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PRIME/45th PT/IPC 1
PRIME ACADEMY 45th SESSION – IPC - PROGRESS TEST – ACCOUNTING
SUGGESTED ANSWERS PART – A
1. In the books of Puri Suri in Account Current with Puri
(interest to 31st March,2011@10%p.a.)
2. Calculation of Average Due Date (Taking 3rd March, 2012 as base date)
Date of bill 2012
Term Due date 2012
Amount No. of days from the base date i.e. 3rd March,2012
Product (INR) (INR) (INR)
29th January 20th March 12th July 10th August
1 month 2 months 1month 2 months
3rd March1 23rd May 14th Aug.2 13th Oct
5,000
4,000
7,000
6,000 22,000
0
81
164
224
0
3,24,000
11,48,000
13,44,000 28,16,000
Average due date = Base date + Days equal to Sum of Products Sum of Amounts = 3rd March, 2012 = 28,16,000 22,000 = 3rd March, 2012 + 128 days = 9th July, 2012
PRIME A
CADEMY
PRIME/45th PT/IPC 2
3. Journal Entries
4. Statement showing differences between Hire Purchase and Instalment System
` `
(i) Equity share Capital A/c. To Equity Stock To 12% Fully Convertible Debentures (Being conversion of 2 lakh equity shares of INR 10 each into stock of INR 1,00,000 and balance as 12% fully convertible debentures as per resolution dated…)
(ii) Equity Share Capital A/c (INR 2.50) (iii) To Equity Share Capital A/c (INR 10) (iv) (Being consolidation of 40 lakh shares of INR
2.50 each into 10 lakh shares of INR 10 each as per resolution dated…)
(iii) 11% Preference Shares Capital A/c (INR 50) To 11% Preference Share Capital A/c (INR 10) (Being subdivision of 10 lakh preference
shares of INR 50 each into 50 lakh shares of INR 10 each as per resolution dated…)
(iv) 12% Preference Share Capital A/c
To 14% Preference Share Capital To 12% Non-cumulative Preference Share Capital (Being conversion of 12% preference shares of
INR into 14% preference shares of INR 300,000 and 12% non cumulative preference shares of INR 200,000 as per resolution dated…)
Dr. Dr. Dr. Dr.
20,00,000
100,00,000
500,00,000
500,000
1,00,000
19,00,000
100,00,000
500,00,000
3,00,000 2,00,000
Basis of Distinction Hire Purchase Instalment System
1. 2. 3. 4.
Governing Act Nature of Contract Passing of Title (ownership) Right to Return goods
It is governed by Hire Purchase Act, 1972. It is an agreement of hiring. The title to goods passes on last payment. The hirer may return goods without further payment except for accrued instalments.
It is governed by the Sale of Goods Act, 1930. It is an agreement of sale. The title to goods passes immediately as in the case of usual sale. Unless seller defaults, goods are not returnable. The seller can sue for price if the buyer is in default. He cannot take possession of the goods.
PRIME A
CADEMY
PRIME/45th PT/IPC 3
5. Calculation of total Interest and Interest included in each instalment Hire Purchase Price (HPP) = Down Payment + instalments = 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000 Total Interest = 1,80,000 – 1,50,000 = 30,000 Computation of IRR (considering two guessed rates of 6% and 12%)
Year Cash Flow DF @6% PV DF @12% PV
0 30,000 1.00 30,000 1.00 30,000
1 50,000 0.94 47,000 0.89 44,500
2 50,000 0.89 44,500 0.80 40,000
3 30,000 0.84 25,200 0.71 21,300
4 20,000 0.79 15,800 0.64 12,800
NPV 1,62,500 NPV 1,48,600
Interest rate implicit on lease is computed below by interpolation:
Interest rate implicit on lease = 6% + 162,500 – 150,000 x (12- 6) = 11.39% 162,500 148,600
= 6 % + 12.500 x 6 = 11.39% 13,900
5. 6. 7. 8. 9.
Seller’s right to repossess Right of Disposal Responsibility for Risk of Loss. Name of Parties involved Component other than cash price.
The seller may take possession of the goods if hirer is in default. Hirer cannot hire out sell, pledge or assign entitling transferee to retain possession as against the hire vendor. The hirer is not responsible for risk of loss of goods if he has taken reasonable precaution because the ownership has not yet transferred. The parties involved are called Hirer and Hire vendor. Component other than Cash Price included in instalment is called Hire charges.
The buyer may dispose off the goods and give good title to the bona fide purchaser. The buyer is responsible for risk of loss of goods because of the ownership has transferred. The parties involved are called buyer and seller. Component other than Cash Price included in Instalment is called Interest.
PRIME A
CADEMY
PRIME/45th PT/IPC 4
Thus repayment schedule and interest would be as under: Instalment
Instalment no.
Principal at beginning
Interest included in each instalment
Gross amount Instalment Principle at end
Cash down 1,50,000 1,50,000 30,000 1,20,000
1 1,20,000 13,668 1,33,668 50,000 83,668
2 83,668 9,530 93,198 50,000 43,198
3 43,198 4,920 48,118 30,000 18,118
4 18,118 2,064 20,182 20,000 182*
30,182*
Ledger Accounts in the books of Happy Valley Florist Ltd. Van Account
Date
Particulars
INR Date Particulars
INR
1.4.2010 1.4.2011 1.4.2012 1.4.2013
To Ganesh Enterprises
To Balance b/d
To Balance b/d
To Balance b/d
1,50,000
1,50,000
1,35,000
1,35,000
1,21,500
1,21,500
1,09,350
1,09,350
31.03.2011
31.03..2012
31.03.2013
31.03.2014
By Depreciation A/c
By Balance c/d
By Depreciation A/c
By Balance c/d
By Depreciation A/c
By Balance c/d
By Depreciation A/c
By Balance c/d
15,000
1,35,000
1,50,000
13,500
1,21,500
1,35,000
12,150
1,09,350
1,21,500
10,935
98,415
1,09,350
PRIME A
CADEMY
PRIME/45th PT/IPC 5
Ganesh Enterprises Account
Date Particulars ` Date Particulars `
1.4.2010 31.03.2011 31.03.2012 31.3.2013 31.3.2014
To Bank A/c To Bank A/c To Balance c/d To Bank A/c To Balance c/d To Bank A/c To Balance c/d To Bank A/c
30,000 50,000 83,668
163,668
50,000 43,198
93,198
30,000 18,118
48,118
20,000
20,000
1.4.10 31.03.11 1.4.11 31.03.12 1.4.12 31.3.13 1.4.13 31.3.14
By Van A/c By Interest c/d By Balance b/d By Interest A/c By Balance b/d By Interest A/c By Balance b/d By Interest A/c
1,50,000 13,668
1,63,668
83,668 9,530
93,198
43,198
4,920
48,118 18,118 1,882*
20,000
*Balanced due to approximation in interest calculations.
PRIME A
CADEMY
PRIME/45th PT/IPC 6
PART - B 1.
(i) Profit & Loss Account
INR (for nine months)
INR (for three months
INR (for nine months)
INR (for three months)
To Depreciation To Net profit
6,000
35,700
41,700
3,000
10,900
13,900
By Profit (W.N.1)
41,700
41,700
13,900
13,900
Profit & Loss Appropriation Account
INR (for nine months)
INR (for three months
INR (for nine months)
INR (for three months)
To Partners’ capital A/cs Ramu Shamu Raju To Ramu’s Executor A/c (W.N.2) -
15,300 10,200 10,200
35,700
- 3,043 3,044
4,813 10,900
By Net Profit
35,700
35,700
10,900
10,900
(ii) Partners’ Capital Accounts as on 1st October, 2009
Ramu (`)
Shamu (`)
Raju (`)
Ramu (`)
Shamu (`)
Raju (`)
To Drawings To Ramu’s Executors A/c To Balance c/d
9,000
-
55,276
64,276
9,000
-
55,276
64,276
By Balance b/d By Reserves By Goodwill∗ (W.N.3) By Fixed Assets∗∗ By Profit & Loss Appropriation A/c
30,000
6,000
36,114
9,000
15,300
96,414
20,000
4,000
24,076
6,000
10,200
64,276
20,000
4,000
24,076
6,000
10,200
64,276
PRIME A
CADEMY
PRIME/45th PT/IPC 7
(iii) Partners’ Capital Accounts as on 31.12.2009
Shamu (`)
Raju (`)
Shamu (`)
Raju (`)
To Drawings To Goodwill To Balance c/d
3,000
42,133
75,441
1,20,574
3,000
42,133
75,442
1,20,575
By Balance b/d By Cash By Profit & Loss Appropriation A/c
55,276 62,255
3,043
1,20,574
55,276 62,255
3,044
1,20,575
(iv) Ramu’s Executors’ A/c as on 31.12.2009
(`) (`)
To Bank
92,227
92,227
By Balance b/d By P&L Appropriation A/c
87,414
4,813
92,227
(v) Cash & Bank A/c
` `
To Balance b/d To Shamu’s capital A/c To Raju’s capital A/c
1,951
62,255
62,255
1,26,461
By Ramu’s executors A/c By Partners’ Capital A/cs (Drawings): Ramu Shamu Raju By Balance c/d
92,227
9,000 12,000 12,000
1,234 1,26,461
Working Notes: 1. Profit for the year before depreciation
INR
INR Profit after depreciation Add: Depreciation Profit before depreciation
46,600 9,000
55,600
As per section 37 of the Partnership Act, in case of settlement of deceased partner’s account on the date other then the date of death, the executor of deceased partner has a choice to take Either-
PRIME A
CADEMY
PRIME/45th PT/IPC 8
2. Profit earned on un-settled capital = Profit x Unsettled capital as on 1.10.09 Total capital as on 1.10.09
= 10,900 x 87,414 (87,414 + 55,276 + 55,276) = 10,900 x 87,414 = INR 4,813 1,97,966
Or- a) Interest on capital @ 6% i.e. INR 87,414 × 6% × 3/12 = INR 1,311 Option A is beneficial, therefore heirs of Ramu will opt for proportionate share of profit i.e. INR 4,813. 3.
3. Valuation of Goodwill: Weighted Average Profit = 2,52,800 = ` 42,133
6 Goodwill = 2 years’ purchase of average profit = ` 42,133 × 2 = ` 84,266.
2. a) Memorandum Trading Account for the period 1st April, 2013 to 30th Sept. 2013
` `
To Opening Stock To Purchases Less: Advertisement (2,500) Cost of goods taken by proprietor (20,000)
To Wages To Gross Profit [20% of Sales)
1,20,000 2,40,000
2,17,500
70,000 62,000
4,69,500
By Sales By Consignment stock By Closing Stock (Bal. fig.)
3,10,000 18,000
1,41,500
4,69,500
` Weight Product
Profit for 2006 2007 2008
30,000
40,000
47,600
1,17,600
1 2 3 6
30,000
80,000
1,42,800
2,52,800
PRIME A
CADEMY
PRIME/45th PT/IPC 9
Statement of Insurance Claim
`
Value of stock destroyed by fire Less: Salvaged Stock Insurance Claim
1,41,500 (27,000) 1,14,500
Note: Since policy amount is less than claim amount, average clause will apply. Therefore, claim amount will be computed by applying the formula Claim= Insured value × Loss suffered Total cost Claim amount = INR 60,689 (1,14,500 x 75,000/ 1,41,500)
b) In the books of M/s Bull & Bear
Investment Account for the period from 1st December 2012 to 1st March, 2013 (Scrip: 12% Debentures of M/s. Wye Ltd.)
Working Notes: (i) Cost of 12% debentures purchased on 1.12.2012 ` INR 101) = 10,10,000 Add: Brokerage (1% of INR 10,10,000) = 10,100 Less: Cum Interest (10,000 x 100 x12% x 2/12) = (20,000) Total = 10,00,100 (ii) Sale proceeds of 12% debentures sold on 31st March, 2013 INR
INR 106) = 10,60,000 Less: Brokerage (1% of INR 10,60,000) = (10,600) Less: Cum Interest (10,000 x 100 x12% x 5/12) = (50,000) Total = 9,99,400
PRIME A
CADEMY
PRIME/45th PT/IPC 10
c) Statement showing pre and post incorporation profit for the year ended 31st March, 2014
Particulars
Total Amount `
Basis of Allocation
Pre incorporation `
Post Incorporation `
Gross Profit Less: Depreciation Director’s Fees Preliminary Expenses Office Expenses Selling Expenses Interest to vendors Net Profit (` 33,000 being preincorporation profit is transferred to capital reserve Account)
5,40,000
1,23,000 50,000 12,000 78,000 72,000
5,000
2,00,000
2:7
1:2 Post Post
1:2 2:7
Actual
1,20,000
41,000 - -
26,000 16,000
4,000
33,000
4,20,000
82,000 50,000 12,000 52,000 56,000
1,000
1,67,000
Working Notes:
1. Sales ratio The sales per month in the first half year were half of what they were in the later half year. If in the later half year, sales per month is Re.1 then it should be 50 paise per month in the first half year. So sales for the first four months (i.e. from 1 INR 2 and for the last eight months (i.e. from 1st August, 2013 to 31st March, 2014) will be (2 × .50 + 6 × 1) = INR 7. Thus sales ratio is 2:7.
2. Time ratio 1st April, 2013 to 31st July, 2013 : 1st August, 2013 to 31st March, 2014 = 4 months : 8 months = 1:2 Thus, time ratio is 1:2.
3. Gross profit Gross profit = Net profit + All expenses = INR 2,00,000 + INR ( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000) = INR 2,00,000 +INR 3,40,000 = INR 5,40,000
3.
a) Purchase consideration computation ` Cash payment for (3,00,000 x INR 2.5) 7,50,000 Equity Shares (4,50,000 x INR 15) 67,50,000 ----------------- 75,00,000 -----------------
PRIME A
CADEMY
PRIME/45th PT/IPC 11
In the books of Srishti Ltd. Realisation Account
Equity Shareholders A/c
9% Debentures Account
` `
To realisation Account 500,000 By Balance b/d 500,000
Anu Ltd.
` `
To realisation Account 75,00,000 By Share capital By Bank A/c.
67,50,000 750,000
` `
To Goodwill To Tangible Fixed Assets To Stock To Debtors To Cash & Bank A/c (2,80,000- 25,000) To Cash & Bank A/c (Realization expenses) To Profit on realization transfer to shareholders
5,00,000 30,00,000
10,40,000
1,80,000 2,55,000
25,000
31,00,000
81,00,000
By 9% Debentures By Creditors By By Anu Ltd. (Purchase consideration)
5,00,000
1,00,000 75,00,000
81,00,000
` `
To To To
Preliminary expenses Equity Shares in Anu Ltd. Cash & Bank A/c
50,000
67,50,000
7,50,000
75,50,000
By Equity Share Capital By Export Profit Reserves By General Reserves By P & L A/c By Realization A/c
30,00,000
8,50,000
50,000
5,50,000
31,00,000
75,50,000
PRIME A
CADEMY
PRIME/45th PT/IPC 12
Journal Entries in the books of Anu Ltd.
A. Debtors as on 31.3.2008 = INR 1,40,000 Credit period allowed = 2 months i.e. Debtors as on 31.3.2008 is standing for credit sales of February and March 2008 Credit sales per month = INR 1,40,000 /2 = 70,000 Credit sales for the year 2007-2008 = INR 70,000 × 12 = 8,40,000
Add: Cash sales = 8,400, 00 × 25 / 75 = INR 2,80,000 Total sales of the company for the year ended 31.3.2008 INR 11,20,000 Closing balance of Sundry Debtors = INR 6,30,000 Closing provision for doubtful debts to be maintained @ 10%
= INR 63,000 Less: Opening Provision for doubtful debts = INR 51,000
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CADEMY
PRIME/45th PT/IPC 13
Additional provision to be maintained = INR 12,000
Journal Entry
INR INR
Profit and Loss A/c Dr. To Provision for doubtful debts (Being additional provision on doubtful debts maintained @ 10%)
12,000 12,000
1 2 3 4 5 6
Business Purchase A/c To Liquidator of Srishti Ltd (Being business of Srishti Ltd. taken over) Tangible Fixed Assets Stock Debtors Cash & Bank A/c Goodwill A/c (Bal. fig.) To Provision for doubtful debts To Liability for 9 % Debentures To Creditors To Business Purchase account (Being assets and liabilities taken over) Amalgamation Adjustment A/c To Export Profit Reserves (Being statutory Reserves taken over) Goodwill To Bank A/c (Liquidation expenses reimbursed)) Liquidator of Shristi Ltd. To Equity Share Capital To Securities Premium To Bank A/c (Being purchase consideration discharged) Liability for 9% Debentures ( 5,00,000 x 120/100) Discount on issue of debentures To 8% Debentures (6,00,000 x 100/96) (Being liability of debenture holders’ discharged)
Dr. Dr Dr Dr Dr Dr Dr. Dr. Dr. Dr.
75,00,000
60,00,000 7,10,000 1,80,000 2,55,000
10,64,000
8,50,000
50,000
75,00,000
6,00,000
25,000
75,00,000
9,000 6,00,000 1,00,000
75,00,000
8,50,000
50,000
45,00,000 22,50,000
7,50,000
625,000
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CADEMY
PRIME/45th PT/IPC 1
PRIME ACADEMY 45th SESSION – IPC - PROGRESS TEST – BUSINESS LAWS, ETHICS & COMMUNICATION
SUGGESTED ANSWERS
1. a) Creditors of a company can challenge on the ground that the company was formed with an intention to
defraud creditors on the principle of lifting the corporate veil in the given situation and promoters held personally liable (Gilford Motor Co Ltd Vs Horne)
b) Ethics and Morals Moral is derived from a Greek word “mos” meaning “custom”. Custom means behavior developed by a group over a period of time. It generally work on a smaller scale addressing human needs. Ethics is derived from the Greek word “ethos” meaning “character”. Ethics follow from personally accepted principles.
c) A director is absolved of the liability for false statement in the prospectus only on the following two grounds Sec 35(2)(a) & 35 (2) (b) (i) having consented to become a director of the company, he withdrew his consent before the issue of the
prospectus, and that it was issued without his authority or consent; or (ii) The prospectus was issued without his knowledge or consent, and that on becoming aware of its issue,
he forthwith gave a reasonable public notice that it was issued without his knowledge or consent. However if it is proved that a prospectus has been issued with an intent to defraud the applicants for the securities of a company or for any other fraudulent purpose, even the above grounds are not available and all the persons responsible for the issue become liable. Hence in the given situation as the director cannot escape the liability citing he relied on the promoters ‘Statements, if he has given his consent to the issue of the prospectus.
d) 1. Nature of ethical decisions
Ethical decisions should be made in groups and should be made public. Such decisions will include diverse interests and views. It makes the decision making process reliable and removes unfair biases , if any.
2. Integration of ethical programs Management practices should integrate programs for ethics management. and includes ethical values preferred in the workplace while developing “value statements” of the organization. Personnel policies should be designed on the basis of ethical values, which the enterprise considers important.
3. Atmosphere of trust encourages the employees to report ethical violations they observe. Companies may outsource this function by having an outside consultant.
4. Update policies and procedures regularly to bring preferred code of conduct. Job descriptions, performance appraisal forms, checklists, budget report formats and other control documents should be regularly updated.
5. Grievance policy should be developed which will help employees in settlement of disputes with supervisors and staff.
6. Top level management should show their commitment to ethical values and principles by following the same in their conduct. They should encourage ethical behavior of employees and punish any sort of unethical behavior. They should bring ethical principles and guidelines into actions. They must ensure that employees who report unethical behavior are protected and are not treated partially.
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PRIME/45th PT/IPC 2
e) Definition of Abridged Prospectus: An abridged prospectus means a memorandum containing such salient features of a prospectus as may be prescribed by SEBI by making regulations in this behalf. [Sec.2(1) of Companies Act, 2013]
Prospectus for securities is a bulky document. It is not economically feasible to supply full prospectus to all prospective investors. Hence, provision for issue of abridged prospectus has been made to reduce cost of issue.
As Per Sec. 33 (1) of the Companies Act, 2013, 1. Meaning of Abridged Prospectus: According of Section 2 (1) of the Companies Act, 2013, an abridged
prospectus means a memorandum containing such salient features of a prospectus as may be specified by the SEBI by making regulations in this behalf.
2. Abridged prospectus to be issued along with application form: Section 33 (1) of the Companies Act, 2013 states that no application form for the purchase of any of the securities of a company can be issued unless such form is accompanied by an abridged prospectus. The abridged prospectus and application form should bear the same printed number. The investor may detach the share application form along the perforated line, after he has had an opportunity to study the contents of this abridged prospectus. The objective of the abridged prospectus is to reduce the cost of issue as the detailed prospectus is a very bulky document whereas the contents of abridged prospectus are limited. However, under sub section (2) a copy of the prospectus shall, on a request by any person before the closing date of the subscription list and the offer, be furnished to him. Penalty for failure to comply with sub section (3) can be fine of up to Rs 50,000 for each fault.
3. Circumstance under which the abridged prospectus need not accompany the application forms: in terms of the Proviso to Section 33 (1) an abridged prospectus need not accompany the application form it it is shown that the form of application was issued: (i) In connection with a bona fide invitation to a person to enter into an underwriting agreement with
respect to such securities or; (ii) Where the securities are not offered to the public.
2. (a) Exemption for rights issue:
Non-applicability of Sec.62 Offer of subsequent issue of shares to existing equity shareholders does not apply to – Increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company to convert such debentures or loans into shares of the company or to subscribe for shares in the company provided the terms containing such an option – (i) Have been approved by the Central Government before the issue of debentures or raising of loans or is in conformity with the rules made by the Government; (ii) Have been approved by a special resolution passed in the general meeting before the issue of debentures or raising of loans in cases where the debentures have not been issued to or loans raised from the Government or any institutions specified by the Government; (iii) Include conversion of part or whole of the debentures issued to or loans raised from the Government into shares of the company, in pursuance of a direction issued by the Central Government in public interest on such terms and conditions as appear to be fair and reasonable to the Central Government, even if the terms of such debentures/loans do not contain a term providing the option for conversion of debentures/loans into shares of the company.
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PRIME/45th PT/IPC 3
(b) Rights and duties for calls paid in advance a. Calls paid in advance do not entitle additional voting rights to the shareholders. b. The shareholder is entitled to interest on calls paid in advance if authorised by the Articles. c. Calls paid in advance are not refundable. d. On winding up, shareholders who have paid calls in advance are entitled to return of excess amount
paid with interest before payment to other shareholders. e. The power to receive calls in advance is to be exercised in the interest of the Company. f. The company may pay dividend in proportion to the amount paid on shares, if authorised by the Articles
(Sec 51).
3. (a) Forged transfer is a nullity- comment.
Forged Transfer It is a transfer deed on which the signature of the transferor is forged. The consequences of forged transfer are: a. Transferor’s Rights
• A forged transfer is a nullity and it does not confer any legal title upon the transferee. • The true owner can have his name restored on the register of members. b. Transferee’s Claim
If the Company has issued a share certificate to the transferee on a forged transfer and he has sold these shares to an innocent buyer, the buyer gets no right to be registered as a shareholder. In such a case, he can claim damages from the Company on the ground that he acted on the share certificate of the Company.
c. Company’s Claim If the Company has been put to a loss by reason of the forged transfer, it may recover the loss from the person who procured the registration, even though he might have acted in good faith.
(b) Ethics is derived from a Greek word “ethos” meaning “character”. Ethics follow from personally accepted principles.
Ethics is neither a science nor law. Social sciences can guide us in making ethical decisions. But they do not provide solutions for all problems. Adherence to legal framework does not mean that it is fully ethical. Business ethics provides the guidance to handle ethical issues arising from business environment. It is a set of principles governing the conduct of business – both at the individual and collective level by the application of ethical reasoning to specific business situations and activities.
4. (a) OPC should get itself converted into a Private Co. or Public Co. in the following circumstances
i. Where the paid up capital exceeds Rs. 50 lakhs or ii. Where the average annual turnover for the past 3 Financial Years exceeds Rs. Two crores. iii. Where the Balance sheet total exceeds Rs.1 crore Within 30 days, the OPC shall give notice of its conversion to the ROC.
(b) Types of Debentures WHICH A PUBLIC COMPANY CAN ISSUE: On the basis of transferability
A public company can issue only Registered debentures and not Un –registered Debentures.
Registered They are debentures payable to registered holders. A holder whose name appears
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CADEMY
PRIME/45th PT/IPC 4
Debentures both on the debenture certificate and in the Company’s Register of Debenture holders as required u/s 152., is a registered debenture holder.
On the basis of security
Secured Debentures Debentures, which create some charge on the property of the Company* are called secured debentures or mortgage debentures.
Unsecured Debentures
Also known as Naked Debentures, these debentures do not create any charge on the assets of the Company and holders of these debentures are ordinary unsecured creditors.
On the basis of convertibility 1. Convertible debentures
Fully convertible : They are debentures that are converted into equity shares of the Company at the time of redemption, at the option of the holder. Convertible debentures should be approved by a special resolution in General Meeting.
Partly convertible : It consists of two parts – convertible and non-convertible. The convertible portion is convertible into equity shares at the expiry of specified period, whereas the non-convertible portion is redeemable at the expiry of certain period.
2. Non-Convertible Debentures They are debentures which do not confer any option on the holder to convert them into equity shares and which are redeemable at the expiry of a specified period. On the basis of priority
1. First Debentures They are debentures, which are to be repaid in priority over other debentures.
2. Second Debentures Debentures, which are to be repaid after the first debentures have been redeemed, are called Second Debentures.
Whenever debentures are issued by a company it shall create a Debenture Redemption Reserve (DRR) out of the profits or Free Reserves of the company and such a reserve shall not be utilised for any purpose other than redemption of debentures.
4. (a) CSR Mechanism:
Key Strategies which Companies can use while implementing CSR policies. 1. Mission, Vision and Value statements
When CSR is regarded as and integral part of business decision making, it finds an important place in the Mission, Vision and Value documents of the company. These statements state a company’s goals, aspiration and also provide an insight into company’s values, culture and strategies. The mission or vision of a socially responsible business will be beyond “making profits” and specifies its commitment to society and various other stakeholders.
2. Culture Values There must be a commitment to close the gap between what the company says it stands for and the reality of its actual performance. Goals and aspirations should be ambitious but care should be exercised that it does not go beyond the cultural values of the society.
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3. Structure of management Many companies have taken steps to create a system for identifying key CSR issues, evaluating and developing a structure for long term integration of social values by transferring to a CSR committee or a group of executives. Such management structure should suit the company’s mission, size, culture, business structure, geographic locations, risk areas and level of CSR commitment.
4. Strategic planning Companies are beginning to incorporate CST into their long term planning processes, identifying specific goals and measures of progress of the organization.
5. General accountability Every single person in the organization is accountable and one major step in implementing CSR is making them to realize their accountability and by this way company can make a good progress in achieving CSR.
6. Employee recognition and rewards Companies can encourage employees, who voluntarily accept CSR in their area and who make an active participation by recognizing and rewarding them suitably.
7. Communication, Education and Training Communication, education and training of employees in corporate social responsibility will enhance the knowledge and decision making processes of the employees. Companies are developing a code of conduct for managers and employees to guide them in achieving CSR.
8. CSR Reporting Companies have understood the importance of assessing their performance of CSR activities on a regular basis. Annual CSR reports help the company to achieve this and build trust among stakeholders. It also encourage the internal efforts of the company to comply with its CSR goals.
(b) Nomination of Shares : Sec. 72
i. Every shareholder or a debenture holder may nominate at any time, a person to whom his shares or debentures should devolve in the event of his death. The nomination will be in the prescribed form.
ii. In case of joint holdings, the joint holders may together nominate a person to whom such share or debentures should devolve in case of death of all the joint holders.
iii. Where the nominee is a minor, then the holder of shares or debentures may make the nomination to appoint a person to become entitled to shares in or debentures of, the Company, in the event of his death, during the minority.
iv. Where a nomination has been made in accordance with the provisions of this section, and such
nomination has not been cancelled or varied, such nominee shall automatically become entitled to such shares or debentures, in the event of death of the shareholder or debenture holder, and in case of joint holdings, in the event of death of all joint holders.
v. Where the nominee elects to be registered as a member, then he shall send to the Company a notice in writing conveying his decision, accompanied by the death certificate of the deceased shareholder or debenture holder, as the case may be.
6. (a) Companies Limited by Guarantee – Sec.2 (21)
It is a Company, where the liability of the members is limited by Memorandum to such an amount which the members undertake to contribute to the assets of the Company, in the event of it being wound up. The Articles of such a Company must state the number of members with which it is registered. Liability of shareholders:
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i. Company limited by guarantee without share capital To the extent of guarantee
ii. Company limited by guarantee with share capital To the extent of guarantee plus unpaid liability on share capital
(b) Not disclosing the facts that the dividends were paid only out of capital profits and not out of trading profit
is a material mis-statement at hence the allottee of the shares in the firm ease can have all the rights available for mis-statement in prospectus ( rights against the company -35 and rights against the person responsible for the issue both under Sec 34 and sec 35). I. CRIMINAL LIABILITY – Sec. 34 When the prospectus issued, distributed or circulated under chapter III of the Act includes any statement which is untrue or misleading in from or content or in which there is any inclusion or omission of any matter which is likely to mislead, every person who has authorised such an issue shall be liable c/s 447 II. CIVIL LIABILITY – Sec. 35 The allottee can seek cancellation of the contract of Allotment of securities either from the Company itself and seek damages from directors and others responsible for the issue.
7. (a) Ecological Ethics The problems of pollution and other environmental issues have affected the ecological system, in which we live in. An ecological system is an interrelated and interdependent set of organisms and environments. For Eg. A lake has fishes which depend on small aquatic organisms and the small aquatic organisms, in turn depend on the waste of fish for their food. Thus, the activities of one part of eco system affect its other parts. Business firms and other social institutions are a part of the larger ecosystem. They satisfy their energy and power needs from the natural environment and dispose their wastes into it. The business firms need to identify their responsibilities towards the environment and strive to protect it. They need to carry out their activities in such a way that they do not pollute the environment or damage it by the release of toxic and hazardous residues and wastes. Ecological ethics deals with the protection of the environment. It is concerned with the issues that arise out of exploitative human nature and attitude. Business organizations have to understand the interrelationships and interdependencies of the ecological system. They should satisfy themselves that their activities do not seriously injure the ecological system. (b) Conditions for buy-back of shares: (Power of company to Purchase its own shares). A company may purchase its own share or other securities out of its free reserves or out of the balance in securities premium account or out of the proceeds of a fresh issue. The following conditions apply: 1. The buyback is authorised by the company’s articles. 2. If the buyback is for 10% or less of the paid up capital plus free reserves, Board approval alone would
be sufficient. 3. If it is more than 10%, approval of shareholders by way of a special resolution is necessary. 4. The amount used for buyback cannot exceed 25% of the paid up capital plus free reserves in any
financial year. 5. Debt equity ratio after the buyback shall not exceed 2:1. 6. All the shares or other securities selected for buy back should be fully paid up. 7. SEBI guideline are to be followed for listed companies. 8. Not more than one buy back is allowed in one financial year.
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9. The explanatory statement issued at the time of giving notice for the meeting shall contain full details about the buy back.
10. The buyback shall be completed within a period of one year from the date of the passing of special resolution.
11. Buy back may be for buy-back of securities from the open market or from existing holders or by purchasing securities issued to employees.
12. A declaration of solvency* signed by atleast two directors one of whom shall be the MD (if any), is to be filed with the ROC.
13. Company shall destroy such share or security certificate bought back within a period of 7 days. 14. The company shall not resort to any fresh issue (or) allotment of shares (or) other specified securities
(except bonus shares, sweat equity shares, conversion of warrants, stock option schemes, bonds, preference shares and debentures into shares) for a period of six months.
15. Register for buy-back should be maintained by the company. 16. Return to be filed with ROC (and also with SEBI for listed companies). 17. Whenever such buy back is done through its own shares or free reserves or share premium, an
equivalent amount shall be transferred to CRR – Sec. 69. 18. Prohibition of buyback in certain cases:
a) Buy back of securities through subsidiary company or through investment companies b) If default is made in repayment/payment of interest on FDs / Debentures / Term Loans / Preference
shares c) The restriction will not apply if the default is remedied and a period of 3 years has lapsed after such
remedy. 19. To enable purchase of its own shares, the company should not have committed any default with
respect to payment of dividend or filing of annual return or filing of its financial statements (As contained in Sections 123, 127, Sec 92 & Sec 129 respectively.
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PRIME/45th PT/IPC 1
PRIME ACADEMY 45th SESSION – IPC - PROGRESS TEST – COST ACCOUNTING AND FINANCIAL MANAGEMENT
SUGGESTED ANSWERS
PART - A
1 2 3 4 5 6 7 8 9 10 11 12 13
B C D C B C B C A B B D D
14 15 16 17 18 19 20 21 22 23 24 25 B D D D A C D B B B B A
PART - B 1.
Particulars 16,000 units 40,000 units
Sales @ `30 p.u. 480,000 1,200,000 Less: profit
loss @ 10 per unit (160,000) 320,000
Total costs 640,000 880,000
16000 units = 640,000 40,000 units = 880,000 Variable cost p.u, = 8.80L-6.40L
40K - 16K
= `10
Fixed cost = 6,40,000 - 10(16,000)
= ` 480,000 `
Sales 30 Variable costs -10 Contribution 20 PVR = 66.67%
(i) Break even (`) = Fixed Costs / PVR = 4.80Lakhs/.6667 =` 7,20,000 (ii) Profit at sales of 50,000 units = 50,000 x 20 (-) 4,80,000 = ` 5,20,000 (iii) Minimum production = Avoidable fixed costs / contribution p.u = (4.80L – 1.50L )/20 =
16,500 units
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2.
Contract No.999 Account for the year ended 31st March 2017
Particulars ` Particulars `
To balance b/d – Work Certified 1,200,000.00 By Work in Progress – Work Certified 3,500,000.00
– Work Uncertified 20,000.00 – Work Uncertified 40,000.00
To Material at Site b/d 15,000.00 By Materials Returns – Stores 30,000.00
To Material issued 500,000.00 – Supplier 20,000.00
To Materials directly purchased 160,000.00 By Balance c/d - Material at site 30,000.00 To Wages (7,00,000 + 20,000 – 10,000) 710,000.00
To Drawings and Maps 60,000.00 To Sundry Expenses 15,000.00 To Electricity Charges 25,000.00 To Plant Hire Charges 60,000.00 To Sub–Contract Cost 20,000.00 To Notional Profit – balancing
figure 835,000.00 Total 3,620,000.00 Total 3,620,000.00
Particulars ` Particulars ` To Profit & Loss A/c – transfer (Note b)
417,500.00 By Notional Profit b/d 835,000.00
To Reserve Profit c/d – balancing figure
417,500.00
Total
835,000.00 Total 835,000.00
Note:
(a) Percentage of Completion = Work Certified
3,500,000.00
= 70%
Contract Price =
5,000,000.00
(b) So, Profit transferred to P&L A/c =
2 /3 x Notional Profit x Cash Received / Work Certified =
2 /3 x 835000 * 75% = 417,500.00
Contractee's A/c
Particulars ` Particulars `
To balance c/d (bal. figure)
2,625,000.00 By balance b/d (80% of Work Certified on Opening Date) 900,000.00
By Bank [75% of ( 35,00,000 – 12,00,000)] 1,725,000.00
Total 2,625,000.00 Total 2,625,000.00
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3. Process a/c
Particulars units Amount ` Particulars units Amount `
To opening stock
8,000 75000 By Normal loss
9,500 47,500
To materials 182,000 737,500 By abnormal loss
4,500 28,800
To labour
338800 By closing stock 18,000 109,800
To overheads
169,400 By transfer 158,000 1,134,600
182,000 1,320,700
190000 1,320,700
Step 1: Input output statement ` Opening stock 8,000 Add: Input 182,000
Total input 190,000 Less: Closing stock 18,000
Processed production 172,000 less: Normal loss 9,500
Expected output 162,500 Actual output 158,000
Abnormal loss 4,500
Step 2:Units introduced, completed and transferred =transfer (-) opening stock = 1,58,000-8000 =1,50,000 Step 3: Statement of Equivalent units
Item units Materials Labour & Overheads
Opening stock 8,000 0% - 40% 3,200 Units introduced, completed & transferred 150,000 100% 150,000 100% 150,000 Closing stock 18,000 100% 18,000 70% 12,600 Normal loss 9,500 0% - 0% - Abnormal loss 4,500 100% 4,500 80% 3,600
172,500
169,400
Step 4: Cost per equivalent units
Materials ` Labour & Overheads
Cost 737,500 508,200 Additional materials
Less: Normal Loss realizable price (47,500) Net cost 690,000 508,200
Equivalent units 172,500 169,400 Cost per equivalent units 4.00 3.00
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Step 5: Statement of valuation ` Units transferred
Opening stock 75000 + (3200x3) 84,600 Units introduced, completed & transferred 1,50,000x(4+3) 1,050,000
1,134,600
Closing stock =(18,000x4) + (12,600 x3) 109,800 Normal loss at realizable value 47,500 Abnormal loss =(4,500x4) + (3,600 x3) 28,800
4. Calculation of earnings for workers under different incentive plans:
(i) Halsey’s Premium Plan Worker-A Worker-B
Actual time taken 40 hours 40 hours
Standard time for actual production (176 pcs × 15 min)/60 min = 44 hours
(140 pcs × 15 min)/60 min = 35 hours
Minimum wages 40 hours × 40 = 1600 40 hours × 40 = 1600
Bonus 50% (44-40) × 40 = 80 No bonus
Earning 1680 1600
Rowan’s Premium Plan:
Minimum wages (as above) 1600 1600
Bonus (4/44)×40×40 = 145.45 No bonus
Earning 1745.45 1600
(ii) Taylor’s differential Piece Rate
Efficiency (176/160)×100=110% (140/160)×100=87.5%
Earning 10×120%×176 pcs = 2112 10×80%×140 pcs = 1120
Emerson’s efficiency Plan
Time wages 40×40 hours = 1600 40×40 hours = 1600
Bonus (20%+10%) of (40×40) = 480
20% of 1600 = 320
Earning 2080 1920
5.
Profit as per Cost Accounts
-3,47,000
S.no: Item Financial a/cs Cost a/cs +/- Dr(-)/cr(+) Product Difference
(i) Factory overheads 1,40,000 1,00,000 + - - 40,000 (ii) Administration overheads 40,000 1,00,000 - - + 60,000 (iii) Depreciation 3,25,000 2,75,000 + - - 50,000 (iv) Interest on investments 96,000 0 + + + 96,000 (v) Income Tax 54,000 0 + - - 54,000 (vi) Transfer fees 24,000 0 + + + 24,000 (vii) Interest on loan 2,45,000 0 + - - 2,45,000 (viii) Stores adjustment 14,000 0 + + + 14,000 (ix) Dividend received 32,000 0 + + + 32,000
Profit as per Financial Accounts
-5,10,000
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Memorandum Reconciliation a/c ` `
To Net loss as per Cost accounts 3,47,000 By Administration overheads over–
absorbed 60,000
" Factory overheads under–absorbed
40,000 " Stores adjustment 14,000
" Income tax 54,000 " Interest on investments 96,000
" Depreciation under charged 50,000 " Transfer fees 24,000
" Interest on loan funds 2,45,000 " Dividend received 32,000
" Net Loss as per Financial a/cs 5,10,000
7,36,000
7,36,000
6. (i)
a) Material price variance = AQSR - AQAR = (205600 x 4.20) – (205600 x 4.50) = 61680 (A)
b) Material usage variance = SRSQ - SRAQ = (4.20 x [40960 x 5]) – (4.20 x 205600) = 204800 – 205600 = 3360 (A)
c) Material cost variance = SRSQ - ARAQ = (40960 x 21) – (205600 x 4.50) = 65040 (A)
(ii) Labour variances a) Labour cost variance = SRSQ - ARAQ
= (40,960 X 9) – 3,87,840 = 19,200 (A) b) Labour rate variance = AHSR - AH x AR
= (1,21,200 x3) – (1,21,200 x 3.20) = 24,240 (A) c) Labour efficiency variance = SRSH – SRAH
= [3 x (40,960 x 3)] – (3 x 1,21,200) = 5,040 (F) d) Total factory overhead variance = Standard fixed Factory overhead for actual Production – Actual factory overhead
= (40,960 x 3 x 1.20) – 1,00,000 = 47,456 (F)
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PRIME ACADEMY 45th SESSION – IPC - PROGRESS TEST – TAXATION
SUGGESTED ANSWERS PART – A
1. A non-resident is chargeable to tax in India in respect of following incomes:
(i) Income received or deemed to be received in India; and (ii) Income accruing or arising or deemed to accrue or arise in India.
In view of the above provisions, taxability of income is determined in following manner:
2. Mr. Dey is a resident in A.Y.2016-17 and A.Y.2017-18 since he has stayed in India for a period of 365
days (more than 182 days) during the P.Y.2015-16 and P.Y.2016-17, respectively.
As per section 6(6), a person will be “Not ordinarily Resident” in India in any previous year, if such person: (a) Has been a non-resident in 9 out of 10 previous years preceding the relevant previous year; or (b) Has during the 7 previous years immediately preceding the relevant previous year been in India
for 729 days or less. If he does not satisfy either of these conditions, he would be a resident and ordinarily resident. In the instant case, applying the above, the status of Mr. Dey for the previous year 2015-16 (A.Y. 2016-17) will be “Resident but not ordinarily resident”. For the previous year 2016-17 (A.Y. 2017-18) his status would continue to be Resident but not ordinarily resident since he was non-resident in 9 out of 10 previous years immediately preceding the previous year and also had stayed for less than 729 days in 7 previous years immediately preceding the previous year. Therefore, his status for A.Y. 2016-17 – “Resident but not ordinarily resident” A.Y. 2017-18 – “Resident but not ordinarily resident”
3. As per section 2(10), "Average Rate of tax" means the rate arrived at by dividing the amount of
income-tax calculated on the total income, by such total income. Section 2(29C) defines "Maximum marginal rate" to mean the rate of income-tax (including surcharge on the income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, AOP or BOI, as the case may be, as specified in Finance Act of the relevant year
S. No.
Particulars (in lacs)
(i) (ii) (iii) (iv) (v)
Amount received from an Indian domestic company for providing technical knowhow in India is deemed to accrue or arise in India and is, therefore, taxable in India. Conducting the feasibility study for the new project in Finland for the Indian firm is not taxable in India as the income accrues outside India since such study is done for a business outside India. Income received from a non-resident for use of patent for a business in India is taxable in India as it is deemed to accrue or arise in India. Income received from a non-resident Indian for use of knowhow for a business in Singapore. It is not taxable in India since it does not accrue or arise in India nor is it deemed to accrue or arise in India, Income received for supply of manuals and designs for the business to be established in Singapore is not taxable in India Total Income
5
Nil
4
Nil
Nil
9
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4. Perquisite value for housing loan: The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India (SBI) as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it. This rate should be applied on the maximum outstanding monthly balance and the resulting amount should be reduced by the interest, if any, actually paid by him.
“Maximum outstanding monthly balance” means the aggregate outstanding balance for loan as on the last day of each month. The perquisite value for computation is 10% - 6% = 4%
Perquisite Value of Air Conditioners
Chargeable perquisite in the hands of Mr. Badri for the assessment year 2017-18
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5. Advance Salary: Advance salary is taxable when it is received by the employee, irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed. Section 89(1) provides for relief in these types of cases. Loan or Advance against salary: Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified instalments, the loan amount cannot be brought to tax as salary of the employee. Similarly, advance against salary is different from advance salary. It is an advance taken by the employee from his employer. This advance is generally adjusted against his salary over a specified time period. It cannot be taxed as salary.
PART B 1. a) Computation of taxable salary of Mr. X for A.Y. 2017-18
Particulars INR
Basic pay [(INR 20,000×9) + (INR 21,000×3)] = INR 1,80,000 + INR 63,000 Dearness allowance [10% of basic pay] Bonus Employer’s contribution to Recognized Provident Fund in excess of 12% (15%- 12% =3% of INR 2,67,300) [See Note 1 below] Taxable allowances Telephone allowance Taxable perquisites Rent-free accommodation [See Note 1 & 2 below] Medical reimbursement (INR 25,000 - INR 15,000) [See Note 4 below] Reimbursement of salary of housekeeper Gift voucher [See Note 6 below] Salary income chargeable to tax
2,43,000 24,300 21,000
8,019
6,000
44,145 10,000 12,000 10,000
378,464
Notes:
a. It has been assumed that dearness allowance forms part of salary for retirement benefits and accordingly, the perquisite value of rent-free accommodation and employer’s contribution to recognized provident fund have been worked out.
b. Where the accommodation is taken on lease or rent by the employer, the value of rent free accommodation provided to employee would be actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower.
For the purposes of valuation of rent free house, salary includes:
(i) Basic salary i.e., INR 2,43,000 (ii) Dearness allowance (assuming that it is included for calculating retirement benefits) i.e.
INR 24,300 (iii) Bonus i.e., INR 21,000 (iv) Telephone allowance i.e., INR 6,000
Therefore, salary works out to 2,43,000 + 24,300 + 21,000 +6,000 = 2,94,300. 15% of salary = 2,94,300 × 15/100 = 44,145 Value of rent-free house = Lower of rent paid by the employer (i.e. INR 1,20,000) or 15% of salary (i.e., INR 44,145). Therefore, the perquisite value is INR 44,145.
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c. Facility of use of laptop is not a taxable perquisite. d. Clause (v) of the proviso to section 17(2) exempts any sum paid by the employer in respect of
any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family to the extent of INR 15,000. Therefore, in this case, the balance of INR 10,000 (i.e., INR 25,000 – INR 15,000) is a taxable perquisite. Medical insurance premium paid by employer is exempt.
e. Conveyance allowance is exempt since it is based on actual reimbursement for official purposes. f. The value of any gift or voucher or token in lieu of gift received by the employee or by member
of his household below INR 5,000 in aggregate during the previous year is exempt. In this case, the gift voucher was received on the occasion of marriage anniversary and the sum exceeds the limit of INR 5,000.
Therefore, the entire amount of INR 10,000 is liable to tax as perquisite. Note – An alternate view possible is that only the sum in excess of INR 5,000 is taxable in view of the language of Circular No.15/2001 dated 12.12.2001 that such gifts upto INR 5,000 in the aggregate per annum would be exempt, beyond which it would be taxed as a perquisite. As per this view, the value of perquisite would be INR 5,000.
g. Premium of INR 5,000 paid by the company for personal accident policy is not liable to tax
b) As per section 2(7), assessee means a person by whom tax or any other sum of money is payable under the Income-tax Act, 1961. In addition, the term includes –
Every person in respect of whom any proceeding under the Act has been taken for the assessment of –
his income; or
the income of any other person in respect of which he is assessable; or
the loss sustained by him or by such other person; or
the amount of refund due to him or to such other person.
Every person who is deemed to be an assessee under any provision of this Act;
Every person who is deemed to be an assessee in default under any provision of this Act. Deemed Assessee
Assessee includes every person who is deemed to be an assessee under the provisions of the Act. For example, section 160(1) defines “Representative assessee”. Section 160(2) states that, every representative assessee shall be deemed to be an assessee for the purposes of the Act.
Assessee in default
A person is said to be an assessee in default if he fails to comply with the duties imposed upon him under the Income-tax Act, 1961. Suppose an employer who pays salary or other person who pays interest, commission, professional fees etc. but does not deduct tax at source and deposit into government treasury, then, he shall be deemed to be an assessee in default. Likewise, under section 218, if a person does not pay advance tax, then, he shall be deemed to be an assessee-in-default.
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2. a) Computation of Gross Total Income of Mr. X for A.Y. 2017-18
Particulars INR
Basic Salary = INR 20,000 x 10 Dearness Allowance = 50% of basic salary Gift Voucher (See Note - 1) Transfer of car (See Note - 2) Gratuity (See Note - 3) Leave encashment (See Note - 4) Uncommuted pension (INR 5000 x 2) Commuted pension (See Note - 5)
2,00,000 1,00,000
6,000 56,000 80,769
1,30,000 10,000
1,50,000
Taxable Salary /Gross Total Income 732,769
Notes:
(1) As per Rule 3(7)(iv), the value of any gift or voucher or token in lieu of gift received by the employee or by member of his household not exceeding INR 5,000 in aggregate during the previous year is exempt. In this case, the amount was received on his retirement and the sum exceeds the limit of INR 5,000. Therefore, the entire amount of INR 6,000 is liable to tax as perquisite. Note - An alternate view possible is that only the sum in excess of INR 5,000 is taxable in view of the language of Circular No.15/2001 dated 12.12.2001 that such gifts upto INR 5,000 in the aggregate per annum would be exempt, beyond which it would be taxed as a perquisite. As per this view, the value of perquisite would be INR 1,000 and gross taxable income would be INR 7,27,769.
(2) Perquisite value of transfer of car: As per Rule 3(7)(viii), the value of benefit to the employee, arising from the transfer of an asset, being a motor car, by the employer is the actual cost of the motor car to the employer as reduced by 20% of such cost for each completed year during which such motor car was put to use by the employer on a written down value basis. Therefore, the value of perquisite on transfer of motor car, in this case, would be:
The rate of 15% as well as the straight line method adopted by the company for depreciation of vehicle is not relevant for calculation of perquisite value of car in the hands of Mr. X.
(3) Taxable Gratuity
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(4) Taxable leave encashment
Note – It has been assumed that dearness allowance does not form part of salary for retirement benefits. In case it is assumed that dearness allowance forms part of pay for retirement benefits, then, the third limit for exemption under section 10(10AA) in respect of leave encashment would be INR 3,00,000 (i.e. 10 x INR 30,000) and the fourth limit INR 3,30,000, in which case, the taxable leave encashment would be INR 30,000 (INR 3,30,000 -INR 3,00,000). In such a case, the gross total income would be INR 6,32,769.
(5) Commuted Pension Since Mr. X is a non-government employee in receipt of gratuity, exemption under section 10(10A) would be available to the extent of 1/3rd of the amount of the pension which he would have received had he commuted the whole of the pension.
(6) The taxability provisions under section 56(2)(vii) are not attracted in respect of television received from colleagues, since television is not included in the definition of property therein.
b) Unrealised rent refers to the rent payable but not paid by the tenant and which the owner is also not
able to realize from the tenant. As per Explanation below section 23(1), the amount of rent which the owner cannot realize shall not be included in the actual rent while determining the annual value of the property, subject to fulfilment of following conditions prescribed under Rule 4 of the Income-tax Rules, 1962: i) The tenancy must be bonafide; ii) The defaulting tenant has vacated the property or steps have been taken to compel him to
vacate the property; iii) The defaulting tenant does not occupy any other property of the assessee; and iv) The assessee has taken all reasonable steps to institute legal proceedings for the recovery of
unpaid rent or satisfies the Assessing Officer that the legal proceedings would be useless. If the conditions mentioned above are satisfied, then, the actual rent should be reduced by the unrealized rent and thereafter, compared with the Expected rent (being the higher of fair rent and municipal value, but restricted to standard rent) for computing the gross annual value.
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As per section 25A, the unrealised rent, when realised in any subsequent year, shall be deemed to be the income chargeable under the head ‘Income from house property’ in the previous year in which such rent is realised, whether or not the assessee is the owner of the property in that previous year. A sum of 30% of the unrealized rent shall be allowed as deduction.
3. a)
i) The statement is valid. The cost of freight is excluded from the sale price where such cost is separately charged by the dealer in the invoice.
ii) The statement is not valid. Where a product is „controlled‟ and has to be sold at „controlled price‟, subsidies are granted by the Government to manufacturers to compensate the cost of production, which is usually higher than the „controlled price‟. Such subsidy will not form part of sale price.
iii) The statement is not valid. Charity / Dharmada collected by dealer will form part of sale price because so far as the purchaser is concerned, he has to pay the whole amount for purchasing the goods.
iv) The statement is not valid. Under CST Act, free of cost material supplied by buyer is not required to be added.
b) Computation of sale price under CST Act
Particulars `
Total sales Less: Goods returned by Mr. A (deductible since such goods are returned within 6 months) Goods rejected by Mr. B after six months (deductible since the period of 6 months for return of goods is not applicable in respect of rejected goods being a case of un-fructified sale) Goods returned by Mr. C (not deductible since such goods are returned after six months) Dharmada (includible while computing turnover ) Sale Price under CST Act
75,00,000 1,00,000
50,000
Nil
Nil
73,50,000
4. a) Computation of Net VAT liability of Vasudha & Co. for the year ended 31.3.2016
Particulars (`)
Input tax credit: Intra-State purchases of 1000 units raw materials [Refer Note 1] Inter-State purchases of raw materials [Refer Note 2] Import of raw materials [Refer Note 3] Purchase of Capital Goods [Refer Note 4] Other manufacturing expenses [Refer Note 5] Total input tax credit available (A) Output VAT payable: Sale of taxable goods within State [( INR 7,28,000 x 4)/104] Sale of exempted goods within State [Refer Note 6] Total VAT payable (B) Net VAT liability [VAT credit to be carried forward) [(B)-(A)]
30,000
- -
15,000 -
45,000
28,000 -
28,000 (17,000)
PRIME A
CADEMY
PRIME/45th PT/IPC 8
Notes:-
1. VAT paid on intra-State purchases is eligible for input tax credit 2,70,000 x 12.5 112.5
2. CST paid on intra-State purchases is not eligible for input tax credit. 3. Customs duty is not eligible for input tax credit. 4. VAT paid on purchase of capital goods is eligible for input tax credit. However, the same has to be spread over a period of two years 3,30,000 x 10 110 x 2
5. No input tax credit can be availed on expenses incurred on manufacturing. 6. No VAT will be payable on sale of goods exempted from levy of VAT. Further, since these goods were manufactured from the inter-State purchases of raw materials (nonvattable inputs), input tax credit is not affected. 7. VAT system allows credit in respect of purchases made during a period to be set-off against the taxable sales during that period, irrespective of when the supplies/inputs purchased are utilized/sold. Therefore, input tax credit in respect of closing stock of raw materials need not be reduced from total input tax credit available.
b) (i) Transfer of the right to use goods does not require that the goods should be owned by the person
effecting such transfer. Accordingly, sub-lease of an asset too can be taxed, unless the State Value Added Tax law provides for the levy of tax only at one stage.
(ii) Under VAT, tax paid on inputs can be set-off against the tax paid on outputs. This can happen only when both the input tax and output tax are paid to one authority. Since, central sales tax (CST) is paid on purchases made from outside the State; credit thereof cannot be allowed by the State where sale is to be made. Thus, CST is not vatable.
(iii) Tax on sale/ purchase includes a tax on supply, by way of/ as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply/ service is for cash, deferred payment or other valuable consideration. Thus, sale of food in hotel is a deemed sale liable to VAT.
(iv) Under hire purchase, VAT is payable on the date of delivery of the goods. If, for any reason the goods are returned, then refund of tax can be claimed as per the provisions of respective State VAT laws because in substance, this is a sales return. Refund can be claimed if the goods are returned within the specified period, if any, prescribed by the State VAT laws in this regard.
PRIME A
CADEMY
