PAPER 1 : ACCOUNTING - CA Study...PAPER – 1 : ACCOUNTING 3 (iii) Theft of cash of ` 5 lakhs by the cashier on 31st March, 2018 but was detected on 16th July, 2018. (iv) Company sent

PAPER – 1 : ACCOUNTING

Question No. 1 is compulsory.

Answer any four questions from the remaining five questions.

Wherever necessary, suitable assumptions may be made and indicated in answer by the

candidates.

Working Notes should form part of the answer.

Question 1

(a) First Ltd. began construction of a new factory building on 1st April, 2017. It obtained

` 2,00,000 as a special loan to finance the construction of the factory building on 1st April, 2017 at an interest rate of 8% per annum. Further, expenditure on construction of the factory building was financed through other non-specific loans. Details of other

outstanding non-specific loans were:

Amount (`) Rate of Interest per annum

4,00,000 9%

5,00,000 12%

3,00,000 14%

The expenditures that were made on the factory building construction were as follows:

Date Amount (`)

1st April, 2017 3,00,000

31st May, 2017 2,40,000

1st August, 2017 4,00,000

31st December, 2017 3,60,000

The construction of factory building was completed by 31st March, 2018. As per the

provisions of AS 16, you are required to:

(1) Calculate the amount of interest to be capitalized.

(2) Pass Journal entry for capitalizing the cost and borrowing cost in respect of the factory

building.

(b) On 15th June, 2018, Y limited wants to re-classify its investments in accordance with

AS 13 (revised). Decide and state the amount of transfer, based on the following

information:

(1) A portion of long term investments purchased on 1st March, 2017 are to be re-classified as current investments. The original cost of these investments was ` 14

lakhs but had been written down by ` 2 lakhs (to recognise 'other than temporary'

2 INTERMEDIATE (NEW) EXAMINATION: MAY 2019

decline in value). The market value of these investments on 15 th June, 2018 was ` 11 lakhs.

(2) Another portion of long term investments purchased on 15 th January, 2017 are to be

re-classified as current investments. The original cost of these investments was ` 7 lakhs but had been written down to ` 5 lakhs (to recognize 'other than temporary' decline in value). The fair value of these investments on 15 th June, 2018 was ` 4.5

lakhs.

(3) A portion of current investments purchased on 15th March, 2018 for ` 7 lakhs are to be re-classified as long term investments, as the company has decided to retain them. The market value of these investments on 31st March, 2018 was ` 6 lakhs and fair

value on 15th June 2018 was ` 8.5 lakhs,

(4) Another portion of current investments purchased on 7 th December, 2017 for ` 4 lakhs are to be re-classified as long term investments. The market value of these

investments was:

on 31st March, 2018 ` 3.5 lakhs

on 15th June, 2018 ` 3.8 lakhs

(c) State whether the following statements are 'True' or 'False'. Also give reason for your

answer.

(1) As per the provisions of AS-5, extraordinary items should not be disclosed in the

statement of profit and loss as a part of net profit or loss for the period.

(2) As per the provisions of AS-12, government grants in the nature of promoters'

contribution which become refundable should be reduced from the capital reserve.

(3) As per the provisions of AS-2, inventories should be valued at the lower of cost and

selling price.

(4) As per the provisions of AS-13, a current investment is an investment, that by its nature, is readily realisable and is intended to be held for not more than six months

from the date on which such investment is made.

(5) As per the provisions of AS-4, a contingency is a condition or situation, the ultimate

outcome of which (gain or loss) will be known or determined only on the occurrence

of one or more uncertain future events.

(d) The financial statements of PQ Ltd. for the year 2017-18 approved by the Board of

Directors on 15th July, 2018. The following information was provided :

(i) A suit against the company's advertisement was filed by a party on 20th April, 2018,

claiming damages of ` 25 lakhs.

(ii) The terms and conditions for acquisition of business of another company have been decided by March, 2018. But the financial resources were arranged in April, 2018 and amount invested was ` 50 lakhs.

PAPER – 1 : ACCOUNTING 3

(iii) Theft of cash of ` 5 lakhs by the cashier on 31st March, 2018 but was detected on

16th July, 2018.

(iv) Company sent a proposal to sell an immovable property for ` 40 lakhs in March,

2018. The book value of the property was ` 30 lakhs on 31st March, 2018. However,

the deed was registered on 15th April, 2018.

(v) A, major fire has damaged the assets in a factory on 5th April, 2018. However, the

assets are fully insured.

With reference to AS-4 "Contingencies and events occurring after the balance sheet date",

state whether the above mentioned events will be treated as contingencies, adjusting

events or non-adjusting events occurring after the balance sheet date.

(4 Parts x 5 Marks = 20 Marks)

Answer

(a) (i) Computation of average accumulated expenses

`

` 3,00,000 x 12 / 12 = 3,00,000

` 2,40,000 x 10 / 12 = 2,00,000

` 4,00,000 x 8 / 12 = 2,66,667

` 3,60,000 x 3 / 12 = 90,000 8,56,667

(ii) Calculation of average interest rate other than for specific borrowings

Amount of loan (` ) Rate of interest Amount of

interest (` )

4,00,000 9% = 36,000

5,00,000 12% = 60,000

3,00,000 14% = 42,000

1,38,000

Weighted average rate of interest

1,38,000100

12,00,000

= 11.5%

(iii) Amount of interest to be capitalized

`

Interest on average accumulated expenses:

Specific borrowings (` 2,00,000 x 8%) = 16,000


Non-specific borrowings (` 6,56,667 x 11.5%) = 75,517

Amount of interest to be capitalised = 91,517

(iv) Total expenses to be capitalised for building

`

Cost of building ` (3,00,000 + 2,40,000 + 4,00,000 + 3,60,000) 13,00,000

Add: Amount of interest to be capitalized 91,517

13,91,517

(v) Journal Entry

Date Particulars Dr. (` ) Cr. (` )

31.3.2018 Building A/c Dr. 13,91,517

To Building WIP A/c 13,00,000

To Borrowing costs A/c 91,517

(Being amount of cost of building and

borrowing cost thereon capitalised)

(b) As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are

reclassified as current investments, transfers are made at the lower of cost and carrying amount at the date of transfer; and where investments are reclassified from current to long

term, transfers are made at lower of cost and fair value on the date of transfer.

Accordingly, the re-classification will be done on the following basis:

(i) In this case, carrying amount of investment on the date of transfer is less than the

cost; hence this re-classified current investment should be carried at ` 12 lakhs in the

books.

(ii) In this case also, carrying amount of investment on the date of transfer is less than the cost; hence this re-classified current investment should be carried at ` 5 lakhs in

the books.

(iii) In this case, reclassification of current investment into long-term investments will be made at ` 7 lakhs as cost is less than its fair value of ` 8.5 lakhs on the date of

transfer.

(` 8,56,667 – ` 2,00,000) Considering that ` 13,00,000 was debited to Building WIP A/c earlier.


(iv) In this case, market value (considered as fair vale) is ` 3.8 lakhs on the date of transfer which is lower than the cost of ` 4 lakhs. The reclassification of current

investment into long-term investments will be made at ` 3.8 lakhs.

(c) (1) False: The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current

profit or loss can be perceived.

(2) True: When grants in the nature of promoters’ contribution becomes refundable, in

part or in full to the government on non-fulfillment of some specified conditions, the

relevant amount refundable to the government is reduced from the capital reserve.

(3) False: Inventories should be valued at the lower of cost and net realizable value (not

selling price) as per AS 2.

(4) False: A current investment is an investment that is by its nature readily realizable

and is intended to be held for not more than one year from the date on which such

investment is made.

(5) False: A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence, of

one or more uncertain future events.

(d) (i) Suit filed against the company is a contingent liability but it was not existing as on balance sheet date as the suit was filed on 20 th April after the balance Sheet date. As per AS 4, 'Contingencies' used in the Standard is restricted to conditions or

situations at the balance sheet date, the financial effect of which is to be determined by future events which may or may not occur. Hence, it will have no effect on financial

statements and will be a non-adjusting event.

(ii) In the given case, terms and conditions for acquisition of business were finalised and

carried out before the closure of the books of accounts but transaction for payment of financial resources was effected in April, 2018. This is clearly an event occuring after the balance sheet date. Hence, necessary adjustment to assets and liabilities

for acquisition of business is necessary in the financial statements for the year ended

31st March 2018.

(iii) Only those significant events which occur between the balance sheet date and the date on which the financial statements are approved, may indicate the need for

adjustment to assets and liabilities existing on the balance sheet date or may require disclosure. In the given case, theft of cash was detected on 16 th July, 18 after approval

of financial statements by the Board of Directors, hence no treatment is required.

(iv) 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. In the given case, sale of immovable property was under proposal stage (negotiations also not started) on the balance sheet date. Therefore, no adjustment


to assets for sale of immovable property is required in the financial statements for the

year ended 31st March, 2018.

(v) The condition of fire occurrence was not existing on the balance sheet date. Only the

disclosure regarding event of fire and loss being completely insured may be given in

the report of approving authority.

Question 2

(a) M/s Amar bought six Scooters from M/s Bhanu on 1st April, 2015 on the following terms:

Down payment ` 3,00,000

1st instalment payable at the end of 1st year ` 1,59,000

2nd instalment payable at the end of 2nd year ` 1,47,000

3rd instalment payable at the end of 3rd year ` 1,65,000

Interest is charged at the rate of 10% per annum.

M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.

On 31st March, 2018 M/s Amar failed to pay the 3rd instalment upon which M/s Bhanu repossessed two Scooters. M/s Bhanu agreed to leave the other four Scooters with M/s Amar and adjusted the value of the repossessed Scooters against the amount due. The

Scooters taken over were valued on the basis of 30% depreciation per annum on written down value. The balance amount remaining in the vendor's account after the above

adjustment was paid by M/s Amar after 5 months with interest@ 15% per annum.

M/s Bhanu incurred repairing expenses of ` 15,000 on repossessed scooters and sold

scooters for ` 1,05,000 on 25th April, 2018.

You are required to :

(1) Calculate the cash price of the Scooters and the interest paid with each instalment.

(2) Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar.

(3) Prepare Goods Repossessed Account in the books of M/s Bhanu.

(b) A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire, sales were adversely affected up to 30th September, 2017. The firm had taken Loss of profit policy (with an average clause) for ` 3,50,000 having indemnity period of 5 months. There

is an upward trend of 10% in sales.

The firm incurred an additional expenditure of ` 30,000 to maintain the sales.

There was a saving of ` 5,000 in the insured standing charges.

Actual turnover from 25th May, 2017 to 30th September, 2017 ` 1,75,000

Turnover from 25th May, 2016 to 30th September, 2016 ` 6,00,000

Net profit for last financial year ` 2,00,000


Insured standing charges for the last financial year ` 1,75,000

Total standing charges for the last financial year ` 3,00,000

Turnover for the last financial year ` 15,00,000

Turnover for one year from 25th May, 2016 to 24th May, 2017 ` 14,00,000

You are required to calculate the loss of profit claim amount, assuming that entire sales during the interrupted period was due to additional expenses. (10 + 10 = 20 Marks)

Answer

(a) (i) Calculation of Interest and Cash Price

No. of

installments

Outstanding balance at

the end after the

payment of

installment

Amount due at the time of

installment

Outstanding balance at

the end before the payment of

installment

Interest Outstanding balance at

the beginning

[1] [2] [3] [4] = 2 +3 [5] = 4 x 10/110 [6] = 4-5

3rd - 1,65,000 1,65,000 15,000 1,50,000

2nd 1,50,000 1,47,000 2,97,000 27,000 2,70,000

1st 2,70,000 1,59,000 4,29,000 39,000 3,90,000

Down

payment 3,00,000

Total of interest and Total cash price 81,000 6,90,000

(ii) In the books of M/s Amar

Scooters Account

Date Particulars ` Date Particulars `

1.4.2015 To Bhanu A/c 6,90,000 31.3.2016 By Depreciation A/c 1,38,000

By Balance c/d 5,52,000

6,90,000 6,90,000

1.4.2016 To Balance b/d 5,52,000 31.3.2017 By Depreciation A/c 1,10,400

Balance c/d 4,41,600

5,52,000 5,52,000

1.4.2017 To Balance b/d 4,41,600 31.3.2018 By Depreciation A/c 88,320

By M/s Bhanu a/c (Value of 2 Scooters taken over)

78,890

By Profit and Loss A/c (Bal. fig.)

38,870


By Balance c/d

4

6(4,41,600 - 88,320)

2,35,520

4,41,600 4,41,600

(iii) M/s Bhanu Account


1.4.15

31.3.16

To Bank (down payment)

To Bank (1st Installment)

To Balance c/d

3,00,000

1,59,000

2,70,000

1.4.15

31.3.16

By Scooters A/c

By Interest A/c

6,90,000

39,000

7,29,000 7,29,000

31.3.17

To Bank (2nd Installment)

To Balance c/d

1,47,000

1,50,000

1.4.2016

31.3.2017

By Balance b/d

By Interest A/c

2,70,000

27,000

2,97,000 2,97,000

31.3.18

To Scooter A/c

To Balance c/d (b.f.)

78,890

86,110

1.4.2017

31.3.2018

By Balance b/d

By Interest A/c

1,50,000

15,000

1,65,000 1,65,000

31.8.18

To Bank (Amount settled after 5

months)

91,492

1.4.2018

31.8.2018

By Balance b/d

By Interest A/c (@ 15 % on bal.)

(86,110 x 5/12 x 15/100)

86,110

5,382

91,492 91,492

(iv) In the Books of M/s Bhanu

Goods Repossessed A/c


31.3.18 To Amar A/c 78,890 31.3.2018 By Balance c/d 78,890

78,890 78,890

1.04.2018 To Balance b/d 78,890 25.4.2018 By Bank (Sale) 1,05,000

25.4.2018 To Repair A/c 15,000

25.4.2018 To Profit & Loss A/c 11,110

1,05,000 1,05,000


Working Note:

Value of Scooters taken over

`

2 Scooters (6,90,000/6 x 2) 2,30,000

Depreciation @ 30% WDV for 3 years

(69,000 + 48,300 +33,810)

(1,51,110)

78,890

(b) Computation of the amount of claim for the loss of profit

1. Reduction in turnover `

Turnover from 25th May, 2016 to 30th September, 2016 6,00,000

Add: 10% expected increase 60,000

6,60,000

Less: Actual Turnover from 25th May, 2017 to 30th September, 2017 (1,75,000)

Short Sales 4,85,000

2. Calculation of loss of Profit

Gross Profit on reduction in turnover @ 25% on ` 4,85,000 1,21,250

(see working note 1)

Add: Additional Expenses

Lower of

(i) Actual = ` 30,000

(ii) G.P. on Adjusted Annual TurnoverAdditional Exp. x

G.P. as above + Uninsured Standing Charges

30,000x [3,85,000/(3,85,000+1,25,000)] = ` 22,647

(iii) G.P. on sales generated by additional expenses

175000 x 25% = ` 43,750

It is given that entire sales during the interrupted period was due to additional

expenses.

Therefore, lower of above is (i, ii & iii) ` 22,647

1,43,897

Less: Saving in Insured Standing Charges (5,000)

Amount of claim before application of Average Clause 1,38,897


3. Application of Average Clause:

Amount of Policy× Amount of Claim

G.P. on Annual Turnover

(3,50,000/3,85,000) x 1,38,897= ` 1,26,270

Amount of claim under the policy = ` 1,26,270

Working Notes:

1. Rate of Gross Profit for last Financial Year: `

Net Profi t for last financial year 2,00,000

Add: Insured Standing Charges 1,75,000

Gross Profi t 3,75,000

Turnover for the last financial year 15,00,000

Rate of Gross Profit = 3,75,000×100

15,00,000 = 25%

2. Annual Turnover (adjusted):

Turnover from 25 May, 2016 to 24 May, 2017 14,00,000

Add: 10% expected increase 1,40,000

15,40,000

Gross Profi t on ` 15,40,000 @ 25% 3,85,000

Standing charges not Insured (3,00,000 – 1,75,000) 1,25,000

Gross profit + Uninsured standing charges 5,10,000

Question 3

(a) The following balances appeared in the books of M/s Sunshine Traders:

As on

31-03-2018

(`)

As on

31-03-2019

(`)

Land and Building 2,50,000 2,50,000

Plant and Machinery 1,10,000 1,65,000

Office Equipment 52,500 42,500

Sundry Debtors 77,750 1,10,250

Creditors for Purchases 47,500 ?

Provision for office expenses 10,000 7,500

Stock ? 32,500


Long Term loan from ABC Bank @ 10% per annum 62,500 50,000

Bank 12,500 ?

Capital 4,65,250 ?

Other information was as follows:

In (`)

- Collection from Sundry Debtors 4,62,500

- Payments to Creditors for Purchases 2,62,500

- Payment of office Expenses 21,000

- Salary paid 16,000

- Selling Expenses paid 7,500

- Total sales 6,25,000

Credit sales (80% of Total sales)

- Credit Purchases 2,70,000

Cash Purchases (40% of Total Purchases)

- Gross Profit Margin was 25% on cost

- Discount Allowed 2,750

- Discount Received

- Bad debts

2,250

2,250

- Depreciation to be provided as follows:

Land and Building - 5% per annum

Plant and Machinery - 10% per annum

Office Equipment - 15% Per annum

- On 01.10.2018 the firm sold machine having book value, ` 20,000 (as on 31.03.2018)

at a loss of ` 7,500. New machine was purchased on 01.01.2019.

- Office equipment was sold at its book value on 01.04.2018.

- Loan was partly repaid on 31.03.2019 together with interest for the year.

You are required to prepare:

(i) Trading and Profit & Loss account for the year ended 31st March, 2019.

(ii) Balance Sheet as on 31st March 2019. (12 Marks)


(b) M/s Rani & Co. has head office at Singapore and branch at Delhi (India). Delhi branch is an integral foreign operation of M/s Rani & Co. Delhi branch furnishes you with its Trial

Balance as on 31st March, 2019 and the additional information thereafter:

Dr. Cr.

Rupees in thousands

Stock on 1st April, 2018 600 -

Purchases and Sales 1,600 2,400

Sundry Debtors and Creditors 800 600

Bills of Exchange 240 480

Wages 1,120 -

Rent, rates and taxes 720 -

Sundry Expenses 320 -

Computers 600 -

Bank Balance 520 -

Singapore Office A/c - 3,040

Total 6,520 6,520

Additional information :

(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from Singapore Head Office and paid to the suppliers. Depreciate Computers at the rate

of 40% for the year.

(b) Closing Stock of Delhi branch was ` 15,60,000 on 31st March, 2019.

(c) The Rates of Exchange may be taken as follows :

(i) on 1.4.2018 @ ` 50 per Singapore Dollar

(ii) on 31.3.2019 @ ` 52 per Singapore Dollar

(iii) Average Exchange Rate for the year @ ` 51 per Singapore Dollar.

(iv) Conversion in Singapore Dollar shall be made upto two decimal accuracy.

(d) Delhi Branch Account showed a debit balance of Singapore Dollar 59,897.43 on

31.3.2019 in the Head office books and there were no items pending for reconciliation.

In the books of Head office you are required to prepare :

(1) Revenue statement for the year ended 31st March, 2019 (in Singapore Dollar)

(2) Balance Sheet as on that date. (in Singapore Dollar) (8 Marks)


Answer

(a) Trading and Profit and Loss A/c for the year ended 31.3.2019

` `

To Opening stock

(Balancing figure)

82,500 By Sales- Cash

(W.N.1)

1,25,000

To Purchases-Cash 1,80,000 Credit 5,00,000 6,25,000

Credit (W.N.1) 2,70,000 4,50,000 By Closing stock 32,500

To Gross profit c/d 1,25,000

6,57,500 6,57,500

To Loss on sale of 7,500 By Gross profit b/d 1,25,000

Machine By Discount

To Depreciation received 2,250

Land & Building 12,500

Plant & Machinery 11,875

Office Equipment 6,375 30,750

To Expenses paid

Salary 16,000

Selling Expenses 7,500

Office Expenses 18,500 42,000

To Bed debt 2,250

To Discount allowed 2,750

To Interest on loan 6,250

To Net profit 35,750

1,27,250 1,27,250

Balance Sheet as on 31-3-2019

Liabilities ` Assets `

Capital (Balancing

Figure)

4,65,250 Land & Building 2,50,000

Add: Net profit 35,750 5,01,000 Less: Depreciation (12,500) 2,37,500

Sundry creditors (W.N.3) 52,750 Plant & Machinery 1,65,000

Bank loan 50,000 Less: Depreciation (10,875) 1,54,125

Provision for expenses 7,500 Office Equipment 42,500


Less: Depreciation (6,375) 36,125

Debtors 1,10,250

Stock 32,500

Bank balance

(W.N.4)

40,750

6,11,250 6,11,250

Working Notes:

1. Calculation of Sales and Purchases

Total sales = ` 6,25,000

Cash sales = 20% of total sales (6,25,000) = ` 1,25,000

Credit sales = 80% of total sales = (6,25,000) ` 5,00,000

Gross Profit 25% on cost = 6,25,000 x 25

125 = `1,25,000

Credit purchases = ` 2,70,000

Credit purchases = 60% of total purchases

Cash purchases = 40% of total purchases

Total purchases = 2,70,000

100 4,50,00060

`

Cash purchases = 4,50,000 – 2,70,000 = ` 1,80,000

2. Plant & Machinery

` `

To Balance b/d 1,10,000 By Sale of Machinery A/c 20,000

To Cash-purchase (Bal. Fig.) 75,000 By Balance c/d 1,65,000

1,85,000 1,85,000

Depreciation on Plant & Machinery:

@ 10% p.a. on ` 20,000 for 6 months = 1,000

@ 10% p.a. on ` 90,000 (i.e. ` 1,10,000 – ` 20,000) = 9,000

@ 10% p.a. on ` 75,000 for 3 months (i.e. during the year) = 1,875

11,875


Sale of Machinery Account

To Plant and Machinery 20,000 By Depreciation (20,000 x 10% x 1/2

1000

By Profit and Loss A/c 7,500

By Bank (Balancing figure) 11,500

20,000 20,000

3. Creditors Account

` `

To Cash 2,62,500 By Balance b/d 47,500

To Discount received 2,250 By Credit purchases (W.N.2) 2,70,000

To Balance c/d (Bal. Fig.) 52,750

3,17,500 3,17,500

Debtors Account

` `

To Balance b/d (Given) 77,750 By Cash 4,62,500

To Sales (Credit) 5,00,000 By Discount allowed 2,750

By Bad debts 2,250

By Balance c/d 1,10,250

5,77,750 5,77,750

Provision for Office Expenses Account

` `

To Bank 21,000 By balance b/d 10,000

To balance c/d 7,500 By Expenses. (Bal. fig.) 18,500

28,500 28,500

4. Bank Account

` `

To Balance b/d 12,500 By Creditors 2,62,500

To Debtors 4,62,500 By Purchases 1,80,000

To Office Equipment

(sales)

10,000 By Expenses

` (16,000 + 7,500 + 21,000)

44,500

To Cash sales (W.N.1) 1,25,000 By Bank loan paid 18,750


To Machine sold 11,500 By Machine purchased (W.N.4) 75,000

By Balance c/d (Bal. Fig.) 40,750

6,21,500 6,21,500

5. Office Equipment Account

To balance b/d 52,500 By Sales 10,000

By balance c/d 42,500

52,500 52,500

(b) Revenue Statement

for the year ended 31st March, 2019

Singapore dollar Singapore dollar

To Opening Stock 12,000.00 By Sales 47,058.82

To Purchases 31,372.55 By Closing stock 30,000.00

To Wages 21,960.78 (15,60,000/52)

To Gross profit b/d 11,725.49

77,058.82 77,058.82

To Rent, rates and taxes 14,117.65 By Gross profit c/d 11,725.49

To Sundry Expenses 6,274.51 By Net loss b/d 13,466.67

To Depreciation on computers

(Singapore dollar 12,000 × 0.4) 4,800.00

25,192.16 25,192.16

Balance Sheet of Delhi Branch

as on 31st March, 2019

Liabilities Singapore dollar

Assets Singapore dollar

Singapore dollar

Singapore Office A/c 59,897.43 Computers 12,000.00

Less: Net Loss (13,466.67) 46,430.76 Less: Depreciation (4,800.00) 7,200.00

Sundry creditors 11,538.46 Closing stock 30,000.00

Bills payable 9,230.77 Sundry debtors 15,384.61

Bank balance 10,000.00

Bills receivable 4,615.38

67,199.99 67,199.99


Working Note:

M/s Rani & Co.

Delhi Branch Trial Balance in (Singapore $)

as on 31st March, 2019

Conversion Dr. Cr. rate per

Singapore dollar

Singapore dollar

Singapore dollar

(`)

Stock on 1.4.18 6,00,000.00

50 12,000.00 –

Purchases and sales 16,00,000.00 24,00,000.00 51 31,372.55 47,058.82

Sundry Debtors and Creditors

8,00,000.00 6,00,000.00 52 15,384.61 11,538.46

Bills of exchange 2,40,000.00 4,80,000.00 52 4,615.38 9,230.77

Wages 11,20,000.00

51 21,960.78 –

Rent, rates and taxes 7,20,000.00

51 14,117.65 –

Sundry Expenses 3,20,000.00

51 6,274.51 –

Computers 6,00,000.00

– 12,000.00 –

Bank balance 5,20,000.00

52 10,000.00 –

Singapore office A/c

–

59,897.43

1,27,725.48 1,27,725.48

Question 4

The following is the Balance Sheet of M/s Red and Black as on 31st March, 2018:

Liabilities (`) Assets (`)

Red’s Capital

Black's Capital

Red's Loan

General Reserve

Sundry Creditors

80,000

1,00,000

1,80,000

20,000

20,000

40,000

Building

Closing Stock

Sundry Debtors

Investment

(6% Debentures in Cool Ltd.)

Cash

1,00,000

60,000

40,000

40,000

20,000

2,60,000 2,60,000

It was agreed that Mr. White is to be admitted for a fifth share in the future profits from 1st April, 2018. He is required to contribute cash towards goodwill and ` 20,000 towards capital.

(a) The following further information is furnished:


(i) The partners Red and Black shared the profits in the ratio of 3 : 2.

(ii) Mr. Red was receiving a salary of ` 1,000 p.m. from the very inception of the firm in

addition to the share of profit.

(iii) The future profit ratio between Red, Black and White will be 3 : 1 : 1. Mr. Red will not

get any salary after the admission of Mr. White.

(iv) The goodwill of the firm should be determined on the basis of 2 years' purchase of the average profits from business of the last 5 years. The particulars of profits/losses are

as under :

Year Ended (`) Profit/Loss

31.3.2014 40,000 Profit

31.3.2015 20,000 Loss

31.3.2016 40,000 Profit

31.3.2017 50,000 Profit

31.3.2018 60,000 Profit

The above profits and losses are after charging the salary of Mr. Red. The profit of

the year ended 31st March, 2014 included an extraneous profit of ` 60,000 and the loss for the year ended 31st March, 2015 was on account of loss by strike to the extent of ` 40,000.

(v) It was agreed that the value of the goodwill should not appear in the books of the firm.

(b) Trading profit for the year ended 31st March, 2019 was ` 80,000 (Before charging

depreciation)

(c) Each partner had drawn ` 2,000 per month as drawing during the year 2018-19.

(d) On 31st March, 2019 the following balances appeared in the books:

Building (Before Depreciation) ` 1,20,000

Closing Stock ` 80,000

Sundry Debtors Nil

Sundry Creditors Nil

Investment ` 40,000

(e) Interest was @ 6% per annum on Red's loan was not paid during the year.

(f) Interest on Debenture was received during the year.

(g) Depreciation is to be provided @ 5% on Closing Balance of Building.

(h) Partners applied for conversion of the firm into a private Limited Company i.e. RBW Private

Limited. Certificate received on 1.4.2019.


They decided to convert Capital accounts of the partners into share capital, in the ratio of 3: 1: 1 (on the basis of total Capital as on 31.3.2019). If necessary, partners have to

subscribe to fresh capital or withdraw.

You are required to prepare :

(1) Profit & Loss Account for the year ended 31st March, 2019 in the books of M/s Red

and Black.

(2) Balance Sheet as on 1st April , 2019 in the books of RBW Private Limited. (20 Marks)

Answer

M/s Red, Black and White

Statement of Profit & Loss for the year ended on 31st March, 2019

` `

To Depreciation on Building (1,20,000 x 5%) 6,000 By Trading Profit 80,000

To Interest on Red’s loan (20,000 x 6%) 1,200 By Interest on 2,400

To Net Profit to : Debentures

Red’s Capital A/c 45,120

Black’s Capital A/c 15,040

White’s Capital A/c 15,040

82,400 82,400

Balance Sheet of the RBW Pvt. Ltd. as on 1-4-2019

Notes No. `

I Equity and Liabilities

Shareholders funds 2,39,040

Non-current liabilities

Long term borrowings 1 21,200

Total 2,60,240

II Assets

Non-current assets

Property, Plant & Equipment

Tangible assets 2 1,14,000

Non-current investments 40,000

Current assets

Inventories 80,000

Cash and cash equivalents 26,240

Total 2,60,240


Notes to Accounts

`

1. Borrowings

Loan from Red 21,200

2. Tangible assets

Land and Building (1,20,000 – 6,000) 1,14,000

Working Notes:

1. Calculation of goodwill

Year ended March, 31

2014 2015 2016 2017 2018

₹ ` ` ` `

Book Profits 40,000 (20,000) 40,000 50,000 60,000

Adjustment for extraneous profit of 2014 and abnormal loss for 2015

(60,000)

40,000

—

—

—

(20,000) 20,000 40,000 50,000 60,000

Add Back: Remuneration of Red 12,000 12,000 12,000 12,000 12,000

(8,000) 32,000 52,000 62,000 72,000

Less: Debenture Interest being non-

operating income

(2,400)

(2,400)

(2,400)

(2,400)

(2,400)

(10,400) 29,600 49,600 59,600 69,600

Total Profit from 2015 to 2018 2,08,400

Less: Loss for 2014 (10,400)

Accumulated Profit 1,98,000

Average Profit 39,600

Goodwill equal to 2 years’ purchase 79,200

Contribution from White, equal to 1/5 15,840

2. Partners’ Capital Accounts

Red Black White Red Black White

` ` ` ` ` `

To Drawings 24,000 24,000 24,000 By Balance b/d 80,000 1,00,000 —

To Black A/c 15,840 By General 12,000 8,000 —

To Balance c/d 1,13,120 1,14,880 11,040 Reserve


By White A/c 15,840 —

By Bank A/c — — 35,840

By Profit &

Loss A/c 45,120 15,040 15,040

1,37,120 1,38,880 50,880 1,37,120 1,38,880 50,880

3. Balance Sheet as on 31st March, 2019

Liabilities ` ` Assets ` `

Red’s Capital 1,13,120 Land & Building 1,20,000

Black’s Capital 1,14,880 Less: Depreciation (6,000) 1,14,000

White’s Capital 11,040 Investments 40,000

Red’s Loan 20,000 Stock-in-trade 80,000

Add: Interest due 1,200 21,200 Cash (Balancing figure) 26,240*

2,60,240 2,60,240

4. Conversion into Company

`

Capital: Red 1,13,120

Black 1,14,880

White 11,040

Share Capital 2,39,040

Distribution of share: Red (3/5) 1,43,424

Black (1/5) 47,808

White (1/5) 47,808

Red should subscribe shares of ` 30,304 (` 1,43,424 – ` 1,13,120) and White should

subscribe shares of ` 36,768 (` 47,808 less 11,040). Black withdraws ` 67,072

(` 47,808 – ` 1,14,880).

5 Adjustment for Goodwill

To be raised in old Raio To be written off in new ratio Difference

Red 47,520 47,520 Nil

Black 31,680 15,840 15,840 Cr.

White 15,840 15,840 Dr.


6. Closing cash balance* can also be derived as shown below:

` `

T rading profit (assume realised) 80,000

Add: Debenture Interest 2,400

Add: Decrease in Debtors Balance 40,000

1,22,400

Less: Increase in stock 20,000

Less: Decrease in creditors 40,000 (60,000)

Cash Profit 62,400

Add: Opening cash balance 20,000

Add: Cash brought in by White 35,840

1,18,240

Less: Drawings 72,000

Less: Additions to Building 20,000 (92,000)

26,240

Question 5

(a) The Summarized Balance Sheet of Clean Ltd. as on 31st March, 2019 is as follows:

Particulars (`)

EQUITY AND LIABILITIES

1. Shareholder's funds:

(a) Share Capital 5,80,000

(b) Reserves and Surplus 96,000

2. Current Liabilities:

Trade Payables 1,13,000

Total 7,89,000

ASSETS:

1. Non-Current Assets

(a) Property, Plant and Equipment

Tangible Assets

6,90,000

(b) Non-current investments 37,000

2. Current Assets

Cash and cash equivalents (Bank) 62,000

Total 7,89,000


The Share Capital of the company consists of ` 50 each Equity shares of ` 4,50,000 and ` 100 each 8% Redeemable Preference Shares of ` 1,30,000 (issued on 1.4.2017).

Reserves and Surplus comprises statement of profit and loss only.

In order to facilitate the redemption of preference shares at a premium of 10%, the

Company decided:

(a) to sell all the investments for ` 30,000.

(b) to finance part of redemption from company funds, subject to, leaving a Bank balance of ` 24,000.

(c) to issue minimum equity share of ` 50 each at a premium of ` 10 per share to raise

the balance of funds required.

You are required to

(1) Pass Journal Entries to record the above transactions.

(2) Prepare Balance Sheet after completion of the above transactions.

(b) The following information was provided by PQR Ltd. for the year ended 31st March, 2019 :

(1) Gross Profit Ratio was 25% for the year, which amounts to ` 3,75,000.

(2) Company sold goods for cash only.

(3) Opening inventory was lesser than closing inventory by ` 25,000.

(4) Wages paid during the year ` 5,55,000.

(5) Office expenses paid during the year ` 35,000.

(6) Selling expenses paid during the year ` 15,000.

(7) Dividend paid during the year ` 40,000 (including dividend distribution tax).

(8) Bank Loan repaid during the year ` 2,05,000 (included interest ` 5,000)

(9) Trade Payables on 31st March, 2018 were ` 50,000 and on 31st March, 2019 were

` 35,000.

(10) Amount paid to Trade payables during the year ` 6,10,000

(11) Income Tax paid during the year amounts to ` 55,000

(Provision for taxation as on 31st March, 2019 ` 30,000)·

(12) Investments of ` 8,20,000 sold during the year at a profit of ` 20,000.

(13) Depreciation on furniture amounts to ` 40,000.

(14) Depreciation on other tangible assets amounts to ` 20,000.

(15) Plant and Machinery purchased on 15 th November, 2018 for ` 3,50,000.


(16) On 31st March, 2019 ` 2,00,000, 7% Debentures were issued at face value in an

exchange for a plant.

(17) Cash and Cash equivalents on 31st March, 2018 ` 2,25,000.

(A) Prepare cash flow statement for the year ended 31st March, 2019, using direct method.

(B) Calculate cash flow from operating activi ties, using indirect method. (10 + 10 = 20 Marks)

Answer

(a) Journal Entries

Particulars Dr. (`) Cr. (`)

1 Bank A/c Dr. 75,000

To Share Application A/c 75,000

(For application money received on 1,250 shares @ ` 60 per share)

2 Share Application A/c Dr. 75,000

To Equity Share Capital A/c 62,500

To Securities Premium A/c 12,500

(For disposition of application money received)

3 Preference Share Capital A/c Dr. 1,30,000

Premium on Redemption of Preference Shares A/c Dr. 13,000

To Preference Shareholders A/c 1,43,000

(For amount payable on redemption of preference shares)

4 Profit and Loss A/c Dr. 13,000

To Premium on Redemption of Preference Shares A/c

13,000

(For writing off premium on redemption out of profits)

5 Bank A/c Dr. 30,000

Profit and Loss A/c (loss on sale) A/c Dr. 7,000

To Investment A/c 37,000

(For sale of investments at a loss of ` 3,500)

6 Preference Shareholders A/c

To Bank

(Being amount paid to Preference shareholders)

Dr. 1,43,000

1,43,000


7 Profit and Loss A/c Dr. 67,500

To Capital Redemption Reserve A/c 67,500

(For transfer to CRR out of divisible profits an amount equivalent to excess of nominal value of preference shares over proceeds (face value of equity shares) i.e., ` 1,30,000 - ` 62,500)

Balance Sheet of Clean Ltd. (after redemption)

Particulars Notes No. `

EQUITY AND LIABILITIES

1. Shareholders’ funds

a) Share capital 1 5,12,500

b) Reserves and Surplus 2 88,500

2. Current liabilities

T rade Payables 1,13,000

Total 7,14,000

ASSETS

1. Non-Current Assets

Property Plant and Equipments

Tangible asset 6,90,000

2. Current Assets

Cash and cash equivalents (bank) 3 24,000

Total 7,14,000

Notes to accounts

`

1. Share Capital

Equity share capital ` (4,50,000 + 62,500) 5,12,500

2. Reserves and Surplus

Capital Redemption Reserve 67,500

Profit and Loss Account ` (96,000 – 13,000 – 7,000 – 67,500) 8,500

Security Premium 12,500

88,500

3. Cash and cash equivalents

Balances with banks ` (62,000 + 75,000 +30,000 – 1,43,000) 24,000


Working Note:

Calculation of Number of Shares: `

Amount payable on redemption (1,30,000 + 10% Premium) 1,43,000

Less: Sale price of investment (30,000)

1,13,000

Less: Available bank balance (62,000 - 24,000) (38,000)

Funds required from fresh issue 75,000

No. of shares = 75,000/60 = 1,250 shares

(b) (i) PQR Ltd.

Cash Flow Statement for the year ended 31st March, 2019

(Using direct method)

Particulars ` `

Cash flows from Operating Activities

Cash sales (` 3,75,000/25%) 15,00,000

Less: Cash payments for trade payables (6,10,000)

Wages Paid (5,55,000)

Office and selling expenses ` (35,000 + 15,000) (50,000) (12,15,000)

Cash generated from operations before taxes 2,85,000

Income tax paid (55,000)

Net cash generated from operating activities (A) 2,30,000

Cash flows from Investing activities

Sale of investments ` (8,20,000 + 20,000) 8,40,000

Payments for purchase of Plant & machinery (3,50,000)

Net cash used in investing activities (B) 4,90,000

Cash flows from financing activities

Bank loan repayment (including interest) (2,05,000)

Dividend paid (including dividend distribution tax) (40,000)

Net cash used in financing activities (C) (2,45,000)

Net increase in cash (A+B+C) 4,75,000

Cash and cash equivalents at beginning of the period 2,25,000

Cash and cash equivalents at end of the period 7,00,000


(ii) ‘Cash Flow from Operating Activities’ by indirect method

`

Net Profit for the year before tax and extraordinary items 2,80,000

Add: Non-Cash and Non-Operating Expenses:

Depreciation 60,000

Interest Paid 5,000

Less: Non-Cash and Non-Operating Incomes:

Profit on Sale of Investments

(20,000)

Net Profit after Adjustment for Non-Cash Items

3,25,000

Less: Decrease in trade payables

Increase in inventory

15,000

25,000

(40,000)

Cash generated from operations before taxes 2,85,000

Working Note:

Calculation of net profit earned during the year

` `

Gross profit 3,75,000

Less: Office expenses, selling expenses 50,000

Depreciation 60,000

Interest paid 5,000 (1,15,000) 2,60,000

Add: Profit on sale of investments 20,000

Net profit before tax 2,80,000

Question 6

Answer any four of the following :

(a) Write short note on Timing difference and Permanent Difference as per AS 22.

(b) Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:

Liabilities Amount

(`)

Assets Amount

(`)

Proprietor's Capital 3,00,000 Fixed Assets 3,60,000

Profit & Loss Account 1,25,000 Closing Stock 1,50,000

10% Loan Account 2,10,000 Sundry Debtors 1,00,000


Sundry Creditors 50,000 Deferred Expenses 50,000

Cash & Bank 25,000

6,85,000 6,85,000

Additional Information is as follows :

(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net realisable value of fixed assets on 31.03.2018 was ` 3,25,000.

(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000

respectively.

(3) The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and ` 2,50,000 respectively.

(4) Expenses for the year amounted to ` 78,000.

(5) Deferred Expenses are amortized equally over 5 years.

(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection of another ` 25,000 depends on successful re-installation of certain product supplied

to the customer;

(7) Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.

(8) Cash balance as on 31.03.2018 is ` 4,22,000.

(9) There is an early repayment penalty for the loan of ` 25,000.

You are required to prepare: (Not assuming going concern)

(1) Profit & Loss Account for the year 2017-18.

(2) Balance Sheet as on 31st March, 2018.

(c) Tarun Ltd. was incorporated on 1st July, 2018 to acquire a running business of Vinay Sons with effect from 1st April, 2018. During the year 2018-19, the total sales were ` 12,00,000 of which ` 2,40,000 were for the first six months. The Gross Profit for the

year is ` 4,15,000. The expenses debited to the Profit and Loss account included:

(i) Director's fees ` 25,000

(ii) Bad Debts ` 6,500

(iii) Advertising ` 18,000 (under a contract amounting to ` 1,500 per month)

(iv) Company Audit Fees ` 15,000

(v) Tax Audit Fees ` 10,000

(1) Prepare a statement showing pre-incorporation and post incorporation profit for the

year ended 31st March, 2019.

(2) Explain how profits are to be treated.


(d) State the circumstances when Garner V/s Murray rule is not applicable.

(e) Wooden Plywood Limited has a normal wastage of 5% in the production process. During the year 2017-18, the Company used 16,000 MT of Raw material costing ` 190 per MT. At

the end of the year, 950 MT of wastage was in stock. The accountant wants to know how

this wastage is to be treated in the books.

You are required to :

(1) Calculate the amount of abnormal loss.

(2) Explain the treatment of normal loss and abnormal loss. [In the context of AS-2 (Revised)] (4 Parts x 5 Marks = 20 Marks)

Answer

(a) Matching of taxes against revenue for a period poses special problems arising from the fact that in number of cases, taxable income may be different from the accounting income.

The divergence between taxable income may be different from the accounting income arises due to two main 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 deductions for tax purposes, known as Permanent Difference. Secondly, there are differences between the amount in respect of a particular item of revenue or expense as recognised in the statement of profit and loss and the

corresponding amount which is recognised for the computation of taxable incom e, known

as T iming Difference.

Permanent differences are the differences between taxable income and accounting income which arise in one accounting period and do not reverse subsequently. For example, an

income exempt from tax or an expense that is not allowable as a deduction for tax

purposes.

T iming differences are those differences between taxable income and accounting income which arise in one accounting period and are capable of reversal in one or more

subsequent periods. For e.g., Depreciation, Bonus, etc.

(b) Profit and Loss Account for the year ended 2017-18(not assuming going concern)

Particulars Amount Particulars Amount

` `

To Opening Stock 1,50,000 By Sales 27,50,000

To Purchases 22,50,000 By Closing Stock 2,50,000

To Expenses* 78,000 By Trade payables 7,500

To Depreciation 35,000

To Provision for doubtful debts 30,000

To Deferred cost 50,000

To Loan penalty 25,000


To Net Profit (b.f.) 3,89,500

30,07,500 30,07,500

Balance Sheet as at 31st March, 2018 (not assuming going concern)

Liabilities Amount

`

Assets Amount

`

Capital 3,00,000 Fixed Assets 3,25,000

Profit & Loss A/c 5,14,500 Stock 2,50,000

10% Loan 2,35,000 Trade receivables (less provision) 1,20,000

Trade payables 67,500 Deferred costs Nil

Bank 4,22,000

11,17,000 11,17,000

*Assumed that ` 78,000 includes interest on 10% loan amount for the year.

(c) Statement showing the calculation of Profits for the pre-incorporation and post-

incorporation periods

For the year ended 31st March, 2019

Particulars Total

Amount

Basis of

Allocation

Pre-

incorporation

Post-

incorporation

Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500

Less: Directors’ fee 25,000 Post 25,000

Bad debts 6,500 Sales (1:9) 650 5,850

Advertising 18,000 T ime (1:3) 4,500 13,500

Company Audit Fees 15,000 Post 15,000

Tax Audit Fee 10,000 Sales (1:9) 1,000 9,000

Net Profit 3,40,500 35,350 3,05,150

Pre-incorporation profits to be transferred to capital reserve and post-incorporation profit

to be transferred to profit & Loss A/c.

Working Notes:

(i) Sales ratio

Particulars `

Sales for period up to 30.06.2018 (2,40,000 x 3/6) 1,20,000

Sales for period from 01.07.2018 to 31.03.2019 (12,00,000 – 1,20,000)

10,80,000


Thus, Sales Ratio = 1 : 9 (1,20,000 : 10,80,000)

(ii) Time ratio

1st April, 2018 to 30 June, 2018: 1st July, 2018 to 31st March, 2019

= 3 months: 9 months = 1: 3

Thus, T ime Ratio is 1: 3

(d) Garner vs Murray rule is non-applicable in the following cases:

1. When the solvent partner has a debit balance in the capital account.

Only solvent partners will bear the loss of capital deficiency of insolvent partner in their capital ratio. If incidentally a solvent partner has a debit balance in his capital

account, he will escape the liability to bear the loss due to insolvency of another

partner.

2. When the firm has only two partners.

3. When there is an agreement between the partners to share the deficiency in capital

account of insolvent partner.

4. When all the partners of the firm are insolvent.

(e) (i) As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted

materials, labour and other production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in which they are incurred. The normal loss will be included in determining the cost of inventories (finished goods)

at the year end.

Amount of Abnormal Loss:

(ii) Material used 16,000 MT @ ` 190 = ` 30,40,000

Normal Loss (5% of 16,000 MT) 800 MT (included in calculation of cost of

inventories)

Net quantity of material 15,200 MT

(iii) Abnormal Loss in quantity (950 - 800) 150 MT

Abnormal Loss ` 30,000

[150 units @ ` 200 (` 30,40,000/15,200)]

Amount of ` 30,000 (Abnormal loss) will be charged to the Profit and Loss statement.

PAPER – 2 : CORPORATE & OTHER LAW


Attempt any three questions from the remaining four questions.

Question 1

(a) As at 31st March, 2018, the paid up share capital of S Ltd. is ` 1,00,00,000 divided into 10,00,000 equity shares of ` 10 each. Of this, H Ltd. is holding 6,00,000 equity shares and 4,00,000 equity shares are held by others. Simultaneously, S Ltd. is holding 5%

equity shares of H Ltd. out of which 1% shares are held as a legal representative of a deceased member of H Ltd. On the basis of the given information, examine and answer

the following queries with reference to the provisions of the Companies Act, 2013 :

(i) Can S Ltd. make further investment in equity shares of H Ltd. during 2018-19?

(ii) Can S Ltd. exercise voting rights at Annual general meeting of H Ltd.?

(iii) Can H Ltd. allot or transfer some of i ts shares to S Ltd.? (4 Marks)

(b) (i) Modem Jewellery Ltd. decides to pay 5% of the issue price gap of shares as

underwriting commission to the underwriters, but the Articles of the company authorize only 4% underwriting commission on shares. Examine the validity of the above decision under the provision of the Companies Act, 2013. (2 Marks)

(ii) PQ Ltd. declared and paid 10% dividend to all its shareholders except Mr. Kumar,

holding 500 equity shares, who instructed the company to deposit the dividend amount directly in his bank account. The company accordingly remitted the dividend, but the bank returned the payment on the ground that the account number

as given by Mr. Kumar doesn't tally with the records of the bank. The company, however, did not inform Mr. Kumar about this discrepancy. ·Comment on this issue with reference to the provisions of the Companies Act, 2013 regarding failure to

distribute dividend. (2 Marks)

(c) The Government of India is holding 51% of the paid-up equity share capital of Sun Ltd. The Audited financial statements of Sun Ltd. for the financial year 2017-18 were placed at its annual general meeting held on 31st August, 2018. However, pending the

comments of the Comptroller and Auditor General of India (CAG) on the said accounts the meeting was adjourned without adoption of the accounts. On receipt of CAG comments on the accounts, the adjourned annual general meeting was held on

15th October, 2018 whereat the accounts were adopted. Thereafter, Sun Ltd. filed its financial statements relevant to the financial year 2017-18 with the Registrar of Companies on 12th November, 2018. Examine, with reference to the applicable

provisions of the Companies Act, 2013, whether Sun Ltd. has complied with the statutory requirement regarding filing of accounts with the Registrar? (4 Marks)

PAPER – 2 : CORPORATE AND OTHER LAWS 33

(d) Manoj guarantees for Ranjan, a retail textile merchant, for an amount of ` 1,00,000, for which Sharma, the supplier may from time to time supply goods on credit basis to Ranjan

during the next 3 months.

After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on credit for ` 40,000. Referring to the provisions of the Indian Contract Act, 1872, decide whether Manoj is discharged from all the liabilities to Sharma for any subsequent credit supply.

What would be your answer in case Ranjan makes default in paying back Sharma for the goods already supplied on credi t i .e. ` 40,000 ? (4 Marks)

(e) Ram purchases some goods on credit from Singh, payable within 3 months. After 2 months, Ram makes out a blank cheque in favour of Singh, signs and delivers it to Singh

with a request to fill up the amount due, as Ram does not know the exact amount

payable by him.

Singh fills up fraudulently the amount larger than the amount payable by Ram and endorses the cheque to Chandra in full payment of Singh's own due. Ram's cheque is

dishonoured. Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the rights of Singh and Chandra. (3 Marks)

Answer

(a) The paid up share capital of S Ltd. is ` 1,00,00,000 divided into 10,00,000 equity shares of ` 10 each. Of this, H Ltd. is holding 6,00,000 equity shares.

Hence, H Ltd. is the holding company of S Ltd. and S Ltd. is the subsidiary company of H

Ltd. by virtue of section 2(87) of the Companies Act, 2013.

In the instant case,

(i) As per the provisions of sub-section (1) of Section 19 of the Companies Act, 2013, no company shall, either by itself or through its nominees, hold any shares in its holding company. Therefore, S Ltd. cannot make further investment in equity shares

of H Ltd. during 2018-19.

(ii) As per second proviso to Section 19, a subsidiary company shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee. Therefore, S Ltd. can exercise voting rights at

the Annual General Meeting of H Ltd. only in respect of 1% shares held as a legal

representative of a deceased member of H Ltd.

(iii) Section 19 also provides that no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a

company to its subsidiary company shall be void. Therefore, H Ltd. cannot allot or

transfer some of its shares to S Ltd.

(b) (i) Section 40(6) of the Companies Act, 2013 provides that a company may pay commission to any person in connection with the subscription to its securities

subject to such conditions as may be prescribed. Rule 13 of the Companies

34 INTERMEDIATE (NEW) EXAMINATION: MAY, 2019

(Prospectus and Allotment of Securities) Rules, 2014 provides the conditions. As per Rule 13(c) of the Companies (Prospectus and Allotment of Securities) Rules,

2014, the rate of commission paid or agreed to be paid shall not exceed, in case of shares, five per cent of the price at which the shares are issued or a rate authorised

by the articles, whichever is less.

In the instant case, Modern Jewellery Ltd. decides to pay 5% of the issue price gap

of shares as underwriting commission to the underwriters, but the Articles of the

company authorize only 4% underwriting commission on shares.

Hence, the company can only pay a maximum of 4% underwriting commission on

shares.

(ii) Section 127 of the Companies Act, 2013 provides for punishment for failure to

distribute dividend on time. One of such situations is where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has not been communicated to the

shareholder.

In the instant case, PQ Ltd. has failed to communicate to the shareholder Mr. Kumar about non-compliance of his direction regarding payment of dividend. Hence, the

penal provisions under section 127 will be attracted.

(c) According to first proviso to section 137(1) of the Companies Act, 2013, where the

financial statements are not adopted at annual general meeting or adjourned annual general meeting, such unadopted financial statements along with the required documents shall be filed with the Registrar within thirty days of the date of annual general meeting

and the Registrar shall take them in his records as provisional till the financial statements are filed with him after their adoption in the adjourned annual general meeting for that

purpose.

According to second proviso to section 137(1) of the Companies Act, 2013, financial

statements adopted in the adjourned AGM shall be filed with the Registrar within thirty days of the date of such adjourned AGM with such fees or such additional fees as may

be prescribed.

In the instant case, the accounts of Sun Ltd. were adopted at the adjourned AGM held on

15th October, 2018 and filing of financial statements with Registrar was done on 12 th

November, 2018 i.e. within 30 days of the date of adjourned AGM.

Hence, Sun Ltd. has not complied with the statutory requirement regarding filing of unadopted accounts with the Registrar, but has certainly complied with the provisions by

filing of adopted accounts within the due date with the Registrar.

(d) Discharge of Surety by Revocation: As per section 130 of the Indian Contract Act, 1872 a specific guarantee cannot be revoked by the surety if the liability has already accrued. A continuing guarantee may, at any time, be revoked by the surety, as to future


transactions, by notice to the creditor, but the surety remains liable for transactions

already entered into.

As per the above provisions, liability of Manoj is discharged with relation to all

subsequent credit supplies made by Sharma after revocation of guarantee, because it is

a case of continuing guarantee.

However, liability of Manoj for previous transactions (before revocation) i.e. for ` 40,000 remains. He is liable for payment of ` 40,000 to Sharma because the transaction was

already entered into before revocation of guarantee.

(e) According to section 44 of the Negotiable Instruments Act, 1881, when the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in part, the sum

which a holder standing in immediate relation with such signer is entitled to receive from

him is proportionally reduced.

Explanation—The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in

immediate relation with the payee, and the indorser with his indorsee. Other signers may

by agreement stand in immediate relation with a holder.

In the given question, Singh is a party in immediate relation with the drawer (Ram) of the cheque and so he is entitled to recover only the exact amount due from Ram and not the

amount entered in the cheque. However, the right of Chandra, who is a holder for value,

is not adversely affected and he can claim the full amount of the cheque from Singh.

Question 2

(a) State, with reasons, whether the following statements are True or False?

(i) ABC Private Limited may accept the deposits from its members to the extent of ` 50.00 Lakh, if the aggregate of its paid-up capital; free reserves and security

premium account is ` 50.00 Lakh. (1 Mark)

(ii) A Government Company, which is eligible to accept deposits under Section 76 of the Companies Act, 2013 cannot accept deposits from public exceeding 25% of the

aggregate of its paid- up capital, free reserves and security premium account.

(1 Mark)

(iii) The Registrar of Companies is not bound to issue notice to the holder of charge, if

the company gives intimation of satisfaction of charge in the specified form and signed by the holder of charge. (1 Mark)

(iv) The Registrar of Companies may allow the company or holder of charge to file intimation within a period of 300 days of the satisfaction of charge on payment of

fee and additional fees as may be prescribed. (1 Mark)


(b) (i) The Income Tax Authorities in the current financial year 2019-20 observed, during the assessment proceedings, a need to re-open the accounts of Chetan Ltd. for the

financial year 2008-09 and, therefore, filed an application before the National Company Law Tribunal (NCLT) to issue the order to Chetan Ltd. for re-opening of its accounts and recasting the financial statements for the financial year 2008-09.

Examine the validity of the application filed by the Income Tax Authorities to NCLT.

(3 Marks)

(ii) The Board of Directors of A Ltd. requested its Statutory Auditor to accept the assignment of designing and implementation of suitable financial information system to strengthen the internal control mechanism of the Company. How will you

approach to this proposal, as an Statutory Auditor of A Ltd., taking into account the consequences, i f any, of accepting this proposal? (3 Marks)

(c) Aarthi is the wife of Naresh. She purchased some sarees on credit from M/s Rainbow

Silks, Jaipur.

M/s Rainbow Silks, Jaipur demanded the amount from Naresh. Naresh refused. M/s

Rainbow Silks, Jaipur filed a suit against Naresh for the said amount. Decide in the light of provisions of the Indian Contract Act, 1872, whether M/s Rainbow Silks, Jaipur would succeed? (4 Marks)

(d) Explain the concept of 'Noting', 'Protest' and 'Protest for better security' as per the

Negotiable Instruments Act,1881. (3 Marks)

Answer

(a) (i) As per the provisions of Section 73(2) of the Companies Act, 2013 read with Rule 3 of the Companies (Acceptance of Deposits) Rules, 2014, as amended by the Companies (Acceptance of Deposits) Amendment Rules, 2016, a company shall

accept any deposit from its members, together with the amount of other deposits outstanding as on the date of acceptance of such deposits not exceeding thirty five per cent of the aggregate of the Paid-up share capital, free Reserves and securities

premium account of the company. Provided that a private company may accept from its members monies not exceeding one hundred per cent of aggregate of the paid up share capital, free reserves and securities premium account and such

company shall file the details of monies so accepted to the Registrar in such

manner as may be specified.

Therefore, the given statement of eligibility of ABC Private Ltd. to accept deposits from its members to the extent of ` 50.00 lakh is True.

(ii) A Government company is not eligible to accept or renew deposits under section

76, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds thirty five per cent of the aggregate of its Paid-up share capital, free Reserves and securities premium

account of the company.

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Therefore, the given statement prescribing the limit of 25% to accept deposits is False.

(iii) According to the proviso to section 82(2) of the Companies Act, 2013, no notice shall be required to be sent, in case the intimation to the Registrar in this regard is

in the specified form and signed by the holder of charge.

Hence, the given statement is True.

(iv) As per section 77 of the Companies Act, 2013, it shall be duty of the company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise and situated in or outside India, to

register the particulars of the charge signed by the company and the charge holder together with the instruments, if any, creating such charge in such form, on payment of such fees and in such manner as may be prescribed, with the registrar within 30

days of creation. The Registrar may, on an application by the company, allow such registration to be made within a period of three hundred days of such creation on

payment of such additional fees as may be prescribed.

Hence, the given statement is True.

(b) (i) As per section 130 of the Companies Act, 2013, a company shall not re-open its

books of account and not recast its financial statements, unless an application in this regard is made by the Central Government, the Income-tax authorities, the Securities and Exchange Board, any other statutory body or authority or any person

concerned and an order is made by a court of competent jurisdiction or the Tribunal

to the effect that—

(i) the relevant earlier accounts were prepared in a fraudulent manner; or

(ii) the affairs of the company were mismanaged during the relevant period,

casting a doubt on the reliability of financial statements:

However, no order shall be made in respect of re-opening of books of account

relating to a period earlier than eight financial years immediately preceding the

current financial year.

In the given instance, an application was filed for re-opening and re-casting of the

financial statements of Chetan Ltd. for the financial year 2008-2009.

Though application filed by the Income Tax Authorities to NCLT is valid, its

recommendation for reopening and recasting of financial statements for the period earlier than eight financial years immediately preceding the current financial year

i.e. 2019-2020, is invalid.

(ii) According to section 144 of the Companies Act, 2013, an auditor appointed under

this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be. But such services shall not include designing and implementation of any financial information

system.


In the said instance, the Board of directors of A Ltd. requested its Statutory Auditor to accept the assignment of designing and implementation of suitable financial

information system to strengthen the internal control mechanism of the company. As

per the above provision said service is strictly prohibited.

In case the Statutory Auditor accepts the assignment, he will attract the penal

provisions as specified in Section 147 of the Companies Act, 2013.

In the light of the above provisions, we shall advise the Statutory Auditor not to take

up the above stated assignment.

(c) The situation asked in the question is based on the provisions related with the modes of creation of agency relationship under the Indian Contract Act, 1872. Agency may be created by a legal presumption; in a case of cohabitation by a married woman (i.e. wife i s

considered as an implied agent of her husband). If wife lives with her husband, there is a legal presumption that a wife has authority to pledge her husband’s credit for

necessaries. But the legal presumption can be rebutted in the following cases:

(i) Where the goods purchased on credit are not necessaries.

(ii) Where the wife is given sufficient money for purchasing necessaries.

(iii) Where the wife is forbidden from purchasing anything on credit or contracting debts.

(iv) Where the trader has been expressly warned not to give credit to his wife.

If the wife lives apart for no fault on her part, wife has authority to pledge her husband’s

credit for necessaries. This legal presumption can be rebutted only in cases (iii) and (iv)

above.

Applying the above conditions in the given case M/s Rainbow Silks will succeed. It can recover the said amount from Naresh if sarees purchased by Aarthi are necessaries for

her.

(d) Noting: When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a

notary public upon the instrument, or upon a paper attached thereto, or partly upon each.

Such note must be made within a reasonable time after dishonour, and must specify the

date of dishonor, the reason if any assigned for such dishonor, or if the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonoured and

the notary’s charges.

Protest: When a promissory note or bill of exchange has been dishonoured by non-

acceptance or non-payment, the holder may, within a reasonable time, cause such

dishonour to be noted and certified by a notary public. Such certificate is called a protest.

Protest for better security: When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the

holder may, within a reasonable time, cause a notary public to demand better security of


the acceptor, and on its being refused, may with a reasonable time, cause such facts to

be noted and certified as aforesaid. Such certificate is called a protest for better security.

Question 3

(a) Which fund may be utilized by a public limited company for purchasing (buy back) its own

shares? Also explain the provisions of the Companies Act, 2013 regarding the circumstances in which a company is prohibi ted to buy back i ts own shares. (5 Marks)

(b) (i) Alex limited is facing loss in business during the financial year 2018-2019. In the immediate preceding three financial years, the company had declared dividend at

the rate of 7%, 11% and 12% respectively. The Board of Directors has decided to declare 12% interim dividend for the current financial year atleast to be in par with the immediate preceding year. Is the act of the Board of Directors valid ? (3 Marks)

(ii) The Directors of East West Limited proposed dividend at 15% on equity shares for

the financial year 2017-2018. The same was approved in the Annual general body

meeting held on 24th October 2018. The Directors declared the approved dividends.

Mr. Binoy was the holder of 2000 equity of shares on 31st March, 2018, but he transferred the shares to Mr. Mohan, whose name has been registered on 18th

June, 2018. Who will be entitled to the above dividend ? (2 Marks)

(c) (i) 'M' draws bill on 'N'. 'N' accepts the bill without any consideration. The bill is transferred to 'O' without consideration. 'O' transferred it to 'P' for ` 10,000. On dishonor of the bill, 'P' sued 'O' for recovery of the value of ` 10,000. Examine

whether 'O' has any right to action against M and N? (2 Marks)

(ii) A Bill of Exchange was made without mentioning any time for payment. The holder added the words "on demand" on the face of the instrument. Does this amount to any material al teration? Explain. (2 Marks)

(d) 'Preamble does not over-ride the plain provision of the Act.' Comment. Also give suitable

example. (3 Marks)

Answer

(a) Funds utilized for purchase of its own securities: Section 68 of the Companies Act,

2013 states that a company may purchase its own securities out of:

(i) its free reserves; or

(ii) the securities premium account; or

(iii) the proceeds of the issue of any shares or other specified securities.

However, buy-back of any kind of shares or other specified securities cannot be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other

specified securities.


Prohibition for buy-back in certain circumstances [Section 70]

(1) The provision says that no company shall directly or indirectly purchase its own

shares or other specified securities-

(a) through any subsidiary company including its own subsidiary companies; or

(b) through any investment company or group of investment companies; or

(c) if a default is made by the company in repayment of deposits or interest

payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest

payable thereon, to any financial institutions or banking company;

But where the default is remedied and a period of three years has lapsed after

such default ceased to subsist, then such buy-back is not prohibited.

(2) No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with provisions of Sections 92 (Annual Report), 123 (Declaration of dividend), 127 (Punishment for failure to

distribute dividends), and section 129 (Financial Statements).

(b) (i) As per Section 123(3) of the Companies Act, 2013, the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such

interim dividend is sought to be declared:

Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than

the average dividends declared by the company during the immediately preceding

three financial years.

According to the given facts, Alex Ltd. is facing loss in business during the financial year 2018-2019. In the immediate preceding three financial years, the company

declared dividend at the rate of 7%, 11% and 12% respectively. Accordingly, the rate of dividend declared shall not exceed 10%, the average of the rates (7+11+12=30/3) at which dividend was declared by it during the immediately

preceding three financial years.

Therefore the act of the Board of Directors as to declaration of interim dividend at

the rate of 12% during the F.Y 2018-2019 is not valid.

(ii) Payment of dividend: According to section 123(5) of the Companies Act, 2013, dividend shall be payable only to the registered shareholder of the share or to his

order or to his banker. As said in the question, East West Limited proposed dividend for Financial Year 2017- 2018. Mr. Binoy was the holder of 2000 equity shares on 31st March, 2018. He transferred the shares to Mr. Mohan, whose name

was registered on 18th June 2018 in the register of members.


Since, Mr. Mohan became the registered shareholder before the declaration of dividend in the Annual General Meeting of the company held on 24 th October, 2018

he will be entitled to the dividend.

(c) (i) Negotiable instrument made, etc. without consideration: A negotiable

instrument—

➢ made, drawn, accepted, endorsed, or transferred without consideration, or

➢ for a consideration which fails,

creates no obligation of payment between the parties to the transaction.

But if any such party has transferred the instrument with or without endorsement to a holder for a consideration, such holder, and every subsequent holder deriving title

from him, may recover the amount due on such instrument from the transferor for

consideration or any prior party thereto.

In the light of the above provisions, in the given instance the bill was drawn, accepted and transferred without consideration by ‘M’ to ‘N’, and from ‘N’ to ‘O’

respectively. Therefore, no obligation of payment is created between the parties. So

‘O’ has no right to action against ‘M’ and ‘N’.

(ii) Payment of instrument on which alteration is not apparent: A bill of exchange was made without mentioning any time for payment. The holder added the words

“on demand” on the face of the instrument. As per the provision of Section 89 of the Negotiable Instruments Act, 1881 this is not a material alteration since a bill of exchange where no date of payment is specified will be treated as payable on

demand. Therefore, adding the words “on demand” does not alter the business

effect of the instrument.

Therefore, this cannot be said to have caused material alteration to the instrument.

(d) Preamble: The Preamble expresses the scope, object and purpose of the Act more comprehensively. The Preamble of a Statute is a part of the enactment and can legitimately

be used as an internal aid for construing it. However, the Preamble does not over-ride the plain provision of the Act. But if the wording of the statute gives rise to doubts as to its proper construction, for example, where the words or phrase has more than one meaning

and a doubt arises as to which of the two meanings is intended in the Act, the Preamble

can and ought to be referred to in order to arrive at the proper construction.

In short, the Preamble to an Act discloses the primary intention of the legislature but can only be brought in as an aid to construction if the language of the statute is not clear.

However, it cannot override the provisions of the enactment.

Example: Use of the word ‘may’ in section 5 of the Hindu Marriage Act, 1955 provides that “a marriage may be solemnized between two Hindus…..” has been construed to be mandatory in the sense that both parties to the marriage must be Hindus as defined in section 2 of the

Act. It was held that a marriage between a Christian male and a Hindu female solemnized


under the Hindu Marriage Act was void. This result was reached also having regard to the preamble of the Act which reads: ‘An Act to amend and codify the law relating to marriage

among Hindus” [GullipoliSowria Raj V. BandaruPavani, (2009)1 SCC714].

Question 4

(a) Explain various instances which make the allotment of securities as irregular allotment under the Companies Act, 2013. (4 Marks)

(b) Madurai Ltd. issued a notice for holding of its Annual general meeting on 7 th November 2018. The notice was posted to the members on 16 th October 2018. Some members of

the company allege that the company had not complied with the provisions of the Companies Act, 2013 with regard to the period of notice and as such the meeting was

valid. Referring to the provisions of the Act, decide:

(i) Whether the meeting has been validly called?

(ii) If there is a shortfall, state and explain by how many days does the notice fall short

of the statutory requirement?

(iii) Can the delay in giving notice be condoned? (6 Marks)

(c) (i) The Companies Act, 2013 provides that the amount of dividend remained unpaid/unclaimed on expiry of 30 days from the date of declaration of dividend shall be transferred to unpaid dividend account within 7 days from the date of expiry of

such period of 30 days. If the expiry date of such 30 days is 30.10.2018, decide the last date on or before which the unpaid/unclaimed dividend amount shall be required to be transferred to a separate bank account in the light of the relevant

provisions of the General Clauses Act, 1897? (2 Marks)

(ii) Referring to the provisions of the General Clauses Act, 1897, find out the day/ date

on which the following Act/Regulation comes into force. Give reasons also,

(1) An Act of Parliament which has not specifically mentioned a particular date.

(2) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Fifth Amendment) Regulations, 2015 was issued by SEBI vide

Notification dated 14th August, 2015 with effect from 1st January, 2016.

(2 Marks)

(d) How will you understand whether a provision in a statute is 'mandatory' or 'directory'?

(3 Marks)

Answer

(a) Irregular allotment: The Companies Act, 2013 does not specifically provide for the term “Irregular Allotment” of securities. Hence, we have to examine the requirements of a proper issue of securities and consider the consequences of non- fulfillment of those

requirements.


In broad terms an allotment of shares is deemed to be irregular when it has been made by a company in violation of Sections 23, 26, 39 or 40. Irregular allotment therefore

arises in the following instances:

1. Where a company does not issue a prospectus in a public issue as required by

section 23; or

2. Where the prospectus issued by the company does not include any of the matters required to be included therein under section 26 (1), or the information given is

misleading, faulty and incorrect; or

3. Where the prospectus has not been filed with the Registrar for registration under

section 26 (4); or

4. The minimum subscription as specified in the prospectus has not been received in

terms of section 39; or

5. The minimum amount receivable on application is less than 5% of the nominal value

of the securities offered or lower than the amount prescribed by SEBI in this behalf; or

6. In case of a public issue, approval for listing has not been obtained from one or more of the recognized stock exchanges under section 40 of the Companies Act,

2013.

(b) According to section 101(1) of the Companies Act, 2013, a general meeting of a

company may be called by giving not less than clear twenty-one days' notice either in

writing or through electronic mode in such manner as may be prescribed.

Also, it is to be noted that 21 clear days mean that the date on which notice is served

and the date of meeting are excluded for sending the notice.

Further, Rule 35(6) of the Companies (Incorporation) Rules, 2014, provides that in case

of delivery by post, such service shall be deemed to have been effected - in the case of a notice of a meeting, at the expiration of forty eight hours after the letter containing the

same is posted.

Hence, in the given question:

(i) A 21 days’ clear notice must be given. In the given question, only 19 clear days’

notice is served (after excluding 48 hours from the time of its posting and the day of

sending and date of meeting). Therefore, the meeting was not validly called.

(ii) As explained in (i) above, notice falls short by 2 days.

(iii) The Companies Act, 2013 does not provide anything specific regarding the condonation of delay in giving of notice. Hence, the delay in giving the notice calling

the meeting cannot be condoned.

(c) (i) Section 9 of the General Clauses Act, 1897 provides that, for computation of time, in any legislation or regulation, it shall be sufficient, for the purpose of excluding the first in a series of days or any other period of time to use the word “from” and for the

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purpose of including the last in a series of days or any other period of time, to use

the word “to”.

As per the facts of the question the company shall transfer the unpaid/unclaimed

dividend to unpaid dividend account within the period of 7 days. 30 th October 2018 will be excluded and 6th November 2018 shall be included, i.e. 31st October, 2018

to 6th November, 2018 (both days inclusive).

(ii) (1) According to section 5 of the General Clauses Act, 1897, where any Central

Act has not specifically mentioned a particular date to come into force, it shall be implemented on the day on which it receives the assent of the

President in case of an Act of Parliament.

(2) If any specific date of enforcement is prescribed in the Official Gazette, the Act

shall come into enforcement from such date.

Thus, in the given question, the SEBI (Issue of Capital and Disclosure Requirements) (Fifth Amendment) Regulations, 2015 shall come into enforcement on 1st January, 2016 rather than the date of its notification in the

gazette.

(d) Practically speaking, the distinction between a provision which is ‘mandatory’ and one which is ‘directory’ is that when it is mandatory, it must be strictly observed; when it is ‘directory’ it would be sufficient that it is substantially complied with. However, we have to

look into the substance and not merely the form; an enactment in mandatory form might substantially be directory and, conversely, a statute in directory form may in substance be mandatory. Hence, it is the substance that counts and m ust take precedence over

mere form. If a provision gives a power coupled with a duty, it is mandatory; whether it is

or is not so would depend on such consideration as:

(i) the nature of the thing empowered to be done,

(ii) the object for which it is done, and

(iii) the person for whose benefit the power is to be exercised.

Question 5

(a) A group of individuals intend to form a club namely 'Budding Pilots Flying Club' as limited liability company to impart class room teaching and aircraft flight training to trainee pilots.

It was decided to form a limited liability company for charitable purpose under Section 8 of the Companies Act, 2013 for a period of ten years and thereafter the club will be dissolved and the surplus of assets over the liabilities, if any, will be distributed amongst

the members as a usual procedure allowed under the Companies Act.

Examine the feasibility of the proposal and advise the promoters considering the provisions of the Companies Act, 2013. (5 Marks)


OR

Give the points of distinction between ordinary resolution and special resolution. (5 Marks)

(b) (i) Explain the provisions of the Companies Act, 2013 relating to quorum for general meeting of a public company having total 30 members, of which, two members are

bodies corporate and one member is the President of India.

Whether the representatives appointed by body corporate and President of India to participate in the general meeting shall be counted for quorum and can such representatives cast vote at that general meeting? (3 Marks)

(ii) If a member of a listed company who has casted his vote through electronic voting

can attend general meeting of the company and change his vote subsequently and can he appoint a proxy? (2 Marks)

(c) (i) "An agent is neither personally liable nor can he personally enforce the contract on

behalf of the principal." Comment.

(ii) What is the liability of a bailee making unauthorized use of goods bailed? (4 Marks)

(d) If it is defined as:

(i) "Company means a company incorporated under the Companies Act, 2013 or under

any previous company Law".

(ii) "Person" includes, _______ under the Consumer Protection Act,1986.

How would you interpret/construct the nature and scope of the above definitions?

(3 Marks)

Answer

(a) According to section 8(1) of the Companies Act, 2013, where it is proved to the satisfaction of the Central Government that a person or an association of persons

proposed to be registered under this Act as a limited company—

(a) has in its objects the promotion of commerce, art, science, sports, education,

research, social welfare, religion, charity, protection of environment or any such

other object;

(b) intends to apply its profits, if any, or other income in promoting its objects; and

(c) intends to prohibit the payment of any dividend to its members;

the Central Government may, by issue of licence, allow that person or association of

persons to be registered as a limited liability company.

In the instant case, the decision of the group of individuals to form a limited liability

company for charitable purpose under section 8 for a period of ten years and thereafter to dissolve the club and to distribute the surplus of assets over the liabilities, if any, amongst the members will not hold good, since there is a restriction as pointed out in


point (b) above regarding application of its profits or other income only in promoting its objects. Further, there is restriction in the application of the surplus assets of such a

company in the event of winding up or dissolution of the company as provided in sub-section (9) of Section 8 of the Companies Act, 2013. Therefore, the proposal is not

feasible.

OR

Difference between ordinary resolution and Special resolution

Ordinary Resolution—

Section 114(1) of the Companies Act, 2013 states that a resolution shall be ordinary

resolution, if the notice required under this Act has been duly given and it is required to be passed by the votes cast, whether on a show of hands, or electronically or on a poll, as the case may be, in favour of the resolution, including the casting vote of the

Chairman, if any, of the Chairman, by members, who, being entitled so to do, vote in person, or where proxies are allowed, by proxy or by postal ballot, exceed the votes, if

any cast against the resolution by members, so entitled and voting.

Simply put, the votes cast in the favour of the resolution, by any mode of voting should

exceed the votes cast against it.

Special Resolution—

As per Section 114(2) of the Act, a resolution shall be a special resolution, when–

(a) The intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the

members of the resolution;

(b) The notice required under this Act has been duly given; and

(c) The votes cast in favour of the resolution, whether on a show of hands, or

electronically or on a poll, as the case may be, in favour of the resolution, including the casting vote of the Chairman, if any, of the Chairman, by members, who, being entitled so to do, vote in person, or where proxies are allowed, by proxy or by postal

ballot, are required to be not less than 3 times the number of the votes, if any, cast

against the resolution by members so entitled and voting.

(b) (i) According to section 103(1)(a)(i) of the Companies Act, 2013, unless the articles of the company provide for a larger number, in case of public company, if the number

of members as on the date of meeting is not more than one thousand, five members personally present shall be the quorum for a meeting of the company.In the instant

case, the quorum for the public company will be 5 members personally present.

In the said company, two members are bodies corporate and one member is the

President of India.


Only members present in person and not by proxy are to be counted. Hence, proxies whether they are members or not will have to be excluded for the purposes

of quorum.

As per section 113 of the Companies Act, 2013, if a company is a member of another company, it may authorize a person by resolution to act as its representative at a meeting of the latter company, then such a person shall be

deemed to be a member present in person and counted for the purpose of quorum

and shall be entitled to vote.

As per section 112 of the Companies Act, 2013, the President of India, if he is a member of a company, may appoint such a person as he thinks fit, to act as his

representative at any meeting of the company. A person so appointed shall be deemed to be a member of such a company and thus considered as member

personally present and shall be entitled to vote.

(ii) According to Rule – 20(4)(iii)(C) of the Companies (Management and

Administration) Rules, 2014, the notice of the meeting shall clearly state that the members who have cast their vote by remote e-voting prior to the meeting may also

attend the meeting but shall not be entitled to cast their vote again.

In the instant case, a member of a listed company who has casted his vote through

electronic voting can attend general meeting of the company but cannot c hange his

vote subsequently and is not permitted to appoint a proxy.

(c) (i) According to section 230 of the Indian Contract Act, 1872, in the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by

him on behalf of his principal, nor is he personally bound by them. Thus, an agent

cannot personally enforce, nor be bound by, contracts on behalf of principal.

Presumption of contract to the contrary: But, such a contract shall be presumed

to exist in the following cases:

(1) Where the contract is made by an agent for the sale or purchase of goods for a

merchant resident abroad/foreign principal;

(2) Where the agent does not disclose the name of his principal or undisclosed

principal; and

(3) Where the principal, though disclosed, cannot be sued.

(ii) Liability of bailee making unauthorised use of goods bailed: According to section 154 of the Indian Contract Act, 1872, if the bailee makes any use of the

goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during

such use of them.


(d) Restrictive and extensive definitions: The definition of a word or expression in the definition section may either be restricting of its ordinary meaning or may be extensive of

the same.

When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’ restrictive and exhaustive, we must restrict the meaning of the word to that given in the definition

section.

But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’

extensive: here the word defined is not restricted to the meaning assigned to it but has extensive meaning which also includes the meaning assigned to it in the definiti on

section.

Thus,

(i) The definition is restrictive and exhaustive to the effect that only an entity

incorporated under the Companies Act, 2013 or under any previous Companies Act,

shall deemed to be company.

(ii) The definition is inclusive in nature, thereby the meaning assigned to the respective word (here ‘person’) is extensive. It has a wider scope to include other terms into

the ambit of the definition having regard to the object of the definition.

PAPER – 3: COST AND MANAGEMENT ACCOUNTING


Attempt any four questions out of the remaining five questions.

In case, any candidate answers extra question(s)/ sub-question(s) over and above the required number, then only the requisite number of questions first answered in the answer

book shall be valued and subsequent extra question(s) answered shall be ignored.

Working notes should form part of the answer

Question 1

Answer the following:

(a) Following data is available for ABC Ltd.:

Standard working hours 8 hours per day of 5 days per

week

Maximum Capacity 60 employees

Actual working 50 employees

Actual hours expected to be worked per four week 8,000 hours

Standard hours expected to be earned per four week 9,600·hours

Actual hours worked in the four week period 7,500 hours

Standard hours earned in the four week period 8,800 hours

The related period is of four weeks. Calculate the following Ratios :

(i) Efficiency Ratio

(ii) Activity Ratio

(iii) Standard Capacity Usage Ratio

(iv) Actual Capacity Usage Ratio

(v) Actual Usage of Budgeted Capacity Ratio

(b) M/s Zeba Private Limited allotted a standard time of 40 hours for a job and the rate per

hour is ` 75. The actual time taken by a worker is 30 hours.

You are required to calculate the total earnings under the following plans:

(i) Halsey Premium Plan (Rate 50%)

(ii) Rowan Plan

(iii) Time Wage System

(iv) Piece Rate System


(v) Emerson Plan

(c) A Factory is engaged in the production of chemical Bomex and in the course of its manufacture a by-product Cromex is produced which after further processing has a

commercial value. For the month of April 2019 the following are the summarised cost data:

Joint Expenses

(`)

Separate Expenses

(`)

Bomex Cromex

Materials

Labour

Overheads

Selling Price per unit

Estimated profit per unit on sale of Cromex

Number of units produced

1,00,000

50,000

30,000

6,000

20,000

10,000

100

2,000 units

4,000

18,000

6,000

40

5

2,000 units

The factory uses net realisable value method for apportionment of joint cost to

by-products.

You are required to prepare statements showing :

(i) Joint cost allocable to Cromex

(ii) Product wise and overall profitability of the factory for April 2019.

(d) M/s Abid Private Limited disclosed a net profit of ` 48,408 as per cost books for the year ending 31st March 2019. However, financial accounts disclosed net loss of ` 15,000 for

the same period. On scrutinizing both the set of books of accounts, the following

information was revealed:

Works Overheads under-recovered in Cost Books 48,600

Office Overheads over-recovered in Cost Books 11,500

Dividend received on Shares 17,475

Interest on Fixed Deposits 21,650

Provision for doubtful debts 17,800

Obsolescence loss not charged in Cost Accounts 17,200

Stores adjustments (debited in Financial Accounts) 35,433

Depreciation charged in financial accounts 30,000

Depreciation recovered in Cost Books 35,000

Prepare a Memorandum Reconciliation Account.

(4 x 5 = 20 Marks)

PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 51

Answer

(a) (i) Efficiency Ratio:

= ×100 = = 117.33%

(ii) Activity Ratio:

= ×100 = = 110%

(iii)Standard Capacity Usage Ratio:

=

= = 83.33%

(iv) Actual Capacity Usage Ratio:

=

= = 78.125%

(v) Actual Usage of Budgeted Capacity Ratio:

= = = 93.75%

Working Notes:

1. Maximum Capacity in a budget period

= 60 Employees × 8 Hrs. × 5 Days × 4 Weeks = 9,600 Hrs.

2. Budgeted Hours (Hrs)

= 50 Employees × 8 Hrs. × 5 Days × 4 Weeks = 8,000 Hrs.

3. Actual Hrs. = 7,500 Hrs. (given)

4. Standard Hrs. for Actual Output = 8,800 Hrs.

Standard Hrs

Actual Hrs

8,800 hours×100

7,500 hours

Standard Hrs

Budgeted Hrs

8,800 hours×100

8,000 hours

Budgeted Hours×100

Max. possible hours in the budgeted period

8,000 hours×100

9,600 hours

Actual Hoursworked×100

Max. possible working hours in a period

7,500 hours×100

9,600 hours

Actual working Hours×100

Budgeted Hours

7,500 hours×100

8,000 hours


(b) (i) Halsey Premium plan:

= 1

(Time taken×Rateper hour)+ ( ×Time saved×Rate per hour)2

= 1

(30hours×Rs.75)+ ( ×10hours×Rs.75)2

= ` 2,250 + ` 375 = ` 2,625

(ii) Rowan Premium plan:

=Time saved

(Time taken×Rateper hour)+ ×Time taken×Rateper hourTimeallowed

=10

(30hours× 75)+ ×30× 7540

`

= ` 2,250 + ` 562.5 = ` 2,812.5 or 2,813

(iii) Time wage system:

= T ime taken × Rate per hour

= 30 × ` 75 = ` 2,250

(iv) Piece Rate System:

= Std. T ime × Rate per hour

= 40 × ` 75 = ` 3,000

(v) Emerson plan:

Efficiency level = 40/30 = 133.33%

T ime taken × (120% + 33.33%) of Rate

= 30 hours × 153.33% of ` 75

= ` 3,450

(c) (i) Statement Showing Joint Cost Allocation to ‘Cromex’

Particulars Cromex (`)

Sales (` 40 × 2,000 units) 80,000

Less: Post Split Off Costs (4,000+18,000+6,000)

(28,000)

Less: Estimated Profit (` 5 × 2,000 units) (10,000)

Joint cost allocable 42,000


(ii) Statement Showing Product Wise and Overall Profitability

Particulars Bomex (`) Cromex (` ) Total (` )

Sales 2,00,000 80,000 2,80,000

Less: Share in Joint Expenses (1,38,000)* (42,000) (1,80,000)

Less: Post Split Off Costs (36,000) (28,000) (64,000)

Profit 26,000 10,000 36,000

(*) 1,80,000 – 42,000

(d) Memorandum Reconciliation Account

Dr. Cr.

Particulars (`) Particulars (`)

To Works overheads under

recovered in Cost Accounts 48,600 By Net profit as per

Costing books 48,408

To Provision for doubtful debts 17,800 By Office overheads over recovered in cost accounts

11,500

To Obsolescence loss 17,200 By Dividend received on shares

17,475

To Store adjustment (Debit) 35,433 By Interest on fixed deposit 21,650

By Depreciation over-

charged 5,000

By Net loss as per financial accounts

15,000

1,19,033 1,19,033

[Note: This question may also be solved by taking net loss as per financial accounts as basis.]

Question 2

(a) M/s Areeba Private Limited has a normal production capacity of 36,000 units of toys per

annum. The estimated costs of production are as under:

(i) Direct Material ` 40 per unit

(ii) Direct Labour ` 30 per unit (subject to a minimum of ` 48,000 p.m.)

(iii) Factory Overheads:

(a) Fixed ` 3,60,000 per annum

(b) Variable ` 10 per unit


(c) Semi-variable ` 1,08,000 per annum up to 50% capacity and additional ` 46,800 for every 20% increase in capacity or any part thereof.

(iv) Administrative Overheads ` 5, 18,400 per annum (fixed)

(v) Selling overheads are incurred at ` 8 per unit.

(vi) Each unit of raw material yields scrap which is sold at the rate of ` 5 per unit.

(vii) In year 2019, the factory worked at 50% capacity for the first three months but it

was expected that it would work at 80% capacity for the remaining nine months.

(viii) During the first three months, the selling price per unit was ` 145.

You are required to:

(i) Prepare a cost sheet showing Prime Cost, Works Cost, Cost of Production and Cost

of Sales.

(ii) Calculate the selling price per unit for remaining nine months to achieve the total annual profi t of ` 8,76,600. (10 Marks)

(b) KT Ltd. produces a product EMM which passes through two processes before it is

completed and transferred to finished stock. The following data relate to May 2019:

Particulars Process Finished stock

A

(`)

B

(`)

(`)

Opening Stock

Direct Materials

Direct Wages

Factory Overheads

Closing Stock

Inter-process profit included in opening stock

5,000

9,000

5,000

4,600

2,000

5,500

9,500

6,000

2,030

2,490

1,000

10,000

5,000

4,000

Output of Process A is transferred to Process B at 25% profit on the transfer price and output of Process B is transferred to finished stock at 20% profit on the transfer price. Stock in process is valued at prime cost. Finished stock is valued at the price at which it

is received from Process B. Sales during the period are ` 75,000.

Prepare the Process cost accounts and Finished stock account showing the profit element at each stage. (10 Marks)


Answer

(a) (i) Cost Sheet of M/s Areeba Pvt. Ltd. for the year 2019.

Normal Capacity: 36,000 units p.a.

Particulars

3 Months

4,500 Units

9 Months

21,600 units

Amount

(`)

Cost per unit (`)

Amount

(`)

Cost per unit (`)

Direct material 1,80,000 8,64,000

Less: Scrap (22,500) (1,08,000)

Materials consumed 1,57,500 35 7,56,000 35

Direct Wages 1,44,000 32 6,48,000 30

Prime Cost 3,01,500 67 14,04,000 65

Factory overheads:

- Fixed 90,000 2,70,000

- Variable 45,000 2,16,000

- Semi variable 27,000 36 1,51,200 29.50

Works Cost 4,63,500 103 20,41,200 94.50

Add: Administrative overheads 1,29,600 28.80 3,88,800 18

Cost of Production 5,93,100 131.80 24,30,000 112.5

Selling Overheads 36,000 8 1,72,800 8

Cost of Sales 6,29,100 139.80 26,02,800 120.5

Working Notes:

1. Calculation of Costs

Particulars 4,500 units 21,600 units

Amount (`) Amount (`)

Material 1,80,000 (` 40 × 4,500 units) 8,64,000 (`40 × 21,600 units)

Wages 1,44,000 (Max. of ` 30 × 4,500 units = `1,35,000 and ` 48,000 × 3 months = `1,44,000)

6,48,000 (21600 Units×30)

Variable Cost 45,000 (`10 × 4,500 units) 2,16,000 (`10 × 21,600 units)

Semi-variable

Cost 27,000 (1,08,000

×3 Months12 Months

` ) 1,51,200[(

1,08,000×9 Months

12 Months

`)


+46,800(for 20 % increase) +23,400(for 10% increase)

Selling Overhead

36,000 (`8 × 4,500 units) 1,72,800(` 8 × 21,600 units)

Notes:

1. Alternatively scrap of raw material can also be reduced from Work cost.

2. Administrative overhead may be treated alternatively as a part of general overhead. In that case, Works Cost as well as Cost of Production will be same i.e. ` 4,63,500

and Cost of Sales will remain same as ` 6,29,100.

(ii) Calculation of Selling price for nine months period

Particulars Amount (`)

Total Cost of sales ` (6,29,100+26,02,800) 32,31,900

Add: Desired profit 8,76,600

Total sales value 41,08,500

Less: Sales value realised in first three months (`145 × 4,500 units) (6,52,500)

Sales Value to be realised in next nine months 34,56,000

No. of units to be sold in next nine months 21,600

Selling price per unit (` 34,56,000 ÷ 21,600 units) 160

(b) Process-A A/c

Particulars Total

(`)

Cost

(`)

Profit

(`)

Particulars Total

(`)

Cost

(`)

Profit

(`)

Opening stock 5,000 5,000 _ Process B

A/c

28,800 21,600 7,200

Direct materials 9,000 9,000 _

Direct wages 5,000 5,000 _

19,000 19,000 _

Less: Closing

stock

(2,000) (2,000) _

Prime Cost 17,000 17,000 _

Overheads 4,600 4,600 _

Process Cost 21,600 21,600 _


Profit (33.33% of

total cost)

7,200 - 7,200

28,800 21,600 7,200 28,800 21,600 7,200

Process-B A/c

Particulars Total

(`)

Cost

(`)

Profit

(`)

Particulars Total

(`)

Cost

(`)

Profit

(`)

Opening stock 5,500 4,500 1,000 Finished stock A/c

61,675 41,550 20,125

Process A A/c 28,800 21,600 7,200

Direct materials 9,500 9,500 _

Direct wages 6,000 6,000 _

49,800 41,600 8,200

Less: Closing stock (2,490) (2,080) (410)

Prime Cost 47,310 39,520 7,790

Overheads 2,030 2,030 _

Process Cost 49,340 41,550 7,790

Profit (25% of total cost)

12,335 - 12,335

61,675 41,550 20,125 61,675 41,550 20,125

Finished Stock A/c

Particulars Total

(`)

Cost

(`)

Profit

(`)

Particulars Total

(`)

Cost

(`)

Profit

(`)

Opening stock 10,000 6,000 4,000 Costing P&L A/c 75,000 44,181 30,819

Process B A/c 61,675 41,550 20,125

71,675 47,550 24,125

Less: Closing stock (5,000) (3,369) (1,631)

COGS 66,675 44,181 22,494

Profit 8,325 - 8,325

75,000 44,181 30,819 75,000 44,181 30,819

Question 3

(a) A gang of workers normally consists of 30 skilled workers, 15 semi-skilled workers and

10 unskilled workers. They are paid at standard rate per hour as under:

Skilled ` 70


Semi-skilled ` 65

Unskilled ` 50

In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output. During the week ended 31st March, 2019, the gang consisted of 40 skilled, 10

semi-skilled and 5 unskilled workers. The actual wages paid were at the rate of ` 75, ` 60 and ` 52 per hour respectively. Four hours were lost due to machine breakdown

and 1,600 units were produced.

Calculate the following variances showing clearly adverse (A) or favourable (F)

(i) Labour Cost Variance (ii) Labour Rate Variance

(iii) Labour Efficiency Variance (iv) Labour Mix Variance

(v) Labour Idle Time Variance (10 Marks)

(b) MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the

basis of direct labour hours. The budgeted overheads and direct labour hours for the month of March 2019 are ` 15,00,000 and 25,000 hours respectively. The information

about the company's products is as follows:

Equipment

A B

Budgeted Production Volume

Direct Material Cost

Direct Labour Cost

A: 3 hours @ ` 120 per hour

B: 4 hours @ ` 120 per hour

3,200 units

` 350 per unit

` 360

3,850 units

` 400 per unit

` 480

Overheads of ` 15,00,000 can be identified with the following three major activities:

Order Processing: ` 3,00,000

Machine Processing: ` 10,00,000

Product Inspection: ` 2,00,000

These activities are driven by the number of orders processed, machine hours worked

and inspection hours respectively. The data relevant to these activities is as follows:

Orders processed Machine hours worked Inspection hours

A

B

400

200

22,500

27,500

5,000

15,000

Total 600 50,000 20,000


Required:

(i) Prepare a statement showing the manufacturing cost per unit of each product using the absorption costing method assuming the budgeted manufacturing volume is

attained.

(ii) Determine cost driver rates and prepare a statement showing the manufacturing cost per unit of each product using activity based costing, assuming the budgeted

manufacturing volume is attained.

(iii) MNO Ltd.'s selling prices are based heavily on cost. By using direct labour hours as

an application base, calculate the amount of cost distortion (under costed or over costed) for each equipment. (10 Marks)

Answer

(a) (i) Labour Cost Variance = Standard Cost – Actual Cost

= `1,14,400 – `1,54,400

= 40,000 (A)

(1,600*75+400*60+200*52= `1,54,400)

Or

Types of workers Standard Cost – Actual Cost Amount (`)

Skilled Workers (30x40x70/2,000x1,600)- (40x40x75)

67,200-1,20,000

52,800 (A)

Semi- Skilled (15x40x65/2,000x1,600)- (10x40x60)

31,200-24,000

7,200 (F)

Un-Skilled Workers (10x40x50/2,000x1,600)- (5x40x52)

16,000-10,400

5,600 (F)

Total 1,14,400-1,54,400 40,000 (A)

(ii) Labour Rate Variance

Types of workers Actual Hours × (Standard Rate -

Actual Rate) Amount (` )

Skilled Workers 1,600 hours × (`70.00 – `75.00) 8,000 (A)

Semi- Skilled 400 hours × (`65.00 – `60.00) 2,000 (F)

Un-Skilled Workers 200 hours × (`50.00 – `52.00) 400 (A)

Total `8,000 (A) + `2,000 (F) + `400 (A) 6,400 (A)


(iii) Labour Efficiency Variance

Types of workers Standard Rate × (Standard Hours – Actual Hours)

Amount (`)

Skilled Workers `70.00 × (960 hours – 1,440 hours)

33,600 (A)

Semi- Skilled `65.00 × (480 hours – 360 hours) 7,800 (F)

Un-Skilled Workers `50.00 × (320 hours – 180 hours) 7,000 (F)

Total 33,600 (A) + 7,800 (F) + 7,000 (F) 18,800 (A)

Alternatively labour efficiency can be calculated on basis of labour hours paid

Types of workers Standard Rate × (Standard Hours – Actual Hours)

Amount (`)

Skilled Workers 70.00 × (960 hours – 1600 hours) 44,800 (A)

Semi- Skilled 65.00 × (480 hours – 400 hours) 5,200 (F)

Un-Skilled Workers 50.00 × (320 hours – 200 hours) 6,000 (F)

Total 33,600 (A) + 7,800 (F) + 7,000 (F) 33,600 (A)

(iv) Labour Mix Variance

= Total Actual T ime Worked (hours) × {Average Standard Rate per hour of Standard Gang Less Average Standard

Rate per hour of Actual Gang}

@on the basis of hours worked

= 1,980 hours ×

= ` 4,500 (A)

Or

Labour Mix Variance

Types of workers Std. Rate (Revised Actual Hours Worked- Actual Hours Worked)

Amount (`)

Skilled Workers `70 × (1,080 hrs. – 1440 hrs.) 25,200 (A)

Semi- Skilled `65 × (540 hrs. – 360 hrs.) 11,700 (F)

Un Skilled Workers `50 × (360 hrs. – 180 hrs.) 9,000 (F)

Total `25,200 (A) + `11,700 (F) + `9,000 (F) 4,500 (A)

–1,14,400 1,440hrs.× 70 + 360hrs.× 65 + 180hrs.× 50

1,760 hrs. 1,980 hrs.

` ` ` `


(v) Labour Idle Time Variance

Types of workers Standard Rate × (Hours Paid – Hours

Worked)

Amount (`)

Skilled Workers `70.00 × (1,600 hours – 1,440 hours) 11,200 (A)

Semi- Skilled `65.00 × (400 hours – 360 hours) 2,600 (A)

Un-Skilled Workers `50.00 × (200 hours – 180 hours) 1,000 (A)

Total 11,200 (A) + 2,600 (A) + 1,000 (A) 14,800 (A)

Verification:

Labour Cost Variance

= Labour Rate Variance + Labour Efficiency Variance + Labour Idle T ime Variance

= 6,400 (A) + 18,800 (A) + 14,800 (A) = ` 40,000 (A)

Labour Cost Variance

= Labour Rate Variance + Labour Efficiency Variance

= 6400(A) + 33600(A)= `40000(A)

In this case, labour idle time variance is a part of labour efficiency variance.

Working Notes:

Category Standard Cost Actual (1600 units) Revised Actual Hours

Hrs. Rate Amt. (`) Hrs. Rate Amt. (`)

Skilled 960

(30Wx40x1,600/2,000)

70.00 67,200 1,440

(40Wx36)

75.00

1,08,000 1,080

(1,980x6/11)

Semi-

Skilled

480

(15Wx40 x1,600/2,000)

65.00 31,200 360

(10Wx36)

60.00

21,600 540

(1,980x3/11)

Unskilled 320

(10Wx40 x1,600/2,000)

50.00 16,000 180

(5Wx36)

52.00 9,360 360

(1,980x2/11)

Total 1,760 65 1,14,400 1,980 1,38,960 1,980

(b) (i) Overheads application base: Direct labour hours

Equipment Equipment

A (`) B (`)

Direct material cost 350 400

Direct labour cost 360 480


Overheads* 180 240

890 1120

*Pre-determined rate = =

(ii) Estimation of Cost-Driver rate

Activity Overhead cost Cost-driver level Cost driver rate

(`) (`)

Order processing

3,00,000

600

Orders processed 500

Machine processing

10,00,000

50,000

Machine hours 20

Inspection

2,00,000

15,000

Inspection hours 10

Equipment Equipment

A (`) B (`)

Direct material cost 350 400

Direct labour cost 360 480

Prime Cost(A) 710 880

Overhead Cost

Order processing 400: 200 2,00,000 1,00,000

Machine processing 22,500: 27,500 4,50,000 5,50,000

Inspection 5,000: 15,000 50,000 1,50,000

Total overhead cost 7,00,000 8,00,000

(Overheads cost per unit for each overhead can also be calculated)

Per unit cost A (`) B (`)

7,00,000 /3,200 (B)-A 218.75

8,00,000/ 3,850 (B)-B 207.79

Unit manufacturing cost (A+B) 928.75 1,087.79

Budgeted overheads

Budgeted direct labour hours

15,00,000

25,00

0 = 60

hours

``


(iii) Calculation of Cost Distortion

Equipment Equipment

A (`) B (`)

Unit manufacturing cost–using direct labour

hours as an application base 890.00 1,120.00

Unit manufacturing cost-using activity based costing 928.75 1,087.79

Cost distortion -38.75 32.21

Question 4

(a) X Ltd. distributes' its goods to a regional dealer using single lorry. The dealer premises

are 40 kms away by road. The capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded on the outward journey and empty on return journey. The

following information is available:

Diesel Consumption 8 km per litre

Diesel Cost ` 60 per litre

Engine Oil ` 200 per week

Driver's Wages (fixed) ` 2,500 per week

Repairs ` 600 per week

Garage Rent ` 800 per week

Cost of Lorry (excluding cost of tyres) ` 9,50,000

Life of Lorry 1,60,000 kms

Insurance ` 18,200 per annum

Cost of Tyres ` 52,500

Life of Tyres 25,000 kms

Estimated sale value of the lorry at end of its life is ` 1,50,000

Vehicle License Cost ` 7,800 per annum

Other Overhead Cost ` 41,600 per annum

The lorry operates on a 5 day week.

Required:

(i) A statement to show the total cost of operating the vehicle for the four week period

analysed into Running cost and Fixed cost.


(ii) Calculate the vehicle operating cost per km and per tonne km. (Assume 52 weeks in a year) (10 Marks)

(b) The following are the details of receipt and issue of material 'CXE' in a manufacturing Co.

during the month of April 2019:

Date Particulars Quantity

(kg)

Rate

per kg

April 4 Purchase 3,000 ` 16

April8 Issue 1,000

April15 Purchase 1,500 ` 18

April 20 Issue 1,200

April 25 Return to supplier out of purchase made on April 15 300

April 26 Issue 1,000

April 28 Purchase 500 ` 17

Opening stock as on 01-04-2019 is 1,000 kg @ ` 15 per kg.

On 30th April, 2019 it was found that 50 kg of material 'CXE' was fraudulently

misappropriated by the store assistant and never recovered by the Company.

Required:

(i) Prepare a store ledger account under each of the following method of pricing the

issue:

(a) Weighted Average Method

(b) LIFO

(ii) What would be the value of material consumed and value of closing stock as on 30-04-2019 as per these two methods? (10 Marks)

Answer

(a) Working Notes:

Particulars For 4 weeks For 1 week

(by dividing by 4)

Total distance travelled (40 k.m × 2 × 2 trips × 5 days × 4 weeks)

3,200 km 800 km

Total tonne km (40 k.m × 10 tonnes × 2 × 5 days × 4 weeks)

16,000 tonne km 4,000 tonne km


(i) Statement showing Operating Cost

Amount (` )

Particulars For 4 weeks

For 1 week (by dividing

by 4)

A. Fixed Charges:

Drivers’ wages (`2,500 4 weeks) 10,000 2,500

Garage rent (`800 × 4 weeks) 3,200 800

Insurance {(`18,200 ÷ 52 weeks) × 4 weeks} 1,400 350

Vehicle license {(`7,800 ÷ 52 weeks) × 4 weeks}

600 150

Other overheads cost {(`41,600 ÷ 52 weeks) × 4 weeks}

3,200 800

Total (A) 18,400 4,600

B. Running Cost:

Cost of diesel {(3,200 ÷ 8 kms) × `60} 24,000 6,000

Engine Oil (`200 × 4 weeks)* 800 200

Repairs (`600 × 4 weeks)* 2,400 600

Depreciation on vehicle

9,50,000 1,50,0003,200km

1,60,000km

` `

16,000 4,000

Depreciation on tyres

52,5003,200km

25,000km

`

6,720 1,680

Total (B) 49,920 12,480

C. Total Cost (A + B) 68,320 17,080

*Cost of engine oil & repairs may also be treated as fixed cost, as the question relates

these with time i.e. in weeks instead of running of vehicle.

(ii) Calculation of vehicle operating cost:

Operating cost per k.m. = ` 68,320 or ` 17,080 = ` 21.35

3,200 kms 800 Kms

Operating cost per Tonne-k.m. = ` 68,320 or ` 17,080 = ` 4.27

16,000 4,000


(b) (i) (a) Stores Ledger Account for the month of April, 2019 (Weighted Average

Method)

Receipt Issue Balance

Date Qty

Units

Rate

(`)

Amount

(`)

Qty

Units

Rate

(`)

Amount

(`)

Qty

Units

Rate

(`)

Amount

(`)

1-4-19 _ _ _ _ _ _ 1,000 15.00 15,000

4-4-19 3,000 16.00 48,000 _ _ _ 4,000 15.75 63,000

8-4-19 _ _ _ 1,000 15.75 15,750 3,000 15.75 47,250

15-4-19 1,500 18.00 27,000 _ _ _ 4,500 16.50 74,250

20-4-19 _ _ _ 1,200 16.50 19,800 3,300 16.50 54,450

25-4-19 _ _ _ 300 18.00 5,400 3,000 16.35 49,050

26-4-19 _ _ _ 1,000 16.35 16,350 2,000 16.35 32,700

28-4-19 500 17.00 8,500 _ _ _ 2,500 16.48 41,200

30-4-19 _ _ _ 50 16.48 824 2,450 16.48 40,376

(b) Stores Ledger Account for the month of April, 2019 (LIFO)

Receipt Issue Balance

Date Qty

Units

Rate

(`)

Amount

(`)

Qty

Units

Rate

(`)

Amount

(`)

Qty

Units

Rate

(`)

Amount

(`)

1-4-19 _ _ _ _ _ _ 1,000 15 15,000

4-4-19

3,000 16 48,000 _ _ _ 1,000

3,000

15

16

15,000

48,000

8-4-19 _ _ _ 1,000 16 16,000 1,000

2,000

15

16

15,000

32,000

15-4-19 1,500 18 27,000 _ _ _ 1,000

2,000

1,500

15

16

18

15,000

32,000

27,000

20-4-19 _ _ _ 1,200 18 21,600 1,000

2,000

300

15

16

18

15,000

32,000

5,400

25-4-19 _ _ _ 300 18 5,400 1,000

2,000

15

16

15,000

32,000

26-4-19 _ _ _ 1,000 16 16,000 1,000

1,000

15

16

15,000

16,000

28-4-19 500 17 8,500 _ _ _ 1,000 15 15,000


1,000

500

16

17

16,000

8,500

30-4-19 _ _ _ 50 17 850 1,000

1,000

450

15

16

17

15,000

16,000

7,650

(ii) Value of Material Consumed and Closing Stock

Weighted Average method (`)

LIFO method

(`)

Opening stock as on 01-04-2019 15,000 15,000

Add: Purchases 83,500 83,500

98,500 98,500

Less: Return to supplier 5,400 5,400

Less: Abnormal loss 824 850

Less: Closing Stock as on 30-04-2019 40,376 38,650

Value of Material Consumed 51,900 53,600

Question 5

(a) M/s Gaurav Private Limited is manufacturing and selling two products:

'BLACK' and 'WHITE' at selling price of ` 20 and ` 30 respectively.

The following sales strategy has been outlined for the financial year 2019-20:

(i) Sales planned for the year will be ` 81,00,000 in the case of 'BLACK' and ` 54,00,000 in the case of 'WHITE'.

(ii) The selling price of 'BLACK' will be reduced by 10% and that of 'WHITE' by 20%.

(iii) Break-even is planned at 70% of the total sales of each product.

(iv) Profit for the year to be maintained at ` 8,26,200 in the case of 'BLACK' and ` 7,45,200 in the case of 'WHITE'. This would be possible by reducing the present

annual fixed cost of ` 42,00,000 allocated as ` 22,00,000 to 'BLACK' and ` 20,00,000 to 'WHITE'.

You are required to calculate:

(1) Number of units to be sold of 'BLACK' and 'WHITE' to Break even during the

financial year 2019-20.

(2) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned

at (iv) above. (5 Marks)


(b) M/s Zaina Private Limited has purchased a machine costing ` 29,14,800 and it is expected to have a salvage value of ` 1,50,000 at the end of its effective life of 15 years.

Ordinarily the machine is expected to run for 4,500 hours per annum but it is estimated that 300 hours per annum will be lost for normal repair & maintenance. The other details

in respect of the machine are as follows :

(i) Repair & Maintenance during the whole life of the machine are expected to be

` 5,40,000.

(ii) Insurance premium (per annum) 2% of the cost of the machine.

(iii) Oil and Lubricants required for operating the machine (per annum) ` 87,384.

(iv) Power consumptions: 10 units per hour @ ` 7 per unit. No power consumption

during repair and maintenance. ·

(v) Salary to operator per month ` 24,000. The operator devotes one third of his time to

the machine.

You are required to calculate comprehensive machine hour rate. (5 Marks)

(c) A contractor prepares his accounts for the year ending 31st March each year. He

commenced a contract on 1st September, 2018. The following information relates to

contract as on 31st March, 2019:

Material sent to site ` 18,75,000

Wages paid ` 9,28,500

Wages outstanding at end ` 84,800

Sundry expenses ` 33,825

Material returned to supplier ` 15,000

Plant purchased ` 3,75,000

Salary of supervisor ` 15,000 per month

(Devotes 1/3rd of his time on contract)

Material at site as on 31-03-2019 ` 2,16,800

Some of material costing ` 10,000 was found unsuitable and was sold for ` 11,200. On 31-12-2018 plant which costs ` 25,000 was transferred to some other contract and on

31-01-2019 plant which costs ` 32,000 was returned to stores. The plant is subject to

annual depreciation @ 15% on written down value method.

The contract price is ` 45,00,000. On 31st March, 2019 two-third-of the contract was

completed. The architect issued certificate covering 50% of the contract price.

Prepare Contract A/c and show the notional profit or loss as on 31st March, 2019.

(10 Marks)


Answer

(a) (i) Statement showing Break Even Sales

Particulars Black White

Sales Planned 81,00,000 54,00,000

Selling Price (`) 18 24

Number of Units to be sold 4,50,000 2,25,000

Break Even sales (in Units),70% of total sales 3,15,000 1,57,500

Or

Break Even sales (in ),70% of total sales 56,70,000 37,80,000

(ii) Statement Showing Fixed Cost Reduction

Profit to be maintained (`) 8,26,200 7,45,200

Margin of Safety (70% of Sales) (`) 24,30,000 16,20,000

PVR (Profit/ Margin of Safety) x 100 34% 46%

Contribution (Sales x 34% or 46%) (`) 27,54,000 24,84,000

Less: Profit (`) 8,26,200 7,45,200

Revised Fixed Cost (` ) 19,27,800 17,38,800

Present Fixed Cost (`) 22,00,000 20,00,000

Reduction in Fixed Cost 2,72,200 2,61,200

(b) Effective machine hour = 4,500 – 300 = 4,200 hours

Calculation of Comprehensive machine hour rate

Elements of Cost and Revenue Amount (`) Per

Annum

Repair and Maintenance

(`5,40,000 ÷15 years)

36,000

Power (4,200 hours × 10 units × `7) 2,94,000

Depreciation 29,14,800 - 1,50,000

15 years

` `

1,84,320

Insurance (`29,14,800 × 2%) 58,296

Oil and Lubricant 87,384

Salary to Operator {(`24,000×12)/3} 96,000


Total Cost 7,56,000

Effective machine hour 4,200

Total Machine Rate Per Hour 180

(c) Contract Account as on 31-03-2019

Particulars (` ) Particulars (` )

To Materials sent to site 18,75,000 By Material returned to

Supplier

15,000

To Wages paid 9,28,500 By Material sold 11,200

Add: Outstanding 84,800 10,13,300 By Plant transferred to

other contract 23,750

To Plant purchased 3,75,000 By Plant returned to stores

30,000

To Sundry Expenses 33,825 By Plant at site c/d 2,90,175

To Salary of Supervisor

{1/3rd (`15,000 × 7 month)}

35,000 By Material at site c/d 2,16,800

To Costing P & L A/c

(’11,200-10,000)

1,200 By Works Cost 27,46,400

33,33,325 33,33,325

To Works Cost 27,46,400 By Work-in-progress c/d Work certified

22,50,000

By Work uncertified 6,86,600

To Notional profit (Profit

for the year) 1,90,200

29,36,600 29,36,600

Working Notes:

1. Value of plant transferred to other contract:

` 25,000 less Depreciation for 4 months

= ` 25,000-(` 25,000×15%×4/12) = ` 23,750

2. Value of plant returned to stores:

` 32,000 less Depreciation for 5 months

= ` 32,000-(` 32,000×15%×5/12) = ` 30,000

3. Value for work uncertified:


The cost of 2/3rd of the contract is `27,46,400

Cost of 100% " " " " 27,46,400

×32

` = `41,19,600

Cost of 50% of the contract which has been certified by the architect is ` 41,19,600 /2= ` 20,59,800. Also, the cost of 1/3rd of the contract, which has been

completed but not certified by the architect is ` (27,46,400- 20,59,800) = `

6,86,600/-

Question 6

Answer any four of the following:

(a) Differentiate between cost control and cost reduction.

(b) What are the cases when a flexible budget is found suitable?

(c) Explain integrated accounting system and state its advantages.

(d) Explain Direct Expenses and how these are measured and their treatment in cost

accounting.

(e) What are the limitations of marginal costing? (4 x 5 = 20 Marks)

Answer

(a) Difference between Cost Control and Cost Reduction

Cost Control Cost Reduction

1. Cost control aims at maintaining the costs in accordance with the established standards.

1. Cost reduction is concerned with reducing costs. It challenges all standards and endeavours to better them continuously.

2. Cost control seeks to attain lowest possible cost under existing conditions.

2. Cost reduction recognises no condition as permanent, since a change will result in lower cost.

3. In case of Cost Control, emphasis is on past and present.

3. In case of cost reduction it is on present and future.

4. Cost Control is a preventive function.

4. Cost reduction is a corrective function. It operates even when an efficient cost control system exists.

5. Cost control ends when targets are achieved.

5. Cost reduction has no visible end.


(b) Flexible budgeting may be resorted to under following situations:

(i) In the case of new business venture due to its typical nature it may be difficult to

forecast the demand of a product accurately.

(ii) Where the business is dependent upon the mercy of nature e.g., a person dealing in

wool trade may have enough market if temperature goes below the freezing point.

(iii) In the case of labour-intensive industry where the production of the concern is

dependent upon the availability of labour.

Suitability for flexible budget:

1. Seasonal fluctuations in sales and/or production, for example in soft drinks

industry;

2. a company which keeps on introducing new products or makes changes in the

design of its products frequently;

3. industries engaged in make-to-order business like ship building;

4. an industry which is influenced by changes in fashion; and

5. General changes in sales.

(c) Integrated Accounting System: Integrated Accounts is the name given to a system of accounting, whereby cost and financial accounts are kept in the same set of books. Obviously, then there will be no separate sets of books for Costing and Financial records.

Integrated accounts provide or meet out fully the information requirement for Costing as well as for Financial Accounts. For Costing it provides information useful for ascertaining the cost of each product, job, and process, operation of any other identifiable activity and

for carrying necessary analysis. Integrated accounts provide relevant information which is necessary for preparing profit and loss account and the balance sheets as per the requirement of law and also helps in exercising effective control over the liabilities and

assets of its business.

Advantages of Integrated Accounting System

The main advantages of Integrated Accounts are as follows:

(i) No need for Reconciliation - The question of reconciling costing profit and finan-

cial profit does not arise, as there is only one figure of profit.

(ii) Less efforts - Due to use of one set of books, there is a significant saving in efforts

made.

(iii) Less time consuming - No delay is caused in obtaining information as it is

provided from books of original entry.

(iv) Economical process - It is economical also as it is based on the concept of

“Centralisation of Accounting function”.


(d) Direct Expense: Expenses other than direct material cost and direct employee cost, which are incurred to manufacture a product or for provision of service and can be

directly traced in an economically feasible manner to a cost object. The following costs

are examples for direct expenses:

(i) Royalty paid/ payable for production or provision of service;

(ii) Hire charges paid for hiring specific equipment;

(iii) Cost for product/ service specific design or drawing;

(iv) Cost of product/ service specific software;

(v) Other expenses which are directly related with the production of goods or provision

of service.

The above list of expenses is not exhaustive; any other expenses which are directly

attributable to the production or service are also included as direct expenses.

Measurement of Direct Expenses

The direct expenses are measured at invoice or agreed price net of rebate or discount but includes duties and taxes (for which input credit not available), commission and other

directly attributable costs.

In case of sub-contracting, where goods are get manufactured by job workers

independent of the principal entity, are measured at agreed price. Where the principal supplies some materials to the job workers, the value of such materials and other

incidental expenses are added with the job charges paid to the job workers.

Treatment of Direct Expenses

Direct Expenses forms part the prime cost for the product or service to which it can be

directly traceable and attributable. In case of lump-sum payment or one time payment, the cost is amortised over the estimated production volume or benefit derived. If the expenses incurred are of insignificant amount i.e. not material, it can be treated as part of

overheads.

(e) Limitations of Marginal Costing

(i) Difficulty in classifying fixed and variable elements: It is difficult to classify exactly the expenses into fixed and variable category. Most of the expenses are neither totally variable nor wholly fixed. For example, various amenities provided to

workers may have no relation either to volume of production or time factor.

(ii) Dependence on key factors: Contribution of a product itself is not a guide for

optimum profitability unless it is linked with the key factor.

(iii) Scope for Low Profitability: Sales staff may mistake marginal cost for total cost and sell at a price; which will result in loss or low profits. Hence, sales staff should

be cautioned while giving marginal cost.


(iv) Faulty valuation: Overheads of fixed nature cannot altogether be excluded particularly in large contracts, while valuing the work-in- progress. In order to show

the correct position fixed overheads have to be included in work-in-progress.

(v) Unpredictable nature of Cost: Some of the assumptions regarding the behaviour of various costs are not necessarily true in a realistic situation. For example, the assumption that fixed cost will remain static throughout is not correct. Fixed cost

may change from one period to another. For example, salaries bill may go up because of annual increments or due to change in pay rate etc. The variable costs do not remain constant per unit of output. There may be changes in the prices of

raw materials, wage rates etc. after a certain level of output has been reached due to shortage of material, shortage of skilled labour, concessions of bulk purchases

etc.

(vi) Marginal costing ignores time factor and investment: The marginal cost of two

jobs may be the same but the time taken for their completion and the cost of machines used may differ. The true cost of a job which takes longer time and uses

costlier machine would be higher. This fact is not disclosed by marginal costing.

(vii) Understating of W-I-P: Under marginal costing stocks and work in progress are

understated.

PAPER – 4 : TAXATION

SECTION A : INCOME TAX LAW

Part - II

Question No.1 is compulsory.

Candidates are also required to answer any two questions from the remaining three questions.

Working notes should form part of the respective answers.

All questions relate to assessment year 2019-20, unless otherwise stated.

Question 1

From the following particulars of Shri Jagdish (aged 59 years) for the Assessment Year 2019-20, you are required to find out his taxable income and net tax liability :

(i) Basic Salary @ ` 51,000 per month, Dearness allowance @ ` 10,000 per month (Part of salary for retirement benefits), House rent allowance ` 4,000 per month and rent paid for house in Mumbai is ` 7 ,000 per month.

(ii) He owns a commercial building at New Delhi, which is let out on 1/7/2018 at a monthly rent of ` 46,000. He paid municipal taxes of ` 27,000 and ` 25,000 for the financial year 2017-18 and 2018-19 on 31-3-2019 and 20-4-2019, respectively.

(iii) He deals in shares. During financial year 2018-19, he earned ` 1,70,000 from his share business and paid ` 30,000 as securities transaction tax.

(iv) He purchased 4000 unlisted shares of Shyam Limited on 16-1-2008 for ` 80,000. Company declared bonus in the ratio of 1:1 on 1st February, 2008. Shri Jagdish sold 3000 Bonus Shares on 28/12/2018 for ` 2,00,000 to his friend Mr. Mehul through unrecognized stock exchange. (Cost Inflation Index: 2007-08: 129, 2018-19: 280)

(v) He received dividend of ` 13,00,000 as dividend income from listed domestic company (on which dividend distribution tax is paid) Interest from saving bank account deposits with IDBI Bank ` 15,000 and lottery winnings (Net of TDS@30%) is ` 21,000.

He paid the following amount out of his taxable income:

(a) Deposits in Public Provident Fund ` 2,00,000.

(b) Medical insurance 'premium paid for health of his wife ` 19,000 and for health of dependent son ` 12,000 through cheque. (14 Marks)

The Suggested Answers for Paper 4A: Income-tax law are based on the provisions of income-

tax law as amended by the Finance Act, 2018. The relevant assessment year is A.Y.2019-20.


Answer

Computation of Taxable Income of Mr. Jagdish for the A.Y.2019-20

Particulars ` `

Salaries

Basic Salary = ` 51,000 x 12 6,12,000

Dearness Allowance (DA) = ` 10,000 x 12 1,20,000

House Rent Allowance (HRA) = ` 4,000 x 12 ` 48,000

Less: Least of the following exempt u/s 10(13A) ` 10,800

37,200

(i) HRA actually received = ` 4,000 x 12 = ` 48,000

(ii) Rent paid (-) 10% of salary [` 84,000 (i.e., ` 7,000 x 12) (-) ` 73,200 (10% of salary i.e., 10% of ` 7,32,000 (Basic Salary + DA)] = ` 10,800

(iii) 50% of salary [50% of ` 7,32,000 (Basic Salary + DA)] = ` 3,66,000

Gross Salary 7,69,200

Less: Standard deduction u/s 16(ia) 40,000

7,29,200

Income from house property

Gross Annual Value [` 46,000 x 9]1 4,14,000

Less: Municipal tax paid during the P.Y. 2018-19 27,000

Net Annual Value 3,87,000

Less: Deduction u/s 24 [30% of Net Annual Value] 1,16,100

2,70,900

Profits and gains of business or profession

Profits from share business 1,70,000

Less: Securities transaction tax paid deductible u/s 36(1)(xv) 30,000

1,40,000

1 In the absence of information relating to fair rent, the GAV in the above solution has been worked out on the assumption that the actual rent for 9 months exceeds the fair rent for the whole year. In the alternative, it is possible to assume that the

fair rent is equal to actual rent. In such a case, GAV would be ` 5,52,000 i.e., ` 46,000 x 12, being fair rent for the whole

year. The income from house property would be ` 3,67,500. The gross total income and total income would, accordingly ,

change to ` 17,81,700 and ` 15,96,700 respectively . The tax payable would be ` 2,10,970.

PAPER – 4 : TAXATION 77

Particulars ` `

Capital Gains

Full value of consideration 2,00,000

Less: Cost of acquisition of bonus shares allotted on or after 1.4.2001

Nil

Long-term capital gains (since bonus shares are held for a period of more than 24 months)

2,00,000

Income from Other Sources

Dividend received from domestic company 13,00,000

Less: Exempt under section 10(34) 10,00,000

Dividend in excess of ` 10 lakh chargeable to tax u/s 115BBDA@10%

3,00,000

Interest from saving bank account deposits with IDBI Bank 15,000

Lottery winnings [21,000 x 100/70] 30,000

3,45,000

Gross Total Income 16,85,100

Less: Deduction under Chapter VI-A

Section 80C

Deposits in PPF ` 2,00,000

Restricted to ` 1,50,000, being the maximum allowable deduction 1,50,000

Section 80D

Medical insurance premium for wife and dependent son `

31,000, restricted to 25,000

Section 80TTA

Interest on saving bank account deposit 10,000 1,85,000

Total Income 15,00,100

Computation of tax liability of Mr. Jagdish for A.Y. 2019-20

Particulars ` `

Tax on total income of ` 15,00,100

Tax on long-term capital gains of ` 2,00,000@20% u/s 112 40,000

Tax on lottery income of ` 30,000 @30% u/s 115BB 9,000

Tax on dividend income of ` 3,00,000@10% u/s 115BBDA 30,000


Tax on other income of ` 9,70,100 [` 15,00,100 – ` 2,00,000, capital gains – ` 30,000, lottery income – 3,00,000, dividend income]

Upto ` 2,50,000 Nil

` 2,50,001 – ` 5,00,000 [i.e., ` 2,50,000@5%] 12,500

` 5,00,001 – ` 9,70,100 [i.e., ` 4,70,100@20%] 94,020

1,85,520

Add: Health and education cess@4% 7,421

Tax liability 1,92,941

Less: Tax deducted at source2

TDS on lottery income

9,000

Tax Payable 1,83,941

Tax Payable (rounded off) 1,83,940

Question 2

(a) The following are the incomes of Shri Subhash Chandra, a citizen of India, for the previous year 2018-19 :

(i) Income from business in India ` 2,00,000. The business is controlled from London and ` 60,000 were remitted to London.

(ii) Profits from business earned in Japan ` 70,000 of which ` 20,000 were received in India. This business is controlled from India.

(iii) Untaxed income of ` 1,30,000 for the year 2016-17 of a business in England which was brought in India on 3rd March, 2019.

(iv) Royalty of ` 4,00,000 received from Shri Ramesh, a resident, for technical service provided to run a business outside India.

(v) Agricultural income of ` 90,000 in Bhutan.

(vi) Income of ` 73,000 from house property in Dubai, which was deposited in bank at Dubai.

Compute Gross Total Income of Shri Subhash Chandra for the A.Y. 2019-20, if he is -

(1) A Resident and Ordinarily Resident; and

(2) A Resident but Not Ordinarily Resident (7 Marks)

2 It is presumed that commercial building is let out to an indiv idual/HUF whose turnover does not exceed limit specified in section 44AB during the immediately preceding F.Y. Hence, TDS u/s 194-I is not attracted. Also, TDS u/s 194-IB is not attracted since monthly rent does not exceed ` 50,000.


(b) Examine the TDS implications in the following cases along-with reasons thereof:

(i) Ms. Varsha received a sum of ` 95,000 on 31st December 2018 towards maturity proceeds of LIC taken on 1st October 2013 for which sum assured was ` 80,000. and annual premium was ` 10,000.

(ii) Mr. Deepak transferred a residential house property to Mr. Karan for ` 45 lacs. The stamp duty value of such property is ` 55 lacs.

(iii) XYZ Private Limited pays the following amounts to Mr. Narayan during previous year 2018-19 :

(1) ` 22,000 towards fee for professional services

(2) ` 18,000 towards royalty.

(iv) Payment of ` 1,75,000 made to Mr. Vaibhav for purchase of calendar according to specifications of M/s. ABC Limited. However, no material was supplied for such calendar by ABC Limited to Mr. Vaibhav.

(v) Talent Private Limited pays ` 12,000 to Ms. Sudha, its director, towards sitting fee which is not taxable u/s 192.

(vi) Radha Limited is engaged for Shyam Limited only in the business of operation of call centre. On 18-03-2019, the total amount credited by Shyam Limited in the ledger account of Radha Limited is ` 70,000 regarding service charges of call centre. The amount is paid through cheque on 28/03/2019 by Shyam Limited. (7 Marks)

Answer

(a) Computation of Gross Total Income of Shri Subhash Chandra for the A.Y. 2019-20

Particulars

Resident and Ordinarily Resident

[ROR] (` )

Resident but Not Ordinarily

Resident [RNOR]

(` )

(i) Income from business in India,

controlled from London

[Taxable both in the hands ROR and RNOR, since income accrues/arises from business in India, irrespective of the fact that business is controlled from London]

2,00,000 2,00,000

(ii) Profits earned from business in Japan

[Profits from business in Japan is taxable in the hands of ROR, since global income is taxable in the hands of ROR. Moreover, entire profit of ` 70,000 would be taxable in the hands of RNOR, even if only ` 20,000 is received in India, since the business in Japan is controlled from India]

70,000 70,000


(iii) Untaxed income for the year 2016-17 of a business in England which was brought in India during the P.Y. 2018-19

[Not taxable either in the hands of ROR or RNOR, since such income is not related to the P.Y. 2018-19.]

Nil Nil

(iv) Royalty received from a resident for technical service provided to run a business outside India

[Taxable in the hands of ROR, since global income is taxable in the hands of ROR. Not taxable in the hands RNOR, since royalty income is not deemed to accrue or arise in India as such income is paid by a resident for technical services used to run a business outside India.]

4,00,000 Nil

(v) Agricultural Income in Bhutan3

[Since agricultural income accrues/arises outside India, it is taxable only in the hands of ROR. No exemption is available in respect of agricultural income earned outside India]

90,000 Nil

(vi) Income from house property in Dubai, which was deposited in a bank at Dubai

Since income accrues/arises outside India and is also received outside India, it is taxable only in the hands of ROR

Less: Deduction u/s 24@30%

73,000

21,900

51,100

Nil

[See Note below for alternative treatment]

Gross Total Income 8,11,100 2,70,000

Note – In the above solution, income of ` 73,000 from house property in Dubai is presumed to be the rent received, since the said amount is stated to be the amount

deposi ted in bank. Accordingly, deduction@30% of the said amount has been provided

to compute the “Income from house property”, where Shri Subhash Chandra is a ROR.

3 Presumed that the same was received in Bhutan


However, since the words “Income from house property” appears to indicate that the same is the income computed under that head of income, it is possible to consider the said amount

of ` 73,000 as income computed under the head “Income from house property” after providing deduction@30% under section 24(a). In such a case, the gross total income of Shri Subhash Chandra, if he were a ROR, would be ` 8,33,000.

(b) TDS implications

(i) On payment of LIC maturity proceeds - The annual premium exceeds 10% of sum

assured in respect of a policy taken after 31.3.2012, and consequently, the maturity proceeds of ` 95,000 would not be exempt u/s 10(10D) in the hands of Ms. Varsha. However, tax deduction provisions u/s 194-DA are not attracted since the maturity proceeds are less than ` 1 lakh.

(ii) On payment of sale consideration for purchase of residential house property

- Since the sale consideration of house property is less than ` 50 lakhs, Mr. Karan is not required to deduct tax at source u/s 194-IA, irrespective of the fact that the stamp duty value is more than the sale consideration as well as the threshold limit of ` 50 lakhs.

(iii) On payment of fee for professional services and royalty – Under section 194J, the threshold limit of ` 30,000 is specified separately for, inter alia, fees for professional services and royalty. Therefore, XYZ Private Limited is not required to deduct tax at source under section 194J either on fee of ` 22,000 for professional services or on royalty of ` 18,000 paid to Mr. Narayan, since the payment under each category does not exceed the independent threshold ` 30,000 specified thereunder.

(iv) On payment for purchase of calendar according to specifications - As per section 194C, the definition of “work” does not include the manufacturing or supply of product according to the specification by customer in case the material is purchased from a person other than the customer.

Therefore, M/s ABC Limited is not required to deduct tax at source in respect of payment of ` 1,75,000 to Mr. Vaibhav, for purchase of calendar according to its specifications, since it did not supply the material for such calendar. Hence, the contract is a contract for ‘sale’ and not a works contract.

(v) On payment of sitting fees to the director - Talent Private Limited is required to

deduct tax at source @10% on sitting fees of ` 12,000 paid to its director, since the threshold limit of ` 30,000 u/s 194J is not applicable in respect of fees paid to a director of a company.

(vi) On payment of call centre service charges - Since Radha Limited is engaged only

in the business of operation of call centre, Shyam Limited is required deduct tax at source@2% on the amount of ` 70,000 u/s 194J on 18.3.2019 i.e., at the time of credit of call centre service charges to the account of Radha Limited, since the said date is earlier than the payment date i.e., 28.3.2019.


Question 3

(a) Mr. Madhvan is a finance manager in Star Private Limited. He gets a salary of ` 30,000

per month. He owns two houses, one of which has been let out to his employer and which is in tum provided to him as rent free accommodation. Following details (annual) are

furnished in respect of two house properties for the Financial Year 2018-19.

House 1 House 2

Fair rent 75,000 1,95,000

Actual rent 65,000 2,85,000

Municipal Valuation 74,000 1,90,000

Municipal taxes paid 18,000 70,000

Repairs 15,000 35,000

Insurance premium on building 12,000 17,000

Ground rent 7,000 9,000

Nature of occupation Let-out to Let-out to

Star Private Limited Ms. Puja

` 17,000 were paid as interest on loan taken by mortgaging House 1 for construction of

House 2.

During the previous year 2018-19, Mr. Madhvan purchased a rural agricultural land for

` 2,50,000. Stamp valuation of such property is ` 3,00,000.

Determine the taxable income of Mr. Madhvan for the assessment year 2019-20. All workings should form part of your answer. (8 Marks)

(b) Mr. Roy owned a residential house in Noida. It was acquired on 09.09.2009 for ` 30,00,000. He sold it for ` 1,57,00,000 on 07.01.2016.

Mr. Roy utilized the sale proceeds of the above property to acquire a residential house in

Panchkula for ` 2,05,00,000 on 20.07.2016. The said house property was sold on 31.10.2018 and he purchased another residential house in Delhi for ` 2,57,00,000 on 02.03.2019. The property at Panchkula was sold for ` 3,25,00,000.

Calculate capital gains chargeable to tax for the assessment year 2016-17 and 2019-20.

All workings should form part of your answer: Cost inflation index for various financial years

are as under :

2009-10 - 148

2015-16 - 254

2016-17 - 264

2018-19 - 280 (6 Marks)


Answer

(a) Computation of taxable income of Mr. Madhvan for A.Y. 2019-20

Particulars ` ` `

Salaries

Basic Salary = ` 30,000 x 12 3,60,000

Rent free accommodation 54,000

[Lower of lease rental paid or payable by the employer (or) 15% of salary i.e., lower of ` 65,000 or ` 54,000, being 15% of ` 3,60,000]

Gross Salary 4,14,000

Less: Standard deduction u/s 16(ia)

[Actual salary or ` 40,000, whichever is less]

40,000

Net Salary 3,74,000

Income from house property House 1 House 2

Municipal value (A) 74,000 1,90,000

Fair rent (B) 75,000 1,95,000

Higher of (A) and (B) = (C) 75,000 1,95,000

Actual rent received 65,000 2,85,000

Gross Annual Value

[Higher of (C) and Actual rent]

75,000 2,85,000

Less: Municipal tax paid 18,000 70,000

Net Annual Value (NAV) 57,000 2,15,000

Less: Deductions u/s 24

30% of NAV

17,100

64,500

Interest on loan Nil 17,000

39,900 1,33,500


[` 39,900 + ` 1,33,500]

1,73,400


Purchase of rural agricultural land for a consideration less than stamp duty value [Not taxable under section 56(2)(x), since rural agricultural land is not a capital asset]

Nil


Note - Expenditure on repairs, insurance premium on building and ground rent are not allowable under the head “Income from house property.”


(b) Computation of capital gains chargeable to tax for A.Y. 2016-17

Particulars `

Full value of consideration received on sale of residential house in Noida 1,57,00,000

Less: Indexed cost of acquisition [` 30,00,000 x 254/148] 51,48,649

Long-term capital gain 1,05,51,351

Less: Exemption under section 54

Purchase of new residential house property at Panchkula for ` 2,05,00,000 on 20.7.2016 i.e., within two years from the date of transfer of residential house in Noida; exemption restricted to long term capital gain, since cost of new house exceeds long-term capital gain

1,05,51,351

Taxable long term capital gain Nil

Computation of capital gains chargeable to tax for A.Y. 2019-20

Particulars `

Full value of consideration received on sale of residential house at

Panchkula

3,25,00,000

Less: Indexed cost of acquisition [As per section 54, if the new

residential house purchased (i.e., on 20.7.2016, in this case) is

transferred within 3 years of its purchase (i.e., on 31.10.2018, in this

case), and the cost of acquisition of the new house (i.e.,

` 2,05,00,000) is higher than the long-term capital gain (i.e.,

` 1,05,51,351,) then, the cost of acquisition of such new residential

house shall be reduced by long term capital gain exempted earlier,

while computing capital gains on sale of the new residential house]

[` 99,48,649 (` 2,05,00,000 – ` 1,05,51,351) x 280/264]

1,05,51,597

Long-term capital gain [Since the residential house is held for more

than 24 months]

2,19,48,403

Less: Exemption under section 54

Purchase of new residential house property in Delhi for

2,57,00,000 on 2.3.2019 i.e., within two years from 31.10.2018,

being the date of transfer of residential house at Panchkula;

exemption restricted to long term capital gain, since cost of new

house exceeds long-term capital gains

2,19,48,403

Taxable long term capital gain Nil


Question 4

(a) Ms. Geeta, a resident individual, provides the following details of her income/losses for the

year ended 31.03.2019:

Particulars Amount

(` )

(i) Income from salary (computed) 41,20,000

(ii) Rent received from house property situated in Delhi 5,00,000

(iii) Interest on loan taken for purchase of above property. Loan was taken from a friend

7,50,000

(iv) Rent received from house property situated in Jaipur 3,20,000

(v) Interest on loan taken for house property in Mumbai, which is self-occupied. Loan was taken from PNB on 01.01.1999 for purchase of this property.

1,57,000

(vi) Interest on loan taken for repair of house properties situated in Mumbai and Delhi. Loan was taken on 01.04.17 and was utilized in 50:50 ratio for house properties situated in Mumbai and Delhi, respectively.

1,50,000

(vii) Long-term capital gains on sale of equity shares computed in

accordance with section 112A 8,95,000

(viii) Interest on fixed deposit 73,000

(ix) Loss from textile business 7,50,000

(x) Speculation profit 2,30,000

(xi) Lottery income 75,000

(xii) Loss incurred by the firm in which she is a partner 1,60,000

(xiii) Salary received as a partner from partnership firm. The same was

allowed to firm 50,000

(xiv) Brought forward short-term capital loss on sale of gold 2,75,000

(xv) Brought forward loss on sale of equity shares of the nature

specified u/s 111A 25,000

(xvi) Life insurance premium paid for her son who is 30 years of age

and is working in USA 15,000

Compute total income of Ms. Geeta for the assessment year 2019-20 and the amount of

loss that can be carried forward.

For the above solution, you may assume principal repayment of loan as under:

(1) Loan taken for purchase of house property in Delhi - · ` 2,50,000


(2) Loan taken for purchase of house property in Mumbai - ` 50,000

(3) Loan taken for repair of house properties in Delhi and Mumbai - ` 75,000

Working notes should form part of your answer. Wherever necessary, suitable assumptions

may be made by the candidates and disclosed by way of note. (10 Marks)

(b) Discuss the provisions of section 139A(1) which provides the persons who are compulsorily

required to apply for allotment of Permanent Account Number (PAN) with the Assessing Officer. (4 Marks)

OR

(i) What is the fee for default in furnishing return of income u/s 234F? (2 Marks)

(ii) To whom the provisions of section 139AA relating to quoting of Aadhar Number do not apply? (2 Marks)

Answer

(a) Computation of total income of Ms. Geeta for the A.Y.2019-20

Particulars ` ` `

Income from salary (computed) 41,20,000


(i) House property at Delhi (Let out)

Rent received (taken as Annual Value in the absence of information relating to Fair Rent and Municipal Value)

5,00,000

Less: Deduction u/s 24

(a) 30% of Annual Value

[30% of ` 5 lakh]

1,50,000

(b) Interest on loan

for purchase of property 7,50,000

for repairs of property

[` 1,50,000/2]

75,000

9,75,000

(4,75,000)

(ii) House property at Jaipur (Let out)

Rent received (taken as Annual Value in the absence of information relating to Fair Rent and Municipal Value)

3,20,000

Less: Deduction u/s 24

30% of Annual Value = 30% of ` 3,20,000 96,000

2,24,000


(iii) House property at Mumbai (Self-occupied)

Annual value of self-occupied property Nil

Less: Deduction u/s 24(b)

Interest on loan for purchase and repairs (to be restricted to ` 30,000, since loan for purchase was taken prior to 1.4.1999)

30,000

(30,000)

Loss from house property [(i) + (ii) + (iii)] (2,81,000)

As per section 71(3A), loss from house property to

be set-off against salary income to the extent of

(2,00,000)

39,20,000

Profits and gains of business or profession

Speculation profit (assumed as business income)

2,30,000

Salary received as partner of firm is taxable in her hands since the entire salary was allowed as deduction in the hands of the firm

50,000

2,80,000

Set-off of loss from textile business to the extent of (2,80,000) Nil

Note – Share of loss of ` 1,60,000 incurred by the firm in which she is partner cannot be set-off against salary received as partner of firm or any other income, since loss from an exempt source cannot be set-off against profit from a taxable source.

Capital Gains

Long-term capital gains on sale of equity shares computed in accordance with section 112A

8,95,000

Less: Set-off of brought forward short-term capital loss as per section 744

B/f Short-term capital loss on sale of gold 2,75,000

B/f Short-term capital loss u/s 111A 25,000

3,00,000

5,95,000

Less: Set-off of balance loss of textile business5

[` 7,50,000 – ` 2,80,000 – ` 73000]

(3,97,000)

1,98,000

4 As per section 74, B/f short-term capital loss can be set-off against long-term capital gain taxable u/s 112A. It is assumed that the eight year period for set-off of losses has not expired. 5 Permitted as per section 71(2)


Particulars ` `


Interest on fixed deposit

Less: Set off balance loss of textile business to the extent of

73,000

(73,000)

Nil

Lottery income (assumed as Gross Income) 75,000 75,000

Gross Total Income 41,93,000

Less: Deduction under Chapter VI-A

Under section 80C

Life insurance premium paid

Life insurance premium paid to insure the life of her son allowable as deduction even if he is major, resides abroad and is not dependent on her

15,000

Repayment of housing loan

` 2,50,000, for house property in Delhi, not allowable

since loan is taken from a friend

Nil

` 50,000 for house property in Mumbai, allowable since loan is taken from a bank for purchase of property

50,000

` 75,000, for house properties in Mumbai and Delhi, not allowable since loan is taken for repairs of properties

Nil

65,000


Loss to be carried forward to A.Y.2020-21:

Particulars `

Loss from house property (` 2,81,000 - ` 2,00,000)

As per section 71(3A), loss from house property can be set-off against any other head of income to the extent of ` 2,00,000 only. As per section 71B, balance loss not set-off can be carried forward to the next year for set-off against income from house property of that year. Such loss can be carried forward for a maximum of eight assessment years.

81,000

(b) [First Alternative]

Persons who are mandatorily required to apply for PAN as per section 139A(1)

(i) Every person whose total income or the total income of any other person in respect of which he is assessable under the Income-tax Act, 1961 during any previous year exceeds the basic exemption limit


(ii) Every person carrying on business or profession whose total sales, turnover or gross receipts are or is likely to exceed ` 5 lakh in any previous year

(iii) Every person, being a resident, other than an individual, which enters into a

financial transaction of an amount aggregating to ` 2,50,000 or more in a financial year

(iv) Every person who is the managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer or office bearer of the person referred to in (iii) above or any person competent to act on behalf of the person referred to in (iii) above.

(b) [Second Alternative]

(i) Fee for default in furnishing return of income u/s 234F Where a person, who is required to furnish a return of income under section 139, fails

to do so within the prescribed time limit under section 139(1), he shall pay, by way of fee, a sum of –

Fee Circumstances

` 5,000 If the return is furnished on or before the 31st December of the

assessment year;

` 10,000 In any other case

Note - However, if the total income of the person does not exceed ` 5 lakhs, the fees payable shall not exceed ` 1,000

(i i ) Persons to whom provisions of section 139AA relating to quoting of Aadhar

Number does not apply

T he provisions of section 139AA relating to quoting of Aadhar Number would not

apply to an individual who does not possess the Aadhar number or Enrolment ID

and is:

(i) residing in the States of Assam, Jammu & Kashmir and Meghalaya;

(ii) a non-resident as per Income-tax Act, 1961;

(iii) of the age of 80 years or more at any time during the previous year;

(iv) not a citizen of India.

PAPER – 4 : TAXATION

SECTION B: INDIRECT TAXES


Candidates are also required to answer any three questions from the remaining four

questions.

All questions should be answered on the basis of position of GST law as amended upto

31st October,2018.

Working notes should form part of the answer.

Wherever necessary, suitable assumptions may be made by the candidates and disclosed by

way of note.

Question 5

Mr. Himanshu, a registered supplier of chemicals, pays GST under regular scheme. He is not eligible for any threshold exemption. He has made the following outward taxable supplies for

the month of September 2018:

Intra-State supply of goods ` 25,00,000

Inter-State supply of goods ` 5,00,000

He has also made the following inward supply :

Intra-State purchase of goods from registered dealer ` 14,00,000

Intra-State purchase of goods from unregistered dealer ` 2,00,000

Inter-State purchase of goods from registered dealer ` 4,00,000

Balance of ITC at the beginning of September 2018 :

CGST ` 95,000

SGST ` 60,000

IGST ` 50,000

Additional Information :

• He purchased a car (Intra-State supply) used for business purpose at a price of ` 6,72,000/- (including CGST of ` 36,000 & SGST of ` 36,000) on September 15, 2018. He capitalized the full value including GST in the books on the same date to claim

depreciation.

• Out of Inter-State purchase from registered dealer, goods worth ` 1,00,000 were

received on October 3, 2018 due to road traffic jams.

Note:

(i) Rate of CGST, SGST and IGST to be 9%, 9% and 18% respectively.


(ii) Both inward and outward supplies given above are exclusive of taxes, wherever

applicable.

(iii) All the conditions necessary for availing the ITC have been fulfilled except mentioned

above.

Compute the net CGST, SGST and IGST payable in cash by Mr. Himanshu for the month of

September, 2018. (8 Marks)

Answer

Computation of net GST payable in cash of Mr. Himanshu for September, 2018

Particulars Value (` ) CGST (` ) SGST (` )

IGST (` )

Total tax liability

Intra-State outward supplies of goods 25,00,000 2,25,000 2,25,000

Inter-State outward supplies of goods 5,00,000 90,000

Total tax liability (A) 2,25,000 2,25,000 90,000

Input Tax Credit (ITC)

Brought forward ITC 95,000 60,000 50,000

Intra-State purchase of goods from registered dealer [Note-1]

14,00,000 1,26,000 1,26,000

Inter-State purchase of goods from

registered dealer [Note-1 and Note 4] 3,00,000 - - 54,000

Intra-State purchase of goods from

unregistered dealer [Note-2] 2,00,000 - - -

Purchase of car used for business purpose [Note-3]

- - - -

Total ITC (B) 2,21,000 1,86,000 1,04,000

Net GST liability = (A)-(B) 4,000 39,000 (14,000)

Less: Set off from IGST credit [Note-5] 4,000 10,000

Net GST payable in cash Nil 29,000 Nil

Notes:

1. Every registered person is entitled to take credit of input tax charged on any inward

supply of goods used/intended to be used in the course/furtherance of his business.

2. Intra-State supplies received by a registered person from any unregistered supplier, are

exempt from the whole of the tax leviable thereon under reverse charge till 30.09.2019.

Since no tax has been paid, so no credit is available.


3. Input tax paid on capital goods cannot be availed as ITC if depreciation has been claimed on such tax component. Moreover, ITC on motor vehicle (car) is blocked under section

17(5) of CGST Act, 2017.

4. A registered person is entitled to avail input tax in respect of any supply of goods to him only if he has actually received the said goods. Since goods worth ` 1,00,000 have not been received by Mr. Himanshu in the month of September 2018, credit in respect of

same cannot be claimed in the said month.

5. Input tax credit of IGST has been used to pay IGST, CGST and SGST in that order.

Question 6

(a) M/s. Apna Bank Limited, a Scheduled Commercial Bank has furnished the following

details for the month of August, 2018:

Particulars Amount ` in Crores (Excluding GST)

Extended Housing Loan to its customers 100

Processing fees collected from its customers on sanction of loan

20

Commission collected from its customers on bank guarantee 30

Interest income on credit card issued by the bank 40

Interest received on housing loan extended by the bank 25

Minimum balance charges collected from current account and

saving account holder

01

Compute the value of taxable supply. Give reasons with sui table assumptions. (6 Marks)

(b) Decide with reason whether the following independent services are exempt under CGST

Act, 2017:

(i) Gokul Residents' Welfare Association received ` 9,000 per month as contribution from each member for sourcing of goods and services from third persons for

common use of its members.

(ii) Mr. Vikalp, a performing artist, has received ` 1,58,000 from performance of

classical dance and ` 90,000 from acting in TV Serial during the month of June 2018. (4 Marks)

Answer

(a) Computation of value of taxable supply of M/s. Apna Bank Limited for the month of

August, 2018

Particulars Amount in

crores (` )

Housing loan extended to customers Nil


[Since money does not constitute goods, extending housing loan is not a supply.]

Processing fee collected on sanction of loan

[Interest does not include processing fee on sanction of the loan. Hence, the same is taxable.]

20

Commission collected on bank guarantee

[Any commission collected over and above interest on loan, advance or deposit are not exempt.]

30

Interest income on credit card issued by the bank

[Services by way of extending loans in so far as the consideration is represented by way of interest are exempt from tax. However, interest involved in credit card services is not exempt.]

40

Interest received on housing loan

[Services by way of extending loans in so far as the consideration is represented by way of interest are exempt from tax.]

Nil

Minimum balance charges collected from current account and saving

account holder

[Any charges collected over and above interest on loan, advance or deposit are not exempt.]

01

Value of taxable supply 91

(b) (i) Service by an unincorporated body or a registered non-profit entity, to its own members by way of share of contribution up to an amount of ` 7,500 per month per

member for sourcing of goods/services from a third person for the common use of

its members in a housing society or residential complex, is exempt.

In the given case, monthly contribution per month per member received by Gokul Residents’ Welfare Association exceeds ` 7,500.

Therefore, exemption will be available up to ` 7,500 and GST would be payable on

the amount in excess of ` 7,500 (viz. ` 1,500 in this case).

(ii) Services by an artist by way of a performance in folk or classical art forms of music, dance, or theatre, if the consideration charged for such performance is not more than ` 1,50,000 are exempt from GST.

In the given case, since the consideration received by the performing artist -

Mr. Vikalp for performance of classical dance is more than ` 1,50,000, said services

are not exempt.

Further, consideration received for acting in TV serial is also not exempt since said

performance is not in folk/classical art forms of theatre.


Question 7

(a) Examine the following independent cases of supply of goods and services and determine the time of issue of invoice under each of the cases as per the provisions of CGST Act, 2017:

(i) Sakthi Enterprises, Kolkata entered into a contract with Suraj Enterprises, Surat for supply of goods on 31st October, 2018. The goods were removed from the factory at Kolkata on 11th October, 2018. As per the agreement, the goods were to be delivered by 31st October, 2018. Suraj Enterprises has received the goods on 14th October, 2018.

(ii) Trust and Fun Ltd, an event management company, has provided its services for an event at Kapoor Film Agencies, Mumbai on 5 th June, 2018. Payment for the event was made on 19t h June, 2018. (4 Marks)

(b) M/s. Daksha Enterprises has made a cash deposit of ` 10,000 under minor head 'tax' of major head 'SGST’. It has a liability of ` 2,000 for minor head "Interest" under the major head "SGST".

State whether M/s. Daksha Enterprises can utilise the amount available for payment of interest. (2 Marks)

(c) State with brief reason, whether following suppliers of taxable goods are required to register under the GST Law :

(i) Mr. Raghav is engaged in wholesale cum retail trading of medicines in the State of Assam. His aggregate turnover during the financial year is ` 9,00,000 which consists of ` 8,00,000 as Intra-State supply and ` 1,00,000 as Inter-State supply.

(ii) Mr. S.N Gupta of Rajasthan is engaged in trading of taxable goods on his own account and also acting as an agent of Mr. Rishi of Delhi. His turnover in the financial year 2017-18 is of ` 12 lakhs on his own account and ` 9 lakhs on behalf of principal. Both turnovers are Intra -State supply. (4 Marks)

Answer

(a) (i) A registered person supplying taxable goods shall issue a tax invoice, before or at the time of removal of goods for supply to the recipient, where the supply involves

movement of goods.

Therefore, in the given case, invoice has to be issued on or before, 11th October

2018 (the time of removal of goods).

(ii) A registered person [other than an insurer/banking company/financial institution, including an NBFC] supplying taxable services shall issue a tax invoice before or after

the provision of service, but within a period of 30 days from the date of supply of service.

Thus, in the given case, invoice has to be issued within 30 days of 5th June 2018

(date of supply of service), i.e. on or before, 5th July 2018.


(b) The cash available in any minor head of a major head cannot be utilised for any other minor head of the same major head.

Therefore, in the given case, amount of ` 10,000 available under minor head ‘tax’ of major head ‘SGST’ cannot be utilised for payment of liability of `2,000 under minor head ‘interest’ of the same major head.

(c) (i) Person making any inter-State taxable supply of goods is required to obtain registration compulsorily under GST laws irrespective of the quantum of aggregate turnover.

Thus, in the given case Mr. Raghav is required to obtain registration compulsorily under GST laws even though his aggregate turnover does not exceed the threshold limit of ` 10 lakh [since Assam is a Special Category State] in the financial year.

(ii) Persons who make taxable supply of goods on behalf of other taxable persons whether as an agent or otherwise are required to obtain registration compulsorily under GST laws irrespective of the quantum of aggregate turnover.

Aggregate turnover includes all supplies made by the taxable person, whether on his own account or made on behalf of all his principals.

Since Mr. S.N Gupta is also acting as an agent of Mr. Rishi of Delhi, he is required to obtain registration compulsorily under GST laws.

Question 8

(a) Enumerate the persons who are not eligible to opt for Composition Scheme under section 10(2) of the CGST Act, 2017. (5 Marks)

Answer either 8(b) or 8(c) but not both

(b) List out the situations in which a Credit note/Debit note may be issued under the CGST Act, 2017. (5 Marks)

(c) Answer the following questions with respect to casual taxable person under the CGST Act, 2017 :

(i) Who is a casual taxable person?

(ii) Can a casual taxable person opt for the composition scheme?

(iii) When is the casual taxable person liable to get registered?

(iv) What is the validity period of the registration certificate issued to a casual taxable person?

(v) Can the validity of registration certificate issued to a casual taxable person be extended? If yes, what will be the period of extension. (5 Marks)

Answer

(a) A registered person shall not be eligible to opt for composition scheme if:-

(i) he is engaged in supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II.


(ii) he is engaged in supply of goods not leviable to tax

(iii) he is engaged in inter-State outward supplies of goods

(iv) he is engaged in supply of goods through an electronic commerce operator

(v) he is a manufacturer of notified goods, namely, manufacturer of ice cream, pan masala and tobacco.

(b) Credit note is required to be issued by the Supplier:-

(i) If taxable value charged in the tax invoice is found to exceed the taxable value in respect of supply of goods and/or services, or

(ii) If tax charged in the tax invoice is found to exceed the tax payable in respect of supply of goods and/or services, or

(iii) if goods supplied are returned by the recipient, or

(iv) if goods and/or services supplied are found to be deficient.

Debit note is required to be issued by the Supplier:-

(i) if taxable value charged in the tax invoice is found to be less than the taxable value in respect of supply of goods and/or services or

(ii) if tax charged in the tax invoice is found to be less than the tax payable in respect of supply of goods and/or services

(c) (i) Casual taxable person means a person who occasionally undertakes transactions involving supply of goods and/or services in the course or furtherance of business, whether as principal, agent or in any other capacity, in a State/UT where he has no fixed place of business.

(ii) No, a casual taxable person cannot opt for the composition scheme.

(iii) A casual taxable person (CTP) is liable to obtain registration compulsorily under GST laws, at least 5 days prior to commencement of business.

However, threshold limit of ` 20 lakh (` 10 lakh in case of Special Category States other than Jammu & Kashmir) is available in case of CTP making taxable supplies of specified handicraft goods.

(iv) The registration certificate issued to a casual taxable person will be valid for:

(a) the period specified in the registration application, or

(b) 90 days from the effective date of registration

whichever is earlier.

(v) Yes, the validity of registration certificate issued to a casual taxable person can be extended.

It can be extended by a further period not exceeding 90 days.

Documents

PAPER 1 : ACCOUNTING - CA Study...PAPER – 1 : ACCOUNTING 3 (iii) Theft of cash of ` 5 lakhs by the cashier on 31st March, 2018 but was detected on 16th July, 2018. (iv) Company sent