Revision Test Paper: Cap-Ii: Advanced Accounting: Questions Accounting For Departments

REVISION TEST PAPER:
CAP-II: ADVANCED ACCOUNTING
QUESTIONS
Accounting for Departments

1. Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 10% profit
on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales, respectively.
Department Z charges 20% and 25% profit on cost to Department X and Y, respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealized profit on
departmental sales being eliminated. Departmental profits after charging Managers‘ commission, but before
adjustment of unrealized profit are as under:
Rs.
Department X 36,000
Department Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
Rs. Rs. Rs.
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 —
Find out the correct departmental Profits after charging Managers‘ commission
Insurance Claim
2. On 2.6.2072 the stock of Mr. Narendra was damaged by flood. However, following particulars were
furnished from the records saved:
Stock at cost on 1.4.2071 135,000
Stock at 90% of cost on 31.3.2072 162,000
Purchases for the year ended 31.3.2072 645,000
Sales for the year ended 31.3.2072 900,000
Purchases from 1.4.2072 to 2.6.2072 225,000
Sales from 1.4.2072 to 2.6.2072 480,000
Sales upto 2.6.2072 includes Rs. 75,000 being the goods not dispatched to the customers. The sales
invoice price is Rs. 75,000. Purchases upto 2.6.2072 includes a machinery acquired for Rs. 15,000.
Purchases upto 2.6.2072 does not include goods worth Rs. 30,000 received from suppliers, as invoice not
received upto the date of fire. These goods have remained in the godown at the time of incident. The
insurance policy is for Rs. 120,000 and it is subject to average clause. Ascertain the amount of claim for
loss of stock.
Investment Accounts
3. On 1.4.2070, Mrs. Sabina Thapa purchased 1,000 equity shares of Rs. 100 each in SBB Ltd. @ Rs. 120
each from a Broker, who charged 1% brokerage. She incurred 50 paisa per Rs. 100 as cost of shares
transfer stamps. On 31.1.2071, 50% Bonus share was declared. Before and after the rec ord date of bonus
shares, the shares were quoted at Rs. 155 per share and Rs. 90 per share respectively. On 28.2.2071 Mrs.
Thapa sold bonus shares through a Broker, who charged 1% brokerage.
She held the shares as Current assets. Show the Investment Account in the books of Mrs. Thapa on
31.3.2071 when the market value per share was Rs. 79.
RTP-CAP II –2015-December @ICAN Page 1 of 153

Accounting for Branches
4. A company has three branches at Thimi, Kapan and Gwarko. The Head Office at Newroad purchases
goods and sends them to branches, to be sold at a uniform percentage of profit on cost. The following
particular are made available to you to enable you to prepare a combined Trading Account for the year
ended 31st Ashadh, 2071.
Newroad Thimi Kapan Gwarko
Rs. Rs. Rs. Rs.
Stock on 1st Shrawan, 2070 54,000 16,000 12,500 10,000
Purchases in the year 274,000 - - -
Sales - 180,000 120,000 100,000
Stock on 31st Ashadh, 2071 28,000 6,000 5,000 2,500
Branch Accounts on 1st Shrawan, 2070:
Thimi 15,000
Kapan 32,000
Gwarko 4,000
Remittances from Branch 320,000 150,000 100,000 70,000
Newroad Office invoices goods to the branches at fixed sales prices but maintains branch accounts in its
ledgers at cost price.
Hire Purchase Transactions

5. From the following information extracted from the books of Pashupati Enterprises prepare Hire
Purchase Trading account for the year ended 31.3.2072, showing the profit in respect of the hire
purchase business of the company:
(i) Instalments due but not received on 1.4.2071 Rs. 30,000
(ii) Instalments due but not received on 31.3.2072 Rs. 50,000
st
(iii) Cash received during the year ended 31 Ashadh 2072 by way of hire purchase instalments Rs.
4,000,000.
(iv) Value of stock ‗out‘ on hire purchase as at 1.4.2071 at hire purchase price (loading 20% above cost)
Rs. 120,000
(v) Cost price of truck ‗out‘ in hire purchase as on 31.3.2072, amounted Rs. 2,000,000 in respect of
which instalments receivable were Rs. 2,400,000 and instalments received and due up to 31.3.2072
amounted Rs. 1,800,000 in total.
(vi) Purchase of trucks during the financial year 2071/72 Rs. 4,000,000.
(vii) Sale of trucks, otherwise than on HP (at a profit of 6.25% of cost thereof) Rs. 425,000
(viii) Body building charges in respect of truck, sold on HP Rs. 200,000.
(ix) Interest paid was Rs. 40,000 and unsold trucks on 31.3.2072 at cost price were Rs. 80,000 (Hire
purchase price Rs. 96,000)
Issue of Shares and Debentures

6. Elite Limited recently made a public issue in respect of which the following information is available:
a) No. of partly convertible debentures issued 200,000; face value and issue price NRs.100 per
debenture.
b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from the date of
closing of issue.
c) Date of closure of subscription lists 1.5.2007, date of allotment 1.6.2007, rate of interest on debenture
15% payable from the date of allotment, value of equity share for the purpose of conversion NRs. 60
(Face Value NRs. 10).
d) Underwriting Commission 2%.
e) No. of debentures applied for 150,000.
f) Interest payable on debentures half-yearly on 30th September and 31st March.

Write relevant journal entries for all transactions arising out of the above during the year ended 31st March,
2008 (including cash and bank entries).
7. Everest Co. Ltd. issued 200,000 shares of Rs. 100 each at a premium of Rs. 20 per share payable as
follows:
on application Rs. 20
on allotment Rs. 50 (including premium)
on First/ call Rs. 30
on second and final call Rs. 20
Applications were received for 300,000 shares and pro-rata allotment was made to applicants of 240,000
shares. Amount excess received on application was employed on account of sum due on allotment as part of
share capital. Mr. Subash, to whom, 4,000 shares were allotted, failed to pay the allotment money and on his
subsequent failure to pay the first call, his shares were forfeited and Mr. Dhiraj, the holder of 6,000 shares
failed to pay to calls and his shares were forfeited after the second call. Of the forfeited shares, 8,000 shares
were reissued to Mr. Gopal at a discount of 10%, the whole of Dhiraj's forfeited shares being reissued. Pass
necessary journal entries in the books of Everest Co. Ltd.
Underwriting of Shares and Debentures

8. Kathmandu Ltd. came out with an issue of 450,000 equity shares of Rs. 100 each at a premium of Rs. 20
per share. The promoters took 20% of the issue and the balance was offered to the public. The issue was
equally underwritten by A & Co; B & Co. and C & Co.
Each underwriter took firm underwriting of 10,000 shares each. Subscriptions for 310,000 e quity shares
were received with marked forms for the underwriters as given below:
A & Co. 72,500 shares
B & Co. 84,000 shares
C & Co. 131,000 shares
Total 287,500 shares
The underwriters are eligible for a commission of 5% on face value of shares. The entire amount towards
shares subscription has to be paid along with application. You are required to:
(a) Prepare the statement showing the underwriters‘ liability (number of shares)
(b) Compute the amounts payable or due to underwriters; and
(c) Pass necessary journal entries in the books of Kathmandu Ltd. relating to underwriting.
Incomplete Records
9. The following is the Balance Sheet of Pathibhara Enterprises on 31 st Ashadh, 2070 :
Rs. Rs.
Capital 1,000,000 Fixed Assets 400,000
Creditors (Trade) 140,000 Stock 300,000
Profit & Loss A/c 60,000 Debtors 150,000
Cash & Bank 350,000
1,200,000 1,200,000
The management estimates the purchases and sales for the year ended 31st Ashadh, 2071 as under:
upto 31.2.2071 Ashadh 2071
Rs. Rs.
Purchases 1,410,000 110,000
Sales 1,920,000 200,000
It was decided to invest Rs. 100,000 in purchases of fixed assets, which are depreciated @ 10% on cost.
The time lag for payment to Trade Creditors for purchase and receipt from sales is one month. The business
earns a gross profit of 30% on turnover. The expenses against gross profit amount to 10% of the turnover.
The amount of depreciation is not included in these expenses.
Draft a Balance Sheet as at 31st Ashadh, 2071 assuming that creditors are all Trade Creditors for purchases
and debtors for sales and there is no other item of current assets and liabilities apart from stock and cash and
bank balances.

Ratio Analysis
10. Nyatapola Enterprises asked you to prepare their Balance Sheet from the particulars furnished
hereunder:
Gross Profit Margin: 10%
Stock Velocity: 12
Capital turnover ratio: 2
Fixed assets turnover ratio: 5
Debt collection period: 1 month
Creditor‘s payment period: 73 days
Gross Profit: Rs. 100,000
Excess of closing stock over opening stock: Rs. 30,000
Make suitable assumptions wherever necessary.
Business Combination
11. The following is the Balance Sheet of Blue Star Ltd. as at 31 st Ashadh, 2072:
Liabilities Rs. Assets Rs.
8,000 equity shares of Rs.100 each 800,000 Building 340,000
10% debentures 400,000 Machinery 640,000
Loan from A 160,000 Stock 220,000
Creditors 320,000 Debtors 260,000
General Reserve 80,000 Bank 136,000
Goodwill 130,000
Deferred Revenue Exp. 34,000
1,760,000 1,760,000
Big Star Ltd. agreed to absorb Blue Star Ltd. on the following terms and conditions:
(1) Big Star Ltd. would take over all Assets, except bank balance at their book values less 10%.
Goodwill is to be valued at 4 year‘s purchase of super profits, assuming that the normal rate of
return be 8% on the combined amount of share capital and general reserve.
(2) Big Star Ltd. is to take over creditors at book value.
(3) The purchase consideration is to be paid in cash to the extent of Rs. 600,000 and the balance in
fully paid equity shares of Rs.100 each at Rs.125 per share.
The average profit is Rs. 124,400. The liquidation expenses amounted to Rs. 16,000 to be borne by
Big Star Ltd. Blue Star Ltd. had purchased prior to 31 st Ashadh, 2072 goods costing Rs. 120,000
from Big Star Ltd. for Rs. 160,000. Rs. 100,000 worth of goods is still in stock of Blue Star Ltd.
on 31st Ashadh, 2072. Creditors of Blue Star Ltd. include Rs.40,000 still due to Big Star Ltd.
Show the necessary Ledger Accounts to close the books of Blue Star Ltd. and prepare the Balance
Sheet (extract) of Big Star Ltd. as at 1 st Shrawan, 2072 after the takeover.
Internal Reconstruction
12. The following is the Balance Sheet of Pokhara Light Ltd. as on 31.3.2072:
Equity shares of Rs.100 each 10,000,000 Fixed assets 12,500,000
12% cumulative preference shares of 5,000,000 Investments (Market value 1,000,000
Rs.100 each Rs.950,000)
10% debentures of Rs.100 each 4,000,000 Current assets 10,000,000
Sundry creditors 5,000,000 P & L A/c 400,000
Provision for taxation 100,000 Preliminary expenses 200,000
24,100,000 24,100,000
The following scheme of reorganization is sanctioned by the AGM and Court:
(i) All the existing equity shares are reduced to Rs.40 each.
(ii) All preference shares are reduced to Rs.60 each.
(iii) The rate of interest on debentures is increased to 12%. The debenture holders surrender their
existing debentures of Rs.100 each and exchange the same for fresh debentures of Rs. 70 each
for every debenture held by them.
(iv) One of the creditors of the company to whom the company owes Rs. 2,000,000 decides to forgo
40% of his claim. He is allotted 30,000 equity shares of Rs.40 each in full satisfaction of his
claim.
(v) Fixed assets are to be written down by 30%.
(vi) Current assets are to be revalued at Rs. 4,500,000.
(vii) The taxation liability of the company is settled at Rs.150,000.
(viiii) Investments to be brought to their market value.
(ix) It is decided to write off the fictitious assets.
Pass Journal entries and show the Balance sheet of the company after giving effect to the above.
Profit or Loss Pre and Post Incorporation

13. The partnership of Bara Enterprises decided to convert the partnership into private limited company
named Churimai Company Pvt. Ltd. with effect from 1 st Baisakh 2071. The consideration was agreed at
Rs. 234,00,000 based on firm‘s Balance Sheet as on 31 st Chaitra 2070. However, due to some procedural
difficulties, the company could be incorporated only on 1 st Shrawan 2071. Meanwhile, the business was
continued on behalf of the company and the consideration was settled on that day with interest at 12%
p.a. The same books of accounts were continued by the company, which closed its accounts for the first
time on 31st Ashadh, 2072 and prepared the following summarized profit and loss account:
Particulars Rs. Particulars Rs.
To Cost of goods sold 327,60,000 By sales 468,00,000
To Salaries 2340,000
To Depreciation 360,000
To Advertisement 1404,000
To Discount 2340,000
To Managing Director‘s Salary 180,000
To Miscellaneous Office Expenses 240,000
To Office/Showroom Rent 1440,000
To Interest paid 1902,000
To Net Profit 3834,000
Total 468,00,000 Total 468,00,000
The company‘s only borrowing was a loan of Rs. 100,00,000 at 12% p.a. to pay the purchase
consideration due to the firm and for working capital requirements. The company was able to double the
monthly average sales of the company from 1 st Shrawan 2071 but the salaries treble from that date. It had
to occupy additional space from 1 st Kartik 2071 for which rent was Rs. 60,000 per month.
Prepare a statement showing apportionment of costs and revenue between pre -incorporation and post-
incorporation periods.
Liquidator’s Final Statement

14. The following is the Balance Sheet of Himchuli Co. Limited as at 31 st Ashadh, 2072:
Share Capital: Fixed Assets:
2,000 Equity Shares of Rs. 100 Land & Buildings 400,000
each Rs. 75 per share paid up 150,000 Plant and Machineries 380,000
6,000 equity shares of Rs. 100 Current Assets:
each Rs. 60 per share paid up 360,000 Stock at Cost 110,000
2,000 10% Preference Share of Cash at Bank 60,000
Rs. 100 each fully paid up 200,000 Profit and Loss A/c 240,000
10% Debentures (having a floating Sundry Debtors 220,000
charge on all assets) 200,000
Interest accrued on Debentures
(also secured as above) 10,000
Sundry Creditors 490,000
1,410,000 1,410,000
On that date, the company went into Voluntary Liquidation. The dividends on preference shares were in
arrear for the last two years. Sundry Creditors include a loan of Rs. 90,000 on mortgage of Land and
Buildings. The assets realized were as under:-
Rs.
Land and Buildings 340,000
Plant & Machineries 360,000
Stock 120,000
Sundry Debtors 160,000
Interest accrued on loan on mortgage of buildings upto the date of payment amounted to Rs. 10,000. The
expenses of Liquidation amounted to Rs. 4,600. The Liquidator is entitled to a remuneration of 3% on all
the assets realized (except cash at bank) and 2% on the amounts distributed among equity shar eholders.
Sundry creditor included preferential creditors Rs. 30,000. All payments were made on 31 st Ashwin
2072. Prepare the liquidator‘s final statement.
Accounting for Partnership

15. A, B and C were partners of a firm sharing profits and losses in the ratio of 3 : 4 : 3. The Balance Sheet
of the firm, as at 31st Ashadh, 2070 was as under:
Capital Accounts: Fixed Assets 100,000
A 48,000 Current Assets:
B 64,000 Stock 30,000
C 48,000 160,000 Debtors 60,000
Reserve 20,000 Cash and Bank 30,000
Creditors 40,000
220,000 220,000
The firm had taken a Joint Life Policy for Rs. 100,000; the premium periodically paid was charged to
Income Statement. Partner C died on 30 th Poush, 2070. It was agreed between the remaining partners
and the legal representatives of C that:
(i) Goodwill of the firm will be taken at Rs. 60,000.
(ii) Fixed Assets will be written down by Rs. 20,000.
(iii) In lieu of profits, C should be paid at the rate of 25% per annum on his capital as on 31 st Ashadh,
2070.
Policy money was received and the legal representatives were paid off. The profits for the year ended
31st Ashadh, 2071, after charging depreciation of Rs. 10,000 (depreciation upto 30 th Poush was agreed
to be Rs. 6,000) were Rs. 48,000. Legal representative claimed proportionate profit for remaining
period after death.
Partners‘ Drawings Accounts showed balances as under:
A Rs. 18,000 (drawn evenly over the year)
B Rs. 24,000 (drawn evenly over the year)
C (up-to-date of death) Rs. 20,000
On the basis of the above figures, please indicate the entitlement of the legal representatives of C,
assuming that they had not been paid anything other than the share in the Joint Life Policy.
16. A, B and C are partners of the firm ‗KK Enterprises‘ for the past 5 years. The par tners decided to
dissolve the firm consequent to insolvency of partner C in Magh, 2070. The Balance Sheet of the
firm as on 31.10.2070 is furnished below. They share profits and losses equally:
Capital Accounts: Land and Building 500,000
A 450,000 Plant and Machinery 200,000
B 450,000 Furniture and Fittings 50,000
C 200,000 Stock in Trade 300,000
General Reserve 210,000 Debtors 500,000
Creditors 290,000 Cash at Hand/Bank 50,000
1,600,000 1,600,000
The partners A and B decided to form a new firm ‗RR Traders‘ and takeover all the assets and
liabilities of the firm at values given below:
Land and Building Rs. 350,000
Plant and Machinery Rs. 150,000
Furniture and Fittings Rs. 20,000
Stock in trade Rs. 200,000
Debtors include Rs. 300,000 due from SK & Co. owned by C. (Nothing is recoverable from the
said concern). Other debtors can be recovered fully.
Prepare:
(i) Realisation account, Partners‘ capital accounts in the books of KK Enterprises; and
(ii) The Balance Sheet of RR Traders (immediately after commencement).
Accounting for Banks

17. BIG Bank Limited provides you the following information regarding Loan Loss provisioning as on 31 st
Ashadh 2071:
Category Amount Rs.

1. Pass 5000,000
2. Rescheduled /Restructured 210,000
3. Substandard 500,000
4. Doubtful 300,000
5. Bad 500,000
During financial year 2071-72 additional loans amounting to Rs. 3,000,000 were disbursed. The Bad loans
amounting to Rs. 200,000 was written off during the year. Loans amounting to Rs. 150,000 were shifted
from Doubtful category to Bad category. Similarly, Loans amounting to Rs. 500,000 shifted from Good
category to substandard category and Substandard Loans amounting to Rs. 200,000 were rescheduled
during the year.
From the above information, you are required to calculate the loan loss provision and pass necessary journal
entries in the books of BIG Bank Limited as per the directive issued by Nepal Rastra Bank and find the
percentage of total Non-Performing Assets.
18. From the following information calculate Core capital ratio and total capital adequacy ratio of BIG
Bank Ltd. and suggest management about the compliance of the same:
In lakh
Paid up Capital 20,000
General Reserve Fund 377
Retained Earnings 308
Profit for current year 1,945
General Loan Loss Provision 1,215
Investment Adjustment Reserve 22
Loan Given to Relatives of Staffs 37
Risk weighted Exposure for Credit Risk 213,546
Risk weighted Exposure for Operational Risk 4,235
Risk Weighted Exposure for Market Risk 1,618

Cash Flow Statement
19. The following are the changes in the account balances taken from the balance sheet of Nepal Ltd. as the
beginning and end of the year.
Particular Debit Credit
8% Debentures 150,000
Debenture Discount 3,000
Plant and Machinery at cost 180,000
Depreciation on Plant and Machinery 43,200
Trade Receivables 150,000
Inventory including work in progress 115,500
Trade payables 35,400
Net profit for the year 229,500
Dividend paid in respect of earlier years 90,000
Provision for Doubtful Debts 9,900
Trade Investments at cost 141,000
Bank 211,500
Total 679,500 679,500
You are informed that:

 During the year plant costing Rs. 54,000 against which depreciation provision of Rs. 40,500 was lying
was sold for Rs. 21,000.
 During the middle of the year, Rs. 150,000 debentures were issued for cash at a discount of Rs. 3,000.
 The net profit for the year was after crediting the profit on sale of plant and charging debenture
interest.
Prepare a cash flow statement which will explain why bank borrowing has increased by Rs. 211,500
during the year end, ignore taxation.
Nepal Accounting Standards

20. a. Curex Pvt. Ltd., a pharmaceutical company, while valuing its finished stock at the year end wants to
include interest on bank overdraft as an element of cost, for the reason that overdraft has been taken
specifically for the purpose of financing current assets like inventory and for meeting day to day working
expenses. State your comments on this treatment.
b. Indicate any three areas in respect of which different accounting policies may be adopted by different
enterprises. Also indicate the requirements with regard to disclosure of accounting policies as per the
relevant NAS.
c. A company is in a dispute involving allegation of infringement of patents by a competitor company who is

seeking damages of a huge sum of Rs. 20 million. The directors are of the opinion that the claim can be
successfully resisted by the company. How would you deal with the same in the annual accounts of the
company?
d. An earthquake destroyed a major warehouse of ABC Ltd. on 30.4.2072. The accounting year of the
company ended on 31.3.2072. The accounts were approved on 30.6.2072. The loss from earthquake is
estimated at Rs. 25 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or non-
adjusting event and how the fact of loss is to be disclosed by the company.
e. From the information furnished you are required to compute the basic and diluted EPS (earnings per share)
for accounting year 1.4.2071 to 31.3.2072 and adjusted EPS for the year ended 32.3.2071.
Net profit for year ended 32.3.2071 75,50,000
Net profit for year ended 31.3.2072 100,25,000
No. of equity shares as on 1.4.2071 50,00,250

Bonus issue on 1.1.2072 1 share for every 2 held
No. of 12% convertible debentures of Rs. 100 each issued on 1.1.2072 100,000
Conversion ratio of Debentures 10 shares per debenture
Tax rate 30 percent
Write Short Notes

21. (a). Reinsurance
(b). Related Party Transactions
(c). Super profits in partnership firms
(d). Components of Financial Statement
(e). Government Accounting System in Nepal
(f). Prediction of insolvency on the basis of ratios
(g). Advantages of Customised Accounting Packages

SUGGESTED ANSWERS
Accounting for Departments

1. Answer:
Statement of Correct Profit
Depart– Depart– Depart–
ment X ment Y ment Z
Rs. Rs. Rs.
Profit after charging managers‘ commission 36,000 27,000 18,000
Add back: Managers‘ commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000
Less: Unrealized profit on stock
(Working Note) 4,000 4,500 2,000
Profit before Manager‘s commission 36,000 25,500 18,000
Less: Commission for Department
Manager @10% 3,600 2,550 1,800
32,400 22,950 16,200
Working Note:
Stock lying with
Dept. X Dept. Y Dept. Z Total
Rs. Rs. Rs. Rs.
Unrealized Profit of:
Department X 1/5×15,000 =3,000 1/11×11,000 =1,000 4,000
Department Y 0.15×14,000 =2,100 0.20×12,000 =2,400 4,500
Department Z 1/6×6,000 =1,000 1/5×5,000 =1,000 2,000
.
Insurance Claim
2. Answer:
In the books of Narendra
Trading Account for the year ended 31.3.2072
To Opening stock 135,000 By Sales 900,000
To Purchases 645,000 By Closing Stock 180,000
To Gross Profit 300,000 (162,000X90/100)
Total 1,080,000 1,080,000
Memorandum Trading Account

for the period form 1.4.2072 to 2.6.2072
To Opening stock 180,000 By Sales 480,000
To Purchases 225,000 Less: goods not (75,000) 405,000
Add: goods received but invoice not 30,000 dispatched
Less: machinery purchased (15,000) 240,000 By Closing Stock 150,000
To Gross Profit (working note) 135,000 (balancing figure)
Total 555,000 Total 555,000
Calculation of insurance claim

Claim subject to average clause: 120,000X150,000/150,0000 = 120,000
Working note:
Gross profit ratio = (300,000/900,000)X 100% = 1/3rd on sales
Amount of gross profit = 405,000 x 1/3 = 135,000
Investment Accounts
3. Answer:
In the books of Mrs. Sabina Thapa
Investment Account (Share)
for the year ended 31.3.2071
Dr. Cr.
Date Particulars Nominal Cost Date Nominal Cost
Value Value
(Rs.) (Rs.) (Rs.) (Rs.)
1.4.70 To Bank A/c 1,00,000 1,21,800 28.2.71 By Bank A/c 50,000 44,550
31.1.71 To Bonus shares 50,000  31.3.71 By P & L A/c - 2,200
28.2.71 To P & L A/c  3,950 31.3.71 By Balance c/d 1,00,000 79,000
1,50,000 1,25,750 1,50,000 1,25,750
Working Notes:
(i) Cost of shares purchased on 1.4.2070 = 1,000  Rs. 120 + 1% of Rs. 1,20,000 + ½% of Rs. 1,20,000 =
Rs. 1,21,800
(ii) Sale proceeds of shares sold on 28.2.2071 = 500  Rs. 90 – 1% of Rs. 45,000 = Rs. 44,550.
(iii) Profit on sale of bonus shares on 28.2.2071
= Sales proceeds – Average cost
Sales proceeds = Rs. 44,550
Average cost = Rs. (1,21,800  50,000)/1,50,000
= Rs. 40,600
Profit = Rs. 44,550 – Rs. 40,600 = Rs. 3,950.
(iv) Valuation of shares on 31.3.2071
Cost = (Rs. 1,21,800 × 1,00,000)/1,50,000 = Rs. 81,200
Market Value = 1,000 shares × Rs. 79 = Rs. 79,000
Closing balance has been valued at Rs. 79,000 being the market value is lower than cost price.
Accounting for Branches

4. Answer:
Combined Trading Account
For the year ended 31st Ashadh 2071
Particular Newroad Thimi Kapan Gwarko Total

To Opening stock at cost 54,000 12,800 10,000 8,000 84,800
(Working note iv)
To Purchases 274,000 - - -
To Goods received from HO at cost - 136,000 90,000 74,000 300,000
(balancing figure)
To Gross profit @ 20% on Sales 36,000 24,000 20,000 80,000
Total 328,000 184,800 124,000 102,000 738,800
By Sales - 180,000 120,000 100,000 400,000
By Goods sent to branch at cost 300,000 - - - 300,000
By Closing Stock at cost 28,000 4,800 4,000 2,000 38,800
(working note iv)
Total 328,000 184,800 124,000 102,000 738,800
Working Notes:
i). Calculation of cost of Stock sent to all branches
Opening stock at HO 54,000
Add: Total Purchases at HO 274,000
Less: Closing stock at HO (28,000)
Goods sent to branches at cost 300,000
ii). Calculation of invoice of goods received from HO by all branches

Closing stock at branch level (total) 13,500
Add: Total sales 400,000
Less: Opening stock at branch level (total) (38,500)
Goods received from HO (total) 375,000
iii) Calculation of profit margin on goods sent to the branches

Goods sent to branches at Invoice Price 375,000
Less: Goods sent to branches at cost price (300,000)
Profit 75,000
Rate of profit margin is 20% of Invoice price or 25% of cost price
iv). Valuation of stock at cost price

Opening Stock Closing stock
Thimi 16,000x80%= 12,800 6,000x80%=4,800
Kapan 12,500x80%=10,000 5,000x80%=4,000
Gwarko 10,000x80%=8,000 2,500x80%=2,000
Hire Purchase Transactions

5. Answer:
In the books of Pashupati Enterprises
Hire Purchase Trading Account
Particular Amount Amount Particular Amount
To Opening Balance By Bank 4,000,000
HP Stock 120,000 By Stock Reserve 20,000
HP Debtors 30,000 150,000 By Trucks sent on HP 704,000
To Trucks Sent on HP By Closing Balance
Purchased during the year 4,000,000 HP Stock 600,000
Less: Other Sales (400,000) HP Debtors 50,000
3,600,000
Less: Closing Stock (80,000)
3,520,000
Add: Loading 704,000 4,224,000
To Body Building charges 200,000
To Bank Interest Paid 40,000
To Stock Reserve (20% on cost) 100,000
To Profit for the Year 660,000
Total 5,374,000 Total 5,374,000
Working Note: 1 Calculation of value of closing HP stock

Cost of trucks in respect of HP agreement subsisting as on 31.3.2072 2,000,000
HP price in respect thereof 2.400.000
Instalments not due (24 lakhs less 18 lakhs) 600,000
Issue of Shares and Debentures
6. Answer:
Journal Entries

In the books of Elite Ltd.
NRs. NRs.
Date Particulars Dr. Cr.
1.5.2007 Bank A/c Dr. 15,000,000

To Debenture Application A/c 15,000,000
(Application money received on 150,000 debentures @ NRs. 100 each)
1.6.2007 Debenture Application A/c Dr. 15,000,000

Underwriters A/c Dr. 5,000,000
To 15% Debentures A/c 20,000,000
(Allotment of 150,000 debentures to applicants and 50,000 debentures to underwriters)
1.6.2007 Underwriting Commission A/c Dr. 400,000

To Underwriters A/c 400,000
(Commission payable to underwriters @ 2% on NRs. 20,000,000)
1.6.2007 Bank A/c Dr. 4,600,000

To Underwriters A/c 4,600,000
(Amount received from underwriters in settlement of account)
30.9.2007 Debenture Interest A/c Dr. 1,000,000

To Bank A/c 1,000,000
(Interest paid on debentures for 4 months @ 15% on NRs. 20,000,000)
30.10.2007 15% Debentures A/c Dr. 12,000,000

To Equity Share Capital A/c 2,000,000
To Securities Premium A/c 10,000,0000
(Conversion of 60% of debentures into shares of NRs. 60 each with a face value of NRs. 10)
31.3.2008 Debenture Interest A/c Dr. 750,000

To Bank A/c 750,000
(Interest paid on debentures for the half year)
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2008
On NRs. 8,000,000 for 6 months @ 15% = NRs. 600,000
On NRs. 12,000,000 for 1 months @ 15% = NRs. 150,000
NRs. 750,000
7. Answer:
Journal Entries
In the books of Everest Co. Ltd.
Bank A/c Dr. 6,000,000
To Share Application A/c 6,000,000
(Being application amount received)
Share Application A/c Dr. 6,000,000
To Share Capital A/c 4,000,000
To Bank A/c 1,200,000
To Share Allotment A/c 800,000
(Being application money transferred to share capital, refunded
and excess transferred to allotment )
Share Allotment a/c Dr. 10,000,000
To Share Premium A/c 4,000,000
(Being allotment amount due)
Bank A/c Dr. 9,016,000
Calls in Arrear A/c Dr. 184,000
To Share Allotment A/c 9,200,000
(Being allotment money received except from Mr. Subash)
Share First Call A/c Dr. 6,000,000
(Being first call amount due)
Bank A/c Dr. 5,700,000
To Share First Call A/c 6,000,000
(Being first call money received except from Mr. Subash and
Mr. Dhiraj)
Share Capital A/c Dr. 320,000
Share Premium a/c Dr. 80,000
To Calls in Arrear A/c 304,000
To Share Forfeiture A/c 96,000
(Being forfeiture of shares of Mr. Subash)
Share Final Call A/c Dr. 3,920,000
(Being final call amount due)
Bank A/c Dr. 3,800,000
To Share Final Call A/c 3,920,000
(Being final call money received except from Mr. Dhiraj)
Share Capital A/c Dr. 600,000
To Calls in Arrear A/c 300,000
To Share Forfeiture A/c 300,000
(Being forfeiture of shares of Mr. Dhiraj)
Bank A/c Dr. 720,000
Share Forfeiture A/c Dr. 80,000
To Share Capital A/c 800,000
(Being re-issue of shares @ 90 to Mr. Gopal as fully paid up)
Share Forfeiture a/c Dr. 268,000
To Capital Reserve A/c 268,000
(Being forfeiture amount transferred to capital Reserve A/c)
Working Note:
1. No. of Shares applied by Mr. Subash = (240,000/200,000) x 4,000 = 4,800

2. Amount paid my Mr. Subash at the time of application = 4,800 x 20 = 96,000
3. Forfeiture amount available for use = full of Mr. Dhiraj (300,000) + half of Mr. Subash (96,000/2)
=348,000
4. Amount Transferred to capital reserve = 348,000 – 80,000 = 266,000
Underwriting of Shares and Debentures

8. Answer:
(a) Statement showing the underwriters’ liability (No. of shares)
A & Co. B & Co. C & Co.
Gross Liability 120,000 120,000 120,000
Less: Firm underwriting 10,000 10,000 10,000
110,000 110,000 110,000
Less: Marked applications 72,500 84,000 131,000
37,500 26,000 (21,000)
Less: Unmarked applications distributed to A &
Co. and B & Co. in equal ratio (11,250) (11,250) Nil
26,250 14,750 (21,000)

Less: Surplus of C & Co. distributed to A & Co.
and B & Co. in equal ratio (10,500) (10,500) 21,000
Net liability (excluding firm underwriting) 15,750 4,250 Nil
Add: Firm underwriting 10,000 10,000 10,000
Total liability (No. of shares) 25,750 14,250 10,000
(b) Computation of amounts payable by underwriters

Liability towards shares to be subscribed @ 120 per 3,090,000 1,710,000 1,200,000
share
Less: Commission (5% on 1.2 lakhs shares @ 100
each) 600,000 600,000 600,000
Net amount to be paid by the underwriters 2,490,000 1,110,000 600,000
(c) In the Books of Kathmandu Ltd.

Journal Entries
Particulars Dr. Cr.
Rs. Rs.
Underwriting commission A/c Dr. 1,800,000
To A & Co. A/c 600,000
To B & Co. A/c 600,000
To C & Co. A/c 600,000
(Being underwriting commission on the shares underwritten)
A & Co. A/c Dr. 3,090,000
B & Co. A/c Dr. 1,710,000
C & Co. A/c Dr. 1,200,000
To Equity share capital A/c 5,000,000
To Share premium A/c 1,000,000
(Being shares including firm underwritten shares allotted to
underwriters)
Bank A/c Dr. 4,200,000
To A & Co. A/c 2,490,000
To B & Co. A/c 1,110,000
To C & Co. A/c 600,000
(Being the amount received towards shares allotted to underwriters
less underwriting commission due to them)
Incomplete Records
9. Answer:
Projected Balance Sheet
as on 31st Ashadh, 2071
Capital 1,000,000 Fixed Assets 400,000
Profit & Loss Account as on Additions 100,000
1st Shrawan, 2070 60,000 500,000
Add: Profit for the year 374,000 434,000 Less: Depreciation (50,000) 450,000
Creditors (Trade) 110,000 Stock in trade 336,000
Sundry Debtors 200,000
Cash & Bank Balances 558,000
1,544,000 1,544,000
Working Notes:
Projected Trading and Profit and Loss Account
for the year ended 31st Ashadh, 2071
Rs. Rs.
To Opening Stock 300,000 By Sales 2,120,000
To Purchases 1,520,000 By Closing Stock (balancing figure) 336,000
To Gross Profit (30% on sales) 636,000
2,456,000 2,456,000
To Sundry Expenses (10% on sales) 212,000 By Gross Profit b/d 636,000
To Depreciation 50,000
To Net Profit 374,000
636,000 636,000
Cash and Bank Account for the period

1st Shrawan, 2070 to 31st Ashadh, 2071
Rs. Rs.
To Balance b/d 350,000 By Sundry Creditors 1,550,000
To Sundry Debtors 2,070,000 (Rs. 140,000 + Rs. 1,410,000)
(Rs. 150,000 + Rs. 1,920,000) By Expenses 212,000
By Fixed Assets 100,000
By Balance c/d 558,000
2,420,000 2,420,000
Note: It is assumed that the entire sales and purchases are on credit basis.
Ratio Analysis
10. Answer:
Balance Sheet of Nyatapola Enterprises

Capital 500,000 Fixed Assets 200,000
Creditors 186,000 Stock 90,000
Debtors 83,333
Bank Balance (balancing figure) 312,667
686,000 686,000
Working Note
(i) Gross profit= Rs. 100,000
Gross profit margin= 10%
Hence, Sales= Rs. 100,000 x 100/10= Rs. 1,000,000
Cost of goods sold = Sales – Gross profit
= Rs.( 1000,000-100,000)
= Rs. 900,000
Purchase = Cost of goods sold + Increase in stock
= Rs. ( 900,000+30,000) = Rs. 930,000
Average stock= Cost of goods sold/stock velocity

= Rs. 900,000/12=75000
(ii) Capital:
Capital turnover ratio = 2
Sales/Capital=2
Hence, Capital= Rs. 1,000,000/2 = Rs. 500,000
(iii) Creditors:
Creditors payment period = 73 days
Hence, Creditors= Purchases x 73/365 =Rs. 930,000 x 1/5 = Rs. 186,000
(iv) Fixed assets:

Fixed assets turnover ratio = 5
Hence, Fixed Assets = Sales/5= Rs. 1,000,000/5= Rs. 200,000
(v) Closing stock:

Closing stock is Rs. 30,000 more than opening stock; it is Rs. 15000 more than average stock.
Hence, closing stock= Average stock + Rs. 15000
= Rs. 75,000+Rs.15,000= Rs. 90,000
(vi) Debtors:
Debt collection period = 1 month
Hence, debtors= Sales x 1/12 = Rs. 1,000,000 x 1/12 = Rs. 83,333.33
It is assumed that there is no change in capital during the period.
Business Combination
11. Answer:
Books of Blue Star Limited
Realization Account
Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders A/c (Loss) 60,000
To Debtors 2,60,000
To Goodwill 1,30,000
1,590,000 1,590,000
Bank Account
To Balance b/d 136,000 By 10% debentures 400,000
To Big Star Ltd. 600,000 By Loan from A 160,000
By Equity shareholders A/c 176,000
736,000 736,000
Big Star Ltd. Account

To Realisation A/c 1,210,000 By Bank A/c 600,000
By Equity Share holders A/c
(4,880 shares at Rs.125 each in Big Star
Ltd.) 610,000
1,210,000 1,210,000
Equity Share Holders Account

To Realisation A/c 60,000 By Equity Share Capital 800,000
To Deferred Revenue Exp. 34,000 By General Reserve 80,000
To Equity shares in Big Star Ltd. 610,000
To Bank A/c 176,000
880,000 880,000

Big Star Ltd.
Balance Sheet as on 1 st Shrawan, 2072 (An extract)
4880 Equity shares of Rs.100 each 488,000 Goodwill 232,000
(Shares have been issued for Building 306,000
consideration other than cash)
Securities Premium 122,000 Machine 576,000
Profit and Loss A/c ….
Less: unrealized profit 15,000 …..
Creditors (320,000 - 40,000) 280,000 Stock (198,000 -15,000) 183,000
Bank Overdraft 616,000 Debtors (260,000 – 40,000) 220,000
Less: Provision for bad debts 26,000 194,000
Working Notes:
1. Valuation of Goodwill Rs.
Average profit 124,400
Less: 8% of Rs. 880,000 70,400
Super profit 54,000
Value of Goodwill = 54,000 x 4 216,000
2. Net Assets for purchase consideration

Goodwill as valued in W.N.1 216,000
Building 306,000
Machinery 576,000
Stock 198,000
Debtors 260,000
Total Assets 1,556,000
Less: Creditors 320,000
Provision for bad debts 26,000 346,000
Net Assets 1,210,000
Out of this Rs. 600,000 is to be paid in cash and remaining i.e., (1,210,000–600,000) Rs. 610,000 in shares of
Rs. 125/-. Thus, the number of shares to be allotted 610,000/125 = 4,880 shares.
3. Unrealized Profit on Stock Rs.
The stock of Blue Star Ltd. includes goods worth Rs. 100,000 which was sold by
40,000
Big Star Ltd. on profit. Unrealized profit on this stock will be 1,00,000 25,000
1,60,000
As Big Star Ltd. purchased assets of Blue Star Ltd. at a price 10% less than the (10,000)
book value, 10% need to be adjusted from the stock i.e., 10% of Rs.100,000.
Amount of unrealized profit 15,000
4. Liquidation expenses borne by the Big Star Ltd. so that should be debited to Goodwill Account.
Internal Reconstruction
12. Answer:
Journal Entries
in the books of Pokhara Light Ltd.
Rs. Rs.
(i) Equity Share Capital (Rs.100) A/c Dr. 1,00,00,000
To Equity Share Capital (Rs.40) A/c 40,00,000
To Reconstruction A/c 60,00,000
(Being conversion of equity share capital of Rs.100 each into Rs.40 each
as per reconstruction scheme)
(ii) 12% Cumulative Preference Share capital (Rs.100) A/c Dr. 50,00,000
To 12% Cumulative Preference Share Capital (Rs.60) A/c 30,00,000
(Being conversion of 12% cumulative preference share capital of Rs.100
each into Rs.60 each as per reconstruction scheme)
(iii) 10% Debentures A/c Dr. 40,00,000
To 12% Debentures A/c 28,00,000
(Being 12% debentures issued to 10% debenture-holders for 70% of their
claims. The balance transferred to capital reduction account as per
reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
(Being a creditor of Rs.20,00,000 agreed to surrender his claim by 40%
and was allotted 30,000 equity shares of Rs.40 each in full settlement of
his dues as per reconstruction scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Reconstruction A/c Dr. 50,000
To Current Assets (Bank A/c) 1,50,000
(Being conversion of the provision for taxation into liability for taxation
for settlement of the amount due)
(vi) Reconstruction A/c Dr. 99,50,000
To P & L A/c 4,00,000
To Preliminary Expenses A/c 2,00,000
To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
To Capital Reserve A/c 50,000
(Being amount of Reconstruction utilized in writing off P & L A/c (Dr.)
Balance, Preliminary Expenses, Fixed Assets, Current Assets,
Investments and the Balance transferred to Capital Reserve)
Balance Sheet of Pokhara Light Ltd. (and reduced)

as on 31.3.2071
Issued, subscribed and paid up capital: Fixed Assets 87,50,000
1,30,000 equity shares of Rs.40 each 52,00,000 (1,25,00,000 – 37,50,000)
12% Cumulative Preference Shares of Rs. Investments 9,50,000
60 each 30,00,000 (10,00,000 – 50,000)

Reserves & Surplus: Current Assets 43,50,000
Capital Reserve 50,000 (45,00,000 – 1,50,000)
Secured Loan:
12% Debentures 28,00,000
Current Liabilities and Provisions:
Sundry Creditors: 30,00,000
(50,00,000 – 20,00,000)
1,40,50,000 1,40,50,000
Working Note:
Reconstruction Account
Rs. Rs.
To Liability for taxation A/c 50,000 By Equity share capital 60,00,000
To P & L A/c 4,00,000 By 12% Cum. preference share 20,00,000
To Preliminary expenses 2,00,000 By 10% Debentures 12,00,000
To Fixed assets 37,50,000 By Sundry creditors 8,00,000
To Current assets 55,00,000
To Investment 50,000
To Capital Reserve 50,000
(balancing figure) _________ _________
1,00,00,000 1,00,00,000
Profit or Loss Pre and Post Incorporation

13. Answer:
Statement showing calculation of profits for pre and post incorporation periods
For the year ended 31.3.2072 (15 months)
Gross profit Total Ratio Pre Post
Gross Profit 140,40,000 1:8 1560,000 124,80,000
Less: Salaries 2340,000 1:12 180,000 2160,000
Depreciation 360,000 1:4 72,000 288,000
Advertisement 1404,000 1:8 156,000 1248,000
Discount 2340,000 1:8 260,000 2080,000
Managing Director‘s Salary 180,000 Post - 180,000
Office/showroom rent 1440,000 Actual 180,000 1260,000
Miscellaneous office expenses 240,000 1:4 48,000 192,000
Interest paid 1902,000 Actual 702,000 1200,000
Goodwill (loss) 38,000 -
Net Profit - 3,872,000
Working note:
Pre post
1. calculation of time ratio = 1:4 1st Baisakh to 31.3.2071 1.4.2071 to 31.3.2072
3 months 12 months
2. Calculation of sales ratio = 1:8 3x1 = 3 12 x 2 = 24
3. Calculation of staff salary ratio = 1:12 3x1 = 3 12 x 3 = 36
4. calculation of interest 234,00,000 x 12% for 3 months 100,00,000 x 12% for 1 year
Rs. 702,000 Rs. 1200,000
5. Calculation of Rent
(i) additional rent 60,000x9 = 540,000
(ii) regular rent = (1440,000-540000) 900,0000X3/15 = 180,000 900,0000X12/15 = 720,000
= 900,000
6. Calculation of gross profit = sales – cost of goods sold = 468,00,000-327,60,000 = 140,40,000

14. Answer:
Receipts Rs. Rs. Payments Rs. Rs.
Cash at Bank 60,000 Liquidation expenses 4,600
Assets realised:
Sundry Debtors 160,000 Liquidator‘s remuneration (W.N. 1) 30,400
Stock 120,000 Debenture holders:
Plant & Machinery360,000 640,000 10% debentures 200,000
Surplus from Land & Interest accrued (W.N.2) 15,000 215,000
Buildings: Preferential creditors 30.000
Amount realised 340,000 Unsecured creditors 370,000
Less: Secured Preference shareholders:
Creditors 100,000 240,000 10% Preference Share
Capital 200,000
Arrear dividend 40,000 240,000
Equity Shareholders
(W.N. 3) :
Rs. 17.50 per share
on 2,000 shares 35,000
Rs. 2.50 per share
on 6,000 shares 15,000 50,000
940,000 940,000
Working Notes:
(1) Liquidator’s remuneration: Rs.
3% on Assets realised (3% of Rs. 980,000) 29,400
2% of the amounts distributed among Equity Shareholders
(2/102 × Rs. 51,000) 1,000
30,400
(2) Interest accrued on 10% debentures
Interest accrued as on 31.3.2071 10,000
Interest accrued upto the date of payment
(upto 31st Ashwin, 2071) 5,000
15,000
(3) Amount payable to Equity Shareholders
Equity Share Capital 510,000
Less: Surplus available for Equity Shareholders 50,000
Loss to be borne by them 460,000
Loss per Equity share (Rs. 460,000/8,000) 57.50
Amount payable to Equity shareholders:
Each Equity share of Rs. 75 paid up 17.50
Each Equity share of Rs. 60 paid up 2.50
Accounting for Partnership

15. Answer:
Computation of entitlement of legal representatives of C
(1) Profits for the half year ended 31 st Ashadh, 2071
Rs.
st
Profits for the year ended 31 Ashadh, 2071 (after depreciation) 48,000
Add: Depreciation 10,000
Profits before depreciation 58,000
Profits for the first half (assumed: evenly spread) 29,000
Less: Depreciation for the first half 6,000
Profits for the first half year (after depreciation) 23,000
Profits for the second half (i.e., 1 st Magh, 2070 to 31st Ashadh, 2071) 29,000
Less: Depreciation for the second half 4,000
Profits for the second half year (after depreciation) 25,000
th
(2) Capital Accounts of Partners as on 30 Poush, 2070
Dr. Cr.
A B C A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Fixed Assets By Balance b/d 48,000 64,000 48,000
(loss on revaluation) 6,000 8,000 6,000 By Reserve 6,000 8,000 6,000
By Goodwill 18,000 24,000 18,000
To Drawings 9,000 12,000 20,000 By Interest
To C Executor‘s A/c 52,000 (Rs. 48,000 @ 25%
To Balance c/d 57,000 76,000 – for 6 months) — — 6,000
72,000 96,000 78,000 72,000 96,000 78,000

(3) Calculation of Proportionate profit to Legal Representative of C
Profit for the second half = 25,000
Proportionate profit to C‘s legal representative = 25,000 x 52,000/(57,000+76,000+52,000)
= 7,027
(4) Amount due to legal representative of C Rs.
Balance in C‘s Executor‘s account 52,000
Amount of profit earned out of unsettled capital [calculated in (3)] 7,027
Total Amount due 59,027
16. Answer:
In the Books of KK Enterprises
Realisation Account
Rs. Rs.
To Sundry assets: By Creditors 290,000
Land and building 500,000 By RR Traders 970,000
Plant and machinery 200,000 (W.N. 1)
Furniture and fittings 50,000 By Loss transferred to partners‘
Stock 300,000 capital accounts
Debtors 200,000 A 110,000
Cash at hand/bank 50,000 B 110,000
To RR Traders 290,000 C 110,000 330,000
(liability taken over) ________ ________
1,590,000 1,590,000
Partners’ Capital Accounts

A B C A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Sundry 300,000 By Balance 450,000 450,000 200,000

debtors b/d
To Realisation 110,000 110,000 110,000 By General 70,000 70,000 70,000

account reserve
To C‘s account 70,000 70,000 By Cash 110,000* 110,000*
(deficiency By A and B
borne by (deficiency
solvent borne by
partners) solvent
To Balance c/d 450,000 450,000 _______ partners) -______ -_____ 140,000
630,000 630,000 410,000 630,000 630,000 410,000
* Solvent partners bring cash to the extent of loss arising upon realisation of assets of the firm as per Garner vs
Murray Rule.
Balance Sheet of RR Traders

As on 31.10.2070
(Immediately after commencement)
Capital Accounts: Land and building 350,000
A 450,000 Plant and machinery 150,000
B 450,000 Furniture and fittings 20,000
Creditors 290,000 Stock in trade 200,000
Debtors 200,000
Cash at hand/bank 270,000
________ (W.N. 2) ________
1,190,000 1,190,000
Working Notes:
1. Agreed value of assets taken over by RR Traders
Rs.
Land and building 350,000
Plant and machinery 150,000
Furniture and fittings 20,000
Stock in trade 200,000
Debtors (500,000 – 300,000) 200,000
Cash at hand/bank 50,000
970,000
2. Cash in hand/bank balance of RR Traders as on 31.10.2070
Rs.
Opening Balance 50,000
Add: A‘s and B‘s contribution 220,000
(Rs.110,000 + Rs.110,000) _______
270,000
Accounting for Banks

17. Answer:
Calculation of Loan Loss Provisioning
Provision Amount
Loan as on 31st 31st
Amount 31st Ashad Additional Ashad Rate of Total
Category Ashad 2071 2071 Loans Shifting 2072 Provision Provision
1. Pass 5,000,000 50,000 3,000,000 (500,000) 7,500,000 1% 75,000
2. Rescheduled
/Restructured 210,000 26,250 200,000 410,000 12.5% 51,250
3. Substandard 500,000 125,000 300,000 800,000 25% 200,000
4. Doubtful 300,000 150,000 (150,000) 150,000 50% 75,000

5. Bad 500,000 500,000 (50,000) 450,000 100% 450,000
Total 6,510,000 851,250 9,310,000 851,250
Total NPA 1,400,000
NPA % 15.04%
Journal Entries
In the books of BIG Bank Limited
Loans and Advances Dr.
To Cash A/c 30,00,000
(Being Loans given during the year. Assumed that all the loans are 30,00,000
taken in cash)
Profit and Loss A/c Dr.
Restructured Loans Dr. 2,00,000
Substandard Loans Dr. 2,00,000
To Pass Loans 3,00,000
To Doubtful Loans 5,00,000
To Bad loans 1,50,000
(Being changes of in various categories of loans and advances during 50,000
the year.)
Profit and Loss A/c Dr.
To LLP Pass Loans 1,25,000
To LLP Restructured Loans 25,000
To LLP Substandard 25,000
(Being changes of in various categories of loans loss provisioning 75,000
during the year.)
LLP Doubtful Loans Dr.
LLP Bad Loans Dr. 75,000
To Profit and Loss A/c 50,000
(Being changes of in various categories of loans and advances during 1,25,000
the year.)
Note:
Though no additional entry is required for the amount of LLP as the amount of LLP last year and this year is same
but individual category wise LLP has changed thus requiring the above journal entries.
18. Answer:
a. Calculation of Total Risk Weighted Assets = 213,546 + 4,235 + 1,618 = 219,399
b. Calculation of Core Capital

Particular Amount
Paid up Capital 20,000
General Reserve Fund 377
Retained Earnings 308
Profit for current year 1,945
Less: Loan Given to Relatives of Staffs (37)
Total core capital 22,593
c. Supplementary Capital
Particular Amount
General Loan Loss Provision 1,215
Investment Adjustment Reserve 22
Total Supplementary Capital 1,237
d. Core Capital Ratio = 22,593 X 100/ 219,399 = 10.29%

e. Total Capital Adequacy Ratio = (22,593 + 1,237) X 100/ 219,399 = 10.86%
f. Compliance with NRB Directives
Particular NRB Actual
Requirement
Core Capital Ratio 6% 10.29%
Total Capital Adequacy Ratio 10% 10.86%
Cash Flow Statement

19. Answer:
Cash Flow Statement
Particular Amount Amount
Cash Flow from Operating Activities
Net Profit before Taxation (given) 229,500
Adjustment for Depreciation (WN 2) 83,700
Debenture Interest (150,000x8%x6/12) 6,000
Provision for Doubtful Debts 9,900
Profit/gain on sale of plant (WN 1) (7,500) 92,100
Operating profit before working capital changes 321,600
Increase in Inventory (115,500)
Increase in Trade Receivables (150,000)
Increase in Trade Payables 35,400 (230,100)
Net cash flow from Operating Activities (A) 91,500
Cash Flow from Investing Activities
Purchase of Plant & Machinery (WN 3) (234,000)
Purchase of Trade Investments (141,000)
Sale of machinery 21,000
Net cash flow from Investing Activities (B) (354,000)
Cash Flow from Financing Activities
Proceeds from issue of 8% Debentures (net) 147,000
Interest paid on 8% Debentures (6,000)
Dividends paid in respect of earlier years (90,000)
Net Cash flow from Financing Activities (C) 51,000
Net Increase/(Decrease) in Cash and Cash Equivalents (A+B+C) (211,500)
Working Notes:
1. Profit on sale of Plant = WDV at disposal – sale value
= (54,000-40,500) – 21,000
= 7,500
2. Depreciation for current year = 43,200 + 40,500 = 83,700
3. Cash flow towards assets purchase = Increase in Plant & machinery at cost + cost of plant sold
= 180,000 + 54,000 = 234,000
Nepal Accounting Standards
20. Answers:
(a) As per Nepal Accounting Standard (NAS) – 2 ‗Inventories‘, cost of inventories comprises all costs of
purchase, cost of conversion and other costs incurred in bringing the inventories to their present location
and condition. However, it makes clear that interest and other borrowing costs are usually not included in
the cost of inventories because generally such costs are not related in bringing the inventories to their
present location and condition. Therefore, the proposal of Curex Pvt. Ltd. to include interest on bank
overdraft as an element of cost is not acceptable because it does not form part of cost of production.
(b). Areas in which different accounting policies may be adopted: The following are three areas in which
different accounting policies may be adopted by different enterprises:

(i) Methods of depreciation, depletion and amortization.
(ii) Valuation of inventories.
(iii) Valuation of Fixed Assets.
(The above three areas are not exhaustive. There are other areas also)
Disclosure requirements of accounting policies :The disclosure requirements as prescribed in Accounting
Standard 1 (NAS 1) ‗Disclosure of Accounting Policies‘ are as follows :
(i) All significant accounting policies adopted in the preparation and presentation of financial statements
should be disclosed at one place and they should form part of the financial statements.
(ii) Any change in the accounting policies which has a material effect in the current period should be
disclosed along with the amount, to the extent ascertainable, by which any item in the financial statement
is affected. Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
However, if a change in accounting policies is reasonably expected to have a material effect in later
periods, the fact of such change should be appropriately disclosed in the period in which the change is
made.
(iii) If the fundamental accounting assumptions viz .Going concern, Consistency and Accrual are
followed in the preparation of financial statements, specific disclosure is not required. If a fundamental
accounting assumption is not followed, the fact should be disclosed.
(c). As per NAS 12 ‗Provisions, contingent liabilities and contingent assets‘ a provision should be recognised
when;
(a) an enterprise has a present obligation as a result of a past event.
(b) it is probable that an outfolow 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 recognised.
In the given situation the directors of the company are of the opinion that the claim can be successfully
resisted by the company, therefore there will be no out flow of the resources. The company will disclose
the same as contingent liability by way of the following notes:
‗Ligation is in process against the company relating to a dispute with a competitor who alleges that the
company has infringed patents and is seeking damages of Rs. 20 millions. However, the directors are of
the opinion that the claim can be successfully resisted by the company.‘
(d). Nepal Accounting Standard (NAS) 10 ‗Events after the reporting period‘, states that adjustments to
assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events
do not relate to conditions existing at the balance sheet date. The destruction of warehouse due to
earthquake did not exist on the balance sheet date i.e. 31.3.2072. Therefore, loss occurred due to
earthquake is not to be recognized in the financial year 2071-72.
However, unusual changes affecting the existence or substratum of the enterprise after the balance sheet
date may indicate a need to consider the use of fundamental accounting assumption of going concern in
the preparation of the financial statements. As per the information given in the question, the earthquake
has caused major destruction; therefore fundamental accounting assumption of going concern is called
upon.
Hence, the fact of earthquake together with an estimated loss of Rs. 25 lakhs should be disclosed in the
report of the directors for the financial year 2071-72.
(e). No. of bonus shares issued as on 1.1.2072
On existing share (50,00,250 x ½) 25,00,125
On convertible debentures on Bonus issue
(100,000 debentures X 10 shares X ½) 500,000 shares
Basic Earnings per share for the year 20171-72 = 100,25,000/(5000,250+2500,125+500,000)

= Rs. 1.25
Adjusted Earnings per share for the year 2070-71 = 7550,000/(5000,250+2500,125+500,000)
= Rs. 0.94
For diluted EPS
Interest expense for the current year = 1200,000
Tax relating to interest expense (30%) = 360,000
Adjusted net profit for the current year = 100,25,000 + (1200,000-360,000) x 3/12
= 102,35,000
No. of equity shares resulting from conversion of debentures = 100,000 x 10 = 10,00,000
No. of equity shares used to compute diluted earnings per share,
= 50,00,250 + 25,00,125 + 500,000 + 10,00,000 x 3/12)
= 82,50,375 shares
Diluted earnings per share = 102,35,000/82,50,375 = Rs. 1.24
Write Short Notes

21. Answers:
(a). Reinsurance
If an insurer does not wish to bear the whole risk of policy written by him, he may reinsure a part of the
risk with some other insurer. In such a case the insurer is said to have ceded a part of his business to other
insurer. The reinsurance transaction may thus be defined as an agreement between a ‗ceding company‘ and
‗reinsurer‘ whereby the former agreed to ‗cede‘ and the latter agrees to accept a certain specified share of
risk or liability upon terms as set out in the agreement. A ‗ceding company‘ is the original insurance
company which has accepted the risk and has agreed to ‗cede‘ or pass on that risk to another insurance
company or a reinsurance company. It may however be emphasized that the original insured does not
acquire any right under a reinsurance contract against the reinsurer. In the event of loss, therefore, the
insured‘s claim for full amount is against the original insurer. The original insurer has to claim the
proportionate amount from the reinsurer. There are two types of reinsurance contracts, namely, facultative
reinsurance and treaty reinsurance. Under facultative reinsurance each transaction has to be negotiated
individually and each party to the transaction has a free choice, i.e., for the ceding company to offer and
the reinsurer to accept. Under treaty reinsurance a treaty agreement is entered into between ceding
company and the reinsurer whereby the volume of the reinsurance transactions remain within the limits of
the treaty.
(b). Related Party Transactions

NAS 24 requires disclosure of related party transactions and outstanding balances in the separate
financial statements of a parent, venture or investor company or entity. The following information
shall be disclosed in the financial statements as per this Accounting Standard.
a. Relationship between parents and subsidiaries shall be disclosed irrespective of whether there
have been transactions between those related parties.
b. An entity shall disclose key management personnel compensation.
c. If there have been transactions between related parties, an entity shall disclose the nat ure of the
related party relationship as well as information about the transactions and outstanding balances
necessary for an understanding of the potential effect of the relationship on the financial
statements.
Items of the similar nature may be disclosed in aggregate except when separate disclosure is necessary for
an understanding of the effects of related party transactions on the financial statements of the entity.

(c). Super profits in partnership firms
Among various basis of determining the sharing and paying for joining or sacrificing the profits of a
firm one basis is super profit method. Under this method, it is assumed that any partner can get
normal profits by joining any average firm in the market. However, focus should be given on super
profits of the firm. Such super profit implies that the profit can be earned by a firm over and above all
ordinary firms in the industry/market. This is the excess amount of profit earned by a firm over the
past years and expected to continue the same in the future.
If and only if the average profit of the firm is more than the normal profit in the market there comes
into existence the super profit or goodwill.
(d). Components of Financial Statement

A complete set of financial statement includes the following components:
1. A Balance Sheet: Statement showing financial position of entity as on date.
2. An income statement: Statement showing performance of the entity during the period.
3. A Statement of changes in equity showing either:
i) All changes in equity, or
ii) Changes in equity other than those arising from transactions with equity holders acting in their
capacity as equity holder
4. A cash flow statement: Summary of cash inflow and outflow from operating, financing and
investing activities.
5. Notes to accounts: Comprising a summary of significant accounting policies and other explanatory
notes.
(e). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts
under which revenue and expenditure are accounted for. It follows double entry system; however, do
not follow the mercantile system of accounting. Government accounting system broadly classifies
expenditure into administrative and development expenses. Accounting system followed by the
government differentiates Capital expenditures and revenue expenditure in its subsidiary records.
Office of the Financial Comptroller General specifies the chart of accounts under which all the
government revenue and expenditure are to be accounted for.
(f). Prediction of insolvency on the basis of ratios
The relevance of the ratios in predicting insolvency can be elaborated with the help of the following
illustrative ratios as below:
Working capital to total assets indicates the liquidity position of the firm. If the ratio is too low it
indicates inability of the firm to carry on its day to day activities. If it is negative, the firm will not
have fund for its day to operations. If such situation continues, the firm may be forced to suspend its
operations and it may result insolvency in the long run.
Similarly, ratio of sales to total assets indicates the utilization of its assets to generate sales which
ultimately generates surplus for the firm. If it is too low, it indicates that the firm is keeping idle
assets which in long run may result to insolvency.
Another example can be given of retained earnings to total assets. Retained earnings are cushion for
firm‘s health. So if it is too thin it may indicate that firm has very low leverage and is posed to
insolvency earlier.
(g). Advantages of customized Accounting packages

Following are the advantages of the customized accounting packages:
 The input screens can be tailor made to match the input documents for ease of data entry.
 The reports can be prepared as per the specification of the organization. Many additional MIS
reports can be included in the list of reports.
 Bar-code scanners can be used as input devices suitable for the specific needs of and
individual organization.
 The system can suitably match with the organizational structure of the company.

“AUDIT AND ASSURANCE”
Question No.1
a) What is an Audit Engagement letter?

b) NSA 210 Terms of Audit Engagements explains the content and use of engagement letters. State at least seven
items that could be included in an engagement letter.
Question No.2
a) State the auditor’s responsibilities regarding the detection of fraud.

b) Are there any limitations of accounting and control systems? If yes, explain in brief.
Question No.3
Planning and Assurance Engagement
You are the audit senior of B R & Co and are planning the audit of Brother & Co for the year ending on 2013. The
company produces printers and has been a client of your firm for two years; your audit manager has already had
a planning meeting with the finance director. He has provided you with the following notes of his meeting and
financial statement extracts.
Brother & Co’s management was disappointed with the 2012 results and so in 2013 undertook a number of
strategies to improve the trading results. This included the introduction of a generous sales-related bonus
scheme for their salesmen and a high profile advertising campaign. In addition, as market conditions are difficult
for their customers, they have extended the credit period given to them.
The finance director of Brother & Co has reviewed the inventory valuation policy and has included additional
overheads incurred this year as he considers them to be production related. He is happy with the 2012 results
and feels that they are a good reflection of the improved trading levels.
Particulars Draft 2013 Actual 2012

(NRs in millions) (NRs in millions)
Revenue 23.0 18.0
Cost of Sales -11.0 -10.0
Gross Profit 12.0 8.0
Operating Expenses -7.5 -4.0
PBIT 4.5 4.0
Inventory 2.1 1.6

Receivable 4.5 3.0
Cash - 2.3

Trade Payables 1.6 1.2
Overdraft 0.9 -
From the above information calculate:
(i) FIVE ratios for both years, which would assist the audit senior in planning the audit; and
(ii) From a review of the above information and the ratios calculated, explain the audit risks that arise and describe
the appropriate response to these risks.
Question No.4
Audit of Special Sectors
While planning the audit of a NGO what are the areas that you need to concentrate? Also, explain in brief the
points that you will consider in preparing the Audit Programme of this NGO such that all the assets, liabilities,
income and expenditures are covered and no material items are omitted.
Question No.5
Audit Risk and Internal Control
a) Auditors have a responsibility under NSA 260 Communication of audit matters with those Charged with
Governance, to communicate deficiencies in internal controls. In particular SIGNIFICANT deficiencies in internal
controls must be communicated in writing to those charged with governance.
Explain examples of matters the auditor should consider in determining whether a deficiency in internal
controls is significant.
b) You are an audit senior in C R & Co, a firm providing audit and assurance services. At the request of an audit
partner, you are preparing the audit programme for the income and receivables systems of Zoom Co. Audit
documentation is available from the previous year’s audit, including internal control questionnaires and audit
programmes for the dispatch and sales system. The audit approach last year did not involve the use of computer-
assisted audit techniques (CAATs); the same approach will be taken this year. As far as you are aware, Zoom’s
system of internal control has not changed in the last year. Explain the steps necessary to check the accuracy of
the previous year’s internal control questionnaires.
c) What are the points that you need to consider for evaluating the reliability of internal control system in CIS?
‘Doing an audit in an EDP environment is simpler since the trial balance always tallies’ Analyze critically?
Question No.6
Regulatory and Ethical Aspects of Audit
a) Yaris Co sells cars, car parts and petrol from 25 different locations in one country. Each branch has up
to 20 staff working there, although most of the accounting systems are designed and implemented
from the company’s head office. All accounting systems, apart from petty cash, are computerized, with
the internal audit department frequently advising and implementing controls within those systems
Yaris has an internal audit department of six staff, all of whom have been employed at Yaris for a
minimum of five years and some for as long as 15 years.
In the past, the chief internal auditor appoints staff within the internal audit department, although the
chief executive officer (CEO) is responsible for appointing the chief internal auditor. The chief internal
auditor reports directly to the finance director. The finance director also assists the chief internal
auditor in deciding on the scope of work of the internal audit department.

Required: Explain the issues which limit the independence of the internal audit department in Yaris Co.
Recommend a way of overcoming each issue.
b) Explain the provisions of Custody of Client Assets as given in Code of Ethics. What are the safeguards or
measures to be taken to balance this threat?
Question No.7 .
Company audit
a. Explain the provisions as mentioned under Section 108 of the Companies Act with regards to the maintenance of
the Accounts of the company.
b. What are the provisions under Section 112 of the Companies Act for disqualification of the auditor?
c. You are appointed as an auditor of Gundruk & Company. What are the matters that you need to report to the
shareholders of the appointing authority as per the Section 115 of the Companies Act?
Question No.8
In connection with your examination of the financial statements of Okhati Products Co, for the year ended on 31
Ashad 2072, you are reviewing the plans for a physical inventory count at the company's warehouse on the same
date. The company assembles domestic appliances, and inventory of finished appliances, unassembled parts and
sundry inventory are stored in the warehouse which is adjacent to the company's assembly plant. The plant will
continue to produce goods during the inventory count until 5pm on 31 Ashad 2072.
On 30 Ashad 2072, the warehouse staff will deliver the estimated quantities of unassembled parts and sundry
inventory which will be required for production for 31 Ashad 2072; however, emergency requisitions by the
factory will be filled on 31 Ashad. During the inventory count, the warehouse staff will continue to receive parts
and sundry inventory, and to dispatch finished appliances. Appliances which are completed on 31 Ashad 2072
will remain in the assembly plant until after the count has been completed.
(a) List the principal procedures which the auditors should carry out when planning attendance at a company's
physical inventory count.
(b) Describe the procedures which Okhati Products should establish in order to ensure that all inventory items are
counted and that no item is counted twice.
Question No.9
As an auditor, comment on the following situations/statements:
a) You are a partner in M R & Co, Chartered Accountants. You are approached by Mr Ramesh, the managing
director of MAW Enterprises Ltd, who asks your firm to become auditors of his company. In return for giving you
this appointment Mr Ramesh says that he will expect your firm to waive 50 per cent of your normal fee for the
first year's audit. The existing auditors, B R & Co, have not resigned but Mr Ramesh informs you that they will not
be re-appointed in the future.

What action should M R & Co take in response to the request from Mr Ramesh to reduce their first year's
fee by 50 per cent?
Is B R & Co within their rights in not resigning when they know Mr Ramesh wishes to replace them?
Give reasons for your answer.
b) After the statutory audit has been completed a fraud has been detected at the office of the auditee. What is your
defense as an auditor that you performed the duty properly?
c) The auditors should consider the effect of subsequent events on the financial statement and on auditor’s report”
according to NSA 560 – Comment.
d) At the Annual General Meeting of the Company, a resolution was passed by the entire body of shareholders
restricting some of the powers of the Statutory Auditors. Is it tenable? Can the powers of the Statutory Auditors
be restricted?
e) Managing Director of PR Ltd. himself wants to appoint Mr. Sanjay, a practicing Chartered Accountant, as first
auditor of the company. Comment on the proposed action of the Managing Director.
f) Some of the shareholders of RNP Limited have written letters to auditor of the company demanding copies of
audit report for their perusal and further action. The auditor is in no mood to oblige the shareholders.
g) Auditor of Mango Ltd. was unable to confirm the existence and valuation of imported goods lying with the
transporter and accepted a certificate from the management without obtaining other audit evidence.
h) Ram Rahim & Concern a partnership firm, running a departmental centre have decided to discontinue you as an
auditor for the next year and requests you to handover all the relevant working papers of the previous year.
i) Mr. Papito, Finance Manager of INGO appoints PIIG & Company a chartered accountant firm for the audit for the
FY 2072/73. He informs that as the organization has budgeted NRs 40,000 under the head annual audit
therefore, he requests the auditor to accept the said amount as audit fees.
j) Leach & Associates a chartered accountant firm is yet to receive their professional fee from Ms Snail Service &
Company. In spite of the overdue of the fees for past 3 years, it has yet again appointed the same firm to conduct
the annual audit of the organization. In the light of the code of conduct or the pronouncement from the ICAN is
it appropriate for the firm to continue the engagement. Explain.
k) Mr. Rishi, the partner of the firm Dhamala & Company, says that since he has formally e-mailed the audit opinion
along with the financial statements to the company as accepted therefore he does not require signing the audit
report. Comment.
l) Newcomer & Company accepted the audit of a Cooperative for NRs 40,000. The management of the Cooperative
had disclosed during their meeting that their deposits for the year amount to NRs 102 crores. In the light of the
code of ethics and the pronouncement made by the ICAN comment.
Question No.10
Vouching and Verification
How will you vouch the following?
a) Receipt of Special backward area subsidy from Nepal Government
b) Assets abroad
c) Research and Development Expenses
d) Sale Proceeds of Junk Materials
e) Sale of Assets
f) Provision for bonus
g) Audit of contingent liabilities
Question No.11
Distinguish between:
a) Explain difference between Vouching and Verification
b) Distinguish between Internal Audit and Statutory Audit
c) How would you as an auditor distinguish between Reports and Certificates
d) How would you distinguish Assurance engagement versus Non assurance engagement
e) Explain the difference between Clean Audit Report and Qualified Audit Report.
Question No.12
Write short note on following:
a) Analytical procedures to verify inventories.
b) Concept of True and Fair view
c) Professional Skepticism
d) Intimidation Threat
e) Permanent and timing differences
SUGGESTED ANSWERS/HINTS
Answer to Question No.1
(a) Audit engagement letter : Audit engagement letter is a communication issued by auditor to the auditee (the
client) expressing therein inter alia, the fact of acceptance of his audit engagement, the objectives and scope of
his audit, the extent of auditor's responsibilities and management responsibility for compilation of accounting,
application of accounting principles, standards, fees.
This letter documents and confirms the auditor‘s acceptance of the appointment, the objective and scope
of the audit the extent of the auditor‘s responsibilities to the client and the form of any reports.
(b) Contents Audit Engagement Letter: The form and content of the audit engagement letter may vary for each
client, but would generally include:
 The objective of the audit of the financial statements
 Management’s responsibility for the financial statements
 The scope of the audit, including reference to applicable legislation, regulation or pronouncements of
professional bodies to which the auditor adheres
 The form or any reports or other communication of the result of the engagement
 The fact that because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of the internal control there is an unavoidable risk that even some material misstatement may remain
undiscovered
 Unrestricted access to whatever records, documentation and other information requested in connection with
the audit
 Management’s responsibility for establishing and maintaining effective internal control
 Arrangements for planning and performance of the audit
 Expectations for receiving from the management written confirmation concerning representations made in
connection with the audit
 Basis of fee calculation and billing arrangements
a) NSA 240 sets out the Auditors responsibility to consider fraud in the financial statements and under this standard
the auditor has a responsibility to consider the risk of material misstatement due to fraud.
The auditor has to do this at the planning stage of the audit, discussing the matter with the engagement
team and documenting that discussion.
The auditor must perform the audit with professional skepticism and if a fraud is discovered then the
audit may well be seen as higher risk and more testing required.
The auditor is responsible for discovering material misstatements whether through fraud or error so if a
material fraud exists they are responsible for finding it. If an immaterial fraud exists they need to inform
management of it.
Fraud will need to be reported to shareholders, management (unless they are involved), any regulatory
body and potentially the legal authorities.
b) Limitations of accounting and control systems

Any internal control system can only provide a reasonable assurance that their objectives are reached,
because of inherent limitations. These include:
 The costs of control not outweighing their benefits
 The potential for human error
 Collusion between employees
 The possibility of controls being by-passed or overridden by management
 Controls being designed to cope with routine and not non-routine transactions
These factors demonstrate why auditors cannot obtain all their evidence from tests of the systems of
internal control. The key factors in the limitations of controls system are human error and potential for
fraud.
The safeguard of segregation of duties can help deter fraud. However, if employees decide to perpetrate
frauds by collusion, or management commits fraud by overriding systems, the accounting system will not
be able to prevent such frauds. This is one of the reasons that auditors always need to be alert to the
possibility of fraud, the subject of NSA 240.
a. Following Ratio Analysis can be done for planning the audit.
Ratio Calculation Working 2013 Working 2012

Gross Gross Profit / 12 / 23 52.2% 8 / 18 44.4%
Margin Revenue
Operating Operating 4.5 / 23 19.6% 4 / 18 22.2%
Margin Profit / Revenue
Inventory Inventory /COS (2.1 / 11)x365 70 Days (1.6 / 10) x 58 Days
Days x 365 365
Receivables Receivables/Revenue (4.5/23)x365 71 Days (3.0/18) x365 61 Days
Days x 365
Payables Payables/COS x 365 (1.6/11)x365 53 Days (1.2/10) x365 44 Days
Days
Current Ratio Current Assets/ 6.6/2.5 2.6 6.9/1.2 5.8
Current Liabilities
Quick Ratio Current Assets - (6.6-2.1)/2.5 1.8 (6.6-1.6)/1.2 4.4
Inventory/
Current Liabilities
b. From the above analysis, following planning for the perceived audit risks and approaches to reduce the same can
be derived.
SN Audit Risk Response to Risk
1 Management was disappointed with 2012 results Throughout the audit the team will need to
and hence undertook strategies to improve the be alert to this risk. They will need to
2013 trading results. carefully review judgmental decisions and
There is a risk that management might feel under compare treatment against prior years.
pressure to manipulate the results through the
judgments taken or through the use of
provisions.
2 A generous sales-related bonus scheme has been Increased sales cut-off testing will be
introduced in the year; this may lead to sales cut- performed along with a review of post
off errors with employees aiming to maximize year-end sales returns as they may indicate
their current year bonus. cut-off errors.
3 Revenue has grown by 28% in the year however; During the audit a detailed breakdown of
cost of sales has only increased by 10%. sales will be obtained, discussed with
This increase in sales may be due to the bonus management and tested in order to
scheme and the advertising however, this does understand the sales increase.
not explain the increase in gross margin. There is
a risk that sales may be overstated.
4 Gross margin has increased from 44·4% to The classification of costs between cost of
52·2%. Operating margin has decreased from sales and
22·2% to 19·6%.
Operating expenses will be compared with
This movement in gross margin is significant the prior year to ensure consistency.
and there is a risk that costs may have been
omitted or included in operating expenses rather
than cost of sales. There has been a significant
increase in operating expenses which may be
due to the bonus and the advertising campaign
but could be related to the misclassification of
costs.
5 The finance director has made a change to the The change in the inventory policy will be
inventory valuation in the year with additional discussed with management and a review
overheads being included. of the additional overheads included
performed to ensure that these are of a
production nature.
In addition inventory days have increased from
58 to 70 days. There is a risk that inventory is Detailed cost and net realizable value
testing to be performed and the aged
overvalued
inventory report to be reviewed to assess
whether inventory requires writing down.
6 Receivable days have increased from 61 to 71 Extended post year-end cash receipts
days and management have extended the credit testing and a review of the aged
period given to customers. receivables ledger to be performed to
This leads to an increased risk of recoverability assess valuation.
of receivables.
7 The current and quick ratios have decreased Detailed going concern testing to be
from 5·8 to 2·6 and 4·4 to 1·8 respectively. In performed during the audit and discussed
addition the cash balances have decreased with management to ensure that the going
significantly over the year. concern basis is reasonable.
Although all ratios are above the minimum
levels, this is still a significant decrease and
along with the increase of sales could be
evidence of overtrading which could result in
going concern difficulties.
While planning the audit, the auditor shall concentrate on the followings:
a. Knowledge of NGO’s work, its mission and vision, areas of operations and environment in which it operate.
b. Updating knowledge of relevant statues (amendments, circulars, judicial decisions etc)
c. Reviewing the legal form of organization and its Memorandum of Association, Articles of Association, Rules and
regulations.
d. Reviewing the organizations chart, financial and administrative manuals, project and programme guidelines,
funding agencies requirement and formats and budgetary policies, if any.

e. Study the accounting systems, procedures, internal controls and internal checks existing for the NGO and verify
its applicability.
f. Setting materiality level for the audit purpose
g. The nature and the timing of reports or other communications
h. The involvements of the expert and their reports.
i. Review of previous years audit report.
The audit programme should include in a sequential order all assets, liabilities, receipts and expenditures
ensuring that no material item is omitted.
Some of the important points to be considered while preparing the Audit Programme of the NGOs are:
(a) Corpus Fund: The contributions / grants received towards corpus be vouched with special reference to the letters
from the donor(s). The interest income be checked with Investment Register and Physical Investments in hand.
(b) Reserves: Vouch transfers from projects / programmes with donor’s letters and board resolutions of NGO. Also
check transfer of gross value of asset sold from capital reserve to general reserve and adjustments during the
year.
(c) Ear-marked Funds: Check requirements of donor’s institutions, board resolution of NGO, rules and regulations of
the schemes of the ear-marked funds.
(d) Project / Agency Balances: Vouch disbursements and expenditure as per agreements with donors for each of the
balances.
(e) Loans: Vouch loans with loan agreements, receipt counter-foil issued.
(f) Fixed Assets: Vouch all acquisitions, sale or disposal of assets including depreciation and the authorizations for
the same. Also check donor's agreements for the grant. In the case of immovable property check title, etc.
(g) Investments: Check Investment Register and the investments physically ensuring that investments are in the
name of the NGO. Verify further investments and disinvestments for approval by the appropriate authority and
reference in the bank accounts for the principal amount and interest.
(h) Cash in Hand: Physically verify the cash in hand and impress balances, at the close of the year and whether it
tallies with the books of account.
(i) Bank Balance: Check the bank reconciliation statements and ascertain details for old outstanding and unadjusted
amounts.
(j) Stock in Hand: Verify stock in hand and obtain certificate from the management for the quantities and valuation
of the same.
(k) Programme and Project Expenses: Verify agreement with donor/contributor(s) supporting the particular
programme or project to ascertain the conditions with respect to undertaking the programme / project and
accordingly, in the case of programmes/projects involving contracts, ensure that income tax is deducted,
deposited and returns filed and verify the terms of the contract.
(l) Establishment Expenses: Verify that provident fund, life insurance premium, employee’s insurance and
their administrative charges are deducted, contributed and deposited within the prescribed time. Also check
other office and administrative expenses such as postage, stationery, travelling, etc.
a. Some of the important matters that auditor should consider in determining whether a deficiency in internal
controls is significant or not are:

 The likelihood of the deficiencies leading to material misstatements in the financial statements in the future.
 The susceptibility to loss or fraud of the related asset or liability.
 The subjectivity and complexity of determining estimated amounts.
 The financial statement amounts exposed to the deficiencies.
 The volume of activity that has occurred or could occur in the account balance or class of transactions exposed to
the deficiency or deficiencies.
 The importance of the controls to the financial reporting process.
 The cause and frequency of the exceptions detected as a result of the deficiencies in the controls.
 The interaction of the deficiency with other deficiencies in internal control.
b. The steps necessary to check the accuracy of the previous year’s internal control questionnaires are:
 Obtain the audit file from last year’s audit. Ensure that the documentation on the sales system is complete.
Review the audit file for indications of weaknesses in the sales system and note these for investigation this year.
 Obtain system documentation from the client. Review this to identify any changes made in the last 12 months.
 Interview client staffs to ascertain whether systems have changed this year and to ensure that the internal
control questionnaires produced last year are correct.
 Perform walk-through checks. Trace a few transactions through the sales system to ensure that the internal
control questionnaires on the audit file are accurate and can be relied upon to produce the audit programmes for
this year.
 During walk-through checks, ensure that the controls documented in the system notes are actually working, for
example, verifying that documents are signed as indicated in the notes.
c. For evaluating the reliability of internal control system in CIS, the auditor would consider the followings:-
 That authorized, correct and complete data is made available for processing.
 That it provides for timely detection and corrections of errors.
 That in case of interruption due to mechanical, power or processing failures, the system restarts without
distorting the completion of entries and records
 That it ensures the accuracy and completeness of output.
 That it provides security to application software & data files against fraud etc.
 That it prevents unauthorized amendments to programs.
Audit in EDP environment:

Though it is true that in EDP environment the trial balance always tallies, the same can not imply that the
job of an auditor becomes simpler. There can still be some accounting errors like omission of certain
entries, compensating errors, duplication of entries, errors of commission in the form of wrong A/c head
is posted., possibility of ―Window Dressing‖ and/or ―Creation of Secret Reserves‖ where the trial
balance tallied. At present, due to complex business environment the importance of trial balance cannot
be judged only up to the arithmetical accuracy but the nature of transactions recorded in the books and
appear in the trial balance should be focused.
The emergence of new forms of financial instruments like options and futures, derivatives, off balance
sheet financing etc have given rise to further complexities in recording and disclosure of transactions. In
an audit, besides the tallying of a trial balance, there are also other issue like estimation of provision for
depreciation, valuation of inventories , obtaining audit evidence, ensuring compliance procedure and
carrying out substantive procedure, verification of assets & liabilities their valuation etc. which still
requires judgment to be exercised by the auditor.
Responsibility of expressing an audit opinion and objectives of an audit are not changed in the audit in
EDP environment. Therefore, it can be said that simply because of EDP environment and the trial
balance has tallied it does not mean that the audit would become simpler.
a) The major issues that may limit the independence of the internal audit department in the said organization and
the possible ways of overcoming them is explained as under:
Reporting system
The chief internal auditor reports to the finance director. This limits the effectiveness of the internal audit
reports as the finance director will also be responsible for some of the financial systems that the internal auditor
is reporting on. Similarly, the chief internal auditor may soften or limit criticism in reports to avoid confrontation
with the finance director. To ensure independence, the internal auditor should report to an audit committee.
Scope of work
The scope of work of internal audit is decided by the finance director in discussion with the chief internal auditor.
This means that the finance director may try and influence the chief internal auditor regarding the areas that the
internal audit department is auditing, possibly directing attention away from any contentious areas that the
director does not want auditing. To ensure independence, the scope of work of the internal audit department
should be decided by the chief internal auditor, perhaps with the assistance of an audit committee.
Audit work
The chief internal auditor appears to be auditing the controls which were proposed by that department. This
limits independence as the auditor is effectively auditing his own work, and may not therefore identify any
mistakes. To ensure independence, the chief internal auditor should not establish control systems in the
Company. However, where controls have already been established, another member of the internal audit should
carry out the audit of petty cash to provide some limited independence.
Length of service of internal audit staff
All internal audit staff at the Company has been employed for at least five years. This may limit their
effectiveness as they will be very familiar with the systems being reviewed and therefore may not be sufficiently
objective to identify errors in those systems. To ensure independence, the existing staff should be rotated into
different areas of internal audit work and the chief internal auditor independently review the work carried out.
Appointment of chief internal auditor

The chief internal auditor is appointed by the chief executive officer (CEO) of Yaris Co. Given that the CEO is
responsible for the running of the company, it is possible that there will be bias in the appointment of the chief
internal auditor; the CEO may appoint someone who he knows will not criticize his work or the company. To
ensure independence, the chief internal auditor should be appointed by an audit committee or at least the
appointment agreed by the whole board.
b) While taking custody of Client Assets following things needs to be evaluated:

 Keep such assets separately from personal or firm assets;
 Use such assets only for the purpose for which they are intended;
 At all times be ready to account for those assets and any income, dividends, or gains generated, to any persons
entitled to such accounting;
 Comply with all relevant laws and regulations relevant to the holding of and accounting for such assets.
 Make appropriate inquiries about the source of such assets and consider legal and regulatory obligations.
 Consider seeking legal advice where needed.
a. Section 108 of the Companies Act prescribes the following for the maintenance of accounts of company:
(1) Every company shall duly maintain its accounts in the Nepali or the English language.
(2) The accounts to be maintained under Sub-section (1) shall be maintained according to the double entry
system of accounting and in consonance with the accounting standards enforced by the competent body
under the prevailing law and with such other terms and provisions required to be observed pursuant to
this Act, in such a manner as to clearly reflect the actual affairs of the Company.
(3) The books of account of a company shall not be kept at any place other than its registered office, except
with the approval of the Office.
(4) The cash balance of a company, other than the amount specified by the board of directors, shall be
deposited in a bank and transaction shall be done through the bank.
(5) Subject to the provisions contained in this Chapter, the directors or other officers shall have the final
responsibility to maintain books of account and records of the company.
(6) Where there is a default in complying with the provisions made in this Act in respect of the preparation
of books of account and annual financial statements of a company, the director or officer him/herself,
during whose tenure the annual financial statements and other reports have been prepared, shall be
responsible under this Act.
b. The list of points under the provisions of Section 112 of the Companies Act for disqualification of the auditor
are as follows:
(1) None of the following persons or the firms or companies in which such persons are partners shall be
qualified for appointment as auditor and shall, despite appointment as auditor, continue to hold office:
(a) A director, advisor appointed with entitlement to regular remuneration or cash benefit, a person or
employee or worker involved in the management of the company or a partner of any of them or/and
employee of any of such partners or a close relative of a director or partner, out of them, or/and employee
of such relative;
(b) A debtor who has borrowed moneys from the company in any manner, or a person who has failed to pay
any dues payable to the company within the time limit and is in such arrears or close relative of such
person;
(c) A person who has been sentenced to punishment for an offense pertaining to audit and a period of five
years has not elapsed thereafter;
(d) A person who has been declared insolvent;

(e) A substantial shareholder of the company or a shareholder holding one percent or more of the paid up
capital of the company or his close relative;
(f) A person who has been sentenced to punishment for an offense of corruption, fraud or a criminal offense
involving moral turpitude and a period of five years has not elapsed thereafter;
(g) A person referred to in Sub-section (3) of Section 111;
(h) In the case of a public company, any person who works, whether full time or part time, for any
governmental body or anybody owned fully or partly by the Government of Nepal or any other company
or a partner of such person or a person who is working as an employee of such partner or a person who is
authorized to sign any documents or reports to be prepared by the management of the company;
(i) A company or corporate body with limited liability;
(j) A person having interest in any transaction with the company or his/her close relative or a director,
officer or substantial shareholder of another company having any interest in any transaction with the
company.
(2) The auditor shall, prior to his/her appointment ,give information in writing to the company that he/she is
not disqualified pursuant to Sub-section(1).
(3) Where any auditor becomes disqualified to audit the accounts of a company or there arises a situation
where he/she becomes disqualified for appointment or can no longer continue to act as an auditor of the
company, he/she shall immediately stop performing audit which is required to be performed or is being
performed by him/her and give information thereof to the company in writing.
(4) The audit performed by an auditor who has been appointed in contravention of this Section shall be
invalid.
c. Functions and duties of auditor:

As an auditor of the Gundruk & Company, followings are the matters that are required to be reported to
the shareholders of the Company as required under the Section 115 of the Companies Act.
(1) The auditor shall, addressing the shareholders or the appointing authority, submit to the company his/her
report, certifying the balance sheet, profit and loss account and cash flow statement based on the books
of account, records and accounts audited by him/her.
(2) The audit report shall be prepared in accordance with the prevailing law or in consonance with the audit
standards prescribed by the competent body; and such report shall state the matters to be set out under
this Act, as per necessity.
(3) The audit report as referred to in Sub-section (2) shall also indicate the following matters, inter alia:
(a) Whether such information and explanations have been made available as were required for the
completion of audit;
(b) Whether the books of account as required by this Act have been properly maintained by the company in
a manner to reflect the real affairs of its business;
(c) Whether the balance sheet, profit and loss account and cash flow statements received have been prepared
in compliance with the accounting standards prescribed under the prevailing law and whether such
statements are in agreement with the books of account maintained by the company;
(d) Whether, in the opinion of the auditor based on the explanations and information made available in the
course of auditing, the present balance sheet properly reflects the financial situation of the company, and
the profit and loss account and cash flow statement for the year ended on the same date properly reflect
the profit and loss, cash flow of the company, respectively;
(e) Whether the board of directors or any representative or any employee has acted contrary to law or
misappropriated any property of the company or caused any loss or damage to the company or not;
(f) Whether any accounting fraud has been committed in the company
(g) Suggestion, if any.

(a) In planning attendance at a physical inventory count the auditors should:
(i) Review previous year's audit working papers and discuss any developments in the year with
management.
(ii) Obtain and review a copy of the company's count instructions.
(iii)Arrange attendance at count planning meetings, with the consent of management.
(iv) Gain an understanding of the nature of the inventory and of any special problems this is likely to present,
for example liquid in tanks, scrap in piles.
(v) Consider whether expert involvement is likely to be required as a result of any circumstances noted in
(iv) above.
(vi) Obtain a full list of all locations at which inventories are held, including an estimate of the amount and
value of inventories held at different locations.
(vii) Using the results of the above steps, plan for audit attendance by appropriately experienced audit
staff at all locations where material inventories are held, subject to other factors (for example rotational
auditing, reliance on internal controls).
(viii)Consider the impact of internal controls upon the nature and timing of attendance at the count.
(ix) Ascertain whether inventories are held by third parties and if so make arrangements to obtain written
confirmation of them or, if necessary, to attend the count.
(b) Procedures to ensure a complete count and to prevent double-counting are particularly important in this
case because movements will continue throughout the count.
(i) Clear instructions should be given as to procedures, and an official, preferably not someone normally
responsible for inventories, should be given responsibility for organizing the count and dealing with
queries.
(ii) Before the count, all locations should be tidied and inventory should be laid out in an orderly manner.
(iii)All inventories should be clearly identified and should be marked after being counted by a tag or
indelible mark, so that it is evident that it has been counted.
(iv) Pre-numbered sheets should be issued to counters and should be accounted for at the end of the count.
(v) Counters should be given responsibility for specific areas of the warehouse. Each area should be subject
to a recount.
(vi) A separate record should be kept of all goods received or issued during the day (for example by noting
the goods received note or dispatch note numbers involved).
(vii) Goods received on the day should be physically segregated until the count has been completed.
(viii)Similarly, goods due to be dispatched on the day should be identified in advance and moved to a special
area or clearly marked so that they are not inadvertently counted in inventory as well as being included in
sales.

a) The request by Mr Ramesh that half of the first year's audit fee should be waived is quite improper. If this
proposal were to be accepted it could be held that M R & Co had sought to procure work through the quoting of
lower fees. This would be unethical and would result in disciplinary proceedings being taken against the firm.
Mr Ramesh should be informed that the audit fee will be determined by reference to the work involved in
completion of a satisfactory audit, taking into account the nature of the audit tasks involved and the
resources required to carry out those tasks in an efficient manner. He should also be told that if he is not
prepared to accept an audit fee arrived at in this way and insists on there being a reduction then
regrettably the nomination to act as auditor will have to be declined.
B R & Co has every right not to resign even though they may be aware that Mr Ramesh wishes to replace
them. The auditors of a company are appointed by, and report to, the members of a company and the
directors are not empowered to remove the auditors. If the reason for the proposed change arises out of a
dispute between management and the auditors then the auditors have a right to put forward their views as
seen above and to insist that any decision should be made by the members, but only once they have been
made aware of all pertinent facts concerning the directors' wishes to have them removed from office.
b) The responsibility for the prevention and detection of fraud and error rests with management through the
implementation and continued operation of an adequate system of internal control. Such a system reduces but
does not eliminate the possibility of fraud and error. In forming his opinion, the auditor carries out procedures
designed to obtain evidence that will provide reasonable assurance that the financial information is properly
stated in all material respects. Consequently, the auditor seeks reasonable assurance that fraud or error which
may be material to the financial information has not occurred or that; if it has occurred, the effect of fraud is
properly reflected in the financial information or the error is corrected.
The auditor, therefore, plans his audit so that he has a reasonable expectation of detecting material
misstatements in the financial information resulting from fraud or error. The degree of assurance of detecting
errors would normally be higher than that of detecting fraud, since fraud is usually accompanied by acts
specifically designed to conceal its existence. Due to the inherent limitations of an audit there is a possibility that
material misstatements of the financial information resulting from fraud and, to a lesser extent, error may not be
detected.
The subsequent discovery of material misstatement of the financial information resulting from fraud or error
existing during the period covered by the auditor’s report does not, in itself, indicate that whether the auditor
has adhered to the basic principles governing an audit. The question of whether the auditor has adhered to the
basic principles governing an audit (such as performance of the audit work with requisite skills and competence,
documentation of important matters, details of the audit plan and reliance placed on internal controls, nature
and extent of compliance and substantive tests carried out, etc.) is determined by the adequacy of the
procedures undertaken in the circumstances and the suitability of the auditor’s report based on the results of
these procedures. The liability of the auditor for failure to detect fraud exists only when such failure is clearly
due to not exercising reasonable care and skill.
Thus in the instant case after the completion of the statutory audit, if a fraud has been detected, the same by
itself cannot mean that the auditor did not perform his duty properly. If the auditor can prove with the help of
his papers (documentation) that he has followed adequate procedures necessary for the proper conduct of an
audit, he cannot be held responsible for the same. If however, the same cannot be proved, he would be held
responsible.
c) Effect of Subsequent Events:

NSA 560 “Subsequent Events”, establishes standards on the auditor’s responsibility regarding subsequent events.
According to it, ‘subsequent events’ refer to those events which occur between the date of balance sheet and
the date of the audit report, and facts that become known to the auditor after the date of the auditor’s report.
It lays down the standard that the auditor should consider the effect of subsequent events on the financial
statements and on the auditor’s report.
The auditor should obtain sufficient appropriate evidence that all events up to the date of the auditor‘s
report requiring adjustment or disclosure have been identified and to identify such events, the auditor
should:
I. Obtain an understanding of any procedures management has established to ensure that subsequent events are
identified.
II. Reading minutes, if any, of the meetings, of the entity’s owners, management and those charged with
governance, that have been held after the date of the financial statements and inquiring about matters discussed
at any such meetings for which minutes are not yet available.
III. Reading the entity’s latest subsequent interim financial statements, if any.
IV. Read the entity’s latest available budgets, cash flow forecasts and other related management reports for periods
after the date of the financial statements.
V. Inquire, or extend previous oral or written inquiries, of the entity’s legal counsel concerning litigation and claims;
or
VI. Inquire management and, where appropriate, those change with governance as to whether any subsequent
events have occurred which might affect the financial statements.
Examples of inquiries of management on specific matters are:
 Whether new commitments, borrowings or guarantees have been entered into.
 Whether sales or acquisitions of assets have occurred or are planned.
 Whether there have been increases in capital or issuance of debt instruments, such as the issue of new shares or
debentures, or an agreement to merge or liquidate has been made or is planned.
 Whether there have been any developments regarding contingencies.
 Whether there have been any developments regarding risk areas and contingencies.
 Whether any unusual accounting adjustments have been made or are contemplated.
 Whether any events have occurred or are likely to occur which will bring into question the appropriateness of
accounting policies used in the financial statements as would be the case, for example, if such events call into
question the validity of the going concern assumption. Whether any events have occurred that is relevant to the
measurement of estimates or provisions made in the financial statements. Whether any events have occurred
that is relevant to the recoverability of assets.
VII. Consider whether written representations covering particular subsequent events may be necessary to support
other audit evidence and thereby obtain sufficient appropriate audit evidence.
When the auditor identifies events that require adjustment of, or disclosure in, the financial statements,
the auditor shall determine whether each such event is appropriately reflected in those financial
statements. If such events have not been considered by the management and which in the opinion of the
auditor are material, the auditor shall modify his report accordingly.
d) Restrictions on Powers of Statutory Auditors:

Section 114 of the Companies Act, 2063 provides that an auditor of a company shall have right of access
at all times to the books and accounts and vouchers of the company whether kept at the Head Office or
other places and shall be entitled to require from the offices of the company such information and
explanations as the auditor may think necessary for the purpose of his audit. These specific rights have
been conferred by the statute on the auditor to enable him to carry out his duties and responsibilities
prescribed under the Act, which cannot be restricted or abridged in any manner. Hence' any such
resolution even if passed by entire body of shareholders is ultra vires and therefore void.
(In the case of Newton vs. Birmingham Small Arms Co., it was held that any regulations which preclude
the auditors from availing themselves of all the information to which they are entitled under the
Companies Act, are inconsistent with the Act.)
e) Appointment of First Auditor of Company:

The appointment of Mr Sanjay, a practicing Chartered Accountant as first auditors by the Managing
Director of PR Ltd by himself is in violation of Section 111(1) of the Companies Act, 2063, which
authorizes the Board of Directors to appoint the first auditor of the company prior to the holding of the
first annual general meeting.
In view of the above, the Managing Director of PR Ltd should be advised not to appoint the first auditor
of the company.
f) It is no part of the duty of the auditor to send a copy of his report or to allow inspection thereof by each member
of the company individually or to see that the report is read before the company in general meeting. The duty of
the auditor is confirmed only to forwarding his report on the account to the secretary of the company. It will be
for the secretary or the Directors to convene the general meeting and send the financial statements and the
Auditor’s report to members or others entitled to receive it. The action of the auditor to not obliging the
shareholders is perfectly held in law.
g) As per NSA 580 on “Management Representations” in the course of audit, an auditor comes across various
matters in respect of which he is not able to obtain sufficient appropriate audit evidence. In such a situation he
may rely on the submission by the management but he should seek corroborative audit evidence from sources
inside or outside the entity and evaluate the representation made by management.
Management representation is not a substitute for other audit evidence. The auditor should seek and apply
normal audit procedure. Mere possession of a certificate does not absolve the auditor from his liability. He
should not seek or accept certificates when subject matter is such that it is capable of verification from internal
and/or external evidences.
In the instant case, the stock of imported material lying with the transporter can be easily verified with purchase
order, invoice, bill of entry, custom document etc. Therefore the auditor in this instant case has not used
available evidences. He should not have rested with the certificate obtained from the management and could
have evaluated other evidences. He may be held liable for negligence and professional misjudgment.
h) As per NSA 230 on “Audit Documentations” the working papers are the property of the auditor and the auditor
has right to retain them. He may at his discretion can make available working papers to his client. The auditor
should retain them long enough to meet the needs of his practice and legal or professional requirement.
Working papers are the important records of the auditor. They serve as evidence of the auditor’s exercise of due
care and conclusion reached regarding significant matters. The client does not have a right to access the working
papers and it is up to the discretion of the auditor to make them available or not to others including the client.
Hence in the instant case, management of Ram Rahim & Concern cannot insist upon the auditor to handover the
working papers of the previous year.
i) As per councils decision (194th meeting) dated Falgun 4th 2071, the minimum fees for the I/NGOs shall be as
under:
Grant or other receipts Minimum audit fees (NRs)
More than 50 crores 500,000
More than 50 Lakhs 50,000
However, the audit fees for the INGOs cannot be less than NRs 100,000.
j) A self-interest threat may be created if fees due from an audit client remain unpaid for a long time, especially if a
significant part is not paid before the issue of the audit report for the following year. Generally the firm is
expected to require payment of such fees before such audit report is issued. If fees remain unpaid after the
report has been issued, the existence and significance of any threat shall be evaluated and safeguards applied
when necessary to eliminate the threat or reduce it to an acceptable level. An example of such a safeguard is
having an additional professional accountant who did not take part in the audit engagement, provide advice or
review the work performed. The firm shall determine whether the overdue fees might be regarded as being
equivalent to a loan to the client and whether, because of the significance of the overdue fees, it is appropriate
for the firm to be reappointed or continue the audit engagement.
Relative size of the fees mentioned hereinbefore, until ICAN makes specific guidelines shall not be
considered as self-interest or intimidation threats
k) Section 116 of the Company’s Act provides that an audit report prepared by the auditor appointed by the
company shall be signed and dated by the auditor. Further, where the company has appointed any accounting
institution to carry out the audit the member who has been authorized by the decision of the partners of such
institution shall sign and date the audit report.
l) Sol: As per Councils decision (194th meeting) dated Falgun 4th 2071, the minimum fees for Cooperatives
shall be as follows:
Loan investments or deposits Minimum audit fees (NRs)
More than 2 croress 25,000
Therefore, the firm has failed to comply with the Council‘s decision.
a) Receipt of Special backward area subsidy from Nepal Government

 The claim for backward area subsidy submitted to the authorities should be studied.
 It should be ascertained whether the grant is of a capital nature for funding assets or of a revenue nature.
Mere computation formula of quantum of grant with reference to the cost of project of itself will not
make the grant a capital nature ipso facto.
 The accounting of the grant should be in accordance with NAS 10 ―Accounting for Government Grants‖
of ICAN. The revenue grant can be taken to income statement with appropriate disclosure.
 The capital grant may be adjusted against cost of assets or may be kept in the capital reserve to be
transferred to profit or loss account each year in proportion to the depreciation of that asset charged in
profit and loss account.

 The receipt of the grant should be checked with bank statement, remittance challan etc.
 The conditions attached to the grant should be fulfilled by the company. The auditor should check
whether any liability or refund of grant for breach of conditions could arise.
b) Assets abroad
 Examine the title deeds of the immovable properties abroad.
 Ensure that the immovable properties abroad have been properly classified and disclosed.
 Where documents of title relating to assets held abroad are not available for inspection, a certificate
should be obtained from the agent or any other party holding the document.
 Ascertain that certificate has been obtained disclosing unequivocally that they are free from any charge
or encumbrance.
c) Research and Development Expenses

 Ascertain the nature of research and development work at the outset and enquire whether separate
Research and Development Department exists.
 See allocation of expenses under revenue and deferred revenue. Ensure that expenses which are routine
development expenses are charged to Profit and Loss Account.
 Check whether the concerned research activity is authorized by the Board and has relevance to the
objectives of the company.
 Examine that generally research expenses for developing products or for inventing a new product are
treated as deferred revenue expenditure to be written off over a period of three to five years, if
successful. In case it is established that the research effort is not going to succeed, the entire expenses
incurred should be written off to the profit and loss account.
 Ensure that if any machinery and equipment have been bought specially for the purpose of research
activity, the cost thereof, less the residual value should be appropriately debited to the Research and
Development Account over the years of research.
d) Sale Proceeds of Junk Materials

 Review the internal control on junk materials, as regards its generations, storage and disposal and see
whether it was properly followed at every stage.
 Ascertain whether the organization is maintaining reasonable records for the sale and disposal of junk
materials.
 Review the production and cost records for the determination of the extent of junk materials that may
arise in a given period.
 Compare the income from the sale of junk materials with the corresponding figures of the preceding
three years.
 Check the rates at which different types of junk materials have been sold and compare the same with the
rates that prevailed in the preceding year.
 See that all junk materials sold have been billed and check the calculations on the invoices.
 Ensure that there exists a proper procedure to identify the junk material and good quality material is not
mixed up with it.
 Make an overall assessment of the value of the realization from the sale of junk materials as to its
reasonableness.
e) Sale of Assets
 As in the case of sale of Assets, the authority for sale is very important, It is therefore a matter which
should receive the attention of the auditor.
 Another important aspect which requires consideration is the basis of sale, whether by auction or by
negotiation, for determining that the asset was sold at the maximum price that could be contained for it
and that the sale proceeds of the asset have been fully accounted for.
 It should further be confirmed that sale proceeds have been credited to an appropriate head of account
and the amount of profit arising out of it has been segregated between revenue profits and capital profits
and accordingly appropriate accounts are credited, where there is a loss, the same should be written off.
f) Provision for bonus

 Examine whether the liabilities are provided for in accordance with the Bonus Act and/or in agreement
with the employees or award of the competent authority.
 Ensure that the Bonus has been obtained (or calculated) by the personnel as per the Bonus Act.
 Where the bonus actually paid is in excess of the amount required to be paid as per the provisions of the
applicable law/agreement/award the auditor should specifically examine the authority for the same.
 Examine whether the appropriate amount has been transferred to welfare fund account. As per the Act,
70% of the rest amount after the distribution of the bonus from the amount allotted for the bonus shall be
deposited in welfare fund established in accordance with Section 37 of the Labour Act.
 Ensure that the remaining 30% has been deposited in the National Level Welfare Fund which has been
established by the Government of Nepal for the benefit of the personnel of the Enterprise.
g) Audit of contingent liabilities

The auditor may take following steps to verify the contingent liabilities:
 Inspect the minute books of the company to ascertain all contingent liabilities known to the company.
 Examine the contracts entered into by the company and the likelihood of contingent liabilities emanating
there from.
 Scrutinize the lawyer‘s bills to track unreported contingent liabilities.
 Examine bank letters in respect of bills discounted and not matured.
 Examine bank letters to ascertain guarantees on behalf of other companies or individuals.
 Discuss with various functional officers of the company about the possibility of contingent liability
existing in their respective field.
 Obtain a certificate from the management that all known contingent liabilities have been included in the
accounts and they have been properly disclosed.
 Ensure that proper disclosure has been made as per NAS 12, Provisions, Contingent Liabilities and
Contingent Assets.
a. Vouching and Verification

 Vouching pertains to the entire transactions recorded in the books while verification relates to the assets and
liabilities appearing in the balance sheet.
 Vouching is done through the year and verification is generally carried out at the end of the year
 Vouching is to verify the completeness, accuracy and validity of the transactions while verification is to confirm
the existence, ownership, possession, completeness, valuation and disclosure of items relating to the balance
sheet.
 Vouching is based only on documentary examination and verification is based on observation as well as
documentary examination.
 Vouching is a routine matter which is generally conducted by junior staff while verification requires experienced
people and done by senior staff.
 Vouching does not include valuation but verification includes valuation.
b. Internal audit and Statutory audit

Internal audit is the arrangement within the organization to verify on continuous basis the correctness
and truthfulness of the transactions by the salaried staff/outsourced. Statutory audit is the examination of
the books of accounts of the business by an external auditor and to report that the profit and loss account
and balance sheet are drawn according to provisions of law and the financial statements reveal the true
and fair view of the results of operations and financial state of affairs of the business.
Internal audit is not compulsory. Statutory audit is compulsory as per applicable law.
Internal audit is carried out by the person appointed by the business enterprises. It is not necessary that
the internal auditor should possess the qualification prescribed for professional auditor. Statutory audit
can be carried out only by those who are qualified for appointment as per the provision of the
Companies Act and other Acts.
Internal auditor is answerable to the management. His duties, responsibilities etc. regarding audit work
are determined by the management. The management can increase the powers and authority of the
internal auditor. Similarly it can also curtail his powers.
The rights, duties, responsibilities and liabilities of statutory auditors are governed by the provisions of
law. The auditor is independent of management.
The internal auditor points out irregularities in the procedural aspects and suggests ways and means to
rectify the same. He assures that the financial operations and other types of control in force are carried
out in conformity with the accounting systems.
The statutory auditor is concerned with the legality and validity of the transactions of business. His audit
work is based on the financial statement prepared by the business.
c. Reports and Certificates

The term 'certificate', is a written confirmation of the accuracy of the facts stated therein and does not
involve any estimate or opinion. When an auditor certifies a financial statement, it implies that the
contents of that statement can be measured and that the auditor has vouchsafed the exactness of the data.
The term certificate is, therefore, used where the auditor verifies certain exact facts. An auditor may thus,
certify the circulation figures of a newspaper or the value of imports or exports of a company. An
auditor's certificate represents that he has verified certain precise figures and is in a position to vouch
safe their accuracy as per the examination of documents and books of account.

An auditor's report, on the other hand, is an expression of opinion. When we say that an auditor is
reporting, we imply that he is expressing an opinion on the financial statements.
The term report implies that the auditor has examined relevant records in accordance with generally
accepted auditing standards and that he is expressing an opinion whether or not the financial statements
represent a true and fair view of the state of affairs and of the working results of an enterprise. Since an
auditor cannot guarantee that the figures in the balance sheet and profit and loss account are absolutely
precise, he cannot certify them. This is primarily because the accounts itself are product of observance of
several accounting policies, the selection of which may vary from one professional to another and, thus,
he can only have an overall view of the accounts through normal audit procedures. Therefore, the term
certificate cannot be used in connection with these, statements.
Thus, when a reporting auditor issues a certificate, he is responsible for the factual accuracy of what is
stated therein. On the other hand, when a reporting auditor gives a report, he is responsible for ensuring
that the report is based factual data, that his opinion is in due accordance with facts, and that it is arrived
at by the application of due care and skill.
d. Assurance engagement versus Non assurance engagement

An engagement in which a professional accountant in public practice expresses a conclusion designed to enhance
the degree of confidence of the intended users other than the responsible party about the outcome of the
evaluation or measurement of a subject matter against criteria. Any engagement that fulfills the following
criteria is an assurance engagement:
 Existence of three party relationship
 Subject matter
 Criteria
 Gathering of sufficient appropriate evidence
 Expression of opinion
However, for an assurance engagement to be an audit engagement one additional requirement is that level of
assurance provided by such engagement needs to be of reasonable level. Any engagement other than above is
non- assurance engagement. For e.g.: Legal services, Management services, Internal Audit etc.
e. Clean Audit Report and Qualified Audit Report.

A clean report which is otherwise known as unconditional opinion is issued by the auditor when he does
not have any reservation with regard to the matters contained in the financial statements. In such a case,
the audit report may state that the financial statements give a true and fair view of the state of affairs and
profit and loss account for the period. Under the following circumstances an auditor is justified in issuing
a clean report:
a. the financial information has been prepared using acceptable accounting policies, which have been
consistently applied;
b. the financial information complies with relevant regulations and statutory requirements; and
c. there is adequate disclosure of all material matters relevant to the proper presentation of the financial
information, subject to statutory requirements, where applicable.
Qualified audit report, on the other hand, is one which does not give a clear cut about the truth and
fairness of the financial statements but makes certain reservations. The gravity of such reservations will
vary depending upon the circumstances. In majority of cases, items which are the subject matter of
qualification are not so material as to affect the truth and fairness of the whole accounts but merely
creates uncertainty about a particular item. In such cases, it is possible for the auditors to report that in
their opinion but subject to specific qualifications mentioned, the accounts present a true and fair view.

Thus, an auditor may give his particular objection or reservation in the audit report and state "subject to
the above, we report that balance sheet shows a true and fair view…….." The auditor must clearly
express the nature of qualification in the report. The auditor should also give reasons for qualification.
The words "subject to" are essential to state any qualification. It is also necessary that the auditors
should quantify, wherever possible the effect of these qualifications on the financial statements in clear
and unambiguous manner if the same is material and state aggregate impact of qualifications.
Thus, it is clear from the above that in case of a clean report, the auditor has no reservation in respect of
various matters contained in the financial statements but a qualified report may involve certain matters
involving difference of opinion between the auditor and the management.
Qualified Audit report:

Qualified audit report is one in which the auditor does not give clean report about the truthfulness and
fairness of financial statement but makes certain reservations. While qualifying the audit report, it has to
be seen that the subject matter of qualification is material but not so much as to affect the overall true and
fair view of accounts. Where an auditor fails to obtain sufficient information to warrant an expression of
opinion, then he is unable to form an opinion and, thus, he makes a disclaimer of opinion.
Accordingly, the auditor may state that he is unable to express an opinion because he has not been able to
obtain sufficient and appropriate audit evidence to form an opinion. The necessity of a disclaimer of
opinion may arise due to many reasons such as restriction on scope of examination or in certain
circumstances the auditor may not have access to all the books of account for certain reasons, e.g., books
are seized by excise authorities or destroyed in fire, etc. It is but natural that the auditor must make all
efforts to verify and substantiate the events. In case he is unable to obtain audit evidence even from
alternative sources', then the auditor can only state that he is unable to form an opinion. Therefore, an
auditor is required to exercise judgment as to circumstances which may cause modification in the audit
report.
The following are some of the circumstances when qualified audit report is warranted:
 if the auditor is unable to obtain all the information and explanations which he considers necessary for the
purpose of his audit.
 if proper books of account have not been kept by the company in accordance with the law.
 if the Balance Sheet and Profit and Loss Account are not in agreement with the books of account and returns.
 if information required by law is not furnished.
 if the profit and loss account and balance sheet do not comply, with the accounting standards referred to in sub-
section (2) of Section 108 of the Companies Act, 2063.
 if there is contravention of the provision of the Companies Act, 2063 having a bearing on the accounts and
transactions of the company.
The aforesaid circumstances have to be carefully evaluated by the auditor having regard to materiality to
see whether the circumstance require disclaimer of opinion or adverse opinion.
Answer to Question No.12 ,
f) Analytical procedures to verify inventories.

The auditor can adopt the following analytical procedures to verify inventories.
 Quantitative reconciliation of opening stock, purchases, production, sales and closing stock
 Comparison of closing stock quantities and values with those of previous year.
 Comparison the inventory turnover ratio with that of the previous year and industry average, if available.
 Comparison of the current year gross profit ratio with that of previous year.
 Comparison of actual stock, purchase and sales figures with the budgeted one.
 Comparison of raw material yield/wastage with previous year
g) Concept of True and Fair view

The concept of ‗true and fair‘ in the auditor‘s report signifies that the auditor is required to express his
opinion whether the state of affairs and the results of the entity are truly and fairly represented by the
accounts under audit.
What constitutes ‗true and fair‘ has not been defined in any legislation. To ensure a true and fair view, an
auditor has to see that the assets and liabilities are neither undervalued nor overvalued, no material assets
or liabilities are omitted, the requirements of acts/ legislation have been followed, and accounting
principles have been disclosed separately.
h) Professional Skepticism
Professional skepticism includes being alert to, for example:
 Audit evidence that contradicts other audit evidence obtained.
 Information that brings into question the reliability of documents and responses to inquiries to be used as
audit evidence.
 Conditions that may indicate possible fraud.
 Circumstances that suggest the need for audit procedures in addition to those required by the NSAs.
Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to
reduce the risks of:
 Overlooking unusual circumstances.
 Over generalizing when drawing conclusions from audit observations.
 Using inappropriate assumptions in determining the nature, timing and extent of the audit procedures and
evaluating the results thereof.
 Professional skepticism is necessary to the critical assessment of audit evidence. This includes
questioning contradictory audit evidence and the reliability of documents and responses to inquiries and
other information obtained from management and those charged with governance. It also includes
consideration of the sufficiency and appropriateness of audit evidence obtained in the light of the
circumstances, for example, in the case where fraud risk factors exist and a single document, of a nature
that is susceptible to fraud, is the sole supporting evidence for a material financial statement amount.
i) Intimidation Threat
"Intimidation Threat" occurs when a members of the assurance team may be deterred from acting
objectively and exercising professional skepticism by threats, actual or perceived, from the directors,
officers or employees of an assurance client, or from within the firm. Examples of circumstances that
may create intimidation threats include, but are not limited to:
 Being threatened with dismissal or replacement in relation to a client engagement with the application of
on accounting principles.
 Being threatened with litigation.
 Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.
j) Permanent and timing differences

Tax on income is one of the significant items in the statement of profit and loss of an enterprise. In
accordance with the matching concept, taxes on income are accrued in the same period as the revenue
and expenses to which they relates. Matching of such taxes against revenue for a period poses special
problems arising from the fact that in a number of cases, taxable income may be significantly different
from the accounting income. This divergence between taxable income and accounting income arises due
to two reasons:
Firstly, there are differences between items of revenue and expenses as appearing in the statement of
profit and loss and the items, which are considered as revenue, expenses or deduction for tax purpose i.e.
permanent difference. Such permanent differences are the difference between taxable income and
accounting income for a period that originate in one period and do not reverse subsequently.
Secondly, there are differences between the amount in respect of a particular item of revenue or expenses
as recognized in the statement of profit and loss and the corresponding amount which is recognized for
the computation of taxable income i.e. timing difference. Such timing difference are those difference
between taxable income and accounting income for a period that originate in one period and are capable
of reversal in one or more subsequent periods.
Corporate and Other Laws
Companies Act, 2063

1) Give your opinion on each case based on the Provisions of Companies Act, 2063:
A. Aaditya Motors Limited was established on 2071.07.01 with the paid capital of Rs. 7
million.
Answer: As per Section 11(1) of the Companies Act, 2063 to establish a public limited company
requires the paid up capital of rupees 10 million; however, sub section (2) of the section
envisaged that if any public limited company was established earlier before the Act came into
effect i.e. 2063.07.24, then the capital shall be increased to 10 million up 2065.06.2065.
Accordingly, Aaditya Motors Limited was established as on 2071.07.01 with rupees 7 million
paid up capital is not valid as per the requirement of Section 11(1) of the Companies Act, 2063.
B. Palpa Bank Limited wishes to establish itself with Rs. 50 million paid up capital as an
‚A‛ class licensed financial institution.
Answer: Here, Palpa Bank Limited, a national level ‘A’ class bank and hence, falls in the
category of public company. It is also governed by Bank and Financial Institution Act, 2063.
The Monetary Policy of the Nepal Rastra Bank for fiscal year 2072/73 requires the paid up
capital of "A" class commercial bank to be minimum of Rs. 8,000 million. Hence, Palpa Bank
Limited shall not establish with the paid up capital of Rs. 50 million.

C. Capital Stock Exchange Private Limited wishes to establish as a stock exchange with Rs.
50 million paid up capital.
Answer: As per section 12 of the Companies Act, 2063, notwithstanding anything mentioned in
the Act, company operating in the areas of banking transactions, financial transactions,
insurance business, stock exchange business, pension fund or mutual fund or company
operating other business or transaction as prescribed must be established as public limited
company.
Accordingly, capital stock Exchange Private Limited; being a company dealing in stock
exchange business shall not be established as private limited company though the capital
requirement of public company as per the companies Act, 2063 and Securities Act, 2063 has
met.
D. Ram construction Private Limited wants to open partnership firm with Hari and Shyam.
Answer: Section 10 is the clause that should be abide by the companies registered under
Companies Act, 2063 in addition to those set forth in Memorandum of Association and Articles
of Association. Section 10 (e) of Companies Act, 2063 states that a company shall not open a
partnership or private firm. Hence, Ram Construction Private Limited cannot open a
partnership firm with Hari and Shyam.
E. Hanuman Construction Private Limited sold its share by public offering to subscribe its
share.
Answer: Section 10 of Companies Act, 2063 is the clause that should be abide by the companies
registered under Companies Act, 2063 in addition to those set forth in Memorandum of
Association and Articles of Association. Section 10 (c) of Companies Act, 2063 states that a
private company shall not sell its shares and debentures publicly, hence, Hanuman
Construction Private Limited cannot sell its shares publicly.
F. Pramod, a promoter of a public company wants to subscribe 300 shares of the company to
become a promoter of the company, however, Articles of the company states that at least 500
shares required to become a promoter.
Answer: Section 19 of the Companies Act, 2063 states that every promoters of the company
shall affix their signatures in Memorandum of Association and Articles of Association
mentioning shares undertaken to subscribe by them. Section 19(3) states that each promoter
shall undertake to subscribe the shares as mentioned in Articles of Association and at least 100
shares, if Articles of Association does not mention. Here, in this Articles of Association mention
that at least 500 shares require to subscribe to become a promoter, Pramod cannot become
promoter by subscribing only 300 shares.
G. Consensus agreement of Baneshwor Private Limited states that there shall not be held
meeting of the Board of Directors and Annual General Meeting. Does such agreement is
valid?
Answer: If consensus agreement clearly states there shall not be Board of Directors and Annual
General Meeting shall not be held by the consensus agreement of the promoters of the private
company is valid one. Section 145 of Companies Act, 2063 states that if consensus agreement
provides that there shall not be Board of Directors and Annual General Meeting, such
agreement is valid between the promoters of the company; however, consensus agreement
shall also state that who shall perform the functions of be Board of Directors and Annual
General Meeting in the absence of such meetings.
H. Company not for profit distribution is established with the objectives to earn profit.
Answer: As per Section 3 (1) of Companies Act 2063, any person desirous of undertaking any
enterprise with profit motive may, either singly or jointly with others, incorporate a company
for the attainment of one or more objectives set forth in the Memorandum of Association. Here,
not for profit company can also establish with an objective of profit earnings; however, they shall not
distribute profit in any manner.
I. Financial statements of a public company contain only the signatures of a chairperson and
a director out of 7 Board of Directors. Can that company issue financial statements for
shareholders?
Answer: Audited financial statements of the company shall have to be approved by the Board
of Directors and signed by the Chairperson of the Board of Directors and at least one director.
After approval of the financial statements by the Board of Directors; it is authorized for issue to
the shareholders and general public. (Refer: Section 108 (7) of Companies Act, 2063.)
J Shareholder of a company has casted vote as per one shareholder one vote in election of
Board of Directors its Annual General Meeting.
Answer: Except otherwise provided in the AOA, on a poll of election of directors, every
shareholders shall be entitled to cast vote on the basis of number of shares held multiplying the
number of shares held by each shareholders. The voting in the election of Board of Directors is
inconsistent with the provisions of the Companies Act, 2063.
2) ABC Private Limited Company is a private company having five members only. All the
members of the company were going by car to Dharan in relation to some business. An
accident took place and all of them died. Answer with reasons, under the Companies Act,
2063 whether existence of the company has also come to the end?
Answer:
Company's life does not depend upon the death, insolvency or retirement of any or all
shareholders or directors. Provision for transferability or transmission of the share helps to
preserve the perpetual existence of a company. Law creates company and law alone can
dissolve it. Shareholders may come and go but the company can go on forever. Death of all the
shareholders of the company does not affect the continuity of the company. As per Section 7 of
the Companies Act, 2063 company incorporated shall be an autonomous and body corporate
with perpetual succession. In such case, ABC Private Limited does not cease to exist. By way of

transmission of shares, shares are transmitted to their legal representatives. The company
ceases to exist only on the winding up of the company. Therefore, even with the death of all
shareholders of ABC Private Limited does not cease to exist.
3) A Company was in the process of incorporation. Promoters of the company signed an

agreement for the purchase of certain furniture for the company and payment was to be
made to the suppliers of furniture by the company after incorporation. The company was
incorporated and the furniture was used by it. Shortly after incorporation, the company
went into liquidation and the debt could not he paid by the company for the recovery of
money. Examine whether promoters can he held liable or company be liable for payment
under the following situation:
i. In case of a Public Limited Company?
ii. In case of a Private Limited Company?
Answer:
Section 17 (1) of Companies Act, 2063 states that a contract made prior to the incorporation of a
company shall be a proposed contract only and such contract shall not be binding on the
Company. Section 17(2) states that if prior to the incorporation of a company, any person
carries on any transaction or borrows moneys on behalf of the company, such person shall be
personally liable for any contract related with the transaction so carried on.
Further a company cannot ratify a contract entered into by the promoters on its behalf before
its incorporation. Therefore it cannot ratify a contract entered into by the promoters on its
behalf before its incorporation. Therefore, it cannot by adoption or ratification obtain the
benefit of the contract purported to have been made on its behalf before it came into existence
as ratification by the company when formed is legally impossible. The doctrine of ratification
applies only of an agent contracts for a principal who is in existence and who is competent to
contract at the time of contract by the agent. The company can if it desires, enter into a new
contract, after its incorporation with the other party. The contract may be on the same basis and
terms as given in the pre-incorporation contract made by the promoters.
Based on above:
i) In case of public company: If Memorandum of Association of the company mentions
that company shall bear the expenses held on pre-incorporation. It shall be the responsibility of
the company. Similarly, if company adopts pre-incorporation contract through its acceptance,
conduct and behavior, company shall be liable. In other case, persons who sign on behalf of the
proposed company shall have to take personal responsibility. In this case, company has
accepted the contract through the use of the furniture purchased by the proposed company.
ii) In case of private company: Pre incorporation contract shall be dealt by the provisions
as mentioned in Memorandum of Association, Articles of Association and Consensus
Agreement.
4) Explain clearly the doctrine of ‘indoor management’ as applicable in cases of companies
registered under the Companies Act, 2063. Explain the circumstances in which an
outsider dealing with the company cannot claim any relief on the ground of ‘indoor
management’.
Answer:
One limitation to the doctrine of constructive notice of the Memorandum and Articles of a
company is the doctrine of indoor management. According to the doctrine of indoor
management ,the outsider, dealing with the company are entitled to assume that as far as the
internal proceedings of the company are concerned, everything has been regularly done. They
are bound to rend the registered documents and to see that the proposed dealing is not
inconsistent therewith, but they are not bound to do more, they need not inquire into the
regularity of the internal proceedings as required by the memorandum and articles. The
limitation of the doctrine of constructive notice is known as the ‘Doctrine of indoor
management’, popularly known as rule in Royal British Bank vs Turquand. Thus the doctrine
of indoor management aims to protect outsiders against the company.
Exceptions:
In the following circumstances an outsider dealing with the company cannot claim any relief
on the ground of indoor management
i. Knowledge of irregularly: Where a person dealing with the company has actual or
constructive notice of the irregularity as regard internal management, he cannot claim
the benefit under the rule of indoor management.
ii. Negligence: where a person dealing with the company could discover the irregularity if
he had made proper inquiries, he cannot claim benefit of the rule of indoor
management. The protection of the rule is also not available where the circumstance
surrounding the contract-are so suspicious as to invite inquiry, and the outsider dealing
with the company does not make proper inquiry.
iii. Act void ab initio and forgery: where the acts done in the name of a company are void
ab initio, the doctrine of indoor management does not apply. The doctrine applies only
to irregularities that otherwise might affect a genuine transaction; it does not apply to a
forgery. A company can never be held liable for forgeries committed by its officers.
iv. Acts outside the scope of apparent authority: if an officer of a company enters into a
contract with a third party and if the act of the officer is beyond the scope of his
authority, the company not bound.
v. A person having no knowledge of Articles of Association cannot seek protection under
indoor management.
5) Explain the meaning of ‘transmission of shares‛ under the Companies Act, 2063. In what
ways is "transmission of shares" different from ‚transfer of shares‛?
Answer
Transmission and transfer of shares: Under section 153 (1) of the Companies Act, 2053,
transmission of shares takes place when shares are transferred under the operation of law,
either on the death of the registered shareholder or on his being adjudged as insolvent. Upon
the death, the shares of the deceased vest in his executors or administrators and the estate
becomes liable for calls if the shares are not fully paid up. In the like manner the official
assignee or the receiver, as the case may be, is also entitled to be registered as a member in the
place of shareholder who has been adjudged as insolvent.
Distinction between transfer and transmission of shares
Transfer of shares Transmission of shares
1. It is affected by a voluntary/deliberate act of the 1. It takes place by operation of law e.g. due to
parties. death, insolvency or lunacy of a member.
2. It takes place for consideration. 2. No considerations is involved.
3. The transferor has to execute a valid instrument 3. There is no prescribed instrument of transfer.
of transfer.
4. As soon as the transfer is complete, the liability 4. Shares continue to be subject to the original
of the transferor ceases. liabilities.
6) What is the provision relating to interim dividend?
Answer:
As per Section 182 (7) of Companies Act, 2063 interim dividend can be declared by the Board of
Directors; however, same to be approved by the general meeting of the shareholders of the
company. Interim dividend is declared when Annual General Meeting of the company is not
held on time. Before declaration of the interim dividend following provisions shall have to be
fulfilled:
 Declaration of the interim dividend is authorized by the Articles of Association.
 Interim dividend is declared from previous year's profit.
 Previous year's financial statements have been certified by auditor.
 Previous year's financial statements have been approved by Board of Directors.
7) Mention the procedures to change objectives clause of Memorandum of Association.

Answer: Section 23 of Companies Act, 2063 states the procedures to amend Memorandum of
Association and Articles of Association of the company. To amend the objectives of the
company special resolution to be adopted by the general meeting of the company; however, if
any shareholder who is not satisfied with an amendment made to the objectives of the
company may on fulfilling the following requirements, file a petition, setting out the reasons
therefore, in the court to have that amendment declared null and void.
Information of amendment to Within 30 days from the date of resolution
ROC
Filing a petition to court If a or shareholders holding at least five percent
shares of the paid-up capital except the
shareholders who consent to or vote for the
amendment or alteration can make a petition to the

court.
Petition up to When? Within 21 days from the date of resolution
Notice of petition Should be given to Company as well unless
petition will not hear; however, if company refuse
to get information and court believes that, petition
can be hear.
Court May decide (a) Declaring the amendment fully or partially valid or
void.
(b) Requiring the company to subscribe for a reasonable
value of the shares of dissatisfied shareholders and
(c) Buy back of shares as per section 61 of the Act.
Information of amendment by Within 7 days after receipt of information
ROC
Where an order is issued by the court to fully or partly void the decision made by the company
to amend its objectives, the company shall not be entitled to amend its MOA or AOA in that
matter without permission of the court or in a manner contrary to the order of the court.
When objectives are amended by the court's decisions it shall be considered as same were
made by the general meeting of the company on its own.
8) What do you mean by allotment of shares? Write down the process of allotment of shares
as per Companies Act, 2063.
Answer: When there are a lot of shares subscribed by the general public than the issued share
capital, there arises allotment of shares. Public company shall issue its share through the
issuance of prospectus. General public subscribes shares based on the prospectus. At the time
of issue of shares company must issue shares through securities dealer. At the time of issue of
shares provision of underwriter must be made by the company. Company shall have to allot
shares within 3 months from the date of closure of share issue. After the shares subscription by
the general public, there may arises two situations.
i. Under Subscription
 If general public subscribes less than 50% of issued shares including underwriter's
commitment. If this circumstances allotment cannot made. If company applies to Registrar of
Company to extend time limit, Registrar of Company extends time limit up to three months.
Even in extended time, minimum subscription of 50% has not subscribed, amount have to
refund to the applicant.
 If general public subscribes exceeding 50% and between 100% of issued share capital
including underwriter's commitment; allotment can be made to the all the applicants based
on application received.
ii. Over Subscription
If general public subscribes exceeding 100% of issued share capital. Allotment shall have to
be made based on pro rata allotment or other conditions as approved by Securities Exchange
Board of Nepal.

Bank and Financial Institutions Act,
2063
9) Mention the criteria need to fulfill for buyback of its own shares by bank and financial
institutions.
Answer:
Section 10 of the Bank and Financial Institutions Act, 2063; no bank or financial institution shall
purchase its own shares (buy-back) or lend money against security of its own shares; however,
if it meets following conditions can buyback of shares after obtaining approval from Registrar
of Companies and Nepal Rastra Bank.
Financial Condition:
(a) Buy back amount is not more than 20% of the total paid up capital and general reserve
fund of that bank or financial institution.
(b) Debt to equity ratio shall not exceed 2:1 after the buyback of shares.
Other Conditions:
(a) If the shares issued are fully paid up;
(b) If the shares issued have already been listed in the Securities Board;
(c) If the buy-back of shares is authorized by the Articles of Association;
(d) If a special resolution has been adopted at the general meeting for buy-back;
(e) If the buy-back of shares is not in contravention of the directives issued from time to time
by Nepal Rastra Bank and Registrar of Companies.
The general meeting which has decided to buy back shares must mention the following
matters too:
(a) The reason and necessity for the buy-back of shares;
(b) A statement of the evaluation of possible impacts on the financial situation of the bank or
financial institution as a result of the buy-back of shares;
(c) The class and number of shares intended to be bought back;
(d) The maximum or minimum amount required to buy back shares and source of such
amount;
(e) The time limit for the buy-back of shares;
(f) The mode of the buy-back of shares;
(g) Such other necessary matters as specified by Nepal Rastra Bank and as required to be
disclosed under the laws in force, in respect of the buy-back of shares.

Completion of Buyback:

Within six months after the date of receipt of such approval or twelve months of the adoption
of a special resolution at the general meeting whichever occurs later.
Manner of Buyback:
(a) Purchasing from the stock exchange;
(b) Purchasing from the concerned employees of the bank or financial institution the shares
allotted to them;
(c) Purchasing from the existing shareholders on a proportionate basis.
Establishment of Capital Redemption Reserve Fund:

A separate Capital Redemption Reserve Fund (CRRF) to which a sum equal to the nominal
value of the shares bought back shall be transferred; and the amount of such fund shall be
maintained as if it were the paid-up capital.
Cancellation of buyback of shares:
BFIs shall cancel the shares so bought back within 120 days of the date of such buy-back.
10) Mention Restriction to distribute dividend by Bank and Financial Institutions:

Answer:
As per Section 46 of Bank and Financial Institutions Act, 2063 before declaration of dividend by
bank and financial institutions following conditions need to fulfill:
 Recovered all of its preliminary expenses;
 Recovered all of its losses sustained by it until the previous year;
 Amount shall have to set aside for capital fund;
 Amount shall have to set aside for risk bearing fund;
 Amount shall have to set aside for general reserve fund;
 Shares set aside for public issue are issued and fully paid up,
 Before declaration and distribution of dividend, approval of Neal Rastra Bank requires.
11) General Reserve Fund:
Answer:
Every licensed bank and financial institution must maintain a general reserve fund. At least
20% of the net profit of each year shall be kept on being credited to such fund until the amount
of general reserve fund doubles the paid-up capital. The amount credited to the reserve fund of
a licensed institution, may not be invested or transferred to any other head without prior
approval of Nepal Rastra Bank.
12) Conversion of licensed institution of lower class into licensed institution of higher class:
Answer:
Every licensed institution of a lower class which meets all of the following conditions may,
with approval of Nepal Rastra Bank, be converted into a licensed institution of a higher class:

Capital Requirement: If it has capital prescribed by the Nepal Rastra Bank for a licensed
institution of higher class;
Profit Requirement: If it has been able to earn profits since five consecutive years;
Non Performing Loan: If it's total non-performing loan is within the limit prescribed by Nepal
Rastra Bank;
Other Conditions: If it has met all conditions as prescribed by the Nepal Rastra Bank.
If, on receipt of the approval, the concerned licensed institution is required to amend its
Memorandum of Association and Articles of Association to carry on the financial transactions
of higher class, it shall amend the same in accordance with the laws in force and make an
application to the Nepal Rastra Bank to obtain the license of higher class.
13) Mention the procedures of merger of bank and financial institutions as per Bank and
Financial Institutions Act, 2063.
Answer:
Section 77 of Bank and Financial Institutions Act, 2063 states about the procedures for merger
as follows:
Joint application for approval of merger:
If any licensed institution wishes to be merged with or merging another licensed institution,
the merging and merged licensed institutions shall adopt a special resolution to that effect in
their respective general meetings and make a joint application, setting out the following
matters, to the Nepal Rastra Bank for approval:
(a) Audit report of the last fiscal year of the merging licensed institution, along with its audited
balance sheet, profit and loss account, cash flow statement and other financial statements;
(b) A copy of the written consent of the creditors of merging and merged licensed institutions;
(c) Valuation of the movable and immovable properties of, and actual details of the assets and
liabilities of merging licensed institution;
(d) A copy of the decision as to the employees of merging licensed institution;
(e) Such other necessary matters as prescribed by Nepal Rastra Bank in relation to the merger
of licensed institutions.
Approval by Nepal Rastra Bank:
If an application is made for approval, Nepal Rastra Bank shall examine the documents and
returns attached with the application and decide whether or not to grant approval for merger
of licensed institutions with each other and give information thereof to concerned licensed
institutions within 45 days, and within a period of additional 15 days if the Nepal Rastra Bank
has demanded any returns or documents in the course of making decision.
Approval for merger shall not granted for: if it sees that the merger of such licensed
institutions is likely
 To create an environment of unhealthy competition or
 To give rise to the monopoly or
 Controlled practices of any licensed institution in the financial sector.

Assets and Liabilities of Merging Bank and Financial Institutions:
On receipt of an approval from Nepal Rastra Bank, all the assets and liabilities of the merging
licensed institution shall be transferred to the merged licensed institution.

Nepal Rastra Bank Act, 2058
14) What are the privileges and facilities of Nepal Rastra Bank?
Answer:
As per Section 8 of Nepal Rastra Bank Act 2058, following privileges and facilities shall be
allowed to Nepal Rastra Bank:
 Exemption from all types of taxes, fees and charges on incomes, capital transactions,
houses, land, assets etc.;
 No requirement of revenue stamps on any of the documents relating to the Nepal Rastra
Bank;
 There would be no tax, fee, charge, duty on the export and import of bank notes, coins,
gold, silver and the paper, metal, chemicals, and other materials to be used for printing
bank notes and minting coins.
15) Can a practicing chartered accountant having 20 years of experience be qualified to

become a deputy governor? Who appoints deputy governor? What is the tenure of
deputy governor?
Answer:
Qualification of Deputy Governor:
No. A practicing chartered accountant having 20 years of experience cannot become deputy
governor of Nepal Rastra Bank. To become a deputy governor he must be a special class officer
of the Nepal Rastra Bank.
Who appoints deputy Governor?
Government of Nepal shall appoint deputy governor on the basis of recommendation made by
Governor. Governor shall recommend the double the number of vacant positions from the
special class officer of NRB on the basis of their performance and capability.
Tenure of Deputy Governor and reappointment:
 Deputy Governor shall have tenure of 5 years.
 Government of Nepal may, reappoint the retiring directors for any term, if it is deemed
necessary
16) Mention disqualifications criteria to become Board of Directors of NRB.

Answer:
As per Section 21 of Nepal Rastra Bank Act, 2058 none of the following persons shall be eligible
for appointment to the office of the Governor, Deputy Governor and Director of Nepal Rastra
Bank:-
(a) Member or official of a political party, or

(b) The person blacklisted in relation to transaction with a commercial bank or financial
institution, or
(c) An official currently engaged in any commercial bank or financial institution, or
(d) A person having five percent or more shares or voting right in a Commercial Bank or
financial institution, or
(e) A person rendered bankrupt for being unable to pay debts to creditors, or
(f) A insane person, or
(g) A person convicted by a court in an offence involving moral turpitude.

Securities Act, 2063
17) Out of 7 members of the Securities Exchange Board of Nepal, six members except
chairperson have decided to remove chairperson from the Board. Give your opinion
based on Securities Act, 2063.
Answer:
As per Section 7 of Securities Act, 2063 Government of Nepal shall appoint the chairperson of
the Securities Exchange Board of Nepal to act as the chief administrator and to perform day to
day business of the Board. Government of Nepal shall appoint to the office of chairperson an
appropriate person from amongst the renowned persons who have obtained at least master's
degree and gained at least seven years of experience in the field of stock exchange,
management, capital market development, economics, finance commerce, management or law.
There shall be formed a committee under the convenorship of the member of National
Planning Commission responsible for the concerned sector and consisting of the Secretary at
the Ministry of Finance and an expert in the field of securities as its members, for
recommending a name for the purpose of appointment of chairperson. While, recommending a
name for chairperson Recommendation Committee recommends names of at least three
persons who have possessed the qualification. In this way chairperson of Securities Exchange
Board of Nepal has been appointed.
Removal of Chairperson:
Conditions for Removal:
 Chairperson commits any act or action contrary to the interests of the Securities Exchange
Board of Nepal or
 Chairperson commits any act or action contrary to the interests of the development of capital
market or
 Chairperson commits any act or action contrary to the interests of causes any loss and
damage to the Securities Exchange Board of Nepal
Appointment of Inquiry Committee:
Before removal of chairperson, Government of Nepal may form an inquiry committee and on
recommendation of such a committee, remove him or her from the office of the chairperson.
Provided that prior to removal from his or her office, the Chairperson shall be provided with
appropriate opportunity to defend him/ her.
Majority decisions of the members shall be valid only in case of the decisions of the meeting of
Securities Exchange Board of Nepal; however, for the removal of members appointing
authority only can remove the Board of Directors.
Conclusion:
Majority decisions of the members cannot remove chairperson of Securities Exchange Board of
Nepal. Only the appointing authority i.e. Government of Nepal by forming an inquiry
committee and giving reasonable opportunity to defend to the chairperson can remove from
the post.
18) When Prospectus need not be issued by the Company before public issue?

Answer:
A body corporate shall have to get a prospectus approved by the Securities Exchange Board of
Nepal for making public issue of securities and publish the prospectus for information to all
the concerned. While publishing prospectus, prospectus shall also mention the place where the
general public can obtain or inspect the prospectus.
It shall not be required to issue a prospectus to issue the following securities:
(a) Securities issued by the Nepal Rastra Bank,
(b) Securities issued against the full guarantee of the Government of Nepal,
(c) Securities proposed to be sold to up to fifty persons at a time,
(d) Securities issued to own workers or employees,
(e) Securities permitted by the Board as to issue and sell without issuing a prospectus.
19) What do you mean by Business Standards?

Answer:
As per Section 76 of Securities Act, 2063; Securities business person shall, in carrying on the
securities business, observe the following business principles:-
(a) To maintain the operation of securities business fair and of high standards,
(b) To carry on the securities business with proper skills, care and hard working,
(c) To keep on the higher standard of stock exchanges,
(d) To obtain information from customers as to their objective to make investment and
provide services accordingly,
(e) To provide such information and advice as may be required for customers to make
decision on investment in securities,
(f) To avoid conflicts of own interests with the interests of customers and, in the event of
the existence of such situation, to disclose that matter to customers and carry on the
securities business having regard to the interest of customers,
(g) To make such provisions as may be necessary to fulfill commitments made in relation to
the securities business,
(h) To properly maintain records relating to the securities business,
(i) To provide necessary training to employees in order to prepare skilled human resources
for the operation of the securities business,
(j) To observe such other principle as prescribed in relation to the operation of the
securities business.
20) Mention types of securities business as per relevant provision of the Securities Act,
2063.
Answer:
As per Section 63 of Securities Act, 2063 securities business shall be divided into the
following types:-
(a) Securities brokerage,

(b) Securities trade,
(c) Issue and sales management,
(d) Investment management,
(e) Investment consultancy service,
(f) Collective investment fund management,
(g) Securities registration or securities central deposit service or custodial service,
(h) Service relating to the settlement of the account of securities transactions,
(i) Market maker,
(j) Such other business specified by the SEBON as a securities business.
21) Mention when Board of Directors signing on the prospectus shall not become liable for
the false matters in the prospectus?
Answer:
Who shall be liable for false matters in the prospectus?
Where any person subscribes for any securities on the faith of the matters set down in the
prospectus subsequently sustains any loss or damage by the reason that the matters set down
in the prospectus have been set down with mala fide intention or untrue or false statements
have been included therein knowingly, body corporate, board of directors or experts
preparing the prospectus shall be liable to pay compensation for such loss or damage.
When Board of Directors shall not liable for matters contained in prospectus?
 He/she has resigned prior to making a decision on the matters set down in the
prospectus with ulterior motive or knowingly or
 He/she did not know that the prospectus was untrue and prove in the court of law or
 Board of Directors on becoming aware of the false matters in the prospectus reigns and
inform to general public that prospectus contain false matters or
 For the portion of expert's opinion/statement etc, expert shall become responsible if
calculations has wrongly made.
22) What do you mean by false trading as per Securities Act, 2063? What are the punishments
for person involved in false trading?
Answer:
As per Section 94 of Securities Act, 2063, if following trading is done, such a trading shall be
deemed to be a fake or false trading:
 The actual ownership is not changed, even though the purchase or sale of securities is
done directly or indirectly.
 An offer is made to purchase or sell securities on the line of same price upon knowing
the price offered by another for sale or purchase.
Punishment for persons involved in false trading:

 Fine of Rs. 50,000 to Rs. 100,000 or with imprisonment for a term not exceeding one year
or with both and
 If anyone has suffered any loss or damage from such an act, such loss or damage has
also to be recovered from persons involved in false trading.

Nepal Chartered Accountants Act, 2053
23) Mention duties, responsibilities and powers of the Disciplinary Committee.
Answer: Under Rule 68 of Nepal Chartered Accountants, Regulation, 2061 duties,
responsibilities and powers of the disciplinary committee in addition to those provided by the
Section 14 of the Nepal Chartered Accountants Act, 2053 shall be as followings:
 To investigate the complaint filed by a member under sub-article (1) of article 35 of Nepal
Chartered Accountants Act, 2053 or forwarded by the council,
 To receive the service of the legal advisor or a related expert,
 To recommend for action/ penalty with findings if the complaint is found based on facts and
subject to penalty according to sub-article (5) of article 14 of the Nepal Chartered
Accountants Act, 2053,
 To report the council to close the complaint if after investigation not found based on facts or
to recommend action against the complainer if found filed with malafide intention.
 To perform other duties fixed or delegated to do.
24) The respondent 'A' registered auditor issued audit report without being legally
appointed as auditor and without verifying books of accounts, knowing that the
company has another legally appointed statutory auditor. He pleaded that he issued the
audit report on request for visa processing and that report had not harmed anybody, and
that it was his mistake and that he will not repeat such mistakes in futures.
Answer:
The respondent was found compromising the provisions of Section 34 (9) of Nepal Chartered
Accountants Act, 2053 which requires the members holding certificate of practice shall not
certify any financial statements or give report of any type until they or their partner or
employee check and verify it. He was also found compromising that members holding
certificate of practice shall discharge their duties with due care in the course of their profession
and shall draw attention of all concerned to all materials facts which are or have taken place
contrary to the prevailing law and do not comply with generally accepted principles of
auditing. Further he was found compromising the codes of ethics on these grounds the
registered auditor was held guilty of professional misconduct.
Audit Act, 2048
25) Office of the Auditor General appointed Umesh & Associates, chartered accountancy
firm, as an assistant auditor to conduct the audit of a corporation fully owned by
Government of Nepal. Mr. Umesh, proprietor of the firm thinks that he shall have to
audit independently. Mr. Umesh started to bargain for the remuneration with the client.
Can he perform audit independently and ask remuneration from client? Give your
opinion based on relevant provisions of the Act.
Answer:
Background of the Case:
Umesh & Associates, a chartered accountancy firm has been appointed as an assistant auditor
to conduct the audit of a government corporation. Here the final responsibility of audit of
government office lies with the office of auditor general, a constitutional body. Mr. Umesh
thinks that he can firm independently based on the independence, integrity principle of the
auditing. This case is related with the Audit Act, 2048.
Provision of Audit Act, 2048:
Section 7 of Audit Act, 2048 states that the audit of corporate body wholly owned by
Government of Nepal shall be audited by Auditor General; however, if Auditor General has
time and resources constraints, he/she may appoint license holder auditors under the
prevailing law as an assistant. The assistant appointed shall act under the direction,
supervision and control of Auditor General. Mr. Umesh cannot do the audit independently,
since he has been appointed as an assistant auditor of Auditor General.
Similarly, remuneration of such an assistant auditor shall be fixed by Auditor General keeping
in view of volume of financial transactions, status of accounts, number of branches, work load
etc. and paid by client. Here in this case by the corporation wholly owned by Government of
Nepal.
Conclusion:
Mr. Umesh cannot do the audit independently, since his appointment is to assist the work of
Auditor General. Similarly, as per the Audit Act, 2048, Mr. Umesh shall have to function under
the direction, supervision and control of Auditor General and cannot function independently.
Fee to be received by Mr. Umesh shall be fixed by Auditor General and paid by the concerned
organization means corporate body fully owned by Government of Nepal.
26) Mention Qualification of Auditor General and appointment of Auditor General:
Answer:
Qualification of Auditor General:
 Having experience in the special class of Government of Nepal or having at least 20 years of
experience in audit related work after having obtained a bachelor's degree in management,
commerce or accounting from recognized university by the Government of Nepal or having
passed a chartered accountancy examination;
 Not being a member of any political party at the time of appointment;
 Having attained the age of 45 years; and
 Being of high moral character.
Appointment of Auditor General:
The prime minister shall, on the recommendation of the Constitutional Council, appoint
Auditor General. The term of office of the Auditor General shall be six years from the date of
appointment.
27) Write Short Notes on Propriety Audit:

Answer:

Office of the Auditor General shall have to conduct the audit in view of economy, efficiency,
effectiveness, regularity and propriety. Propriety audit means to audit from the eyes of
proprietor. If the expenses or authorizations shall have to incur; expenses or authorization shall
be made or not if the person making expenses or giving authorizations etc. for his/ her own
business. As per Audit Act, 2048 following matters to be audited at the time of audit of
government offices:
 On the propriety of any expenditure and its authorization, if in the opinion of the Auditor
General such expenditure is a reckless one or is an abuse of national property, whether
movable or immovable, despite that the expenditure confirms to the authorization, and
 On the propriety of all authorizations issued in respect of any grant of national property
whether movable or immovable, fixed or current, or underwriting of any revenue, or any
contract, license or permits relating to mining, forest, water resources, etc. and any other act
of abandoning movable or immovable, assets of the nation.
Negotiable Instruments Act, 2034
28) Crossing after issue:
It may be noted that the crossing of a cheque is an instance of an alteration which is authorized
by the act.
 If cheque has not been crossed, the holder there of may cross it either generally, or specially.
 If it is crossed generally, the holder may cross it, specially.
 If it is crossed, either generally or specially the holder may add the words ‚not negotiable‛.
 If a cheque is crossed specially, the banker to whom it is crossed, may again cross it
specially to another banker, his agent, for collection. This is the only case where the act
allows a second special crossing by a banker and for the purpose of collection.
29) Holder due in course and Payment in due course:

Answer:
Holder in Due Course:
In the case of an instrument payable to bearer "holder in due course"means any person who,
for consideration became its possessor before the amount mentioned in it became payable.
In the case of an instrument payable to order, "holder in due course" means any person who
became the payee or endorsee of instrument before the amount mentioned in it became
payable. In both the case, he must receive the instrument without having sufficient cause to
believe that any defect existed in the title of the person from whom he derived his title. Thus a
person who claims to be "holder in Due Course" is required to prove that:
 On paying valuable consideration, he became either possessor of the instrument if
payable to bearer or endorsees thereof , if payable to order,
 He had come into the possession of the instrument before the amount due there under
became actually payable and

 He had come to possess the instrument without having sufficient cause to believe that
any defect existed in the title of transferor from whom he derived his title.
Payment in Due Course:

Payment in due course means payment in accordance with the apparent tenor of the
instruments in good faith and without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for believing that he is not entitled to
receive payment of the amount therein mentioned. In order that such payment may operate as
a discharge of a negotiable instrument, it must fulfill the following conditions:
That the payment should be in accordance with the apparent tenor of the instrument. The
connotation of the expression "Apparent Tenor" is "in accordance with what appears on the
face of the instrument to be the intention of the parties. Consequently, it is imperative that the
payment should be made at or after maturity. A payment before maturity is not a payment in
accordance with apparent tenor of the instrument; and such it is not a payment in due course.
Further, such payment should be made in money only, because the instrument expressed to be
payable in money. A different form of payment may however be adopted but only with the
consent of the holder of the instrument.
That the person to whom payment is made should be in possession of the instrument.
Therefore, payment must be made to the "holder" or a person authorized to receive payment on
his behalf. Suppose, the instrument is payable to a particular person or order and is not
endorsed by him. Payment to any person in actual possession of the instrument in such case,
will not amount to the payment in due course. However, in the event of the instrument being
payable to bearer or endorsed in blank the payment to a person who possesses the instrument
is, in the absence of suspicious circumstances, payment in due course. Any party to a bill, but
not any stranger, may pay it; and on payment, acquire the rights of the holder against all
parties prior to him. But a stranger may pay protest for honour of some party to the bill or note.
That the payment should be made in good faith, without negligence, and under circumstances
which do not afford a reasonable ground for believing that the person to whom it is made is
not entitled to receive the amount. If suspicious circumstances are there, the person making the
payment is to at once put on an enquiry. If he does not make the enquiry, the payment would
not be in due course.
30) Write about the Notice of Dishonor in case of non acceptance and non-payment.
Answer:
Dishonor by Non Acceptance:
A bill may be dishonored either by non-acceptance or by non-payment. A dishonor by non
acceptance may take place in any one of the following circumstances:
a) When the drawee either does not accept the bill within 48 hours of presentment or refuse to
accept it;
b) When one of several drawees, not being partners, makes default in acceptance;

c) When drawee gives a qualified acceptance;
d) When presentment for acceptance is excused and the bill remains unaccepted; and
e) When the drawee is incompetent to contract.
Note that presentment is not necessary where the drawee after diligent, search cannot be
discovered, or where the drawee is incompetent to contract or here the drawee is fictitious
person.
When a bill has been dishonored by non acceptance, it gives the holder an immediate right to
have recourse against the drawer or the endorser. Since a dishonor by non acceptance
constitutes a material ground entitling the holder to take action against the drawer, he need not
wait till the maturity of the bill for it to be dishonored on presentment for payment.
Dishonor by Non Payment:
An instrument is dishonored by non-payment when the party primarily liable e.g.; the acceptor
of a bills of exchange, maker of a promissory note or the drawee of a cheque, make default in
payment. An instrument is also dishonored for non-payment when presentment for payment
excused and the instrument, when overdue, remains unpaid.
31) Write short notes on Noting and Protesting
Answer:
Noting:
Noting is a convenient mode of authenticating the fact that a bill or note has been dishonored.
When a note or a bill has been dishonored by non acceptance or non-payment, the holder
causes such dishonor to be noted by a Notary Public. Noting is a minute recorded by a notary
public in the dishonored instrument. When an instrument, say a bill of exchange, is to be noted
for dishonor, it is taken to Notary Public who presents it once again for acceptance or payment,
as the case may be; and if the drawee or acceptor still refuses to accept or pay the bill, it is
noted, i.e., a minute is prepared containing date of dishonor, reason for such dishonor, etc;
which is attached to the instrument; and the facts are noted on the instrument.
Protesting:
When an instrument is dishonored, the holder may cause the fact not only to be noted, but also
to be certified by a Notary Public that the bill has been dishonored. Such a certificate is referred
to as a protesting.
Neither noting nor protesting is compulsory in the case of inland bills; however, every foreign
bill of exchange must be protested for dishonor when such a protest is required by the law of
the country where the bill was drawn. The advantage of both noting and protesting is that it
constitutes prima facie evidence in the court that instrument has been dishonored. Any bill or
document which has been noted can be protested any time thereafter for taking legal action
against the parties.

Industrial Enterprises Act, 2049
32) Mention objectives of Industrial Enterprises Act, 2049.
Answer:
As per the preamble of Industrial Enterprises Act, 2049, following are the objectives of the Act:
 Economic development of country;
 Fostering industrial enterprises in a competitive manner;
 Increment in the productivity and
 To make the environment of industrial investment more congenial, straightforward and
encouraging.
33) Mention National Priority Industry as per Industrial Enterprises Act, 2049.
Answer:
As per annexure 4 of the Industrial Enterprises Act, 2049 following are the industries
categorized as national priority industry:
1. Agro and Forestry –based Industries.
2. Engineering Industry (Producing Agricultural and Industrial machine).
3. Industry manufacturing Fuel Saving or Pollution Control Devices.
4. Solid Waste Processing Industry.
5. Road, Bridge, Tunnel, Ropeway, Flying Bridge, constructing and Operating Industry, and
Trolley Bus and Tram Manufacturing and Operating Industry.
6. Hospital and Nursing Home (Only outside the Kathmandu Valley).
7. Industries Producing Ayurvedic, Homeopathic and other Traditional Medicine, and
Industries Producing Crutch, Seat Belt, Wheel chair, Stretcher and Stick and so on to be used in
aid of the disabled and orthopedic.
8. Cold Storage installed for the storage of Fruits and Vegetables.
34) Makalu industry has been in operation from 2065 Sharwan; however, industry is in
consecutive losses since its establishment. Council of Ministers, Government of Nepal
thinks that it will be more beneficial to protect the employment of industry's worker or
employee rather than to liquidate the company, consequently, Government of Nepal
decided to nationalize the industries. Give your opinion based on the relevant provisions
of the law.
Answer:
Makalu industry is suffering from the losses since its establishment. Industry's management is
thinking to liquidate the company and Government of Nepal wants to protect the employment
of the worker and employee of the industry and wants to nationalize the industry. This case is
related to the nationalization of the industries as per Industrial Enterprises Act, 2049.
Provision of the Relevant Provision of the Act
Section 21 of the Industrial Enterprises Act, 2049 states that Government of Nepal shall not
nationalized any industries. Nationalization of the industry means to take over the industry by
Government of Nepal.
Conclusion:
Government of Nepal shall not be allowed to nationalize the industry as per the Section 21 of
the Industrial Enterprises Act, 2049. Decision of the Government of Nepal is inconsistent with
Industrial Enterprises Act, 2049. If promoters of the Makalu industry thinks that it can able to
pay debts and liabilities they can voluntary liquidate the company by fulfilling the procedures
mentioned in the concerned act.
35) Powers of Government of Nepal as per Industrial Enterprises Act, 2049.

Answer:
Government of Nepal shall take any action to any person who has done the following actions:
 Establishing any industry without permission or
 Noncompliance with the terms and conditions set forth in the license or
 Noncompliance with the terms and conditions set forth certificate of registration or
 Violation of other provisions of Industrial Enterprises Act, 2049.
Power of Government of Nepal in case of violation of above conditions:
(a) To impose a fine in an amount not exceeding Rs. 500,000,
(b) To cancel the registration or permission of the industry,
(c) To cause to close down the industry;
Before taking any action, Government of Nepal shall give reasonable opportunity to
explain or correct the mistake. If any person is dissatisfied with the actions taken by
Government of Nepal may file an appeal to an Appellate Court within thirty five days of
the notification thereof.
Foreign Investment and Technology
Transfer Act, 1992
36) Write down objectives of Foreign Investment and Technology Transfer Act 1992.
Answer:
As per the preamble of Foreign Investment and Technology Transfer Act, 1992 following are
the objectives:
 Process of industrialization of the country;
 To promote foreign investment and technology transfer;
 To make the economy viable, dynamic and competitive and
 Maximum mobilization of the limited capital, human and the other natural resources.
37) Define Foreign Investment and Technology Transfer.

Answer: Section 2(b) of the Foreign Investment and Technology Transfer Act, 1992 defines
foreign investment as the following investment made by a foreign investor in any industry:
 Investment in Share (Equity);
 Reinvestment of the earnings derived from the investment Equity Share investment;
 Investment made in the form of loan or loan facilities.
Section 2(b) of the Foreign Investment and Technology Transfer Act, 1992 defines foreign
investment as any transfer of technology to be made under an agreement between an industry
and a foreign investor on the following matters:
 Use of any technological right, specialization, formula, process, patent or technical know-how
of foreign origin;
 Use of any trademark of foreign ownership;
 Acquiring any foreign technical, consultancy, management and marketing service.
38) Mention repatriation procedures of loans and interest by an industry established in

Nepal with foreign loans under the Foreign Investment and Technology Transfer Act,
1992.
Answer: Section 5 (2) ( c) of the Foreign Investment and Technology Transfer Act 1992
provides for repatriation in foreign currency of loan principal and interest arising out of foreign
investments.
The industry desiring to repatriate foreign currency has to apply to the Department of
Industries for permission to send out the principal amount of loan and interest on the foreign
loan obtained with the approval of Department of Industries along with the following
documents:
i. Certificate from the commercial bank for transfer of loan amount into Nepal.
ii. Custom declaration certificate and invoice of the plant and machinery if the loan was
obtained in the form of machinery.
iii. Date of approval of loan agreement and
iv. Approval of Nepal Rastra Bank to effect through the banking channel.
39) Mention industries where permission for foreign investments are not allowed.
Answer: No permission shall be granted for making foreign investment in the industries set
forth in the Annex of Foreign Investment and Technology Transfer Act, 1992. Annex has
categorized those industries into Part A and Part B. The details are:
Part (A)
Cottage Industries, Personal Service Business (Business such as Hair Cutting, Beauty Parlor,
Tailoring, Driving Training etc.), Arms and Ammunition Industries, Explosives, Gunpowder,
Industries related to Radio-Active Materials, Real Estate Business (Excluding Construction
Industries), Motion Pictures Business (Produced in state and national language of the nation),
Security Printing, Currencies and Coinage Business
Part (B)
Other Retail Business except the retail business instantly conducted more than two countries as
international transaction, Bidi (Tobacco), (Excluding those exporting more that 90%), Internal
Courier Service, Atomic Energy, Poultry Farming, Fisheries, Bee-Keeping, Other Consultancy
Services such as Management, Accounting, Engineering and Legal Services besides
Consultancy Services having the foreign investment up to Fifty One percent, Beauty palour,
Domestic food processing methods in rent, Local catering Service, Rural tourism
Provided that permission may be granted for the transfer of technology in such industries.
Labour Act, 2048
40) Demand cannot be claimed with Organization.
Answer:
As per Section 75 of Labour Act, 2048, following claims cannot be made to the organization:
 Which is contrary to the Constitution of Nepal;
 Which would affect other's interest due to being based on untestified or baseless
allegation;
 Matter which is prejudicial to the personal conduct of any worker or employee;
 Matters unrelated to the Enterprise; and
 Where a period of two years has not elapsed since the date of last collective agreement.
41) A company wants to employ foreign citizen to improve in the production quality. Based
on Labour Act, 2048, Answer the following questions:
i. Can foreign national appointment is possible in Nepal?
ii. If yes, write down the process.
iii. Who gives permission to appoint foreign national?
iv. Up-to when foreign national can be employed?
v. What need to fulfill by industry after completing 7 years?
vi. Can repatriation of salary and allowances are allowed?
Answer:
i. Section 4A of Labour Act, 2048 does not permit to engage non-Nepalese citizens at work
in any of the post in an Enterprise.
ii. An advertisement in national level public newspapers and journals shall have to publish
and if Nepali citizens are not found then apply to Department of Labour for the
approval to appoint a non-Nepalese citizen.
iii. Department of Labour may, on the recommendation of the Labour Office, grant
approval to engage a non-Nepalese citizen.

iv. Foreign national can be appointed for a maximum period of upto five years, not
exceeding two years at a time and in the specialized kind of skilled technical post, for a
period upto seven years.
v. Industry shall have to make arrangements for making the Nepalese citizens skilled and
for replacing non-Nepalese citizens gradually by them.
vi. As per Industrial Enterprises Act, 2049 foreign employee can repatriate not exceeding
75% remuneration, allowances and benefits in foreign currency.
42) Welfare Officer

Answer:
As per Section 68 of Labour Act, 2048 enterprise shall have to appoint welfare officer. Where
the Welfare Officer and Assistant Welfare Officer are appointed Department of Labour shall be
informed of such appointment. Provision regarding welfare officer shall be as follows:
Where 250 or more workers or employees are engaged: One Welfare Officer
Where 1,000 or more workers or employees are engaged: One Welfare Officer and 1 Assistant
Welfare Officer.
In the enterprise where there are less than two hundred fifty workers or employees, the
Proprietor may designate or appoint any officer of the enterprise as the Welfare Officer.
43) Write the Special Provisions relating to Tea Estate:

Answer:
The special provision in respect of the tea estate shall be as follows:
(a) Formation of Committee:
Government of Nepal may constitute, as prescribed, a Committee to provide necessary advice
on promotion, policy formulation and other related matters in respect of the tea estates.
(b) Provision for Quarter:
The Proprietor shall have to make arrangements for appropriate quarters within the tea-estate
for the workers who do not have their residence nearby.
(c) Provisions of Primary Health Care:

The Proprietor shall have establish a primary health care center under the responsibility of a
trained employee in order to provide free primary treatment of minor injuries to the workers
and employees engaged within the tea-estate and to the members of their family.
(d) Safety Devices:
The Proprietor shall have to provide safety devices and equipment required for personal
protection of the workers of the tea-estate.
(e) Provisions of Primary School:

The Proprietor of a Tea-estate shall run a primary school if there are fifty or more children of
the age between five and fourteen years, receiving primary education, of the workers residing
in the quarters provided by the tea-estate and in case there is no school within a distance of one
kilometer from the tea-state.
(f) Daily Consumer Goods:
The Proprietor shall have to arrange to make the daily consumer goods easily available to the
workers and employees, if there is no market near the tea-estate.
(g) Provision for Entertainment:
The Proprietor shall have to make necessary arrangements for appropriate sports facilities
within the tea-estate for physical and mental development of the workers of the tea-estate.
(h) To get the works done on contract:
This provision shall not be deemed to prevent from entering into agreement between the
Proprietor and the workers of the tea-estate in respect of doing certain specified works of the
tea-estate under contract.

Bonus Act, 2030
44) Buddha Cottage industry, employing 9 worker and employee has been in operation in its
own factory located at Nawalparasi. Buddha Cottage industry able to earn profit for the
fiscal year 2071/72 and became confused regarding the distribution of bonus. State
relevant provision of Bonus Act, 2030 for distribution of bonus.
Answer:
Buddha Cottage industry is confused about the provision on the distribution of bonus to its
worker and employee since industry has able to earn profit during the fiscal year. Industry has
employed 9 workers and employees during the fiscal year 2071/72. This case is to handle as per
the provisions of the Bonus Act, 2030.
Relevant provision of Bonus Act, 2030:
Bonus Act shall be applicable to "Enterprise" as defined by Bonus Act. Enterprise means any
factory, company, organization, association, firm or group thereof, established under the
prevailing laws for the purpose of operating any industry, profession or service, where ten or
more workers or employees are engaged and this expression also includes:
(1) Tea estates, established under the law for commercial purpose;
(2) Enterprise operating within the industrial districts established by Government of Nepal
where less than ten workers or employees are engaged.
Similarly, other provision states that an enterprise which generates profit has to pay bonus.
Which means enterprises which employ ten or more worker or employee shall have to pay 10%
bonus from the net profit during the fiscal year. However, Bonus act shall be applicable only to
the enterprises defined above.
Conclusion:
The employee employed by Buddha Cottage Industry is only seven. Bonus Act, 2030 shall be
applicable to those enterprises which have employed 10 or more than 10 worker or employees
throughout the life of the Company. In this case, Bonus shall not be distributed to worker and
employee by the Buddha Cottage Industry.
45) A company having head office and 4 branches has following profit and loss for fiscal
year 2071/72. Determine whether the company needs to declare bonus as per Bonus Act,
2030. Does the loss generating branches employee eligible to get bonus?
Head office Profit Rs. 150,000
Butwal Branch Loss Rs. 50,000
Biratnagar Branch Loss Rs. 35,000
Birgunj Branch Loss Rs. 25,000
Birtamod Branch Profit Rs. 10,000
Answer:
For the purpose of computation of bonus under Bonus Act, 2030 the branches or sub-branches
of any enterprise situated in various places shall be treated as part of the Enterprise.
Establishment includes departments, undertakings and branches too. After considering all the
profit and losses, if there is net profit; enterprise shall have to declare 10% of bonus amount
from the net profit of the Enterprise. In the above case, enterprise has to declare 10% bonus on
Rs. 50,000.
Similarly, Section 6 of the Bonus Act, 2030 states that every employee who has worked for
more than half of the working period to be worked in a fiscal year shall be entitled to obtain
bonus. Instead of determining branch wise profit and loss, profit and loss statement of the
enterprise as a whole shall be calculated considering branches and sub branches as a single
enterprises and if employee works for more than half of the working period of an enterprise,
they are eligible to get bonus provided all the other requirement of the Bonus Act, 2030 has
been fulfilled.
Here, the employee of the Branch shall be eligible to get bonus, if they have worked more than
half of the working period of the company.
46) Mr. A received the following payments from the employer during a year. Calculate his
salary for the purpose of the Bonus Act, 2030.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Salary 20,000 Conveyance allowance 5,000
Dearness Allowance 20,000 Telephone 1,500
Provident Fund 4,000 Leave salary 2,000
Bonus 10,000 Medical benefit 5,000
Overtime 2,000
Answer: Eligible Salary/Wages for Bonus: Means any kind of remuneration payable to an
employee in cash for the work done in an enterprise. Provided that, this term does not include
any other amounts to be obtained by an employee for electricity, water supply, medicine,
travel, bonus, provident fund or subsidies.
In the above case, eligible salary for the purpose of bonus calculation is:
Salary Rs. 20,000
Dearness Allowance Rs. 20,000
Leave Salary Rs. 2,000 (Leave salary will be taken, if accounted for on cash basis).
47) Nepal Oil Corporation (NOC) a Government owned corporation has able to generate
profit of Rs. 10 Million. Board of Directors of NOC has declared 10% staff bonus from
the Net Profit and distributed to its employee. Give your opinion can NOC declare
bonus from the Net profit?
Answer:
Section 5(3) of Bonus Act, 2030 states that the percentage of bonus and other matter relating to
bonus which is to be distributed by the Government owned enterprises shall be as determined
by Government of Nepal.

Every establishment owned by the Government of Nepal, other than factory shall be required
to allocate bonus eight percent of the net profit made by it every fiscal year. The Government of
Nepal may also, if it so deems necessary, issue an order under the Act, prohibiting the payment
of bonus by any establishment owned by it, other than a factory.
In the Above case, NOC is government owned corporation and need to obtain prior approval
from Government of Nepal before declaration of bonus. The declaration of bonus made by the
Board of Directors is inconsistent and invalid as per Bonus Act, 2030. Similarly, NOC cannot
declare 10% bonus from its net profit because percentage of bonus to be distributed shall be as
prescribed by Government of Nepal.
48) A private company established in fiscal year 2068/69 has following profitability:
Fiscal Year 2068/69 Loss Rs. 160,000
Fiscal Year 2069/70 Loss of Rs. 100,000
Fiscal Year 2070/71 Loss of Rs. 50,000
Fiscal Year 2071/72 Profit of Rs. 130,000
Determine whether the company is eligible to declare staff bonus for fiscal year 2071/72
from the profit of the company as per Bonus Act, 2030.
Answer: Section 5 (1) provides that every establishment making profit should allocate 10% of
the net profit made in a year for bonus to employee. The profit to consider for declaration of
staff bonus is to consider net profit during the year and not have a look for accumulated losses
of the enterprise. If in a fiscal year, company is in net profit can declare 10% staff bonus from
the net profit of the company.
To declare staff bonus, act has not made provision to recover all the accumulated profit and
losses up to previous year. In the above case, company can declare 10% staff bonus from the
profit of the fiscal year 2071/72.
49) Mention the circumstances in which employee shall restrict to obtain Bonus:
As per Section 8 of Bonus Act, 2030; an employee shall not be entitled to obtain bonus under
this Act, if he/she is punished or dismissed from service for committing any act as follows:
Provided that, this Section shall not be deemed to be prejudiced to obtain in the case of the
bonus for a period before committing such a punishable act.
 Theft of the property of the enterprise or any damage to such property.
 Illegal strike or abetment to other for such strike,
 Riots or breaching of discipline.
50) Write down the disputes settlement mechanism as per Bonus Act, 2030.
Answer:
As per Section 16 of the Bonus Act, 2030; following are the disputes settlement mechanism:
Labour Office through Mutual Negotiations:
If any dispute arises between employee and management with respect to the bonus to be
payable, the Labour Office shall resolve such dispute by negotiations having invited both the
parties.
Labour office through collection of Evidence:

If the dispute could not be resolved by negotiations as per above, the Labour Office shall ask to
concerned enterprise and employees to produce necessary documents and statements of
accounts and shall give a decision on the basis of such documents and statements.
Appeal to Labour Court
The party who is dissatisfied with the decision of Labour Office, may appeal to the Labour
Court, within thirty five days of receipt of such notice.
Labour Court's Decision
Decision made by the Labour Court shall be final one.

Insurance Act 2049:
51) How insurance premium is paid at the time of cancellation of license of an insurer.
Answer:
After the cancellation of license, every insurer shall pay the amount received as insurance to
the person, organization or the Insurance Board, within the period and method specified by the
Insurance Board. According to the type of insurance, following is the payment method:
In case of Life Insurance: Premium paid plus bonus amount as specified by Insurance Board.
In case of Non Life Insurance: Uncovered proportion of risk on proportionate basis.
52) Difference between subrogation and Contribution:

Subrogation Contribution
Question of Subrogation does not imply more Question of contribution comes where there is more
than one insurer. than one contract of insurance.
Subrogation is the substitution of one person in Contribution is the right of the insurers to claim from
place of another person in place of another in other some payment towards the loss and arises only
relation to the claim, its rights, remedies or where there is double insurance. It takes place where
securities. different insurers insure the same interest in respect
of the same property and the same perils.
Subrogation does not imply more than one Contribution implies more than one contract of
insurance. insurance each of which undertakes a similar, if not
identical, liability in respect of the same subject
matter and the same interest therein.
The objective is substitution of one person in The objective of contribution is to distribute the
place of another so that the one who is actual loss in such a way that each bears his proper
substituted succeeds to the rights and remedies share. No one insurer is more liable than any other,
of another person. no more than the whole loss can be recovered.
After satisfying the claim, the insurer stands in In contribution, after making payment to the insured,
the place of insured. He may recover from a third recovers the amount that he has paid in excess of his
party who would have been liable to pay had share from other insurers.
there been no insurance.
53) Difference between Insurance Agent and Broker

Insurance Agent Broker
Means a person other than a salaried employee of Means a person who has obtained a license
an insurer who has obtained a license pursuant to pursuant to Section 30B, to work as an
Section 30 to work on behalf of the insurer on the intermediary between an insurer and insured
basis of commission. Section 2(l) of Insurance Act, relating to insurance business.
2049.
Insurance Agent is a natural person. Insurance Broker is a corporate body.
A recommendation letter of insurer requires to get No such recommendation letter of insurer requires
license for insurance agent. to get license of broker.
At least SLC pass or equivalent course shall be the The General manager of Broker Company shall
educational qualification. have 15 years experience in insurance business.
Renewal fee is Rs. 200 Renewal fee is of Rs. 25,000.
Receives the commission amount. Insurer may also Receives the commission amount by acting on
provide incentive bonus in addition to the behalf of insurer.
commission.

54) Mention the objectives and formation of Insurance Tariff Advisory:
Answer:
Objectives of Insurance Tariff Advisory:
 To provide necessary advice and recommendation to the Insurance Board relating to the
determination of the tariff of the Insurance Business.
Formation: There shall be following members of Insurance Tariff Advisory Committee:
Chairperson, Insurance Board –Chairperson
Three persons from among the Chief of Insurers as nominated by the Nepal Government –
Member
Secretary, Insurance Board –Member-Secretary
55) Write Short Notes on: Insurable Interest

Answer:
For an insurance contract to be valid, the insured must possess an insurable interest in the
subject matter of insurance. The insurable interest is pecuniary interest whereby the policy
holder is benefited by the existence of the subject matter and is prejudiced by the death or
damage of the subject matter. The essentials of a valid insurable interest are:
 There must be a subject matter to be insured
 The policyholder should have monetary relationship with the subject matter
 The relationship between the policyholders and subject matter should be recognized by
law.
 The financial relationship between the policyholder and subject matter should be such
that the policy holder is economically benefited by the survival.
56) Mention order of priority in settlement of liabilities in case of liquidation of insurer:
Answer:
As per Section 41B of Insurance Act, 2049; if any Insurer is dissolved due to the cancellation of
its registration, the liabilities shall be settled in the following order of priority
(a) The expenses incurred for the dissolution,
(b) The amount to be paid against the insurance claims to the Insured pursuant to Section 16,
(c) The remuneration and other outstanding amounts to be obtained by the employees of the
Insurer,
(d) Loan amounts,
(e) The amount to be paid to the Board,
(f) The amount to be paid to the Government of Nepal.

Contract Act, 2056
57) Mention place for performing contract:
Answer:
 In case any specific place has been specified in the contract for performing the work, the
work shall be performed at the same place.
 In case any party has to hand over or deliver goods to the other party under the contract
and the place where those goods are to be hands over or delivered has not been
specified in the contract, the contract shall be deemed to have been concludes with a
provision to and over or deliver the goods at the place where those goods are stored.
 In case the specific place where the work mentioned in the contract has to be performed,
has not been specified in the contract, and where as that work can be performed only in
as specific place or in case the work needs to be performed in any specific place due to
the general practice and custom or the nature of the work, the contract shall be deemed
to have been concluded with a provision to perform at work at place.
 In case the place for performing the work prescribed in the contract shall inform the
other party to specify a reasonable place for performing the work and the other party
shall specify a reasonable place to perform the work.
58) Mention Circumstances in which contracts need not be performed as per Contract Act,
2056.
Answer: Work under a contract need not be performed in any of the following
circumstances as per the section 73 of Contract Act, 2056:
 In case one party to the contact absolves the other than from fulfilling the obligations
according to the contract.
 In case a voidable contract is made void by the party concerned;
 In case one cannot execute the contract due to its violation by the other party;
 In case it becomes unnecessary to perform the work mentioned in the contract under
any provision of this act;
 In case it becomes unnecessary to comply with the contract under section 79. Section 79
states following contracts need not to be performed:
a) In case the contract becomes illegal and it cannot be executed;
b) In case it becomes impossible to execute the contract due to emergence of such situations
as war, floods landslides, fire, earthquakes, and volcanic eruptions, which are beyond
the control of human beings;
c) In case anything essential for executing the contract is destroyed or damaged, or no
longer exists, or cannot be obtained;
d) In case the contract has been signed with a provision to provide services on the basis of
efficiency, skill or talent, and the person providing such service dies or loses his/her

sense or becomes incapable of performing the contract because of physical or mental
disability.
59) Write Short Notes on Quantum Meruit

Answer: Quantum meruit means so much as one deserves (as much as one has earned),
which is a reasonable amount for the work done. A quantum meruit action arises where
work is done or services are rendered by one person for person entitling the former to
receive a reasonable remuneration there from. Quantum meruit is applied when a person
claims reasonable remuneration for his services when there is no enforceable contract that
expresses promise as to the amount of remuneration.
Under section 85 of Contract Act, 2056, the aggrieved party may claim payment in
proportion to the work performed or the amount paid by him in cash or in kind in any of
the following circumstances:
In case contract is terminated due to mistake of the second party at a time when the first
party has already completed the work to be performed under the contract or is performing
it. In case the second party was availed of any service or goods that has been provided to
him without clear intentions of giving it free of cost.
60) Writes short notes on Privity of Contract
Answer: A person may be a stranger to the consideration but he should not be a stranger to
the contract because privity of contract (i.e. Relationship subsisting between the parties to a
contract) is essential for enforcing any of the rights arising out of the contract. It being a
fundamental principle of the law of contract that a stranger to a contract cannot sue, who is
a party to a contract can sue on it.
Under section 78 (1) of contract act-only a person who is a party to a contract may demand
the execution of that contract from other party. Provided that, in case the contract has been
signed for the benefit of any person, such person may demand the execution of that contract
is even if he/she is not a party to that contract.
The rule of privity of contract is subject to the following exceptions.
a) In case of trust, beneficiary can sue in his own right to enforce his right under the trust
though he was not a party to the contract between the settler and the trustees.
b) An addressee of an insured article is entitled to sue the post office in case of loss, as on
receipt of such article, the post office becomes in law a constructive trustee for the
addressee.
c) Where a provision is made in a partition or family arrangement for maintenance or
marriage expenses of female members, such members though not parties to the agreement,
can sue on the footing of the arrangement.
d) When the person constitutes himself, as the agent of the third party
e) Where a contract is entered into by an agent, the principle can sue on it.
f) In case of assignment of rights under a contract in favor of a third party either voluntarily
or by operation of law, the assignee can enforce the benefits of the contract.

61) Sher Bahadur left his motorbike in a workshop for repair. Dinesh, the senior mechanic of
the workshop said that Sher Bahadur’s motorbike would be ready by the evening. When
Sher Bahadur went to get his motorbike back, Dinesh denied returning his bike saying
Sher Bahadur did not pay the bill amount as per the rules of the workshop. Can Dinesh
hold the bike? Is there any contract between them and is there any other solution as per
other prevailing laws of Nepal?
Answer:
Section 32 of Contract Act, 2056 states that in case person has given any property for repair,
improvement or renovation in any way to any person, the latter shall return it to the former
after collecting expense or service charge fixed for repair, improvement or renovation. The
property handed over for repair shall be returned to the concerned owner after repairing,
improving or renovating it within the period mentioned in the contract. In case it is not
returned within the prescribed period, or any additional loss or damage is caused to the
property or the property is damaged in such a way as to become unusable in the course of
repair, improvement or renovation, action shall be taken as provided for in the contract,
and if no provision has been made in the connection in that contract, an appropriate
compensation shall be paid to the concerned owner.
Notwithstanding anything contained elsewhere, the person repairing, improving or
renovating any property may keep it with him/her until the cost of repair, improvement or
renovation or the service charge fixed for that purpose is paid. In case the cost or service
charge is not paid within a reasonable period, the person repairing, improving or
renovating the property may recover his/her expenses or service charge by selling the
property.
Hence, Sher Bahadur must pay the agreed amount as per the contract to get his motorbike
back; otherwise Dinesh, the senior mechanic can hold until it is paid.
Financial Management
1. ABC Co is preparing a cash flow forecast for the three-month period from January to the end of
March. The following sales volumes have been forecast:
December January February March April

Sales (units) 1,200 1,250 1,300 1,400 1,500
Notes:
1. The selling price per unit is NRs. 800 and a selling price increase of 5% will occur in February.
Sales are all on one month’s credit.
2. Production of goods for sale takes place one month before sales.
3. Each unit produced requires two units of raw materials, costing NRs. 200 per unit. No raw
materials inventory is held. Raw material purchases are on one months’ credit.
4. Variable overheads and wages equal to NRs. 100 per unit are incurred during production, and paid
in the month of production.
5. The opening cash balance at 1 January is expected to be NRs. 40,000.
6. A long-term loan of NRs. 300,000 will be received at the beginning of March.
7. A machine costing NRs. 400,000 will be purchased for cash in March.

Required:
(a) Calculate the cash balance at the end of each month in the three-month period. (5 marks)
(b) Calculate the forecast current ratio at the end of the three-month period. (2 marks)
2. Recent information on the earnings per share and share price of XYZ Co is as follows:
NRs.
Year 2011 2012 2013 2014
Earnings per share 64 68 70 62
Year-end share price 915 988 1,049 1,090
Par Co currently has the following long-term capital structure:
NRs. m NRs. m
Equity finance
Ordinary shares 30.00
Reserves 38.40 68.40
Non-current liabilities
Bank loans 15.0
8% convertible loan notes 40.0 55.0
Total equity and liabilities 123.4
The 8% loan notes are convertible into eight ordinary shares per loan note in seven years’ time. If not
converted, the loan notes can be redeemed on the same future date at their nominal value of NRs.
10,000. XYZ Co has a cost of debt of 9% per year.
The ordinary shares of XYZ Co have a nominal value of NRs. 100 per share and have been traded on
a large stock exchange for many years. Listed companies similar to Par Co have been recently reported
to have an average price/earnings ratio of 12 times.
Required:
a) Calculate the market price of the convertible loan notes of XYZ Co, commenting on
whether conversion is likely. (5 marks)
b) Calculate the share price of XYZ Co using the price/earnings ratio method and discuss the
problems in using this method of valuing the shares of a company. (5 marks)
3. Jaiswal Co is planning to raise funds for an expansion of existing business activities and in preparation
for this the company has decided to calculate its weighted average cost of capital. Jaiswal Co has the
following capital structure:
NRs. m NRs. m
Equity
Ordinary shares 200
Reserves 650 850
Loan notes 200
1,050
The ordinary shares of Jaiswal Co have a nominal value of NRs. 50 per share and are currently trading
on the stock market on an ex dividend basis at NRs. 585 per share. Jaiswal Co has an equity beta of
1.15.

The loan notes have a nominal value of NRs. 10,000 and are currently trading on the stock market on
an ex interest basis at NRs. 10,350 per loan note. The interest on the loan notes is 6% per year before
tax and they will be redeemed in six years’ time at a 6% premium to their nominal value.
The risk-free rate of return is 4% per year and the equity risk premium is 6% per year. Jaiswal Co pays
corporation tax at an annual rate of 25% per year.
Required:
Calculate the market value weighted average cost of capital and the book value weighted
average cost of capital of Jaiswal Co, and comment briefly on any difference between the two values.
(9 marks)
4. Given is the Statement of financial position & income statement of Cozy Pvt. Ltd.
NRs. ‘000
Statement of financial position
20X6 20X5
Non-current assets 1,800 1,400
Current assets
Inventory 1,200 200
Receivables 400 800
Cash 100 100
Total Assets 3,500 2,500
Equity and Liabilities
Ordinary share capital (NRs. 100/ shares) 1,200 500
Share premium 600 0
Reserves 200 100
Equity 2,000 600
10% Loan notes 1,000 600
Current liabilities
Loans and other borrowing 200 500
Other payables 300 800
Total Equity & Liabilities 3,500 2,500
Income statements
20X6 20X5
Revenue 2,000 1,000
Cost of sales (1,300) (700)
Gross profit 700 300
Distribution costs (260) (90)
Administration expenses (100) (60)
Operating profit 340 150
Interest (100) (60)
Profit before taxation 240 90
Taxation (50) (20)

Profit after taxation 190 70
Ordinary dividends (90) (50)
Retained profit for the year 100 20
Profit and loss up to previous year 100 80
Total Retained Earning 200 100
Share price (NRs.) 130 126
Industry information:
Industry PE ratio 12 10
Industry average growth in EPS (%) 12 8
ROE 15 12
Required
Calculate and analyze ROCE, EPS, PE Ratio, ROE & DPS
20 Marks
5. A company has provided the following information:
Receivables collection period 56 days

Raw material inventory holding period 21 days
Production period (WIP) 14 days
Suppliers’ payment period 42 days
Finished goods holding period 28 days
Calculate the length of the operating cycle

5 Marks
6. Kharel Associates has sales of NRs. 16 million p.a., and average receivables are NRs. 3.3 million
(representing about 75 days of sales). It is now considering a factoring arrangement where 80% of the
book value of invoices is paid immediately, with finance costs charged on the advance at 7% pa
whereas the firm can borrow at an interest rate of 8% pa.
Suppose that this factor will charge 1% of sales as their fee for managing the sales ledger, that there will
be administrative savings of NRs. 100,000, but that outstanding balances will be paid after 75 days.
Determine the relative costs and benefits of using the factoring service and advise whether to
go for factoring or not.
5 Marks
7. A manufacturing business makes and sells widgets. Each widget requires two units of raw materials,
which cost NRs. 3 each. Production and sales quantities of widgets each month are as follows:
Month Sales and production units
December (actual) 50,000
January (budget) 55,000
February (budget) 60,000
March (budget) 65,000
In the past, the business has maintained its inventories of raw materials at 100,000 units. However, it
plans to increase raw material inventories to 110,000 units at the end of January and 120,000 units at
the end of February. The business takes one month’s credit from its suppliers.
Calculate the forecast payments to suppliers each month, for raw material purchases.
5 Marks
8. Hirachan Co is appraising an investment project which has an expected life of four years and which
will not be repeated. The initial investment, payable at the start of the first year of operation, is NRs. 5
million. Scrap value of NRs. 500,000 is expected to arise at the end of four years.
There is some uncertainty about what price can be charged for the units produced by the investment
project, as this is expected to depend on the future state of the economy. The following forecast of
selling prices and their probabilities has been prepared:
Future economic state Weak Medium Strong

Probability of future economic state 35% 50% 15%
Selling price in current price terms (NRs./Unit) 25 30 35
These selling prices are expected to be subject to annual inflation of 4% per year, regardless of which
economic state prevails in the future.
Forecast sales and production volumes, and total nominal variable costs, have already been forecast, as
follows:
Year 1 2 3 4
Sales and production (units) 150,000 250,000 400,000 300,000
Nominal variable cost (NRs.’000) 2,385 4,200 7,080 5,730
Incremental overheads of NRs.400,000 per year in current price terms will arise as a result of
undertaking the investment project. A large proportion of these overheads relate to energy costs which
are expected to increase sharply in the future because of energy supply shortages, so overhead inflation
of 10% per year is expected.
The initial investment will attract tax-allowable depreciation on a straight-line basis over the four-year
project life. The rate of corporation tax is 30% and tax liabilities are paid in the year in which they arise.
Hirachan Co has traditionally used a nominal after-tax discount rate of 11% per year for investment
appraisal.
Required:
Calculate the expected net present value of the investment project and comment on its
financial acceptability.
(10 marks)
9. You are an accounting technician working at GD & Co., a company that manufactures and distributes
clothing. You have estimated the following figures for the coming year:
NRs.
Sales 5,600,000
Average receivables 506,000
Gross profit margin 25% on sales
Average inventories
Finished goods 350,000
Work in progress 550,000
Raw materials 220,000
Average payables 210,000
Material costs represent 50% of the total cost of sales.

GD & Co. imports most of its materials from overseas countries, especially USA. The high inflation
rates in USA have meant that the company's cost of materials has risen rapidly over recent years. This
has led to a significant deterioration in the company's margins, which, coupled with its increasing
liquidity problems, is making the shareholders nervous.
Required
(a) Calculate the cash operating cycle, to the nearest day. (6 marks)
(b) Suggest four methods of reducing the length of the cash operating cycle. (4 marks)
10. Aswin plans to raise NRs.5m in order to expand its existing chain of retail outlets. It can raise the
finance by issuing 10% loan notes redeemable in 2X15, or by a rights issue at NRs. 200 per share. The
current financial statements of Aswin are as follows.
NRs.'000
Particulars Amount
Income statement for the last year
Sales 50,000
Cost of sales 30,000
Gross profit 20,000
Administration costs 14,000
Profit before interest and tax 6,000
Interest 300
Profit before tax 5,700
Taxation at 30% 1,710
Profit after tax 3,990
Dividends 2,394
Retained earnings 1,596
Statement of Financial Position extract

Net non-current assets 20,100
Net current assets 4,960
12% loan notes 2X10 2,500
22,560
Ordinary shares, par value 100 2,500
Retained profit 20,060
22,560
The expansion of business is expected to increase sales revenue by 12% in the first year. Variable cost
of sales makes up 85% of cost of sales. Administration costs will increase by 5% due to new staff
appointments. Aswin has a policy of paying out 60% of profit after tax as dividends and has no
overdraft.
Required
(a) For each financing proposal, prepare the forecast income statement after one additional year of
operation.
(5 marks)
(b) Evaluate and comment on the effects of each financing proposal on the following:
(i) Financial gearing;
(ii) Operational gearing;
(iii) Interest cover;
(iv) Earnings per share.
(15 marks)

11. Explain the following
(a) Book Building

(b) Random Walk Theory
(c) Dividend Signaling
(d) Financial restructuring
12. Distinguish between:
(a) Money market and Capital Market

(b) Factoring and Forfaiting
(c) Distinguish between Hire Purchase and Lease Financing
13. Answer the following questions
(a) What are the assumptions of Capital Asset Pricing Model (CAPM) and describe its logical
consequences?
(b) Describe the concept of 'Adjusted Present Value'
14. Write short notes on:

a) Working Capital Cycle
b) Packing Credit
c) Tax consideration influencing the dividend policy of the firm
d) Bridge Finance
15.
(a) Discuss the causes of capital rationing for investment purposes.
(b) Discuss the reasons why different bonds of the same company might have different costs of debt
(c) Discuss the key factors to be considered when formulating a working capital funding policy.
16. From the following data calculate Operating leverage, Financial leverage and Combined leverage of
two Companies:
Company A Company B
Equity Capital (NRs) 600,000 350,000
12% Debentures (NRs) 400,000 650,000
Output (units) per annum 60,000 15,000
Selling price/ unit (NRs) 30 250
Fixed Costs per annum (NRs) 700,000 1,400,000
Variable Cost per unit (NRs) 10 75
(5 marks)
17. The following information relates to Maya Ltd
Earnings of the company 1,000,000
Dividend payout ratio 60%

No. of Shares outstanding 200,000
Rate of return on investment 15%
Equity capitalization rate 12%
(a) What would be the market value per share as per Walter’s model?
(b) What is the optimum dividend payout ratio according to Walter’s model and the market value of
company’s share at that payout ratio?
8 marks
18. An investor has two portfolios known to be on minimum variance set for a population of three
securities A, B & C having weights mentioned below:
WA WB WC
Portfolio X 0.30 0.40 0.30
Portfolio Y 0.20 0.50 0.30
It is supposed that there are no restrictions on short sales.

(i) What would be the weight for each stock for a portfolio constructed by investing NRs.5000 in
portfolio X and NRs. 3000 in portfolio Y?
(ii) Suppose the investor invests NRs. 4000 out of NRs. 8000 in security A. how he will allocate
the balance between security B & C to ensure that his portfolio is on minimum variance set?
19. An investor is considering to purchase the following bond
Face value NRs. 100
Coupon rate 11%
Maturity 3 years
(a) If he wants a yield of 13% what is the maximum price he should be ready to pay for?
(b) If the bond is selling for NRs. 97.6, what would be his yield?
4 Marks
20. Shares of Goyal Ltd. are being quoted at a price-earning ratio of 8 times. The company retains 45% of
its earnings which are NRs. 5 per share.
You are required to compute
(a) The cost of equity to the company if the market expects a growth rate of 15% p.a.
(b) If the anticipated growth rate is 16% p.a., calculate the indicative market price with the same cost
of capital.
(c) If the company’s cost of capital is 20% p.a. & the anticipated growth rate is 19% p.a., calculate
the market price per share.
8 Marks
21. S Engineering Company is considering to replace or repair a particular machine, which has just
broken down. Running & maintenance cost of the machine during the previous year was NRs. 20,000
to run and maintain. These costs have been increasing in real terms in recent years with the age

of the machine. A further useful life of 5 years is expected, if immediate repairs of NRs. 19,000
are carried out. If the machine is not repaired, it can be sold immediately to realize about NRs. 5,000
(Ignore loss/gain on such disposal).
Alternatively, the company can buy a new machine for NRs. 49,000 with an expected life of 10 years
with no salvage value after providing depreciation on straight line basis. In this case, running and
maintenance costs will reduce to NRs. 14,000 each year and are not expected to increase much in real
term for a few years at least. S Engineering Company regard a normal return of 10% p.a. after tax as a
minimum requirement on any new investment. Considering capital budgeting techniques, which
alternative will you choose? Take corporate tax rate of 50% and assume that depreciation on
straight line basis will be accepted for tax purposes also.
Given cumulative present value of Re. 1 p.a. @ 10% for 5 years NRs. 3.791, 10 years NRs. 6.145.
(20 Marks)
22. NTC Inc. has been growing at the rate of 20% in recent years that is expected to last for 2 more years.
If D0= 1.60, k =10% & the company’s growth rate is expected to remain at the level of 6% after that,
what is the expected price of these shares today? Also what is the capital gain yield & dividend yield at
this time?
23. The following financial information relates to QK Co, whose ordinary shares have a nominal value of
NRs. 100 per share:
NRs. Million
Current assets 8
Inventory 12 20
Trade receivables
Total assets 140
Equity
Ordinary shares 25
Reserves 80 105
Non-current liabilities 20
Current liabilities 15
Total equity and
liabilities 140
On an historic basis, what is the net asset value per share of QK Co?
24. Phoenix Ltd. having limited funds of 7,000,000 is evaluating the desirability of following projects
Project A B C D
Initial Cash Outflows 30 lakh 20 lakh 25 lakh 60 lakh
Present Value 36 lakh 25 lakh 40 lakh 78lakh
Advise the management which project it should select assuming that

(i) All projects are divisible
(ii) Projects are indivisible

PAPER 5: COST AND MANAGEMENT ACCOUNTING
QUESTIONS
Costs concepts and costing methods
Question No. 1
a. Match the following:
i. Total fixed cost 1. What cost should be?
ii. Total variable cost 2. Incurred cost
iii. Unit variable cost 3. Increase in proportion to output
iv. Unit fixed cost 4. Cost of conversion
v. Standard cost 5. What costs are expected to be
vi. Period cost 6. Decreases with rise in output
vii. Actual cost 7. Remains constant per unit
viii. Labour and overhead 8. Remains constant in total
ix. Incremental cost 9. Cost not assigned to products
x. Budgeted cost 10. Added value of a new product
b. Describe briefly the role of the cost accountant in a manufacturing organization.

c. List out the important factors that should be considered before installing a costing system.
d. Define ‗Cost object‘ and ‗Cost driver‘ with example.
Material Control
Question No. 2
a. Explain, why the Last in First out (LIFO) has an edge over First in First out (FIFO) or any other method of
pricing material issues.
b. ZED Company supplies plastic crockery to fast food restaurants. One of its products is a special soup bowl
disposable after initial use. Bowls are sold in pack of 10 pieces at a price of Rs. 50 per pack. The demand for
plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every year. The company purchases the
bowl direct from manufacturer at Rs. 40 per pack with a three days lead time. The ordering and related cost is
Rs. 8 per order. The storage cost is 10% per cent per annum of average inventory investment.
Required:
i. Calculate Economic Order Quantity.
ii. Calculate number of orders needed every year.
iii. Calculate the total cost of ordering and storage bowls for the year.
iv. Determine when the next order should be placed. Assuming that the company does maintain a safety
stock and that the present inventory level is 333 packs with a year of 360 working days.
c. Prepare store ledger account from the following transactions of XY Company Ltd.
February 2015,
1 Opening balance 200 units @ Rs. 10 per unit.
5 Receipt 250 units costing Rs. 2,000
8 Receipt 150 units costing Rs. 1,275
10 Issue 100 units
15 Receipt 50 units costing Rs. 500
20 Shortage 10 units
21 Receipt 60 units costing Rs 540
22 Issue 400 units
The issues up to 10-2-15 will be priced at LIFO and from 11-2-15 issues will be priced at FIFO.
Shortage will be charged as overhead.
d. Explain the concept of ―ABC Analysis‖ as a technique of inventory control.

e. State whether the following statements are true or false along with the reasons:

i. Safety stock increases as demand increases.
ii. In ABC analysis high cost items are most likely to fall in category A, and the least cost items are likely to
fall in category C.
iii. To protect against stock outs, a large batch size is a must.
iv. E.O.Q is based on a balancing between inventory carrying cost and shortage cost.
v. Lead time is a time interval elapsing between the placement of a replenishment order and the receipt of
first installment of goods against the order.
Labour Control
Question No. 3
a. Two workmen, A and B, produce the same product using the same material. A is paid bonus according to
Halsey plan, while B is paid bonus according to Rowan plan. The time allowed to manufacture the product is
100 hours. A has taken 60 hours and B has taken 80 hours to complete the product. The normal hourly rate of
wages of workman A is Rs.24 per hour. The total earnings of both the workers are same. Calculate normal
hourly rate of wages of workman B.
b. XYZ boutique Ltd. takes contract on job works basis. It works for various fashion houses and retail stores. It
has employed 26 workers and pays them on time rate basis. On an average, an employee is allowed 2 hours for
boutique work on piece of garment. In month of March 2015, two workers A and B were given 30 and 42
pieces of garments respectively for boutique work. The following are the details of their work:
A B
Work assigned 30 pcs 42 pcs
Time taken 28 hours 40 hours
Workers are paid bonus as per Halsey System. The existing rate of wages is Rs. 50 per hour. As per
the new wages agreement the workers will be paid Rs. 55/hour w.e.f. 1st April 2015. At the end of
month march 2015, the accountant of the company has calculated wages to these two workers taking
Rs. 55 per hours.
i. From the above information calculate the amount of loss that the company has incurred due to
incorrect rate of selection.
ii. What would be the loss incurred by XYZ due to incorrect rate of selection if it had followed Rowan
scheme of Bonus Payment.
iii. Amount that could have been saved if Rowan scheme of bonus payment was followed.
iv. Do you think Rowan scheme of bonus payment is suitable for XYZ?
Overhead
Question No. 4
a. BCD Co. manufactures a product X at the rate of 80 pieces per hour. The company has been producing and
selling 160,000 units annually in the past five years. However, during current year the company was able to
produce 146,000 units only. The company‘s annual fixed overhead for current year amounted to Rs. 584,000.
The company works on single shift only at 8 hours per day and 6 days a week. The company had declared 13
holidays during the year. The quarterly preventive maintenance and repair work involved 77 hours.
You are required to:
i. Compute Maximum, practical, normal and actual capacities, in terms of hours for the current year.
ii. Compute the Idle capacity and hourly rate of recovery of overhead rates for each of the capacities
computed in a) above.
Prepare a statement showing the idle capacity cost assuming that the overhead rates of recovery are based on
the various capacities arrived at a) above.

b. Why are predetermined overhead absorption rates preferred to overhead absorption rates calculated from
factual information after the end of a financial period?
c. The actual total expenditure of MeroNep Co. was Rs. 675,912. Overhead were recorded at the rate of Rs. 2 per
hour at normal capacity of the factory. Out of 10,000 units produced, only 8,000 units were sold. 500 units
were in work in progress. Actual hours worked were 284,756. Sixty percent of the difference between the
actual and applied overheads was due to fluctuations in material prices and labor rates. There was a fire in the
factory during this accounting period and the company lost Rs. 50,000 of which the buildings accounted for Rs
30,000 and the balance represented loss of materials stored in the godown. A sum of Rs. 10,000 was paid as
wages to workmen during the strike period. The balance amount represented the difference between the actual
and applied overheads due to operational efficiency and inefficiency.
Calculate the under/over absorption of production overheads for the period and state the appropriate treatment
in cost accounts.
Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 5
Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting
system?
Methods of Costing
Question No. 6
a. A product passes through two processes A and B. During the year 2011, the input to process A of basic raw
material was 8,000 units @ Rs. 9 per unit. Other information for the year is as follows:
Process A Process B
Output units 7,500 4,800
Normal loss (% to input) 5% 10%
Scrap value per unit (Rs.) 2 10
Direct wages (Rs.) 12,000 24,000
Direct expenses (Rs.) 6,000 5,000
Selling price per unit (Rs.) 15 25
Total overheads Rs. 17,400 were recovered as percentage of direct wages. Selling expenses were Rs. 5,000.
These are not allocated to the processes. 2/3 of the output of Process A was passed on to the next process and
the balance was sold. The entire output of Process B was sold.
Prepare Process A and B accounts.

b. What is the difference between Job costing and Process costing?
c. A contractor commenced a contract on 1-7-2014. The costing records concerning the said contract reveal the
following information as on 31-3-2015.
Particulars Amount Rs.
Material sent to site 774,300
Labour paid 1,079,000

Labour outstanding as on 31-3-2015 102,500
Salary to engineer 20,500 per month
Cost of plant sent to site (1-7-2014) 771,000
Salary to supervisor (3/4 time devoted to contract) 9,000 per month
Administration and other expenses 460,600
Prepaid Administration expenses 10,000
Material in hand at site as on 31-3-2015 75,800
Plant used for the contract has an estimated life of 7 years with residual value at the end of life Rs.
50,000. Some of the material costing Rs. 13,500 was found unsuitable and sold for Rs. 10,000.
Contract price was Rs. 4,500,000. On 31-3-2015 two third of the contract was completed. The
architect issued certificate covering 50% of the contract price and the contractor has been paid Rs.
2,000,000 on account. Depreciation on plant is charged on straight line basis. Prepare Contract
Account.
d. A truck starts with a load of 10 tonnes of goods from Station F. It unloads 4 tonnes at station G and rest of the
goods at station H. It reaches back directly to station F after getting reloaded with 8 tonnes of goods at station
H. The distances between F to G, G to H and then from H to F are 40 kms, 60 kms, and 80 kms respectively.
Compute ‗Absolute Tonne-km‘ and ‗Commercial tonne-km‘
Cost Concepts for Decision Making

Question No. 7
a. The following figures and ratios are related to a company:
i. Sales for the year (all credit) Rs. 3,000,000
ii. Gross Profit Ratio 25 percent
iii. Fixed assets Turnover (Based on cost of goods sold) 1.5
iv. Stock Turnover (based on cost of goods sold) 6
v. Liquid Ratio 1:1
vi. Current Ratio 1.5:1
vii. Debtors Collection period 2 months
viii. Reserve and surplus to share capital 0.6:1
ix. Capital Gearing Ratio 0.5
x. Fixed assets to net worth 1.20:1
You are required to prepare:

a. Balance sheet of the company on the basis of the above details.
b. The statement showing the working capital requirement, if the company wants to make a provision for
contingencies @10 percent of net working capital including such provision.
b. XYZ Company has just completed its first year of operations. The unit costs on a normal costing basis are as
under:
Rs.
Direct Material 4 kg @ Rs. 4 16.00
Direct labour 3 hrs. @ Rs. 18 54.00
Variable Overhead 3 hrs. @ Rs. 4 12.00
Fixed Overhead 3 hrs. @ Rs. 6 18.00
100.00
Selling and Administration Costs
Variable Rs. 20 / unit
Fixed Rs. 760,000
During the year the company has the following activity:

Units Produced : 24,000
Units Sold : 21,500
Unit Selling Price : Rs. 168
Direct labour hours worked : 72,000
Actual Fixed Overhead was Rs. 48,000 less than the budgeted fixed overhead. Budgeted variable
overhead was Rs. 20,000 less than the actual variable overhead. The company used an expected
actual activity level of 72,000 direct labour hours to compute the predetermined overhead rates.
Required:
i. Compute the unit cost and total income under;
a. Absorption costing
b. Marginal Costing
ii. Under or over absorption of overhead
iii. Reconcile the difference between the total income under absorption and marginal costing.
Costing for planning and Control –Budgets

Question No. 8
a. What are control ratios? List out the formulas of each of the following ratios and also explain what they
indicate;
i. Calendar Ratio
ii. Capacity Ratio
iii. Efficiency Ratio
iv. Activity Ratio
b. Management Ltd produces and sells a single product. Sales budget for the calendar year 2015 by quarter is as
under:
Quarte No. of units to

r be sold
I 12,000
II 15,000
III 16,500
IV 18,000
The opening inventory of finished product is 4,000 units and is expected to close with an inventory of
6,500 units.
Production is customarily scheduled to provide for two-thirds of the current quarter‘s sales demand
plus one- third of the following quarter‘s demand. Thus production anticipates sales volume by about
one month.
The standard cost details for one unit of the product is as follows:
Direct materials 10 lbs. @ 50 paise per lb.
Direct labour 1 hour 30 minutes@ Rs. 4 per hour.
Variable overheads 1 hour 30 minutes @ Re. 1 per hour.

Fixed overheads 1 hour 30 minutes @Rs. 2 per hour based on a budgeted production volume of 90,000
direct labour hours for the year.
Compute the following:

i. Prepare a Production Budget for 2015, by quarters, showing the number of units to be produced, and the
total costs of direct material, direct labour, variable overheads and fixed overheads.
ii. If the budgeted selling price per unit is Rs. 17, what would be the budgeted profit for the year as a whole?
iii. In which quarter of the year, is the company expected to breakeven.
Standard Costing
Question No. 9
a. What are the advantages of standard costing?
b. Simply Soup Limited manufactures and sells soups in a JIT environment. Soup is made in a manufacturing
process by mixing liquidized vegetables, melted butter and stock (stock in this context is a liquid used in
making soups). They operate a standard costing and variances system to control its manufacturing processes.
At the beginning of the current financial year they employed a new production manager to oversee the
manufacturing process and to work alongside the purchasing manager. The production manager will be
rewarded by a salary and a bonus based on the directly attributable variances involved in the manufacturing
process. After three months of work there is doubt about the performance of the new production manager. On
the one hand, the cost variances look on the whole favorable, but the sales director has indicated that sales are
significantly down and the overall profitability is decreasing.
The table below shows the variance analysis results for the first three months of the manager‘s work.
Table 1
F = Favorable. A = Adverse
Month 1 Month 2 Month 3
Material Price Variance Rs. 300 (F) Rs. 900 (A) Rs. 2,200 (A)
Material Mix Variance Rs. 1,800 (F) Rs. 2,253 (F) Rs. 2,800 (F)
Material Yield Variance Rs. 2,126 (F) Rs. 5,844 (F) Rs. 9,752 (F)
Total Variance Rs. 4,226 (F) Rs. 7,197 (F) Rs. 10,352 (F)
The actual level of activity was broadly the same in each month and the standard monthly material
total cost was approximately Rs. 145,000.
The standard cost card is as follows for the period under review
Rs.
0.90 liters of liquidized vegetables @ Rs.0.80/ltr 0.72
0.05 liters of melted butter @ Rs.4/ltr 0.20
1.10 liters of stock @ Rs.0.50/ltr 0.55
Total cost to produce 1 liter of soup 1.47
Required:
a) Using the information in Table 1:
i. Explain the meaning of each type of variances above (price, mix and yield but excluding the total
variance) and briefly discuss to what extent each type of variance is controllable by the production
manager.
ii. Evaluate the performance of the production manager considering both the cost variance results
above and the sales director‘s comments.
iii. Outline two suggestions how the performance management system might be changed to better
reflect the performance of the production manager.

b) The board has asked that the variances be calculated for Month 4. In Month 4 the production department
data is as follows:
Actual results for Month 4
Liquidized vegetables: Bought 82,000 liters Costing Rs.
69,700
Melted butter: Bought 4,900 liters Costing Rs. 21,070
Stock: Bought 122,000 liters Costing Rs. 58,560
Actual production was 112,000 liters of soup

Calculate the material price, mix and yield variances for Month 4. You are not required to
comment on the performance that the calculations imply. Round variances to the nearest Rupees.
Uniform Costing and Inter-firm comparison

Question No. 10
a. What are the limitations of Uniform Costing?
b. Write short note on inter firm comparison.
Cost control and cost reduction

Question No. 11
Describe briefly the important areas of cost reduction.
SUGGESTED ANSWERS / HINTS

Answer 1 (a)
Correct matching are indicated as below:
i. ………. 7
ii. ………. 3
iii. ………. 8
iv. ………. 6
v. ………. 1
vi. ………. 9
vii. ………. 2
viii. ………. 4
ix. ………. 10
x. ………. 5
Answer 1 (b)
Cost accountant plays several important roles in a manufacturing organization mainly in the areas of cost
ascertainment, cost comparison, cost reduction, cost control and cost reporting.
Some of the main functions that a cost accountant may be involved in are listed out below;
- Establishment of a Cost Accounting department
- Ascertainment of the requirement of cost information which may be useful to organizational managers at
different levels of the hierarchy.
- Development of a manual, which specifies the functions to be performed by the Cost Accounting
department. The manual also contains the format of various forms which would be utilized by the concern
for procuring and providing information to the concerned officers. It also specifies the frequency at which
the cost information would be supplied to a concerned executive.
- Ascertainment of the basis for classifying costs firstly into direct and indirect and indirect costs further
into viz factory, administration and selling and distribution overheads.
- Establishment of standards for all the elements of cost and thus a standard cost of the finished product to
facilitate cost comparison and determination of variance.

- Taking suitable actions on variances arising from cost comparison.
- Performance of cost analysis for taking decisions and for reviewing the current performance.
- Suggestion of suitable techniques for the purpose of cost reduction/cost control, after carrying out a cost
benefit analysis.
- Preparation of Cost reports to help the executive of a business concern in reviewing their own
performance and in identifying the weak areas, where enough control measure may be taken in future.
In brief, one may say that there is hardly any activity in a manufacturing organization with which a Cost
Accountant is not directly associated in some form or the other.
Answer 1 (c)
The factors which must be considered before installing a costing system are listed below;
i. Nature of business: The system of costing to be introduced should suit the general nature of business.
ii. Layout aspects: The size and layout of the organization should be studied by the system designers.
iii. Methods and procedures in vogue: The system designers should study various methods and procedures for
the purchase, receipts, storage and issue of materials. They should also study the methods of wage
payment.
iv. Management‘s expectations and policies: The system of costing should be designed after a careful analysis
of the organizational operations, management‘s expectation and the policies of the concern.
v. Technical aspects: The technical aspects of the business should be studied thoroughly by the designers.
They should also make an attempt to seek the assistance and support of the supervisory staff and workers
of the concern for the system.
vi. Simplicity of the system: The system of costing to be installed should be easy to understand and simple to
operate. The procedures laid down for operating the system should be easily understood by operating
system.
vii. Forms standardization: Various forms to be used by the costing system for various data/information
collection and dissemination should be standardized as far as possible.
viii. Accuracy of data: The degree of accuracy of data to be supplied by the system should be determined.
Answer 1 (d)
Cost object is anything for which a separate measurement of cost is required. Cost object may be a
product, a service, a project, a customer, a brand category, an activity, a department or a program etc.
Cost drivers are the factors or variable which influence the level of cost. They are responsible for the
incurrence of cost. Level of activity or volume of production are examples of cost driver.
Answer 2 (a)
LIFO has following advantages:
i. The cost of the material issued will be reflected at current market price.
ii. The use of this method during the period of rising prices does not reflect undue high profit in the income
statement.
iii. In the case of falling price, profit tend to rise due to lower material cost, yet the finished goods appear to
be more competitive and are at market price.
iv. During the period of inflation, LIFO will tend to show the correct profit.

Answer 2 (b)
i. Economic Order Quantity
EOQ = √2 x C x O/UI
= √2 x 40,000 x 8/4
= √160,000
= 400 packs
ii. Number of orders per year
= Annual requirements
Economic Order Quantity
= 40,000/400
= 100 orders per year
iii. Ordering and storage costs
Ordering costs = 100 orders x Rs. 8

= Rs. 800
Storage cost = (400/2) x (10% of 40)

= Rs. 800
Total cost of ordering & storage = Rs. 1,600
iv. Timing of next order
(a) Days‘ requirement served by each order

= Total no. of working days/No. of order in a year
= 360/100
= 3.6 days‘ supply
This implies that each order of 400 packs supplies for requirements of 3.6 days only.
(b) Days requirement covered by present inventory level

= (Units in inventory/ Economic order quantity) x Days‘ requirement served by an order
= (333/400) x 3.6 days
= 3 days requirement.
(c) Time interval for placing next order

= Days‘ requirement covered by present inventory level – Lead time for delivery
= 3 day‘s requirements – 3 days lead time
=0
Therefore, next order for the replenishment of supplies has to be placed immediately to avoid
stock out.

Answer 2 (c)
STORE LEDGER ACCOUNT
Receipts Issues Balance
Qty Rate Amt. Qty Rate Amt. Qty Rate Amt.
Date
. (Rs.) (Rs.) . (Rs.) . (Rs.) (Rs.)
(Rs.)
Feb 1 200 10 2,000
Feb 5 250 8 2,000 200 10 4,000
250 8
Feb 8 150 8.5 1,275 200 10 5,275
250 8
150 8.5
Feb 10 100 8.50 850 200 10 4,425
250 8
50 8.50
Feb 15 50 10 500 200 10 4.925
250 8
50 8.50
50 10
Feb 20 10 10 100 190 10 4,825
250 8
50 8.50
50 10
Feb 21 60 9 540 190 10 5.365
250 8
50 8.5
50 10
60 9
Feb 22 190 10 3,58 40 8 1,785
210 8 0 50 8.50 (Cl.
50 10 Stock
60 9 )
Answer 2 (d)
It is a system of selective inventory control whereby the measure of control over an item of inventory
varies with its usage value. It exercises discriminatory control over different items of stores grouped on
the basis of the investment involved. Usually, the items of materials are grouped into three categories viz,
A, B and C according to their use value during the period. In other words, the high use value items are
controlled more closely than the items of low use value.
i. ‗A‘ category of items consists of only a small percentage i.e. about 10% of the total items of the material
handled by the stores but requires heavy investment i.e. about 70% of the inventory value, because of their
high price and heavy requirement.
ii. ‗B‘ category of items consists of about 20% of the items of the material handled by the stores. The
percentage of investment required is about 20% of the total investment in the inventories.
iii. ‗C‘ category of items does not require much investment. It may be about 10 % of the total inventory value
but are nearly 70% of the items handled by the stores.
‗A‘ category of items can be controlled effectively by using a regular system, which ensures neither
over-stocking nor shortage of materials for production. Such a system plans its total material requirement
by making budgets. The stock of materials are controlled by fixing certain levels like maximum level,
minimum level and re-order level. A reduction in inventory management cost is achieved by determining
economic order quantities after taking into account ordering cost and carrying cost. To avoid shortage
and to minimize heavy investment of funds in inventories, the techniques of value analysis, variety
reduction, and standardization etc. are used along the aforesaid techniques.
In case of ‗B‘ category of items, as the sum involved is moderate, therefore, the same degree of control
as applied in ‗A‘ category of items is not warranted. The order for the items, belonging to this category
may be placed after reviewing their situation periodically. This category of items may be controlled by
routine control measures.
For ‗C‘ category of items, there is no need for exercising constant control. Orders for items in this group
can be placed either after six month or once in a year, after ascertaining consumption requirements.
Answer 2 (e)
S.N. True/ Not true Reasons
i. Not true Safety stock is held for meeting the unpredictable fluctuation in the
demand and supply. It varies with the fluctuations in demand and not with
the level of demand.
ii. Not true The categorization of A, B and C is done on the basis of their annual usage
value ( Consumption value ) and not on their cost X, Y and Z. Analysis is
done on the basis of value of inventory stored.
iii. True If the batch size is large, number of orders in a year will be lower. Hence,
stock moves to the lowest point (re-order level) fewer times a year. Hence
danger of stock out will be less. Thus to protect against the stock out, large
batch size is the must.
iv. Not true E.O.Q is based on a balancing between ordering cost and carrying cost of
inventory. It does not take into account the shortage cost.
v. Not true Lead time is the time interval elapsing between the placement of the
replenishment order and the receipt of the final installment of goods
against the order.
Answer 3 (a)
A B
Time Allowed (Hrs.) 100 100
Time Taken (Hrs.) 60 80
Time Saved (Hrs.) 40 20
Let the rate of wages of the worker B is Rs. x per hour
Normal Wages 1440 80x

(Time taken × Hourly rate of wages) (60×24)
Bonus 480 16x
(1/2 × 40 × 24) (20/100) x (80×X)
1920 96x
According to the problem,
Total earnings of A = Total earnings of B
Rs. 1,920 = 96x
x = Rs. 1920/96 = Rs. 20

Hourly rate of wages of the worker B is Rs.20 per hour.
Answer 3 (b)
A B
No. of garments assigned (Pieces) 30 42
Hour allowed per piece (hours) 2 2
Total hours allowed (Hours) 60 84
Hours Taken (Hours) 28 40
Hours Saved (Hours) 32 44
i. Calculation of loss incurred due to incorrect rate selection

(While calculating loss only excess rate per hour has been taken.)
A B Total
Basic wages 140 200 340
(28 hrs. x Rs. 5) (40 hrs. x Rs. 5)
Bonus (as per Halsey Scheme) 80 110 190
(50% of 32 hours x Rs. 5) (50% of 44 hours x Rs. 5)
Excess Wages paid 220 310 530
ii. Amount of loss if Rowan Scheme of bonus payment were followed:

A B Total
Basic Wages 140 200 340
(28 hrs. x Rs. 5) (40 hrs. x Rs. 5)
Bonus (as per Rowan Scheme) 74.67 104.76 179.43
(Time taken/time allowed)x (28/60 x 32 x Rs. 5) (40/84 x 44 x Rs. 5)

time saved x excess rate
Excess Wages paid 214.67 304.76 519.43
iii. Calculation of amount that could have been saved if Rowan Scheme were followed:
A B Total
Wages paid under Halsey‘s Scheme 220 310 530
Wages paid under Rowan Scheme 214.67 304.76 519.43
Difference (Savings) 5.33. 5.24 10.57

iv. Rowan Scheme of incentive payment has the following benefits, which is suitable with the nature of business
in which XYZ operates:
 Under Rowan Scheme of bonus payment, workers cannot increase their earnings or bonus merely
increasing its work speed. Bonus under Rowan Scheme is maximum when time taken by a worker on
a job is half of the time allowed. As this fact is known to the workers, therefore, they work at such a
speed which helps them to maintain the quality of the output too.
 If the rate setting department commits any mistake in setting the standards for time to be taken to
complete the works, the loss incurred will be relatively low.
Answer 4 (a)
i. Computation of Maximum, practical, normal and actual capacities, in terms of hours
 Maximum capacity: Hours
Total days in current year x Hours per shift:
= 365 x 8
2920
 Practical capacity: Hours
Maximum capacity 2920
Less: Idle capacity in hrs.
Saturdays – 52 days x 8 hrs. = 416
hrs.
Declared holidays – 13 days x 8 hrs. = 104
hrs.
Preventive Maint. & Repairs – 77 hrs. x 4 qtrs. = 308 (828)
hrs. 2092
 Normal Capacity:
(Normal production
and sales expected ÷ Production per hour) = (160000 units ÷ 80
units) 2000
 Actual capacity:
(Total production ÷ Production per hour) = (146000 units ÷ 80
units) 1825
ii. Statement Showing Idle Capacity and Hourly Rate for Recovery of Overhead Rates
Base Base Capacity Idle Hourly Rate of

capacity utilized capacity recovery for
(Hrs.) (Hrs.) (Hrs.) Fixed
Overheads (Rs.)
Maximum 2920 1825 1095 200.00
capacity
Production 2092 1825 267 279.16
capacity
Normal capacity 2000 1825 175 292.00
Actual capacity 1825 1825 0 320.00
Working note: (Calculation of hourly FO recovery rate)

Hourly rate of Recovery of fixed overhead = Total fixed overheads/ Base capacity hours
Total F.O. Base capacity hrs. Recovery rate per
(Rs.) hour
Maximum 584,000 2920 200.00
capacity
Production 584,000 2092 279.16
capacity
Normal capacity 584,000 2000 292.00
Actual capacity 584,000 1825 320.00
iii. Statement of Idle Capacity cost
Overhead Applied Fixed Idle capacity Cost

Absorption Overhead
Base capacity Rate per Hours Amount Hours Amount
hour (Rs.) (Rs.)
(Rs.)
Maximum capacity 200.00 1825 365,000 1095 219,000
Production capacity 279.16 1825 509,467 267 74,535.72
Normal capacity 292.00 1825 532,900 175 51,100
Actual capacity 320.00 1825 584,000 - -
Answer 4 (b)
The predetermined overhead absorption rates are preferred to overhead absorption rates calculated from
factual information after the end of a financial period due to following reasons;
a) Predetermined overhead rate allows for immediate costing of job or products and determination of selling
prices whereas in actual overhead absorption product cost cannot be determined until some considerable
time after the end of the accounting period.
b) Predetermined rates contribute effectively to standard costing and budgetary control programs as these
programs use estimated costs and standard cost to measure production activities. Actual overhead rates do
not allow for controlling of costs.
c) Predetermined overhead rate provides a reasonably constant unit cost and to avoid unit cost fluctuations
caused by seasonal overhead cost fluctuations, changes in volume or accounting methods whereas in
actual overhead rate inequitable situations arise due to overheads of seasonal nature, variation due to
production and efficiency of the factory, overhead costs of fixed nature which give a different per unit cost
when divided by differing production volumes.
Answer 4 (c)
Unabsorbed overheads Rs.
Overheads recovered from production (284,756 x 2) 569,512
Actual overheads 675,912
Under recovery 106,400
60% of total under absorption i.e. Rs. 63,840 was due to fluctuations in the prices of material and labor
rates therefore this should be charged to units produced by means of supplementary rate.
Supplementary rate = 63,840 / 10,500 = Rs. 6.08
Apportionment of overheads
The amount of Rs. 63,840 will be apportioned between Cost of Sales, Finished Goods and Work-in-
Progress as follows;
Cost of Sales A/c (8,000 × 6.08) = Rs. 48,640

Finished Goods A/c (2,000 × 6.08) = Rs. 12,160
Work-in-Progress A/c (500×6.08) = Rs. 3,040
Rs. 63,840
The balance of Rs 42,560 (40% of Rs. 106,400) which represents unabsorbed overheads on account of
abnormal factors such as strike, operational inefficiency etc. should be charged to Costing profit & loss
account.
Answer 5
In integrated accounting system, cost and financial accounts are kept in same set of books. Such system
will have to afford full information required for costing as well as for Financial Accounts. In other
words, information and data should be recorded in such a way so as to enable the firm to ascertain the
cost (together with the necessary analysis) of each product, job, process, operation or any other
identifiable activity. It also ensures the ascertainment of marginal cost, variances, abnormal losses and
gains. In fact all the information that management requires from a system of costing for doing its work
properly is made available. The integrated accounts give full information in such a manner so that the
profit and loss account and the balance sheet can be prepared according to the requirements of law and
the management maintains full control over the liabilities and assets of its business.
Since, the only sets of books are kept for both cost accounting and financial accounting purpose, so there
is no necessity of reconciliation of cost and financial accounts.
Answer 6 (a)
Process A Account
Particulars Units Amount Particulars Units Amount

(Rs.)
(Rs.)
To, Input 8,000 72,000 By, Normal Loss (5%) 400 800
To, Direct Wages 12,000 By, Abnormal Loss @ 100 1,250

12.50
To, Direct Expenses 6,000 By, Process B a/c 5,000 62,500
To, Overheads (1:2) 5,800 By, Profit and Loss a/c 2,500 31,250
(2500 @ 12.50)
8,000 95,800 8,000 95,800
Cost of abnormal loss in process A = (95,800-800)/ (8,000-400) = 95,000/7,600= 12.50 per unit
Process B Account
Particulars Units Amount Particulars Units Amount
(Rs.) (Rs.)
To, Process A a/c 5,000 62,500 By, Normal Loss 500 5,000
To, Direct Wages 24,000 By, Finished Stock a/c or P/L 4,800 104,640
a/c
To, Direct 5,000
Expenses
To, Overheads 11,600
To, Abnormal gain 300 6,540
5,300 109,640 5,300 109,640

Cost of Abnormal gain = (103100 – 5000)/ (5000-500) = 98100/4500 = 21.80
Working Notes:
Profit and Loss Account
Particulars Amount Particulars Amount
To, Cost of Sales : 1,35,890 By, Sales 1,57,500
Process A (2500 @Rs. 12.50= Process A (2500 x 15)=37,500
31,250) Process B(4,800 x 25)= 1,20,000
Process B (4800 @ Rs. 21.80=
1,04,640)
To, Abnormal Loss: 1050 By, Abnormal gain : 3,540
Process A (100 units @ (12.50 - 2)) Process B (300 units @ (21.80 -
10))
To, Selling Expenses 5,000
To, Net Profit 19,100
1,61,040 1,61,040
Note:
1. As mentioned selling expenses are not allocable to process which is debited directly to the P/L a/c.
2. It is assumed that Process A and Process B are not responsibility centers and hence, Process A and Process
B have not been credited to direct sales. P/L a/c is prepared to arriving at profit /loss.
Answer 6 (b)
Job costing involves the detailed accumulation of production costs attributable to specific units or groups
of units. For example, the construction of a custom-designed piece of furniture would be accounted for
with a job costing system. The costs of all labor worked on that specific item of furniture would be
recorded on a time sheet and then compiled on a cost sheet for that job. Similarly, any wood or other
parts used in the construction of the furniture would be charged to the production job linked to that piece
of furniture. This information may then be used to bill the customer for work performed and materials
used, or to track the extent of the company's profits on the production job associated with that specific
item of furniture.
Process Costing involves the accumulation of costs for lengthy production runs involving products that
are indistinguishable from each other. For example, the production of 100,000 gallons of gasoline would
require that all oil used in the process, as well as all labor in the refinery facility be accumulated into a
cost account, and then divided by the number of units produced to arrive at the cost per unit. Costs are
likely to be accumulated at the department level, and no lower within the organization.
Given these descriptions of job costing and process costing, following are the differences between the two costing
methodologies:
 Uniqueness of product. Job costing is used for unique products, and process costing is used for
standardized products.
 Size of job. Job costing is used for very small production runs, and process costing is used for large
production runs.
 Record keeping. Much more record keeping is required for job costing, since time and materials must
be charged to specific jobs. Process costing aggregates costs, and so requires less record keeping.
 Customer billing. Job costing is more likely to be used for billings to customers, since it details the
exact costs consumed by projects commissioned by customers.
In situations where a company has a mixed production system that produces in large quantities but then
customizes the finished product prior to shipment, it is possible to use elements of both the job costing
and process costing systems, which is known as a hybrid system.

Answer 6 (c)
Contract Account
For the period 1.7.2014-31.3.2015
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To, Material issued 7,74,300 By, Material sold 10,000
To, Labour 11,81,500 By, P/L a/c (Loss) 3,500

10,79,000
(13,500 - 10,000)
Add: Outstanding
1,02,500
To, Salary to engineer (20,500 x 1,84,500 By, Material in hand 75,800

9)
To, Salary to supervisor 60,750 By, Cost of Contract c/d 26,39,600
(9,000x3/4x9)
To, Administration & other 4,50,600

expenses: 4,60,600
Less: Prepaid 10,000
To, Depreciation on Plant 77,250
(Working Note 1)
27,28,900 27,28,900
To, Cost of Contract b/d 26,39,600 By, Work in Progress:
To, Notional Profit c/d 2,70,300 Work certified (50% of 22,50,000

45,00,000)
Work uncertified (W.N.2) 6,59,900
(26,39,600-19,79,700)
29,09,900 29,09,900
To P/L a/c (W.N.3) 1,60,178 By, Notional Profit b/d 2,70,300
To Reserve 1,10,122
2,70,300 2,70,300
Working Note:
1. Calculation of depreciation on Plant:
Cost of the Plant Rs. 7,71,000

Less: Residual Value Rs. 50,000
Rs. 7,21,000
Estimated life 7 years
Depreciation per annum Rs. 1,03,000
Depreciation for 9 months = (Rs.1,03,000/12) × 9

= Rs. 77,250
2. Cost of Work uncertified :

= Cost incurred to date - 50% of the total cost of contract
= Rs. 26,39,600 (shown in contract a/c) – Rs. 19,79,700
= Rs. 6,59,900
3. Calculation of Profit to be transferred

= 2/3 x Rs. 2,70,300 x Rs. 20,00,000/ Rs. 22,50,000
= Rs. 1,60,178
Answer 6 (d)
Absolute tonnes-kms = 10 tonnes x 40 kms. + 6 tonnes x 60 kms. + 8 tonnes x 80 kms.
= 1,400 tonne – kms.
Commercial tonnes-kms = Average load x total kilometers traveled

= (10+6+8)/3 tonnes x 180 kms.
= 8 tonnes x 180 kms.
= 1,440 tonnes – kms.
Note: For calculating the absolute tonne-kms, the travel between any two stations is considered
individually, while in the case of commercial tonne-kms, the trip is considered as a whole.
Answer 7 (a)
a. Balance Sheet of a Company
Liabilities Amount (Rs.) Assets Amount (Rs.)
Equity Share Capital 7,81,250 Fixed Assets 15,00,000
Reserves and Surplus 4,68,750 Current Assets
Long Term Debts 6,25,000 Stock 3,75,000
Current Liabilities 7,50,000 Debtors 5,00,000
Cash 2,50,000
Total 26,25,000 Total 26,25,000
b. Statement Showing Working Capital Requirement

Particulars Rs. Rs.
A. Current Assets
Stock 3,75,000
Debtors 5,00,000

Cash 2,50,000 11,25,000
B. Current Liabilities 7,50,000
Working Capital Before Provision (A-B) 3,75,000
Add: Provision for contingencies@ 10% of the 41,667

Working Capital including Provision i.e. 1/9th of the
Working Capital before provision ; 3,75,000 x 1/9
Working Capital Requirement including provision 4,16,667
Working Notes:
i. Cost of Goods sold = Sales – Gross Profit (25% of Sales)
= Rs. 30,00,000 - Rs 7,50,000
= Rs. 22,50,000
ii. Closing Stock = Cost of Goods sold/Stock Turnover

= Rs. 22,50,000/6
= Rs 3,75,000
iii. Fixed Assets = Cost of goods sold/ Fixed Assets Turnover

= Rs. 22,50,000/1.5
= Rs. 15,00,000
iv. Current Assets/Current Ratio = 1.5 and Liquid Ratio = 1

Stock = 1.5 -1 = 0.5
Current Assets = Amount of Stock x 1.5/0.5
= Rs. 3,75,000 x 1.5/0.5
= Rs. 11,25,000
v. Liquid Assets (Debtors and Cash) = Current Assets - Stock

= Rs. 11,25,000 - Rs. 3,75,000
= Rs. 7,50,000
vi. Debtors = Sales x Debtors Collection Period / 12

= Rs. 30,00,000x 2/12
= Rs. 500,000

vii. Cash = Liquid Assets – Debtors
= Rs. 7,50,000 – Rs. 5,00,000
= Rs. 2,50,000
viii. Net Worth = Fixed Assets / 1.2

= Rs. 15,00,000 / 1.2
= Rs. 12,50,000
ix. Reserves and Surplus

Reserves and Share Capital = 0.6 +1 = 1.6
Reserves and Surplus = Rs. 12,50,000 x 0.6/1.6 = Rs. 4,68,750
x. Share Capital = Net Worth – Reserves and Surplus

= Rs. 12,50,000 – Rs. 4,68,750
= Rs. 7,81,250
xi. Current Liabilities = Current Assets/Current Ratio

= Rs. 11,25,000/1.5 = Rs. 7,50,000
xii. Long Term Debts

Capital Gearing Ratio = Long-Term Debts /Equity shareholder‘s Fund
Long Term Debts = Rs. 12,50,000 x 0.5 = Rs. 6,25,000
Answer 7 (b)
i. Computation of Unit cost and Total Income
Unit Cost Absorption Marginal
Costing (Rs.) Costing (Rs.)
Direct material 16.00 16.00
Direct Labour 54.00 54.00
Variable Overhead 12.00 12.00
Fixed Overhead 18.00 -
Unit Cost 100.00 82.00
Income Statements
Absorption Costing Rs.

Sales (21500 x Rs. 168) 36,12,000
Less: Cost of Goods sold (21,500 x 100) 21,50,000
Less: Over Absorption 28,000 21,22,000
14,90,000
Less : Selling & distribution Expenses 11,90,000
Profit 3,00,000
Marginal Costing Rs.
Sales 36,12,000
Less: Cost of goods Sold (21,500 x 82)

17,63,000
17,83,000
Add: Under Absorption 20,000
18,29,000
Less: Selling and Distribution Expenses 4,30,000
Contribution 13,99,000
Less: Fixed Factory and Selling & Distribution Overhead 11,44,000
(38,400 +7,60,000)
Profit 2,55,000
ii. Under or over absorption of overhead:
Budgeted Fixed Overhead Rs.

72,000 hrs. x Rs. 6 4,32,000
Less: Actual Overhead was less than Budgeted Fixed OH 48,000
Actual fixed Overhead 3,84,000
Budgeted Variable Overhead
72,000 hrs X Rs. 4 2,88,000
Add: Actual Overhead was higher than budgeted 20,000
Budgeted 3,08,000
Both Fixed and Variable Overhead applied
72,000 hrs x Rs. 10 7,20,000
Actual OH (3,84,000 + 3,08,000) 6,92,000
Over Absorption 28,000
iii. Reconciliation of Profit
Difference in Profit = Rs. 3,00,000 - 2,55,000 = Rs. 45,000

The difference is due to Fixed Factory Overhead being included in Closing Stock in Absorption
Costing not in marginal Costing.

Therefore,
Difference in Profit = Fixed Overhead Rate (Production-Sale)
= 18 (24,000-21,500)
= Rs. 45,000
Answer 8 (a)
Control ratios are the ratios used by the management to analyze there are deviations of the actual
performance to budgeted performance and whether the same are favorable or unfavorable. If the ratio is
100% or more performance is considered as favorable and vice versa.
Ratio Formula Interpretations

Calendar Ratio: Number of actual working days in a period × This ratio indicates
100 whether all the budgeted
Number of working days in the budget period working days in a budget
period have been available
in actual practice.
This ratio indicates the
Capacity Ratio: Actual hours worked × 100 extent to which budgeted
Budgeted works hours of activity is actually
utilized.
This ratio is an indicator of
Standard hours for actual production × 100 the efficiency attained in
Efficiency Ratio:
Actual hours worked the production over a
period.
Activity Ratio: This ratio measures the
Standard hours for actual production × 100
level of activity attained
Budgeted standard hours
during the budget period.
Answer 8 (b)
i. A. Production Budget
For the year 1987 by quarters
Units to be Quarter I Quarter II Quarter III Quarter IV Total

produced in
each quarter Units Units Units Units Units
2/3rd of current 8,000 10,000 11,000 12,000 41,000

quarter‘s sales
demand (2/3x12,000) (2/3x15,000) (2/3x16,500) (2/3x18,000)
Add: 5,000 5,500 6,000 6,500 23,000
1/3rd of the (1/3x15,000) (1/3x16,500) (1/3x18,000)

following
quarter‘s sales
demand in first 3
quarters and
closing inventory
in the 4th quarter
Total 13,000 15,500 17,000 18,500 64,000

B. Statement showing Total cost of Direct Material, Direct Labour,
Variable Overheads and Fixed Overheads
Quarter I Quarter II Quarter III Quarter IV Total
Units to be 13,000 15,500 17,000 18,500 64,000

produced as per (a)
Rs. Rs. Rs. Rs. Rs.
Direct Material @ 65,000 77,500 85,000 92,500 3,20,000

Rs. 5 per unit
Direct Labour @ 78,000 93,000 1,02,000 1,11,000 3,84,000

Rs. 6 per unit
Variable Overhead 19,500 23,250 25,500 27,750 96,000

@ Rs. 1.50 per unit
Fixed Overheads 45,000 45,000 45,000 45,000 1,80,000
Total Cost 2,07,500 2,38,750 2,57,500 2,76,250 9,80,000
ii. Statement of Budgeted Profit

For the year (as a whole)
Rs.
Total Sales : 61,500 units @Rs.17 per unit 10,45,500
Less: Total Variable Cost : 61,500 units @Rs. 12.50 per unit 7,68,750
Contribution 2,76,750
Less: Fixed cost for the year 1,80,000
Profit for the year 1987 as a whole 96,750
iii. Break –Even Point = Fixed Overhead/(Selling Price per unit – Variable Cost per unit)
= Rs. 1,80,000/(Rs. 17 – Rs. 12.50) = 40,000 units
Total sales in units by the end of 3rd quarter will be 43,500 i.e. 12,000+15,000+16,500. Therefore,
the company will break even in the later part of the 3rd quarter.
(Note: Marginal costing approach has been followed for the ascertainment of profit i.e. all fixed expenses
Rs. 1,80,000 for the year have been deducted from the contribution.)
Working notes:
1. Variable Cost per unit Rs.

Direct material: 10 lbs @ 50 paise per lb 5.00
Direct labour: 1.5 hours@ Rs.4 per hour 6.00
Variable overheads: 1.50 hours@ Rs. 1 per hour 1.50
Total 12.50
2. Fixed Overheads per annum : 90,000 hrs @ Rs. 2 1,80,000

Therefore, Fixed overheads per quarter to be divided equally
over four quarters according to time (Rs. 180,000/4) 45,000
3. Number of units to be sold during the year 1987

Quarter I 12,000 units
Quarter II 15,000 units
Quarter III 16,500 units
Quarter IV 18,000 units
Sales during the year 61,500 units
Answer 9 (a)
The advantages of standard costing are listed below;
i. Managerial planning: Standard costs help in formulation of plans for managerial action and execution in
order to utilize resource in a manner so as to maximize business profits. Standard cost help in budget
formulation for different production levels and for different product mixes.
ii. Coordination: The establishment of standards coordinates all functions – manufacturing, marketing, research
and accounting towards the achievement of a common goal. Setting standards involves defining and
communicating targets so that they can work towards the attainment of the goal.
iii. Cost control: Standards enable management to make periodic comparison of actual costs with standard costs
in order to measure performance and to take action to maintain control over costs.
iv. Economical means of costing and record keeping: The use of standard costs can reduce clerical labor and
expense by avoiding the detailed record keeping which is necessary when actual costs alone are used.

v. Formulating price and production policies: Standard costs help determine expected unit costs and selling
prices. Standards can be modified from time to time to reflect current conditions and changes in material
prices or labor rates and the price of the product can be determined on a realistic basis.
vi. Standards as incentives to employees: If standards are reasonable and attainable they act as incentives to
employees to improve their performances and to maintain the quality of the product. Standards motivate
workers, supervisors and foremen to work more efficiently in the accomplishment of their respective
standards.
Answer 9 (b)
a)
i. Meaning and Controllability of the variances
Material Price Variance

Indicates whether Simply Soup has paid more (adverse) or less (favorable) for its input materials than the
standard prices set for the period. For example, if a new supplier had to be found and the price paid was
more than the standard price then Simply Soup would incur an extra cost. This extra cost is the price
variance.
Price variances are controllable to the extent that Simply Soup can choose its suppliers. On the other
hand, vegetables are a seasonal and weather dependent crop and therefore factors outside Simply Soups
control can influence prices in the market. The key issue is that the production manager will not control
the price paid that is the job of the Purchasing Manager.
Material Mix Variance

Considers the cost of a change in the mix of the ingredients to make soup. For example adding less butter
(which is expensive) and more stock (which is cheaper) will be a cheaper mix than the standard mix. A
cheaper mix will result in a favorable variance.
The recipe determines the mix. The recipe is entirely under the control of the production manager.
Material Yield Variance

This shows the productivity of the manufacturing process. If the process produces more soup than
expected then the yield will be good (favorable). At the moment 2.05 liters of input produces 1 liter of
soup, if 2.05 liters of input produces more than 1 liter of soup then the yield is favorable. Greater yield
than expected can be a result of operational efficiency or a change in mix.
The production manager controls the operational process so should be able to control the yield. Poor
quality ingredients can damage yield but the production manager should be in control of quality and
reject dubious ingredients. The production manager is also responsible for things like spillage. Higher
spillage can also reduce yield.
ii. Production manager‘s performance
Cost Efficiency
The production manager has produced significant favorable cost variances. The total favorable variance
has risen from Rs.4,226 to Rs.10,352 in the first three months. This last figure represents approximately
7.1% of the standard monthly spend.
The prices for materials have been rising but are probably outside the control of the production manager.
The rising prices may have put pressure on the production manager to cheapen the mix.
The mix has become cheaper. This could be seen as a cost efficient step. However, Simply Soup must
question the quality implications of this (see later).
The yield results are the most significant. The manager is getting far more out of the process than is
usual. The new mix is clearly far more productive than before. This could easily be seen as an indicator
of good performance as long as the quality is maintained.
Quality

The concern is that the production manager has sacrificed quality for lower cost and greater quantity. The
sales director has indicated that sales are falling, perhaps an indication that the customers are unhappy
with the product when compared to competitor offers. The greater yield and cheaper mix may well have
produced a tasteless soup.
Overall
Overall there has to be concern about the production manager‘s performance. Cost control and efficiency
are important but not at the expense of customer satisfaction and quality. We do not have figures for the
extent to which sales have been damaged and small reductions may be acceptable.
iii. Changes to the performance management system

The performance management system needs to take account of the quality of the soup being produced
and the overall impact a decision has on the business.
Quality targets need to be agreed with the manager. These are difficult to quantify but not impossible.
For example soup consistency (thickness) is measurable. Regular tasting will indicate a fall in quality;
tasters could give the soup a mark out of 10 on taste, color, smell etc.
The production manager should not be rewarded for producing lots of cheap soup that cannot be sold.
The performance management system should reflect the overall effect that decisions have. If the
production manager‘s actions have reduced sales then sales volume variances should be allocated to the
production manager as part of the performance assessment.
b) Material variances for month 4
Material Price Variance:

Mixed Vegetables = {(Rs. 69,700/82,000) – 0.80}x 82,000 = Rs.4,100 (A)
Butter = {(Rs. 21,070/4900) – 4} x 4,900 = Rs.1,470 (A)
Stock = {(Rs. 58,560/1,22,000) – 0.50} x 122,000 = Rs.2,440 (F)
Material Mix Variance:

Mixed Vegetables = (82,000 – 91,712.2*) x 0.80 = Rs.7,770 (F)
Butter = (4,900 – 5,095.1) x 4 = Rs.780 (F)
Stock = (122,000 – 112,092.7) x 0.50 = Rs.4,954 (A)
Total Mix Variance = Rs.3,596 (F)
(Note: it is only the total mix variance that is a valid variance here)
Total input volume = (82,000 + 4,900 + 122,000) = 208,900

* Standard mix for mixed vegetables is = Rs.91,712.2
(Note: alternate approaches are acceptable.)
Material Yield Variance = [112,000 – 101,902.4] x 1.47 = Rs.14,843(F)

The standard inputs add up to 2.05 units (0.9+0.5+1.1). This produces 1ltr of soup. The actual inputs
were 208,900 litres and therefore the standard expected output should be 208,900 x 1/2.05 = 101,902.4
litres
Answer 10 (a)
The limitations of Uniform Costing are as follows;
i. Sometimes it is not possible to adopt uniform standards, methods and procedures of costing in different
firms due to differing circumstances in which they operate. Hence, the adoption of uniform costing becomes
difficult in such firms.
ii. Disclosure of cost information and other data is an essential requirement of a uniform costing system. Many
firms do not wish to share such information with their competitors in the same industry.

iii. Small firms in an industry believe that uniform costing system is only meant for big and medium size firms,
because they cannot afford it.
iv. It induces monopolistic trend in the business, due to which prices may be increased artificially and supplies
withheld.
Answer 10 (b)
Inter firm comparison is a technique of evaluating the performance, efficiency, costs and profits of firms
in an industry. It consists of voluntary exchange of information/data concerning costs, prices profits
productivity and over-all efficiency among firms engaged in similar type of operations for the purpose of
bringing improvement in efficiency and indicating the weaknesses. Such a comparison will be possible
where uniform costing is in operation. Inter firm comparison indicates the efficiency of production and
selling, adequacy of profits, weak spots etc. in the organization.
Answer 11
Some of the important area of cost reduction are as follows;
 Product improvement
Product improvement and the level of efficiency determine the costs incurred. Important factors in product
improvement are;
- Quality of the product

- Unnecessary weight, materials contents, machine or labor operations.
- Waste and losses to be eliminated
- Proper designing of the product
 Production methods and layout
The area of production methods and organization is important for the purpose of cost reduction. There are
many vital activities relating to production and production planning where a cost reduction program may
be applied. E.g. materials control, labor control, production layout, system analysis, time and motion study
work measurements etc.
 Marketing areas
In marketing, the cost reduction areas include channels of distribution, sales promotion schemes,
marketing research plan, territorial responsibilities, methods of remunerating salesmen, advertising
methods, after-sales service costs, packaging methods, materials handling, transport arrangement.
 Administrative areas
Administrative functions include personnel, purchase and general administration. Cost reduction require
efficiency in administration, effective purchasing procedure and a fair personnel policy and schemes.
Some of the important areas are investment planning, cash discount policy, mechanized system of
accounting, labor relations, labor welfare measure, availability of servicing facilities.
Income Tax and VAT

Attempt all questions. Working note should form part of the answer.
1. Answer the following:
a) State the decisions under which a revision petition can be filled before the Inland Revenue
Department under the Income Tax Act, 2058. [5 Marks]
b) List out the payments not included in the income from employment under the Income Tax Act,
2058. [5 Marks]
c) Explain on the taxability and the implication thereon, of the following transactions as per the
Income Tax Act, 2058. [6+4=10 Marks]
d) Air Pakistan registered in Pakistan, having contact office in Nepal and is operating its airlines
business. During Income Year 2071/72, it has sold the tickets in Nepal as follows:
i. Sale of tickets from the passengers departing from Nepal - Rs. 50 crores.
ii. Sale of tickets in Nepal, for the passengers departing from country other than Nepal – Rs.
10 crores.
e) Airtail Ltd. is a company registered in Singapore. The company, with its objective to transmit
information and storing data, has a communication hub in Nepal (without any office in Nepal).
Through such system, the companies in Europe and America are storing data and transmitting
information. Airtail has received USD 1 million for such services.
Ans.
a) In case a taxpayer is not satisfied with any decision of IRO, it has to file an application, as its first
step, to IRD for an administrative review. According to Sec 114, an application against the
following decisions should be moved to IRD for an administrative review:
i. Advance ruling issued under Sec. 76 by IRD;
ii. Decision or order to withholding agent under Section 90(8)
iii. Reassessment of estimation of advance payment by a taxpayer made by a Tax Officer under
Section 95(7);
iv. Decision by a Tax Officer to require a taxpayer to file return of tax under Section 96(5) or
97;
v. Decision by a Tax Officer with regard to an extension of time for filling returns under
Sec.98;
vi. Jeopardy assessment under Section 100, an amended assessment under Section 101, an
assessment of expenses incurred on auction sales under Section 105(5), or fees and interest
imposed under Sections 122;
vii. Notification by the IRO of an amount to be set aside by a receiver under Section 108(2);
viii. Order by a tax office to a debtor of the taxpayer to pay the amount due to the tax office
instead of to the taxpayer under Section 109(1);
ix. Order by a Tax Officer to a person to pay tax on behalf of a non-resident person under
Section110(1);
x. Decision of IRO on an application by a taxpayer for a refund of a tax under Section 113(5);
and
xi. Decision of IRD on an application by a taxpayer for extension of time within which to file
an objection under Section 115(3).
b) Following are the payments, which are not included while computing income from
employment:
i. Any amount received by an employee for which exemption is given under Section 10 of the
Act and any amount received which is subject to final withholding of tax.
ii. Work-time meals or refreshments provided by the employer in equal terms for all the
employees at working place or uniform applicable to working place only.
iii. Any reimbursement of expenses incurred by the employee:
 That serves the purpose of the business of the employer; or
 That would otherwise be deductible in calculating the individual‘s income from the
business or investment.
 Reimbursement of outstation cost-travelling or daily allowance
iv. Any prescribed small amounts, which are too small and thus unreasonable or
administratively impracticable to make accounting for them. The amount prescribed by the
rule is Rs. 500 at a time. The expenses prescribed by the rule include tea expenses,
stationery expenses, prizes, gifts, emergency medical facility, or other such payments as
specified by IRD.
c)

i) For the provision of section 70 of Income Tax Act, 2058, the 'non-resident' means a resident entity
that is a part of a group of associated entities the main office is situated outside Nepal (explanation to
section 70). The gross receipts from the following activity of non-resident person are treated as the
taxable income of the person from the activities:
 A person engaged in Nepal in any, air, water or chartered transport services, other than
transmission in Nepal, for the carriage or passengers who embark from within the territory of
Nepal [section 70(1)].
 Hence, the gross receipts of Air Pakistan from the sale of tickets in Nepal departing the
passengers from Nepal amounting to Rs. 50 crores and for the passengers departing from
country other than Nepal – Rs. 10 crores are taxable at the rates of 5% and 2% respectively as
per schedule 1 Section 2 subsection 7
 No tax credits shall be allowed to the person to reduce the tax payable by the person under
this section. Further, expenditures incurred in conducting such activities are neither allowed
to be deducted from the taxable income from the above sources nor allowed to be deducted
from any other source of income of the person.
ii. The gross receipts from the following activity of non-resident person are treated as the taxable
income of the person from the activity:
 A person engaged in the transmission of messages by cable, radio, optical fiber, or satellite
through an apparatus or equipment established in Nepal, irrespective of the place of origin of
messages [section 70(2)].
 Hence, the gross receipts of Airtail from the communication hub (apparatus) established in
Nepal amounting to USD 1 million is taxable at the rates of 5 % as per schedule 1 Section 2
sub Section 7 irrespective of the place of origin of messages.
 No tax credits shall be allowed to the person to reduce the tax payable by the person under
this section. Further, expenditures incurred in conducting such activities are neither allowed
to be deducted from the taxable income from the above sources nor allowed to be deducted
from any other source of income of the person.
2. Write short note of the followings with reference to Income Tax Act, 2058. (5×2=10)
a. Tax
b. Debt Claim
c. Exempt Organization
d. Underlying Ownership
e. Payment
Answer
a)
As per sec 2 (Dha), "Tax" means income tax imposed under the Income Tax Act and includes following
payments:-
i. Expenses incurred in the process of creating charge and performing auction of the property of tax
Debtors by the department as mentioned in section 104 (8) (a);
ii. Amount payable by a withholding agent Withholding agent or withholdee under section 90, or
amount payable by an installment payer under section 94, and on assessment under sections 99,
100,and 101; and amount payable by person who required to deposit tax under section 95 ka
iii. Amount payable to the Department in respect of a tax liability of a third party under section 107(2),
108(3) or (4), 109(1), and 110(1);
iv. Amount payable by way of interest and fees under Chapter 22; and
v. Amount payable by way of fines in order of the department as per section 129.
b) As per Sec 2(Tha) of Income Tax Act, Debt claim means a right of one person to receive a payment
from another person and includes a right to repayment of an amount paid by one person to another

person as well as deposits in banks and other financial institutions, accounts receivable, notes, bills of
exchange, bonds, and rights under annuities, finance leases and installment sales.
c) As per sec 2(Dhna), "Exempt organization" means the following entities:
Following entities registered with the Inland Revenue Department as an exempt organization:
i. a social, religious, educational, or a charitable organization of a public character established
without having a profit motive,
ii. an amateur sporting association formed for the purpose of promoting social or sporting facilities
not involving the acquisition of gain,
iii. a political party registered with the Election Commission,
iv. a village development committee, municipality or district development committee,
Provided that, in cases where any person has derived any benefit from the property of that organization
and the monies obtained from that organization except in making payment for the property or the service
provided by any person to that organization or in discharging functions in consonance with the objective
of the organization entitled to exemption, tax exemption shall not be granted.
d) As per Sec 2 (Ra) of Income Tax Act, "Underlying ownership" means following ownership:-
i. in relation to an entity, an ownership created on basis of an interest held in the entity directly or
indirectly through one or more interposed entities by an individual or by an entity in which no
individual has an interest; or
ii. in relation to an asset owned by an entity, an ownership of the asset that is determined on basis of
proportion to the ownership held by the persons having underlying ownership of the entity.
e) As per Sec 2(Ha), "Payment" means:

i. the transfer by one person of money or an asset to another person or the transfer by another person
of a liability to the one person;
ii. the creation by one person of an asset that on creation is owned by another person or the decrease
by one person of a liability owed by another person;
iii. the provision by one person of services to another person; and the use, or availability for use, of an
asset owned by one person to another person.
3. What are the Tax Rate applicable for non business chargeable assets ? [5 Marks]
Ans:
Gain from disposal of Non Business Chargeable Assets are taxed at 10% after taking into
consideration exemption limit (i.e Rs.2,50,000 for individual and Rs.3,00,000 for couples). In case of
land and buildings, if the disposed land & buildings has been owned for more than 5 years, tax rate of
5% shall apply. Gain from Non Business Chargeable Assets includes
• gain from sale of shares of companies,
• gain from sale of land and building owned and resided for less than 10 years and disposed for
more than Rs.30 lakhs.
4. What are the deductions and facilities for resident persons while calculation taxable income? [5
Marks]
Ans:
1) Life Insurance Premium: While calculating taxable income, life Insurance premium
paid by a resident natural person is deductible up to the limit of Rs 20,000.
2) Employees working in Diplomatic Agencies: 75% of foreign allowance is deducted
from taxable income in case of an employee employed at diplomatic agencies of Nepal
situated at foreign countries.
3) Incapacitated natural persons: In case of incapacitated natural persons, the minimum
exemption limit (Rs.2,50,000 for individual and Rs.3,00,000 for couples) is increased by
additional 50%.

4) Remote Area Benefit: In case of resident natural persons working in remote areas,
minimum exemption limit shall be increased by Rs 50,000 depending on remote area
category.
5) Additional limit for pension income: If income of a resident natural person includes
pension income, the taxable income is first reduced by additional 25% or pension amount
included in income whichever is lower and then tax liability is calculated on balance
income.
5. Write down the tax credits applicable for natural resident persons for calculating total tax liability? [5
Marks]
Ans:
i. Medical Tax Credit: In case of approved medical expenses, medical tax credit is available
to resident natural persons as deduction from tax liabilities. The limit prescribed is Rs.750
or 15% of Approved medical expense or actual approved medical expense incurred
whichever is lower. Any unutilized expenses can be carried forward to next year.
ii. Foreign Tax Credit: If foreign income is included in taxable income of a resident person,
foreign tax credit for tax paid in foreign country in respect of that income. The foreign tax
paid can either be deducted as expense or tax liability in Nepal can be reduced by such tax
paid up to average rate of tax applicable in Nepal, depending on the option of tax payer.
6. M/s ABC Construction Company Pvt. Ltd., a construction company, has purchased a heavy duty
earth moving machine from M/s XYZ Company Pvt. Ltd. with the amount payable in five
installments which are payable at the beginning of the year. The amount of each installment is Rs. 10
lakhs. Calculate the amount of interest to be claimed under Section 14 of the act by showing the year
wise interest and repayment of debt claim. [5 Marks]
Ans:
In the case given
 Per Installment amount Rs. 10 Lacs payable at the beginning of the year.
 Standard Interest Rate for discounting as per Section 32(8) : 15 percent per annum.
Year Installment Discount Discounted
amount (Rs.) Factor Value(Rs.)
1 1,000,000 1 10,00,000
2 1,000,000 0.8695 869,500
3 1,000,000 0.7561 756,100
4 1,000,000 0.6575 657,500
5 1,000,000 0.5717 571,700
Present value of payments (Rs.) 3,854,800
Total payments(Rs.) 5,000,000
Interest (Rs.) 1,145,200
Year wise Break Up (Rs.)

Year Opening Total Interest Principal Outstanding

Balance Portion Portion Principal
1 3,854,800 1,000,000 1,000,000 2,854,800
2 2,854,800 1,000,000 428,220 571,780 2,283,020
3 2,283,020 1,000,000 342,453 657,547 1,625,473
4 1,625,473 1,000,000 243,821 756,179 869,294
5 869,294 1,000,000 130,706 869,294
Total 50,00,000 11,45,200 38,54,800
The amount of total interest to be claimed as interest under section 14 is Rs. 11,45,200 on year
wise basis as shown above.
7. Define interest, debt claim and debt obligation as per the Income Tax Act 2058.
Ans:
Definitions:
Interest: As per section 2(kaJha) of the act, interest means the following payments or gains:
a. A payment under a debt obligation that is not repayment of principal amount.
b. A gain realized by way of a discount, premium, swap payment or similar payment under a debt
obligation.
c. The portion which is treated as interest from the payments made to a person by a person who
acquires assets under an annuity or installment sale or for use of assets under a finance lease.
Debt Claim: As per section 2(tha) of the act, debt claim means a right of one person to receive a
payment from another person and the expression includes a right to receive back of an amount paid
by one person, deposits in banks and financial institutions, receivable amount, debentures, bills of
exchange, bond, annuities, finance leases and installment sale.
Debt Obligation: As per section 2(ta) of the act, debt obligation means the obligation equivalent to a
debt claim.
8. Write down the Treatment of Loss on disposal of Assets as per Income Tax Act 2058.
Ans:
The Income Tax law has classified assets of an entity into stock, depreciable assets and business
assets. Personal assets of Natural persons may be taxed as Non Business Chargeable Assets if they
meet certain criteria.
 Loss from stock is adjusted in cost of goods sold.
 Depreciation is calculated on pool basis, with assets classified into five pools. Gain or loss
on disposal of depreciable assets is not calculated separately for each assets, but
considered on pool basis. If there is loss on disposal of a pool of depreciable assets, it is
deductible as normal loss in the concerned income year.
 Non depreciable capital assets are categorized as business assets. Any loss from disposal
of business assets can be claimed as deduction in the same year as normal loss. But while
calculating gain from disposal of business assets in a year, any unrelieved business loss of
previous years (due to seven years limit) can be claimed for setoff. The same provision
applies for disposal of business liability.
9. Explain the annual tax returns provision for FY 2071-72 as per Income Tax Act 2058.
Ans:
Annual tax return should generally be filed within 3 months from the end of an income year. So, the
due date of filing annual tax returns for the income year 2072/73 (2015/16) is Asoj end 2073 (Mid
October, 2016). However, a taxpayer may have this due date extended for a maximum period of 3
months i.e. up to Poush end 2073 (mid January, 2017) in case he files an application in the IRD with
bonafide reasons for such extension. This extension only applies to tax return submission and not for
payment of tax.
10. Mr. Ram Sing is a salaried employee. How would he treat unreimbursed business expenses? There is
no room for this deduction from his individual salary income? [2 Marks]
Ans:
Deducting so-called business expenses of salaried employees is a major loophole in the current tax
system. Genuine business expenses ought to be borne by employers, in which case they are
deductible under the business tax.
11. Write Short Notes on [3*2=6 Marks]

i. Self Assessment
ii. Amended Assessment
iii. Appeal and Review
Ans:
i. Self Assessment
The taxpayer is required to make self assessment of its tax and should file annual return and pay
tax within 3 months from the end of an income year. So, the tax should be paid and return should
be filed within Asoj end 2073 (Mid October, 2016) for the income year 2072/73 (2015/16).
However, a taxpayer may have due date extended for a maximum period of 3 months i.e. up to
Poush end 2073 (mid January, 2017) on request to IRD with bonafide reasons for such extension.
ii. Amended Assessment

The tax return filed as per self assessment by a taxpayer is not final. Tax Authority may revise the
assessment within four years from the date of submission of tax return under self assessment. It
may revise it as many times as it deems necessary but within the four years period. If tax
authority obtains evidence that the tax return of any year is misleading due to fraudulent
assessment, it may revise the assessment at any time after the submission of return, but within
one year of obtaining the information. If any authorized body restricts tax authority to make
additional assessment, the tax authority cannot make amended assessment.
iii. Appeal & review

When tax authority makes amended assessment, the taxpayer has the right to go for
administrative review. The review petition can be filed within 30 days of obtaining notification
issued under Sec 102. In case a taxpayer cannot file a review petition within the specified days,
the due date may be extended for another 30 days if an application is filed within 7 days of expiry
of the due date of first 30 days. A deposit of 33% of disputed tax is required for application. In
case Inland Revenue Department (IRD) does not decide in the review within 60 days of filing the
review petition or decides against the tax payer, the taxpayer may file an application to Revenue
Tribunal within 35 days. The application deadline may be extended further by 30 Days. A deposit
of 50% of disputed tax is required for application.
12. State the correct answer in the following with proper reasoning. (5×2Marks =10 Marks)
a. Excel Insurance Co. Ltd. issued a life insurance policy for Rs. 500,000 to Mr. Hiralal on
1.4.2068 for 25 years at an annual premium of Rs. 1200 with a condition that if the premium

is not paid every year on due date, the policy will be cancelled. Mr. Hiralal did not pay the
premium for FY 2070/071 and the insurance company cancelled the policy within 5 years of
its issue. Is this investment insurance or not?
b. Mr. Harihar took a loan of Rs. 5,000,000 for building his house at 12% p.a. interest on
1.4.2067. The interest amounted to Rs. 600,000 per annum. For the year 2071/72, the bank
reduced the interest from 12% to 10% p.a. Now the Tax Office says Rs. 100,000 difference
between the interest is income of Mr. Harihar. Is it income or not?
c. A Ltd. receives dividend of Rs. 400,000 and interest (net) of Rs. 200,000. A Ltd. distributes
Rs. 450,000 as dividend. How much tax A Ltd. should deduct from the dividend distributed
by it?
d. A Ltd. has a taxable income of Rs. 600,000 during the year 2068/69. It had paid advance tax
of Rs. 100,000 on 25th Ashadh 2069. The return was filed on 25th Ashwin 2069 after paying
the balance tax and interest. How much amount the A Ltd. has to pay as interest under the
Income Tax Act?
e. Mr. Madan Lal is running a lodge for stay only on a daily rent basis. It is not registered under
VAT Act. The guests where stay there should deduct TDS on payment. But it is not
practicable in practice. Is the practice right according to the provision of Section 88 and no
guest deducts TDS and pay to the government?
Ans.
a. Here the policy is for more than 5 years. But it was cancelled as per the terms of the contract.
Even though it is cancelled for non-payment of premium within 5 years, it is an investment
Insurance.
b. Interest covers any payment other than payment towards principal amounts. According to
Sedc.2(ka jha)(1). 2(ka jha)(2) states that any discount or variation in payment or any profit /
benefit received from such payments. In this case, the interest rate of bank is reduced by 2%
during the financial year 2069/070. Therefore, there is no question of refund of interest. It is
not any special discount given to Mr. Harihar but a general reduction in interest charged by
the Bank. Therefore, it is not income of Mr. Harihar.
c. As per Income Tax Act, if the dividend is declared from dividend income which is final tax
withholding income, there is no need to pay again dividend tax from such income. Unless a
Company specifies, from which source how much dividend is paid, it will be assessed that
dividend is paid proportionally that the total such available. The total such is Rs.4,00,000+
Rs. 2,00,000=Rs. 6,00,000 out of which Rs.2,00,000 is 1/3 of the total remain. So, the
dividend paid shall be deemed to have been paid Rs.1,50,000/- out of interest income and on
that 5% viz. Rs.7,500 have to be deducted at source. Note: There may be alternative solution.
Since the question said Interest income is net of Tax that is gross Interest Income is Rs.
2,35,294. Therefore proportion is Rs. 4,00,000+ Rs. 2,35,294 = Rs. 6,35,294 out of which Rs.
2,35,294 is 37.04% of total. Therefore dividend paid shall be deemed to have been paid
Rs.1,66,680 out of Interest Income and 5% of such amount is subject to Tax i.e. Rs. 8,334.
d. A Ltd. has not paid the advance tax as per Sec. 118(2)
Tax Paid Balance Paid Balance Interest@15%

Balance
Poush 60,0000.00 60,0000.00 2,250.00
end(40%)
Chaitra end 1,05,0000.00 1,05,0000.00 3,937.50
(70%)
Ashadh end 1,50,000.00 1,00,000.00 5,0000.00 1,875.00
(100%)
Total Interest 8,062.50
u/s 118
e. If the lodge is registered under VAT and issued VAT bill, then no deduction at source is
applicable. If the lodge is not registered under VAT but only under Income-tax Act, as per
Sec. 88, the guest is required to deduct tax on rent paid by him and remit to the government.
But the guests may not have PAN registration and then it becomes difficult to remit the tax
also. Since it is not practicable, it cannot be insisted on. But the lodge owner has to submit his
advance tax return within time with the required advance tax payment.
13. Write short notes on the following: (8×3=24)

a) Foreign Permanent Establishment
b) Transfer Pricing Arrangement
c) Perquisites
d) Jeopardy Assessment
e) Investment Insurance
f) Taxable Income and Classification of Income Heads
g) Assessable Income
h) Final Tax Deduction at Source and Non-Final Tax Deduction at Source
Answer:
a) A Foreign Permanent Establishment (FPE) is a permanent establishment of such a person who is
a resident of some other country. (Section 2 (KaNga) read with 2 (Bha)). The person may be a
company or a partnership registered in a foreign country, a trust established abroad, a foreign
government or its political subdivision up to village level etc. When any one of these foreign
persons establishes a foreign permanent establishment in Nepal under the same incorporated status
in Nepal, the permanent establishment is said to be a foreign permanent establishment. Test of a
foreign permanent establishment:
 It is entirely owned by a foreign person. Owner foreign person may be controller foreign entity
too.
 It is a branch, a division, warehouse, construction site, factory, sales outlet or site office of a
foreign person.
 It has not got any incorporated status in Nepal.
 It has its effective control and management situated outside Nepal.
b) Transfer pricing is an arrangement of transferring the profit by way of cost rather than by
repatriation of income after tax. Transfer pricing generally happens between associated parties
where the resulting loss and profit from the planned transaction go to the same person. The better
test of whether transfer pricing has happened or not is whether the transaction is at the arm‘s length
or not. According to the test, the payment for transaction is ‗over‘ or ‗under‘ if it is greater or lesser
than the hypothetical price (the arm‘s length price), which the parties would have been paid, had
their ties been unrelated to business. Tax authorities see the risk of transferring the income of one
person to another between associated person, Inland Revenue Department or Inland Revenue Office
may by a notification in writing, distribute, apportion, or allocate the amounts to be included or
deducted in the income between the persons as to reflect their taxable income or tax liability.
c) Perquisite is a facility provided in kind by the employer to an employee under the terms of
employment. Such facilities include residence facility, vehicle facility, facility from driver for
vehicles, facility of house maid, gardeners, telephone facility for his/her residence etc. All facilities
other than residence and vehicle are included in income from employment of the employee on the
basis of the actual expenses incurred by the employer. But Rule 13 of the Income Tax Rules has

quantified the residence facility and the vehicle facility and the expenses borne by the employer in
providing the facility.
Residence facility:
Quantification for house facility is 2% of the salary for the year. Here salary means the basic salary
and the grades. There is no difference whether the house provided is furnished or unfurnished one.
Also it does not matter if the house was taken on rent and the employer paid different amount to the
land lord.
Vehicle facility:
Quantification for vehicle facility by the employer for employees exclusive use or for a part time
use, an amount equal to 0.5% of the salary regularly being paid is quantified as income.
Assessment of tax within income year or after the closure of the income year or before the due date
of filing of the returns, when an assessment of tax is done, then that is called jeopardy assessment.
Jeopardy assessment is of two types; jeopardy assessment as self assessment (Sec 100(1)) and
jeopardy assessment by taxation authority (Sec 100(2)). Jeopardy assessment by the IRO is possible
only under any of these conditions:
a. The person becomes bankrupt, is wound up, or goes into liquidation,

b. The person is about to leave Nepal indefinitely,
c. The person is about to leave the business, or
d. The IRD otherwise considers it appropriate.
Under any one of the above conditions the IRO may serve a notice to the tax payer to submit a tax
return for the specified period of the year within specified days. In the case of a taxpayer who
submits the return as per the notification or does not submit it, in either case, the income tax
assessment is supposed to be made as per the provisions of the Act. Section 100 (2) has given
authority to the respective Inland Revenue Office to make a jeopardy assessment in the above case
on the basis of the best judgment. When a jeopardy assessment is done for the full year, then
separate return is not required to be submitted, similarly if the jeopardy assessment is done for the
part of the financial year, then returns for full year should be submitted and the tax paid for jeopardy
assessment can be adjusted with full year assessment.
d) Investment Insurance: As per sec 2(am) of Income tax Act, 2058, "Investment insurance" means
insurance of any of the following classes:
i. insurance where the event covered is the death of an individual who is the insured or an
associate of the insured;
ii. insurance where the event covered is an individual who is the insured or an associate of
the insured sustaining personal injury or becoming incapacitated in a particular manner;
iii. insurance where the insurance agreement is expressed to be in effect for at least five years
or without limit of time and is not terminable by the insurer before the expiry of five years
except in special circumstances specified in the contract;
iv. insurance under which an amount or series of amounts is to become payable to the insured
in the future; and
v. reinsurance of insurance referred to under subparagraphs (i), (ii),or (iv); and reinsurance
of reinsurance referred to under subparagraph (v).
e) Taxable Income and Classification of Income Heads

The taxable income of a person for an income-year is equal to the amount as calculated by
subtracting reduction, if any, claimed for the year under section 12 or 63 or both from the total of
the person's assessable income for the year from each of the following income heads-
(a) business;
(b) employment; and
(c) investment,
f) Assessable Income
Subject to this Act, the following income of a person for an income-year from any employment,
business, or investment shall be as the assessable income:-
(a) income of a resident person from the employment, business, or investment of the year
irrespective of the location of the source of the income; and
(b) income of a non-resident person from the employment, business, or investment of the year but
only to the extent the income has a source in Nepal, provided that, the assessable income does not
include any income exempt under sections 11 or 64 or both.
g) Final Tax Deduction at Source and Non-Final Tax Deduction at Source

A. Final TDS The TDS that is deducted from the payment by the TDS withholding agent cannot
be used to reduce the income tax liability of the withholdee. The payment itself is not considered
income of the withholdee when calculating income tax. It is simply ignored when calculating the
income tax liability of the withholdee.
B. Non-final TDS The TDS that is deducted from the payment by the TDS withholding agent can
be used to reduce the tax liability of the withholdee. The withholdee claims non-final TDS as tax
credits. Non-final TDS reduces the income tax payable (i.e. tax liability) of the withholdee
because it was paid by the TDS withholding agent on behalf of the withholdee. The payment
itself is considered income (or an inclusion) of the withholdee when calculating the witholdee‘s
income tax liability.
14. Gurans Oil Pvt. Ltd. engaged in producing edible oils, keeps books of accounts under cash basis of
accounting. You just joined in the company as Chief Accountant. With the help of assistant
accountant, you obtained the following information. Now you are required to compute income tax
payable for the income year 2071/72.
Particulars Rs. Particulars Rs.
Opening Bank 100,000 Loan repaid 300,000
Payment for purchase 7,000,000 Sales realized 10,000,000
Interest paid 500,000 Interest income 100,000
Personnel Expense paid 1,500,000 Other income 200,000
Wage expense paid 900,000 Bank balance 200,000
Loan received 800,000
10,800,000 10,800,000
Further information gathered by the assistants are as follows:
Particulars Opening Rs. Closing Rs.

Debtors 100,000 1,300,000
Creditors 300,000 100,000
Paid up capital 1,000,000 1,500,000
Machineries 1,500,000 2,100,000
Interest payable 50,000 150,000
Wage payables 50,000 100,000
3,000,000 5,250,000
a) Depreciation has not been charged in the books. Additional investments in machineries have
been done on Ashadh 2072. Trading stock of Rs. 100,000 has not been shown in the above
information.
b) The shareholders of the company are foreigners and interest is paid to one of the foreign banks.

c) Donation of Rs. 20,000 has been given to an exempt entity which is included in administrative
expense. Staff also donated Rs. 7,000 to the same entity.
d) Personnel expense excludes a gratuity provision of Rs. 200,000. During this year Rs. 30,000 was
paid as retirement payment from this provision account.
From the above information, find current tax expense for income year 2071/72. [20 Marks]
Ans:
Gurans Oil
Computation of Income from Business for income year 2071/72
Profit or Gain Rs.
Sales (note 1) 11,200,000
Interest income (note 2) 100,000
Other income 200,000
11,500,000
Less Deduction of Expense

Interest expense u/s 14 600,000
Cost of Goods sold u/s 15 (note 3) 7,650,000
Depreciation u/s 19 (note 4) 340,000
Other expense u/s 13 (note 5) 1,530,000
10,120,000
Income from business 1,380,000
Income from business 1,380,000

Income from Investments 0
Assessable income 1,380,000
Reduce: Donation
Minimum of : 20,000
a. Rs 100,000
b. 5% of adjusted taxable income
(1,380,000*5%)
c. Actual eligible donation Rs. 20,000
Taxable income 1,360,000
Tax rate 20%
Current tax 272,000
Working Notes:
1. Adjustments of basis of accounting
Closing Rs. Cash basis Opening Rs. Accrual
Rs. basis Rs.
Sales Debtors 1,300,000 10,000,000 -100,000 11,200,000
Purchases Creditors 100,000 7,000,000 -300,000 6,800,000
Interest Interest payable 150,000 500,000 -50,000 600,000
expense
Wage expense Wage payables 100,000 900,000 -50,000 950,000
1,650,000 18,400,000 -500,000 19,550,000
2. Interest income and other income are assumed directly relating to the industrial business, so
included in profit or gain from business.
3. Cost of Goods sold u/s 15
Opening Stock 0
Purchase 6,800,000
Wage 950,000
Total 7,750,000
Less: Closing -100,000
Stock
Cost of Goods sold 7,650,000
4. Depreciation expense as per schedule 2:
Pool D
Opening depreciation base 1,500,000
Absorbed addition (1/3rd) 200,000
Disposal Proceeds 0
Depreciation Base 1,700,000
Rate of Depreciation (including 20%
accelerated)
Allowed depreciation allowance 340,000
5. Other expense allowed:
Personnel expense (except provision) 1,500,000

Payment from provision 30,000
Allowed expense 1,530,000
15. M/s Nepal Solar System Pvt. Ltd. (NSS Pvt. Ltd.) is engaging in solar power system production for
sale in which 65% share capital is subscribed by a NGO Nepal Youth Development Organization
(NYDO) which is a tax exemption organization under Income Tax Act of Nepal. The following
information is available from accounts of the Company for FY 2070/71:
Particulars Debit/Credit Amount (Rs)
Raw Material Consumption Debit 4,000,000.00
Salary and wages Debit 1,800,000.00
Finished Goods stock decreased Debit 510,000.00
Administrative overheads Debit 600,000.00
Donation Debit 310,000.00
Pollution Control exp. Debit 690,000.00
R & D Exp. Debit 1,300,000.00
Interest paid to NYDO Debit 2,950,000.00
Interest to Bank/FI Debit 70,000.00
Repair of plants Debit 230,000.00
Depreciation per tax Act Debit 432,000.00
Sales Credit 12,300,000.00
Dividend Received net of tax Credit 190,000.00
Scrap Sales Credit 140,000.00
Consulting income Credit 450,000.00
Profit of the year Debit 188,000.00
Notes:
Donation to Tax Exempted Organization is only Rs. 220,000
Required to calculate under Income Tax Act, 2058.
a) allowable pollution control expenses [3 Marks]
b) allowable research & development expenses [3 Marks]
c) allowable interest expenses [3 Marks]
d) income tax liability [6 Marks]
Ans:
Amount
1. Adjusted total income for calculation of allowable donation: (Rs.)
Net profit as per P&L account 188,000.00
Less: Dividend Exempt income. (190,000.00)
Net Assessable income (2,000.00)
Add: Total Donations in PL 310,000.00
Adjusted total income for donation 308,000.00
Maximum Allowable Donation Expenses 5% of Rs 308,000 15,400.00
Donation not allowable Rs. 310,000 – Rs. 15,400 294,600.00
Amount
2. Adjusted total income for pollution control expenses (Rs.)
Net assessable income before tax (2,000.00)
Pollution control expenses 690,000.00
Adjusted total income for calculation of pollution control expenses 688,000.00
50% of adjusted income 344,000.00
Pollution control expenses disallowed for calculation of Income Tax = 346,000 346,000.00
( Rs. 6,90,000 – Rs. 3,44,000)
3. Adjusted total income for calculation of allowable Research & Development Amount
Expenses (Rs.)
Net assessable income before tax (2,000.00)
Research & Development Expenses 1,300,000.00
Adjusted total income for research & development 1,298,000.00
50% of adjusted income Rs. 1,298,000.00 649,000.00
Research & development expenses not allowable Rs. 1,300,000 – Rs. 649,000 = Rs.
651,000
Amount
4. Adjusted total income for Interest expenses Rs. (Rs.)
Net Assessable income as per P&L a/c (2,000.00)
Interest paid to NYCO- exempt organization 2,950,000.00
(considering as NSS Pvt. Ltd. an associate of NYCO)
Adjusted Taxable Income for computation of Interest expenses in PL 2,948,000.00
50% of Adjusted Taxable Income for Computation of allowable Interest 1,474,000.00
Interest expenses not allowable = Rs. 2,950,000 – Rs. 1,474,000 1,476,000
5. Computation of Income Tax Liability
Amount
Total taxable income (Rs.)
Net profit as per as per P&L a/c 188,000.00
Less: Dividend income exempt from tax 190,000.00
Profit as per P/L (2,000.00)
Add: Interest not allowable 1,476,000.00
Pollution control not allowable 346,000.00

Research & development 651,000.00
Donation not allowable 294,600.00
Total Taxable Income 2,767,600.00
Tax Liabilities 20% of Taxable Profit 553,520.00
16. State the payments are subject to final TDS under Income Tax Act 2058? [5 Marks]
Ans:
a. Payments of dividends by a resident company to its beneficiaries.
b. Except if in conjunction with business operations, payment of rent for the lease of land or (part
of) a building and its associated fittings and fixtures.
c. Gain of payment made by a resident investment insurance company to an insured.
d. Gain of payments made to resident persons from unapproved retirement funds.
e. Payments made for interest on deposits to an individual (not related with business) by resident
banks or financial institutions.
f. Any of the above listed payments made to non-resident persons.
g. Lump sum retirement payments made by Nepal Government or an approved retirement fund to its
beneficiaries.
17. Explain the payments and TDS rates to be deducted under Income Tax Act 2058? [5 Marks]
Ans:
a. Remuneration payments
b. A resident person, when making remuneration payments to employees, must deduct TDS. TDS
should be deducted at the time of payment and must be deducted at the rate given in Annex-1 of
the Income Tax Act 2058. For detailed information regarding TDS calculation on remuneration
income, please refer to the brochure "Provision of Taxation for Remuneration Income in Income
Tax Act 2058".
c. Interest payments, natural source payments, rent payments, royalties, service fees A resident
person, when making payments for interests, natural sources, rent, royalties or service fees, must
deduct TDS at the rate of 15% of the payment. However, if interest is paid to an individual for a
deposit, debenture or government bond, only 6% TDS must be deducted.
d. Retirement payments
 A resident person, when making retirement payments, must deduct TDS at the rate of 15% of
the payment.
 When making lump sum retirement payments from HMG as well as approved retirement
funds, must deduct TDS at the rate of 6% of the gain of the payment. The gain is calculated
by deducting Rs 5 lakhs or 50% of the lump sum retirement payment, whichever is higher.
 When making retirement payment from unapproved retirement funds must deduct TDS at the
rate of 10% of the gain of the payment.
e. Dividend and Investment insurance payment
A resident company, when distributing dividend to its beneficiaries, must deduct TDS at the rate
of 5%. Similarly, an investment insurance company, when making payment to its beneficiaries,
must deduct TDS at the rate of 5%.
f. General insurance premiums
A resident person, when paying out business related general insurance premiums, must deduct
TDS at the rate of 1.5% of the insurance premium.
g. Business contracts
A resident person must withhold TDS at the rate of 1.5% of the contractual amount for contracts
above Rs. 50,000.

Value Added Tax (VAT)
18. Goodwill Ltd. has purchased a motorcycle from a VAT registered dealer and paid Rs. 10,000 as
VAT. Goodwill Ltd. wants to take input credit of Rs. 10,000 as per section 17 of the Act. But the tax
officer contends that as per rule 41 of VAT Rules, only 40% of the VAT paid i.e. Rs. 4,000 can be
claimed. Give your opinion with regards to this transaction by citing the provision of Section 17 and
Rule 41. [5 Marks]
Ans:
As per section 17 of the Act, a registered person can offset the amount of tax he has collected against
the tax he had paid or due in importing or receiving goods or services related to his own taxable
transactions. But no offset or only a partial offset shall be granted in the case of the goods that can be
used for personal purposes as well as for business purposes like Automobiles.
Similarly as per Rule 41 of VAT Rules, Tax on the Automobiles shall be deducted only to the extent
of 40 percent of purchase value. But as per the explanation provided to this rule, the term
'automobile' means any motor vehicle with three or more wheels used on a road for carriage of
passengers.
In the given case, a motorcycle has been purchased and as per the explanation to Rule 41, it does not
fall within the ambit of definition of Automobile. Hence full credit of VAT paid i.e. Rs. 10,000 can
be claimed and it is well within the provision of both section 17 and Rule 41.
19. What are the special provisions relating to Tax Payer Registration under VAT Act, 2052. [5 Marks]
Ans:
As per section 10 of VAT Act 2052, any person willing to do business transaction should apply to the
tax officer in prescribed format for the registration prior to the start of business transaction. If the
business transaction of any person becomes taxable or if any person does the business of hardware,
sanitary, furniture, fixture, furnishing, automobile, motor parts, electronics, marble and colour lab, he

should apply to tax officer in prescribed format for registration within 30 days of becoming taxable
or startion such business.
However the person dealing in tax exempt goods and services is not required to get registration
under the Act.
As per section 10 (Ka) of VAT Act, 2052, a tax payer operating business of temporary nature. i.e.
Exhibitions, Fair etc can get such events temporarily registered under this Act before start of such
event for which the assessing officer can ask for security deposit.
Such tax payer can transport the goods to and fro. The tax payer will have to furnish the full details of
transactions in prescribed formats and pay VAT (tax) in full within 7 days of completion of such
event and should cancel the temporary registration.
20. Answer the following: [5*5=25 Marks]

a) What is VAT?
b) What is the principle of taxation at destination?
c) VAT is a multipoint taxation system. Will it not escalate prices of the goods?
d) What is Taxable Turnover under VAT?
e) What shall be the fine and penalty chargeable under the following situations as per VAT Act, 2052?
i) Late payment of VAT amount.
ii) Tax plate not kept/misplaced.
Ans:
a)
VAT is a consumption tax, charged on most goods and services traded for use or consumption in the
country. It is levied on the "value added" to the product at each stage of production and distribution. The
"value added" means the difference between the cost of inputs into the product / service and the price at
which it is sold to the consumer. VAT is charged when VAT-registered (taxable) businesses sell to other
businesses (B-2-B) or to the final consumer (B-2-C). VAT is intended to be "neutral" in that businesses
are able to reclaim any VAT that they pay on goods or services. Ultimately, the final consumer should be
the only one who is actually taxed. Businesses are given a VAT identification number and have to show
the VAT charged to customers on the invoices.
b)
Taxation at destination means that the supplies are in principle taxed in the place where the goods arrive
or where the recipient of the services is located. Compared to the origin system, the main feature is that
VAT revenues accrue directly in the consumption at the rate of 13%, exemptions and conditions.
c)
Input tax credit/ set off of tax paid on purchases will eliminate double taxation and cascading, thereby, it
will reduce the cost of production. A dealer will not add the tax paid on purchase to the value of a
commodity as tax paid is passed on to the buyer, ultimately to be borne by the consumer. In the existing
sales tax system, sale price includes tax paid under the Act, but under VAT, sale price does not include
tax paid under the Act. Hence, a dealer will not fix the sale price taking into account the tax paid on
purchases. There is provision for set off of tax paid if the goods are exported or sold in course of inter-
state trade and commerce.
c)
Taxable turnover means the turnover on which the dealer is liable to pay tax. Taxable turnover is
determined after making the following deductions from the Gross turnover:
(a) the turnover of goods exempt from tax
(b) the turnover of sale of goods outside the territory of Nepal.
(c) All amounts allowed as cash discount, or trade discount
(d) Cost of outward freight by a dealer for transportation of goods for the purchases.
(e) In case of works contract, the expenditure incurred towards labour and service.

d)
i. Late payment of VAT amount.
Additional fee:
On late payment of VAT amount to Inland Revenue, additional fee of 10% annually shall be imposed on
payable VAT amount (Section 19 (2)).
Interest
On late payment of VAT amount to Inland Revenue, 15% annual interest shall be imposed in such
outstanding amount. (Section 26).
ii. Tax plate not kept/misplaced.

As per section 29(1) if tax plate is not kept, penalty @ 2000 per week shall be charged and if it is not
kept at prescribed place, penalty @ 1000 shall be imposed.
21. Answer the following questions

a. What are the records to be maintained by a registered person dealing in used or second hand
materials? How the tax is assessed in such case? Answer with reference to the Value Added Tax
Rules, 2053. [5 Marks]
b. Explain about the ―Tax Periods‖ under the Value Added Tax Act/Rules. [5 Marks]
c. Describe the circumstances beyond the control under the Value Added Tax Act, 2052. [10 Marks]
d. State the conditions, procedures for and effect of cancellation of registration under Value Added
Tax Act/Rules. [5 Marks]
e. Mercantile Business House. deals in computer & related IT technology business. In the course of
its business, it received service from Chinese Mercantile LLP., China. Key against which,
Chinese Mercantile LLP. raised bill of Rs. 50 lakhs. Management of Mercantile Business House
is confused as to whether VAT shall be charged on same. Advise him as regards to VAT
applicable on same and net payment to be send. Specify the provision of VAT Act, 2052 in this
regards. (Ignore other taxes, if applicable). [5 Marks]
Answer
a) As per rule 33 of Value Added Tax Rules, 2053, following are the provisions regarding records to be
maintained, for a registered person dealing in used or second had goods.
1) A registered person who is dealing in used or secondhand goods has to maintain purchase register and
sales register containing the following particulars:
Relating to purchases:
i. Date of purchase
ii. Particulars giving full information of the goods
iii. Buying price excluding tax
iv. Rate of tax
v. Amount of tax
vi. Total amount paid
Relating to Sales:
i. Date of sale
ii. Selling price excluding tax
iii. Difference between the buying price and selling price
iv. Rate of tax
v. Amount of tax
vi. Total amount received.
(2) In case the buying price of every item of used goods exceeds Rs. 10,000, separate records of buying
or selling shall be maintained.

(3) In case a registered person is found not to have satisfactorily maintained the records as prescribed
above, tax officer may impose VAT on the total selling price of the goods sold by such taxpayer, and the
tax officer may issue a written order requiring him to pay such tax along with the next tax return.
(4) In case of used or second hand goods, tax shall be assessed on the amount which is difference
between the selling price and buying price. Buying price means price including taxes.
b) Tax Period means a period prescribed by the Act or Rules for calculation of net VAT
payable or receivable. Generally, a registered person has to adopt a month as per Nepali Calendar as tax
period. The tax starts from day 1st of a month and ends at end day of the same month. As per Rule 26 of
VAT Rule, 2053, the different tax periods could be adopted by certain specific taxpayers.
i. Tax Period of 2 months:

Tax period of 2 months is allowed to a taxpayer having taxable transaction during previous 12 months
more than NPR 2 million but not more than NPR 10 million. The tax period shall be, Shrawan and
Bhadra, Ashwin and Kartik, Marg and Paush, Magh and Falgun, Chaitra and Baisakh and Jestha and
Ashad. If hotel and tourism enterprises opt, the department may be allowed a tax period of 2 months.
ii. Tax period of 4 months:

Tax period of 4 months is allowed to a taxpayer who has taken the registration voluntarily and having
taxable transaction during previous 12 months less than NPR 2 million. The tax period shall be Shrawan
to Kartik, Marg to Falgun, and Chaitra to Ashad.
iii. Different tax period:

In case a registered person who maintains its accounts adopting computer systems, it may apply to a tax
officer for allowing it to adopt different tax period. In case the tax officer finds it proper, it may allow the
taxpayer to adopt different tax period.
iv. Tax period for first time of registration:

In case of a person has obtained registration at a middle of a month, the tax period shall be started from
the date on which the registration is obtained to the end of the month.
c) As per Rule 35 of Vat Rule 2053, the following circumstances shall be deemed to be circumstances
beyond control for the purpose of sub-section (4) of Section 19 of the Act:
(i) In case the person required to pay tax becomes disabled due to falling ill; up to seven days of the date
of his recovery.
(ii) In case the person required to pay tax is to observe obsequies; up to seven days of the end of the
obsequies,
(iii) In case a woman required to pay tax delivers a child; up to thirty five days of the date of delivery,
(iv) In case the person required to pay tax dies or becomes insane or disappears and his heir or guardian
submits an application within thirty five days of the date of such incident; up to seven days of receipt of
such application,
(v) In circumstances when the person required to pay tax has not been able to come to the IRO because
of the closure of a road due to floods, landslides or similar other reasons; up to seven days of opening of
the road,

(vi) In circumstances when he cannot come to the IRO due to total haltage of transport; up to the next
day of the end of such haltage.
vii. In case where the natural calamities like fire earthquake, arises; up to thirty days from the date when
such calamities occur.
In case an additional time limit shall be required to be requested due to circumstances beyond control
referred to point (ii), (iii), (iv), (v) & (vii) above ; the recommendation of the concerned Village
Development Committee or Municipality shall be submitted. While requesting for an additional time-
limit due to the circumstance referred to point no. (vi) , the recommendation of the Village Development
Committee or Municipality concerned with the place where the haltage of means of transport has taken
place, shall be submitted.
d)
Following provisions are mentioned regarding the conditions, procedures for and effect of cancellation
under Value Added Act/Rules.
Conditions for cancellation

Section 11 (1) and (1ka) mentions the following conditions for cancellation of registration;
a. In the case of body corporate, if the body corporate is closed down, sold or transferred or if the
body corporate otherwise ceases to exist
b. In the case of an individual ownership, if the owner dies
c. In the case of a partnership firm, if it is dissolved or any of the partners expires
d. If a registered person ceases to be engaged in taxable transactions
e. In case the registered person submits zero tax return continuously for one year or it has not
submitted tax return till the date
f. If registered mistakenly
In case, the person is voluntarily registered, cancellation of registration can only be done after at
least one year period has elapsed after registration.
In case the condition for de-registration is triggered and the person is willing to deregister, an
application might be filed within 30 days of such de-registration event along with the VAT
returns till such date and any VAT due.
If the tax payer has any input tax credit claimed stocks or capital assets on date of such
application, such assets are considered to be as disposed for VAT purchase. VAT should be paid
for such deemed disposed items on basis of their market value.
In case a person has applied for cancellation of its registration number has to produce its records
and documents for audit within fifteen day of the application to the tax office. The tax officer
shall audit the records and documents and within three months of the application submitted may
allow or reject the cancellation.,
Once the application for cancellation of registration is submitted as per sub-rule (1) of rule 12, tax
return shall have to be submitted until the notice of cancellation or within three months. It shall
be the responsibility of concerned tax officer to give notice to the person submitted the
application for cancellation of registration, about the cancellation, within three months of
submission of application.
e)
As per section 8 (2) of Vat Act, 2052, "Any registered / unregistered person receiving service within
Nepal from unregistered person outside Nepal, need to determine and collect Vat on taxable Value as per

provisions of this Act. Bill raised by key consultant is for Rs. 50,00,000.Thus, Taxable Value for the
VAT is Rs. 50,00,000. Thus, 13% VAT on purchase invoice Rs. 50,00,000 = Rs. 650,000 is applicable
as per section 8(2) of VAT Act. The amount to be paid to Chinese Mercantile LLC shall be
Rs.50,00,000.00 which remains unchanged with the value of service. Thus, VAT of Rs. 650,000 need to
be charged on the above service, and deposited to VAT office. The paid VAT can be claimed for set-off
under Reverse Charging System.
22. Answer the following in the light of VAT Act, 2052.

Janta Garment Factory had the following transaction in the month of Shrawan 2072. Calculate the
VAT payable/receivable from the information below:
Particulars Amount (Rs.)
Local sale 5,000,000
Export sale 10,000,000
Purchase of clothes, Stitching, Packing Materials, loose tools for machineries 8,100,000
Special packing for export 400,000
Payment of consultancy charges abroad 500,000
Purchase of bus for staff transportation 2,000,000
Purchase of motorcycle of hire purchase 400,000
Telephone expenses 76,000
Purchase of diesel for generator 80,000
Purchase of diesel for bus 24,000
Purchase of petrol for motorcycle 30,000
Purchase of computers 90,000
Purchase of soft drinks 12,000
Additional information:
Opening VAT receivable for the month was Rs. 91,560. Diesel for bus for Rs. 16,000 and soft drinks for
Rs. 6,000 was purchased through abbreviated tax invoice. Items above are exclusive of VAT.
b) Paper Press Limited is manufacturing Books & Copy. During shortage, the company imports copy
from abroad and sell it to its customers to maintain its market. The VAT accounts of paper press limited
showed the following data for fiscal year 2071/72.
Particulars Trading of Copy (import Manufacturing
purchase and sales) of Copy
A. VAT collected on sales

i From VAT registered party 17,00,000 18,00,000
ii From Non-VAT registered party 6,00,000 1,90,000
B. VAT paid on purchase 15,00,000 14,00,000
Calculate the VAT amount which Paper Press Limited is facilitated to get refund from Inland Revenue
Department.
Answer a) Calculation of VAT payable/receivable for the month of Shrawan 2072 for Janta Garment
Factory:
Amount
Particulars (Rs) VAT (Rs) Remarks
Local Sale 5,000,000 650,000 Full
Export Sale 10,000,000 - 0% for export
Total output VAT 15,000,000 650,000
Purchase of clothes, Stitching, Packing
Materials, loose tools for machineries 8,100,000 1,053,000 Full
Special packing for export 400,000 52,000 Full
Payment of consultancy charges reverse charging, assuming the
abroad 500,000 65,000 VAT is already paid.
Purchase of bus for staff transportation 2,000,000 104,000 only 40% allowed
Purchase of motorcycle of hire
purchase 400,000 52,000 Full
Telephone expenses 76,000 9,880 Full
Purchase of diesel for generator 80,000 10,400 Full
Abbreviated Tax Invoice not
Purchase of diesel for bus 24,000 1,040 allowed
Purchase of petrol for motorcycle 30,000 0 Not allowed Rule 41
Purchase of computers 90,000 11,700 Full
Purchase of soft drinks 12,000 0 Not allowed Rule 41
Total Input tax credit 1,359,020
Calculation of VAT Payable/Receivable for the month of Shrawan 2072 Amount (Rs)
Opening VAT Receivable 91,560
Add: input VAT 1,359,020
Less: output VAT 650,000
Net Receivable 800,580
b) As per Schedule 1 of VAT Act 2052, 50% of VAT collected on sale of own produced paper by
domestic paper company, if sold to VAT registered person shall be refunded as prescribed by IRD. Paper
Press Limited cannot enjoy VAT refund on Trading of copy. On its manufacturing sales, it can have
following VAT refund:
VAT collected from sales to VAT registered party (out of manufactured Copy) = Rs. 18,00,000. VAT
Refund ( 50% of it) = Rs. 900,000. Thus, Paper Press Limited can claim against Rs. 900,000 VAT
Refund.
23. State with reason whether the following statements are True or False.[10 Marks]
i) A person shall apply for the registration of VAT in the format prescribed in Schedule – 3 of
VAT Regulation, 2053.
ii) A shopkeeper can issue abbreviated tax invoice for the transaction upto Rs.10,000.
iii) A registered person shall preserve all the VAT records upto 6 years.
iv) A separate record for purchase and sale shall be maintained for the used goods which have
purchase price more than Rs. 20,000.
v) Government organizations shall take VAT bill purchasing goods and services above Rs. 5,000.
vi) The rate of VAT for the import of goods and services will be same as VAT applicable for the
purchase of goods and services in Nepal.
vii) In the case of purchase and sale of land and building, VAT is not applicable.
viii) In the case of import of goods from USA, the place of transaction is USA.
ix) A foreign tourist can take refund of VAT on the purchase of goods amounting to Rs. 15,000 or
more.
x) VAT will not applicable in cable car service.

b) Sanjog Pvt. Ltd. has following transactions during the month of Baisakh, 2072, find the amount
of VAT credit available for the month of Jestha:
Amount (Rs.)
Opening Credit available 12,000
Purchases net of VAT 10,00,000
Salary for the month 1,50,000
Electricity expenses 10,000
Telephone expenses with VAT 13,560
Fuel expenses with VAT 28,250
Purchase of car with VAT 11,30,000
Purchase of office supplies net of VAT 1,50,000
Total sales for the month 15,00,000
Additional information:
All the sales of the company were VAT applicable. Out of office supplies Rs. 20,000 purchased
by taking abbreviated tax invoice. In purchases, Rs. 375,000 is import of raw material and
customs office has valued these goods Rs. 450,000. Fuel expenses consists expenses for petrol
used for office vehicle. [6 Marks]
c) A dealer manufactured goods worth Rs. 10 million which were exempt under schedule I of VAT
Act out of the goods purchased partly VAT exempt and partly goods liable to VAT. VAT exempt
goods amounting to Rs. 7 million were used for the production of goods which were exported.
The Dealer claims that all the exports were zero rated and he should get full credit for VAT on
exempted goods. Consider his claim and to set off the VAT paid by him on the inputs. [4 Marks]
Answer No 16
a) State with reason whether the following statements are True or False.
a) False. Application for VAT registration shall be filed in the format prescribed in Schedule – 1
of VAT Regulation, 2053.
b) False. Abbreviated tax invoice can be issued by the shopkeeper for the transaction upto Rs.
5,000.
c) True. VAT records shall be preserved by registered person for 6 years (Rule 23(7) of VAT
Regulation, 2053)
d) False. Separate record shall be maintained for used goods costing Rs. 10,000 or more.
e) True. As per Rule 56 of VAT Regulation, Government organizations shall take VAT bill for
the purchases more than Rs. 5,000.
f) True. Same rate of VAT shall be applicable to import and local purchases.
g) True. Land and building is included in Schedule – I of VAT ACT.
h) False. In case of goods import in Nepal, customs entry point will be the place of transaction.
i) True. As per section 25Ka of VAT Act, tourists can take refund of VAT on the purchase of
goods amounting to Rs. 15,000 or more.
j) False. VAT is applicable in Cable car service as it is excluded in Schedule – I of VAT Act.
b)
Calculation of VAT Credit Available for Jestha, 2072
Amount (Rs.)
VAT collected in Sales 195,000
VAT Credit on Input:
VAT paid on purchases 139,750
VAT paid on telephone expenses 1,560
VAT credit available on car 52,000
VAT paid on office Supplies 16,900 210,210

Net VAT Credit for the month 15,210
Add: Opening credit available 12,000
Opening VAT credit available for the month of Jestha 27,210
Note:
1. VAT paid on purchases:
Local purchase (1,000,000-3,75,000)*13% 81,250
Import (450,000*13%) 58,500
Total VAT paid on purchases 139,750
2. Credit available on Car purchase
Total VAT paid 130,000
40% credit available 52,000
3. Credit available on VAT paid on Office Supplies
Total Office supplies Net of VAT 150,000
Less: Purchased by taking Abbreviated Tax invoice 20,000
Credit available on office supplies purchase 130,000
VAT Credit on office supplies (13% of Rs. 130,000) Rs. 16,900
4. VAT credit cannot be claimed in the purchases of petrol.
c)
No Vat is collectible on the sale of the goods whether those goods are sold locally or exported if
those goods are exempt under schedule I. Since the goods are listed in schedule I, according to
section 5(3) of VAT Act, the exports of those goods are not entitled to zero tax facility under
schedule II.
As per Section 5(3), no deduction or refund is applicable with regard to VAT paid on goods used
for VAT exempt transaction. Hence, the dealer cannot claim any input VAT paid on the
purchases against his export sale also in this case.
24. Ginger Cellular Ltd., a cellular mobile Phone Set producing domestic enterprise, is engaged in
producing and selling of cellular mobile phone sets. As a tax expert, Ginger Ltd. seeks your advice
on the refund of VAT paid on purchase of its raw materials. Give your opinion on this.[5 Marks]
Ans:
As per clause 20 of Schedule 1 of the VAT Act, sixty percent of the VAT paid on purchases of
mobile sets by importer or 60% of the VAT paid on raw materials for producing mobile sets, shall be
refunded by the Inland Revenue Department on producing evidence that the mobile sets are sold. The
procedure of the refund shall be as prescribed by Inland Revenue Department.
In the case given, Ginger cellular is a cellular mobile set producing company, so 60% of VAT paid it
on purchase of raw materials shall be refunded by IRD if it can produce the evidence that the
produced mobiles are sold.
25. Ms. Amita is a proprietor of a VAT registered firm. For the month of Shrawan 2067, she has
collected VAT of Rs. 200,000 which she has to deposit within 25th Bhadra. But on Bhadra 10,2067,
she has delivered a baby boy due to that she could not deposit the VAT amount within Bhadra 25.
The tax officer wants to levy additional fee of 10% per annum on her. She has submitted an
application to Director General IRD on Bhadra 26, 2067 for waiver of additional fee levied by the tax
officer as the nonpayment of VAT was due to the circumstances beyond her control. Can DG waive
that additional fee levy imposed by the tax officer? Give your opinion. [5 Marks]
Ans:
As per rule 35 of the VAT Rules, In case a woman required to pay tax delivers a child; up to thirty
five days of the date of delivery is considered as circumstances beyond the control. Further, as per
Rule 36 of VAT Rules, For the remission of the additional charges pursuant to sub-section (4) of
Section 19 of the Act, an application shall be submitted to the Director General within thirty days of

the expiry of time-limit prescribed for payment of tax. In case an application is not submitted within
the time-limit referred, the waiver of additional charges shall not be granted.
In this case, she has made an application within the limit mentioned in Rule 36. So applying the
provision of section 19(4) of the Act which states " If a taxpayer applies to the Director General for
the exemption of the additional charges levied due to nonpayment of VAT within time stating the
reason that the failure to make a timely payment was caused by extraordinary circumstances beyond
the taxpayer's control, the Director General may, if he finds the reason reasonable, exempt such
charges. The Director General after the necessary verification of the matter can waive the additional
fee levied.
26. What are the records to be maintained by registered dealer dealing in used or second hand materials?
[5 Marks]
Ans:
As per Rule 33 of the VAT Rules, a registered person who is dealing in used or secondhand goods has to
maintain the purchase register and sales register containing the following information:
Related to Purchases:
 Date of Purchase
 Particulars giving full information of the goods
 Buying price excluding tax
 Rate of tax
 Amount of tax
 Total amount paid.
Related to Sales:
 Date of sale
 Selling price excluding tax
 Difference between the buying price and the selling price
 Rate of tax
 Amount of tax
 Total amount received
In case the buying price of every item of used goods exceeds Rs. 10,000, separate records of
buying or selling shall be maintained.
Failure to maintain the above records satisfactorily may attract the tax officer imposing VAT on
the total selling price of the goods sold by such taxpayer and the tax officer may issue a written
order requiring him to pay such tax along with the next tax return.
27. Discuss the provision of Debit and Credit Note in VAT Rules. [5 Marks]
Ans:
When a person issues an invoice for supply of goods or services, but after the invoice is issued it is
required to change the value as mentioned in the invoice due to any reason, the person has to issue
debit note or credit note for such changes in value of the goods. Rule 20 of VAT Rules has not
prescribed any format for debit and credit note but the debit or credit note must include the following
information:
 Serial Number of the debit or credit note
 Date of issue
 Name, address and registration number of supplier
 Recipient's name, address and registration number if he is a registered person.
 Number and date of the tax invoice connected with the transaction.
 particulars of the goods or services and reason of issuing the credit or debit note
 Amount debited or credited.
 Tax Amount debited or credited.

The tax payer has to keep a copy of such debit or credit note received or issued. The taxpayer has
to maintain a register for recording monthly details of debit note or credit note received or issued
during the month.
Indian Income Tax

28.
a) PQR Ltd., a manufacturing company, purchases a factory building (constructed on a leasehold land)
on May 6, 1998 for Rs. 20 Lacs (prior to this the company used the same building as a tenant for
about 5 years). The building is compulsorily acquired by the Government on April 20, 2015 for which
a sum of Rs. 60 Lacs is paid as compensation on March 14, 2015. Compute the amount of capital gain
chargeable to tax for the assessment year 2014-15 taking into consideration the following information
:
On April 1, 2009, the company owns two buildings (rate of depreciation 10 percent) one of which is
acquired by the Government during 2009-10. The depreciated value of the block on April 1, 2009 is
Rs. 21.35 Lacs. The company purchases a factory building (constructed on a leasehold land) on April
6, 2010 for Rs. 15 Lacs. Will your answer differ if the factory building is purchased on March 31,
2010? [10 Marks]
b) The Head Office of PQ, a Hindu Undivided Family (HUF), is situated in Hong Kong. The family is
managed by Q (Since 1980) who is resident in India in only 3 out of 10 years preceding the previous
year 2009-10 and he is present in India for more than 729 days during the last 7 years. Determine the
residential status of the family for the assessment year 2014-15 if the affairs of the family's business
are (a) wholly controlled from Hong Kong, (b) partly controlled from India. [5 Marks]
c) Mr. Ravi Shankar is employed as a senior executive of GoodBrain Ltd. GoodBrain Ltd. offers rights
to its existing shareholders in the ratio of 1:1 on February 15, 2014 at Rs. 150 per share. Mr. Ravi
Shankar was offered 500 shares at Rs.150 each, which he accepted. Mr. Ravi Shankar wants to know
the tax consequences of this transaction for the AY 2014-15. Advise Mr. Ravi Shankar. [5 Marks]
Ans.
a) Rs.
Sale consideration 6,000,000
Less:
Cost of acquisition as per sec. 50 being the depreciated value of the
Block as on April 1, 2015. 2,135,000
Short Term Capital Gain 3,865,000
Less:
Exemption u/s 54D
(Since the taxpayer has purchased a factory building within 3 years
From March 15, 2010, exemption is available u/s 54D, the exemption
Being Rs. 15 Lacs. 1,500,000
Short term capital gain chargeable to tax for AY 2014-15 2,365,000
If the asset is purchased On March 31,2015.
The amount of capital gain will be reduced if the new building is purchased in the previous year
2014-15.The building is purchased on March 31, 2015, then as per sec. 50, the cost of acquisition
of the building acquired by the Government will increase and the capital gain shall be determined
as follows:
Rs.
Sale Consideration 6,000,000
Less:
Cost of acquisition as per section 50(Being the depreciated value of
The block on April 1, 2015 and cost of building purchased during
2014-15, i.e. 21.35 Lacs + 15 Lacs) 3,635,000
Short Term Capital gain 2,365,000
Less:
Exemption under section 54D 1,500,000
Short Term Capital Gain 865,000
b)
(a) If the affairs of a HUF are controlled from a place outside India, the family will be nonresident.
Accordingly, PQ HUF will be nonresident for the assessment year 2014-15.
(b) If the affairs of the family business are partly controlled from India during the previous year
2009-10, the HUF will be resident in India. However, it would be ordinarily resident in India if
Karta satisfies the following two conditions:
 He has been resident in India in at least 2 out of 10 years preceding the previous year.
 He has been present in India for at least 730 days during seven years preceding the
previous year.
As the karta is resident in India in 3 out of 10 years preceding the previous year and he has been
present in India for at least 730 days during seven years preceding the previous year, the family
would be resident and ordinarily resident in India for the assessment year 2014-15.
(c) The value of any benefit provided by a company free of cost or at a concessional rate to its
employees by way of allotment of shares, debentures or warrants, directly or indirectly under the
Employees Stock Option Plan or Scheme of the said company is chargeable to tax in the hands of
the recipient. In this case, all the shareholders are offered right shares at the rate of Rs.150 and

Mr.Ravi Shankar also paid Rs.150 per share. Therefore, there is no concession given to him and
hence Ravi Shankar need not to pay any tax in this transaction.
29.
a) State with reasons whether the following statements are true or false: [7×2Marks=14]
i) Indian Resident Individuals are not single type of resident as per Income Tax Act, 1961.
ii) Income earned from sale of electricity by local authority beyond own territory is tax exempt as per
Sec. 10(20) of Income Tax Act, 1961.
iii) Indian tax is not levied in couple based option.
iv) Mr. X entered into India on October 2 and stayed 300 days continuously, so he is resident.
v) There are 2 blocks for the purpose of depreciation of building as per Income Tax Act, 1961.
vi) Indexation facility is availed in case of finding short-term capital gain as per Income Tax Act, 1961.
vii) Encashment of leave during tenure of service is not taxed as per Income Tax Act, 1961.
b) What is Demerger as per Income Tax Act? [6 Marks]
Ans.29
a)
i. True: Indian resident individual has two categories: i) resident and ordinarily resident in India; and ii)
resident, but not ordinarily resident in India.
ii. True: Income earned from supply of water or electricity by a local authority within or outside its own
jurisdictional area shall be exempt as per Sec. 10(20) of Income Tax Act, 1961.
iii. False: According to Sec. 64 of Income Tax Act, 1961, clubbing can be done in case of spouse, where
the remuneration to spouse is paid by a concern in which such individual has a substantial interest.
iv. False: Mr. X stayed 181 days in first previous year and 119 days in second previous year. He is non-
resident for both income year, even his stay is higher than 182 days altogether.
v. False: Actually there are 3 building blocks for depreciation- having depreciation rate of 5%, 10% and
100%.
vi. False: As per Sec. 48, indexation facility is availed in case computation of long-term capital gain
only.
vii. False: Encashment of leave is fully taxable in case it is paid during the service, but can be claimed
for relief.
b)
Demerger, in relation to the companies ,means transfer, pursuant to a scheme of arrangement under
section 391 to 394 of the companies Act 1956, by a demerged company of its one or more undertakings
to the resulting company in the following manner:
 All the property of the undertaking being transferred by the demerged company, becomes the
property of the resulting company.
 All the liabilities relatable to the undertaking being transferred by the demerged company, becomes
the liabilities of the resulting company.
 The property and the liabilities of the undertaking being transferred by the demerged company are
transferred at values appearing in its books of account immediately before the demerger. For this
purpose, any change in the value of assets consequent to their revaluation shall be ignored.
 The resulting company issues shares to the shareholders of the demerged company on a proportionate
basis as a consideration for demerger.

 The shareholders holding not less than three- fourths in value of the shares in the demerged company
( other than the shares already held therein immediately before the demerger, or by a nominee for, the
resulting company or its subsidiary) become shareholders of the resulting company.
 The transfer of the undertaking is on a going concern basis.
 The demerger is in accordance with the conditions, if any, notified under section 72A(5).
As per the Income tax act 1961, accumulated losses and unabsorbed depreciation in case of demerger can
be carried forward and set off as specified under sec. 72 A (4) and (5)
30.
a) Define "Previous Year" with section as per Income Tax Act, 1961. [2 Marks]
b) What will be the Assessment Year in the following cases: [2×1=2 markss]
i) Mrs. Pintu let out house @ 15,000/- per month on 01.09.2014.
ii) Mr. Kumar starts his new business on 01.10.2015
c) Determine the status of the following under section 2(31) of the Income Tax Act: [6×1=6Marks]
i) Mr. Rahul Gupta, a manager in a Private Company.
ii) Calcutta University
iii) Life Insurance Corporation of India
iv) A Joint Hindu Undivided Family of Mrs. & Mr. Baid and their son and daughter.
v) Zindal Industries Ltd.
vi) Raheja Group Housing Co-operative Society
Ans.
a) As per section 2 (34) of Income Tax Act, 1961, previous year has been defined in section 3. Previous
year means the financial year, a period between April 1 to 31st of March next year, immediately
preceding the Assessment year.
b) Assessment year would be

(1) 2014 – 15
(2) 2015 – 16
c)
(i) Individual
(ii) Artificial Juridical Person
(iii) Company
(iv) A Hindu Undivided Family
(v) Company
(vi) An association of persons
31. Answer the following with reference to the Indian Income Tax Act, 1961.
a) Which are the incomes exempted under section 11? [3 Marks]
b) How would you determine the residential status of a company? Can a company be not ordinarily
resident in India? [3 Marks]
Ans:
a) The following incomes of a religious or charitable trust or institution are not included in the total
income:
i. Income from property held under trust wholly for charitable or religious purposes.
ii. Income from property held under trust which is applied in part only for charitable or religious
purposes.
iii. Income from property held under trust which is applied for charitable purposes outside India.
iv. Voluntary contributions forming part of corpus.
The above incomes of a religious or charitable trust will be exempted provided it complied the other
relevant provisions of Income Tax Act, 1961.
b) As per section 6(3), a company is said to be a resident in India in any previous year if:
i. It is an Indian company, or
ii. During the relevant previous year, the control and management of its affairs is situated wholly in
India.
Excepting individual and HUF, all other persons are classified either as resident or non-resident. They
are not to be further classified as ordinary resident or as not ordinary resident. Therefore, a company
cannot be not ordinarily resident in India.
***

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REVISION TEST PAPER:

CAP-II: ADVANCED ACCOUNTING

Accounting for Departments

RTP-CAP II –2015-December @ICAN Page 1 of 153

Hire Purchase Transactions

Issue of Shares and Debentures

RTP-CAP II –2015-December @ICAN Page 2 of 153

Underwriting of Shares and Debentures

RTP-CAP II –2015-December @ICAN Page 3 of 153

Profit or Loss Pre and Post Incorporation

Liquidator’s Final Statement

Accounting for Partnership

Accounting for Banks

Category Amount Rs.

RTP-CAP II –2015-December @ICAN Page 7 of 153

You are informed that:

Nepal Accounting Standards

c. A company is in a dispute involving allegation of infringement of patents by a competitor company who is

RTP-CAP II –2015-December @ICAN Page 8 of 153

Write Short Notes

RTP-CAP II –2015-December @ICAN Page 9 of 153

Accounting for Departments

Memorandum Trading Account

Calculation of insurance claim

1,50,000 1,25,750 1,50,000 1,25,750

Accounting for Branches

Particular Newroad Thimi Kapan Gwarko Total

ii). Calculation of invoice of goods received from HO by all branches

iii) Calculation of profit margin on goods sent to the branches

iv). Valuation of stock at cost price

Hire Purchase Transactions

Working Note: 1 Calculation of value of closing HP stock

Issue of Shares and Debentures

RTP-CAP II –2015-December @ICAN Page 12 of 153

1.5.2007 Bank A/c Dr. 15,000,000

1.6.2007 Debenture Application A/c Dr. 15,000,000

1.6.2007 Underwriting Commission A/c Dr. 400,000

1.6.2007 Bank A/c Dr. 4,600,000

30.9.2007 Debenture Interest A/c Dr. 1,000,000

30.10.2007 15% Debentures A/c Dr. 12,000,000

31.3.2008 Debenture Interest A/c Dr. 750,000

1. No. of Shares applied by Mr. Subash = (240,000/200,000) x 4,000 = 4,800

Underwriting of Shares and Debentures

RTP-CAP II –2015-December @ICAN Page 14 of 153

(b) Computation of amounts payable by underwriters

(c) In the Books of Kathmandu Ltd.

Cash and Bank Account for the period

Liabilities Rs. Assets Rs.

Average stock= Cost of goods sold/stock velocity

(iv) Fixed assets:

(v) Closing stock:

Big Star Ltd. Account

Equity Share Holders Account

RTP-CAP II –2015-December @ICAN Page 17 of 153

2. Net Assets for purchase consideration

Balance Sheet of Pokhara Light Ltd. (and reduced)

RTP-CAP II –2015-December @ICAN Page 19 of 153

Profit or Loss Pre and Post Incorporation

6. Calculation of gross profit = sales – cost of goods sold = 468,00,000-327,60,000 = 140,40,000

Accounting for Partnership

72,000 96,000 78,000 72,000 96,000 78,000

Partners’ Capital Accounts

RTP-CAP II –2015-December @ICAN Page 22 of 153