One new share for each 3 shares outstanding i.e. 5,00,000 shares.
: Right Issue price ` 25
: Last date to exercise rights 31st July, 2016
Fair value of one equity share immediately prior to exercise of rights on 31.07.2016 is
` 35.
You are required to compute:
(i) Basic earnings per share for the year 2015-16.
(ii) Restated basic earnings per share for the year 2015-16 for right issue.
(iii) Basic earnings per share for the year 2016-17.
AS 24 Discontinuing Operations
18 Give four examples of activities that do not necessarily satisfy criterion (a) of paragraph 3
of AS 24, but that might do so in combination with other circumstances
AS 26 Intangible Assets
19 Desire Ltd. acquired a patent at a cost of ` 1,00,00,000 for a period of 5 years and the
product life-cycle is also 5 years. The company capitalized the cost and started amortizing
the asset on SLM. After two years it was found that the product life-cycle may continue for
another 5 years from then. The net cash flows from the product during these 5 years were
expected to be ` 45,00,000, ` 42,00,000, ` 40,00,000, ` 38,00,000 and ` 35,00,000.
Patent is renewable and company changed amortization method from 3 rd year (i.e. from
SLM to ratio of expected new cash flows).
You are required to compute the amortization cost of the patent for each of the years
(1st year to 7 th year).

AS 29 Provisions, Contingent Liabilities and Contingent Assets

20 M/s. XYZ Ltd. is in a dispute with a competitor company. The dispute is regarding alleged
infringement of Copyrights. The competitor has filed a suit in the court of law seeking
damages of ` 200 lakhs.
The Directors are of the view that the claim can be successfully resisted by the Company.
How would the matter be dealt in the annual accounts of the Company in the light of AS
29? You are required to explain in brief giving reasons for your answer.
SUGGESTED ANSWERS
1. (a) Journal Entries in the books of JKS Ltd

` `
15.03.2018 Bank A/c (3,600 x ` 30) Dr. 1,08,000
to 31.3.18 Employee compensation expense A/c
(3,600 x ` 20) Dr. 72,000
To Equity share capital A/c
(3600 x ` 10) 36,000
To Securities premium A/c
(3600 x ` 40) 1,44,000
(Being shares issued to the employees
against the options vested to them in
pursuance of Employee Stock Option Plan)
31.3.18 Profit and Loss A/c Dr. 72,000
To Employee compensation expenses A/c 72,000
(Being transfer of employee compensation
expenses transfer to Profit and Loss
Account)
Working Notes:
1. No entry is passed when stock options are granted to employees. Hence, no
entry will be passed on 1 st January 2018;
2. Market Price = ` 50 per share and as stock option price = ` 30, Hence, the
difference ` 50 – ` 30 = ` 20 per share is equivalent to employee cost or
employee compensation expense and will be charged to P &L Account as such
for the number of options exercised i.e. 3,600 shares.

(b) Paragraph 19 of the Guidance Note on Share Based Payments requires, for a
performance condition that is not a market condition, the enterprise to recognize the
services received during the vesting period based on the best available estimate of
the number of shares or stock options expected to vest and to revise that estimate, if
necessary, if subsequent information indicates that the number of shares or stock
options expected to vest differs from previous estimates. On vesting date, the
enterprise revises the estimate to equal the number of instruments that ultimately
vested. However, paragraph 24 of the Guidance Note requires, irrespective of any
modifications to the terms and conditions on which the instruments were granted, or
a cancellation or settlement of that grant of instruments, the enterprise to recognize,
as a minimum, the services received, measured at the grant date fair value of the
instruments granted, unless those instruments do not vest because of failure to satisfy
a vesting condition (other than a market condition) that was specified at grant date.
Furthermore, paragraph 26(c) of the Guidance Note specifies that, if the enterprise
modifies the vesting conditions in a manner that is not beneficial to the employee, the
enterprise does not take the modified vesting conditions into account when applying
the requirements for treatment of vesting conditions as specified in Guidance Note.
Therefore, because the modification to the performance condition made it less likely
that the stock options will vest, which was not beneficial to the employee, the
enterprise takes no account of the modified performance condition when recognizing
the services received. Instead, it continues to recognize the services received over
the three-year period based on the original vesting conditions. Hence, the enterprise
ultimately recognizes cumulative remuneration expense of ` 1,80,000 over the three-
year period (12 employees × 1,000 options × ` 15).
The same result would have occurred if, instead of modifying the performance target,
the enterprise had increased the number of years of service required for the stock
options to vest from three years to ten years. Because such a modification would
make it less likely that the options will vest, which would not be beneficial to the
employees, the enterprise would take no account of the modified service condition
when recognizing the services received. Instead, it would recognize the services
received from the twelve employees who remained in service over the original three-
year vesting period.
2. Journal Entries in the books of Pee Limited
Particulars Dr. Cr.
(i) Bank Account Dr. 25,00,000
Profit and Loss Account Dr. 5,00,000
To Investment Account 30,00,000
(Being the investments sold at loss for the purpose of
buy back)

(ii) Equity Share capital account Dr. 4,80,000

Premium payable on buy back Account Dr. 24,00,000
To Equity shares buy back Account 28,80,000
(Being the amount due on buy back)
(iii) Securities Premium Account Dr. 24,00,000
To Premium payable on buy back Account 24,00,000
(Being the premium payable on buy back adjusted
against securities premium account)
(iv) Revenue Reserve Account Dr. 1,80,000
To Capital Redemption Reserve Account 1,80,000
(Being the amount equal to nominal value of equity shares
bought back out of free reserves transferred to capital
redemption reserve account (4,80,000-3,00,000)
(v) Equity shares buy-back Account Dr. 28,80,000
To Bank Account 28,80,000
(Being the payment made on buy back)
Balance Sheet of Pee Limited as on 1 st April, 2017
(After buy back of shares)
Particulars Note No (`)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 22,20,000
(b) Reserves and Surplus 2 68,00,000
(2) Current Liabilities 16,00,000
Total 1,06,20,000
II. Assets
(1) Non-current assets
(a) Fixed assets 76,00,000
(2) Current assets 30,20,000
Total 1,06,20,000
Notes to Accounts
`
1 Share Capital
Authorised capital: 30,00,000

Issued and subscribed capital:

3,000 10% Preference shares of ` 100 each fully paid 3,00,000 22,20,000
up
Reconciliation of share capital
Opening no. of shares 2,40,000
Buy back of shares during the year 48,000 1,92,000
During the year the company has buy back of 48,000
shares
2 Reserves and Surplus
Capital reserve 10,00,000
Capital redemption reserve 1,80,000
Securities Premium 27,00,000
Less: Premium payable on buy back of shares 24,00,000 3,00,000
Revenue reserve 25,00,000
Less: Transfer to Capital redemption reserve 1,80,000 23,20,000
Profit and loss A/c 35,00,000
Less: Loss on investment 5,00,000 30,00,000 68,00,000
3. (a) Equity shares with Differential Rights means the share with dissimilar rights as to
dividend, voting or otherwise. No; the preference shares cannot be issued with
differential rights.
(b) E, F,G and H hold Equity capital is held by in the proportion of 30:30:20:20 and S,T,U
and V hold preference share capital in the proportion of 40:30:10:20. As the paid up
equity share capital of the company is ` 120 Lakhs and Preference share capital is `
60 Lakhs & (2:1), then relative weights in the voting right of equity shareholders and
preference shareholders will be 2/3 and 1/3. The respective voting right of various
shareholders will be
E = 2/3X30/100 = 3/15
F = 2/3X30/100 = 3/15
G = 2/3X20/100 = 2/15
H = 2/3X20/100 = 2/15
S = 1/3X40/100 = 2/15
T = 1/3X30/100 = 1/10
U = 1/3X10/100 = 1/30

V = 1/3X20/100 = 1/15
4. (i) Computation of total liability of underwriters in shares
(In shares)
Amit Sumit lalit Total
Gross liability 1,20,000 50,000 30,000 2,00,000
Less: Marked applications
(excluding firm underwriting) (80,000) (35,000) (24,800) (1,39,800)
40,000 15,000 5,200 60,200
Less: Unmarked applications in the
ratio of gross liabilities of
12:5:3 (excluding firm (15,000) (6,250) (3,750) (25,000)
underwriting)
25,000 8,750 1,450 35,200
Less: Firm underwriting (10,000) (6,000) (4,000) (20,000)
15,000 2,750 (2,550) 15,200
Less: Surplus of Lalit adjusted by
Amit and Sumit in 12:5 (1,800) (750) 2,550
Net liability 13,200 2,000 - 15,200
Add: Firm underwriting 10,000 6,000 4,000 20,000
Total liability 23,200 8,000 4,000 35,200
(ii) Calculation of amount payable to or due from underwriters
Amit Sumit Lalit Total
Total Liability in shares 23,200 8,000 4,000 35,200
Amount receivable @ ` 30 from 6,96,000 2,40,000 1,20,000 10,56,000
underwriter (in `)
Less: Underwriting Commission (1,80,000) (75,000) (45,000) (3,00,000)
payable @ 5% of ` 30 (in `)
Net amount receivable (in `) 5,16,000 1,65,000 75,000 7,56,000
(iii) Journal Entries in the books of the company (relating to underwriting)
` `
1. Amit Dr. 6,96,000
Sumit Dr. 2,40,000
Lalit Dr. 1,20,000

To Share Capital A/c 3,52,000

To Securities Premium A/c 7,04,000
(Being allotment of shares to underwriters)
2. Underwriting commission A/c Dr. 3,00,000
To Amit 1,80,000
To Sumit 75,000
To Lalit 45,000
(Being amount of underwriting commission
payable)
3. Bank A/c Dr. 7,56,000
To Amit 5,16,000
To Sumit 1,65,000
To Lalit 75,000
(Being net amount received by
underwriters for shares allotted less
underwriting commission)
5. (a) In the Books of Beta Ltd.
Realisation Account
` `
To Sundry Assets 15,96,000 By Retirement Gratuity 56,000
Fund
To Preference Shareholders By Trade payables 2,24,000
(Premium on 28,000 (Purchase
Redemption) Consideration)
To Equity Shareholders By Alex Ltd. 14,84,000
(Profit on Realisation) 1,40,000 _______
17,64,000 17,64,000
Equity Shareholders Account
` `
To Equity Shares of Alex Ltd. 11,76,000 By Share Capital 8,40,000
By General Reserve 1,96,000
By Realisation Account
(Profit on
_______ Realisation) 1,40,000
11,76,000 11,76,000

Preference Shareholders Account

` `
To 8% Preference Shares 3,08,000 By Preference Share Capital 2,80,000
of Alex Ltd.
By Realisation Account
(Premium on Redemption of
Preference Shares) 28,000
3,08,000 3,08,000
Alex Ltd. Account
` `
To Realisation Account 14,84,000 By 8% Preference Shares 3,08,000
_______ By Equity Shares 11,76,000
14,84,000 14,84,000
(b)
In the Books of Alex Ltd.
Journal Entries
Dr. Cr.
` `
Business Purchase A/c Dr. 14,84,000
To Liquidators of Beta Ltd. Account 14,84,000
(Being business of Beta Ltd. taken over)
Goodwill Account Dr. 1,40,000
Building Account Dr. 4,20,000
Machinery Account Dr. 4,48,000
Inventory Account Dr. 4,41,000
Trade receivables Account Dr. 2,80,000
Bank Account Dr. 56,000
To Retirement Gratuity Fund Account 56,000
To Trade payables Account 2,24,000
To Provision for Doubtful Debts Account 21,000
To Business Purchase A/c 14,84,000
(Being Assets and Liabilities taken over as per
agreed valuation).

Liquidators of Beta Ltd. A/c Dr. 14,84,000

To 8% Preference Share Capital A/c 3,08,000
To Equity Share Capital A/c 11,20,000
To Securities Premium A/c 56,000
(Being Purchase Consideration satisfied as
above).
(c)
Balance Sheet of Alex Ltd. (after absorption) as at 31 st March, 2017
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 45,08,000
B Reserves and Surplus 2 2,52,000
2 Non-current liabilities
A Long-term provisions 1,96,000
3 Current liabilities
A Trade Payables 5,88,000
B Short term provision 21,000
Total 55,65,000
Assets
1 Non-current assets
A Fixed assets
Tangible assets 3 31,08,000
Intangible assets 2,80,000
2 Current assets
A Inventories 11,41,000
B Trade receivables 8,40,000
C Cash and cash equivalents 1,96,000
Total 55,65,000

Notes to accounts:
`
1 Share Capital
Equity share capital
3,92,000 Equity Shares of ` 10 each fully paid (Out of above 39,20,000
1,12,000 Equity Shares were issued in consideration other than
for cash)
Preference share capital
5,880 8% Preference Shares of ` 100 each (Out of above 3,080 5,88,000
Preference Shares were issued in consideration other than for
cash)
Total 45,08,000
2 Reserves and Surplus
Securities Premium 56,000
General Reserve 1,96,000
Total 2,52,000
3 Tangible assets
Buildings 12,60,000
Machinery 18,48,000
Total 31,08,000
Working Notes:
Purchase Consideration: `
Goodwill 1,40,000
Building 4,20,000
Machinery 4,48,000
Inventory 4,41,000
Cash at Bank 56,000
Less: Liabilities:
Retirement Gratuity (56,000)
Trade payables (2,24,000)
Net Assets/ Purchase Consideration 14,84,000
To be satisfied as under:

Preference Shareholders of Beta Ltd. 2,80,000

Add: 10% Premium 28,000
Satisfied by issue of 3,080 no. of 8% Preference Shares of Alex Ltd. 3,08,000
Equity Shareholders of Beta Ltd. to be satisfied by issue of 1,12,000
Equity Shares of Alex Ltd. at 5% Premium 11,76,000
Total 14,84,000
6. Journal Entries in the Books of Z Ltd.
Dr. Cr.
` `
(i) Equity Share Capital (` 10 each) A/c Dr. 50,00,000
To Equity Share Capital (` 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of
` 10 each fully paid into same number of fully paid
equity shares of ` 5 each as per scheme of
reconstruction.)
(ii) 9% Preference Share Capital (` 100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (` 50 each) A/c 10,00,000
(Being conversion of 9% preference share of
` 100 each into same number of 10% preference
share of ` 50 each and claims of preference
dividends settled as per scheme of
reconstruction.)
(iii) 10% Secured Debentures A/c Dr. 9,60,000
Trade payables A/c Dr. 1,00,000
Interest on Debentures Outstanding A/c Dr. 96,000
Bank A/c Dr. 1,00,000
To 12% Debentures A/c 6,78,000
(Being ` 11,56,000 due to Y (including trade
payables) cancelled and 12% debentures allotted
for the amount after waving 50% as per scheme of
reconstruction.)
(iv) 10% Secured Debentures A/c Dr. 6,40,000

Trade Payables 60,000

Interest on debentures outstanding A/c 64,000
Bank A/c 60,000
To 12% debentures A/c 4,42,000
(Being ` 7,64,000 due to Z (including trade
payables) cancelled and 12% debentures allotted
for the amount after waving 50% as per scheme of
reconstruction.)
(v) Trade payables A/c Dr. 1,70,000
(Being remaining trade payables sacrificed 50% of
their claim.)
(vi) Directors' Loan A/c Dr. 1,00,000
To Equity Share Capital (` 5) A/c 40,000
To Reconstruction A/c 60,000
(Being Directors' loan claim settled by issuing
12,000 equity shares of ` 5 each as per scheme
of reconstruction.)
(vii) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made towards penalty of 5% for
cancellation of capital commitments of ` 3 Lakhs.)
(viii) Bank A/c Dr. 1,00,000
(Being refund of fees by directors credited to
reconstruction A/c)
(ix) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of reconstruction expenses)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 75,000
To Reconstruction A/c 25,000
(Being payment of tax liability in full settlement
against provision for tax)

(xi) Land and Building A/c Dr. 2,00,000

(Being appreciation in value of Land & Building
recorded)
(xii) Reconstruction A/c Dr. 49,85,000
To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Profit and Loss A/c 14,60,000
To Discount on issue of Debentures A/c 1,00,000
To Plant and Machinery A/c 6,50,000
To Furniture & Fixture A/c 1,00,000
To Trade Investment A/c 50,000
To Inventory A/c 2,50,000
To Trade Receivables A/c 1,00,000
To Capital Reserve (bal. fig.) 7,75,000
(Being writing off of losses and reduction in the
value of assets as per scheme of reconstruction,
balance of reconstruction A/c transfer to Capital
Reserve.)
Bank Account
` `
To Reconstruction (Y) 1,00,000 By Balance b/d 1,00,000
To Reconstruction(Z) 60,000 By Reconstruction A/c 15,000
To Reconstruction A/c 1,00,000 (capital commitment
(refund of earlier fees by penalty paid)
directors)
By Reconstruction A/c 15,000
(reconstruction
expenses paid)
By Provision for tax A/c 75,000
(tax paid)
By Balance c/d 55,000
2,60,000 2,60,000

Reconstruction Account
` `
To Bank (penalty) 15,000 By Equity Share
To Bank (reconstruction 15,000 Capital A/c 25,00,000
expenses)
To Goodwill 10,00,000 By 9% Pref. Share
To Patent 5,00,000 Capital A/c 10,00,000
To P & L A/c 14,60,000 By Mr. Y (Settlement) 5,78,000
To Discount on issue of 1,00,000 By Mr. Z (Settlement) 3,82,000
debentures
To P & M 6,50,000 By Trade Payables A/c 1,70,000
To Furniture and Fixtures 1,00,000 By Director’s loan 60,000
To Trade investment 50,000 By Bank 1,00,000
To Inventory 2,50,000 By Provision for tax 25,000
To Trade Receivables 1,00,000 By Land and Building 2,00,000
To Capital Reserve (bal. fig.) 7,75,000
50,15,000 50,15,000
7. Statement of liabilities of B list contributories
Share- No. of Maximum Division of Liability as on
holders shares liability (upto ` 2 per 1.5. 1.10. 1.11. 1.2. Total
transferred share) 2017 2017 2017 2018
` ` ` ` ` `
P 1,500 3,000 1,500    1,500
Q 1,000 2,000 1,000 555   1,555
R 500 1,000 500 278 188  966
S 300 600 300 167 112 21 600
3,300 6,600 3,300 1,000 300 21 4,621
Working Note:
Date Cumulative liability Increase in liability Ratio of no. of shares
held by the members
1.5.2017 3,300  30 : 20 : 10 : 6
1.10.2017 4,300 1,000 20 : 10 : 6

1.11.2017 4,600 300 10 : 6

1.2.2018 6,000 1,400 Only S
Liability of S has been restricted to the maximum allowable limit of ` 600, therefore amount
payable by S is restricted to ` 21 only, on 1.2.2018.
Notes:
1. A will not be liable to pay to the outstanding creditors since he transferred his shares
prior to one year preceding the date of winding up.
2. P will not be responsible for further debts incurred after 1st May, 2017 (from the date
when he ceases to be member). Similarly, Q and R will not be responsible for the
debts incurred after the date of their transfer of shares.
8. In the books of Bharat Insurance Co. Ltd.
Journal Entries
Date Particulars (` in crores)
Dr. Cr.
1.4.2016 Unexpired Risk Reserve (Fire) A/c Dr. 28
Unexpired Risk Reserve (Marine) A/c Dr. 21
Unexpired Risk Reserve (Miscellaneous) A/c Dr. 6
To Fire Revenue Account 28
To Marine Revenue Account 21
To Miscellaneous Revenue Account 6
(Being unexpired risk reserve brought forward
from last year)
31.03.2017 Marine Revenue A/c Dr. 23
To Unexpired Risk Reserve A/c 23
(Being closing reserve for unexpired risk
created at 100% of net premium income
amounting to ` 23 crores i.e.22+8.5-7.5)
Fire Revenue A/c Dr. 23.95
To Unexpired Risk Reserve A/c 23.95
created at 50% of net premium income of
` 47.90 crores i.e.46+7.2-5.3)

Miscellaneous Revenue A/c Dr. 5

To Unexpired Risk Reserve A/c 5
created at 50% net premium income of
`10 crores i.e. 13+5-8)
Unexpired Risk Reserve Account

Date Particulars Marine Fire Misc Date Particulars Marine Fire Misc
(`) . (`) (`) (`) . (`)
1.4.2016 To Revenue A/c 21 28 6 1.4.2016 By Balance b/d 21 28 6
31.3.2017 To Balance c/d 23 23.95 5 31.3.2017 By Revenue A/c 23 23.95 5
44 51.95 11 44 51.95 11
Working Note:
Premium from other insurance companies in respect of risk undertaken:
Received during the year 11.5 9.2 5.5
Less: Receivable – 01.04.16 (7.0) (3.0) (1.5)
Add: Receivable – 31.03.17 4.0 1.0 1.0
8.5 7.2 5.0
9. (a) Calculation of Provisions and Contingencies
(i) Provision on Non-Performing Assets
`in lakhs
Particulars Amount % of Provision
Provision
Standard Assets 4,100 0.4 16.40
Sub-standard Assets 380 15 57
Doubtful Assets not covered by security 155 100 155
Doubtful Assets covered by security:
For 1 year 10 25 2.50
More than 1 year, but less than 2 years 18 40 7.20
More than 2 years & but less than 3 years 35 40 14
More than 3 years 22 100 22
Loss Assets 50 100 50
4,770 324.10

(ii) Calculation of Provision for tax = 35% of [Total Income – Total Expenditure
(excluding tax)]
= 35% of [(1,840 +15) – (1,136+105+324.10)] = ` 101.47 lakhs
Total Provisions and contingencies = Provisions on NPAs + Provisions for tax
= 324.10 + 101.47 = ` 425.57 lakhs
(b) Supreme Bank Limited
Profit and Loss Account for the year ended 31st March, 2018
Particulars Schedule No. ` in lakhs
I Income
Interest Earned 13 1,840
Other Income 14 15
1,855
II Expenditures
Interest Expended 1,136
Operating Expenses 16 1,05
Provisions & Contingencies 425.57
1,666.57
III Profit/Loss
Net Profit/Loss for the year 188.43
Profit/Loss brought forward 65
253.43
IV Appropriations
Transfer to Statutory Reserve @ 25% of 188.43 47.11
Transfer to Other Reserves -
Balance carried over to Balance Sheet 206.32
253.43
Schedule 13 – Interest earned
I Interest & Discount (1,835 – 3) 1,832
II Interest on Investments 8
1,840
Schedule 14- other income
Commission, exchange and brokerage 12

Profit on sale of investments 1

Rent received 2
15
Schedule 16- Operating Expenses
Printing & stationery 18
Repair & maintenance 2
Payment to and provision for employees (salaries, bonus 80
etc.)
Other Operating Expenses 5
105
10. On the basis of the information given, in respect of hire purchase and leased assets,
additional provision shall be made as under:
(` in crore)
(a) Where hire charges are Nil -
overdue upto 12 months
(b) Where hire charges are 10% of the net book value 172.50
overdue for more than 12 10% x (675+1,050)
months but upto 24 months
(c) Where hire charges are 40 percent of the net book value 90
overdue for more than 24 40% x 225
months but upto 36 months
(d) Where hire charges or lease 70 percent of the net book value 14,840
rentals are overdue for more 70% x 21,200
than 36 months but upto 48
months
Total 15,102.50
11. (a) The Seventh Schedule of SEBI (Mutual funds) Regulations, 1996 states that a mutual
fund scheme shall not invest more than 10% of its NAV in unrated debt instruments
issued by a single issuer and the total investment in such instruments shall not exceed
25% of the NAV of the scheme. All such investments shall be made with the prior
approval of the Board of Trustees and the Board of Asset Management Company. It
also states that a mutual fund scheme shall not invest more than 10% of its NAV in
debt instruments issued by a single issuer which are rated not below investment grade
by an authorised credit rating agency. Such investment limit may be extended to 12%
of the NAV of the scheme with the prior approval of the Board of Trustees and the
Board of Asset Management Company. Accordingly, if the debts instruments of Y Ltd.
are unrated then mutual fund Asset Management Company (AMC) cannot invest more

than 10% of its NAV in those instruments.

(b) Statement showing the Movement of Unit Holders’ Funds
(` ’000)
Opening balance of net assets 18,00,000
Add: Par value of units issued (12,75,300 × ` 100) 1,27,530
Net Income for the year 1,27,500
Transfer from Reserve/Equalisation fund (Refer working note) 23,085
20,78,115
Less: Par value of units redeemed (11,28,450 × ` 100) (1,12,845)
Closing balance of net assets (as on 31 st March, 2018) 19,65,270
Working Note:
Particulars Issued Redeemed
Units 12,75,300 11,28,450
` 000 ` 000
Par value 1,27,530 1,12,845
Sale proceeds / Redemption value 1,44,750 1,06,980
Profit transferred to Reserve / Equalisation Fund 17,220 5,865
Balance in Reserve / Equalisation Fund (Issued & 23,085
Redeemed)
12.
`
a Profit for equity fund after current cost adjustment 6,88,000
b Profit (as per Long-term fund approach)
Profit for equity fund 6,88,000
Add: Interest on Long-term loan 2,16,000 9,04,000
c Current cost of capital employed (by Equity approach) 41,60,000
d Capital employed as per Long-term fund approach
Current cost of capital employed (by Equity approach) 41,60,000
Add: 12% Long term loan 18,00,000 59,60,000
e Value of Goodwill

(A) By Equity Approach

Capitalised value of Profit as per equity
49,14,286
approach = (6,88,000/14) x 100
Less: Capital employed as per equity approach (41,60,000)
Value of Goodwill 7,54,286
(B) By Long-Term Fund Approach
Capitalized value of Profit as per Long-term
72,32,000
fund approach = (9,04,000 /12.5) x 100
Less: Capital employed as per Long-term fund
approach (59,60,000)
Value of Goodwill 12,72,000
13. Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd.as on 31 st March, 2017
Particulars Note No. ` in lakhs
I Equity and Liabilities
1 Shareholders’ Funds
(a) Share Capital 1 19,000
(b) Reserves and Surplus 2 5,620
2. Minority interest 3 3,400
3. Current Liabilities
(a) Trade payables 4 2,623
Total 30,643
II Assets
1 Non Current Assets
Fixed Assets
(i) Tangible Assets 5 17,435
2 Current Assets
(a) Inventories 6 6,632
(b) Trade Receivables 7 4,842
(c) Cash and Cash equivalents 8 1,734
30,643

Notes to Accounts
` in lakhs
1. Share Capital
Issued, Subscribed and Paid up (1,500 lakh Equity 15,000
Shares of ` 10 each fully paid up)
400 lakh Preference Shares of ` 10 each fully paid up 4,000
19,000
2. Reserves and Surplus
Credit Balance of Profit & Loss Account 2,750
Less: Capital Receipt wrongly credited (Dividend @ 10% 450
on ` 4500 Lakh Equity Shares)
2,300
Add: Share in Y Ltd. Revenue Profit (Working Note i) 825
3,125
Less: Unrealised Profit (Working Note iv) 30 3,095
Capital Reserve (Working Note iii) 25

General Reserve 2,500 2,525
5,620
3. Minority interest
100 Lakh Preference Shares of ` 10 fully paid up 1,000
150 Lakh Equity Shares of `10 each fully paid up 1,500 2,500
Share in Revenue Profits (Working Note i) 275
Share in Capital Profit (working Note ii) 625 900
3,400
4. Trade payables
X Ltd. 1,646
Y Ltd. 1,027
2,673
Less: Mutual owing 50 2,623
5. Tangible Assets
Land & Building
X Ltd. 3,550

Y Ltd 1,510 5,060

Plant & Machinery
X Ltd. 5,275
Y Ltd (Working note v) 4,500 9,775
Furniture & Fixtures
X Ltd. 1,945
Y Ltd 655 2,600
17,435
6. Inventories
X Ltd. 4,142
Y Ltd 2,520
6,662
Less: Unrealized Profit (30) 6,632
7. Trade Receivables
X Ltd. 3,010
Y Ltd 1,882
4,892
Less: Mutual Owing 50 4,842
8. Cash & cash Equivalents
X Ltd. 1,174
Y Ltd 560 1,734
Working Notes
(i) Calculation of Revenue Profits
Y’s Ltd Profit & Loss Account
` in lakh ` in lakh
To Equity Dividend By Balance b/d 650
10 % of 6,000 lakh 600 By Net profit for the
year (Bal Fig.) 1,200
To balance c/d 1,250
1,850 1,850

Depreciation provided on Plant & Machinery

Balance as on 1 st April, 2016 4,000
Less Balance as 31 st March 2017 3,600
400
Hence rate of Depreciation = 400/4000 x 100 10%
Net Profit for the year ended 31 st March 2017 1,200
Less: Additional Depreciation 100
Revenue Profit 1,100
X Ltd’s share- 1100 x 450/600 825
Y Ltd’s share = 1100 x150/600 275
(ii) Calculation of Capital Profits
Profit & Loss Balance as on 1st April, 2016 650
Less: Dividend Paid 600
50
Add: General Reserve as on 1 st April, 2016 1,450
Add: Profit on Revaluation of Plant & machinery 1,000
Capital Profit 2,500
X Ltd’s Share in Capital Profit = 2,500 x 450/600 1,875
Y Ltd’s Share in Capital Profit = 2,500 x 150/600 625
(iii) Calculation of Capital Reserve
Paid up value of 450 Lakh equity shares 4,500
Add: Share in Capital Profits 1,875
6,375
Amount Paid to acquire the 450 Lakh Equity Shares 6,800
Less: Dividend received out of Pre acquisition profits 450
6,350
Capital Reserve = 6,375-6,350 25
(iv) Unrealised Profit
` 150 Lakh x 25/125* = 30 lakh
(v) Plant & Machinery of Y Ltd.
Balance as on 31 st March, 2017 3,600
Add: Addition due to revaluation 1,000

Less: Depreciation on additional Value of Plant & Machinery 100 900

@ 10 %
4,500
* ` 150 lakh considered as cost to Y ltd.
14. As per para 4 of the ‘General Instructions for preparation of Statement of Profit and Loss’
given in the Schedule III to the Companies Act, 2013, ‘other income’ does not include
operating income. However, rental income arising from leasing of properties is an
operating income as it is income from one of the divisions of R Ltd. There is a separate
head for operating income i.e. ‘Revenue from Operations’. Therefore, classification of rent
income as ‘Other income’ in the Statement of Profit and Loss will not be correct. It would,
infact, be shown under the heading ‘Revenue from Operations’ only as per the Guidance
Note on Schedule III to the Companies Act, 2013.
15. (a)
` in crore
Cost of construction of bridge incurred upto 31.3.18 4.00
Add: Estimated future cost 6.00
Total estimated cost of construction 10.00
Contract Price (12 crore x 1.05) 12.60 crore
Stage of completion
Percentage of completion till date to total estimated cost of construction
= (4/10)100 = 40%
Revenue and Profit to be recognized for the year ended 31 st March, 2018 as per
AS 7
Proportion of total contract value recognized as revenue = Contract price x
percentage of completion
=` 12.60 crore x 40% = ` 5.04 crore
Profit for the year ended 31 st March, 2018 = ` 5.04 crore less ` 4 crore = 1.04 crore
(b) As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions are
fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred to
the buyer and the seller retains no effective control of the goods transferred to
a degree usually associated with ownership; and

(ii) no significant uncertainty exists regarding the amount of the consideration that
will be derived from the sale of the goods.
Case (i): 25% goods lying unsold with consignee should be treated as closing
inventory and sales should be recognized for ` 3,00,000 (75% of ` 4,00,000) for the
year ended on 31.3.17. In case of consignment sale revenue should not be
recognized until the goods are sold to a third party.
Case (ii): The sale is complete but delivery has been postponed at buyer’s request.
Fashion Ltd. should recognize the entire sale of `1,95,000 for the year ended
31st March, 2017.
Case (iii): In case of goods sold on approval basis, revenue should not be recognized
until the goods have been formally accepted by the buyer or the buyer has done an
act adopting the transaction or the time period for rejection has elapsed or where no
time has been fixed, a reasonable time has elapsed. Therefore, revenue should be
recognized for the total sales amounting ` 2,50,000 as the time period for rejecting
the goods had expired.
Thus total revenue amounting ` 7,45,000 (3,00,000+1,95,000+2,50,000) will be
recognized for the year ended 31 st March, 2017 in the books of Fashion Ltd.
16. (a) As per AS 18 ‘Related Party Disclosures’, Enterprises over which a key management
personnel is able to exercise significant influence are related parties. This includes
enterprises owned by directors or major shareholders of the reporting enterprise and
enterprise that have a member of key management in common with the reporting
enterprise.
In the given case, Sun Ltd. and Moon Ltd are related parties and hence disclosure of
transaction between them is required irrespective of whether the transaction was
done at normal selling price.
Hence the contention of Chief Accountant of Sun Ltd is wrong.
(b) As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a
liability at the inception of a finance lease. Such recognition should be at an amount
equal to the fair value of the leased asset at the inception of lease. However, if the
fair value of the leased asset exceeds the present value of minimum lease payment
from the standpoint of the lessee, the amount recorded as an asset and liability should
be the present value of minimum lease payments from the standpoint of the lessee.
Value of machinery
In the given case, fair value of the machinery is ` 10, 00,000 and the net present
value of minimum lease payments is ` 10,01,497 (Refer working Note). As the
present value of the machine is more than the fair value of the machine, the machine
and the corresponding liability will be recorded at fair value of ` 10,00,000.

Calculation of finance charges for each year

Year Finance Payment Reduction in Outstanding
charge (`) (`) outstanding liability (`)
liability (`)
1st year beginning - - - 10,00,000
End of 1 st year 1,60,000 3,50,000 1,90,000 8,10,000
End of 2 nd year 1,29,600 3,50,000 2,20,400 5,89,600
End of 3 rd year 94,336 3,50,000 2,55,664 3,33,936
End of 4 th year 53,430 3,50,000 2,96,570 37,366
Working Note:
Present value of minimum lease payments
Annual lease rental x PV factor
` 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523) ` 9,79 ,405
Present value of guaranteed residual value
` 40,000 x (0.5523) ` 22,092
` 10,01,497
17. Computation of Basic Earnings per Share
Year Year
2015-16 2016-17
(`) (`)
(i) EPS for the year 2015-16 as originally reported
= Net profit for the year attributable to equity share
holder / weighted average number of equity shares
outstanding during the year
` 35,00,000/ 15,00,000 shares 2.33
(ii) EPS for the year 2015-16 restated for the right issue
` 35,00,000/15,00,0000 shares x 1.08 2.16
(iii) EPS for the year 2016-17 (including effect of right
issue) ` 45,00,000 / [(15,00,000x1.08 x 4/12) +
(20,00,000x8/12)] 2.40
Working Notes:
1. Computation of theoretical ex-rights fair value per share =

The difference between this figure and guaranteed residual value is due to rounding off.

Fair value of all outstanding shares immediately prior to exercise of rights+total amount received from exercise
Number of shares outstanding prior to exercise + number of shares issued in the exercise
[(` 35 x15,00,000) + (` 25 x 5,00,000)] / (15,00,000 + 5,00,000) = ` 32.5

2. Computation of adjustment factor
Fair value per share prior to exercise of rights
Theoretical ex-rights value per share
= ` 35 /32.50 = 1.08 (approx.)

18. Para 3 of AS 24 “Discontinuing Operations” explains the criteria for determination of
discontinuing operations. According to Paragraph 9 of AS 24, examples of activities that
do not necessarily satisfy criterion (a) of paragraph 3, but that might do so in combination
with other circumstances, include:
(i) Gradual or evolutionary phasing out of a product line or class of service;
(ii) Discontinuing, even if relatively abruptly, several products within an ongoing line of
business;
(iii) Shifting of some production or marketing activities for a particular line of business
from one location to another; and
(iv) Closing of a facility to achieve productivity improvements or other cost savings.
An example in relation to consolidated financial statements is selling a subsidiary whose
activities are similar to those of the parent or other subsidiaries.
19 Desire Limited amortised ` 20,00,000 per annum for the first two years i.e. ` 40,00,000.
The remaining carrying cost can be amortized during next 5 years on the basis of net cash
flows arising from the sale of the product. The amortisation may be found as follows:
Year Net cash flows ` Amortization Ratio Amortization Amount `
I - 0.200 20,00,000
II - 0.200 20,00,000
III 45,00,000 0.225 13,50,000
IV 42,00,000 0.21 12,60,000
V 40,00,000 0.20 12,00,000
VI 38,00,000 0.19 11,40,000
VII 35,00,000 0.175 10,50,000
Total 2,00,00,000 1.000 1,00,00,000
It may be seen from above that from third year onwards, the balance of carrying amount
i.e., ` 60,00,000 has been amortized in the ratio of net cash flows arising from the product
of Desire Ltd.

20. As per AS 29, 'Provisions, Contingent Liabilities and Contingent Assets’, a provision should
be recognized when
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognized.
In the given situation, since, the directors of the company are of the opinion that the claim
can be successfully resisted by the company, therefore there will be no outflow of the
resources. Hence, no provision is required. The company will disclose the same as
contingent liability by way of the following note:
“Litigation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed copyrights and is seeking damages of
` 200 lakhs. However, the directors are of the opinion that the claim can be successfully
resisted by the company.”

PAPER – 6: AUDITING AND ASSURANCE
PART – I : ACADEMIC UPDATE

(Legislative Amendments / Notifications / Circulars / Rules / Guidelines issued by
Regulating Authority)
1. In exercise of powers conferred by section 143 read with sub-sections (1) and (2) of section
469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby inserted the
clause “(d) whether the company had provided requisite disclosures in its f inancial
statements as to holdings as well as dealings in Specified Bank Notes during the period
from 8th November, 2016 to 30th December, 2016 and if so, whether these are in
accordance with the books of accounts maintained by the company.”, after clause (c) in
rule 11 of the Companies (Audit and Auditors) Rules, 2014.
2. In exercise of the powers conferred by section 139 read with sub-sections (1) and (2) of
section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby
makes the following rules further to amend the Companies (Audit and Auditors) Rules,
2014, namely:—
“In the Companies (Audit and Auditors) Rules, 2014, in rule 5, in clause (b), for the word
“twenty”, the word “fifty” shall be substituted”
The impact of this amendment on the study material would be :
1. Point no. (II) - para 3.1 on page number 10.13 be read as -
all private limited companies having paid up share capital of rupees fifty crores or
more;
2. In diagram appearing at page number 10.14, line in the middle box be read as -
all private limited companies having paid up share capital ≥ Rs. 50 crore
3. Additional requirement for claiming exemption under section 141(3)(g) for counting ceiling
limit is available only if such company has not committed default in filing its financial
statements under section 137 and annual returns under section 92 of the Act to the
registrar as per notification dated 13 June 2017.
4. Notification No. G.S.R. 583(E) stated that requirements of reporting under section 143(3)(i)
read Rule 10 A of the Companies (Audit and Auditors) Rules, 2014 of the Companies Act
2013 shall not apply to certain private companies. Clarification regarding applicability of
exemption given to certain private companies under section 143(3)(i) (vide circular no.
08/2017) clarified that the exemption shall be applicable for those audit reports in respect
of financial statements pertaining to financial year, commencing on or after 1st April, 2016,
which are made on or after the date of the said notification.
5. As per provisions of Section 143(3)(i) of companies Act, the Auditor Report shall state
whether the Company has adequate internal financial controls system in place and the

operating effectiveness of such controls. MCA vide its notification dated 13th June 2017
(G.S.R. 583(E)) amended the notification of the Government of India, In the ministry of
corporate of affair, vide no G.S.R. 464(E) dated 05th June 2015 providing exemption from
Internal Financial Controls to following private companies which is one person Company
(OPC) or a Small Company; or Which has turnover less than ` 50 Crores as per latest
audited financial statement or which has aggregate borrowings from banks or financial
institutions or any body corporate at any point of time during the financial year less then
` 25 Crore. The above exemption shall be applicable to a private company which has not
committed a default in filing its financial statements under section 137 of the Companies
Act 2013 or annual return under section 92 of Act with the Registrar. Further, in section
143 of the principal Act,(i) in sub-section (1), in the proviso, for the words "its subsidiaries",
at both the places, the words "its subsidiaries and associate companies" shall be
substituted; (ii) in sub-section (3), in clause (i), for the words "internal financial controls
system", the words "internal financial controls with reference to financial statements" shall
be substituted; (iii) in sub-section (14), in clause (a), for the words "cost accountant in
practice", the words "cost accountant" shall be substituted.
6. Amendment due to Companies (Amendment) Act 2017
(i) As per section 140(2), the auditor who has resigned from the company shall file
within a period of 30 days from the date of resignation, a statement in the prescribed
Form ADT–3 (as per Rule 8 of CAAR) with the company and the Registrar, and in
case of the companies referred to in section 139(5) i.e. Government company, the
auditor shall also file such statement with the Comptroller and Auditor-General of
India, indicating the reasons and other facts as may be relevant with regard to his
resignation. In case of failure the auditor shall be punishable with fine which shall not
be less than fifty thousand rupees or the remuneration of the auditor, whichever is
less, but which may extend to five lakh rupees as per section 140(3).
(ii) Under sub-section (3) of section 141 along with Rule 10 of the Companies (Audit and
Auditors) Rules, 2014 a person who, directly or indirectly, renders any service
referred to in section 144 to the company or its holding company or its subsidiary
company shall not be eligible for appointment as an auditor of a company
(iii) By virtue of notification dated February 23, 2018, the Central Government has
exempted the companies engaged in defence production to the extent of application
of relevant Accounting Standard on segment reporting.
(iv) The Order for reopening of accounts not to be made beyond eight financial years
immediately preceding the current financial year unless and until Government has,
under Section 128(5) issued a direction for keeping books of account longer than 8
years, reopening of accounts can be made for such longer period.
(v) As per Section 143(3)(i) The auditors of all the companies shall report on the
adequacy of internal financial control systems and its operating effectives. As per the

PAPER – 6: AUDITING AND ASSURANCE 3
recent amendment, the auditors are required to report on Internal Financial Control
with reference to financial statements.
(vii) Right of access by the auditor of a holding company to the accounts and records of
the associate company, whose accounts are required to be consolidated. As per the
recent amendment, this right has been extended to associates also.
(viii) Section 147 of the Companies Act, 2013 prescribes following punishments for
contravention:
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened,
the company shall be punishable with fine which shall not be less than twenty-
five thousand rupees but which may extend to five lakh rupees and every officer
of the company who is in default shall be punishable with imprisonment for a
term which may extend to one year or with fine which shall not be less than ten
thousand rupees but which may extend to one lakh rupees, or with both.
(2) If an auditor of a company contravenes any of the provisions of section 139
section 143, section 144 or section 145, the auditor shall be punishable with fine
which shall not be less than twenty-five thousand rupees but which may extend
to five lakh rupees or four times the remuneration of the auditor, which ever
is less.
It may be noted that if an auditor has contravened such provisions knowingly or
willfully with the intention to deceive the company or its shareholders or creditors
or tax authorities, he shall be punishable with imprisonment for a term which
may extend to one year and with fine which shall not be less than fifty
thousand rupees but which may extend to twenty-five lakh rupees or eight
times the remuneration of the auditor, which every is less
(3) Where an auditor has been convicted under sub-section (2), he shall be liable
to:-
(i) refund the remuneration received by him to the company;
(ii) and pay for damages to the company statutory bodies or authorities or to
members or the creditors of the Company for loss arising out of incorrect
or misleading statements of particulars made in his audit report.
(4) The Central Government shall, by notification, specify any statutory body or
authority of an officer for ensuring prompt payment of damages to the company
or the persons under clause (ii) of sub-section (3) and such body, authority or
officer shall after payment of damages the such company or persons file a report
with the Central Government in respect of making such damages in such manner
as may be specified in the said notification.
(5) Where, in case of audit of a company being conducted by an audit firm, it is
proved that the partner or partners of the audit firm has or have acted in a

fraudulent manner or abetted or colluded in an fraud by, or in relation to or by,

the company or its directors or officers, the liability, whether civil criminal as
provided in this Act or in any other law for the time being in force, for such act
shall be the partner or partners concerned of the audit firm and of the firm jointly
and severally Provided that in case of criminal liability of an audit firm, in respect
of liability other than fine, the concerned partner or partners, who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any fraud
shall only be liable.
PART – II: QUESTIONS AND ANSWERS
QUESTIONS
1. State with reason (in short) whether the following statements are true or false:
(i) The preparation of financial statements does not involve judgment by management
in applying the requirements of the entity’s applicable financial reporting framework
to the facts and circumstances of the entity.
(ii) Audit procedures used to gather audit evidence may be effective for detecting an
intentional misstatement.
(iii) An audit is an official investigation into alleged wrongdoing.
(iv) The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative.
(v) There is no relation between Audit Plans and knowledge of the client’s business
(vi) Planning is not a discrete phase of an audit, but rather a continual and iterative
process.
(vii) Audit documentation is a substitute for the entity’s accounting records.
(viii) An appropriate time limit within which to complete the assembly of the final audit file
is ordinarily not more than 30 days after the date of the auditor’s report.
(ix) When the auditor has determined that an assessed risk of material misstatement at the
assertion level is a significant risk, the auditor shall not perform substantive procedures
that are specifically responsive to that risk.
(x) The SAs ordinarily refer to inherent risk and control risk separately .
Chapter 1- Nature, Objective and Scope of Audit
1. (a) The firm’s system of quality control should include policies and procedures
addressing each element. Explain
(b) The chief utility of audit lies in reliable financial statements on the basis of which the
state of affairs may be easy to understand. Apart from this obvious utility, there are

other advantages of audit. Some or all of these are of considerable value even to
those enterprises and organisations where audit is not compulsory. Explain.
2. (a) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are inherent
limitations of an audit. Explain
(b) The relationship between auditing and law is very close one. Discuss.
Chapter 2- Audit Strategy, Audit Planning and Audit Programme
3. (a) The auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner. Plans should be based on knowledge of the client’s
business. Explain
(b) The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan.
Discuss stating the the process of establishing the overall audit strategy that would
assist the auditor to determine key matters.
4. (a) The auditor shall update and change the overall audit strategy and the audit plan as
necessary during the course of the audit. Explain
(b) The auditor shall document the overall audit strategy, the audit plan and any
significant changes made during the audit engagement to the overall audit strategy
or the audit plan, and the reasons for such changes. Explain
Chapter 3- Audit Documentation and Audit Evidence
5. (a) The form, content and extent of audit documentation depend on factors such as the
size and complexity of the entity, the nature of the audit procedures to be performed
etc. Explain in detail.
(b) The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the
date of the auditor’s report. Explain
6. (a) Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and
evaluating audit evidence. Explain
(b) A higher level of assurance may be sought about the operating effectiveness of
controls when the approach adopted consists primarily of tests of controls, in
particular where it is not possible or practicable to obtain sufficient appropriate audit
evidence only from substantive procedures. Explain.
7. (a) Irrespective of the assessed risks of material misstatement, the auditor shall design
and perform substantive procedures for each material class of transactions, account
balance, and disclosure. Analyse and explain.

(b) External confirmation procedures frequently are relevant when addressing asserti ons
associated with account balances and their elements, but need not be restricted to
these items. Analyse and Explain.
Chapter 4- Risk Assessment and Internal Control
8. (a) While obtaining audit evidence about the effective operation of internal control s, the
auditor considers how they were applied, the consistency with which they were
applied during the period and by whom they were applied. The concept of effective
operation recognises that some deviations may have occurred. Analyse and Explain.
(b) A Flow Chart is a graphic presentation of each part of the company’s system of
internal control. Explain elaborating each and every aspect about flow chart.
9 (a) The auditor can formulate his entire audit programme only after he has had a
satisfactory understanding of the internal control systems and their actual operation.
Analyse and explain.
(b) Auditor’s reporting on internal financial controls is a requirement specified in the Act
and, therefore, will apply only in case of reporting on financial statements prepared
under the Act and reported under Section 143. Explain stating clearly the auditor’s
responsibility for reporting on internal financial controls over financial reporting.
Chapter 5- Fraud and Responsibilities of the Auditor in this Regard.
10. Misappropriation of Assets involves the theft of an entity’s assets and is often perpetrated
by employees in relatively small and immaterial amounts. However, it can also involve
management who are usually more able to disguise or conceal misappropriations in way s
that are difficult to detect. Misappropriation of assets can be accomplished in a variety of
ways. Analyse and Explain
11. The risk of not detecting a material misstatement resulting from fraud is higher than the
risk of not detecting one resulting from error. Explain
Chapter 6- Audit in an Automated Environment
12. When a business operates in a more automated environment it is likely that we will see
several business functions and activities happening within the systems.
Explain stating the points that an auditor should consider to substantiate the above.
13. In today’s digital age when companies rely on more and more on IT systems and networks
to operate business, the amount of data and information that exists in these systems is
enormous. Explain stating uses of Data analytics.
Chapter 7- Audit Sampling
14. While planning the audit of S Ltd. you want to apply sampling techniques. What are the
risk factors you should keep in mind?

15. The auditor shall evaluate the results of the sample and whether the use of audit sampling
has provided a reasonable basis for conclusions about the population that has been tested.
Explain
Chapter 8 - Analytical Procedures
16. Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time. Explain
17. The relationships between individual financial statements items traditionally considered in
the audit of business entities may not always be relevant in the audit of governments or
other non-business public sector entities. Analyse and Explain
Chapter 9 - Audit of Items of Financial Statements
18. Explain with examples the audit procedure to establish the existence of intangible fixed
assets as at the period- end.
19. Verification of liabilities is as important as that of assets, considering if any liability is
omitted (or understated) or overstated, the Balance Sheet would not show a true and fair
view of the state of affairs of the entity. Explain stating also criteria for a liability to be
classified as current liability.
Chapter 10 - The Company Audit
20. (a) When the accounts of the branch are audited by a person other than the company’s
auditor, there is need for a clear understanding of the role of such auditor and the
company’s auditor in relation to the audit of the accounts of the branch and the audit
of the company as a whole. Explain
(b) Why Central Government permission is required, when the auditors are to be removed
before expiry of their term, but the same is not needed when the auditors are changed
after expiry of their term?
21. Explain the duties of Auditor to inquire under Section 143(1) of the Companies Act, 2013.
22. Explain Auditor’s right to-
(a) Report to the members of the company on the accounts examined by him
(b) Obtain information and explanation from officers
Chapter 11 - Audit Report
23. The auditor’s report shall include a section with a heading “Responsibilities of Management
for the Financial Statements.” SA 200 explains the premise, relating to the responsibilities
of management and, where appropriate, those charged with governance, on which an audit
in accordance with SAs is conducted. Explain
24. Explain clearly the purpose of communicating key audit matters.

Chapter 12- Bank Audit

25. The auditor should examine the efficacy of various internal controls over advances in case
of Banks to determine the nature, timing and extent of his substantive procedures. Explain
what is included in the internal controls over advances.
Chapter 13- Audit of Different Types of Entities
26. You have been appointed as an auditor of an NGO, briefly state the points on which you
would concentrate while planning the audit of such an organisation?
27. The general transactions of a hospital include patient treatment, collection of receipts,
donations, capital expenditures. You are required to mention special points of
consideration while auditing such transactions of a hospital?
SUGGESTED ANSWERS / HINTS
1. (i) Incorrect: The preparation of financial statements involves judgment by management

in applying the requirements of the entity’s applicable financial reporting framework
to the facts and circumstances of the entity. In addition, many financial statement
items involve subjective decisions or assessments or a degree of uncertainty, and
there may be a range of acceptable interpretations or judgments that may be made.
(ii) Incorrect: Fraud may involve sophisticated and carefully organised schemes
designed to conceal it. Therefore, audit procedures used to gather audit evidence
may be ineffective for detecting an intentional misstatement that involves, for
example, collusion to falsify documentation which may cause the auditor to believe
that audit evidence is valid when it is not. The auditor is neither trained as nor
expected to be an expert in the authentication of documents.
(iii) Incorrect: An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such as the power of
search, which may be necessary for such an investigation.
(iv) Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid basis
for the auditor to omit an audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the
conduct of the audit. Notwithstanding this, the relevance of information, and there by
its value, tends to diminish over time, and there is a balance to be struck between the
reliability of information and its cost.
(v) Incorrect: The auditor should plan his work to enable him to conduct an effective
audit in an efficient and timely manner. Plans should be based on knowledge of the
client’s business

(vi) Correct: According to SA-300, “Planning an Audit of Financial Statements”, planning

is not a discrete phase of an audit, but rather a continual and iterative process that
often begins shortly after (or in connection with) the completion of the previous audit
and continues until the completion of the current audit engagement.
(vii) Incorrect: The auditor may include copies of the entity’s records (for example,
significant and specific contracts and agreements) as part of audit documentation.
Audit documentation is not a substitute for the entity’s accounting records.
(viii) Incorrect: SQC 1 “Quality Control for Firms that perform Audits and Review of
Historical Financial Information, and other Assurance and related services”, requires
firms to establish policies and procedures for the timely completion of the assembly
of audit files. An appropriate time limit within which to complete the assembly of the
final audit file is ordinarily not more than 60 days after the date of the auditor’s report.
(ix) Incorrect: When the auditor has determined that an assessed risk of material
misstatement at the assertion level is a significant risk, the auditor shall perform
substantive procedures that are specifically responsive to that risk. When the
approach to a significant risk consists only of substantive procedures, those
procedures shall include tests of details.
(x) Incorrect: The SAs do not ordinarily refer to inherent risk and control risk separately,
but rather to a combined assessment of the “risks of material misstatement”.
However, the auditor may make separate or combined assessments of inherent and
control risk depending on preferred audit techniques or methodologies and practical
considerations. The assessment of the risks of material misstatement may be
expressed in quantitative terms, such as in percentages, or in non-quantitative terms.
In any case, the need for the auditor to make appropriate risk assessments is more
important than the different approaches by which they may be made.
Chapter 1- Nature, Objective and Scope of Audit
1. (a) The firm’s system of quality control should include policies and procedures
addressing each of the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.

(b) The chief utility of audit lies in reliable financial statements on the basis of which
the state of affairs may be easy to understand. Apart from this obvious utility, there
An examination
of the system of
accounting and
internal control
Verification of
Reporting to the
the authenticity
appropriate
and validity of
person/body
transaction
Checking the Comparison of the

result shown by Items of FS with the
the profit and loss underlying record
Verification of the
Verification of
title, existence and
the liabilities
value of the assets
are other advantages of audit. Some or all of these are of considerable value even to
those enterprises and organisations where audit is not compulsory, these advantages
are given below:

safeguards the
interest of persons
not associated with
the management
Government may
acts as a moral check
require audited and
certified statement on the employees
help in the
detection of helpful in settling
wastages and liability for taxes
losses
useful for
settling trade
disputes
(a) It safeguards the financial interest of persons who are not associated with
the management of the entity, whether they are partners or shareholders,
bankers, FI’s, public at large etc.
(b) It acts as a moral check on the employees from committing defalcations or
embezzlement.
(c) Audited statements of account are helpful in settling liability for taxes,
negotiating loans and for determining the purchase consideration for a business.
(d) These are also useful for settling trade disputes for higher wages or bonus
as well as claims in respect of damage suffered by property, by fire or some
other calamity.
(e) An audit can also help in the detection of wastages and losses to show the
different ways by which these might be checked, especially those that occur due
to the absence or inadequacy of internal checks or internal control measures.
(f) Audit ascertains whether the necessary books of account and allied
records have been properly kept and helps the client in making good
deficiencies or inadequacies in this respect.
(g) As an appraisal function, audit reviews the existence and operations of
various controls in the organisations and reports weaknesses, inadequacies,
etc., in them.

(h) Audited accounts are of great help in the settlement of accounts at the time
of admission or death of partner.
(i) Government may require audited and certified statement before it gives
assistance or issues a license for a particular trade.
2. (a) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are inherent
limitations of an audit. The inherent limitations of an audit arise from:
(i) The Nature of Financial Reporting: The preparation of financial statements
involves judgment by management in applying the requirements of the entity’s
applicable financial reporting framework to the facts and circumstances of the
entity. In addition, many financial statement items involve subjective decisions
or assessments or a degree of uncertainty, and there may be a range of
acceptable interpretations or judgments that may be made.
(ii) The Nature of Audit Procedures: There are practical and legal limitations on
the auditor’s ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide,
intentionally or unintentionally, the complete information that is relevant to
the preparation and presentation of the financial statements or that has
been requested by the auditor.
2. Fraud may involve sophisticated and carefully organised schemes
designed to conceal it. Therefore, audit procedures used to gather audit
evidence may be ineffective for detecting an intentional misstatement that
involves, for example, collusion to falsify documentation which may cause
the auditor to believe that audit evidence is valid when it is not. The auditor
is neither trained as nor expected to be an expert in the authentication of
documents.
3. An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such as the
power of search, which may be necessary for such an investigation.
(iii) Timeliness of Financial Reporting and the Balance between Benefit and
Cost: The matter of difficulty, time, or cost involved is not in itself a valid basis
for the auditor to omit an audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available
for the conduct of the audit. Notwithstanding this, the relevance of information,
and thereby its value, tends to diminish over time, and there is a balance to be
struck between the reliability of information and its cost.

(iv) Other Matters that Affect the Limitations of an Audit: In the case of certain
subject matters, limitations on the auditor’s ability to detect material
misstatements are particularly significant. Such assertions or subject matters
include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and
transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to continue
as a going concern.
(b) The relationship between auditing and law is very close one. Auditing involves
examination of various transactions from the view point of whether or not these have
been properly entered into. It necessitates that an auditor should have a good
knowledge of business laws affecting the entity. He should be familiar with the law of
contracts, negotiable instruments, etc. The knowledge of taxation laws is also
inevitable as entity is required to prepare their financial statements taking into account
various provisions affected by various tax laws. In analysing the impact of various
transactions particularly from the accounting aspect, an auditor ought to have a good
knowledge about the direct as well as indirect tax laws.
Chapter 2- Audit Strategy, Audit Planning and Audit Programme
3. (a) The auditor should plan his work to enable him to conduct an effective audit in
an efficient and timely manner. Plans should be based on knowledge of the client’s
business.
Plans should be made to cover, among other things:
(a) acquiring knowledge of the client’s accounting systems, policies and internal
control procedures;
(b) establishing the expected degree of reliance to be placed on internal control;
(c) determining and programming the nature, timing, and extent of the audit
procedures to be performed; and
(d) coordinating the work to be performed.
(b) The auditor shall establish an overall audit strategy that sets the scope, timing
and direction of the audit, and that guides the development of the audit plan.
The process of establishing the overall audit strategy assists the auditor to
determine, subject to the completion of the auditor’s risk assessment procedures,
such matters as:
1. The resources to deploy for specific audit areas, such as the use of appropriately

experienced team members for high risk areas or the involvement of experts on
complex matters;
2. The amount of resources to allocate to specific audit areas, such as the number
of team members assigned to observe the inventory count at material locations,
the extent of review of other auditors’ work in the case of group audits, or the
audit budget in hours to allocate to high risk areas;
3. When these resources are to be deployed, such as whether at an interim audit
stage or at key cut-off dates; and
4. How such resources are managed, directed and supervised, such as when team
briefing and debriefing meetings are expected to be held, how engagement
partner and manager reviews are expected to take place (for example, on-site
or off-site), and whether to complete engagement quality control reviews.
4. (a) The auditor shall update and change the overall audit strategy and the audit plan
as necessary during the course of the audit. As a result of unexpected events,
changes in conditions, or the audit evidence obtained from the results of audit
procedures, the auditor may need to modify the overall audit strategy and audit plan
and thereby the resulting planned nature, timing and extent of further audit
procedures, based on the revised consideration of assessed risks. This may be the
case when information comes to the auditor’s attention that differs significantly from
the information available when the auditor planned the audit procedures. For
example, audit evidence obtained through the performance of substantive
procedures may contradict the audit evidence obtained through tests of controls.
(b) The auditor shall document:
(a) the overall audit strategy;
(b) the audit plan; and
(c) any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes.
The documentation of the overall audit strategy is a record of the key decisions
considered necessary to properly plan the audit and to communicate significant
matters to the engagement team.
For example, the auditor may summarize the overall audit strategy in the form of a
memorandum that contains key decisions regarding the overall scope, timing and
conduct of the audit.
The documentation of the audit plan is a record of the planned nature, timing and
extent of risk assessment procedures and further audit procedures at the assertion
level in response to the assessed risks. It also serves as a record of the proper
planning of the audit procedures that can be reviewed and approved prior to their

performance. The auditor may use standard audit programs and/or audit completion
checklists, tailored as needed to reflect the particular engagement circumstances.
A record of the significant changes to the overall audit strategy and the audit plan,
and resulting changes to the planned nature, timing and extent of audit procedures,
explains why the significant changes were made, and the overall strategy and audit
plan finally adopted for the audit. It also reflects the appropriate response to the
significant changes occurring during the audit.
For instance-
The following things should form part of auditor’s documentation:
• A summary of discussions with the entity’s key decision makers
• Documentation of audit committee pre-approval of services, where required
• Audit documentation access letters
• Other communications or agreements with management or those charged with
governance regarding the scope, or changes in scope, of our services
• auditor’s report on the entity’s financial statements.
• Other reports as specified in the engagement agreement (e.g., debt covenant
compliance letter)
Chapter 3- Audit Documentation and Audit Evidence
5. (a) The form, content and extent of audit documentation depend on factors such as:
1. The size and complexity of the entity.
2. The nature of the audit procedures to be performed.
3. The identified risks of material misstatement.
4. The significance of the audit evidence obtained.
5. The nature and extent of exceptions identified.
6. The need to document a conclusion or the basis for a conclusion not readily
determinable from the documentation of the work performed or audit evidence
obtained.
7. The audit methodology and tools used.
(b) The auditor shall assemble the audit documentation in an audit file and complete
the administrative process of assembling the final audit file on a timely basis after the
date of the auditor’s report.
SQC 1 “Quality Control for Firms that perform Audits and Review of Historical
Financial Information, and other Assurance and related services”, requires firms to
establish policies and procedures for the timely completion of the assembly of audit

files. An appropriate time limit within which to complete the assembly of the final audit
file is ordinarily not more than 60 days after the date of the auditor’s report.
The completion of the assembly of the final audit file after the date of the auditor’s
report is an administrative process that does not involve the performance of new audit
procedures or the drawing of new conclusions. Changes may, however, be made to
the audit documentation during the final assembly process, if they are administrative
in nature.
Examples of such changes include:
 Deleting or discarding superseded documentation.
 Sorting, collating and cross referencing working papers.
 Signing off on completion checklists relating to the file assembly process.
 Documenting audit evidence that the auditor has obtained, discussed and
agreed with the relevant members of the engagement team before the date of
the auditor’s report.
After the assembly of the final audit file has been completed, the auditor shall not
delete or discard audit documentation of any nature before the end of its retention
period.
SQC 1 requires firms to establish policies and procedures for the ret ention of
engagement documentation. The retention period for audit engagements ordinarily is
no shorter than seven years from the date of the auditor’s report, or, if later, the date
of the group auditor’s report.
6. (a) Audit evidence is necessary to support the auditor’s opinion and report. It is
cumulative in nature and is primarily obtained from audit procedures performed during
the course of the audit. It may, however, also include information obtained from other
sources such as previous audits. In addition to other sources inside and outside the
entity, the entity’s accounting records are an important source of audit evidence. Also,
information that may be used as audit evidence may have been prepared using the
work of a management’s expert. Audit evidence comprises both information that
supports and corroborates management’s assertions, and any information that
contradicts such assertions. In addition, in some cases the absence of information
(for example, management’s refusal to provide a requested representation) is used
by the auditor, and therefore, also constitutes audit evidence.
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and
evaluating audit evidence. Audit procedures to obtain audit evidence can include
inspection, observation, confirmation, recalculation, re-performance and analytical
procedures, often in some combination, in addition to inquiry. Although inquiry may
provide important audit evidence, and may even produce evidence of a misstatement,
inquiry alone ordinarily does not provide sufficient audit evidence of the absence of a

material misstatement at the assertion level, nor of the operating effectiveness of

controls.
As explained in SA 200, “Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing”, reasonable
assurance is obtained when the auditor has obtained sufficient appropriate audit
evidence to reduce audit risk (i.e., the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated) to an acceptably low
level. The sufficiency and appropriateness of audit evidence are interrelated.
(b) Tests of controls: Test of controls may be defined as an audit procedure designed
to evaluate the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
The auditor shall design and perform tests of controls to obtain sufficient appropriate
audit evidence as to the operating effectiveness of relevant controls when:
(a) The auditor’s assessment of risks of material misstatement at the assertion level
includes an expectation that the controls are operating effectively (i.e., the
auditor intends to rely on the operating effectiveness of controls in determining
the nature, timing and extent of substantive procedures); or
(b) Substantive procedures alone cannot provide sufficient appropriate audit
evidence at the assertion level.
A higher level of assurance may be sought about the operating effectiveness of
controls when the approach adopted consists primarily of tests of controls, in
particular where it is not possible or practicable to obtain sufficient appropriate audit
evidence only from substantive procedures.
7. (a) Irrespective of the assessed risks of material misstatement, the auditor shall
design and perform substantive procedures for each material class of transactions,
account balance, and disclosure.
1. This requirement reflects the facts that:
(i) the auditor’s assessment of risk is judgmental and so may not identify all
risks of material misstatement; and
(ii) there are inherent limitations to internal control, including management
override.
2. Depending on the circumstances, the auditor may determine that:
• Performing only substantive analytical procedures will be sufficient to
reduce audit risk to an acceptably low level. For example, where the
auditor’s assessment of risk is supported by audit evidence from tests of
controls.
• Only tests of details are appropriate.

• A combination of substantive analytical procedures and tests of details are

most responsive to the assessed risks.
3. Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time. SA 520, “Analytical
Procedures” establishes requirements and provides guidance on the application
of analytical procedures during an audit.
4. The nature of the risk and assertion is relevant to the design of tests of details.
For example, tests of details related to the existence or occurrence assertion
may involve selecting from items contained in a financial statement amount and
obtaining the relevant audit evidence. On the other hand, tests of details related
to the completeness assertion may involve selecting from items that are
expected to be included in the relevant financial statement amount and
investigating whether they are included.
5. Because the assessment of the risk of material misstatement takes account of
internal control, the extent of substantive procedures may need to be increased
when the results from tests of controls are unsatisfactory.
6. In designing tests of details, the extent of testing is ordinarily thought of in terms
of the sample size. However, other matters are also relevant, including whether
it is more effective to use other selective means of testing.
(b) External confirmation procedures frequently are relevant when addressing
assertions associated with account balances and their elements, but need not be
restricted to these items. For example, the auditor may request external confirmation
of the terms of agreements, contracts, or transactions between an entity and other
parties. External confirmation procedures also may be performed to obtain audit
evidence about the absence of certain conditions. For example, a request may
specifically seek confirmation that no “side agreement” exists that may be relevant to
an entity’s revenue cut-off assertion. Other situations where external confirmation
procedures may provide relevant audit evidence in responding to assessed risks of
material misstatement include:
• Bank balances and other information relevant to banking relationships.
• Accounts receivable balances and terms.
• Inventories held by third parties at bonded warehouses for processing or on
consignment.
• Property title deeds held by lawyers or financiers for safe custody or as security.
• Investments held for safekeeping by third parties, or purchased from stockbrokers
but not delivered at the balance sheet date.
• Amounts due to lenders, including relevant terms of repayment and restrictive
covenants.

• Accounts payable balances and terms.

Chapter 4- Risk Assessment and Internal Control
8. (a) While obtaining audit evidence about the effective operation of internal
controls, the auditor considers how they were applied, the consistency with which
they were applied during the period and by whom they were applied. The concept of
effective operation recognises that some deviations may have occurred. Deviations
from prescribed controls may be caused by such factors as changes in key personnel,
significant seasonal fluctuations in volume of transactions and human error. When
deviations are detected the auditor makes specific inquiries regarding these matters,
particularly, the timing of staff changes in key internal control functions. The auditor
then ensures that the tests of control appropriately cover such a period of change or
fluctuation.
Based on the results of the tests of control, the auditor should evaluate whether the
internal controls are designed and operating as contemplated in the preliminary
assessment of control risk. The evaluation of deviations may result in the auditor
concluding that the assessed level of control risk needs to be revised. In such cases,
the auditor would modify the nature, timing and extent of planned substantive
procedures.
Before the conclusion of the audit, based on the results of substantive procedures
and other audit evidence obtained by the auditor, the auditor should consider whether
the assessment of control risk is confirmed. In case of deviations from the prescribed
accounting and internal control systems, the auditor would make specific inquiries to
consider their implications. Where, on the basis of such inquiries, the auditor
concludes that the deviations are such that the preliminary assessment of control risk
is not supported, he would amend the same unless the audit evidence obtained from
other tests of control supports that assessment. Where the auditor concludes that the
assessed level of control risk needs to be revised, he would modify the nature, timing
and extent of his planned substantive procedures.
It has been suggested that actual operation of the internal control should be tested
by the application of procedural tests and examination in depth. Procedural tests
simply mean testing of the compliance with the procedures laid down by the
management in respect of initiation, authorisation, recording and documentation of
transaction at each stage through which it flows.
(b) A Flow Chart: It is a graphic presentation of each part of the company’s system of
internal control. A flow chart is considered to be the most concise way of recording
the auditor’s review of the system. It minimises the amount of narrative explanation
and thereby achieves a consideration or presentation not possible in any other form.
It gives bird’s eye view of the system and the flow of transactions and integration and
in documentation, can be easily spotted and improvements can be suggested.

It is also necessary for the auditor to study the significant features of the business
carried on by the concern; the nature of its activities and various channels of goods
and materials as well as cash, both inward and outward; and also a comprehensive
study of the entire process of manufacturing, trading and administration. This will help
him to understand and evaluate the internal controls in the correct perspective.
9. (a) The auditor can formulate his entire audit programme only after he has had a
satisfactory understanding of the internal control systems and their actual operation.
If he does not care to study this aspect, it is very likely that his audit programme may
become unwieldy and unnecessarily heavy and the object of the audit may be
altogether lost in the mass of entries and vouchers. It is also important for him to know
whether the system is actually in operation. Often, after installation of a system, no
proper follow up is there by the management to ensure compliance. The auditor, in
such circumstances, may be led to believe that a system is in operation which in
reality may not be altogether in operation or may at best operate only partially. This
state of affairs is probably the worst that an auditor may come across and he would
be in the midst of confusion, if he does not take care.
It would be better if the auditor can undertake the review of the internal control system
of client. This will give him enough time to assimilate the controls and implications and
will enable him to be more objective in the framing of the audit programme. He will also
be in a position to bring to the notice of the management the weaknesses of the system
and to suggest measures for improvement. At a further interim date or in the course of
the audit, he may ascertain how far the weaknesses have been removed.
From the foregoing, it can be concluded that the extent and the nature of the audit
programme is substantially influenced by the internal control system in operation. In
deciding upon a plan of test checking, the existence and operation of internal control
system is of great significance.
A proper understanding of the internal control system in its content and working also
enables an auditor to decide upon the appropriate audit procedure to be applied in
different areas to be covered in the audit programme.
In a situation where the internal controls are considered weak in some areas, the
auditor might choose an auditing procedure or test that otherwise might not be
required; he might extend certain tests to cover a large number of transactions or
other items than he otherwise would examine and at times he may perform additional
tests to bring him the necessary satisfaction.
(b) Auditors’ Responsibility for Reporting on Internal Financial Controls over
Financial Reporting in India
Clause (i) of Sub-section 3 of Section 143 of the Act requires the auditors’ report to
state whether the company has adequate internal financial controls system in place
and the operating effectiveness of such controls.

It may be noted that auditor’s reporting on internal financial controls is a requirement

specified in the Act and, therefore, will apply only in case of reporting on financial
statements prepared under the Act and reported under Section 143.
Accordingly, reporting on internal financial controls will not be applicable with respect
to interim financial statements, such as quarterly or half-yearly financial statements,
unless such reporting is required under any other law or regulation.
Objectives of an auditor in an audit of internal financial controls over financial
reporting: The auditor's objective in an audit of internal financial controls over
financial reporting is, “to express an opinion on the effectiveness of the company's
internal financial controls over financial reporting.” It is carried out along with an audit
of the financial statements.
Reporting under Section 143(3)(i) is dependent on the underlying criteria for internal
financial controls over financial reporting adopted by the management. However, any
system of internal controls provides only a reasonable assurance on achievement of
the objectives for which it has been established. Also, the auditor shall use the
concept of materiality in determining the extent of testing such controls.
Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the board report
of all companies to state the details in respect of adequacy of internal financial
controls with reference to the financial statements.
The inclusion of the matters relating to internal financial controls in the directors
responsibility statement is in addition to the requirement of the directors stating that
they have taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of the 2013 Act for safeguarding
the assets of the company and for preventing and detecting fraud and other
irregularities.
Chapter 5- Fraud and Responsibilities of the Auditor in this Regard.
10. Misappropriation of Assets:
It involves the theft of an entity’s assets and is often perpetrated by employees in relatively
small and immaterial amounts. However, it can also involve management who are usually
more able to disguise or conceal misappropriations in
ways that are difficult to detect. Misappropriation of
assets can be accomplished in a variety of ways
including:
➢ Embezzling receipts (for example, misappropriating
collections on accounts receivable or diverting
receipts in respect of written-off accounts to personal
bank accounts). Fig.: Theft of Assets*
➢ Stealing physical assets or intellectual property (for example, stealing inventory for

personal use or for sale, stealing scrap for resale, colluding with a competitor by disclosing
technological data in return for payment). 1
➢ Causing an entity to pay for goods and services not received (for example, payments to
fictitious vendors, kickbacks paid by vendors to the entity’s purchasing agents in return
for inflating prices, payments to fictitious employees).
Example
Vineet is a manager in Zed Ex Ltd. He is having authority to sign cheques up to ` 10,000.
While performing the audit, Rajan, the auditor, noticed that there were many cheques of
` 9,999 which had been signed by Vineet. Further Vineet had split large payments
(amounting to more than ` 10,000 each, into two or more cheques less than ` 10,000 each
so that he may authorize the payments). This raised suspicion in the auditor.
The auditor found that the cheques of ` 9,999 were deposited in Vineet’s personal account
i.e. Vineet had misappropriated the amount.
Splitting the cheques into lower amounts involves manipulation of accounts.
The fraud was committed by an employee.
➢ Using an entity’s assets for personal use (for example, using the entity’s assets as
collateral for a personal loan or a loan to a related party).
Misappropriation of assets is often accompanied by false or misleading records or
documents in order to conceal the fact that the assets are missing or have been
pledged without proper authorization.
11. The risk of not detecting a material misstatement resulting from fraud is higher than
the risk of not detecting one resulting from error. This is because fraud may involve
sophisticated and carefully organized schemes designed to conceal it, such as forgery,
deliberate failure to record transactions, or intentional misrepresentations being made to
the auditor. Such attempts at concealment may be even more difficult to detect when
accompanied by collusion. Collusion may cause the auditor to believe that audit evidence
is persuasive when it is, in fact, false. The auditor’s ability to detect a fraud depends on
factors such as the skillfulness of the perpetrator, the frequency and extent of manipulation,
the degree of collusion involved, the relative size of individual amounts manipulated, and
the seniority of those individuals involved. While the auditor may be able to identify
potential opportunities for fraud to be perpetrated, it is difficult for the auditor to determine
whether misstatements in judgment areas such as accounting estimates are caused by
fraud or error.
* Source of image: www.crimevoice.com

Chapter 6- Audit in an Automated Environment

12. When a business operates in a more automated environment it is likely that we will
see several business functions and activities happening within the systems. Consider the
following aspects,
• Computation and Calculations are automatically carried out (for example, bank
interest computation and inventory valuation)
• Accounting entries are posted automatically (for example, sub-ledger to GL postings
are automatic)
• Business policies and procedures, including internal controls, are applied
automatically (for example, delegation of authority for journal approvals, customer
credit limit checks are performed automatically)
• Reports used in business are produced from systems. Management and other
stakeholders rely on these reports and information produced (for example, debtors
ageing report)
• User access and security are controlled by assigning system roles to users ( for
example, segregation of duties can be enforced effectively)
13. In today’s digital age when companies rely on more and more on IT systems and
networks to operate business, the amount of data and information that exists in these
systems is enormous. A famous businessman recently said, “Data is the new Oil”.
The combination of processes, tools and techniques that are used to tap vast amounts of
electronic data to obtain meaningful information is called data analytics. While it is true that
companies can benefit immensely from the use of data analytics in terms of increased
profitability, better customer service, gaining competitive advantage, more efficient
operations, etc., even auditors can make use of similar tools and techniques in the audit
process and obtain good results. The tools and techniques that auditors use in applying
the principles of data analytics are known as Computer Assisted Auditing Techniques or
CAATs in short.
Data analytics can be used in testing of electronic records and data residing in IT systems
using spreadsheets and specialised audit tools viz., IDEA and ACL to perform the
following,
• check completeness of data and population that is used in either test of controls or
substantive audit tests
• selection of audit samples – random sampling, systematic sampling
• re-computation of balances – reconstruction of trial balance from transaction data
• reperformance of mathematical calculations – depreciation, bank interest
calculation.

• analysis of journal entries as required by SA 240

• fraud investigation
• evaluating impact of control deficiencies
Chapter 7 Audit Sampling
14. Risk Factors while applying Sampling Techniques: As per SA 530 “Audit Sampling”,
sampling risk is the risk that the auditor’s conclusion based on a sample may be different
from the conclusion if the entire population were subjected to the same audit procedure.
Sampling risk can lead to two types of erroneous conclusions-
(i) In the case of a test of controls, that controls are more effective than they actually
are, or in the case of tests of details, that a material misstatement does not exists
when in fact it does. The auditor is primarily concerned with this type of erroneous
conclusion because it affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion.
(ii) In the case of test of controls, the controls are less effective than they actually are,
or in the case of tests of details, that a material misstatements exists when in fact it
does not. This type of erroneous conclusion affects audit efficiency as it would usually
lead to additional work to establish that initial conclusions were incorrect.
15. The auditor shall evaluate-
(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for conclusions
about the population that has been tested.
For tests of controls, an unexpectedly high sample deviation rate may lead to an increase
in the assessed risk of material misstatement, unless further audit evidence substantiating
the initial assessment is obtained. For tests of details, an unexpectedly high misstatement
amount in a sample may cause the auditor to believe that a class of transactions or account
balance is materially misstated, in the absence of further audit evidence that no material
misstatement exists.
In the case of tests of details, the projected misstatement plus anomalous misstatement,
if any, is the auditor’s best estimate of misstatement in the population. When the projected
misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the
sample does not provide a reasonable basis for conclusions about the population that has
been tested. The closer the projected misstatement plus anomalous misstatement is to
tolerable misstatement, the more likely that actual misstatement in the population may
exceed tolerable misstatement. Also, if the projected misstatement is greater than the
auditor’s expectations of misstatement used to determine the sample size, the auditor may
conclude that there is an unacceptable sampling risk that the ac tual misstatement in the
population exceeds the tolerable misstatement. Considering the results of other audit
procedures helps the auditor to assess the risk that actual misstatement in the population

exceeds tolerable misstatement, and the risk may be reduced if additional audit evidence
is obtained.
In case the auditor concludes that audit sampling has not provided a reasonable basis for
conclusions about the population that has been tested, the auditor may request
management to investigate misstatements that have been identified and the potential for
further misstatements and to make any necessary adjustments; or tailor the nature, timing
and extent of those further audit procedures to best achieve the required assurance. For
example, in the case of tests of controls, the auditor might extend the sample size, test an
alternative control or modify related substantive procedures.
Chapter 8- Analytical Procedures
16. Substantive Analytical Procedure: Substantive analytical procedures are generally more
applicable to large volumes of transactions that tend to be predictable over time. The
application of planned analytical procedures is based on the expectation that relationships
among data exist and continue in the absence of known conditions to the contrar y.
However, the suitability of a particular analytical procedure will depend upon the auditor’s
assessment of how effective it will be in detecting a misstatement that, individually or when
aggregated with other misstatements, may cause the financial statements to be materially
misstated.
In some cases, even an unsophisticated predictive model may be effective as an analytical
procedure. For example, where an entity has a known number of employees at fixed rates
of pay throughout the period, it may be possible for the auditor to use this data to estimate
the total payroll costs for the period with a high degree of accuracy, thereby providing audit
evidence for a significant item in the financial statements and reducing the need to perform
tests of details on the payroll. The use of widely recognised trade ratios (such as profit
margins for different types of retail entities) can often be used effectively in substantive
analytical procedures to provide evidence to support the reasonableness of recorded
amounts.
17. The relationships between individual financial statements items traditionally
considered in the audit of business entities may not always be relevant in the audit of
governments or other non-business public sector entities; for example, in many public
sector entities there may be little direct relationship between revenue and expenditure. In
addition, because expenditure on the acquisition of assets may not be capitalized, there
may be no relationship between expenditures on, for example, inventories and fixed assets
and the amount of those assets reported in the financial statements. Also, industry data or
statistics for comparative purposes may not be available in the public sector. However,
other relationships may be relevant, for example, variations in the cost per kilometer of
road construction or the number of vehicles acquired compared with vehicles retired.

Chapter 9 - Audit of Items of Financial Statements

18. Since an Intangible Asset is an identifiable non-monetary asset, without physical
substance, for establishing the existence of such assets, the auditor should verify whether
such intangible asset is in active use in the production or supply of goods or services, for
rental to others, or for administrative purposes.
Example- for verifying the existence of software, the auditor should verify whether such
software is in active use by the entity and for the purpose, the auditor should verify the
sale of related services/ goods during the period under audit, in which such software has
been used.
Example- For verifying the existence of design/ drawings, the auditor should verify the
production data to establish if such products for which the design/ drawings were
purchased, are being produced and sold by the entity.
In case any intangible asset is not in active use, deletion should have been recorded in the
books of account post approvals by the entity’s management and amortization charge
should have ceased to be charged beyond the date of deletion.
19. Liabilities in addition to borrowings (discussed above), include trade payables and
other current liabilities, deferred payment credits and provisions. Verification of liabilities
is as important as that of assets, considering if any liability is omitted (or understated) or
overstated, the Balance Sheet would not show a true and fair view of the state of affairs of
the entity.
Further, a liability is classified as current if it satisfies any of the following criteria:
▪ It is expected to be settled in the entity’s normal operating cycle
▪ It is held primarily for the purpose of being traded
▪ It is due to be settled within twelve months after the reporting period
▪ The entity does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period. Terms of a liability that could, at the
option of the counterparty, result in its settlement by the issue of equity instrument s
does not affect its classification.
Chapter 10 - The Company Audit
20. (a) Using the Work of another Auditor: When the accounts of the branch are audited
by a person other than the company’s auditor, there is need for a clear understanding
of the role of such auditor and the company’s auditor in relation to the audit of the
accounts of the branch and the audit of the company as a whole; also, there is great
necessity for a proper rapport between these two auditors for the purpose of an
effective audit. In recognition of these needs, the Council of the Institute of Chartered
Accountants of India has dealt with these issues in SA 600, “Using the Work of
another Auditor”. It makes clear that in certain situations, the statute governing the

entity may confer a right on the principal auditor to visit a component and examine
the books of account and other records of the said component, if he thinks it
necessary to do so. Where another auditor has been appointed for the component,
the principal auditor would normally be entitled to rely upon the work of such auditor
unless there are special circumstances to make it essential for him to visit the
component and/or to examine the books of account and other records of the said
component. Further, it requires that the principal auditor should perform procedures
to obtain sufficient appropriate audit evidence, that the work of the other auditor is
adequate for the principal auditor's purposes, in the context of the specific
assignment. When using the work of another auditor, the principal auditor should
ordinarily perform the following procedures:
(i) advise the other auditor of the use that is to be made of the other auditor's work
and report and make sufficient arrangements for co-ordination of their efforts at
the planning stage of the audit. The principal auditor would inform the other
auditor of matters such as areas requiring special consideration, procedures for
the identification of inter-component transactions that may require disclosure
and the time-table for completion of audit; and
(ii) advise the other auditor of the significant accounting, auditing and reporting
requirements and obtain representation as to compliance with them.
The principal auditor might discuss with the other auditor the audit procedures applied
or review a written summary of the other auditor’s procedures and findings which
may be in the form of a completed questionnaire or check-list. The principal auditor
may also wish to visit the other auditor. The nature, timing and extent of procedures
will depend on the circumstances of the engagement and the principal auditor's
knowledge of the professional competence of the other auditor. This knowledge may
have been enhanced from the review of the previous audit work of the other audit or.
(b) Permission of Central Government for Removal of Auditor Under Section 140(1)
of the Companies Act, 2013: Removal of auditor before expiry of his term i.e. before
he has submitted his report is a serious matter and may adversely affect his
independence.
Further, in case of conflict of interest the shareholders may remove the auditors in
their own interest.
Therefore, law has provided this safeguard so that central government may know the
reasons for such an action and if not satisfied, may not accord approval.
On the other hand if auditor has completed his term i.e. has submitted his report and
thereafter he is not re-appointed then the matter is not serious enough for central
government to call for its intervention.

In view of the above, the permission of the Central Government is required when
auditors are removed before expiry of their term and the same is not needed when
they are not re-appointed after expiry of their term.
21. Duty of Auditor to Inquire on certain matters: It is the duty of auditor to inquire into the
following matters-
(a) whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are
prejudicial to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries
are prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether
so much of the assets of the company as consist of shares, debentures and other
securities have been sold at a price less than that at which they were purchased by
the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have
been allotted for cash, whether cash has actually been received in respect of such
allotment, and if no cash has actually been so received, whether the position as stated
in the account books and the balance sheet is correct, regular and not misleading.
22. (a) Right to report to the members of the company on the accounts examined by
him - The auditor shall make a report to the members of the company on the accounts
examined by him and on every financial statements which are required by or under
this Act to be laid before the company in general meeting and the report shall after
taking into account the provisions of this Act, the accounting and auditing standards
and matters which are required to be included in the audit report under the provisions
of this Act or any rules made there under or under any order made under this section
and to the best of his information and knowledge, the said accounts, financial
statements give a true and fair view of the state of the company’s affairs as at the end
of its financial year and profit or loss and cash flow for the year and such other matters
as may be prescribed.
(b) Right to obtain information and explanation from officers - This right of the
auditor to obtain from the officers of the company such information and explanations
as he may think necessary for the performance of his duties as auditor is a wide and
important power. In the absence of such power, the auditor would not be able to obtain
details of amount collected by the directors, etc. from any other company, firm or
person as well as of any benefits in kind derived by the directors from the company,
which may not be known from an examination of the books. It is for t he auditor to
decide the matters in respect of which information and explanations are required by

him. When the auditor is not provided the information required by him or is denied
access to books, etc., his only remedy would be to report to the members that he
could not obtain all the information and explanations he had required or considered
necessary for the performance of his duties as auditors.
Chapter 11 - Audit Report
23. Responsibilities for the Financial Statements: The auditor’s report shall include a
section with a heading “Responsibilities of Management for the Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management and, where
appropriate, those charged with governance, on which an audit in accordance with SAs is
conducted. Management and, where appropriate, those charged with governance accept
responsibility for the preparation of the financial statements. Management also accepts
responsibility for such internal control as it determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due
to fraud or error. The description of management’s responsibilities in the auditor’s report
includes reference to both responsibilities as it helps to explain to users the premise on
which an audit is conducted.
This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the financial statements in accordance with the applicable financial
reporting framework, and for such internal control as management determines is
necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error;[because of the possible effects of fraud
on other aspects of the audit, materiality does not apply to management’s
acknowledgement regarding its responsibility for the design, implementation, and
maintenance of internal control (or for establishing and maintaining effective internal
control over financial reporting) to prevent and detect fraud.] and
(b) Assessing the entity’s ability to continue as a going concern and whether the
use of the going concern basis of accounting is appropriate as well as disclosing, if
applicable, matters relating to going concern. The explanation of management’s
responsibility for this assessment shall include a description of when the use of the
going concern basis of accounting is appropriate.
24. Purpose of communicating key audit matters
As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, the purpose of
communicating key audit matters is to enhance the communicative value of the auditor’s
report by providing greater transparency about the audit that was performed.
Communicating key audit matters provides additional information to intended users of the
financial statements to assist them in understanding those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the financial statements of
the current period. Communicating key audit matters may also assist intended users in

understanding the entity and areas of significant management judgment in the audited
financial statements.
Chapter 12- Bank Audit
25. Evaluation of Internal Controls over Advances: The auditor should examine the efficacy
of various internal controls over advances to determine the nature, timing and extent of his
substantive procedures. In general, the internal controls over advances should include,
inter alia, the following:
 The bank should make an advance only after satisfying itself as to the credit
worthiness of the borrower and after obtaining sanction from the appropriate
authorities of the bank.
 All the necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.) should be executed by the parties before advances are made.
 The compliance with the terms of sanction and end use of funds should be ensured.
 Sufficient margin as specified in the sanction letter should be kept against securities
taken so as to cover for any decline in the value thereof. The availability of sufficient
margin needs to be ensured at regular intervals.
 If the securities taken are in the nature of shares, debentures, etc., the ownership of
the same should be transferred in the name of the bank and the effective control of
such securities be retained as a part of documentation.
 All securities requiring registration should be registered in the name of the bank or
otherwise accompanied by documents sufficient to give title to the bank.
 In the case of goods in the possession of the bank, contents of the packages should
be test checked at the time of receipt. The godowns should be frequently inspected
by responsible officers of the branch concerned, in addition to the inspectors of the
bank.
 Drawing Power Register should be updated every month to record the value of
securities hypothecated. These entries should be checked by an officer.
 The accounts should be kept within both the drawing power and the sanctioned limit.
 All the accounts which exceed the sanctioned limit or drawing power or are otherwise
irregular should be brought to the notice of the controlling authority regularly.
 The operation of each advance account should be reviewed at least once a year, and
at more frequent intervals in the case of large advances.
Chapter 13- Audit of Different Types of Entities
26. While planning the audit of an NGO, the auditor may concentrate on the following:
(i) Knowledge of the NGO's work, its mission and vision, areas of operations and
environment in which it operate.

(ii) Updating knowledge of relevant statutes especially with regard to recent

amendments, circulars, judicial decisions related to the statutes.
(iii) Reviewing the legal form of the Organisation and its Memorandum of Association,
Articles of Association, Rules and Regulations.
(iv) Reviewing the NGO's Organisation chart, then Financial and Administrative Manuals,
Project and Programme Guidelines, Funding Agencies Requirements and formats,
budgetary policies if any.
(v) Examination of minutes of the Board/Managing Committee/Governing
Body/Management and Committees thereof to ascertain the impact of any decisions
on the financial records.
(vi) Study the accounting system, procedures, internal controls and internal checks
existing for the NGO and verify their applicability.
(vii) Setting of materiality levels for audit purposes.
(viii) The nature and timing of reports or other communications.
(ix) The involvement of experts and their reports.
(x) Review the previous year's Audit Report.
27. Special points of consideration while auditing certain transactions of a hospital are
stated below-
(i) Register of Patients: Vouch the Register of patients with copies of bills issued to
them. Verify bills for a selected period with the patients’ attendance record to see that
the bills have been correctly prepared. Also see that bills have been issued to all
patients from whom an amount was recoverable according to the rules of the hospital.
(ii) Collection of Cash: Check cash collections as entered in the Cash Book with the
receipts, counterfoils and other evidence for example, copies of patients bills,
counterfoils of dividend and other interest warrants, copies of rent bills, etc.
(iii) Legacies and Donations: Ascertain that legacies and donations received for a
specific purpose have been applied in the manner agreed upon.
(iv) Reconciliation of Subscriptions: Trace all collections of subscription and donations
from the Cash Book to the respective Registers. Reconcile the total subscriptions due
(as shown by the Subscription Register and the amount collected and that still
outstanding).
(v) Authorisation and Sanctions: Vouch all purchases and expenses and verify that the
capital expenditure was incurred only with the prior sanction of the Trustees or the
Managing Committee and that appointments and increments to staff have been duly
authorised.

PAPER – 7: ENTERPRISE INFORMATION SYSTEMS AND STRATEGIC
MANAGEMENT
SECTION – A: ENTERPRISE INFORMATION SYSTEMS
QUESTIONS
Chapter 1: Automated Business Processes

1. During a job interview, an interviewer asked Mr. A to list out all the risks and their
controls associated with Order-To-Cash (O2C) business process. Prepare an appropriate
draft reply.
2. A bicycle shop in a city provides rental facility to its customers at different rates for
different models as given below:
Model No. Hire rate per day
Model No. 1 ` 10
Model No. 2 ` 9
Model No. 3 ` 8
Model No. 4 ` 7
To attract customers, the shopkeeper gives a discount of 15 percent to all those

customers, who hire a bicycle for more than one-week period. Further to attract women
customer, he gives additional discount of 10 percent irrespective of hire period. For
every bicycle hired, a security deposit of ` 25 must be paid. Draw a flow chart to print out
the details of each customer such as name of customer, bicycle model number, number
of days a bicycle is hired for, hire charges, discount and total charges including deposits.
Chapter 2: Financial and Accounting Systems
3. Explain the term “Master Data” and its types.
4. On joining a Manufacturing company XYZ, you are briefed about the functioning of
different modules like Financial Accounting Module, Sales and Distribution Module,
Human Resource Module, Material Management Module, Production Planning Module
etc. Prepare a brief description on the Material Management Module (MM) based on your
understanding.
Chapter 3: Information Systems and Its Components
5. Recognize the activities that deal with the System Development Controls in an IT Setup.

6. Determine the controls that are classified based on the time when they act, relative to a
security incident.
Chapter 4: E- Commerce, M-Commerce and Emerging Technologies
7. e-business benefits individuals, businesses, government and society at large. As a
business seller, analyse the benefits that you would draw from e-business.
8. As an IT consultant, advise some tips to an aspiring e-commerce vendor so that his
business can be protected from intrusion.
Chapter – 5: Core Banking Systems
9. Analyse new set of IT risks and challenges associated with the businesses and
standards that the banks should consider?
10. Explain the Internal controls in banks?
1. Risks and Controls related to the Order to Cash (O2C) business process are as follows:
Risks Controls
The customer master file is not The customer master file is maintained
maintained properly and the information is properly and the information is
not accurate. accurate.
Invalid changes are made to the customer Only valid changes are made to the
master file. customer master file.
All valid changes to the customer master All valid changes to the customer
file are not input and processed. master file are input and processed.
Changes to the customer master file are Changes to the customer master file
not accurate. are accurate.
Changes to the customer master file are Changes to the customer master file
not processed in a timely manner. are processed in a timely manner.
Customer master file data is not up-to- Customer master file data is up to date
date and relevant. and relevant.
System access to maintain customer System access to maintain customer
masters has not been restricted to the masters has been restricted to the
authorized users. authorized users.
2. Abbreviations used are as follows:
HCHG: Hire Charges DAYS: No. of days a bicycle is hired for

PAPER – 7: ENTERRPRISE INFORMATION SYSTEMS AND STRATEGIC MANAGEMENT 3
NAME: Name of customer TCHG: Total Charges

MODEL: Bicycle Model No. TDISC: Total Discount
SEX: Gender of the customer
The flowchart is available on the next page.
3. Master Data: Master data is relatively permanent data that is not expected to change
again and again. It may change, but not again and again. In accounting systems, there may
be following type of master data.
Master Data
Accounting Inventory Payroll Statutory

Master Data Master Data Master Data Master Data
• Accounting Master Data – This includes names of ledgers, groups, cost centers,
accounting voucher types, etc. E.g. Capital Ledger is created once and not expected
to change frequently. Similarly, all other ledgers like, sales, purchase, expenses and
income ledgers are created once and not expected to change again and again.
Opening balance carried forward from previous year to next year is also a part of
master data and not expected to change.
• Inventory Master Data – This includes stock items, stock groups, godowns, inventory
voucher types, etc. Stock item is something which bought and sold for business
purpose, a trading goods. E.g. If a person is into the business of dealing in white
goods, stock items shall be Television, Fridge, Air Conditioner, etc. For a person
running a medicine shop, all types of medicines shall be stock items for him/her.
• Payroll Master Data –. Payroll is a system for calculation of salary and recoding of
transactions relating to employees. Master data in case of payroll can be names of
employees, group of employees, salary structure, pay heads, etc. These data are not
expected to change frequently. E.g. Employee created in the system will remain as it
is for a longer period of time, his/her salary structure may change but not frequently,
pay heads associated with his/ her salary structure will be relatively permanent.
• Statutory Master Data – This is a master data relating to statute/law. It may be
different for different type of taxes. E.g. Goods and Service Tax (GST), Nature of
Payments for Tax Deducted at Source (TDS), etc. This data also shall be relatively
permanent. In case of change in tax rates, forms, categories, we need to
update/change our master data.

Ans 2 contd….
Start
Read NAME, MODEL, DAYS, SEX
Yes
If MODEL = 1 RATE = 10.00
No
Yes
If MODEL = 2 RATE = 9.00
No
Yes RATE = 8.00
If MODEL= 3
No
RATE = 7.00
If SEX = “Female” If DAYS > 7 DISC = 0.10

Yes No
No Yes
Yes
DISC = 0.15 If DAYS > 7 DISC= 0.25
No
DISC = 0
HCHG = DAYS * RATE
TDISC = HCHG * DISC
TCHG = (HCHG – TDISC) + 25.00
Print NAME, MODEL, DAYS, HCHG, TDISC, TCHG
Yes No
More Customers? Stop

4. Material Management (MM) Module manages materials required, processed and

produced in enterprises. Different types of procurement processes are managed with th is
system. Some of the popular sub-components in MM module are vendor master data,
consumption based planning, purchasing, inventory management, invoice verification
and so on. Material management also deals with movement of materials via other
modules like logistics, Supply Chain Management, sales and delivery, warehouse
management, production and planning. The overall purchase process includes the
following sub-processes:
• Purchase Requisition from Production Department – Production department
sends a request to purchase department for purchase of raw material required for
production.
• Evaluation of Requisition - Purchase department shall evaluate the requisition
with the current stock position and purchase order pending position and shall decide
about accepting or rejection the requisition.
• Asking for Quotation - If requisition is accepted, quotations shall be asked to
approve vendors for purchase of material.
• Evaluation of quotations - Quotations received shall be evaluated and compared.
• Purchase Order - This is a transaction for letting an approved vendor know what
we want to purchase, how much we want to purchase, at what rate we want to
purchase, by what date we want the delivery, where we want the delivery. Hence a
typical purchase order shall have following information.
o Description of stock items to be purchased.
o Quantity of these stock items.
o Rate for purchases.
o Due Date by which material is to be received.
o Godown where material is to be received.
• Material Receipt - This is a transaction of receipt of material against purchase
order. This is commonly known as Material Receipt Note (MRN) or Goods Receipt
Note (GRN). This transaction shall have a linking with Purchase Order. Information
in Purchase Order is automatically copied to Material Receipt Voucher for saving
time and efforts of user. Stock is increased after recording of this transaction.
• Issue of material - Material received by stores shall be issued to production
department as per requirement.

• Purchase Invoice - This is a financial transaction. Trial balance is affected due this
transaction. Material Receipt transaction does not affect trial balance. This
transaction shall have a linking with Material Receipt Transaction and all the details
of material received shall be copied automatically in purchase invoice. As stock is
increased in Material Receipt transaction, it will not be increased again after
recording of purchase invoice.
• Payment to Vendor - Payment shall be made to vendor based on purchase invoice
recorded earlier. Payment transaction shall have a linking with purchase invoice.
5. The activities that deal with system development controls in IT setup are as follows:
• System Authorization Activities: All systems must be properly and formally that each
new system request be submitted in written form by users to systems professionals who
have both the expertise and authority to evaluate and approve (or reject) the request.
• User Specification Activities: Users must be actively involved in the systems
development process. Regardless of the technology involved, the user can create a
detailed written descriptive document of the logical needs that must It should describe
the user’s view of the problem, not that of the systems professionals.
• Technical Design Activities: The technical design activities translate the user
specifications into a set of detailed technical specifications of a system that
meets the user’s needs. The scope of these activities includes systems analysis,
general systems design, feasibility analysis, and detailed systems design.
• Internal Auditor’s Participation: The internal auditor plays an important role in the
control of systems and should become involved at the inception of the system
development process to make conceptual suggestions regarding system requirements
and controls and should be continued throughout all phases of the development process
and into the maintenance phase.
• Program Testing: All program modules must be thoroughly tested before they are
implemented. The results of the tests are then compared against predetermined results
to identify programming and logic errors. For example, if a program has undergone no
maintenance changes since its implementation, the test results from the audit should be
identical to the original test results. Having a basis for comparison, the auditor can thus
quickly verify the integrity of the program code. On the other hand, if changes have
occurred, the original test data can provide evidence regarding these changes. The
auditor can thus focus attention upon those areas.
• User Test and Acceptance Procedures: Just before implementation, the comprising
user personnel, systems professionals, and internal audit personnel system meets its
stated requirements, the system is formally accepted by the user departments(s).

6. The controls per the time that they act, relative to a security incident can be classified as
under:
• Preventive Controls: These controls prevent errors, omissions, or security incidents
from occurring. Examples include simple data-entry edits that block alphabetic
characters from being entered in numeric fields, access controls that protect sensitive
data/ system resources from unauthorized people, and complex and dynamic technical
controls such as anti-virus software, firewalls, and intrusion prevention systems. Some
examples of preventive controls can be Employing qualified personnel; Segregation of
duties; Access control; Vaccination against diseases; Documentation; Prescribing
appropriate books for a course; Training and retraining of staff; Authorization of
transaction; Validation, edit checks in the application; Firewalls; Anti-virus software
(sometimes this acts like a corrective control also), etc., and Passwords. The above list
contains both of manual and computerized, preventive controls.
• Detective Controls: These controls are designed to detect errors, omissions or
malicious acts that occur and report the occurrence. In other words, Detective Controls
detect errors or incidents that elude preventive controls. Detective controls can also
include monitoring and analysis to uncover activities or events that exceed authorized
limits or violate known patterns in data that may indicate improper manipulation. Some
examples of Detective Controls are Cash counts; Bank reconciliation; Review of payroll
reports; Compare transactions on reports to source documents; Monitor actual
expenditures against budget; Use of automatic expenditure profiling where management
gets regular reports of spend to date against profiled spend; Hash totals; Check points
in production jobs; Echo control in telecommunications; Duplicate checking of
calculations; Past-due accounts report; The internal audit functions; Intrusion Detection
System; Cash counts and bank reconciliation, and Monitoring expenditures against
budgeted amount.
• Corrective Controls: Corrective controls are designed to reduce the impact or correct
an error once it has been detected. Corrective controls may include the use of default
dates on invoices where an operator has tried to enter the incorrect date. For example-
Complete changes to IT access lists if individual’s role changes is a corrective control. If
an accounts clerk is transferred to the sales department as a salesman his/her access
rights to the general ledger and other finance functions should be removed and he/she
should be given access only to functions required to perform his sales job. Some other
examples of Corrective Controls are Submit corrective journal entries after discovering
an error; A Business Continuity Plan (BCP); Contingency planning; Backup procedure;
Rerun procedures; Change input value to an application system; and Investigate budget
variance and report violations.
7. e-businesses benefits individuals, businesses, governments and society at large. As a
seller, the benefits to Business / Sellers are as follows:
• Increased Customer Base: Since the number of people getting online is increasing,

which are creating not only new customers but also retaining the old ones.
• Recurring payments made easy: Each business has number of operations being
homogeneous. Brings in uniformity of scaled operations.
• Instant Transaction: The transactions of e commerce are based on real time
processes. This has made possible to crack number of deals.
• Provides a dynamic market: Since there are several players, providing a dynamic market
which enhances quality and business.
• Reduction in costs:
o To buyers from increased competition in procurement as more suppliers are able to
compete in an electronically open marketplace.
o To suppliers by electronically accessing on-line databases of bid opportunities, on-
line abilities to submit bids, and on-line review of rewards.
o In overhead costs through uniformity, automation, and large-scale integration of
management processes.
o Advertising costs.
• Efficiency improvement due to:
o Reduction in time to complete business transactions, particularly from delivery to
payment.
o Reduction in errors, time, for information processing by eliminating requirements
for re-entering data.
o Reduction in inventories and reduction of risk of obsolete inventories as the
demand for goods and services is electronically linked through just-in- time
inventory and integrated manufacturing techniques.
• Creation of new markets: This is done through the ability to easily and cheaply reach
potential customers.
• Easier entry into new markets: This is especially into geographically remote markets,
for enterprises regardless of size and location.
• Better quality of goods: As standardized specifications and competition have increased
and improved variety of goods through expanded markets and the ability to produce
customized goods.
• Elimination of Time Delays: Faster time to market as business processes are linked,
thus enabling seamless processing and eliminating time delays.
8. Tips to protect any e-Commerce business from intrusion are as follows:
• Viruses: Check your website daily for viruses, the presence of which can result in the
loss of valuable data.

• Hackers: Use software packages to carry out regular assessments of how vulnerable
your website is to hackers.
• Passwords: Ensure employees change these regularly and that passwords set by
former employees of your organization are defunct.
• Regular software updates: Your site should always be up to date with the newest
versions of security software. If you fail to do this, you leave your website vulnerable to
attack.
• Sensitive data: Consider encrypting financial information and other confidential
data (using encryption software). Hackers or third parties will not be able to access
encrypted data without a key. This is particularly relevant for any e-Commerce sites
that use a shopping cart system.
• Know the details of your payment service provider contract.
9. The business processes and standards adapted by Banks should consider these new set
of IT risks and challenges:
(i) Frequent changes or obsolescence of technology: Technology keeps on
evolving and changing constantly and becomes obsolete very quickly. Hence, there
is always a risk that the investment in technology solutions unless properly planned
may result in loss to bank due to risk of obsolescence.
(ii) Multiplicity and complexity of systems: The core of banking services remain
same but by using technology the way these banking products and services are
provided changes drastically. The Technology architecture used for services could
include multiple digital platforms and is quite complex. Hence, this requires the bank
personnel to have personnel with requisite technology skills or the management of
the bank’s technology could be outsourced to a company having the relevant skill
set.
(iii) Different types of controls for different types of technologies/ systems:
Deployment of Technology gives rise to new types of risks which are explained later
in this chapter. These risks need to be mitigated by relevant controls as applicable
to the technology/information systems deployed in the bank.
(iv) Proper alignment with business objectives and legal/ regulatory requirements :
Banks must ensure that the CBS and allied systems implemented, cater to all the
business objectives and needs of the bank, in addition to the legal/regulatory
requirements envisaged.
(v) Dependence on vendors due to outsourcing of IT services: In a CBS
environment, the bank requires staff with specialized domain skills to manage IT
deployed by the bank. Hence, these services could be outsourced to ve ndors and
there is heavy dependency on vendors and gives rise to vendor risks which should
be managed by proper contracts, controls and monitoring.

(vi) Vendor related concentration risk: There may not one but multiple vendors
providing different services. For example, network, hardware, system software and
banking software services may be provided by different vendors or these services
may be provided by a single vendor. Both these situations result in higher risks due
to heavy dependence on vendors.
(vii) Segregation of Duties (SoD): Banks have a highly-defined organization structure
with clearly defined roles, authority and responsibility. The segregation of duties as
per organization structure should be clearly mapped in the CBS used by the bank.
This is a high-risk area since any SoD conflicts can be a potential vulnerability for
fraudulent activities. For example, if a single employee can initiate, authorize and
disburse a loan the possibility of misuse cannot be ignored.
(viii) External threats leading to cyber frauds/ crime: The CBS environment provides
access to customers anytime, anywhere using internet. Hence, information system
which was earlier accessible only within and to the employees of the bank is now
exposed as it is open to be accessed by anyone from anywhere. Making the
information available is business imperative but this is also fraught with risks of
increased threats from hackers and others who could access the software to commit
frauds/crime.
(ix) Higher impact due to intentional or unintentional acts of internal employees:
Employees in a technology environment are the weakest link in an enterprise. This
is much more relevant in bank as banks deal directly with money. Hence, the
employee acts done intentionally or unintentionally may compromise security of the
IT environment.
(x) New social engineering techniques employed to acquire confidential
credentials: Fraudsters use new social engineering techniques such as socializing
with employees and extracting information which is used unauthorizedly to commit
frauds. For example: extracting information about passwords from bank’s staff
acting as genuine customer and using it to commit frauds.
(xi) Need for governance processes to adequately manage technology and
information security: Controls in CBS should be implemented from macro and
business perspective and not just from function and technology perspective. As
Technology, has become key enabler for bank and is implemented across the bank,
senior management of bank should be involved in directing how technology is
deployed in bank and approve appropriate policies. This requires governance
process to implement security as required.
(xii) Need to ensure continuity of business processes in the event of major
exigencies: The high dependence on technology makes it imperative to ensure
resilience to ensure that failure does not impact banking services. Hence, a
documented business continuity plan with adequate technology and information
systems should be planned, implemented and monitored.

10. Risks are mitigated by implementing internal controls as appropriate to the business
environment. These types of controls must be integrated in the IT solution implemented
at the bank’s branches. Some examples of internal controls in bank branch are given
here:
• Work of one staff member is invariably supervised/ checked by another staff
member, irrespective of the nature of work (Maker-Checker process).
• A system of job rotation among staff exists.
• Financial and administrative powers of each official/ position is fixed and
communicated to all persons concerned.
• Branch managers must send periodic confirmation to their controlling authority on
compliance of the laid down systems and procedures.
• All books are to be balanced periodically. Balancing is to be confirmed by an
authorized official.
• Details of lost security forms are immediately advised to controlling so that they can
exercise caution.
• Fraud prone items like currency, valuables, draft forms, term deposit receipts,
traveler’s cheques and other such security forms are in the custody of at least tw o
officials of the branch.

SECTION – B: STRATEGIC MANAGEMENT

Brief answers
1. Briefly answer the following questions:
(a) Define the role of corporate level managers.
(b) Define key success factors (KSFs).
(c) What is strategic vision?
(d) Explain the meaning of the combination strategies.
(e) Explain the meaning of cost leadership strategy.
(f) Define logistics strategy.
(g) Explain strategic business unit (SBUs).
(h) Explain premise control.
Statement type of question (Correct / Incorrect)
2. State with reasons which of the following statements are correct/incorrect:
(a) Control systems run parallel with strategic levels.
(b) Competitive strategy is designed to help firms achieve competitive advantage.
(c) For a small entrepreneur vision and mission are irrelevant.
(d) Stability strategy is not a ‘do-nothing’ strategy.
(e) Porter’s five forces model considers new entrants as a significant source of
competition.
(f) Tele-shopping is an instance of direct marketing.
(g) Strategies may require changes in organizational structure.
(h) Benchmarking and business process reengineering are one and the same.
Short notes
3. Write short notes on the following:
(a) Importance of strategic management.
(b) SWOT analysis.
(c) Essentials of a strategic vision.
(d) Importance of corporate culture.
Differences between the two concepts
4. Distinguish between the following:
(a) Forward integration and backward integration.
(b) Cost leadership and differentiation strategies.

(c) Operational control and management control.

(d) Logistic management and supply chain management.
Descriptive answers
Chapter 1-Introduction to Strategic Management
5. Yummy Foods and Tasty Foods are successfully competing in the business of ready to eat
snacks in Patna. Yummy has been pioneer in introducing innovative products. These
products will give them good sale. However, Tasty Foods will introduce similar products in
reaction to the products introduced by the Yummy Foods taking away the advantage gained
by the former.
Discuss the strategic approach of the two companies. Which is superior?
6. What benefits accrue by following a strategic approach to managing?
Chapter 2-Dynamics of Competitive Strategy
7. ‘Value for Money’ is a leading retail chain, on account of its ability to operate its business
at low costs. The retail chain aims to further strengthen its top position in the retail industry.
Marshal, the CEO of the retail chain is of the view that to achieve the goals they should
focus on lowering the costs of procurement of products.
Highlight and explain the core competence of the ‘Value for Money’ retail chain.
8. How Ansoff’s Product Market Growth Matrix is a useful tool for business organizations?
Chapter 3-Strategic Management Process
9. To convert strategic plans into actions and results, a manager must be able to direct
organizational change, motivate people, build and strengthen company competencies and
competitive capabilities, create a strategy-supportive work climate, and meet or beat
performance targets.
Explain the principal aspects of strategy-execution process.
10. ‘Objectives’ and ‘Goals’ provide meaning and sense of direction to organizational
endeavour. Explain.
Chapter 4-Corporate Level Strategies
11. Vastralok Ltd., was started as a textile company to manufacture cloth. Currently, they are
in the manufacturing of silk cloth. The top management desires to expand the business in
the cloth manufacturing. To expand they decided to purchase more machines to
manufacture cotton cloth.
Identify and explain the strategy opted by the top management of Vastralok Ltd.
12. What is Divestment strategy? When is it adopted?
Chapter 5-Business Level Strategies
13. Gennex is a company that designs, manufactures and sells computer hardware and
software. Gennex is well known for its innovative products that has helped the company to

have advantage over its competitors. It also spends on research and development and
concerned with innovative softwares. Often the unique features of their product, that are
not available with their competitors helps them to gain competitive advantage. Gennex
using the strategy is consistently gaining its position in the industry over its competitors.
Identify and explain the Porter’s generic strategy which Gennex has opted to gain the
competitive advantage.
14. Explain Porter’s five forces model as to how businesses can deal with the competition.
Chapter 6-Functional Level Strategies
15. Rohit Bhargava is the Managing Director of Smooth and Simple Pvt Ltd. The company
established in 2011, with 35 employees grew very fast to become an organisation with 335
employees in the year 2016. With the increase in size Rohit started facing difficulty in
managing things. Many a times he finds that personnel at the functional level are not in
sync with the strategies of the top. He felt that strategies need to be segregated into viable
plans and policies that are compatible with each other and communicated down the line.
Why does Rohit need to segregate the strategies into functional plans? Discuss.
16. What are the objectives that must be kept in mind while designing a pricing strategy of a
new product?
Chapter 7-Organisation and Strategic Leadership
17. KaAthens Ltd., a diversified business entity having business operations across the globe.
The company leadership has just changed as Mr. D. Bandopadhyay handed over the
pedals to his son Aditya Bandopadhyay, due to his poor health. Aditya is a highly educated
with an engineering degree from IIT, Delhi. However, being very young he is not clear about
his role and responsibilities,
In your view, what are the responsibilities of Aditya Bandopadhyay as CEO of the company.
18. Davis and Lawrence have proposed three distinct phases to develop matrix structure.
Explain.
Chapter 8-Strategy Implementation and Control
19. Swift Ltd and Quick Ltd are two companies that are in the business of light industrial
machines. While Swift is the market leader the sales of Quick has been falling. In the year
2017-18 the market share of the two companies was forty per cent and five per cent
respectively. During the last five years the market share of quick reduced from third to sixth
position. As an immediate corrective measure top management of Quick decided to
emulate the successful standards of Swift Ltd and set them as their own yardsticks. With
the help of standards they intended to compare, measure and judge their performance.
What is the strategic tool Quick Ltd is adopting? How is it implemented?
20. What is Strategy Audit? Explain briefly the criteria for strategy audit given by Richard
Rumelt’s.

SUGGESTED ANSWERS / HINTS
1 (a) Corporate-level managers participate in strategic decision making within the

organization. The role of corporate-level managers is to oversee the development of
strategies for the whole organization. This role includes defining the mission and goals
of the organization, determining what businesses it should be in, allocating resources
among the different businesses, formulating and implementing strategies that span
individual businesses, and providing leadership for the organization.
(b) An industry’s key success factors (KSFs) are those things or strategic elements that
affect industry members’ ability to prosper in a market place. For a business
organization within an industry, it may include, cost structure, technology, distribution
system and so on. It is correct to state that the KSFs help to shape whether a company
will be financially and competitively successful.
(c) A strategic vision delineates organisation’s aspirations for the business, providing a
panoramic view of the position where the organisation is going. A strategic vision
points an organization in a particular direction, charts a strategic path for it to fo llow
in preparing for the future, and moulds organizational identity.
A strategic vision is a roadmap of a company’s future – providing specifics about
technology and customer focus, the geographic and product markets to be pursued,
the capabilities it plans to develop, and the kind of company that management is trying
to create.
(d) Combination strategies refer to a mix of different strategies like stability; expansion,
diversification or retrenchment to suit particular situations that an enterprise is facing.
For instance, a strategy of diversification/acquisition may call for retrenchment in
some obsolete product lines.
(e) A number of cost elements affect the relative attractiveness of generic strategies. A
successful cost leadership strategy usually permeates the entire firm, as evidenced
by high efficiency, low overhead cost, and waste reduction. The low cost leadership
should be such that no competitors are able to imitate so that it can result in
sustainable competitive advantage to the cost leader firm.
(f) Logistics is a process that integrates the flow of supplies into, through and out of an
organization to achieve a level of service that facilitate movement and availability of
materials in a proper manner. When a company creates a logistics strategy, it is
defining the service levels at which its logistics is smooth and is cost effective.
(g) A strategic business unit (SBU) is a unit of the company that has a separate mission
and objectives which can be planned independently from other company businesses.
SBU can be a company division, a product line within a division or even a single
product/brand, specific group of customers or geographical location. The SBU is given
the authority to make its own strategic decisions within corporate guidelines as long
as it meets corporate objectives.

(h) A strategy is formed on the basis of certain assumptions or premises about the
complex and turbulent organizational environment. Premise control is a tool for
systematic and continuous monitoring of the environment to verify the validity and
accuracy of the premises on which the strategy has been built. It primarily involves
monitoring two types of factors:
(i) Environmental factors such as economic (inflation, liquidity, interest rates),
technology, social and regulatory.
(ii) Industry factors such as competitors, suppliers, substitutes.
2 (a) Correct: There are three strategic levels in an organisation – corporate, business and
functional. Control systems are required at all the three levels. At the top level,
strategic controls are built to check whether the strategy is being implemented as
planned and the results produced by the strategy are those intended. Down the
hierarchy management controls and operational controls are built in the systems.
Operational controls are required for day-to-day management of business.
(b) Correct: Competitive strategy is designed to help firms achieve competitive
advantage. Having a competitive advantage is necessary for a firm to compete in the
market. Competitive advantage comes from a firm’s ability to perform activities more
effectively than its rivals.
(c) Incorrect: Entrepreneur, big or small has to function within several influences from
external forces. Competition in different form and different degree is present in all kind
and sizes of business. Even entrepreneur with small businesses can have
complicated environment. To grow and prosper they need to have clear vision and
mission.
(d) Correct: Stability strategies are implemented by approaches wherein few functional
changes are made in the products or markets. It is not a ‘do nothing’ strategy. It
involves keeping track of new developments to ensure that the strategy continues to
make sense. This strategy is typical for mature business organizations. Some small
organizations will also frequently use stability as a strategic focus to maintain
comfortable market or profit position.
(e) Correct: Porter’s five forces model considers new entrants as major source of
competition. The new capacity and product range that the new entrants bring in throw
up new competitive pressure. The bigger the new entrant, the more severe the
competitive effect. New entrants also place a limit on prices and affect the profitability
of existing players.
(f) Correct: Direct marketing is done through various advertising media that interact
directly with customer. Teleshopping is a form of direct marketing which operates
without conventional intermediaries and employs television and other IT devices for
reaching the customer. The communication between the marketer and the customer
is direct through third party interfaces such as telecom or postal systems.

(g) Correct: Strategies may require changes in structure as the structure dictates how
resources will be allocated. Structure should be designed to facilitate the strategic
pursuit of a firm and, therefore, should follow strategy. Without a strategy or reasons
for being, companies find it difficult to design an effective structure.
(h) Incorrect: Benchmarking relates to setting goals and measuring productivity based
on best industry practices. The idea is to learn from the practices of competitors and
others to improve the firm’s performance. On the other hand, business process
reengineering relates to analysis and redesign of workflows and processes both within
and between the organizations.
3 (a) Strategic Management is very important for the survival and growth of busines s
organizations in dynamic business environment. Other major benefits of strategic
management are as follows:
 It helps organizations to be more proactive rather than reactive in dealing with
its future. It facilitates the organisations to work within vagaries of environment
and remains adaptable with the turbulence or uncertain future. Therefore, they
are able to control their own destiny in a better way.
 It provides better guidance to entire organization on the crucial point – what it is
trying to do. Also provides framework for all major business decisions of an
enterprise such a decision on businesses, products, markets, organization
structures, etc.
 It facilitates to prepare the organization to face the future and act as pathfinder
to various business opportunities. Organizations are able to identify the available
opportunities and identify ways and means as how to reach them.
 It serves as a corporate defence mechanism against mistakes and pitfalls. It
helps organizations to avoid costly mistakes in product market choices or
investments.
 Over a period of time, strategic management helps organizations to evolve
certain core competencies and competitive advantages that assist in the fight for
survival and growth.
(b) SWOT analysis is a tool used by organizations for evolving strategic options for the
future. The term SWOT refers to the analysis of strengths, weaknesses, opportunities
and threats facing a company. Strengths and weaknesses are identified in the internal
environment, whereas opportunities and threats are located in the external
environment.
Strength: Strength is an inherent capability of the organization which it can use to
gain strategic advantage over its competitor.
Weakness: A weakness is an inherent limitation or constraint of the organisation
which creates strategic disadvantage to it.
Opportunity: An opportunity is a favourable condition in the external environment
which enables it to strengthen its position.

Threat: An unfavourable condition in the external environment which causes a risk

for, or damage to the organisation’s position.
(c) Essentials of a strategic vision:
 The entrepreneurial challenge in developing a strategic vision is to think
creatively about how to prepare a company for the future.
 Forming a strategic vision is an exercise in intelligent entrepreneurship.
 A well-articulated strategic vision creates enthusiasm among the members of the
organisation.
 The best-worded vision statement clearly illuminates the direction in which
organization is headed.
(d) A culture where creativity, embracing change, and challenging the status quo are
pervasive is very conducive to successful execution of a product innovation and
technological leadership strategy. A culture built around such business principles as
listening to customers, encouraging employees to take pride in their work, and giving
employees a high degree of decision-making responsibility is very conducive to
successful execution of a strategy of delivering superior customer service.
A strong strategy-supportive culture nurtures and motivates people to do their jobs in
ways conducive to effective strategy execution; it provides structure, standards, and
a value system in which to operate; and it promotes strong employee identification
with the company’s vision, performance targets, and strategy. All this makes
employees feel genuinely better about their jobs and work environment and the merits
of what the company is trying to accomplish. Employees are stimulated to take on the
challenge of realizing the company’s vision, do their jobs competently and with
enthusiasm, and collaborate with others as needed to bring the strategy to success.
4 (a) Forward and backward integration form part of vertically integrated diversification. In
vertically integrated diversification, firms opt to engage in businesses that are
vertically related to the existing business of the firm. The firm remains vertically within
the same process. While diversifying, firms opt to engage in businesses that are
linked forward or backward in the chain and enters specific product/process steps with
the intention of making them into new businesses for the firm.
Backward integration is a step towards creation of effective supply by enterin g
business of input providers. Strategy employed to expand profits and gain greater
control over production of a product whereby a company will purchase or build a
business that will increase its own supply capability or lower its cost of production. On
the other hand, forward integration is moving forward in the value chain and entering
business lines that use existing products. Forward integration will also take place
where organisations enter into businesses of distribution channels.
(b) Cost leadership emphasizes producing standardized products at a very low per-unit
cost for consumers who are price-sensitive. Differentiation is a strategy aimed at

producing products and services considered unique industry wide and directed at
consumers who are relatively price-insensitive.
A primary reason for pursuing forward, backward, and horizontal integration strategies
is to gain cost leadership benefits. But cost leadership generally must be pursued in
conjunction with differentiation. Different strategies offer different degrees of
differentiation. A differentiation strategy should be pursued only after a careful study
of buyers’ needs and preferences to determine the feasibility of incorporating one or
more differentiating features into a unique product. A successful differentiation
strategy allows a firm to charge a higher price for its product and to gain customer
loyalty.
(c) Differences between operational control and management control are as under:
(i) The thrust of operational control is on individual tasks or transactions as against
total or more aggregative management functions. When compared with
operational, management control is more inclusive and more aggregative, in the
sense of embracing the integrated activities of a complete department, division
or even entire organisation, instead or mere narrowly circumscribed activities of
sub-units. For example, procuring specific items for inventory is a matter of
operational control, in contrast to inventory management as a whole.
(ii) Many of the control systems in organisations are operational and mechanistic in
nature. A set of standards, plans and instructions are formulated. On the other
hand, the basic purpose of management control is the achievement of enterprise
goals – short range and long range – in an effective and efficient manner.
(d) Supply chain management is an extension of logistic management. However, there
are differences between the two. Logistical activities typically include management of
inbound and outbound goods, transportation, warehousing, handling of material,
fulfillment of orders, inventory management and supply/demand planning. Although
these activities also form part of supply chain management, the latter is much broader.
Logistic management can be termed as one of its part that is related to planning,
implementing, and controlling the movement and storage of goods, services and
related information between the point of origin and the point of consumption.
Supply chain management is an integrating function of all the major business activities
and business processes within and across organisations. Supply Chain Management
is a systems view of the linkages in the chain consisting of different channel partners
– suppliers, intermediaries, third-party service providers and customers. Different
elements in the chain work together in a collaborative and coordinated manner. Often
it is used as a tool of business transformation and involves delivering the right product
at the right time to the right place and at the right price.
5. Yummy foods is proactive in its approach. On the other hand Tasty Food is reactive.
Proactive strategy is planned strategy whereas reactive strategy is adaptive reaction to
changing circumstances. A company’s strategy is typically a blend of proactive actions on

the part of managers to improve the company’s market position and financial performance
and reactions to unanticipated developments and fresh market conditions.
If organisational resources permit, it is better to be proactive rather than reactive. Being
proactive in aspects such as introducing new products will give you advantage in the mind
of customers.
At the same time, crafting a strategy involves stitching together a proactive/intended
strategy and then adapting first one piece and then another as circumstances surrounding
the company’s situation change or better options emerge-a reactive/adaptive strategy. This
aspect can be accomplished by Yummy Foods.
6. The following are the benefits of strategic approach to managing:
 Strategic management helps organisations to be more proactive i nstead of reactive
in shaping its future. Organisations are able to analyse and take actions instead of
being mere spectators. Thereby they are able to control their own destiny in a better
manner. It helps them in working within vagaries of environment and shaping it,
instead of getting carried away by its turbulence or uncertainties.
 Strategic management provides framework for all the major decisions of an enterprise
such as decisions on businesses, products, markets, manufacturing facilities,
investments and organisational structure. It provides better guidance to entire
organisation on the crucial point - what it is trying to do.
 Strategic management is concerned with ensuring a good future for the firm. It seeks
to prepare the corporation to face the future and act as pathfinder to various business
opportunities. Organisations are able to identify the available opportunities and
identify ways and means as how to reach them.
 Strategic management serves as a corporate defence mechanism against mistakes
and pitfalls. It help organisations to avoid costly mistakes in product market choices
or investments. Over a period of time strategic management helps organisation to
evolve certain core competencies and competitive advantages that assist in its fight
for survival and growth.
7. A core competence is a unique strength of an organization which may not be shared by
others. Core competencies are those capabilities that are critical to a business achieving
competitive advantage. In order to qualify as a core competence, the competency should
differentiate the business from any other similar businesses. A core competency for a firm
is whatever it does is highly beneficial to the organisation.
‘Value for Money’ is the leader on account of its ability to keep costs low. The cost
advantage that ‘Value for Money’ has created for itself has allowed the retailer to price
goods lower than competitors. The core competency in this case is derived from the
company’s ability to generate large sales volume, allowing the company to remain
profitable with low profit margin.

8. The Ansoff’s product market growth matrix (proposed by Igor Ansoff) is a useful tool that
helps businesses decide their product and market growth strategy. With the use of this
matrix a business can get a fair idea about how its growth depends in new or existing
products in both new and existing markets.
Companies should always be looking to the future. Businesses that use the Ansoff matrix
can determine the best strategy. The matrix can help them to decide how to do this by
demonstrating their options clearly, breaking them down into four strategies, viz., Market
Penetration, Market Development, Product Development, Diversification. Determining
which of these is best for their business will depend on a number of variables including
available resources, infrastructure, market position, location and budget.
9. In most situations, strategy-execution process includes the following principal aspects:
 Developing budgets that steer ample resources into those activities critical to strategic
success.
 Staffing the organization with the needed skills and expertise, consciously building
and strengthening strategy-supportive competencies and competitive capabilities,
and organizing the work effort.
 Ensuring that policies and operating procedures facilitate rather than impede effective
execution.
 Using the best-known practices to perform core business activities and pushing for
continuous improvement.
 Installing information and operating systems that enable company personnel to better
carry out their strategic roles day in and day out.
 Motivating people to pursue the target objectives energetically.
 Creating a company culture and work climate conducive to successful strategy
implementation and execution.
 Exerting the internal leadership needed to drive implementation forward and keep
improving strategy execution. When the organization encounters stumbling blocks or
weaknesses, management has to see that they are addressed and rectified quickly.
Good strategy execution involves creating strong “fits” between strategy and organizational
capabilities, between strategy and the reward structure, between strategy and internal
operating systems, and between strategy and the organization’s work climate and culture.
10. Business organization translates their vision and mission into objectives. Objectives are
open-ended attributes that denote the future states or outcomes. Goals are close -ended
attributes which are precise and expressed in specific terms. Thus, the goals are more
specific and translate to objectives to short term perspective.
All organizations have objectives. The pursuit of objectives is an unending process such
that organizations sustain themselves. They provide meaning and sense of direction to
organizational endeavour. Organizational structure and activities are designed and
resources are allocated around the objectives to facilitate their achievement. They also act

as benchmarks for guiding organizational activity and for evaluating how the organization
is performing.
11. Vastralok Ltd. is currently manufacturing silk cloth and its top management has decided to
expand its business by manufacturing cotton cloth. Both the products are similar in nature
within the same inductry. The strategic diversification that the top management of Vastralok
Ltd. has opted is concentric in nature. They were in business of manufacturing silk and now
they will manufacture cotton as well. They wil be able to use existing infrastructure and
distribution channel. Concentric diversification amounts to related diversification.
In concentric diversification, the new business is linked to the existing businesses through
process, technology or marketing. The new product is a spin-off from the existing facilities
and products/processes. This means that in concentric diversification too, there are
benefits of synergy with the current operations.
12. Divestment strategy involves the sale or liquidation of a portion of business, or a major
division, profit centre or SBU. For a multiple product company, divestment could be a part
of rehabilitating or restructuring plan called turnaround.
 A divestment strategy may be adopted due to various reasons:
 When a turnaround has been attempted but has proved to be unsuccessful.
 A business that had been acquired proves to be a mismatch and cannot be integrated
within the company.
 Persistent negative cash flows from a particular business create financial problems
for the whole company.
 Severity of competition and the inability of a firm to cope with it.
 Technological upgradation is required if the business is to survive but where it is not
possible for the firm to invest in it.
 A better alternative may be available for investment.
13. According to Porter, strategies allow organizations to gain competitive advantage from
three different bases: cost leadership, differentiation, and focus. Porter called these base
generic strategies.
Gennex has opted differentiation strategy. Its products are designed and produced to give
the customer value and quality. They are unique and serve specific customer needs that
are not met by other companies in the industry. Highly differentiated and unique hardware
and software enables Gennex to charge premium prices for its products hence making
higher profits and maintain its competitive position in the market.
Differentiation strategy is aimed at broad mass market and involves the creation of a
product or service that is perceived by the customers as unique. The uniqueness can be
associated with product design, brand image, features, technology, dealer network or
customer service.
14. To gain a deep understanding of a company’s industry and competitive environment,
managers do not need to gather all the information they can find and waste a lot of time

digesting it. Rather, the task is much more focused. A powerful and widely used tool for
systematically diagnosing the significant competitive pressures in a market and assessing
the strength and importance of each is the Porter’s five-forces model of competition. This
model holds that the state of competition in an industry is a composite of competitive
pressures operating in five areas of the overall market:
• Competitive pressures associated with the market manoeuvring and jockeying for
buyer patronage that goes on among rival sellers in the industry.
• Competitive pressures associated with the threat of new entrants into the market.
• Competitive pressures coming from the attempts of companies in other industries to
win buyers over to their own substitute products.
• Competitive pressures stemming from supplier bargaining power and supplier-seller
collaboration.
• Competitive pressures stemming from buyer bargaining power and seller-buyer
Collaboration.
15. Rohit Bhargava needs to break higher level strategies into functional strategies for
implementation. These functional strategies, in form of Marketing, Finance, Human
Resource, Production, Research and Development help in achieving the organisational
objective. The reasons why functional strategies are needed can be enumerated as follows:
• Functional strategies lay down clearly what is to be done at the functional level. They
provide a sense of direction to the functional staff.
• They are aimed at facilitating the implementation of corporate strategies and the
business strategies formulation at the business level.
• They act as basis for controlling activities in the different functional areas of business.
• They help in bringing harmony and coordination as they are formulated to achieve
major strategies.
• Similar situations occurring in different functional areas are handled in a consistent
manner by the functional managers.
16. For a new product pricing strategies for entering a market needs to be designed . In pricing
a really new product at least three objectives must be kept in mind.
i. Making the product acceptable to the customers.
ii. Producing a reasonable margin over cost.
iii. Achieving a market that helps in developing market share.
For a new product an organization may either choose to skim or penetrate the market. In
skimming prices are set at a very high level. The product is directed to those buyers who
are relatively price insensitive but sensitive to the novelty of the new product. For example
call rates of mobile telephony were set very high initially. Even the incoming calls were
charged. Since the initial off take of the product is low, high price, in a way, helps in
rationing of supply in favour of those who can afford it.

In penetration pricing firm keeps a temptingly low price for a new product which itself is
selling point. A very large number of the potential customers may be able to afford and
willing to try the product.
17. Aditya Bandopadhyay, an effective strategic leader of KaAthens Ltd. must be able to deal
with the diverse and cognitively complex competitive situations that are characteristic of
today’s competitive landscape.
A Strategic leader has several responsibilities, including the following:
 Making strategic decisions.
 Formulating policies and action plans to implement strategic decision.
 Ensuring effective communication in the organisation.
 Managing human capital (perhaps the most critical of the strategic leader’s skills).
 Managing change in the organisation.
 Creating and sustaining strong corporate culture.
 Sustaining high performance over time.
18. For development of matrix structure; Davis and Lawrence have proposed three distinct
phases:
• Cross-functional task forces: Temporary cross-functional task forces are initially
used when a new product line is being introduced. A project manager is in charge as
the key horizontal link.
• Product/brand management: If the cross-functional task forces become more
permanent, the project manager becomes a product or brand manager a nd a second
phase begins. In this arrangement, function is still the primary organizational
structure, but product or brand managers act as the integrators of semi -permanent
products or brands.
• Mature matrix: The third and final phase of matrix development involves a true dual-
authority structure. Both the functional and product structures are permanent. All
employees are connected to both a vertical functional superior and a horizontal
product manager.
19. The top management of Quick Ltd is doing benchmarking. The benchmarking helps an
organization to get ahead of competition. A benchmark may be defined as a standard or a
point of reference against which things may be compared and by which something can be
measured and judged. In simple words, benchmarking is an approach of setting goals and
measuring productivity based on best industry practices. In recent years, different
commercial and non-commercial organizations are discovering the value of benchmarking
and are applying it to improve their processes and systems.
Benchmarking processes used by different organisations lack standardization. However,
common elements are as follows:

I. Identifying the need for benchmarking: This step will define the objectives of the
benchmarking exercise. It will also involve selecting the type of benchmarking.
Organizations identify realistic opportunities for improvements.
II. Clearly understanding existing business processes: This step will involve
compiling information and data on performance. This will include mapping
processes.
III. Identify best processes: Within the selected framework, best processes are
identified. These may be within the same organization or external to it.
IV. Compare own processes and performance with that of others: While comparing
gaps in performance between the organization and better performers is identified.
Further, gaps in performance are analysed to seek explanations. Feasibility of making
the improvements is also examined.
V. Prepare a report and Implement the steps necessary to close the performance
gap: A report on the Benchmarking initiatives containing recommendations is
prepared. Such a report includes the action plan(s) for implementation.
VI. Evaluation: A business organization must evaluate the results of the benchmarking
process in terms of improvements vis-à-vis objectives and other criteria set for the
purpose. It should also periodically evaluate and reset the benchmarks in the light of
changes in the conditions that impact its performance.
20. A strategy audit is an examination and evaluation of areas affected by the operation of a
strategic management process within an organization.
Richard Rumelt’s Criteria for Strategy Audit
a. Consistency: A strategy should not present inconsistent goals and policies.
Organizational conflict and interdepartmental bickering are often symptoms of
managerial disorder, but these problems may also be a sign of strategic inconsistency.
Three guidelines help determine if organizational problems are due to inconsistencies
in strategy:
 If managerial problems continue despite changes in personnel and if they tend
to be issue-based rather than people-based, then strategies may be
inconsistent.
 If success for one organizational department means, or is interpreted to mean,
failure for another department, then strategies may be inconsistent.
 If policy problems and issues continue to be brought to the top for resolution,
then strategies may be inconsistent.
b. Consonance: Consonance refers to the need for strategists to examine sets of
trends, as well as individual trends, in auditing strategies. A strategy must represent
an adaptive response to the external environment and to the critical changes occurring
within it. One difficulty in matching a firm’s key internal and external factors in the
formulation of strategy is that most trends are the result of interactions among other
trends. For example, the day-care school/centre came about as a combined result of

many trends that included a rise in the average level of education, need for different
education pedagogy, increase in income, inflation, and an increase in women in the
workforce. Although single economic or demographic trends might appear steady for
many years, there are waves of change going on at the interaction level.
c. Feasibility: A strategy must neither overtax available resources nor create unsolvable
sub-problems. The final broad test of strategy is its feasibility; that is, can the strategy
be attempted within the physical, human, and financial resources of the e nterprise?
The financial resources of a business are the easiest to quantify and are normally the
first limitation against which strategy is audited. It is sometimes forgotten, however,
that innovative approaches to financing are often possible. Devices, s uch as captive
subsidiaries, sale-leaseback arrangements, and tying plant mortgages to long-term
contracts, have all been used effectively to help win key positions in suddenly
expanding industries. A less quantifiable, but actually more rigid, limitation on
strategic choice is that imposed by individual and organizational capabilities. In
auditing a strategy, it is important to examine whether an organization has
demonstrated in the past that it possesses the abilities, competencies, skills, and
talents needed to carry out a given strategy.
d. Advantage: A strategy must provide for the creation and/or maintenance of a
competitive advantage in a selected area of activity. Competitive advantages normally
are the result of superiority in one of three areas:
(1) resources, (2) skills, or (3) position.
The idea that the positioning of firm’s resources that enhance their combined
effectiveness is familiar to military theorists and chess players. Position can also play
a crucial role in an organization’s strategy. Once gained, a good position is defensible-
meaning that it is so costly to capture that rivals are deterred from full-scale attacks.
Positional advantage tends to be self-sustaining as long as the key internal and
environmental factors that underlie it remain stable. This is why entrenched firms can
be almost impossible to unseat, even if their skill levels are only average. Although
not all positional advantages are associated with size, it is true that larger
organizations tend to operate in markets and use procedures that turn their size into
advantage, while smaller firms seek product/market positions that exploit other types
of advantage. The principal characteristic of good position is that it permits the firm to
obtain advantage from policies that would not similarly benefit rivals without the same
position. Therefore, in auditing strategy, organizations should examine the nature of
positional advantages associated with a given strategy.

PAPER – 8: FINANCIAL MANAGEMENT & ECONOMICS FOR FINANCE
PART A: FINANCIAL MANAGEMENT
QUESTIONS
Ratio Analysis
1. Assuming the current ratio of a Company is 2, STATE in each of the following cases
whether the ratio will improve or decline or will have no change:
(i) Payment of current liability
(ii) Purchase of fixed assets by cash
(iii) Cash collected from Customers
(iv) Bills receivable dishonoured
(v) Issue of new shares
Cost of Capital
2. M/s. Navya Corporation has a capital structure of 40% debt and 60% equity. The company
is presently considering several alternative investment proposals costing less than ` 20
lakhs. The corporation always raises the required funds without disturbing its present debt
equity ratio.
The cost of raising the debt and equity are as under:
Project cost Cost of debt Cost of equity
Upto ` 2 lakhs 10% 12%
Above ` 2 lakhs & upto to ` 5 lakhs 11% 13%
Above ` 5 lakhs & upto `10 lakhs 12% 14%
Above `10 lakhs & upto ` 20 lakhs 13% 14.5%
Assuming the tax rate at 50%, CALCULATE:
(i) Cost of capital of two projects X and Y whose fund requirements are ` 6.5 lakhs and
` 14 lakhs respectively.
(ii) If a project is expected to give after tax return of 10%, DETERMINE under what
conditions it would be acceptable?
Capital Structure Decisions
3. Rounak Ltd. is an all equity financed company with a market value of ` 25,00,000 and cost
of equity (K e) 21%. The company wants to buyback equity shares worth ` 5,00,000 by
issuing and raising 15% perpetual debt of the same amount. Rate of tax may be taken as
30%. After the capital restructuring and applying MM Model (with taxes), you are required
to COMPUTE:

INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018 2
(i) Market value of J Ltd.

(ii) Cost of Equity (K e)
(iii) Weighted average cost of capital (using market weights) and comment on i t.
Leverage
4. A firm has sales of ` 75,00,000 variable cost is 56% and fixed cost is` 6,00,000. It has a
debt of ` 45,00,000 at 9% and equity of ` 55,00,000. You are required to INTERPRET:
(i) The firm’s ROI?
(ii) Does it have favourable financial leverage?
(iii) If the firm belongs to an industry whose capital turnover is 3, does it have a high or
low capital turnover?
(iv) The operating, financial and combined leverages of the firm?
(v) If the sales is increased by 10% by what percentage EBIT will increase?
(vi) At what level of sales the EBT of the firm will be equal to zero?
(vii) If EBIT increases by 20%, by what percentage EBT will increase?
Capital Budgeting
5. Shiv Limited is thinking of replacing its existing machine by a new machine which would
cost ` 60 lakhs. The company’s current production is 80,000 units, and is expected to
increase to 1,00,000 units, if the new machine is bought. The selling price of the product
would remain unchanged at ` 200 per unit. The following is the cost of producing one unit
of product using both the existing and new machine:
Unit cost (`)
Existing Machine New Machine Difference
(80,000 units) (1,00,000 units)
Materials 75.0 63.75 (11.25)
Wages & Salaries 51.25 37.50 (13.75)
Supervision 20.0 25.0 5.0
Repairs and Maintenance 11.25 7.50 (3.75)
Power and Fuel 15.50 14.25 (1.25)
Depreciation 0.25 5.0 4.75
Allocated Corporate Overheads 10.0 12.50 2.50
183.25 165.50 (17.75)

PAPER – 8: FINANCIAL MANAGEMENT AND ECONOMICS FOR FINANCE 3
The existing machine has an accounting book value of ` 1,00,000, and it has been fully
depreciated for tax purpose. It is estimated that machine will be useful for 5 years. The
supplier of the new machine has offered to accept the old machine for ` 2,50,000.
However, the market price of old machine today is ` 1,50,000 and it is expected to be
` 35,000 after 5 years. The new machine has a life of 5 years and a salvage value of
` 2,50,000 at the end of its economic life. Assume corporate Income tax rate at 40%, and
depreciation is charged on straight line basis for Income-tax purposes. Further assume
that book profit is treated as ordinary income for tax purpose. The opportunity cost of
capital of the Company is 15%.
Required:
(i) ESTIMATE net present value of the replacement decision.
(ii) CALCULATE the internal rate of return of the replacement decision.
(iii) Should Company go ahead with the replacement decision? ANALYSE.
Year (t) 1 2 3 4 5
PVIF0.15,t 0.8696 0.7561 0.6575 0.5718 0.4972
PVIF0.20,t 0.8333 0.6944 0.5787 0.4823 0.4019
PVIF0.25,t 0.80 0.64 0.512 0.4096 0.3277
PVIF0.30,t 0.7692 0.5917 0.4552 0.3501 0.2693
PVIF0.35,t 0.7407 0.5487 0.4064 0.3011 0.2230
Management of Receivables (Debtors)

6. Tony Limited, manufacturer of Colour TV sets is considering the liberalization of existing
credit terms to three of their large customers A, B and C. The credit period and likely
quantity of TV sets that will be sold to the customers in addition to other sales are as
follows:
Quantity sold (No. of TV Sets)
Credit Period (Days) A B C
0 1,000 1,000 -
30 1,000 1,500 -
60 1,000 2,000 1,000
90 1,000 2,500 1,500
The selling price per TV set is ` 9,000. The expected contribution is 20% of the selling
price. The cost of carrying receivable averages 20% per annum.
You are required:
(a) COMPUTE the credit period to be allowed to each customer.

(Assume 360 days in a year for calculation purposes).

(b) DEMONSTRATE the other problems the company might face in allowing the credit
period as determined in (a) above?
Financing of Working Capital
7. A company is considering its working capital investment and financial policies for the next
year. Estimated fixed assets and current liabilities for the next year are ` 2.60 crores and
` 2.34 crores respectively. Estimated Sales and EBIT depend on current assets
investment, particularly inventories and book-debts. The financial controller of the
company is examining the following alternative Working Capital Policies:
(` Crores)
Working Capital Policy Investment in Current Estimated Sales EBIT
Assets
Conservative 4.50 12.30 1.23
Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00
After evaluating the working capital policy, the Financial Controller has advised the
adoption of the moderate working capital policy. The company is now examining the use
of long-term and short-term borrowings for financing its assets. The company will use
` 2.50 crores of the equity funds. The corporate tax rate is 35%. The company is
considering the following debt alternatives.
(` Crores)
Financing Policy Short-term Debt Long-term Debt
Conservative 0.54 1.12
Moderate 1.00 0.66
Aggressive 1.50 0.16
Interest rate-Average 12% 16%
You are required to CALCULATE the following:
(i) Working Capital Investment for each policy:
(a) Net Working Capital position
(b) Rate of Return
(c) Current ratio
(ii) Financing for each policy:
(a) Net Working Capital position.
(b) Rate of Return on Shareholders’ equity.
(c) Current ratio.

Risk Analysis in Capital Budgeting

8. Gauav Ltd. using certainty-equivalent approach in the evaluation of risky proposals. The
following information regarding a new project is as follows:
Year Expected Cash flow Certainty-equivalent
quotient
0 (4,00,000) 1.0
1 3,20,000 0.8
2 2,80,000 0.7
3 2,60,000 0.6
4 2,40,000 0.4
5 1,60,000 0.3
Riskless rate of interest on the government securities is 6 per cent. DETERMINE whether
the project should be accepted?
Lease Financing
9. XYZ Ltd. requires an equipment costing `50,00,000; the same will be utilized over a period
of 5 years. It has two financing options in this regard:
(i) Arrangement of a loan of `50,00,000 at an interest rate of 14 percent per annum; the loan
being repayable in 5 equal year end instalments; the equipment can be sold at the end of
fifth year for `5,00,000.
(ii) Leasing the equipment for a period of five years at an early rental of `16,50,000 payable
at the year end.
The rate of depreciation is 15 percent on Written Down Value (WDV) basis, income tax
rate is 35 percent and discount rate is 12 percent.
ADVISE which of the financing options should XYZ Ltd. exercise and why?
Dividend Decisions
10. The earnings per share of a company is ` 10 and the rate of capitalisation applicable to it
is 10 per cent. The company has three options of paying dividend i.e. (i) 50%, (ii) 75% and
(iii) 100%.
CALCULATE the market price of the share as per Walter’s model if it can earn a return of
(a) 15, (b) 10 and (c) 5 per cent on its retained earnings.
Miscellaneous
11. (i) “The profit maximization is not an operationally feasible criterion.” IDENTIFY.
(ii) EXPLAIN the difference between Financial Lease and Operating Lease.

SUGGESTED HINTS/ANSWERS
Current Assets (CA)

1. Current Ratio = = 2 i.e. 2 : 1
Current Liabilities (CL)
S. Situation Improve/ Reason

No. Decline/ No
Change
(i) Payment of Current Ratio will Let us assume CA is ` 2 lakhs & CL is
Current liability improve ` 1 lakh. If payment of Current Liability
= `10,000 then, CA = 1, 90,000 CL
= 90,000.
1,90,000
Current Ratio =
90,000
= 2.11 : 1. When Current Ratio is 2:1
Payment of Current liability will reduce
the same amount in the numerator and
denominator. Hence, the ratio will
improve.
(ii) Purchase of Current Ratio will Since the cash being a current asset
Fixed Assets by decline converted into fixed asset, current assets
cash reduced, thus current ratio will fall.
(iii) Cash collected Current Ratio will Cash will increase and Debtors will
from Customers not change reduce. Hence No Change in Current
Asset.
(iv) Bills Receivable Current Ratio will Bills Receivable will come down and
dishonoured not change debtors will increase. Hence no change
in Current Assets.
(v) Issue of New Current Ratio will As Cash will increase, Current Assets will
Shares improve increase and current ratio will increase.
2. (i) Statement of Weighted Average Cost of Capital
Project cost Financing Proportion of After tax cost Weighted
capital (1–Tax 50%) average cost (%)
Structure
Upto ` 2 Lakhs Debt 0.4 10% (1 – 0.5) 0.4 × 5 = 2.0
= 5%
Equity 0.6 12% 0.6 × 12 = 7.2
9.2%

Above ` 2 lakhs Debt 0.4 11% (1 – 0.5) 0.4 × 5.5 = 2.2

& upto to ` 5 Lakhs = 5.5%
Equity 0.6 13% 0.6 × 13 = 7.8
10.0%
Above ` 5 lakhs Debt 0.4 12% (1 – 0.5) 0.4 × 6 = 2.4
& upto ` 10 lakhs = 6%
Equity 0.6 14% 0.6 × 14 = 8.4
10.8%
Above ` 10 lakhs Debt 0.4 13% (1 – 0.5) 0.4 × 6.5 = 2.6
& upto ` 20 lakhs = 6.5%
Equity 0.6 14.5% 0.6 × 14.5 = 8.7
11.3%
Project Fund requirement Cost of capital

X `6.5 lakhs 10.8% (from the above table)
Y `14 lakhs 11.3% (from the above table)
(ii) If a Project is expected to give after tax return of 10%, it would be acceptable
provided its project cost does not exceed ` 5 lakhs or, after tax return should be
more than or at least equal to the weighted average cost of capital.
3. Value of a company (V) = Value of equity (S) + Value of debt (D)
NetIncome(NI)
` 25,00,000 = + ` 5,00,000
Ke
Or, Net Income (NI) = 0.21 (` 25,00,000 – ` 5,00,000)

Market Value of Equity = ` 25,00,000
Ke =21%
Net income (NI) for equity holders
= Market Value of Equity
Ke
Net income (NI) for equity holders

= ` 25,00,000
0.21
Net income for equity holders = ` 5,25,000
EBIT = 5,25,000/0.7 = ` 7,50,000

All Equity Debt and Equity

` `
EBIT 7,50,000 7,50,000
Interest to debt-holders - (75,000)
EBT 7,50,000 6,75,000
Taxes (30%) (2,25,000) (2,02,500)
Income available to equity shareholders 5,25,000 4,72,500
Income to debt holders plus income available to 5,25,000 5,47,500
shareholders
Present value of tax-shield benefits = ` 5,00,000 × 0.30 = ` 1,50,000
(i) Value of Restructured firm
= ` 25,00,000 + ` 1,50,000 = ` 26,50,000
(ii) Cost of Equity (K e)
Total Value = `26,50,000
Less: Value of Debt = `5,00,000
Value of Equity = `21,50,000
4,72,500
Ke = =0.219 = 21.98%
21,50,000
(iii) WACC (on market value weight)
Cost of Debt (after tax) = 15% (1- 0.3) = 0.15 (0.70) = 0.105 = 10.5%
Components of Costs Amount Cost of Capital Weight WACC
(`) (%) (%)
Equity 21,50,000 21.98 0.81 17.80
Debt 5,00,000 10.50 0.19 2.00
26,50,000 19.80
Comment: At present the company is all equity financed. So, Ke = Ko i.e. 21%. However, after
restructuring, the Ko would be reduced to 19.80% and Ke would increase from 21% to 21.98%.
4. Income Statement
Sales 75,00,000
Less: Variable cost (56% of 75,00,000) (42,00,000)
Contribution 33,00,000
Less: Fixed costs (6,00,000)

Earnings before interest and tax (EBIT) 27,00,000

Less: Interest on debt (@ 9% on ` 45 lakhs) (4,05,000)
Earnings before tax (EBT) 22,95,000
EBIT EBIT
(i) ROI = ×100 = ×100
Capital employed Equity + Debt
27,00,000
= ×100 = 27%
55,00,000 + 45,00,000
(ROI is calculated on Capital Employed)

(ii) ROI = 27% and Interest on debt is 9%, hence, it has a favourable financial leverage.
Net Sales
(iii) Capital Turnover =
Capital
Net Sales ` 75,00,000

Or = = = 0.75
Capital ` 1,00,00,000
Which is very low as compared to industry average of 3.

(iv) Calculation of Operating, Financial and Combined leverages
Contribution ` 33,00,000
(a) Operating Leverage = = = 1.22 (approx)
EBIT ` 27,00,000
EBIT ` 27,00,000
(b) Financial Leverage = = = 1.18 (approx)
EBT ` 22,95,000
Contribution ` 33,00,000
(c) Combined Leverage = = = 1.44 (approx)
EBT ` 22,95,000
Or = Operating Leverage × Financial Leverage = 1.22 × 1.18 = 1.44 (approx)

(v) Operating leverage is 1.22. So if sales is increased by 10%. EBIT will be increased
by 1.22 × 10 i.e. 12.20% (approx)
(vi) Since the combined Leverage is 1.44, sales have to drop by 100/1.44 i.e. 69.44% to
bring EBT to Zero
Accordingly, New Sales = ` 75,00,000 × (1-0.6944)
= ` 75,00,000 × 0.3056
= ` 22,92,000 (approx)
Hence at `22,92,000 sales level EBT of the firm will be equal to Zero.

(vii) Financial leverage is 1.18. So, if EBIT increases by 20% then EBT will increase by
1.18 × 20 = 23.6% (approx)
5. (i) Net Cash Outlay of New Machine
Purchase Price ` 60,00,000
Less: Exchange value of old machine
[2,50,000 – 0.4(2,50,000 – 0)] 1,50,000
` 58,50,000
Market Value of Old Machine: The old machine could be sold for ` 1,50,000 in the
market. Since the exchange value is more than the market value, this option is not
attractive. This opportunity will be lost whether the old machine is retained or
replaced. Thus, on incremental basis, it has no impact.
Depreciation base: Old machine has been fully depreciated for tax purpose.
Thus, the depreciation base of the new machine will be its original cost i.e.
` 60,00,000.
Net Cash Flows: Unit cost includes depreciation and allocated overheads. Allocated
overheads are allocated from corporate office therefore they are irrelevant. The
depreciation tax shield may be computed separately. Excluding depreciation and
allocated overheads, unit costs can be calculated. The company will obtain additional
revenue from additional 20,000 units sold.
Thus, after-tax saving, excluding depreciation, tax shield, would be
= {100,000(200 – 148) – 80,000(200 – 173)} × (1 – 0.40)
= {52,00,000 – 21,60,000} × 0.60
= ` 18,24,000
After adjusting depreciation tax shield and salvage value, net cash flows and net
present value are estimated.
Calculation of Cash flows and Project Profitability
` (‘000)
0 1 2 3 4 5
1 After-tax savings - 1824 1824 1824 1824 1824
2 Depreciation - 1150 1150 1150 1150 1150
(` 60,00,000 – 2,50,000)/5
3 Tax shield on depreciation - 460 460 460 460 460
(Depreciation × Tax rate)

4 Net cash flows from - 2284 2284 2284 2284 2284

operations (1 + 3)*
5 Initial cost (5850)
6 Net Salvage Value - - - - - 215
(2,50,000 – 35,000)
7 Net Cash Flows (4+5+6) (5850) 2284 2284 2284 2284 2499
8 PVF at 15% 1.00 0.8696 0.7561 0.6575 0.5718 0.4972
9 PV (5850) 1986.166 1726.932 1501.73 1305.99 1242.50
10 NPV ` 1913.32
* Alternately Net Cash flows from operation can be calculated as follows:

Profit before depreciation and tax = ` 1,00,000 (200 -148) - 80,000 (200 -173)
= ` 52,00,000 – 21,60,000
= ` 30,40,000
So profit after depreciation and tax is ` (30,40,000 -11,50,000) × (1 - .40)
= ` 11,34,000
So profit before depreciation and after tax is :
` 11,34,000 + ` 11,50,000 (Depreciation added back) = ` 22,84,000
(ii)
` (‘000)
0 1 2 3 4 5
NCF (5850) 2284 2284 2284 2284 2499
PVF at 20% 1.00 0.8333 0.6944 0.5787 0.4823 0.4019
PV (5850) 1903.257 1586.01 1321.751 1101.57 1004.35
PV of benefits 6916.94
PVF at 30% 1.00 0.7692 0.5917 0.4550 0.3501 0.2693
PV (5850) 1756.85 1351.44 1039.22 799.63 672.98
PV of benefits 5620.12
1066 .94
IRR = 20% + 10% × = 28.23%
1296 .82
(iii) Advise: The Company should go ahead with replacement project, since it is positive
NPV decision.

6. (a) In case of customer A, there is no increase in sales even if the credit is given. Hence
comparative statement for B & C is given below:
Particulars Customer B Customer C
1. Credit period (days) 0 30 60 90 0 30 60 90
2. Sales Units 1,000 1,500 2,000 2,500 - - 1,000 1,500
` in lakhs `in lakhs
3. Sales Value 90 135 180 225 - - 90 135
4. Contribution at 20% 18 27 36 45 - - 18 27
(A)
5. Receivables:
Credit Period × Sales - 11.25 30 56.25 - - 15 33.75
360
6. Debtors at cost i.e. - 9 24 45 - - 12 27
80% of 11.25
7. Cost of carrying - 1.8 4.8 9 - - 2.4 5.4
debtors at 20% (B)
8. Excess of 18 25.2 31.2 36 - - 15.6 21.6
contributions over
cost of carrying
debtors (A – B)
The excess of contribution over cost of carrying Debtors is highest in case of credit
period of 90 days in respect of both the customers B and C. Hence, credit period of
90 days should be allowed to B and C.
(b) Problem:
(i) Customer A is taking 1000 TV sets whether credit is given or not. Customer C
is taking 1000 TV sets at credit for 60 days. Hence A also may demand credit
for 60 days compulsorily.
(ii) B will take 2500 TV sets at credit for 90 days whereas C would lift 1500 sets
only. In such case B will demand further relaxation in credit period i.e. B may
ask for 120 days credit.
7. (i) Statement showing Working Capital for each policy
(` in crores)
Working Capital Policy
Conservative Moderate Aggressive
Current Assets: (i) 4.50 3.90 2.60
Fixed Assets: (ii) 2.60 2.60 2.60

Total Assets: (iii) 7.10 6.50 5.20

Current liabilities: (iv) 2.34 2.34 2.34
Net Worth: (v)=(iii)-(iv) 4.76 4.16 2.86
Total liabilities: (iv)+(v) 7.10 6.50 5.20
Estimated Sales: (vi) 12.30 11.50 10.00
EBIT: (vii) 1.23 1.15 1.00
(a) Net working capital position: (i)-(iv) 2.16 1.56 0.26
(b) Rate of return: (vii)/(iii) 17.3% 17.7% 19.2%
(c) Current ratio: (i)/(iv) 1.92 1.67 1.11
(ii) Statement Showing Effect of Alternative Financing Policy
(` in crores)
Financing Policy Conservative Moderate Aggressive
Current Assets: (i) 3.90 3.90 3.90
Fixed Assets: (ii) 2.60 2.60 2.60
Total Assets: (iii) 6.50 6.50 6.50
Current Liabilities: (iv) 2.34 2.34 2.34
Short term Debt: (v) 0.54 1.00 1.50
Long term Debt: (vi) 1.12 0.66 0.16
Equity Capital (vii) 2.50 2.50 2.50
Total liabilities 6.50 6.50 6.50
Forecasted Sales 11.50 11.50 11.50
EBIT: (viii) 1.15 1.15 1.15
Less: Interest short-term debt: 0.06 0.12 0.18
(ix) (12% of ` 0.54) (12% of ` 1.00) (12% of ` 1.50)
Long term debt: (x) 0.18 0.11 0.03
(16% of ` 1.12) (16% of ` 0.66) (16% of ` 0.16)
Earning before tax: 0.91 0.92 0.94
(xi) - (ix + x)
Tax @ 35% (0.32) (0.32) (0.33)
Earning after tax: (xii) 0.59 0.60 0.61
(a) Net Working Capital 0.06
Position: (i) - [(iv)+(v)] 1.02 0.56
(b) Rate of return on 23.6% 24% 24.4%
Equity shareholders’
capital : (xii)/(vii)
(c) Current Ratio: 1.35 1.17 1.02
[(i)/(iv)+(v)]

8. Determination of Net Present Value (NPV)

Year Expected Cash Certainty- Adjusted Cash PV factor Total PV (`)
flow (`) equivalent flow (Cash flow (at 0.06)
(CE) × CE) (`)
0 (4,00,000) 1.0 (4,00,000) 1.000 (4,00,000)
1 3,20,000 0.8 2,56,000 0.943 2,41,408
2 2,80,000 0.7 1,96,000 0.890 1,74,440
3 2,60,000 0.6 1,56,000 0.840 1,31,040
4 2,40,000 0.4 96,000 0.792 76,032
5 1,60,000 0.3 48,000 0.747 35,856
NPV = (6,58,776 – 4,00,000) 2,58,776
As the Net Present Value is positive the project should be accepted.
9. Option A
The loan amount is repayable together with the interest at the rate of 14% on loan amount
and is repayable in equal instalments at the end of each year. The PVAF at the rate of 14%
for 5 years is 3.432, the amount payable will be
`50,00,000
Annual Payment = = `14,56,876
3.432
Schedule of Debt Repayment
End of year Total Payment Interest Principal Principal amount
(`) (`) (`) outstanding (`)
1 14,56,876 7,00,000 7,56,876 42,43,124
2 14,56,876 5,94,037 8,62,839 33,80,285
3 14,56,876 4,73,240 9,83,636 23,96,649
4 14,56,876 3,35,531 11,21,345 12,75,304
5 14,56,876 1,81,572* 12,75,304 0
*Balancing Figure
Schedule of Cash Outflows: Debt Alternative (Amount in `)
End Debt Interest Depreciat- Total Tax Cash PV Present
of Payment ion Shield Outflows factor Value
year @12%
1 14,56,876 7,00,000 7,50,000 14,50,000 5,07,500 9,49,376 0.893 8,47,793
2 14,56,876 5,94,037 6,37,500 12,31,537 4,31,038 10,25,838 0.797 8,17,593
3 14,56,876 4,73,240 5,41,875 10,15,115 3,55,290 11,01,586 0.712 7,84,329

4 14,56,876 3,35,531 4,60,594 7,96,125 2,78,644 11,78,232 0.636 7,49,356

5 14,56,876 1,81,572 3,91,505 5,73,077 2,00,577 12,56,299 0.567 7,12,322
39,11,393
Less: PV of Salvage Value (12,57,904)
26,53,489
Total present value of Outflows = ` 26,53,489

Option B
Lease Rent `16,50,000
Tax Shield (5,77,500)
Outflow 10,72,500 × 3.605 = `38,66,363
Since PV of outflows is lower in the Borrowing option, XYZ Ltd. should avail of the loan
and purchase the equipment.
10. Market Price (P) per share as per Walter’s Model is:
r
D (E  D)
P= Ke
Ke
Where,
P = Price of Share
r = Return on investment or rate of earning
Ke = Rate of Capitalisation or Cost of Equity
Calculation of Market Price (P) under the following dividend payout ratio and earning
rates:
(i) (ii) (iii)
Rate of DP ratio 50% DP ratio 75% DP ratio 100%
Earning (r)
 0.15   0.15   0.15 
(a) 15% 5  (10  5) 7.5    (10  7.5) 10    (10  10)
 0.10   0.10   0.10 
0.10 0.10 0.10
12.5 11.25 10
 `125  `112.5  `100
0.10 0.10 0.10

 0.10   0.10   0.10 

5  (10  5) 7.5    (10  7.5) 10    (10  10)
(b) 10%  0.10   0.10   0.10 
0.10 0.10 0.10
10 10 10
 `100  `100  `100
0.10 0.10 0.10
 0.05   0.05   0.05 
5  (10  5) 7.5    (10  7.5) 10    (10  10)
(c) 5%  0.10   0.10   0.10 
0.10 0.10 0.10
7.5 8.75 10
 `75  `87.5  `100
0.10 0.10 0.10
11. (i) The profit maximisation is not an operationally feasible criterion.” This statement is
true because profit maximisation can be a short-term objective for any organisation
and cannot be its sole objective. Profit maximization fails to serve as an operational
criterion for maximizing the owner's economic welfare. It fails to provide an
operationally feasible measure for ranking alternative courses of action in terms of
their economic efficiency. It suffers from the following limitations:
(i) Vague term: The definition of the term profit is ambiguous. Does it mean short
term or long term profit? Does it refer to profit before or after tax? Total profit or
profit per share?
(ii) Timing of Return: The profit maximization objective does not make distinction
between returns received in different time periods. It gives no consideration to
the time value of money, and values benefits received today and benefits
received after a period as the same.
(iii) It ignores the risk factor.
(iv) The term maximization is also vague.
(ii) Difference between Financial Lease and Operating Lease
Financial Lease Operating Lease

1. The risk and reward incident to The lessee is only provided the use of
ownership are passed on to the the asset for a certain time. Risk
lessee. The lessor only remains the incident to ownership belong wholly
legal owner of the asset. to the lessor.
2. The lessee bears the risk of The lessor bears the risk of
obsolescence. obsolescence.

3. The lessor is interested in his rentals As the lessor does not have difficulty
and not in the asset. He must get in leasing the same asset to other
his principal back along with willing lessor, the lease is kept
interest. Therefore, the lease is non- cancelable by the lessor.
cancellable by either party.
4. The lessor enters into the Usually, the lessor bears cost of
transaction only as financier. He repairs, maintenance or operations.
does not bear the cost of repairs,
maintenance or operations.
5. The lease is usually full payout, that The lease is usually non-payout,
is, the single lease repays the cost since the lessor expects to lease the
of the asset together with the same asset over and over again to
interest. several users.

SECTION: B: ECONOMICS FOR FINANCE

QUESTIONS
1. (a) How does Personal Income differ from Disposable Personal Income?
(b) Calculate Gross National Disposable income from the following data (in ` Crores)
NDP at factor cost 6000
Net factor income to abroad - 300
Consumption of fixed capital 400
Current transfers from government 200
Net current transfers from rest of the world 500
Indirect taxes 700
Subsidies 600
2 (a) What would happen if aggregate expenditures were to exceed the country’s
economy’s production capacity?
(b) What effects do income leakages have on multiplier?
(c) An Economy is characterised by the following equations:
Consumption (C) = 100+0.9 Yd
Investment (I) = 100
Government Expenditure (G) = 120
Tax (T) = 50
X (Exports) = 200
M (Imports) = 100+ 0.15 Y
(i) What is the equilibrium Income?
(ii) Calculate trade balance.
(iii) What is the value of Foreign Trade Multiplier?
3. (a) What should be the public revenue and expenditure policy during recession?
(b) Explain the different types of externalities? How do externalities lead to welfare loss
of markets?
(c) Describe price ceilings with examples.
4. Fiscal policy plays a significant role in reducing inequality and achieving equity and social
justice. Do you agree? Substantiate your answer with examples.
5. (a) Explain how ‘technical barriers to trade’ (TBT) may operate as a protectionist
measure?

(b) Distinguish between ‘pump priming’ and ‘compensatory spending’?

6. (a) Critically examine the post Keynesian theories of demand for money?
(b) (i) In Keynesian analysis of speculative demand for money, how will demand for
money be affected if people feel that the level of interest is very high? What is
the rationale behind their choice?
(ii) Do you think money is a unique store of value?
7. (a) Explain how each of the following may affect money multiplier and money supply?
(i) Fearing shortage of money in ATM’s, people decide to hoard money?
(ii) During festival season, people decide to withdraw money through ATMs very
often
(b) Explain the money multiplier approach to money supply.
(c) Explain the function of SLR? What are the eligible securities of SLR?
8. (a) Enumerate the bases of distinction between FDI and FPI
(b) What is meant by ‘monetary policy instruments’?
9. Distinguish between ‘non tariff measures’ and ‘non tariff barriers’
10. (a) How does the WTO address the special needs of developing and the least developed
countries?
(b) What’s meant by free trade area?
(c) What are the objectives of the Agreement on Agriculture (AOA)?
(d) Explain the effect of currency devaluation? Do you think a weak currency is
advantageous to a country?
1. (a) Personal income is a measure of actual current income receipts of persons from all
sources which may or may not be earned from productive activities during a given
period of time. In other words, it is the income ‘actually paid out’ to the household
sector, but not necessarily earned.
Disposable personal income is a measure of amount of the money in the hands of the
individuals that is available for their consumption or savings. Disposable personal
income is derived from personal income by subtracting the direct taxes paid by
individuals and other compulsory payments made to the government.
DI = PI - Personal Income Taxes

(b) Gross National Disposable Income (GNDI)= GNP MP + Net current transfer received
from rest of the world. Net current transfer received from rest of the world is the
difference between the current transfer received from rest of the world and current
transfers paid to rest of the world. Current transfers from government are not included
as they are simply transfers within the economy.
Gross National Disposable Income = (National Consumption Expenditure) + (Gross
National Saving)
= (Government final consumption expenditure+ Private final consumption
expenditure) + (Gross National Saving.)
Calculation: -
= NDP at factor cost + Consumption of fixed capital =GDP at factor cost
GDP at factor cost + Net factor income to abroad = GNP at factor cost
GNP at factor cost + (indirect taxes – subsidies) = GNP at market prices
GNP at market prices + Net current transfers from rest of the world
= Gross National Disposable income
= (6000+400) + (- 300) + (700-600) + 500
= 6400 - 300 + 100 + 500 = 6700 Crores
2. (a) Aggregate demand (AD) is the sum of all planned expenditures for the entire
economy. When aggregate expenditures exceed an economy’s production capacity
at full employment level; the resulting strain on resources creates “demand-pull”
inflation or higher price level. Nominal output will increase, but it merely reflects
higher prices, rather than additional real output.
(b) The multiplier is the ratio of the change in real GDP to the initial change in spending.
Causes responsible for the decline in income are called leakages. Income that is not
spent on currently produced consumption goods and services may be regarded as
having leaked out of income stream. If the increased income goes out of the cycle of
consumption expenditure, there is a leakage from income stream which reduces the
effect of multiplier. The more powerful these leakages are, the smaller will be the
value of multiplier.
(c) (i) National Income
Y = C+I+G+(X-M)
= (100+0.9Y d) +100+120+200-(100+0.15Y)
= 100+0.9(Y-T) +100+120+200-100-0.15Y
= 100+0.9(Y-50) +100+120+200-100-0.15Y
Y= 375+0.75Y

Y-0.75Y= 375
0.25Y= 375
100
Y= 375×  1500.00
25
(ii) Trade balance = X- M
= 200- (100+0.15Y)
Substituting the value of Y We have
Trade Balance = 200-100-225= -125
Trade balance is in deficit of 125.
1
(iii) Value of foreign trade Multiplier =
1 b  m
Where b marginal propensity to consume, and m is marginal propensity to
import. (Here MPC = 0.9 and marginal propensity to Import (m) = 0.15
1 1 1 100
Foreign trade Multiplier =    4
1  0.9  0.15 1.15  0.9 0.25 25
3. (a) Government’s fiscal policy for stabilization purposes attempts to direct the actions of
individuals and organizations by means of its expenditure and taxation decisions.
During recession, an expansionary fiscal policy is resorted to by government through
increased aggregate spending to compensate for the deficiency in effective demand.
Increased government expenditure (for example on building infrastructure) injects
more money into the economy, initiate a series of productive activities, stimulates
overall economic activities, employment and demand.
Production decisions, investments, savings etc can be influenced by government’s
tax policies. During recession, the government’s tax policy is framed to encourage
private consumption and investment. A general reduction in income taxes leaves
higher disposable incomes with people inducing higher consumption. Low corporate
taxes increase the prospects of profits for business and promote further investment.
(b) Externalities, also referred to as 'spillover effects', 'neighbourhood effects' 'third-party
effects' or 'side-effects', occur when the actions of either consumers or producers
result in costs or benefits that do not reflect as part of the market price. Externalities
cause market inefficiencies because they hinder the ability of market prices to convey
accurate information about how much to produce and how much to buy. Since
externalities are not reflected in market prices, they can be a source of economic
inefficiency. Externalities are initiated and experienced, not through the operation of
the price system, but outside the market and therefore are external to the market.
Externalities may be positive or negative or may be unidirectional or reciprocal.

Negative externalities occur when the action of one party imposes costs on another
party. Positive externalities occur when the action of one party confers benefits on
another party. The four possible types of externalities are
(i) negative externality initiated in production which imposes an external cost on
others,
(ii) positive production externality, less commonly seen, initiated in production that
confers external benefits on others,
(iii) negative consumption externalities initiated in consumption which produce
external costs on others,
(iv) positive consumption externality initiated in consumption that confers external
benefits on others. Each of the above may be received by another in
consumption or in production. The firm or the consumer as the case may be,
however, has no incentive to account for the external costs that it imposes on
consumers.
How negative externalities lead to welfare loss of markets may be explained with
the help of the following diagram
The equilibrium level of output that would be produced by a free market is Q1 at which
marginal private benefit (MPB) is equal to marginal private cost (MPC). Marginal
social cost (MSC) represents the full or true cost to the society of producing another
unit of a good. It includes marginal private cost (MPC) and marginal social cost
(MSC). Assuming that there are no externalities arising from consumption, we can
see that marginal social cost (Q1S) is higher than marginal private cost (Q1E). Social
efficiency occurs at Q2 level of output where marginal social cost is equal to marginal
social benefit. Output Q1 is socially inefficient because at Q1, the marginal social cost

is greater than the marginal social benefit and represents over production. The
shaded triangle represents the area of dead weight welfare loss. It indicates the area
of overconsumption. Thus, we conclude that when there is negative externality, a
competitive market will produce too much output relative to the social optimum. This
is a clear case of market failure where prices fail to provide the correct signals.
When there is a positive externality, the actual output is lower than the optimal one
at which marginal social (MSC) cost is equal to marginal social benefit (MSB). There
is a welfare loss to the society due to under production and under consumption. This
is a strong case for government intervention in the case of such goods.
(c) Price ceiling is a government intervention in regulated market economies wherein an
upper limit is set on the price charged for a product or service and the sellers are
bound to abide by such limits. The objective is to influence the outcomes of a market
on grounds of fairness and equity. When prices of certain essential commodities rise
excessively, government may resort to controls in the form of price ceilings (also
called maximum price) for making a resource or commodity available to all at
reasonable prices. Rent controls, setting of maximum prices of food grains and
essential items during times of scarcity etc are examples of price ceiling. A price
ceiling which is set below the prevailing market clearing price will generate excess
demand over supply and shortages will result.
4. Many developed and developing economies are facing the challenge of rising inequality in
incomes and opportunities. Fiscal policy is a chief instrument available to governments to
influence income distribution and plays a significant role in reducing inequality and
achieving equity and social justice. The distribution of income in the society is influenced
by fiscal policy both directly and indirectly. While current disposable incomes of individuals
and corporates are dependent on direct taxes, the potential for future earnings is indirectly
influenced by the nation’s fiscal policy choices.
Government revenues and expenditure have traditionally been regarded as important
instruments for carrying out desired redistribution of income. A progressive direct tax
system ensures that those who have greater ability to pay contribute more towards
defraying the expenses of government and that the tax burden is distributed fairly among
the population.
• Indirect taxes can be differential: for example, the commodities which are primarily
consumed by the richer income group, such as luxuries, are taxed heavily and the
commodities the expenditure on which form a larger proportion of the income of the
lower income group, such as necessities, are taxed light.
• A carefully planned policy of public expenditure helps in redistributing income from
the rich to the poorer sections of the society. This is done through spending
programmes targeted on welfare measures for the disadvantaged, such as
(i) poverty alleviation programmes

(ii) free or subsidized medical care, education, housing, essential commodities etc.
to improve the quality of living of poor
(iii) infrastructure provision on a selective basis
(iv) various social security schemes under which people are entitled to old -age
pensions, unemployment relief, sickness allowance etc.
(v) subsidized production of products of mass consumption
(vi) public production and/ or grant of subsidies to ensure sufficient supply of
essential goods, and
(vii) strengthening of human capital for enhancing employability etc.
Choice of a progressive tax system with high marginal taxes may act as a strong
deterrent to work save and invest. Therefore, the tax structure has to be carefully
framed to mitigate possible adverse impacts on production and efficiency.
Additionally, the redistributive fiscal policy and the extent of spending on redistribution
should be consistent with the macroeconomic policy objectives of the nation.
5. (a) The non tariff measure ‘technical barriers to trade’ (TBT) which cover both food and
non-food traded products refers to mandatory standards and technical regulatio ns
that define specific characteristics that a product should have, such as its size, shape,
design, labelling/marking/packaging, production methods, functionality or
performance. The specific procedures used to check whether a product is really
conforming to these requirements (conformity assessment procedures e.g. testing,
inspection and certification) are also covered in TBT. This involves compulsory
quality, quantity and price control of goods before shipment from the exporting
country. TBT measures are standards-based measures that countries use to protect
their consumers and preserve natural resources, but these can also be used
effectively as obstacles to imports or to discriminate against imports and protect
domestic products. In actual practice, technical measures create trade barriers for
existing and potential exporters for the following reasons:
(a) Altering products and production processes to comply with the diverse
requirements in export markets may be either impossible for the exporting
country or would obviously raise costs hurting the competitiveness of the
exporting country.
(b) Compliance with technical regulations needs to be established through testing,
certification or inspection by laboratories or certification bodies. These are
usually cumbersome and costly
(c) The exporters also need to incur additional costs for consultation, acquisition of
expertise, training etc.
In effect technical measures, or the ways in which they are applied, discriminate
against foreign producers and turn out to be trade restrictive rather than being

legitimate implementation of social policy. Some examples of TBT are: food laws,
quality standards, industrial standards, organic certification, eco-labelling, ingredient
standards, shelf-life restrictions, marketing and labelling requirements.
(b) A distinction is made between the two concepts of public spending during depression,
namely, the concept of ‘pump priming’ and the concept of 'compensatory spending'.
Pump priming involves a one-shot injection of government expenditure into a
depressed economy with the aim of boosting business confidence and encouraging
larger private investment. It is a temporary fiscal stimulus in order to set off the
multiplier process. The argument is that with a temporary injection of purchasing
power into the economy through a rise in government spending financed by borrowing
rather than taxes, it is possible for government to bring about permanent recovery
from a slump. Pumppriming was widely used by governments in the post-war era in
order to maintain full employment; however, it became discredited later when it failed
to halt rising unemployment and was held responsible for inflation. Compensatory
spending is said to be resorted to when the government spending is deliberately
carried out with the obvious intention to compensate for the deficiency in private
investment.
6. (a) The post-Keynesian economists developed a number of models to provide alternative
explanations to confirm the formulation relating real money balances with real income
and interest rates. Most post-Keynesian theories of demand for money emphasize
the store-of-value or the asset function of money.
Inventory Approach to Transaction Balances
Baumol (1952) and Tobin (1956) developed a deterministic theory of transaction
demand for money, known as Inventory Theoretic Approach, in which money or ‘real
cash balance’ was essentially viewed as an inventory held for transaction purposes.
People hold an optimum combination of bonds and cash balance, i.e., an amount that
minimizes the opportunity cost. The optimal average money holding is: a positive
function of income Y, a positive function of the price level P, a positive function of
transactions costs c, and a negative function of the nominal interest rate i.
Friedman's Restatement of the Quantity Theory
Milton Friedman (1956) extending Keynes’ speculative money demand within the
framework of asset price theory holds that demand for money is affected by the same
factors as demand for any other asset, namely, permanent income and relative
returns on assets. The nominal demand for money is positively related to the price
level, P; rises if bonds and stock returns, rb and re, respectively decline and vice versa;
is influenced by inflation; and is a function of total wealth. The Demand for Money as
Behaviour toward as ‘aversion to risk’ propounded by Tobin states that money is a
safe asset but an investor will be willing to exercise a trade-off and sacrifice to some
extent the higher return from bonds for a reduction in risk.

The Demand for Money as Behaviour towards Risk

According to Tobin, rational behaviour explained induces individuals to hold an
optimally structured wealth portfolio which is comprised of both bonds and money and
the demand for money as a store of wealth depends negatively on the interest rate.
These theories establish a positive relation of demand for money to real income and
an inverse relation to the rate of return on earning assets, i.e. the interest rate.
(b) (i) If wealth-holders consider that the current rate of interest is high compared to
the ‘normal or critical rate of interest’, they expect a fall in the interest rate (rise
in bond prices). At the high current rate of interest, people are discouraged from
holding money and hence they will convert their cash balances into bonds
because there is high opportunity cost of holding cash in terms of interest
forgone; as they can earn high rate of return on bonds. Also, there is less chance
of interest rates to rise further resulting in a fall in prices of bonds and
consequent capital losses. They expect fall in the market rate of interest in future
and capital gains resulting from a rise in bond prices. Anticipating such capital
gains from rising bond prices, people will convert their cash into bonds.
The inference from the above is that the speculative demand for money and
interest are inversely related. At higher rates of interest, the speculative
demand for money would be less. The individual would then hold as little
money as possible, only for covering the transactions and precautionary
motives
The individual's demand for money, as a function of the interest rate, would
then be a step function, depicting a discontinuous portfolio decision as shown
in figure below;
Individual’s Speculative Demand for Money

When the current rate of interest r n is higher than the critical rate of
interest rc, the entire wealth is held by the individual wealth-holder in the
form of bonds. If the rate of interest falls below the critical rate of interest
rc, the individual will hold his entire wealth in the form of speculative cash
balances.
(ii) The effectiveness of an asset as a store of value depends on the degree and
certainty with which the asset maintains its value over time. Money is undeniably
a good store of value; but it is not unique as a store of value. Financial assets
other than money are also performing the function of store of value just as money
has the financial assets have fixed nominal value over time and represent
generalised purchasing power. Any asset, such as equities, bonds, land,
buildings, precious metals, antiques and works of art can all act as store of
value.
7. (a) (i) The money multiplier is a function of the currency ratio set by depositors c, which
depends on the behaviour of the public in respect of holding money. The public
by their decisions in respect of the size of the nominal currency in hand
(designated as the currency ratio) is in a position to influence the amount of the
nominal demand deposits of the commercial banks. When people decide to
hoard to money fearing shortage of money in ATM’s, there is an increase in c
because depositors are converting some of their demand deposits into currency.
Demand deposits undergo multiple expansions while currency does not. Henc e
when demand deposits are being converted into currency, there is a switch from
a component of the money supply that undergoes multiple expansions to one
that does not. The overall level of multiple expansion declines, and therefore,
money multiplier also falls.
(ii) Demand deposits held by people are highly liquid as they can be easily
withdrawn and converted to cash. If people, for any reason, withdraw money
from ATMs with greater frequency, then banks will have to keep more cash
reserves to meet the obligations. This will raise the reserve ratio, and lower the
money multiplier. As a result money supply will decline.
(b) The money multiplier approach to money supply propounded by Milton Friedman and
Anna Schwartz, (1963) considers three factors as immediate determinants of money
supply, namely:
(a) the stock of high-powered money (H)
(b) the ratio of deposit to reserve, e = {ER/D} and
(c) the ratio of deposit to currency, c ={C/D}
These three represent the behaviour of the central bank, behaviour of the commerc ial
banks and the behaviour of the general public respectively.
(a) The Behaviour of the Central Bank: The behaviour of the central bank which

controls the issue of currency is reflected in the supply of the nominal high-
powered money. Money stock is determined by the money multiplier and the
monetary base is controlled by the monetary authority. Given the behaviour of
the public and the commercial banks, the total supply of nominal money in the
economy will vary directly with the supply of the nominal high-powered money
issued by the central bank.
(b) The Behaviour of Commercial Banks: By creating credit, the commercial banks
determine the total amount of nominal demand deposits. The behaviour of the
commercial banks in the economy is reflected in the ratio of their cash reserves
to deposits known as the ‘reserve ratio’. If the required reserve ratio on demand
deposits increases while all the other variables remain the same, more reserves
would be needed. This implies that banks must contract their loans, causing a
decline in deposits and hence in the money supply. If the required reserve ratio
falls, there will be greater multiple expansions of demand deposits because the
same level of reserves can now support more demand deposits and the money
supply will increase. The additional units of high-powered money that goes into
‘excess reserves’ of the commercial banks do not lead to any additional loans,
and therefore, these excess reserves do not lead to the creation of deposits.
When the required reserve ratio falls, there will be greater multiple expansions
for demand deposits. Excess reserves ratio e is negatively related to the market
interest rate i. If interest rate increases, the opportunity cost of holding excess
reserves rises, and the desired ratio of excess reserves to deposits falls.
(c) The Behaviour of the Public: The public, by their decisions in respect of the
amount of nominal currency in hand (how much money they wish to hold as
cash) is in a position to influence the amount of the nominal demand deposits of
the commercial banks. The behaviour of the public influences bank credit
through the decision on ratio of currency to the money supply designated as the
‘currency ratio’.
The time deposit-demand deposit ratio i.e. how much money is kept as time
deposits compared to demand deposits, also has an important implication for
the money multiplier and hence for the money stock in the economy. An increase
in TD/DD ratio means that greater availability of free reserves and consequent
enlargement of volume of multiple deposit expansion and monetary expansion.
Thus the money multiplier approach, the size of the money multiplier is
determined by the required reserve ratio (r) at the central bank, the excess
reserve ratio (e) of commercial banks and the currency ratio (c) of the public.
The lower these ratios are, the larger the money multiplier is. In other words,
the money supply is determined by high powered money (H) and the money
multiplier (m) and varies directly with changes in the monetary base, and
inversely with the currency and reserve ratios. Although these three variables
do not completely explain changes in the nominal money supply, nevertheless

they serve as useful devices for analysing such changes. Consequently, these
variables are designated as the ‘proximate determinants’ of the nominal money
supply in the economy.
(c) The Statutory Liquidity ratio (SLR) is an instrument of monetary policy and aims to
control liquidity in the domestic market by means of manipulating bank credit.
Changes in the SLR chiefly influence the availability of resources in the banking
system for lending. A rise in the SLR which is resorted to during periods of high
liquidity, tends to lock up a rising fraction of a bank’s assets in the form of eligible
instruments, and this reduces the credit creation capacity of banks. A reduction in
the SLR during periods of economic downturn has the opposite effect. The SLR
requirement also facilitates a captive market for government securities.
Following are the eligible securities of SLR;
(i) Cash
(ii) Gold valued at a price not exceeding the current market price,
or
(iii) Investments in un-encumbered Instruments that include:
(a) Treasury-bills of the Government of India.
(b) Dated securities including those issued by the Government of India from
time to time under the market borrowings programme and the Market
Stabilization Scheme (MSS).
(c) State Development Loans (SDLs) issued by State Governments under their
market borrowings programme.
(d) Other instruments as notified by the RBI.
8. (a) Foreign direct investment takes place when the resident of one country (i.e. home
country) acquires ownership of an asset in another country (i.e. the host country) and
such movement of capital involves ownership, control as well as management of the
asset in the host country. Foreign portfolio investment is the flow of what economists
call ‘financial capital’ rather than ‘real capital’ and does not involve ownership or
control on the part of the investor.
Foreign direct investment (FDI) VS Foreign portfolio investment (FPI)
Foreign direct investment (FDI) Foreign portfolio investment (FPI)
Investment involves creation of Investment is only in financial assets
physical assets
Has a long term interest and Only short term interest and generally
therefore remain invested for long remain invested for short periods
Relatively difficult to withdraw Relatively easy to withdraw

Not inclined to be speculative Speculative in nature

Often accompanied by technology Not accompanied by technology transfer
transfer
Direct impact on employment of No direct impact on employment of labour
labour and wages and wages
Enduring interest in management No abiding interest in management and
and control control
Securities are held with significant Securities are held purely as a financial
degree of influence by the investor investment and no significant degree of
on the management of the influence on the management of the
enterprise enterprise
(b) Monetary policy instruments are the various direct and indirect instruments or tools
that a central bank can use to influence money market and credit conditions and
pursue its monetary policy objectives. In general, the direct instruments comprise of:
(a) the required cash reserve ratios and liquidity reserve ratios prescribed from time
to time.
(b) directed credit which takes the form of prescribed targets for allocation of credit
to preferred sectors (for e.g. Credit to priority sectors), and
(c) administered interest rates wherein the deposit and lending rates are prescribed
by the central bank.
The indirect instruments mainly consist of:
(a) Repos
(b) Open market operations
(c) Standing facilities, and
(d) Market-based discount window.
9. Non-tariff measures are policy measures other than ordinary customs tariffs that can
potentially have an economic effect on international trade in goods, changing quantities
traded, or prices or both (UNCTAD, 2010). They form a constellation of different types of
policies which alter the conditions of international trade. They are more difficult to quantify
or compare than tariffs. NTMs can be instituted for a range of public policy reasons and
have been negotiated within the General Agreement on Tariffs and Trade and at the World
Trade Organization NTMs are allowed under the WTO’s regulations and are meant to allow
governments to pursue legitimate policy goals even if this can lead to increased trade
costs. For example, NTMs like sanitary and phytosanitary measures and licensing could
be legitimately used by members to ensure consumer health and to protect plant and
animal life and environment.

Depending on their scope and/or design NTMs are categorized as:

(i) Technical Measures: Technical measures refer to product-specific properties such
as characteristics of the product, technical specifications and production processes.
These measures are intended for ensuring product quality, food safety, environmental
protection, national security and protection of animal and plant health.
(ii) Non-technical Measures: Non-technical measures relate to trade requirements; for
example; shipping requirements, custom formalities, trade rules, taxation policies,
etc.
These are further distinguished as:
a. Hard measures (e.g. Price and quantity control measures),
b. Threat measures (e.g. Anti-dumping and safeguards) and
c. Other measures such as trade-related finance and investment measures.
Furthermore, the categorization also distinguishes between:
(i) Import-related measures which relate to measures imposed by the importing country,
and
(ii) Export-related measures which relate to measures imposed by the exporting country
itself.
NTMs are not the same as non-tariff barriers (NTBs). NTMs are sometimes used as means
to circumvent free-trade rules and favour domestic industries at the expense of foreign
competition. In this case they are called non-tariff barriers (NTBs). NTBs are a subset of
NTMs that have a 'protectionist or discriminatory intent' and implies a negative impact on
trade. NTMs only become NTBs when they are more trade restrictive than necessary.
Some examples of NTBs are compulsory standards, often not based on international norms
or genuine science; stringent technical regulations requiring alterations in production
processes, testing regimes which require complex procedures and product approvals
requiring inspection of individual premises. In addition, to these, there are procedural
obstacles (PO) which are practical problems in administration, transportation, delays in
testing, certification etc. that may make it difficult for businesses to adhere to a given
regulation.
10. (a) The WTO addresses the special needs and problems of developing and the least
developed countries in the following ways.
(i) Special and Differential Treatment (S&DT) for these countries is incorporated in
the WTO laws and rules.
(ii) Developing and the least developed countries are generally given longer
implementation time to conform to their obligations for promotion of freer trade.
(iii) They are also given more flexibility in matter of compliance with the WTO and
special privileges and permission to phase out the transition period.

(iv) These countries are granted transition periods to make adjustments to the not
so familiar and intricate WTO provisions
(v) Members may violate the principle of MFN to give special market access to
developing countries.
(b) Free trade policy is based on the principle of non-interference by government in
foreign trade. The distinction between domestic trade and international trade
disappears and goods and services are freely imported from and exported to the rest
of the world. Buyers and sellers from separate economies voluntarily trade without
the domestic government helping or hindering movements of goods and services
between countries by applying tariffs, quotas, subsidies or prohibitions on their goods
and services. The theoretical case for free trade is based on Adam Smith’s argument
that the division of labour among countries leads to specialization, greater efficiency,
and higher aggregate production.
(c) The Agreement on Agriculture (AoA) is an international treaty of the World Trade
Organization negotiated during the Uruguay Round. It contains provisions in three
broad areas of agriculture and trade policy: market access, domestic support and
export subsidies. The Agreement aims to:
(i) establish fair and market oriented agricultural trading system, and
(ii) provide for substantial and progressive reduction in agricultural support and
export subsidies with a view to remove distortion in the world market. These are
to be achieved through enhancement of market access, reduction of domestic
support and elimination of export subsidies.
(d) Devaluation is a deliberate downward adjustment in the value of a country's currency
relative to another currency, group of currencies or standard. It is a policy tool used
by countries that have a fixed exchange rate or nearly fixed exchange rate regime
and involves a discrete official reduction in the otherwise fixed par value of a currency.
The monetary authority formally sets a new fixed rate with respect to a foreign
reference currency or currency basket.
Devaluation is primarily an expenditure switching policy. Ceteris paribus, the
weakening of currency can have positive effects on an economy’s trade balance.
Devaluation increases the price of foreign goods relative to goods produced in the
home country and diverts spending from foreign goods to domestic goods.
Devaluation implies that foreigners pay less for the devalued currency and that the
residents of the devaluing country pay more for foreign currencies. By lowering export
prices, devaluation helps increase the international competitiveness of domestic
industries and increases the volume of exports. Devaluation lowers the relative price
of a country’s exports, raises the relative price of its imports, increases demand both
for domestic import-competing goods and for exports, leads to output expansion,
encourages economic activity, increases the international competitiveness of
domestic industries, increases the volume of exports and promotes trade balance.

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PAPER – 1: ACCOUNTING

PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

PART – II: QUESTIONS AND ANSWERS

Financial Statements of Companies

© The Institute of Chartered Accountants of India

Other advances 14,88,000 Trade receivables 49,00,000

© The Institute of Chartered Accountants of India

company in respect of payment of remuneration for a period not exceeding three

© The Institute of Chartered Accountants of India

Further Information is available:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

You are required to

© The Institute of Chartered Accountants of India

1. Stock as per balance sheet as on 31.3.2017 ` 63,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Accounts from Incomplete Records

© The Institute of Chartered Accountants of India

(f) Difference in cash book, if any, is to be treated as further drawing or introduction of

Dissolution expenses were provided for estimated amount of ` 24,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1. (a) Balance Sheet of Mehar Ltd. as at 31 st March, 2018

© The Institute of Chartered Accountants of India

40,000 10% Redeemable Preference

© The Institute of Chartered Accountants of India

(ii) Dividend distribution tax @ 17.304% 2,03,576

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Rent 4,000 34,400

© The Institute of Chartered Accountants of India

(For final calls of ` 2 per share on 2,70,000

© The Institute of Chartered Accountants of India

Value of right = Cum-right value of the share – Ex-right value of the

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Less: Premium on redemption of debentures (1,200 x ` 5) (6,000) 89,000

© The Institute of Chartered Accountants of India

8,000 8,000 1,00,250 8,000 8,000 1,00,250

© The Institute of Chartered Accountants of India

Note: It is presumed that no dividend is received on bonus shares as bonus shares

Statement of Claim for Loss of Stock

© The Institute of Chartered Accountants of India

Less: Purchase of Machinery (10,000)

© The Institute of Chartered Accountants of India

Book value of car left with the hire purchaser 1,28,000

General Profit and Loss Account

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

13. Trading and Profit and Loss Account of ABC enterprise

© The Institute of Chartered Accountants of India

doubtful debts 1,455 71,295

© The Institute of Chartered Accountants of India

Less: Closing inventory (70,000)

© The Institute of Chartered Accountants of India

To Outstanding expenses By Prepaid expenses A/c

(7) Bills Receivable on 31 st March, 2017