PRIME/44 th PT/IPC 1 PRIME ACADEMY 44 th SESSION – PROGRESS TEST – ACCOUNTING No. of Pages: 5 Total Marks: 75 Time allowed: 2 hrs PART - A (25 Marks) 1. A. Explain the methods of accounting generally adopted for partner’s capital? (3 Marks) B. List down the various methods of valuation goodwill generally adopted. Briefly explain valuation of goodwill under Annuity method? (3 Marks) C. Lee and Lawson are in equal partnership. They agreed to take Hicks as one-fourth partner. For this it was decided to find out the value of goodwill. M/s Lee and Lawson earned profits during 2009-2012 as follows: On 31.12.2012 capital employed in M/s Lee and Lawson was INR 5,00,000. Rate of normal profit is 20%. Find out the value of goodwill following various methods. (6 Marks) D. Explain the conditions to be fulfilled for satisfying as Amalgamation in the nature of merger? (3 Marks) E. What is Amalgamation Adjustment A/c? When this account will be created and why? (3 Marks) F. Purchase consideration includes amount paid to creditors of the transferor Company. Is this statement correct? Also please list what items will be included in the purchase consideration. (3 Marks) G. What are the statutory books to be maintained by a company under various sections of the Companies Act 2013. (4 Marks) PART - B (50 Marks) 1. P Ltd. and Q Ltd. were carrying on the business of manufacturing of auto components. Both the companies decided to amalgamate and a new company PQ Ltd. is to be formed with an Authorized Capital of `10,00,000 divided into 1,00,000 equity shares of `10 each. The Balance Sheet of the companies as on 31.03.2014 were as under: Balance Sheet as at 31.03.2014 Particulars INR Equity and Liabilities Shareholder’s Fund Share Capital Reserves and Surplus Profit and Loss A/c Non – Current borrowings 8% Secured debentures Current borrowings Trade payables 140,000 30,000 110,000 54,000 Total 334,000 Assets Non-current assets Fixed Assets Year Profit 2009 120,000 2010 125,000 2011 130,000 2012 150,000 PRIME ACADEMY
Transcript
PRIME/44th PT/IPC 1
PRIME ACADEMY 44th SESSION – PROGRESS TEST – ACCOUNTING
No. of Pages: 5 Total Marks: 75 Time allowed: 2 hrs
PART - A (25 Marks) 1. A. Explain the methods of accounting generally adopted for partner’s capital? (3 Marks) B. List down the various methods of valuation goodwill generally adopted. Briefly explain valuation of
goodwill under Annuity method? (3 Marks) C. Lee and Lawson are in equal partnership. They agreed to take Hicks as one-fourth partner. For this it was
decided to find out the value of goodwill. M/s Lee and Lawson earned profits during 2009-2012 as follows:
On 31.12.2012 capital employed in M/s Lee and Lawson was INR 5,00,000. Rate of normal profit is 20%. Find out the value of goodwill following various methods. (6 Marks)
D. Explain the conditions to be fulfilled for satisfying as Amalgamation in the nature of merger? (3 Marks) E. What is Amalgamation Adjustment A/c? When this account will be created and why? (3 Marks) F. Purchase consideration includes amount paid to creditors of the transferor Company. Is this statement
correct? Also please list what items will be included in the purchase consideration. (3 Marks) G. What are the statutory books to be maintained by a company under various sections of the Companies
Act 2013. (4 Marks)
PART - B (50 Marks) 1. P Ltd. and Q Ltd. were carrying on the business of manufacturing of auto components. Both the
companies decided to amalgamate and a new company PQ Ltd. is to be formed with an Authorized Capital of `10,00,000 divided into 1,00,000 equity shares of `10 each. The Balance Sheet of the companies as on 31.03.2014 were as under:
Balance Sheet as at 31.03.2014
Particulars INR 1. Equity and Liabilities (1) Shareholder’s Fund
Share Capital Reserves and Surplus Profit and Loss A/c
(2) Non – Current borrowings 8% Secured debentures
(3) Current borrowings Trade payables
140,000
30,000
110,000
54,000 Total 334,000
2. Assets (1) Non-current assets
Fixed Assets
Year Profit 2009 120,000 2010 125,000
2011 130,000 2012 150,000
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(a) Building at cost less depreciation (b) Plant and Machinery at cost less
depreciation (2) Current assets (a) Inventories (b) Trade receivables (c) Cash and cash equivalents
100,000
25,000
135,000 44,000 30,000
Total 334,000 Q Limited
Balance Sheet as at 31.03.2014
Particulars INR 1. Equity and Liabilities (1) Shareholder’s Fund
Share Capital Reserves and Surplus General Reserve Profit and Loss A/c
(2) Current borrowings Trade payables
250,000
120,000 35,000
140,000
Total 545,000 2. Assets (1) Non-current assets
Fixed Assets (a) Building at cost less depreciation (b) Plant and Machinery at cost less
depreciation (c) Furniture and Fixtures at cost less
depreciation (2) Current assets (a) Inventories (b) Trade receivables (c) Cash and cash equivalents
190,000 80,000
25,000
50,000 142,000
58,000 Total 545,000
The assets and liabilities of the existing companies are to be transferred at book value with the exception of some items detailed below:
i. Goodwill of P Ltd. was worth ` 50,000 and of Q Ltd. was worth ` 1,50,000. ii. Furniture & Fixture of Q Ltd. was valued at ` 35,000. iii. The Trade receivables of P Ltd. are realized fully and bank balance of P Ltd. are to be retained by
the liquidator and the trade payables are to be paid out of the proceeds thereof. iv. The debentures of P Ltd. are to be discharged by issue of 8% 11,000 debentures of PQ Ltd. at a
premium of 10%. You are required to: (i) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders of the existing companies. (ii) Draw up a Balance Sheet of PQ Ltd. as at 1st April, 2014, the date of completion of amalgamation.
(12 marks)
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2. A and B who carry on partnership business in the name of M/s. AB Ltd., closes their firm’s account as on 31st March each year. Their partnership agreement provides:
i. Profit and Loss sharing, A: 2/3 and B:1./3 ii. On retirement or admission of partner :
a. If the change takes place during any accounting year, such partner’s share of profits or losses for the period up to retirement or from admission, is to be arrived at by apportionment on a time basis except otherwise stated for specific item(s)
b. No account for Goodwill is to be maintained in the firm’s book c. Any balance due to an outgoing partner is to carry interest @ 9% p.a. from the date of his retirement to
the date of payment. The trial balance of the firm as on March 31st, 2015 was as follows:
Particulars Dr.̀ Cr. ` Capital Account:
A 24,000 B 12,000 C – cash brought in on 30.09.14 9000 Plant & machinery @ cost 22,000
Depreciation provision up to 31.3.14 4,400 Motor car at cost 30,000
Depreciation provision up to 31.03.14 6,000 Purchases 84,000
Stock as on 31st March 2014 15,500 Salaries 18,000 Debtors 5,400
Sales 12,000
Travelling expenses 800 Office Maintenance 1,200
Conveyance 500
Trade Expenses 1,000 Creditors 10,100 Rent and Rates 3,000 Bad Debts 900
Cash in hand and and at Bank 3,200 1,85,500 1,85,500
‘A’ retired from the firm on 30th September, 2014 and on the same day ‘C’ an employee of the firm was admitted as partner. Further Profits or Losses shall be shared – B: 3/5 and C: 2/5. Necessary Accounting Entries adjustments were pending up to 31.03.15. You are given the following further information:
i. The value of firm’s goodwill as on 30th September, 2014 was agreed to 15,000. ii. The stock as on 31st March, 2015 was valued at 18,550 iii. Partners drawings which are included in Salaries :A – 2,000, B – 3,000 and C – 1,000 iv. Salaries also includes 1,500 paid to C prior to his being admitted as a partner. v. Bad-debts of 500 related to the period upto 30th September, 2014 vi. As on 31st March, 2015 rent paid in advance amounted to 600 and trade expenses accrued
amounted to 250
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vii. Provision is to be made for depreciation on Plant and Machinery and on Motor car at the rate of 10% p.a. on cost
viii. A bad-debts provision, specifically attributable to the second half of the year, is to be made @ 5% on debtors as on March 31st 2015.
ix. Amount payable to A on retirement unpaid till March 31st 2015. You are required to prepare:
a. The Trading and Profit & Loss Account for the year ended March 31st 2015 b. Partners Capital Account c. The Balance Sheet as on that date.
(12 marks) 3. From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31st March
2014 as required by Part I, Schedule III of the Companies Act.
Particulars Debit ` Credit ` Equity Share Capital(Face value of 100 each) 50,00,000 Call in Arrears 5,000
Land & Building 27,50,000 Plant & Machinery 26,25,000 Furniture 2,50,000 General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000 Stock : Raw Materials 2,50,000 Finished Goods 10,00,000 12,50,000
Provision for Taxation 3,40,000 Sundry Debtors 10,00,000 Advances 2,13,500
Proposed Dividend 3,00,000 Profit & Loss Account 5,00,000 Cash in Hand 1,50,000 Cash at Bank 12,35,000
The following additional information is also provided:
i. Preliminary expenses included ` 25,000 Audit Fees and ` 3,500 for out of pocket expenses paid to the Auditors.
ii. 10000 Equity shares were issued for consideration other than cash. iii. Debtors of 2,60,000 are due for more than 6 months. iv. The cost of the Assets were:
Building ̀ 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500. v. The balance of ̀ 7,50,000 in the Loan Account with State Finance Corporation is
inclusive of 37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.
vi. Balance at Bank includes 10,000 with Global Bank Ltd., which is not a Scheduled Bank.
(10 marks)
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4. The Balance Sheet of R Ltd., at 31st March 2015 was as follows: Amount ̀ Amount ̀Share capital Authorized 14,00,000 Intangibles 68,000 Issued: 64,000 8% cumulative preference shares of 10 each, fully paid
6,40,000 Freehold premises at cost 1,40,000
10 each, 7.5 paid 4,80,000 Plant and equipment at cost less depreciation
2,40,000
Loans from directors 60,000 Investments in shares in Q Ltd. at cost
3,24,000
Sundry creditors 4,40,000 Stocks 2,48,000
Bank overdraft 2,08,000 Debtors 3,20,000 Deferred Revenue
expenditure 48,000
Profit & Loss account 4,40,000
18,28,000 18,28,000 Note: The arrear of Preference dividends amount to ` 51,200 A scheme of reconstruction was duly approved with effect from 1 April 2015 under the conditions stated below:
a. The unpaid amount on the Equity shares would be called up. b. The Preference shareholders would forego their arrear dividends. In addition, they would accept a
reduction of 2.5 per share. The dividend rate would be enhanced to 10%. c. The Equity shareholders would accept a reduction of 7.5 per share. d. R Ltd. holds 21,600 shares in Q Ltd. This represents 15% of the Share capital of that company. Q Ltd. is
not a quoted company. The average net profit (after tax) of the company is ` 2,50,000. The shares would be valued based on 12% capitalization rate.
e. A bad debt provision at 2% would be created: f. The other assets would be valued as under:
g. The Profit and Loss account debit balance and the balance standing to the debit of the deferred Revenue Expenditure account would be eliminated.
h. The directors would have to take equity shares at the new face value of 2.5 per share in settlement of their loan.
i. The Equity shareholders, including the directors, who would receive equity shares for every one held. j. The Preference shareholders would take up one new preference share for every four held. k. The authorized Share capital would be restated to ` 14,00,000. l. The new face values of the shares-preference and equity will be maintained at their reduced levels.
You are required to prepare: i. Necessary Ledger accounts to effect the above; and ii. The Balance Sheet of the company after reconstruction
(16 marks)
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CADEMY
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PRIME ACADEMY 44th SESSION – IPC - PROGRESS TEST – ACCOUNTING
SUGGESTED ANSWERS PART – A
1. A. Fixed capital method
In fixed capital method, generally initial capital contributions by the partners are credited to partners capital accounts and all subsequent transactions and events are dealt with through current accounts, unless a decision is taken to change it, initial capital account balance is not changed. In fluctuating capital method, no current account is maintained. All such transactions and events are passed through capital accounts. Naturally capital account balance of the partners fluctuate every time. So in fluctuating capital method capital fluctuates all the time
B. There are four methods of valuation of goodwill namely
Average profit method Super profit method
Annuity method Capitalization method
Under Annuity method time value of money is considered. So under annuity method, discounted value of super profit is computed to arrive at goodwill.
C. Method 2 - Average Profit method Year Profit Weight Weighted profit 2009 120,000 1 120,000
Weighted average profit = 13,60,000/10 = 136000 Method 2 – Super profits Average profits = 136,000 Normal profits = 20% of 500,000 = 100,000 Goodwill = 36,000 Method 3 – Annuity method 36000 * 2.1065 = 75834 Method 4 – Capitalization method Normal value of capital employed = 680,000 (136000 * 100/20) Capital employed in M/s Lee and Lawson = 500,000 Goodwill = Rs. 180,000
D. I. All assets and liabilities of transferor company become after amalgamation the assets and liabilities of
transferee company II. Shareholders holding not less than 90% of the face value of equity shares of the transferor company
become equity shareholders of the transferee company by virtue of amalgamation III. The consideration for the amalgamation receivable by those equity shareholders of the transferor
company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by issue of equity shares in the transferee except that cash may be paid in respect of any fractional shares.
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IV. The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company. V. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor
company when they are incorporated in the financial statements of the transferee company except to
ensure uniformity of accounting policies.
E. Amalgamation Adjustment account is created in Purchase method of accounting. No reserves, other than statutory reserves, of the transferor company should be incorporated in the financial statements of Transferee Company. Statutory reserves of the transferor company should be incorporated in the balance sheet of Transferee Company by way of the following journal entry. Amalgamation Adjustment A/c Dr. To Statutory Reserves A/c. When the above statutory reserves will no longer be required to be maintained by Transferee Company, such reserves will be eliminated by reversing the above entry.
F. No. Purchase consideration does not include amount paid to creditors or debenture holders of the Company. For the purpose of accounting for amalgamations, we are essentially guided by AS-14 ‘Accounting for Amalgamations’. Para 3(g) of AS 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company”. In simple words, it is the price payable by the transferee company to the transferor company for taking over the business of the transferor company.
G. The following statutory books are required to be maintained by a company under different sections of the Companies Act, 2013:
♦ Register of Investments of the company held in its own name (Section 187).
♦ Register of Charges (Section 85).
♦ Register of Members (Sections 88).
♦ Register of Debenture-holders and other Security holders (Section 88).
♦ Register of Investments of the company held in its own name (Section 187).
♦ Register of Charges (Section 85).
♦ Register of Members (Sections 88).
♦ Register of Debenture-holders and other Security holders (Section 88).
PART - B
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CADEMY
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1. Calculation of Purchase Consideration Particular P Ltd. INR Q Ltd.INR Assets taken over Goodwill 50,000 1,50,000
Trade Receivables - 1,42,000 Cash at Bank - 58,000 3,10,000 7,05,000 Less: Liabilities taken over 8% Debentures Trade Payable
1,21,000
-
-
1,40,000 Net Assets taken over 1,89,000 5,65,000 To be satisfied by issue of shares of PQ Ltd of INR 10 each at par
18,900 56,500
PQ Limited Balance Sheet as at 1st April, 2014
Particular Note No. Amount INR 1. Equity and Liabilities (i)Shareholder’s Funds (a)Share Capital (b)Reserve & Surplus
1 2
7,54,000 11,000
(ii) Non-current Liabilities (a)Long term borrowings
3
1,10,000
(iii)Current Liabilities (a)Trade Payable
1,40,000
Total 10,15,000 2.Assets (i)Non-current assets Fixed Assets Tangible Intangible
4 5
4,30,000 2,00,000
(ii)Current Assets a)Inventories b)Trade Receivables c)Cash at Bank
1,85,000 1,42,000
58,000
Total 10,15,000 Note to Accounts:
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particular INR 1 Share Capital Authorized
1,00,000 shares of INR 10 each Issued , Subscribed and Paid up 75,400 shares of INR 10 each (All the above share are allotted as fully paid up pursuant to scheme of Amalgamation without payments being received in cash)
10,00,000
7,54,000
2 Reserve & Surplus Securities Premium Account
11,000
3. Long term borrowings 8% Debenture
1,10,000
4 Tangible Fixed Assets Building P Ltd. 1,00,000 Q Ltd. 1,90,000
2,90,000
Plant & Machinery P Ltd. 25,000 Q Ltd. 80,000
1,05,000 Furniture & Fixture
Q Ltd.
35,000 4,30,000
5. Intangible Asset Goodwill P Ltd. 50,000 Q Ltd. 1,50,000
2,00,000 Working Note: Computation of Securities Premium Debentures issued by PQ Ltd. to the exiting debenture holders of P Ltd. at 10% premium. Securities Premium= INR 1,10,000 x 10%= INR 11,000
2.
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3. Elegant Ltd. Balance Sheet as on 31st March, 2014
Particulars Note No Amount INR
Equity and Liabilities 1. Shareholders fund a. Share Capital b. Reserves and Surplus
1 2
49,95,000 14,83,500
2. Non – current liabilities a. Long-term borrowings
3
13,17,500
3. Current liabilities a. Trade Payables b. Other current liabilities c. Short-term provisions
4 5
10,00,000
37,500 6,40,000
Total 94,73,500 Assets
1. Non – current assets a. Fixed assets b. Tangible assets
6
56,25,000 2. Current assets a. Inventories b. Trade receivables c. Cash and cash equivalents d. Short-term loans and advances
7 8 9
12,50,000 10,00,000 13,85,000
2,13,500
Total 94,73,500 Notes to Accounts
No. Particulars Amount INR
1. Share Capital Equity share capital Issued & subscribed & called up 50,000 Equity Share of 100 each (0f the above 10,000 shares have been issued for consideration other than cash) Less: Calls in arrears
50,00,000 (5,000)
49,95,000
Total 49,95,000
2. Reserves and Surplus General Reserves 10,50,000
Total 14,83,500 3. Long-term borrowings Secured Term Loan
State Financial Corporation(7,50,000-37,500) (Secured by hypothecation of Plant and Machinery) Unsecured Loan
7,12,500 6,05,000
Total 13,17,500
4. Other current liabilities Interest accrued but not due on loans (SFC)
37,500
Total 37,500 5. Short-term provisions
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Provision for taxation Proposed Dividend
3,40,000 3,00,000
Total 6,40,000 6. Tangible assets
Land and Building Less: Depreciation Plant & Machinery Less: Depreciation Furniture & Fittings Less: Depreciation
30,00,000 (2,50,000) 35,00,000 (8,75,000)
3,12,500 (62,500)
27,50,000
26,25,000
2,50,000 Total 56,25,000 7. Inventories
Raw materials Finished goods
2,50,000
10,00,000 Total 12,50,000 8. Trade receivables
Outstanding for a period exceeding six months Other Amounts
2,50,000
10,00,000 Total 12,50,000 9. Cash and cash equivalents
Cash at bank With Scheduled Banks With other (Global Ltd) Cash in hand
12,25,000 10,000
12,35,000 1,50,000
Total 13,85,000 Note: as per para 56 of AS 26, preliminary expenses are not shown in the balance sheet, thus they are written off. The amount of 25,000 as audit fee and out of pocket expenses paid to auditors amounting 3,500 have been included in the amount of 66,500. The combined figure 66,500 has been reduced from Profit and Loss Account balance in the given solution.
4. In the books of R Ltd. Ledger Accounts Capital Reduction Account
Particulars Amount INR Particulars Amount INR To Plant and equipment account(2,40,000-1,40,000)
1,00,000 By 8% Cumulative Preference shares capital account
1,60,000
To Intangibles(68,000-48,000) 20,000 By Equity share capital account 4,80,000 To Deferred revenue expenditure account
48,000 By Freehold premises account(3,80,000-1,40,000)
2,40,000
To Profit and loss account 4,40,000 By Inventories(2,50,000-2,48,000) 2,000
To Investment account(W.N.2) 11,500 To Provision for doubtful debts 6,400 To Capital reserve account(Balance Transferred)
2,56,100
8,82,000 8,82,000
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Equity Share Capital Account Particulars Amount INR Particulars Amount INR To capital reduction account 4,80,000 By Balance b/d 4,80,000 To Balance c/d 6,60,000 By Bank account final
call(64,000*2.5) 1,60,000
By Loan from Directors account 60,000 By Bank account[(64,000 +
24,000) * 2* 2.5] 4,40,000
11,40,000 11,40,000 By Balance b/d 6,60,000
8% Cumulative Preference Share Capital Account Particulars Amount INR Particulars Amount INR To 10% Cumulative preference share capital account
4,80,000 By Balance b/d 6,40,000
To Capital reduction account 1,60,000 6,40,000 6,40,000
To Balance c/d 6,00,000 By 8% Cumulative preference share capital account
4,80,000
By Bank(16,000 * 7.5) 1,20,000 6,00,000 6,00,000
By Balance b/d 6,00,000 Bank Account
Particulars Amount INR Particulars Amount INR To Equity share capital account 1,60,000 By Balance b/d(overdraft) 2,08,000 To Equity share capital account 4,40,000 By Balance c/d 5,12,000
To 10% Cumulative preference share capital account
1,20,00
7,20,000 7,20,000 To Balance b/d 5,12,000
Balance Sheet of R Ltd. (After reconstruction)(as on 1st April 2008)
S No Particulars Notes No Amount INR i. Equity and Liabilities i. Shareholders Fund
- Share Capital - Reserves and Surplus
1 2
12,60,000
2,56,100 ii. Current Liabilities
- Trade Payables 3
4,40,000
Total 19,56,100 ii. Assets 1. Non – current assets
Tangible assets Intangible assets
4 5
5,20,000
48,000
2. Other non – current assets Investment in Q Ltd.
6
3,12,500
3. Current assets
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a. Inventories (-Stock) b. Trade Receivables c. Cash and cash equivalents
7 8
2,50,000 3,13,600 5,12,000
Total 19,56,100
Notes to Accounts: 1. Share Capital
Authorized Share Capital Equity Share Equity Shares 2,64,000 equity share of 2.5 each Preference Shares 80,000, 10% Pref. share of 7.5 each
6,60,000
6,00,000
14,00,000
12,60,000 2. Reserves and Surplus
Surplus creditors
2,56,100 3. Trade Payables
Surplus creditors
4,40,000 4. Tangible assets
Freehold premises Plant and equipment
3,80,000 1,40,000
5,20,000 5. Intangibles assets
Balance before reconstruction Less: Reduction
68,000 20,000
48,000
6. Other-non-current assets Investment Investment in shares of Q Ltd 2,50,000/0.12*15/100=3,12,500
3,12,500 7. Trade Receivable
Trade Receivables (Debotrs) Less: Provision for Doubtful debts
3,20,000
(6,400)
3,13,600
8. Cash and cash equivalents Bank Balance
5,12,000
1. Reduction in the value of investment in shares of Q Ltd. 3,24,000-3,12,500 = 11,500.
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CADEMY
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PRIME ACADEMY 44th SESSION – PROGRESS TEST
BUSINESS LAWS ETHICS & COMMUNICATIONS No. of Pages: 3 Total Marks: 75
Time allowed: 2 hrs
Part A 25 Marks
(15 X 1 Mark = 15 Marks) I 1. If a company does not receive the minimum subscription, it should refund all money received
from the applicants for shares without interest:
a. Within 30 days of issue of prospectus
b. Within 60 days of issue of prospectus
c. Within 90 days of issue of prospectus
d. Within 120 days of issue of prospectus
2. A Statement in lieu of prospectus must be filed before the allotment of the shares with the
registrar of companies by
a. A Private Company
b. A Guarantee Company
c. A Public Company which issues the prospectus to the public
d. A Public Company which doesn’t issue the prospectus to the public
3. Which class of Ultravires transaction cannot be ratified?
a. Ultravires Articles
b. Ultravires Statute
c. Ultravires Directors
d. Ultravires Members
4. ______________________ doctrine is an exception to doctrine of constructive notice? (Fill in the
blank)
5. Which is not a classification of capital?
a. Nominal Capital
b. Capital Reserve
c. Called-up Capital
d. Paid-up Capital
6. The amount used for buyback cannot exceed __% of the paid up capital + free reserves in any
financial year
a. 10
b. 15
c. 20
d. 25
7. What is not required on a share certificate?
a. Common Seal
b. Number of shares held by a member
c. Amount paid up
d. Share holders signature
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8. What is the penalty for officer in default if shares certificates are not issued in time?
a. 1000 to 2000
b. 2000 to 5000
c. 5000 to 50000
d. 10000 to 100000
9. How many days’ notice for payment of allotment money is required before forfeiting shares?
a. 7 days
b. 10 days
c. 14 days
d. 21 days
10. When is special resolution required in buy back of shares?
a. If buy back is for less than 5% of paid up capital and free reserves
b. If buy back is for more than 5% and less than 10% of paid up capital and free reserves
c. If buy back is for more than 10% and less than 15% of paid up capital and free reserves
d. If buy back is for more than 10% of paid up capital and free reserves
11. What is the maximum % of paid up share capital that can be issued as sweat equity shares?
a. 10%
b. 15%
c. 20%
d. 25%
12. Chose the correct statement
a. Shares can be freely issued at discount
b. A company is prohibited to issue shares at discount
c. Shares can be issued at discount by passing a special resolution
d. A company is never prohibited to issue shares at discount
13. For a company registered with unlimited liability to be converted into one with limited Liability,
a. Special resolution is required.
b. Ordinary resolution is required.
c. Tribunal’s approval is required.
d. Central Government’s approval is required.
14. On whom is the onus of misstatement in case of misstatement in prospectus?
a. On the company
b. On the directors
c. On the allotted
d. On the promoter
15. Principle of ______________ of Indian Contract Act may be applied in preliminary contracts? (Fill
in the blank)
II Write short notes on any 5 of the following: (5X2=10 Marks)
1. Companies based on incorporation
2. Private company u/s 2(68)
3. Transmission of shares and the situations in which it is used
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4. Circumstances in which OPC should get converted into a private or a public company?
5. Subsidiary Company as defined u/s 2(87) of the Companies Act 2013.
6. A Dormant Company.
Part B 50 Marks
1. Some of the creditors of Get Rich Quick Ltd. have complained that the company was formed by
the promoters only to defraud the creditors and circumvent the compliance of legal provisions of
the Companies Act. In this context they seek your advice as to the meaning of corporate veil and
when the promoters can be made personally liable for the debts of the company. 6 Marks
2. The paid-up Share Capital of AVS Private Limited is ` 1 crore, consisting of 8 lacs Equity Shares of `
10 each, fully paid-up and 2 lacs Cumulative Preference Shares of ` 10 each, fully paid-up. XYZ
Private Limited and BCL Private Limited are holding 3 lacs Equity Shares and 1,50,000 Equity
Shares respectively in AVS Private Limited. XYZ Private Limited and BCL Private Limited are the
subsidiaries of TSR Private Limited. With reference to the provisions of the Companies Act, 2013,
examine whether AVS Private Limited is a subsidiary of TSR Private Limited? 4 Marks
3. What are the differences between morals and ethics? 4 Marks
4. Briefly explain the doctrine of “ultravires” under the Companies Act, 2013. What are the
consequences of ultravires acts of the company? 8 Marks
5. Explain the limitations relating to alternation of Articles of Association of a company 4 Marks
6. Define the term ‘Small Company’ as contained in the Companies Act, 2013 4 Marks
7. Explain the concept of “Shelf Prospectus” in the light of Companies Act, 2013. What is the law
relating to issuing and filing of such prospectus? 6 Marks
8. List out the benefits of business ethics 4 Marks
9. After receiving 80% of the minimum subscription as stated in the prospectus, a company allotted
100 equity shares in favour of ‘X’. The company deposited the said amount in the bank but
withdrew 50% of the amount, before finalisation of the allotment, for the purchase of certain
assets. X refuses to accept the allotment of shares on the ground that the allotment is violations
of the provisions of the Companies Act, 2013. Comment 4 Marks
10. Explain clearly the meaning of the term ‘Underwriting’ and ‘Underwriting Commission’. In what
way, does the Companies Act, 2013 regulate payment of such Commission? Explain. 6 Marks
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PRIME ACADEMY 44th SESSION – IPC - PROGRESS TEST - BUSINESS LAW ETHICS AND COMMUNICATION
SUGGESTED ANSWERS PART – A
I
1. d 2. d 3. d 4. Doctrine of Indoor Management 5. b 6. d 7. d 8. d 9. c 10. d 11. d 12. b 13. a 14. c 15. Principle of Novation (Sec 62)
II 1.
a. Statutory Companies: They are companies created by a special statute of the legislature. Eg., RBI, LIC.
b. Registered Companies: They are companies as defined u/s 2 of the Act.
2. Definition of a Private Company: According to Section 2 (68) of the Companies Act, 2013 a 'private company' means a company which has a minimum paid-up capital as may be prescribed and which by its Articles: (a) Restricts the right to transfer its shares if any. (b) Limits the number of its members to 200 not including its employee members (present or past) [Joint holders of shares are treated as a single member]. (c) prohibits any invitation to the public to subscribe for any securities of the company. (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
3. Under section 56 (2) of the Companies Act, 2013 a company is required to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted. This means that a person who has acquired the right to the securities of a member by the operation of any law can further transfer those shares to a third person without being registered as a member himself. Under the Companies Act, 2013 the company must register the shares either in favour of the legal representative as the nominee of the deceased member or in favour of a third person to whom the shares have been transferred by the legal representative.
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4. There are two circumstances in which OPC shall get converted into a private or a public company. 1. Compulsory Conversion
a. Where paid up capital exceeds Rs 50 lakhs or b. Where the average annual turnover for the past 3 financial years exceeds Rs.2 Crores
or c. Where the balance sheet total exceeds Rs 1 Crore The OPC shall give notice of its conversion to the ROC within 30 days.
2. Voluntary Conversion An OPC can also voluntarily get converted into a private or a public company.
5. Section 2 (87) of the Companies Act 2013 lays down the circumstances under which a company
becomes a subsidiary company of another company which becomes its holding company. These circumstances are as under: (a) When the holding company controls the composition of Board of Directors of the subsidiary company or companies (b) When the holding company exercises or controls more than one half of the total share capital
either on its own or together with one or more of its subsidiary companies (c) Where a company is the holding company of the company which fulfils any of the above
conditions, e.g., if A Ltd. is the holding company of B Ltd., but C Ltd. is the holding company of A Ltd., then B Ltd. will automatically become a subsidiary of C Ltd.
6. Where a company is formed and registered under this Act for a future project or to hold an asset
or intellectual property and has no significant accounting transaction for the last 2 years, such company can make an application to the ROC for obtaining the status of a dormant company.
PART B 1. Corporate Veil: After incorporation, the company in the eyes of law becomes a different person
from the shareholders who have formed the company. The company has its own existence and as a result the shareholders cannot be held liable for the acts of the company even though they hold the entire share capital of the company. This recognition of the company as a separate legal entity and being liable for its own acts and liabilities is known as the “Corporate Veil”. However, under certain exceptional circumstances the courts lift or pierce the corporate veil by ignoring the separate entity of the company and the promoters and other persons who have managed and controlled the affairs of the company. Thus, when the corporate veil is lifted by the courts, the promoters and persons exercising control over the affairs of the company are held personally liable for the acts and debts of the company. In the following circumstances, corporate veil can be lifted by the courts and promoters can be held personally liable for the debts of the company. (i) Trading with enemy country. (ii) Evasion of taxes. (iii) (iii) Forming a subsidiary company to act as its agent. (iv) The benefit of limited liability is destroyed by reducing the number of members below 7 in
the case of public company and 2 in the case of private company for more than six months. (v) Under law relating to exchange control. (vi) Device of incorporation is adopted to defraud creditors or to avoid legal obligations
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2. Holding, subsidiary relationship: In terms of section 2 (87) of the Companies Act 2013, a company
will be the subsidiary of a company which holds a majority of shares in it through its subsidiary company or companies. In this case XYZ Pvt Ltd. and BCL Pvt Ltd. together hold a majority of equity shares in AVS Pvt Ltd. and both these companies are subsidiaries of TSR Pvt Ltd it will have a majority stake in the composition of the Board of Directors of AVS Pvt Ltd. Hence, TSR Pvt, Ltd will be treated as the holding company of AVS Pvt Ltd.
3. Ethics is derived from a Greek word “ethos” meaning character. Ethics follow from personally accepted principles. Moral is derived from a Greek word “mos” meaning “custom”. Custom means behaviour developed by a group over a period of time. They are generally accepted from an authority (cultural, religious, etc). They generally work on a smaller scale addressing human needs.
4. The objects for which a company is formed are laid down in the Object Clause of the Memorandum of Association. These objects define the limits of activities of the company and as a legal entity a company cannot operate outside the ambit defined in its objects clause in the Memorandum. The objects clauses are classified into Main objectives and other objectives. A company therefore, is empowered to do only such acts which are: (a) within the framework of the Memorandum i.e. stated in clear terms in the objects clause in
the Memorandum of Association of the company, or (b) reasonably and fairly incidental to the attainment of its main objects, or (c) Which are otherwise authorised by the Companies Act. If the company does any act which is not covered under the above three categories, such acts shall be beyond the power of the company and shall be declared ultravires the Memorandum of the Company. The term ultravires means “beyond the powers”. A company being an artificial legal person cannot operate outside the powers given to it in its objects clause and any contract which is ultra vires shall be void ab initio. Implications of ultra vires Acts: The implications of ultra vires contracts are as under: (1) Neither party can enforce the contract (2) It is an established legal requirement that persons entering into contracts with the company must satisfy themselves that the terms of the same are within the powers of the company and not ultra vires.
(3) There is no claim on the part of any party to enforce an ultra vires contract nor can he claim any compensation.
(4) There is no personal liability on the part of the directors of the company unless they have represented an ultra vires contract fraudulently as a permissible one.
5. Every company has a right to alter its articles by following a simple process laid down in section 14 of the Companies Act, 2013. Generally speaking the right of a company to alter its Articles is without and restriction. However, section 14 of the Act limits the right of the company to alter its Articles by imposing the following restrictions:
(i) The alteration cannot override its Memorandum or in any way conflict with the provisions thereof.
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(ii) It cannot not be in violation of any provision of the Companies Act or any other statute.
(iii) It cannot allow an activity which is illegal (as a company can be formed only for a lawful object).
(iv) An alteration to the Articles cannot increase the liability of its member which has been already defined in the Memorandum
6. Under Section 2 (85) of the Companies Act, 2013, “small company” means a company, other than a public company:- (i) having paid-up share capital not exceeding fifty lakh rupees or such higher amount as may be
prescribed which shall not be more than five crore rupees; and (ii) having turnover as per its last profit and loss account not exceeding two crore rupees or such
higher amount as may be prescribed which shall not be more than twenty crore rupees. Exceptions: This section shall not apply to: a) a holding company or a subsidiary company b) a company registered under section 8, or c) a company or body corporate governed by any special Act.
7. A shelf prospectus is a prospectus; hence it must comply with all the provisions of Section 26 of
the Act which lays down the matters to be included in a prospectus and filing of the same with the Registrar. It must also comply with the other relevant and applicable sections of the Act to a prospectus. A shelf prospectus may be issued by a class of companies only if and subject to the regulations of SEBI; A shelf prospectus can have a validity of a maximum period of one year during which time the company may bring out a number of issue of securities, all covered by the same prospectus. The validity of a shelf prospectus of a maximum period of one year shall commence from the date on opening of the first offer. A company filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within a period of validity of such shelf prospectus. However, under section 31 (2), a company shall be required to file an information memorandum on all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or any previous offer of securities and the succeeding offer of securities and such other changes as may be prescribe, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus. Section 31 (3) states that where an information memorandum is filed every time an offer of securities is made, such memorandum together with the shelf prospectus shall be deemed to be the prospectus
8. There are many benefits of paying attention to business ethics: a. Improved society: A few decades ago, children and workers were ruthlessly exploited. Trusts
controlled some markets to the extent that prices were fixed and small businesses stifled. Influence was applied through intimidation and harassment. Then society reacted and demanded that businesses place high value on ethics, fairness and equal rights resulting in framing of anti-trust laws, establishment of Government agencies and recognition of labour unions
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b. Easier Change management: Attention to business ethics is critical during times of fundamental change - times like those faced presently by businesses, whether non profit or for-profit. During times of change, there is often no clear moral compass to guide leaders through complex conflicts about what is right or wrong. Continuing attention to ethics in the workplace sensitizes leaders and staff for maintaining consistency in their actions.
c. Strong teamwork and greater productivity: Ongoing attention and dialogue regarding values in the workplace builds openness, integrity and community, all critical ingredients of strong teams in the workplace. Employees feel a strong alignment between their values and those of the organization resulting in strong motivation and better performance.
d. Enhanced employee growth: Attention to ethics in the workplace helps employees face the reality, both good and bad in the organization and gain the confidence of dealing with complex work situations.
e. Ethics programs help guarantee that personnel policies are legal: A major objective of personnel policies is to ensure ethical treatment of employees
f. Ethics programs help to avoid criminal acts “of omission” and can lower fines. Ethics programs help to detect ethical issues and violations early, so that they can be reported or addressed.
g. Ethics programs help to manage values associated with quality management, strategic planning and diversity management.
h. Ethics helps to promote a strong public image
9. The company has received 80% of the minimum subscription as stated in the prospectus. Hence, the allotment is in contravention of section 39(1) of the Companies Act, 2013 which prohibits a company from making any allotment of securities until it has received the amount of minimum subscription stated in the prospectus. Under section 39 (3), it is required to refund the money received (i.e. 80% of the minimum subscription) to the applicants. It has no other option available. Therefore, in the present case X is within his rights refuses to accept the allotment of shares which has been illegally made by the company.
10. ‘Underwriting’ is a contract entered into between the company and certain parties (called underwriters) whereby the underwriters guarantee to purchase or get investors to purchase the whole or an agreed portion of the securities that are not applied for by the public for subscription. In consideration of this guarantee the company pays a commission to the underwriters as a percentage of the value of the shares offered to the public. The consideration payable to the underwriters for underwriting the issue of shares or debentures of a company is called underwriting commission. Such a commission is paid at a specified rate on the issue price of the whole of the shares or debentures underwritten whether or not the underwriters are called upon to take up any shares or debentures. Thus, the underwriters are paid for the risk they bear in the placing of shares before the public. Underwriting commission may be in addition to brokerage. Under Section 40 (6) of the Companies Act 2013, provides that a company may pay commission to any person in connection with the subscription or procurement of subscription to its securities, subject to the following conditions which are prescribed under the Companies (Prospectus and Allotment of Securities) Rules, 2014: i. the payment of such commission shall be authorized in the company’s articles of association;
ii. the commission may be paid out of proceeds of the issue or the profit of the company or both;
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iii. the rate of commission paid or agreed to be paid shall not exceed, in case of shares, five percent (5%) of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of debentures, shall not exceed two and a half per cent (2.5 %) of the price at which the debentures are issued, or as specified in the company’s articles, whichever is less;
iv. the prospectus of the company shall disclose - i. the name of the underwriters; ii. the rate and amount of the commission payable to the underwriter; and iii. the number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally.
v. there shall not be paid commission to any underwriter on securities which are not offered to the public for subscription;
vi. a copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration. Thus, the Underwriting commission is limited to 5% of issue price in case of shares and 2.5% in case of debentures. The rates of commission given above are maximum rates. The company is free to negotiate lower rates with underwriters.
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PRIME ACADEMY 44th SESSION – IPC - PROGRESS TEST
COST ACCOUNTING AND FINANCIAL MANAGEMENT No. of Pages: 6 Total Marks: 75
Time allowed: 2 hrs PART A (25 Marks) I. Choose the correct answer
1. 4,000 Kgs. of material is purchased @ 2 per Kg. Normal wastage is estimated at the rate of 10%. The wastage has recovery value of 1.10 per Kg. Calculate cost of material of work order of 600 units, if each unit requires 1.5 Kg. of material —
(a) 1,260 (b) 1,800 (c) 1,620 (d) 1,890
2. Which of the following expenses as direct (D) (i) Royalties charged as a rate per unit (ii) Cost of making a design, pattern for a specific job (iii) Salesman's commission (iv) Power, fuel, lighting of factory and office.
(a) (i) and (ii) (b) (i), (ii) and (iii) (c) (i), (ii) and (iv) (d) All are direct expenses
3. Labour turnover means: (a) Turnover generated by labour (b) Rate of change in composition of labour force during a specified period (c) Either of the above (d) Both of the above
4. The state of production at which separate products are identified is known as —
(a) Split-off point (b) Break-even point (c) Re-order point (d) Cost indifference point.
5. EOQ is 200 units, ordering cost 20 per order and total purchases in a year is 4,000 units. The carrying cost per unit will be —
(a) 2 (b) 6 (c) 4 (d) None of the above.
6. Store–keeping Expenses are to be apportioned on the basis of (a) Floor area of the production departments (b) Direct labour hours of each product (c) Number of material requisitions (d) Sales price of each product
7. A factory makes use of a component purchased from the market for assembling its final
product. Current usage varies between 300 and 450 units per week and replenishment time is normally two weeks but can go up to five weeks. The minimum stock level of the component is _______ units.
(a) 1500 (b) 1600 (c) 2000 (d) None of the above
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8. After inviting tenders for supply of raw materials, two quotations are received as follows—Supplier A ` 2.20 per unit, Supplier B ` 2.10 per unit plus ` 2,000 fixed charges irrespective of the units ordered. The order quantity for which the purchase price per unit will be the same —
(a) 22,000 units (b) 20,000 units (c) 21,000 units (d) None of the above
9. A hospital is opened for 365 days, but bed occupancy is 25 patients per day in 120 days and 20 beds occupied in another 80 days. Extra beds occupied during the year is 400.patient–days of the hospital is
(a) 4,000 (b) 5,000 (c) 3,500 (d) 4,500
10. Normal rate per hour for worker A in a factory is ` 5.40. Standard time per unit for the worker is one minute. Normal piece rate per unit for the worker is
(a) ` 0.90 (b) ` 0.11 (c) ` 0.09 (d) None of the above
11. Job costing method is generally applied for – (a) Oil refinery (b) Printing press (c) Paint manufacturer (d) Wallpaper manufacturer.
12. A company produces two products, X and Y, in a single joint process. The joint costs were ̀75,000 when 10,000 units of Product X and 15,000 units of Product Y were produced. Additional processing costs were `15,000 for Product X and `10,000 for Product Y. Product X sells for `10, and Product Y sells for `5.The joint cost allocations to Products X and Y The joint cost allocations to Products X and Y using the net realizable value method would be:
X Y a. `30,000 `45,000 b. `42,500 `32,500 c. `42,857 `32143 d. `45,000 `30,000
13. The joint cost allocations to Products X and Y in Q 11 using the constant gross margin percentage method would be:
X Y a. `30,000 `45,000 b. `42,500 `32,500 c. `42,143 `32,857 d. `45,000 `30,000
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14. A manufacturing company produces 3 grades of chocolates X, Y and Z. Total cost is 2095 and fixed cost is `975. Total quantity produced and sold and their selling prices are X-50Kg @ Rs18 p.u, Y-30Kg @ Rs16 p.u and Z- 60Kg@ Rs15. Share of joint cost of X using marginal cost method is
a. ` 420 b. ` 820 c. ` 400 d. `442
15. A worker is allowed 60 hours to complete the job on a guaranteed wage of ` 10 per hour. Under the Rowan Plan, he gets an hourly wage of ` 12 per hour. For the same saving in time, how much he will get under the Halsey Plan?
a. ` 12.25 b. ` 11.10 c. ` 11.25 d. ` 10.50 (15 x 1 = 15 Marks)
II. Fill in the blanks
1. No profit on incomplete contract should be transferred to profit and loss account if the value of work–in–progress is less than _________ of contract price.
2. The allotment of proportion of items/expenses to the cost centre or cost unit is called as_____________
3. Value added is equal to _____________ 4. Profit as per cost accounts will be more when there is ___________ of overheads 5. Job costing is used when a product or service is as per ___________ (5 x 1 = 5 Marks)
III. Correct the following statements.
1. ABC analysis is made on the basis of unit prices of material. 2. Overtime premium is always treated as a factory overhead. 3. Cost control and cost reduction mean the same 4. Cost of tube used for packing tooth paste is indirect material cost. 5. The components or materials which are damaged in manufacturing process and which can
neither be repaired nor be reconditioned are known as defectives. (5 x 1 = 5 Marks) PART - B (50 Marks) (Answer all questions. All questions carry equal marks)
1. The following details are available of Process X for August 2015 : Opening work-in-process 8,000 units
Degree of completion and cost: Material (100%) `63,900 Labour (60%) `10,800 Overheads (60%) ` 5,400
Input 1,82,000 units at `7,56, 900
Labour paid `3,28,000 Overheads incurred `1,64,000 Units scrapped 14,000
Degree of completion: Material 100% Labour and overhead 80%
Closing work-in-process 18000 units Degree of completion: Material 100% Labour and overhead 70%
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1,58,000 units were completed and transferred to next process. Normal loss is 8% of total input including opening work–in–process. Scrap value is ` 8 per unit to be adjusted in direct material cost.
You are required to compute, assuming that average method of inventory is used: i. Equivalent production, and ii. Cost per unit
iii. Prepare process account
2. AKP Builders Ltd. Commenced a contract on April 1, 2015. The total contract was for ` 5,00,000. Actual expenditure for the period April 1, 2015 to March 31, 2016 and estimated expenditure for April 1, 2016 to December 31, 2016 are given below:
2015–16 2016–17 (9 months) (Actuals) (Estimated)
` ` Material Issued 90,000 85,750 Labour : Paid 75,000 87,325 Outstanding at the end 6,250 8,300 Plant 25,000 — Sundry Expenses : Paid 7,250 6,875 Prepaid at the end 625 — Establishment charges 14,625 —
A part of the material was unsuitable and was sold for ` 18,125 (Cost being ` 15,000) and a part of plant was scrapped and disposed of for ` 2,875. The value of plant at site on 31 March, 2016 was ` 7,750 and the value of material at site was ` 4,250. Cash received on account to date was ` 1,75,000, representing 80% of the work certified. The cost of work uncertified was valued at ` 27,375. The contractor estimated further expenditure that would be incurred in completion of the contract:
• The contract would be completed by 31st December, 2016. • A further sum of ` 31,250 would have to be spent on the plant and the residual value
of the pant on the completion of the contract would be ` 3,750. • Establishment charges would cost the same amount per month as in the previous
year. • ` 10,800 would be sufficient to provide for contingencies.
Required: Prepare Contract account and calculate estimated total profit on this contract. Profit transferrable to Profit and Loss account is to be calculated by reducing estimated Profit in proportion of work certified and contract price
3. A transport company has been given a 40 kilometre long route to run 5 buses. The cost of each bus is ` 6,50,000. The buses will make 3 round trips per day carrying on an average 80 percent passengers of their seating capacity. The seating capacity of each but is 40 passenge` The buses will run on an average 25 days in a month. The other information for the year 2010–11 are given below:
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Garage rent ` 4,000 per month
Annual repairs and maintenance ` 22,500each bus
Salaries of 5 drivers ` 3,000 each per month
Wages of 5 conductors ` 1,200 each per month
Manager’s salary ` 7,500 per month
Road tax, permit fee, etc. ` 5,000 for a quarter
Office expenses ` 2,000 per month
Cost of diesel per litre ` 33
Kilometre run per litre for each but 6 kilometres
Annual depreciation 15% of cost
Annual Insurance 3% of cost You are required to calculate the bus fare to be charged from each passenger per kilometre, if the company wants to earn profits of 33 and 1/3rd percent on taking (total receipts from passengers).
4. A Factory producing Article A also produces a By–Product B which is further processed into finished product. The Joint Cost of manufacture and Subsequent Costs are given below: Item Joint cost Subsequent cost
A B
Material 5,000 3,000 1,500 Labour 3,000 1,400 1,000 Overhead 2,000 600 500
Total 10,000 5,000 3,000
Selling Prices are A `16,000, B `8,000 Estimated Profit on Selling Prices is 25% for A and 20% for B. Assume that Selling and Distribution Expenses are in proportion of Sales Prices. Show how you would apportion Joint Costs of manufacture, and prepare statement showing Costs of Production of A and B.
5. A factory incurred the following expenditure during the year 2015 Direct material consumed 12,00,000
Manufacturing Wages 7,00,000
Manufacturing overhead:
Fixed 3,60,000
Variable 2,50,000 6,10,000
25,10,000
In the year 2016, following changes are expected in production and cost of production. (i) Production will increase due to recruitment of 60% more workers in the factory. (ii) Overall efficiency will decline by 10% on account of recruitment of new workers (iii) There will be an increase of 20% in Fixed overhead and 60% in Variable overhead due to increase in costs (iv) The cost of direct material will be decreased by 6%. (v) The company desire to earn a profit of 10% on selling price.
Ascertain the cost of production and selling price
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PRIME ACADEMY 44th SESSION – IPC - PROGRESS TEST
COST ACCOUNTING AND FINANCIAL MANAGEMENT
SUGGESTED ANSWERS PART – A
I.
1 2 3 4 5 6 7 8 9 10
d A b a c c a b b c
11 12 13 14 15
b B c b c
II. 1. 25%
2. allocation 3. sales- material cost 4. under-absorption of overheads
5. customer specification
III. 1. ABC analysis is made on the basis of total value of material. 2. Overtime premium not due to abnormal reasons is treated as a factory
overhead. 3. Cost control and cost reduction are different 4. Cost of tube used for packing tooth paste is direct material cost.
5. The components or materials which are damaged in manufacturing process and which can neither be repaired nor be reconditioned are
known as waste
PART B 1.
Process a/c
Particulars Units Amount ` Particulars units Amount `
To opening stock 8,000 80,100
To materials 1,82,000 7,56,900 By Normal loss 15,200 1,21,600
To labour
3,28,000 By Closing stock 18,000 1,09,800
To Manufacturing overheads 1,64,000 By transfer to Process 1,58,000 11,06,000
To abnormal gains 1,200 8,400
1,91,200 13,37,400
191200 13,37,400
Step 1: Input output statement `
Opening stock 8,000
Add: Input 1,82,000
Total input 1,90,000
Less: Closing stock 18,000
Processed production 1,72,000
less: Normal loss 15,200
Expected output 1,56,800
Actual output 1,58,000
Abnormal gains 1,200
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Step 2: Statement of Equivalent units
Item units Materials ` Labour ` Overheads `
transfer
1,58,000 100%
1,58,000 100%
1,58,000 100%
1,58,000
Closing stock 18,000 100%
18,000 70%
12,600 70% 12,600
Normal loss 15,200 0%
- 0% - 0% -
Ab gains
(1,200) 100%
(1,200) 100%
(1,200) 100%
(1,200)
1,74,800
1,69,400
1,69,400
Step 3: Cost per equivalent units
Materials ` Labour ` Overheads `
Cost 7,56,900 3,28,000 1,64,000
Opening stock 63,900 10,800 5,400
Less: Normal Loss realisable price (1,21,600) Net cost 6,99,200 3,38,800 1,69,400
Add: Outstanding 6,250 81,250 Work certified (WN 1) 2,18,750
To Plant 25,000 Work uncertified 27,375
To Sundry Expenses 7,250 Material at site 4,250
Less: Prepaid (625) 6,625 Plant at site 7,750
To Establishment charges 14,625
To P & L a/c (Profit on Sale 3,125
of materials)
To Notional Profit c/d 58,500
(Bal Fig)
To P & L a/c (W.N-2)
2,79,125
By Notional Profit b/d
2,79,125
29,960 58,500
To WIP reserve 28540
(Bal Fig)
58,500 58,500
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Contract Account
For the period 01.04.2006 to 30.12.2006
Debit Credit
Particulars Amount Amount
(`) (`)
To Opening WIP 2,58,125 By Plant 3,750
To Material issued 85,750 By Closing WIP:
To Labour 87,325 Work certified 5,00,000
Add: Outstanding at end 8,300
95,625
Less: Opening outstanding (6,250) 89,375
To Sundry expenses 6,875
Add: Opening prepaid 625 7,500
To Plant 31,250
To Establishment charges 10,969
[Rs.14,625 x 9/12]
To Reserve for contingency 10,800
To Profit (Balancing Figure) 9,981
5,03,750
5,03,750
Working Notes: WN 1: Computation of Work certified.
Cash received = 80% of Work certified Rs.1,75,000 = 80% of Work certified Work certified = = ` 2,18,750
WN 2: Computation of Profit to be transferred to P & L a/c. (a) Estimated Profit on completing the contract = Year 1 Profit + Year 2 Profit
= ` 58,500 + Rs.9,981 = ` 68,481
(b) Profit to be transferred = 68,481 x WC/CP = ` 29,960
3.
Particulars Per bus (`)
A. Fixed Charges:
Garage rent (4,000 x12) 48,000
Salary of drivers (3,000 x 5 x 12) 180000
Wages of conductors (1200 x 5 x 12) 72000
Manager’s salary (7500 x 12) 90000
Road tax, Permit fee, Etc, (5,000 x 4) 20000
Office expenses (2,000 x 12) 24,000
Insurance (650000 x 3% x 5) 97500
Total A 531,500
B. Variable Charges
Repairs and Maintenance (22,500 x 5) 112,500
Depreciation (650000 x 15% x 5) 487,500
Diesel (3,60,000/6) x Rs.33 1,980,000
Total B 2,580,000
Total cost (A + B) 3,111,500
Add: 33 and 1/3rd % profit 1,555,750
Bus fare to be charged 4,667,250
PRIME A
CADEMY
PRIME/44th PT/IPC 4
Passenger kilometres 1,15,20,000
Fare per passenger kilometres 16.40
Working Notes:
i) Total Kilometres to be run during the year 2010-11 = 40 x 2 x 3 x 25 x 12 x 5 = 360,000 Kilometres
ii) Total Passenger kilometres = 360,000 x 40 x 80% = ` 1,15,20,000 passenger km.
1. Joint costs =` 10,000
2. Method of apportionment: Reverse cost method Selling expenses need to be computed as amount is not given
Particulars A ` B ` Total `
Sales 16,000 8,000 24,000 Less :profit 4,000 1,600 5,600
(25%) (20%)
Total costs 12,000 6,400 18,400 Less: subsequent costs 5,000 3,000 8,000 Less : Selling expenses# 267 133 400
Joint costs 6,733 3,267 10,000
Total selling expenses = Total cost - Total FPC - Total JC = 18,400-8,000-10,000 = 400
distributed to A and B in the
ratio of sales i.e 2:1
Statement of Cost of production
A ` B ` Joint costs 6,733 3,267
subsequent costs 5,000 3,000 cost of production 11,733 6,267
Increase in workers : 60%( direct wages will increase by this amount) Increase in production 1
new output 160% x 90% = 144%
Therefore increase in output is 44%
Direct materials will increase by 44% due to increase in production and fall by 6% due to decrease in price
Fixed overheads will increase by 20% Variable overheads will increase by 44% due to increase in production and
further 60% due to increase in costs
Particulars working Amount ` Direct materials 12L x 144%x94% 16,58,880.00 Direct wages: 11,20,000.00 Manufacturing overheads
Fixed 3.60L *120% 4,32,000.00 Variable 2.5L x 144%x160% 5,76,000.00
Total costs 37,86,880.00 ADD: profit cost/9 4,20,764.44 Selling price 42,07,644.44
PRIME A
CADEMY
PRIME/44th PT/IPC 5
4. Joint costs = Rs.10,000
Method of apportionment: Reverse cost method Selling expenses need to be computed as the amount is not given
Particulars A ` B ` Total `
Sales 16,000 8,000 24,000
Less :profit 4,000 1,600 5,600
(25%) (20%)
Total costs 12,000 6,400 18,400
Less: subsequent costs 5,000 3,000 8,000
Less : Selling expenses# 267 133 400
Joint costs 6,733 3,267 10,000
Total selling expenses = Total cost - Total FPC - Total JC = 18,400-8,000-10,000 = 400 distributed to A and B in the ratio of sales i.e 2:1
Statement of Cost of production
A ` B `
Joint costs 6,733 3,267
subsequent costs 5,000 3,000
cost of production 11,733 6,267
5. Increase in workers: 60 %( direct wages will increase by this amount)
Increase in production: 1 New output 160% x 90% = 144%
Therefore increase in output is 44% Direct materials will increase by 44% due to increase in production and fall by 6% due to decrease in price
Fixed overheads will increase by 20% Variable overheads will increase by 44% due to increase in production and further 60%
due to increase in costs
Particulars working Amount `
Direct materials 12L x 144%x94% 16,24,320.00
Direct wages: 11,20,000.00 Manufacturing overheads
Fixed 3.60L *120% 4,32,000.00
Variable 2.5L x 144%x160% 5,76,000.00
Total costs 37,52,320.00
ADD: profit cost/9 4,16,924.44
Selling price 41,69,244.44
PRIME A
CADEMY
PRIME/44th PT/IPC 1
PRIME ACADEMY 44th SESSION – IPC – PROGRESS TEST – TAXATION
No. of Pages: 3 Total Marks: 75 Time allowed: 2 hrs
PART - A (25 Marks) 1. State with reasons, whether the following statements are true or false, with regard to the provisions
of the Income‐tax Act, 1961 (Answers without reasoning will not deserve any credit): a) If an individual does not pay self‐assessment tax before furnishing the return in incom. The
return furnished shall be deemed to be defective return (3 Marks) b) For a dealer in shares and securities, securities transaction tax paid in a recognized stock
exchange is a permissible business expenditure (3 Marks)
c) Where a person follows mercantile system of accounting, an expenditure of ` 25,000 has been allowed on accrual basis and in a later year, in respect of the said expenditure, assessee makes the payment of ` 25,000 through a cheque crossed "& Co.”, disallowance of ` 25,000 under section 40A(3A) can be made in the year of payment. (3 Marks)
2. Stay includes stay in the territorial waters of India into the sea from the Indian Coastline, the
distance is (2 Marks) a) 12 KM b) 22 Nautical miles c) 12 Nautical miles d) None of the above
3. Under which head the income is charged on “Notional Basis” (2 Marks) a. Income from salary b. Income from house property c. Income from other sources d. None of the above
4. Residential status of any person staying in India can be vary from year to year – whether the
statement is right or wrong? Provide your answer with reason. (2 Marks)
5. State whether the statement is correct or incorrect along with reason: “Deduction of house property tax is allowed if the house property tax is due”. (2 Marks)
6. Jackson, famous dancer in UK comes to India for 100 days every year. What is his residential Status
for the A.Y. 2017‐18? (2 Marks) a) Non‐Resident b) Resident and ordinary resident c) Resident but not ordinary resident
7. Mr. Rajesh is resident in India (resident and ordinarily resident) have income from property situated outside India. He has not brought such income into India. Income from property received by Mr. Rajesh is…….. (2 Marks) a) Taxable in India b) Not taxable in India
PRIME A
CADEMY
PRIME/44th PT/IPC 2
8. Mrs. Jegatha, an Indian citizen, leaves India on 22.9.2016 for the first time, to work as an officer of a company in UK. Determine his residential Status for the A.Y. 2017‐18.
a) Non‐Resident b) Resident and ordinary resident c) Resident but not ordinary resident (2 Marks)
9. Dividend from foreign company received in USA INR 8,000 by a person who is resident but not
ordinary resident in India. Whether it is taxable in India or not? …….. a) Taxable b) Not taxable (2 Marks)
PART – B (50 Marks)
1) State with reasons the allowability or otherwise of the following items under the Income‐tax Act, 1961 while computing income under the head “Profits and gains of business or profession” for the Assessment Year 2017‐18: (i) Payment made in cash ` 30,000 to a transporter in a day for carriage of goods. (ii) Expenses incurred in providing freebees to medical practitioner by Medical enterprises, a pharmaceutical organization. (iii) Municipal tax relating to office premises ` 20,000 not paid till 30.10.2016 by Mr. Arun having turnover of ` 108 lacs during financial year 2016‐17. (iv) Capital expenditure of ` 15,00,000 on scientific research incurred by ABC Ltd., engaged in manufacturing of tires, which includes cost of land ` 5,00,000. (v) Tax deducted at source on salary paid to employees in India not remitted till the ‘due date’ for filing the return prescribed in section 139. (vi) An electric generator has been purchased for ` 50 lakhs by an assessee engaged in the business of generation of power, on 01.04.2016 and installed on the same day. (12 Marks)
2) Ms. Sudha, an Indian Citizen, is a government employee of State Government. She left India for the first time on 22.02.17 due to his transfer to Indian Embassy in USA. She did not visit India any time during the previous year 2016‐17. She has received the following income during the Financial Year 2016‐17. Salary for the year – ` 5,50,000 Travelling allowance – ` 60,000 Foreign allowance – ` 1,50,000 Interest on FD with State Bank of India – ` 60,000 What is the taxable salary income Ms. Sakthi for AY 2017‐18 (6 Marks)
3) Mr. Sundar owns a residential property in Chennai whose municipal valuation is ` 2,40,000 per annum, Fair rent is ` 3,00,00 per annum and Standard rent is ` 3,60,000. During the previous year 2016‐17 2/3rd of the portion was self occupied and 1/3rd portion was let out for residential purpose for ` 7,500 per month. The municipal tax paid for the said property is 30,000 during the year. He paid interest of ` 1,20,000 on housing loan which was borrowed for the purchase of the house during 1997. Compute the income from house property for Mr.Sundar for the AY 2017‐18.
(12 Marks)
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CADEMY
PRIME/44th PT/IPC 3
4) Mr. Rajesh, working as Senior Manager in ABC Ltd. The following amounts were received from the employer for financial year 2016‐17:
Basic Salary ` 3,60,000. Dearness Allowance ` 1,20,000 (40% towards superannuation benefits) Transport Allowance ` 24,000
In addition to the above – (i) The company had taken on lease a residential house at Bangalore, paying a lease rent of
` 9,000 p.m. Mr. Rajesh, who was paying to the company ` 6,000 p.m. towards aforesaid rent. (ii) Mr. Rajesh has two sons. His second son was studying in a school run by the employer‐company
throughout the financial year 2016‐17. The cost of such education in a similar school is ` 4,000 p.m.
(iii) The employer‐company was contributing ` 2,000 p.m. to Central Government Pension Scheme. (iv) Professional tax paid by the employer ` 3,000.
You are required to compute the taxable salary of Mr. Rajesh for the assessment year 2017‐18 (12 Marks) 5) Who is an assessee? Explain the scope of income as per section 5. (8 Marks)
PRIME A
CADEMY
PRIME/44th PT/IPC 1
PRIME ACADEMY 44th SESSION – IPC - PROGRESS TEST – TAXATION
SUGGESTED ANSWERS PART-A
1. a) TRUE. As per Explanation to section 139(9), the return of income shall be regarded as defective return unless the tax, together with interest, if any payable in accordance with the provisions of section 140A has been paid on or before the date of furnishing the return. b) TRUE. The Finance Act, 2008 has inserted clause (xv) in section 36(1) to allow the amount of securities transaction tax paid by the assessee in respect of taxable securities c) TRUE. In the case of an assessee following mercantile system of accounting, if an expenditure has been allowed as deduction in any previous year on due basis, and payment exceeding ` 20,000 has been made in the subsequent year otherwise than by account payee cheque or account payee bank draft, then the payment so made shall be deemed to be the income of the subsequent year in which such payment has been made, as per section 40A (3A).
2. C 3. b) Income from house property 4. The statement is Right, Residential status is based on the number of days stay in India by a
person. 5. Incorrect. The house property tax is allowed on payment basis. 6. C Residential Status in India for A.Y. 2017-18, the relevant previous year is 2016-17.
Step 1: The total stay of Jackson in the last 4 years preceding the previous year is 400 days (i.e.100 × 4) and his stay in the previous year is 100 days. Therefore, since he has satisfied the second condition in section 6(1), he is a resident. Step 2: Since his total stay in India in the last 7 years preceding the previous year is 700 days (i.e. 100 × 7), he does not satisfy the minimum requirement of 730 days in 7 years Any one of the conditions not being satisfied, the Individual is Resident but not ordinarily resident. Therefore, the residential Status of Jackson for the assessment year 2017-18 is Resident but not ordinarily resident.
7. a 8. a
During the previous year 2016-17, Mrs.Jegatha, an Indian citizen, Also, since he is an Indian citizen leaving India for the was in India for 175 days (i.e. 30+ 31+ 30+31+ 31+22 days) purposes of employment, the exemption condition under section 6(1) is applicable to him. He does not satisfy the minimum criteria of 182 days.
Therefore, Mrs.Jegatha is a non-Resident for the A.Y.2015-16. 9. b
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CADEMY
PRIME/44th PT/IPC 2
PART – B 1.
(i) The limit for attracting disallowance under section 40A(3) for payment otherwise than by way of account payee cheque or account payee bank draft is ` 35,000 in case of payment made for plying, hiring or leasing goods carriage. Therefore, in the present case, disallowance under section 40A(3) is not attracted in respect of payment of ` 30,000 made in cash to a transporter for carriage of goods.
(ii) The Explanation below section 37(1) denies claim of any expenses, if the same has been incurred for a purpose which is either an offence or prohibited by law. The Central Board of Direct Taxes has, through Circular No. 5/2012 dated 1-8-2012, has clarified that such expenditure are not allowable as per section 37(1) after considering the fact that the claim of any expense incurred in providing freebees to medical practitioner is in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. Therefore, the expenditure so incurred shall be inadmissible under section 37(1) of the Income-tax Act, 1961, being an expense prohibited by the law.
(iii) As per section 43B, municipal tax is not deductible for A.Y. 2017-18 since it is not paid on or before 30.10.2017, being the due date of filing the return for A.Y. 2017-18.
(iv) Weighted deduction @ 200% is available under section 35(2AB) in respect of expenditure incurred by a company on scientific research on in-house research and development facility as approved by the prescribed authority. However, cost of land is not eligible for deduction. Deduction under section 35(2AB) = 200% of ` 10 lakhs = `20,00,000. Note: It is presumed that the in-house research and development facility is approved by the prescribed authority and is hence, eligible for the weighted deduction @200% under section 35(2AB). It may be noted that the benefit of weighted deduction under section 35(2AB) has been extended to expenditure incurred up to 31.03.2017 by the Finance Act, 2012. Prior to the amendment, the deduction was restricted to expenditure incurred up to 31.03.2012.
(v) The salary expenditure is allowable while computing the income of the employer even though TDS has not been deposited within the due date under section 139(1). The disallowance under section 40(a)(ia) will not apply for non-deduction of tax at source from income chargeable under the head “Salaries”.
(vi) Depreciation under section 32 would be allowed on electric generator purchased @ 15%, which is the rate applicable for plant & machinery as per Income-tax Rules, 1962. Since it was put to use for more than 180 days in the year, full depreciation is allowable for A.Y. 2017-18. Further, as per section 32(1)(ia), additional depreciation is allowable in the case of new plant or machinery acquired and installed after 31.03.2005 by an assessee engaged, inter alia, in generation of power, at the rate of 20% of the actual cost of such plant or machinery. Therefore, allowable depreciation under section 32 would be – Normal depreciation (` 50 lakhs x 15%) ` 7,50,000 Additional depreciation (`50 lakhs x 20%) ` 10,00,000
Particulars ` Income from self-occupied portion (2/3rd ) Net annual Value Nil Less: Deduction u/s 24 (interest paid 2/3rd or 30,000 ) (30,000)
Loss from self-occupied portion (30,000)
Income from Let out portion (1/3rd ) Step 1 MV or FR whichever is higher but subject to maximum of SR - ` 1,20,000 Step 2 Actual rent received `90,000 Gross Annual value ( step 1 or step 2 whichever is higher) 1,20,000 Less: Municipal tax paid (1/3rd ) 10,000
Net annual value 1,10,000 Less: Deduction u/s 24 – 30% of net annual value interest paid 1/3rd
33,000 40,000
Income from let out portion 37,000
Total Income from House Property 7,000
4. Computation of taxable salary of Mr. Rajan for A.Y. 2017-18
Particulars ̀
Basic salary 3,60,000
Dearness Allowance 1,20,000 Employers’ contribution to Central Government Pension Scheme (3,000 x 12) 36,000 Professional tax paid by employer 3,000
Concessional accommodation (See Notes 1 & 2) Nil Value of concessional educational facility (4,000 x 12) (See Note 3) 48,000 Transport allowance (24000 – 9600) 14,400
------------------ Gross Salary 5,81,400
Less : Deduction under section 16(iii) Professional tax 3,000 -------------------
Income from Salary 5,78,400 ------------------
Notes: (1) For computation of perquisite value of concessional accommodation, 40% of dearness
allowance (i.e. `48,000) should be taken into consideration as forming part of salary, since the question clearly mentions that only 40% is to be reckoned for superannuation benefits. Therefore, salary for the purpose of perquisite valuation would be `4,08,000 [i.e., (`3,60,000 + 48,000].
(2) In a case where the accommodation is taken on lease or rent by the employer and provided to the employee, the value of perquisite would be lower of the actual amount of lease rental paid or payable by the employer [i.e. `1,08,000, being 9,000 x 12) and 15% of salary [ i.e., `61,200, being 15% of `2,88,000]. This value (i.e. `61,800) would be reduced by the rent paid by the employee (i.e., `72,000, being 6,000 x 12).
PRIME A
CADEMY
PRIME/44th PT/IPC 4
The value of concessional accommodation is Nil [i.e. ` 61,800 – ̀ 72,00]. (3) In determining the value of perquisite resulting from the provision of free or concessional
educational facilities, from a plain reading of the proviso to Rule 3(5), it is possible to take a view that if the cost of education per child exceeds ` 1,000 per month, the entire cost will be taken as the value of the perquisite. Accordingly, the full amount of ` 4,000 per month is taxable as perquisite. It has been assumed that the education is provided free-of-cost to Mr.Rajesh’s son since the question is silent regarding the same. In such a case, the value of the perquisite would be ` 48,000 (i.e. ` 2,000 × 12).
5. The term “Assessee” under Section 2(7) of the Income means a person by whom any tax or any
other sum of money is payable under the Income Tax Act, and includes – a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income [or assessment of fringe benefits] or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person; b) every person who is deemed to be an assessee under any provision of this Act; c) every person who is deemed to be an assessee in default under any provision of this Act. Scope of Total Income [Sec 5): Scope of total income is according to residential status of assessee. 1. Resident in India/ ordinarily resident in India: A person is assessable to tax in respect of income which i. Is received or deemed to be received in India by him or on his behalf ii. Accrues or arises or deemed to accrue or arise to him in India iii. Accrues or arises to him outside India 2. Resident but not ordinarily resident in India: A person is assessable to tax in respect of income which i. Is received or deemed to be received in India by him or on his behalf ii. Accrues or arises or deemed to accrue or arise to him in India iii. Accrues or arises to him outside India from a business controlled in or profession set up in India. 3. Non-resident in India: A person is assessable to tax in respect of income which i. Is received or deemed to be received in India by him or on his behalf ii. Accrues or arises or deemed to accrue or arise to him in India
