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7/29/2019 SA May 2012-IPCC GROUP-I
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May, 2012
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
SUGGESTED ANSWERS
11Volume 6INTEGRATED PROFESSIONAL
COMPETENCE EXAMINATION
GROUP I
&ACCOUNTING TECHNICIAN EXAMINATION
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SUGGESTED ANSWERS TO QUESTIONS SET AT THE
COMMONFOR
INTEGRATED PROFESSIONAL COMPETENCE
EXAMINATION
GROUP I
&
ACCOUNTING TECHNICIAN EXAMINATION
MAY,2012
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
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The suggested Answers published in this volume do not constitute the basis for evaluation of
the students answers in the examination. The answers are prepared by the Faculty of the
Board of Studies with a view to assist the students in their education. While due care is taken
in preparation of the answers, if any errors or omissions are noticed, the same may be brought
to the attention of the Director of Studies. The Council of the Institute is not in anyway
responsible for the correctness or otherwise of the answers published herein.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
All rights reserved. No part of this publication may be reproduced, stored in a retr ieval
system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without prior permission, in writing, form the publisher.
Website : www.icai.org
Committee/ : Board of StudiesDepartment
E-mail : [email protected]
Price : ` 40/-
ISBN No. : 978-81-8441-556-8
Published by : The Publication Department on behalf of The Institute of Chartered
Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha
Marg, New Delhi- 110 002, India
Typeset and designed at Board of Studies.
Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 004
August/ 2012/ 15,000 Copies
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Contents
Page Nos.
Paper 1. Accounting ........................................................................................... 1 27
Paper 2. Business Laws, Ethics and Communication .........................................28 43
Paper 3. Cost Accounting and Financial Management .......................................44 67
Paper 4 Taxation ..............................................................................................68 96
Examiners comments on the performance of the candidates
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PAPER 1 : ACCOUNTING
Question No. 1is compulsory
Answer any fivequestions from the remaining sixquestions.
Wherever appropriate, suitable assumption/s should be made and indicated in
answer by the candidate.
Working notes should form part of the answer.
Question 1(a) M/s Excellent Construction Company Limited under took a contract to construct a building
for`3 crore on 1st September, 2011. On 31st March, 2012 the company found that it had alreadyspent `1 crore 80 lakhs on the construction. Prudent estimate of additional cost for completion
was `1 crore 40 lakhs. What amount should be charged, to revenue in the final accounts for the
year ended on 31st March, 2012, as per the provisions of Accounting Standard 7 "Construction
Contracts (Revised)" ?
(b) M/s Innovative Garments Manufacturing Company Limited invested in the shares of another
company on 1st October, 2011 at a cost of ` 2,50,000. It also earlier purchased Gold of `
4,00,000 and Silver of`
2,00,000 on 1
st
March, 2009. Market value as on31st March, 2012 of above investments are as follows:
`
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments
Manufacturing Company Limited for the year ending 31 st March, 2012 as per the provisions of
Accounting Standard 13 "Accounting for Investments"?
(c) MIs Progressive Company Limited has not charged depreciation for the year ended on
31st March, 2012, in respect of a spare bus purchased during the financial year 2011-12 and
kept ready by the company for use as a stand-by, on the ground that, it was not actually used
during the year. State your views with reference to Accounting Standard 6 "Depreciation
Accounting".
Further during the year company made additions to its factory by using its own workforce, at a
cost of`4,50,000 as wages and materials. The lowest estimate from an outside contractor to
carry out the same work was `6,00,000. The directors contend that, since they are fully entitled
to employ an outside contractor, it is reasonable to debit the Factory Building Account with
` 6,00,000. Comment whether the directors' contention is right in view of the provisions ofAccounting Standard 10 "Accounting for Fixed Assets"?
(d) Briefly explain the types of Amalgamations? (4 x 5 = 20 Marks)
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2 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
An swer
(a) Calculatio n of Estimated Cost of Constructi on
`in crores
Cost of construction incurred till date 1.80
Add: Estimated future cost 1.40
Total estimated cost of construction 3.20
Percentage of completion of contract till date to total estimated cost of construction
= ` (1.80/3.20)100 = 56.25%
Proportion of total contract value recognised as revenue as per AS 7 (Revised)
= Contract price x percentage of completion
=` 3 crores x 56.25% = ` 1.6875 crores
(b) As per AS 13 Accounting for Investments, for investment in shares - if shares are
purchased with an intention to hold for short-term period then it will be shown at the
realizable value of` 2,25,000 as on 31st March, 2012.
However, if equity shares are acquired with an intention to hold for long term period then
it will be shown at cost of` 2,50,000 in the Balance Sheet of the company. However,
provision for diminution shall be made to recognize a decline, if other than temporary, in
the value of shares.
As per the standard, investment acquired for long term period shall be shown at cost.
Gold and silver are generally purchased with an intention to hold it for long term period
untill and unless given otherwise. Hence, the investment in Gold and Silver (purchased
on 1st March, 2009) shall continue to be shown at cost as on 31st March, 2012 i.e.,
` 4,00,000 and ` 2,00,000 respectively, though their realizable values have been
increased.(c) According to para no. 3.1 of AS 6, Depreciation Accounting, depreciation is a measure
of wearing out, consumption or other loss of value of a depreciable asset arising from
use, effluxion of time or obsolescence through technology and market changes.
Accordingly, depreciation may arise even when asset has not been used in the current
year but was ready for use in that year.
The need for using the stand by bus may not have arisen during the year but that does
not imply that the useful life of the bus has not been affected. Therefore, non-provision
of depreciation on the ground that the bus was not used during the year is not tenable.
As per para no. 10.1 of AS 10, Accounting for Fixed Assets, clearly states that the grossbook value of the self constructed fixed asset includes the costs of construction that
relate directly to the specific asset and the costs that are attributable to the construction
activity in general can be allocated to the specific asset. If any internal profit is there it
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PAPER 1 : ACCOUNTING 3
should be eliminated. Saving of` 1,50,000 on account of using its on work force is an
unrealized/ internal profit, which should not be capitalized/recorded as per the standard.
Thus, only ` 4,50,000 should be debited to the factory building account and not
` 6,00,000. Hence, the contention of the directors of the company to capitalize
` 6,00,000 as cost of factory building, on the ground that the company is fully entitled to
employ an outside contractor is not justifiable.
(d) As per AS 14, Accounting for Amalgamations there are two types of amalgamation. In
first type of amalgamation there is a genuine pooling not merely of assets and liabilities
of the amalgamating companies but also of the shareholders interests and of thebusinesses of the companies. Such amalgamations are amalgamations which are in the
nature of merger and the accounting treatment of such amalgamations should ensure
that the resultant figures of assets, liabilities, capital and reserves more or less represent
the sum of the relevant figures of the amalgamating companies.
In the second category are those amalgamations which are in effect a mode by which
one company acquires another company and, as a consequence, the share holders of
the company which is acquired normally do not continue to have a proportionate share in
the equity of the combined company, or the business of the company which is acquired is
not intended to be continued. Such amalgamations are amalgamations in the nature of
purchase.
Note: It is possible to answer this question by specifying all the conditions to be satisfied for
an amalgamation to be an amalgamation in the nature of merger. The amalgamation would
to be an amalgamation in the nature of purchase if any one or more of the said conditions are
not satisfied.
Question 2
M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated
huge losses. The following is the Balance Sheet of the company as on 31st March, 2012
before reconstruction :
Liabilities Amount (`) Assets Amount(`)
Share Capital
50,000 shares of`50each fully paid up 25,00,000
GoodwillLand & Building
22,00,00042,70,000
1,00,000 shares of`50each `40 paid up 40,00,000 MachineryComputers 8,50,0005,20,000Capital Reserve 5,00,000 Stock 3,20,000
8% Debentures of`
100 each4,00,000 Trade Debtors 10,90,000
12% Debentures of`100 each 6,00,000 Cash at Bank 2,68,000Trade Creditors 12,40,000 Profit & Loss A/c 7,82,000
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4 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
Outstanding Expenses 10,60,000
Total 1,03,00,000 Total 1,03,00,000
Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited:
Mr. Shiv Mr. Ganesh
8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 Total 3,00,000
The following scheme of internal reconstruction was framed and implemented, as approved bythe court and concerned parties :
(1) Uncalled capital is to be called up in full and then all the shares to be converted into
Equity Shares of` 40 each.
(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of`40
each for`12,50,000.
(3) Trade Creditors are given option of either to accept fully paid equity shares of`40 each for
the amount due to them or to accept 70% of the amount due to them in cash in full settlement
of their claim. Trade Creditors for`7,50,000 accept equity shares and rest of them opted for
cash towards full and final settlement of their claim.
(4) Mr. Shiv agrees to cancel debenture amounting to `2,00,000 out of total debentures due to him
and agree to accept 15% Debentures for the balance amount due. He also agree to subscribe
further 15% Debentures in cash amounting to `1,00,000.
(5) Mr. Ganesh agrees to cancel debenture amounting to `50,000 out of total debentures due to
him and agree to accept 15% Debentures for the balance amount due.
(6) Land & Building to be revalued at `51,84,000, Machinery at `7,20,000, Computers at `
4,00,000, Stock at `3,50,000 and Trade Debtors at 10% less to as they are appearing in
Balance Sheet as above.
(7) Outstanding Expenses are fully paid in cash.
(8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital
Reduction A/c will be adjusted against Capital Reserve.
You are required to pass necessary Journal Entries for all the above transactions and draft the
company's Balance Sheet immediately after the reconstruction. (16 Marks)
An swer
Journal Entries
Particulars ` `
1. Equity Share final call A/c Dr. 10,00,000
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PAPER 1 : ACCOUNTING 5
To Equity Share Capital A/c 10,00,000
(Being final call made for `10 each on
1,00,000 shares)
2. Bank A/c Dr. 10,00,000
To Equity Share final call A/c 10,00,000
(Being money on final call received)
3. Equity share capital (` 50) A/c Dr. 75,00,000
To Equity Share Capital (`40) A/c 60,00,000
To Capital Reduction A/c 15,00,000
(Being conversion of equity share capital of`50 each into `40 each as per reconstructionscheme)
4. Bank A/c Dr. 12,50,000
To Equity Share Capital A/c 12,50,000
(Being new shares allotted at `40 each)
5. Trade Creditors A/c Dr. 12,40,000
To Equity Share Capital A/c 7,50,000
To Bank A/c 3,43,000
To Capital Reduction A/c 1,47,000
(Being payment made to creditors in shares orcash to the extent of 70% as perreconstruction scheme)
6. 8% Debentures A/c Dr. 3,00,000
12% Debentures A/c Dr. 4,00,000To 15% Debentures A/c 5,00,000
To Capital Reduction A/c 2,00,000
(Being cancellation of 8% and 12% debenturesof Shiv, & issuance of new 15% debenturesand balance transferred to capital reductionaccount as per reconstruction scheme)
7. Bank A/c Dr. 1,00,000
To 15% Debentures A/c 1,00,000
(Being new debentures subscribed by Shiv)
8. 8% Debentures A/c Dr. 1,00,000
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6 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
12% Debentures A/c Dr. 2,00,000
To 15% Debentures A/c 2,50,000
To Capital Reduction A/c 50,000
(Being cancellation of 8% and 12% debenturesof Ganesh, & issuance of new 15% debenturesand balance transferred to capital reduction
account as per reconstruction scheme)9. Land and Building (51,84,000-42,70,000) Dr. 9,14,000
Stock Dr. 30,000
To Capital Reduction A/c 9,44,000
(Being value of assets appreciated)
10. Outstanding expenses A/c Dr. 10,60,000
To Bank A/c 10,60,000
(Being outstanding expenses paid in cash)
11. Capital Reduction A/c Dr. 33,41,000To Machinery A/c 1,30,000
To Computers A/c 1,20,000
To Trade Debtors A/c 1,09,000
To Goodwill A/c 22,00,000
To Profit and Loss A/c 7,82,000
(Being amount of Capital Reduction utilized inwriting off P & L A/c (Dr.) balance, goodwilland downfall in value of other assets)
12. Capital Reserve A/c Dr. 5,00,000
To Capital reduction A/c 5,00,000
(Being debit balance of capital reductionaccount adjusted against capital reserve)
Balance Sheet (as reduced) as on 31.3.2012
Liabilities ` Assets `
Share Capital: Land & Building 51,84,000
2,00,000 Equity shares of` 40 each 80,00,000 Machinery 7,20,00015% Debentures 8,50,000 Computers 4,00,000
Trade Debtors 9,81,000
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PAPER 1 : ACCOUNTING 7
Stock 3,50,000
Cash at Bank (W.N.1) 12,15,000
88,50,000 88,50,000
Working Notes:
1. Cash at Bank Accoun t
Particulars ` Particulars `
To Balance b/d 2,68,000 By Trade Creditors A/c 3,43,000To Equity Share final call
A/c10,00,000 By Outstanding expenses A/c 10,60,000
To Equity Share Capital A/c 12,50,000 By Balance c/d (bal. fig.) 12,15,000
To 15% Debentures A/c 1,00,000
26,18,000 26,18,000
2. Capital Reducti on Accoun t
Particulars ` Particulars `
To Machinery A/c 1,30,000 By Equity Share Capital A/c 15,00,000
To Computers A/c 1,20,000 By Trade Creditors A/c 1,47,000
To Trade Debtors A/c 1,09,000 By 8% and 12% Debentures A/c 2,00,000
To Goodwill A/c 22,00,000 By 8% and 12% Debentures A/c 50,000
To Profit and Loss A/c 7,82,000 By Land & Building 9,14,000
By Stock 30,000
By Capital Reserve A/c 5,00,000
33,41,000 33,41,000
Question 3
(a) M/s Ice Limited gives you the following information to find out Total Sales and Total
Purchases:
Particulars Amount (`)
Debtors as on 01.04.2011 70,000
Creditors as on 01.04.2011 81,000
Bills Receivables received during the year 47,000
Bills Payable issued during the year 53,000
Cash received from customers 1,56,000
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8 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
Cash paid to suppliers 1,72,000
Bad Debts recovered 16,000
Bills Receivables endorsed to creditors 27,000
Bills Receivables dishonoured by customers 5,000
Discount allowed by suppliers 7,000
Discount allowed to customers 9,000
Endorsed Bills Receivables dishonoured 3,000Sales Return 11,000
Bills Receivable discounted 8,000
Discounted Bills Receivable dishonoured 2,000
Cash Sales 1,68,500
Cash Purchases 1,97,800
Debtors as on 31.03.2012 82,000
Creditors as on 31.03.2012 95,000
(8 Marks)
(b) Good, Better and Best are in partnership sharing profits and losses in the ratio 3 : 2 : 4.
Their capital account balances as on 31st March, 2012 are as follows:
`
Good 1,70,000 (Cr)
Better 1,10,000 (Cr)
Best 1,22,000 (Cr)
Following further information provided:
(1) `22,240 is to be transferred to General Reserve.
(2) Good, Better and Best are paid monthly salary in cash amounting `2,400, `1,600
and `1,800 respectively.
(3) Partners are allowed interest on their closing capital balance @ 6% p.a. and are
charged interest on drawings @ 8% p.a.
(4) Good and Best are entitled to commission @ 8% and 10% respectively of the net
profit before making any appropriation.
(5) Better is entitled to commission @ 15% of the net profit before charging Interest onDrawings but after making all other appropriations.
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PAPER 1 : ACCOUNTING 9
(6) During the year Good withdraw ` 2,000 at the beginning of every month, Better
`1,750 at the end of every month and Best `1,250 at the middle of every month.
(7) Firm's Accountant is entitled to a salary of`2,000 per month and a commission of
12% of net profit after charging such commission.
The Net Profit of the firm for the year ended on 31st March, 2012 before providing for any
of the above adjustments was `2,76,000.
You are required to prepare Profit and Loss Appropriation Account for the year ended on
31st March, 2012 (8 Marks)An swer(a) 1. Total Sales = Cash sales + Credit sales
=` 1,68,500 +` 2,25,000 (W.N.1)=` 3,93,500
2. Purchases = Cash Purchases + Credit Purchases
=` 1,97,800 +` 2,70,000 (W.N.2)
=` 4,67,800
Working Notes:
1. Debtors Accoun t
Particulars ` Particulars `
To Balance b/d 70,000 By Bills receivable 47,000
To Bills receivable dishonoured 5,000 By Cash 1,56,000
To Bills receivable dishonoured(endorsed)
3,000 By Discount allowed 9,000
To Bills receivable dishonoured(discounted)
2,000 By Sales return 11,000
To Credit sales (bal.fig.) 2,25,000 By Balance c/d 82,0003,05,000 3,05,000
2. Creditor s Accoun t
Particulars ` Particulars `
To Bills payable 53,000 By Balance b/d 81,000
ToTo
CashDiscount received
1,72,0007,000
By Bills receivabledishonoured (endorsed)
3,000
To Bills receivableendorsed
27,000 By Credit purchases(bal.fig.)
2,70,000
To Balance c/d 95,0003,54,000 3,54,000
Note:It is assumed that sales return is out of credit sales only.
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10 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
(b) Profit and Loss Appropriation Account
for the year ended on 31st March, 2012
Particulars ` Particulars `
To General reserve 22,240 By Net Profit (See W.N.1) 2,25,000
To Salaries to partners By Interest on drawings(W.N.3)
Good 28,800 Good 1,040
Better 19,200 Better 770
Best 21,600 69,600 Best 600 2,410
To Interest on Capital
Good 10,200
Better 6,600
Best 7,320 24,120
To Commission topartners
Good 18,000
Better 10,281(W.N.4)
Best 22,500 50,781
To Partners Capital A/cs(profit)
Good 20,223
Better 13,482
Best 26,964 60,669
2,27,410 2,27,410
Working Notes:
1. Profit and Loss Accou nt
Particulars ` Particulars `
To Salary (Firms Accountant) 24,000 By Profit 2,76,000
To Commission (FirmsAccountant) (W.N.2) 27,000
To Net Profit transferred to
P & L Appropriation A/c 2,25,000
2,76,000 2,76,000
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PAPER 1 : ACCOUNTING 11
2. Commissio n of Firms Accou ntant
=( )
Profit after salary of firm's accountant12%
100+12 %
=( )
( )
2,76,000 - 24,00012%
100+12 % = ` 27,000
3. Interest on Drawing s
`
Good (at the beginning of every month) ( 2,000 x 6.5 x 8%) 1,040
Better (at the end of every month) ( 1,750 x 5.5 x 8%) 770
Best (at the middle of every month) ( 1,250 x 6 x 8%) 600
2,410
4. Commission of Better
Commission of Better = [Net profit for appropriation (excluding interest on drawings)- General reserve Interest on capital - Salaries to partners Commission to Good
and Best] x 15%Commission to Better =` [2,25,000 22,240 24,120 69,600 18,000 22,500] x 15%
= ` 68,540 x 15% = `10,281.
Question 4
From the following Income & Expenditure A/c of Premium Sports Club for the year ended31st March, 2012, you are required to prepare Receipts & Payment A/c for the year ended 31 st
March, 2012 and Balance Sheet as on that date:
Expenditure Amount Income Amount
`
`
To Salaries 1,18,800 By Subscriptions 4,20,000
To Rent 2,16,000 By Entrance Fee 1,20,000
To Printing & Stationery 28,000 By Profit on sale of Sports
To Postage & Telephone 41,600 Material 5,500
To Membership Fee 3,200 By Interest on 8%
To Electricity Charges 38,500 Government Bonds 12,000
To Garden Upkeep 19,300 By Sale of Old Newspaper 11,600To Sports Material Utilized 62,800
To Repairs & Maintenance 18,700
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12 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
To Depreciation 13,000
To Miscellaneous Expenses 5,700
To Surplus carried to Capital
Fund 3,500
Total 5,69,100 Total 5,69,100
The following additional information is provided to you:
(a)
Balances as Balances as
on 01.04.2011 on 31.03.2012
Fixed Assets 2,40,000 ?
Bank Balance 8,300 ?
Stock of Sports Material 43,450 35,670
Outstanding Subscription 10,200 5,700
Subscription received in advance 2,400 4,900
8% Government Bonds 1,50,000 1,50,000
Outstanding Salaries 16,000 14,300
Outstanding Rent 21,000 15,000
Advance for Stat ionery 1,350 1,550
Outstanding Repairs & Maintenance 1,200 Nil
Creditors for purchase of Sports Material 3,400 4,200
(b) Some of Fixed Assets were purchased on 01.10.2011 and depreciation is to be charged
@ 5% p.a.
(c) Sports Material worth `72,000 was purchased on credit during the year.
(d) The Club became member of State Table Tennis Association on 01.01.2012 when it paid
fee up to 31.12.2012.
(e) 50% of Entrance Fee is to be capitalized.
(f) Interest on 8% Government Bonds was received for two quarters only.
(g) A Fixed Deposit of`80,000 was made on 31st March, 2012. (16 Marks)
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PAPER 1 : ACCOUNTING 13
An swer
Receipts and Payments Account of Premium Sports Club
for the year ended 31st March, 2012
Receipts ` Payments `
To Cash at bank (opening) 8,300 By Salaries (W.N.6) 1,20,500
To Subscription (W.N.1) 4,27,000 By Rent (W.N.7) 2,22,000
To Entrance fee (W.N.2) 2,40,000 By Printing and stationary
(W.N.8)
28,200
To Interest on 8% GovernmentBond (W.N.3)
6,000 By Postage and telephone 41,600
To Sale of old Newspaper 11,600 By Membership fee (W.N.9) 12,800
To Sale of Sports Material(W.N.4)
22,480 By Electricity charges 38,500
By Garden upkeep 19,300
By Payment to creditors forsports material (W.N.5)
71,200
By Purchase of Fixed assets(W.N.10)
40,000
By Repairs and Maintenance(W.N.11)
19,900
By Misc. expenses 5,700
By Fixed Deposit made 80,000
By Cash at bank (closing)(bal.fig.) 15,680
7,15,380 7,15,380
Balance Sheet of Premium Sports Clubas on 31st March, 2012
Liabilities ` ` Assets ` `
Capital fund: Fixed Assets 2,40,000
Opening balance(W.N.12)
4,09,300 Add: Additions(W.N.10)
40,000
Add: Surplus 3,500 4,12,800 2,80,000
Entrance fee 1,20,000 Less: Depreciation 13,000 2,67,000
Subscriptionreceived in advance
4,900 Fixed DepositInvestments in 8%
80,000
Outstanding expenses Government Bonds 1,50,000
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14 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
SalaryRent
14,30015,000 29,300
Stock of sportsmaterial
35,670
Creditors forpurchase of sportsmaterial
4,200 SubscriptionreceivableMembership fee
5,700
paid in advance 9,600
Prepaid printing andstationary charges 1,550
Outstanding intereston 8% Govt. Bond 6,000
Cash at bank 15,680
5,71,200 5,71,200
Working Notes:
1. Subscript ion received durin g the year
`
Subscription for the year ended 31st March, 2012 4,20,000Less: Subscription receivable on 31.3.2012 5,700
Less: Subscription received in advance on 1.4.2011 2,400 (8,100)
4,11,900
Add: Subscription receivable on 1.4.2011 10,200
Add: Subscription received in advance on 31.3.2012 4,900 15,100
4,27,000
2. Entrance Fee received dur ing the year
Entrance fee as per Income and Expenditure Account ` 1,20,000
Add: Capitalised entrance fee (50%) ` 1,20,000
` 2,40,000
3. Interest on 8% Governm ent Bond
`
Interest as per Income and Expenditure Account 12,000
Less: Outstanding interest for 2 quarters [12,000x (6/12)] (6,000)
6,000
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PAPER 1 : ACCOUNTING 15
4. Sales price of Sports Material sold
`
Stock of Sports Material on 1.4.2011 43,450
Add: Purchase of Sports Material during the year 72,000
1,15,450
Less: Stock of Sports Material on 31.3.2012 (35,670)
Cost of Sports Material consumed in the club and for sale 79,780Less: Sports material consumed in the club (62,800)
Cost of Sports material sold 16,980
Sales Price of sports material sold = ` 16,980 + ` 5,500 = ` 22,480
5. Payment to creditors for Sports Material
`
Purchase of Sports Material 72,000
Less: Closing creditors for purchase of Sports Material on 31.3.2012 (4,200)
67,800
Add: Opening creditors for purchase of Sports Material on 1.4.2011 3,400
71,200
6. Salaries paid durin g the year
`
Salary as per Income and Expenditure Account 1,18,800
Less: Outstanding balance as on 31.3.2012 (14,300)
1,04,500Add: Outstanding balance as on 1.4.2011 16,000
1,20,500
7. Rent paid durin g the year
`
Rent as per Income and Expenditure Account 2,16,000
Less: Outstanding balance as on 31.3.2012 (15,000)
2,01,000
Add: Outstanding balance as on 1.4.2011 21,000
2,22,000
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16 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
8. Printing and Stationary paid durin g the year
`
Printing and stationary as per Income and Expenditure Account 28,000
Less: Prepaid balance as on 1.4.2011 (1,350)
26,650
Add: Prepaid balance as on 31.3.2012 1,550
28,200
9. Membership fee paid durin g the year
`
Membership fee as per Income and Expenditure Account 3,200
Add: Prepaid balance as on 31.3.2012 [(3,200/3) x 9] 9,600
12,800
10. Fixed Asset purchased duri ng the year
`
Depreciation during the year 13,000
Less: Depreciation on Opening balance of fixed asset (12,000)
Depreciation on new purchase of fixed asset during the year 1,000
Cost of asset purchased during the year (1,000 x12
6x
100
5)
40,000
11. Repairs and Maintenance paid during the year
`
Repairs and Maintenance as per Income and Expenditure Account 18,700Add: Outstanding balance as on 1.4.2011 1,200
19,900
12. Balance Sheet of Premium Sports Club
as on 1st April, 2011
Liabilities ` Assets `
Capital fund (Bal.fig.) 4,09,300 Fixed Assets 2,40,000
Subscription received in
advance
2,400 Investments in 8% Government
Bonds
1,50,000
Outstanding expenses: Stock of sports material 43,450
Salary 16,000 Subscription receivable 10,200
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PAPER 1 : ACCOUNTING 17
Rent 21,000 Prepaid printing and stationarycharges
1,350
Repairs and maintenance 1,200 Bank 8,300
Creditors for purchase ofsports material 3,400
4,53,300 4,53,300
Note: It is assumed that Premium Sports Club has purchased all the sports equipment on
credit basis only.
Question 5
(a) M/s Multistore Limited sells goods both on cash and hire purchase basis and record hire-
purchase transactions on "Stock and Debtors System". It closes its books of accounts on 31st
March every year. On 1st May, 2011, it sold to Manas a Scooter and a LCD TV.
The other information are as follows:
Particulars Scooter LCD TV
Cost Price 30,000 40,000
Down Payment 5,000 6,000Number of Installments Payable 12 6
Amount of each Installment 2,800 7,600
Mode of Payment Monthly Quarterly
1st Installment due on 1st June, 2011 1st July, 2011
Manas paid all the installments due except for those due on 1 st January, 2012. It was
decided that M/s Multistore Limited will take back Scooter at an agreed price of`22,000
and excess amount, if any, will be adjusted against the installments due of LCD TV.
Scooter repossessed was sold for`
24,500 after incurring repair charges of`
1,000.Prepare necessary ledger accounts to record the above transactions and find out the
profit. (8 Marks)
(b) Mr. Brown has made following transactions during the financial year 2011-12:
Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of` 100 each at ` 84 cum-interest.
Interest is payable on 30th September and 31st March every year.
15.06.2011 Purchased ` 1,50,000 equity shares of` 10 each in Alpha Limited
for`
25 each through a broker, who charged brokerage @ 2%.10.07.2011 Purchased 60,000 equity shares of` 10 each in Beeta Limited for
`44 each through a broker, who charged brokerage @2%.
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18 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
14.10.2011 Alpha Limited made a bonus issue of two shares for every three
shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for`22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.
15. 01.2012 Beeta Limited made a right issue of one equity share for every four
shares held at `5 per share. Mr. Brown exercised his option for 40%
of his entitlements and sold the balance rights in the market at
`2.25 per share.
01.03.2012 Sold 15,000 12% Bonds at `90 ex-interest.
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.
Interest on 12% Bonds was duly received on due dates.
Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited
and Equity Shares of Beeta Limited in the books of Mr. Brown for the year ended on 31st
March, 2012. (8 Marks)
An swer
(a) In the books of M/s Multistore Limit edHire Purchase Stock Accoun t
Date Particulars ` Date Particulars `
1.5.2011 To Goods Sold onHire Purchase A/c(38,600+51,600)
90,200 1.5.2011 By Hire PurchaseDebtors A/c (Downpayment)(5,000+6,000)
11,000
1.6.2011 By Hire PurchaseDebtors A/c (Scooter)
2,800
1.7.2011 By Hire PurchaseDebtors A/c (Scooter& LCD T.V.) (`2,800+` 7,600)
10,400
1.8.2011 By Hire PurchaseDebtors A/c (Scooter)
2,800
1.9. 2011 By Hire PurchaseDebtors A/c (Scooter)
2,800
1.10.2011 By Hire Purchase A/c
(Scooter & LCD T.V.)
10,400
1.11.2011 By Hire PurchaseDebtors A/c (Scooter)
2,800
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PAPER 1 : ACCOUNTING 19
1.12.2011 By Hire PurchaseDebtors A/c (Scooter)
2,800
1.1.2012 By Hire Purchasedebtor A/c (Scooter &LCD T.V.)
10,400
1.1.2012 By Hire Purchasedebtor A/c (Scooter &LCD T.V.) (4 x
2,800)+(3 x 7,600)(W.N.3)
34,000*
90,200 90,200
Hire Purchase Debtors Accoun t
Date Particulars ` Date Particulars `
1.5.2011 To Hire PurchaseStock A/c
11,000 1.5.2011 By Cash A/c 11,000
1.6.2011 To Hire Purchase
Stock A/c
2,800 1.6.2011 By Cash A/c 2,800
1.7.2011 To Hire PurchaseStock A/c
10,400 1.7.2011 By Cash A/c 10,400
1.8.2011 To Hire PurchaseStock A/c
2,800 1.8.2011 By Cash A/c 2,800
1.9. 2011 To Hire PurchaseStock A/c
2,800 1.9. 2011 By Cash A/c 2,800
1.10.2011 To Hire PurchaseStock A/c
10,400 1.10.2011 By Cash A/c 10,400
1.11.2011 To Hire PurchaseStock A/c
2,800 1.11.2011 By Cash A/c 2,800
1.12.2011 To Hire PurchaseStock A/c
2,800 1.12.2011 By Cash A/c 2,800
1.1.2012 To Hire PurchaseStock A/c
10,400 1.1.2012 By GoodRepossessed A/c
22,000
1.1.2012 To Hire PurchaseStock A/c 34,000
31.03.2012 By Balance c/d (ForLCD T.V. only) 22,400
90,200 90,200
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PAPER 1 : ACCOUNTING 21
2012March31
To P & L A/c(W.N.1)
- - 1,05,000 2012Mar. 1
By BankA/c
15,000 75,000 13,50,000
To P & L A/c 2,49,000 2012Mar. 31
By Bank-Interest
54,000
By Balancec/d(W.N.2) 9,000 - 7,47,000
24,000 2,73,000 20,97,000 24,000 2,73,000 20,97,000
Investment in Equity shares of Alph a Ltd. for the year ended 31st
March, 2012Date Particulars No. Dividend
Income
`
Amount
`Date Particulars No. Dividend
Income
`
Amoun t
`
2011June15
To Bank A/c 1,50,000 -- 38,25,000 2011Oct. 31
By Bank A/c 80,000 - 17,60,000
Oct. 14 To Bonus Issue(1,50,000/3 x2)
1,00,000 - - 2012Jan. 1
By Bank A/c-dividend
2,55,000
2012Mar.31
To P & L A/c(W.N.3)
5,36,000 March31
By Balancec/d(W.N.4)
1,70,000 - 26,01,000
To P & L A/c 2,55,000
2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000
Investment in Equi ty sh ares of Beeta Ltd . for the year ended 31st March, 2012
Date Particulars No. DividendIncome
`
Amoun t
`Date Particulars No. Dividend
Income
`
Amoun t
`
2011July 10
To Bank A/c 60,000 -- 26,92,800 2012Jan. 15
By Bank A/c(W.N 6)
- - 20,250
2012
Jan. 15
To Bank A/c
(W.N. 5)
6,000 - 30,000 Mar. 15
2012
By Bank
dividend
- 1,18,800
March31
To P & L A/c
- 1,18,800 -
March31,2012
By Balancec/d
(bal.fig.) 66,000 - 27,02,550
66,000 1,18,800 27,22,800 66,000 1,18,800 27,22,800
Working Notes:
1. Profit on sale of 12% Bond
Sales price ` 13,50,000
Less: Cost of bond sold = 19,92,00024,000
x 15,000 ` 12,45,000
Profit on sale ` 1,05,000
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22 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
2. Closi ng balance as on 31.3.2012 of 12 % Bon d
19,92,000
24,000x 9,000 = ` 7,47,000
3. Profit on sale of equity shares of Alpha Ltd.
Sales price (80,000 shares x `22) ` 17,60,000
Less: Cost of bond sold =38,25,000
2,50,000
x 80,000 ` 12,24,000
Profit on sale ` 5,36,000
4. Closi ng balance as on 31.3.2012 ofequity shares of Alpha Ltd.
38,25,000
2,50,000x 1,70,000 = ` 26,01,000
5. Calculation of right shares subscr ibed by Beeta Ltd.
Right Shares =60,000 shares
4x 1= 15,000 shares
Shares subscribed by Mr. Brown = 15,000 x 40%= 6,000 shares
Value of right shares subscribed = 6,000 shares @` 5 per share = ` 30,000
6. Calculation o f sale of right entitlementby Beeta Ltd.
No. of right shares sold = 15,000 - 6,000 = 9,000 shares
Sale value of right = 9,000 shares x ` 2.25 per share = ` 20,250
Note: Shares are assumed to be purchased on cum right basis, therefore, amountreceived from sale of rights is credited to Investment A/c.
Question 6
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss of
profit, for` 2,10,000 and ` 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a result of
which sales were seriously affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is
given below:
Particulars Amount(`) Particulars Amount (`)
To Opening Stock 96,000 By Sales 12,00,000
To Purchases 7,56,000 By Closing Stock 1,85,000
To Wages 1,58,000
To Manufacturing Expenses 75,000
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PAPER 1 : ACCOUNTING 23
To Gross Profit c/d 3,00,000
Total 13,85,000
Total 13,85,000
To Administrative Expenses 83,600 By Gross Profit b/d 3,00,000
To Selling Expenses (Fixed) 72,400
To Commission on Sales 34,200
To Carriage Outward 49,800
To Net Profit 60,000
Total 3,00,000
Total 3,00,000
Further detail provided is as below:
(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 1.04.2011 to
30.06.2011 were `3,36,000, `2,14,000, `51,000 and `12,000 respectively.
(b) Other Sales figure were as follows
`
From 01.04.2010 to 30.06.2010 3,00,000
From 01.07.2010 to 30.09.2010 3,20,000From 01.07.2011 to 30.09.2011 48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to
increase by 5% on sales.
(d) ` 1,98,000 were additionally incurred during the period after fire. The amount of policy
included ` 1,56,000 for expenses leaving ` 42,000 uncovered. Compute the claim for
stock, loss of profit and additional expenses (16 Marks)
An swer
Claim for l oss of stock
Memorandum Trading Acc ount fo r the period 1st April t o 1st July, 2011
` `
To Opening Stock 1,85,000 By Sales 3,36,000
To Purchases 2,14,000 By Closing stock
To Wages 51,000 (Bal.fig.) 2,26,800
To Manufacturing expenses 12,000
To Gross Profit @ 30% on sales
(W.N) 1,00,800
5,62,800 5,62,800
Claim for loss of stock will be limited to ` 2,10,000 only which is the amount of Insurancepolicy and no average clause will be applied.
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26 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
carry on the business without settling the accounts of Z. Final payment to Z made on 1 st
March, 2012. The partnership firm made profit amounting to ` 30,000 during the period
from 1st December, 2011 to 29th February, 2012.
What are the rights of Z to share subsequent profit as per the provisions of Section 37 of
the Indian Partnership Act?
(c) A computer costing ` 60,000 is depreciated on straight line basis, assuming 10 years
working life and Nil residual value, for three years. The estimate of remaining useful life
after third year was reassessed at 5 years. Calculate depreciation as per the provisions
of Accounting Standard 6 "Depreciation Accounting".
(d) What are the maximum limits of managerial remuneration for companies having adequate
profits?
(e) "ERP package is gaining popularity in big organizations." Briefly explain the advantages
of using an ERP package, in the light of above statement. (4 4 = 16 Marks) An swer
(a) Calculati on of Average Due Date
(Taking 4th August as the base date)
Date of bill Term Due date Amount
`
No. of daysfrom the basedate i.e. 4th
August
Product
12th May 3 months 14th August 44,000 10 4,40,000
10th June 4 months 13thOctober 45,000 70 31,50,000
1st July 1 month 4th August 14,000 0 0
19th July 2 months 23thSeptember 17,000 50 8,50,000
1,20,000
44,40,000
Average due date=Base date+ Days equal toTotal of products
Total amount
= 4th August +44,40,000
1,20,000
=4th August +37 days = 10th September
(b) Under Section 37 of the Partnership Act, Z can exercise any of the following two optionsin the absence of a contract:
1. Z is entitled at his option to such share of the profits made since he ceased to be a
partner as may be attributable to the use of his share of the property of the firm or
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PAPER 1 : ACCOUNTING 27
2. Z is entitled to interest at the rate of six per cent per annum on the amount of hisshare in the property of the firm.
It may be noted that Z is not bound to make election until the share of the profit thatwould be payable to him has been ascertained.
(c) Depreciation per year = ` 60,000 / 10 = ` 6,000
Depreciation on SLM charged for three years = ` 6,000 x 3 years = ` 18,000
Book value of the computer at the end of third year =` 60,000 ` 18,000 = ` 42,000.
Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards = ` 42,000 / 5 = ` 8,400 per annum
(d) For companies having adequate profits, maximum limits of managerial remuneration in
different circumstances are as under:
(i) Overall (excluding fee for attending meetings) 11% of net profit
(ii) If there is one managerial person 5% of net profit
(iii) If there are more than one managerial person 10% of net profit(iv) Remuneration of part-time directors:
(a) If there is no managing or whole-time director 3% of net profit
(b) If there is a managing or whole-time director 1% of net profit
(e) The advantages of using an ERP for maintaining accounts are as follows:
1. Standardised processes and procedures: An ERP is a generalised package
which covers most of the common functionalities of any specific module.
2. Standardised reporting: Majority of the desired reports are available in an ERP
package. These reports are standardised across industry and are generallyacceptable to the users.
3. No Redundancy: Duplication of data entry is avoided as it is an integrated
package.
4. Better Information: Greater information is available through this package.
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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION
Question No. 1is compulsory.
Attempt anyfivequestions from the remainingsixquestions.
Question 1
(a) Explain in brief the rules relating to 'Acceptance' of an offer under the
provisions of the Indian Contract Act, 1872. (5 Marks)
(b) Explain the provisions of the Companies Act, 1956, relating to the utilization, by acompany, of the amount standing to the credit of Securities Premium Account. (5 Marks)
(c) State with reasons whether the following statements are correct or incorrect:
(1) Fairness and honesty are the pillars of success in the business.
(2) Ethical behaviour is essential to working environment at the working place.
(2 2 = 5 Marks)
(d) Explain the socio-psychological barriers of communication in relation to an organization.
(5 Marks)
An swer
(a) Following are the general rules regarding acceptance under the Indian Contract Act,
1872.
(i) Acceptance must be absolute and unqualified. As per section 7 of the Act,
acceptance is valid only when it is absolute and unqualified or unconditional.
(ii) Acceptance must be in the prescribed manner. If the offer is not accepted in the
prescribed manner, then the offeror may reject the acceptance within a reasonable
time.
(iii) Acceptance must be communicated to the offeror. If acceptance is communicated
to the person, other than the offeror, it will not create any legal relationship. Thus,
to conclude a contract between the parties, the acceptance must be communicated
in some perceptible form.
(iv) Acceptance must be given by the party to whom the offer is made.
(v) Acceptance must be given within the prescribed time or within a reasonable time.
(vi) Acceptance cannot be given before communication of an offer
(vii) Acceptance must be made before the offer lapses or is withdrawn.
(viii) Acceptance must show intention to fulfill the promise.
(ix) Acceptance cannot be presumed from silence
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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 29
(x) Acceptance by conduct/performance of condition: Acceptance may also be by
performance of some condition / act as required by the Offeror.
(b) Securities Premium Account Utilization
In accordance with the provisions of the Companies Act, 1956, as contained in section 78(2), the amount standing to the credit of the Share Premium Account can be utilized by a
company for the following purposes :
a. in paying up un-issued securities of the company to be issued to members of the
company as fully paid bonus shares;b. in writing off the Preliminary Expenses of the company;
c. in writing off the expenses of or commission paid or discount allowed on any issue
of shares or debentures of the company;
d. in providing for premium payable on the redemption of any redeemable preference
shares or of any debentures of the company.
(c) (1) Correct. The success of the business depends very much on fairness and honesty
in the business. Fairness and honesty are at the heart of the business ethics and
relate to the general values of decision makers. The business professionals and
persons are expected to follow all applicable rules and regulations, without causingharm to the customers, employees, clients or competitors knowingly throughdeception, misrepresentation, coercion or discrimination. One aspect of fairness
and honesty is related to disclosure of potential harm caused by product use.
Another aspect of fairness relates to competition. Although, numerous laws have
been passed to foster competition and make monopolistic practices illegal,
companies sometimes gain control over markets by using questionable practices
that harm competition. Therefore, we may say that fairness and honesty are the
pillars of success in the business.
(2) Correct. Every organization, whether a business or a Government agency is first
and foremost a human society. In all these setups ethical behavior is essential to
working environment. If an employer does not take steps to create a working
environment where the employees have a clear, common understanding of what is
right and wrong, and feel free to discuss and ask questions about ethical issues and
report violations, significant problems may arise. Lacking of ethical behavior in
working environment may give rise to some significant problems, namely :
(i) Increases risk of making unethical decisions by employees
(ii) Increases tendency of employees to report violations to outside regulatory
authorities (whistle blowing) because of lacking of an adequate internal forum.
(iii) Inability to recruit and retain top people
(iv) Diminishes reputation in the industry and the community
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30 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
(v) Significant legal exposure and loss of competitive advantage in the market
place
Therefore, ethical behavior is essential to working environment at the workplace
(d) Socio Psychological barriers of Communication: The attitudes and opinions, placein society and status consciousness arising from ones position in the hierarchical
structure of the organization, ones relations with peers, seniors, juniors and family
background all these deeply affect ones ability to communicate both as a sender and
receiver. Status consciousness is widely known to be a serious communication barrier in
organizations. It leads to psychological distancing which further leads to breakdown ofcommunication or miscommunication. Often, it is seen that a man high up in an
organization builds up a wall around himself. This restricts participation of the less
powerful in decision making. In the same way, ones family background formulates ones
attitude and communication skills.
Frame of reference is another barrier to clear communication. Every individual has aunique frame of reference formed by a combination of his experiences, education,
culture, attitude and other elements, resulting in biases and different experiences in a
communication situation.
Emotions play a very important role in communication. Both encoding and decoding ofmessages are influenced by our emotions. A message received when we are
emotionally worked up will have a different meaning for us than when we are calm and
composed.
Perception provides each of us with a unique view of the world a view sometimes
related to, but not necessarily identical with that held by others. Selective perception
means that the receivers selectively see and hear depending upon their needs,
background, motivations, experience and other personal characteristics.
Question 2
(a) (i) Explain the provisions of the Payment of Bonus Act, 1965 relating to the time limitwithin which an employer must pay the amount of bonus due to an employee.
(4 Marks)
(ii) Explain as to when is the gratuity payable to an employee of an establishment,
under the provisions of the Payment of Gratuity Act, 1972. (4 Marks)
(b) What reasons force a marketing executive to adopt ethical practices in marketing?
Explain. (4 Marks)
(c) In what way is the 'Ethical Communication' advantageous to a business establishment?
Explain. (4 Marks)
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PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION 31
Answer
(a) (i) As per section 19 of the Payment of Bonus Act, 1965, the employer is bound to pay
his employee bonus within one month from the date on which the award becomes
enforceable or the settlement comes into operation, if a dispute regarding payment
of bonus is pending before any authority under Section 22 of the Act.
In other cases, however, the payment of the bonus is to be made within a period of
8 months from closing of the accounting year. But this period of 8 months may be
extended upto a maximum of 2 years by the Appropriate Government or by any
authority specified by the Appropriate Government. This extension is to be grantedon the application of the employer and only for sufficient reasons.
(ii) According to section 4 (1) of the Payment of Gratuity Act, 1972, Gratuity shall be
payable to an employee on the termination of his employment after he has
rendered continuous services for not less than 5 years:
On his superannuation, or
On his retirement or resignation, or
On his death or disablement due to accident or disease
The condition of the completion of five years continuous service is not essential incase of the termination of the employment of any employee due to death or
disablement.
Generally, gratuity is payable to the employee himself. However, in case of death
of the employee, it shall be paid to his nominee or if no nomination has been made,
to his legal heirs.
The payability of gratuity to the employee is his right as well as the obligation of the
employer. By the change of ownership, the relationship of employer and employees
subsist and the new employer cannot escape from the liability of payment of gratuity
to the employees. (Pattathurila K. Damodharan Vs M. Kassin Kanju, 1993).An employee resigning from service is also entitled to gratuity (Texmaco Ltd. V/s Sri
Ram Dham, 1992) and non acceptance of the resignation is no hurdle in the way of
an employee to claim gratuity (Mathur Spinning Mills V/s Deputy Commissioner of
Labour, 1983).
(b) Behaving Ethically in Marketing: Marketing Executives should practice ethical behavior
because it is morally correct. While this is simple and beautiful in concept, it is not
sufficient motivation for everyone. So let us consider four pragmatic reasons for ethical
behavior :-
(i) To reverse dealing public confidence in marketing: periodically we hear aboutmisleading package labels, false claims in ads, phony list prices and infringement of
well established trademarks. Though, such practices are limited to only a small
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32 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
proportion of all marketing, the reputation of all marketers is damaged. To reverse
this situation, business leaders must demonstrate convincingly, that they are aware
of their ethical responsibility and will fulfill it. Companies must set high ethical
standards and enforce them.
(ii) To avoid increase in Government regulation: Business apathy, resistance or token
responses to unethical behavior simply increase the probability of more Governmentregulation. Indeed, most of Governmental limitations on marketing are the result
of managements failure to live up to ethical responsibilities at one time or other.
Moreover, once some form of Government control has been introduced, it is rarelyremoved.
(iii) To regain the power granted by society: Marketing executives wield a great deal of
social power as they influence markets and speak out on economic issues.
However, there is responsibility tied to that power. If marketers do not use their
power in a socially acceptable manner, that power will be lost in the long run.
(iv) To protect the image of the organization: Buyers often form an impression of an
entire organization based on their contact with one person i.e. salesman or
marketing executive. A customers opinion of a retail store is based on the
behaviour of single sales clerk as observed by Procter and Gamble.(c) Advantages of ethical commun ication: Ethical Communication promotes long term
business success and profit. However, improving profits isnt reason enough to be
ethical; as soon as the cost of being ethical outweighed the benefits, ethical choiceswould no longer be possible. Surveys report that all employees want to work for
organizations with high ethical standards because ethical communication is fundamental
to responsible thinking, decision making and the development of relationship and
communities within and across contexts, cultures, channels and media. Further, it
enhances human worth and dignity by fostering truthfulness, fairness, responsibility,
personal integrity and respect for self and others.
Competent people are likely to search for organizations that maintain high ethical
standards. When competent people migrate towards ethical firms, everyone benefits
because both, competence and ethics go hand in hand. They know that ethical practices
are the only way to meet the level of ethical awareness that has risen over the last fewyears. Many companies are reassessing their communication budgets, moving away
from traditional, functional approaches to public relations and public affairs and pursuing
internal and external corporate communication strategies. The theory and practice
arising from corporate communications lies at the heart of effective strategic
management, planning and control. New digital media technologies are having greater
impact on managements and the monitoring and evaluation of corporate identity,
corporate advertising, organizational reputation and overall performance.
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Question 3
(a) What do you understand by the term 'Consideration'? Are there any circumstances under
which a contract, under the provisions of the Indian Contract Act, 1872, without
consideration is valid? Explain. (8 Marks)
(b) State the special responsibilities of industries that are based on natural resources. How
does the adoption of 'Green Accounting System' help in avoiding policy decisions which
are non-sustainable for the country? Explain. (4 Marks)
(c) What do you understand by non-verbal communication? Explain its methods in brief.(4 Marks)
An swer
(a) Meaning of cons ideration : The expression consideration in general means price paidfor an obligation. According to Section 2 (d) of the Indian Contract Act, 1872 when at the
desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing or promises to do or abstain from doing something,
such an act or abstinence or promise is called consideration for the promise. Thus, on
analyzing the above definition, the following ingredients are essential in understanding
the meaning of the term consideration :-
(i) An act i.e. doing something
(ii) An abstinence or forbearance i.e. abstaining or refraining from doing something,
and
(iii) A return promise.
The general rule is that an agreement made without consideration is void. Sections 25
and 185 of the Indian Contract Act, 1872, provide for exceptions to this rule where an
agreement without consideration is valid. These are :
(1) Love & Affection [Section 25 (1)]Where an agreement is expressed in writing and registered under the law for the
time being in force for the registration of documents and is made on account of
natural love and affection between the parties standing in near relation to each
other, the agreement is enforceable, even through, the consideration is absent.
(2) Compensation for voluntary service [Section 25 (2)]
A promise to compensate, wholly or in part, a person who has already voluntarily
done something for the promissor, is enforceable even without consideration.
(3) Promise to pay, a time barred Debt [Section 25 (3)]
The agreement is valid provided it is made in writing and is signed by the debtor or
by his agent authorized in that behalf.
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34 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
(4) Completed Gift [Explanation 1 to Section 25]
As per explanation 1 to section 25, nothing in section 25 shall affect the validity as
between donor and donee, on any gift actually made.
(5) Agency (Section 185)
No consideration is necessary to create an agency.
(b) Special responsibilities of the industries based on natural resources : Industries that are
based on natural resources like minerals, timber, fiber and foodstuffs etc., have a special
responsibility for :
(i) Adopting practices that have built-in environmental considerations.
(ii) Introducing processes that minimize the use of natural resources and energy,
reduce waste and prevent pollution.
(iii) Making products that are environment-friendly with minimum adverse impact on
people and ecosystem.
Green Accounting Systems: Conventional accounts may result in policy decisions
which are non- sustainable for the country. Green accounting, on the other hand is,
focused on addressing such deficiencies in conventional accounts with respect toenvironment. If the environmental costs are properly reflected in the prices paid for
goods and services, then companies and ultimately the consumer would adjust market
behavior in a way that would reduce damage to environment, pollution and waste
production. Such measures would facilitate the approach of polluter pays principle.
Removing subsidies that encourage environmental damage is another measure.
(c) Non verbal communication: Words are not the only way we communicate. Even while
we use language to communicate explicit information and message content, we use non-
verbal communication along with it to convey relational messages, our feelings about
another person as well as status and power. Methods of non-verbal communication :
(i) Kinesics or Body language: It must be noted, though it is known to almost all, thatall our bodily movements, gestures, postures etc., are guided by our feelings and
thought processes. The nodding of our head, blinking of our eyes, waving of our
hands, shrugging of our shoulders etc., are expressions of our thought and feelings.
All these movements are the signals that our body sends out to communicate. That
is why this area of study has been called body language.
(ii) Paralanguage: The term Paralanguage' is used to describe a wide range of vocal
characteristics like tone, pitch and speed etc., Vocal cues that accompany spoken
language which help to express and reflect the speakers attitude are termed as
paralanguage. It consists of pitch variation, speaking speed, pause, word stressetc.,
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(iii) Arti ficial communication : Sometimes we react to people on the basis of their
appearance. The use of personal adomment like clothing, accessories, makeup,
hairstyle etc., provides important non verbal cues about ones age, social and
economic status, education level and personality etc.,
(iv) Proxemics: It refers to the space that exists between us when we talk or relate to
each other as well as the way we organize space around us. We can also call it
space language.
(v) Chronemics or time language: It is the study of how we use time to communicate.
Punctuality is an important factor in time communication. Misunderstandings ordisagreements involving time can create communication and relationship problems.
(vi) Haptics: It is communication through touch. The impact of touch sends important
messages about us. It reveals our perception of status, our attitudes and even our
needs.
(vi) Silence: The absence of paralinguistic and verbal cues also serves important
communicative functions.
Question 4
(a) Explain the doctrine of 'Indoor Management' as applicable in case of companies. Explainalso the circumstances in which an outsider dealing with a company cannot claim any
relief on the basis of doctrine of 'Indoor Management'. (8 Marks)
(b) What do you understand by the term 'discrimination' inemployment as sometime foundin an establishment ? Explain the basic elements of 'discrimination'. (4 Marks)
(c) Why is the' Active Listening' important for an individual? State the guidelines for' Active
Listening'. (4 Marks)
An swer
(a) Doctrine of Indoor Management & Exception s: One limitation to the doctrine ofconstructive notice of the memorandum and articles of a company is the doctrine of
indoor management. According to the doctrine of indoor management, the outsider,
dealing with the company is entitled to assume that as far as the internal proceedings of
the company are concerned, everything has been regularly done. They are bound toread the registered documents and to see that the proposed dealing is not inconsistent
therewith, but they are not bound to do more; they need not inquire into the regularity of
the internal proceedings as required by the Memorandum and Articles. This limitation of
the doctrine of constructive notice is known as the Doctrine of Indoor Management,
popularly known as rule in Royal British Bank v/s Turquand. Thus, the doctrine of
indoor management aims to protect outsiders against the company.Exceptions: In the following circumstances an outsider dealing with the company cannot
claim any relief on the ground of Indoor Management.
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36 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
(i) Knowledge of irregularity: Where a person dealing with a company has actual or
constructive notice of the irregularity as regards internal management, he cannot
claim the benefit under the rule of Indoor Management (T.R. Pratt, Bombay Ltd., V/s
E.D. Sassoon & Co. Ltd.).
(ii) Negligence: Where a person dealing with a company could discover the irregularity
if he had made proper inquiries, he cannot claim the benefit of the rule of indoormanagement. The protection of the rule is also not available where the
circumstances surrounding the contract are so suspicious as to invite inquiry and
the outsider dealing with the company does not make proper inquiry (Anand BihariLtd., V/s. Dinshaw & Co.). Also, the case ofUnderwood V/s. Bank of Liverpool.
(iii) Act void ab initio and forgery: Where the acts done in the name of a company are
void ab initio, the doctrine of indoor management does not apply. The doctrine
applies only to irregularities that otherwise might affect a genuine transaction. Itdoes not apply to a forgery. A company can never the held liable for forgeries
committed by its officers (Ruben V/s. Great Fingall Consolidated Co.)
(iv) Acts outside the scope of apparent authority: If an officer of a company enters into
a contract with a third party and if the act of the officer is beyond the scope of his
authority, the company is not bound (Kreditbank Cassel V/s. Schenkers Ltd.)(v) A person having no knowledge of articles cannot seek protection under Indoor
Management.
(b) The root meaning of the term discriminate is to distinguish one object from another
Employment discrimination is treating one person better than another because of their
age, gender, race, religion or other protected class of status. Discrimination in
employment is wrong because it violates the basic principle of equality. Discrimination is
to treat people differently. It is usually intended to refer to the wrongful act of making a
difference in treatment or favour on a basis other than individual merit.
Discrimination in employment involves the following three basic elements:(i) It is a decision against one or more employees (or prospective employees) that is
not based on individual merit, such as the ability to perform a given job, seniority or
other morally legitimate qualifications.
(ii) The decision derives solely or in part from racial or sexual prejudice, false
stereotypes or some other kind of morally unjustified attitude against members of
the class to which employee belongs.
(iii) The decision has a harmful or negative impact on the interests of the employees,
perhaps costing them jobs, promotions, or better pay.
(c) Importance of Active Listening :
Active listening is important for several reasons :-
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(i) It aids the organization in carrying out its mission
(ii) It helps individuals to advance in their careers
(iii) It provides information that helps them to learn about important happenings in the
organization, as well as assisting them in doing their own jobs well.
(iv) It also helps to build strong personal relationships.
Guidelines for Active Listening:
(i) Look at the person and suspend other things you are doing in order to understand
the other persons concerns, intentions.
(ii) Be interested in what the person is saying. If you just cant make yourself
interested, you will lose important information, so try taking notes. Doing so will
keep your body and mind active.
(iii) Listen to the tone of voice and inflections; look at gestures and body language,
these may carry an unspoken message.
(iv) Restate what the person said. Restating their meaning is a way for you to make
sure you understand the person clearly.
(v) Ask questions once in a while to clarify meaning. Doing so, will keep you alert andlet the other person know you have been listening and are interested in getting all
the facts and ramifications.
(vi) Be aware of your own feelings and opinions.
Question 5
(a) Examining the provisions of the Negotiable Instruments Act, 1881, distinguish between a
'Bill of Exchange' and a 'Promissory Note'. (8 Marks)
(b) What do you understand by the term 'Floating charge'? State the circumstances under
which 'Floating charge' becomes 'Fixed charge'. (4 Marks)(c) Mr. X has received a cheque book from his bank (Sun Bank) where he (X) has his
savings account. Write a letter to the Bank acknowledging the receipt of the cheque
book. (4 Marks)
An swer
(a) Distinctio n between a Promissory Note and a Bill of Exchange: The distinctive
features of these two types of negotiable instruments are tabulated below:-
Sl. No. Promissory Note Bill of Exchange
1. It contains a promise to pay It contains an order to pay
2. The liability of the maker of a note isprimary and absolute
The liability of the drawer of a bill issecondary and conditional. Hewould be liable if the drawee, after
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38 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
accepting the bill fails to pay themoney due upon it provided notice ofdishonor is given to the drawerwithin the prescribed time.
3. It is presented for payment withoutany previous acceptance by maker
If a bill is payable sometime aftersight, it is required to be acceptedeither by the drawee himself or bysomeone else on his behalf, before itcan be presented for payment.
4. The maker of a promissory notestands in immediate relationship withthe payee and is primarily liable to thepayee or the holder.
The maker or drawer of an acceptedbill stands in immediate relationshipwith the acceptor and the payee
5. It cannot be made payable to themaker himself, that is the maker andthe payee cannot be the same person
In the case of bill, the drawer andpayee or the drawee and the payeemay be the same person.
6. In the case of a promissory note thereare only two parties, viz. the maker
(debtor) and the payee (creditor).
In the case of a bill of exchange,there are three parties, viz., drawer,
drawee and payee, and any two ofthese three capacities can be filledby one and the same person.
7. A promissory note cannot be drawn insets
The bills can be drawn in sets
8. A promissory note can never beconditional
A bill of exchange too cannot bedrawn conditionally, but it can beaccepted conditionally with theconsent of the holder. It should benoted that neither a promissory note
nor a bill of exchange can be madepayable to bearer on demand.
(b) A floating charge is an equitable charge which is not a specific charge on any property of
the company. It is a charge on a class of assets, which may be present or future and
which changes from time to time in the ordinary course of business, for example Stock
in trade. Thus, the company may, despite of the charge, deal with any of the assets in
the ordinary course of business. It is of the essence of a floating charge that it remains
dormant until the undertaking charged ceases to be a going concern or until the person in
whose favour the charge created, intervenes.
Process of conversion of floating charge into a fixed charge is termed as Crystallizationwhich is subject to the same restrictions as the fixed charge. A floating charge
crystallizes or get fixed under the following circumstances.
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40 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
(iv) 'A holder of share-warrant of a company is not a member of the company'.
An swer
(a) Procedu re for the Change of name und er the Companies Act, 1956: According to
Section 21 of the Companies Act, 1956, a company may, by special resolution, and with
the approval of the Central Government, signified in writing, change its name. This
power has been delegated to the Registrar of Companies. The application for change of
name is required to be made to Registrar of Companies in form IA with a fee of Rs. 500.
Where the Registrar is satisfied with the companys proposal, he may accord to the
proposal which will be valid for a period of six months.
However, such an approval of the Central Government would not be necessary where the
only change in the name of the company is the addition thereto or the deletion there from
of the words private consequent upon the conversion as per the provisions of this Act of
a public company into a private company or vice versa (Proviso to Section 21).
Further, according to Section 22 of the above Act, if through inadvertence etc., the name
is identical with, or too nearly resembles, the name by which a company, in existence,
has been previously registered, it may be changed by ordinary resolution with the
sanction of the Central Government within twelve months of the registration. The
company shall make the change by ordinary resolution and with the previous approval ofthe Central Government within three months of the date of the direction of the CentralGovernment being received or such longer period as the Central Government may deem
fit to allow.
According to Section 23 of the above Act, where the name of a company has been
changed, the Registrar of Companies shall issue fresh certificate with the change
embodied therein. The change in name shall not affect any of the companys rights or
obligations of the company or render defective any legal proceedings by or against it.
Any legal proceedings, which might have been continued or commenced by or against
the company by its former name, may be continued by its name.
(b) Indemnity Bond
I, Mr. V, S/o ------resident of ------------ do hereby agree to indemnify the M/s. Brown Ltd.,
for any loss that may occur for seeking release of dividend for 150 shares of Rs. 1,500/-.
I further declare that personally I have not received the dividend warrant in question.
Mr. V
Date : (Signature)
Place :
(c) Correct / Incorrect
(i) Correct
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(ii) Correct
(iii) Correct
(iv) Correct
Question 7
Answer any FOUR of the following:
(a) Explain clearly the meaning of the term 'Basic wages' as defined under the Employees'
Provident Funds and Miscellaneous Provisions Act, 1952. State also what is not includedin the term 'Basic Wages'. (4 Marks)
(b) In what way a 'Member' of a company is different from that of a 'shareholder' of the
company? (4 Marks)
(c) State the ordinary business which may be transacted at an Annual General Meeting of a
public limited company incorporated under the Companies Act, 1956. (4 Marks)
(d) Explain the role played by different committees in regulating the 'Corporate Governance'.
(4 Marks)
(e) Explain the importance of 'Ethics' for finance and accounting professionals. (4 Marks)
An swer
(a) As per section 2 (b) of the Employees Provident Funds and Miscellaneous Provisions Act,
1952, Basic Wages means all emoluments which are earned by an employee while on duty
or on leave or holidays with wages in either case in accordance with the terms of the contract
of employment and which are paid or payable in cash to him, but does not include :-
(i) the cash value of any food concessions
(ii) any dearness allowance (that is to say all cash payments by whatever name iscalled, paid to an employee on account of rise in the cost of living), house rent
allowance, overtime allowance, bonus, commission or pay and other similarallowance payable to the employee in respect of his employment or of work done insuch employment or
(iii) any presents made by the employer.
(b) Members or share holders of a company are the persons who collectively constitute the
company as a corporate entity. They are synonymous in the case of a company limitedby shares, a company limited by guarantee and having a share capital and unlimited
company whose capital is held in definite shares. But in the case of an unlimited
company or a company limited by guarantee, a member may not be a shareholder, for
such a company may or may not have a share capital. However, in certain respect
members and shareholders are separate. They are as follows:-
(i) A registered shareholder is a member but a registered member may not be a
shareholder because the company may not have a share capital.
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42 INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: MAY, 2012
(ii) A person who owns a bearer share warrant is a shareholder but he is not a member
as his name is struck off from the register of members [Section 115 (1)]. This
means that a person can be a holder of shares without being a member.
(iii) A legal representative of a deceased member is not a member until he applies for
registration. He is, however, a shareholder eventhough, his name does not appear
on the register of members.
(iv) A person who subscribes to the memorandum of association immediately becomes
the member, even though no shares are allotted to him. Till shares are allotted to
the subscriber, he is a member but not a shareholder of the company.
(v) A person who has transferred his shares ceases to be a holder of those shares from
the date of the transfer but he continues to be a member till such time the transfer is
registered in the books of the company.
(c) Ordinary Business to be transacted at an Annual General Meeting.
The following business is called the ordinary business, which is transacted at the Annual
General Meeting of a company :-
(1) Consideration of Annual Accounts, Balance sheet & the Reports of the Board of
Directors and Auditors(2) Declaration of Dividend
(3) Appointment of directors in place of those retiring
(4) Appointment of and fixation of remuneration of auditors
Any business other than the above shall be called special business.
(d) Role of different committees in regulating Corporate Governance :
The core roles of the various committees in regulation of Corporate Governance are as
follows :-
(1) Board of directors: The Boards role is that of trusteeship to protect and enhance
shareholders value through strategic supervision. The strategy should aim at
accountability and fulfillment of goals.
(2) Audit committee: They have to provide assurance to Board on adequacy of internal
control systems and financial disclosures.
(3) Compensation Committee: The committee has to recommend to the Board
compensation terms for Executive Directors and the senior most level of
management below the Executive Director.
(4) Nomination committee: It is to recommend to the Board nominations for
membership of the Corporate Management Committee and the Board and oversee
succession to the senior most level of management below the Executive Director.
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(5) Corporate management committee: Its primary role is strategic management of
companys business within Boards approved direction.
(6) Investor services committee: It is to look into redressal of shareholders and
investors grievances, approval of transmissions, sub division of shares, issue of
duplicate shares etc.,
(7) Divisional Management Committee: It is to realize tactical and strategic objectives
in accordance with Corporate Management Committee / Board approved plan.
(e) Finance and Accounts is perhaps the only business function which accepts responsibilityto act in public interest. Hence, a finance and accounting professionals responsibility is
not restricted to satisfy the needs of any particular individual or organization. While acting
in public interest, it becomes imperative that the finance and accounting professional
adheres to certain basic ethics in order to achieve his objectives.
Until recently, various surveys conducted globally had ranked finance and accounting
professionals very high in terms of professional ethics. However, various accounting
scandals witnessed during the past few years have put a serious question mark on the
role of the finance and accounting professional in providing the right information for
decision making both within and outside their respective organizations. As these finance
and accounting professionals are in public practice, they should take reasonable steps toidentify circumstances that could pose the conflict of interest and thus leading to follow
unethical behavior.
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(vi) Depreciation is charged on straight line basis
Compute machine hour rate for the new machine.
(c) RES Ltd. is an all equity financed company with a market value of`25,00,000 and cost
of equity Ke = 21%. The company wants to buyback equity shares worth `5,00,000 byissuing and raising 15% perpetual debt of the same amount. Rate of tax may be taken
as 30%. After the capital restructuring and applying MM Model (with taxes), you are
required to calculate:
(i) Market value of RES Ltd.(ii) Cost of Equity Ke
(iii) Weighted average cost of capital and comment on it.
(d) A company is presently having credit sales of`12 lakh. The existing credit terms are 1/10,net 45 days and average collection period is 30 days. The current bad debts loss is 1.5%. In
order to accelerate the collection process further as also to increase sales, the company is
contemplating liberalization of its existing credit terms to 2/10, net 45 days. It is expected that
sales are likely to increase by 1/3 of existing sales, bad debts increase to 2% of sales and
average collection period to decline to 20 days. The contribution to sales ratio of the
company is 22% and opportunity cost of investment in receivables is 15 percent (pre-tax). 50per cent and 80 percent of customers in terms of sales revenue are expected to avail cash
discount under existing and liberalization scheme respectively. The tax rate is 30%.
Should the company change its credit terms? (Assume 360 days in a year).
(4 5 = 20 Marks)
An swer
(a) (i) Productio n Budget for the year 2012 by Quarters
I II III IV Total
Sales demand(Unit) 18,000 22,000 25,000 27,000 92,000
I Opening Stock 6,000 7,200 8,100 8,700 30,000
II 70% of Current Quarters Demand
12,600 15,400 17,500 18,900 64,400
III 30% of FollowingQuarters Demand
6,600 7,500 8,100 7,400* 29,600
IV Total Production(II &III) 19,200 22,900 25,600 26,300 94,000
V Closing Stock (I+IV-Sales)
7,200 8,100 8,700 8,000 32,000
*Balancing Figure
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(ii) Break Even Point = Fixed Cost/ PV Ratio
=220000/13.75% = 1600000 or 40000 units.
P/V Ratio = (40 - 34.50 = 5.50)/40 100 =13.75%
(Or, Break Even Point= Fixed Cost/ Contribution = 2,20,000/5.50 = 40,000 Units)
Total sales in the quarter II is 40000 equal to BEP means BEP achieved in II quarter.
(b) Computation of machine hour rate of new Machine
Total(`)
Per hour(`)
A. Standing Charges
I. Insurance Premium 9000 x1
9
1,000
II. Rent1
10x2400x12 2,880
3,880 0.97*
B. Machine expenses
I. Repairs and Maintenance [5,000/4,000] 1.25
II. Depreciation10,00,000 10,000
10 4,000
24.75
III. Electricity 8 units x
` 3.75 30.00
Machine hour rate 56.97
Working Note
1 Calculation of productive Machine hour rateTotal hours 4,200
Less: Non-Productive hours 200
4,000
* 3,880/ 4000 = 0.97
(c) Compu tation of Market Value, Cost of Equi ty and WACC of RES Ltd .
Market Value of Equity = 25,00,000
Ke =21%
e
Net income (NI) for equity holders
K= Market Value of Equity
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Net income (NI) for equity holders
0.21= 25,00,000
Net income for equity holders = 5,25,000
EBIT= 5,25,000/0.7=7,50,000
All Equity Debt and Equity
EBIT 7,50,000 7,50,000
Interest to d