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CA-IPCC FM ASSIGNMENT LEVERAGES, COST OF CAPITAL, CAPITAL STRUCTURE AND CASH FLOW STATEMENT MM: 75 Marks Question No. 1: ABC Ltd. has the following capital structure which is considered to be optimum as on 31st March 2006. ` 14% debentures 30,000 11% Preference shares 10,000 Equity (10,000 shares) 1,60,000 2,00,000 The company share has a market price of `23.60. Next year dividend per share is 50% of year 2006 EPS. The following is the trend of EPS for the preceding 10 years which is expected to continue in future. Year EPS (Rs.) Year EPS (Rs.) 1997 1.00 2002 1.61 1998 1.10 2003 1.77 1999 1.21 2004 1.95 2000 1.33 2005 2.15 2001 1.46 2006 2.36 The company issued new debentures carrying 16% rate of interest and the current market price of debenture is `96. Preference share `9.20 (with annual dividend of `1.1 per share) were also issued. The company is 50% tax bracket. (A) Calculate after tax: (i) Cost of new debt (ii) Cost of new preference shares (iii) New equity funds (consuming new equity from retained earnings) (B) Calculate marginal cost of capital when no new shares are issued. (C) How much needs to be spent for capital investment before issuing new shares? 50% of the 2006 earnings are available as retained earnings for the purpose of capital investment. (D) What will the marginal cost of capital when the funds exceed the amount calculated in (C), assuming new equity is issued at Rs. 20 per share? (10 Marks) Answer 1:(A) (i) Cost of new debt K d = I (1 t) NP 16 (1 - 0.50) = 8.33% 96 (ii) Cost of new preference shares K p = D = 1.1 = 11.96% NP 9.2 (iii) Cost of new equity funds (Retained Earnings) K re = D 1 + g = 1.18 + 0.10 = 15% P 0 23.60 D 1 = 50% of 2006 EPS = 50% of 2.36 = ` 1.18 (B) Type of Capital Optimum Weights Specific Cost WMCC Debt 0.15 8.33% 1.25% Preference 0.05 11.96% 0.60% Equity 0.80 15.00% 12.00% Marginal cost of capital 13.85% (C) The company can spend the following amount of available Retained earnings (Breaking Point on exhaustion of RE) = (0.50) (2.36 x 10,000) = ` 11,800 The ordinary equity is 80% of total capital. Capital investment = `11,800 = `14,750 0.80 (D) If the company require fund in excess of `14,750 it will have to issue new shares. The cost of new issue will be Ke = `1.18 + 0.10 = 15.90% 20
Transcript
Page 1: CA Ipcc Assignment

CA-IPCC FM ASSIGNMENT

LEVERAGES, COST OF CAPITAL, CAPITAL STRUCTURE AND CASH FLOW STATEMENT

MM: 75 Marks

Question No. 1: ABC Ltd. has the following capital structure which is considered to be optimum as on 31st March 2006.

`

14% debentures 30,000

11% Preference shares 10,000

Equity (10,000 shares) 1,60,000

2,00,000

The company share has a market price of `23.60. Next year dividend per share is 50% of year 2006 EPS. The following is the

trend of EPS for the preceding 10 years which is expected to continue in future.

Year EPS (Rs.) Year EPS (Rs.)

1997 1.00 2002 1.61

1998 1.10 2003 1.77

1999 1.21 2004 1.95

2000 1.33 2005 2.15

2001 1.46 2006 2.36

The company issued new debentures carrying 16% rate of interest and the current market price of debenture is `96.

Preference share `9.20 (with annual dividend of `1.1 per share) were also issued. The company is 50% tax bracket.

(A) Calculate after tax:

(i) Cost of new debt

(ii) Cost of new preference shares

(iii) New equity funds (consuming new equity from retained earnings)

(B) Calculate marginal cost of capital when no new shares are issued.

(C) How much needs to be spent for capital investment before issuing new shares? 50% of the 2006 earnings are available as

retained earnings for the purpose of capital investment.

(D) What will the marginal cost of capital when the funds exceed the amount calculated in (C), assuming new equity is issued at

Rs. 20 per share?

(10 Marks) Answer 1:(A) (i) Cost of new debt

Kd = I (1 – t)

NP

16 (1 - 0.50) = 8.33%

96

(ii) Cost of new preference shares

Kp = D = 1.1 = 11.96%

NP 9.2

(iii) Cost of new equity funds (Retained Earnings)

Kre = D1 + g = 1.18 + 0.10 = 15%

P0 23.60

D1 = 50% of 2006 EPS = 50% of 2.36 = ` 1.18

(B)

Type of Capital Optimum Weights Specific Cost WMCC

Debt 0.15 8.33% 1.25%

Preference 0.05 11.96% 0.60%

Equity 0.80 15.00% 12.00%

Marginal cost of capital 13.85%

(C) The company can spend the following amount of available Retained earnings (Breaking Point on exhaustion of RE) = (0.50)

(2.36 x 10,000) = ` 11,800

The ordinary equity is 80% of total capital.

Capital investment = `11,800 = `14,750

0.80

(D) If the company require fund in excess of `14,750 it will have to issue new shares. The cost of new issue will be

Ke = `1.18 + 0.10 = 15.90%

20

Page 2: CA Ipcc Assignment

The marginal cost of capital will be

Type of Capital Optimum Weights Specific Cost WMCC

Debt 0.15 8.33% 1.25%

Preference 0.05 11.96% 0.60%

Equity (New) 0.80 15.90% 12.72%

Marginal cost of capital 14.57%

Question No. 2: The XYZ & Co, wishes to find out its weighted marginal cost of capital, WMCC, based on target capital

structure proportions. Using the data given below, find out the Schedule of WMCC and also show the WMCC curve.

Source Proportion Range Cost

Equity Share Capital 50% Up to Rs.3,00,000 13.00%

3,00,000 – 7,50,000 13.30%

Above 7,50,000 15.50%

Preference Shares 10% Up to Rs.1,00,000 9,33%

Above 1,00,000 10.60%

Long Term Debt 40% Up to Rs.4,00,000 5.68%

4,00,000 – 8,00,000 6.50%

Above 8,00,000 7.10%

(8 Marks) Answer 2: Determination of breaking points of difference sources:

Source Weight Cost Range Breaking Points

Equity Capital 0.50 13.00% Up to `3,00,000 3,00,000/0.50 = 6,00,000

13.30% 3,00,000 – 7,50,000 7,50,000/0.50 = 15,00,000

15.50% Above 7,50,000 --

Preference Shares 0.10 9.33% Up to `1,00,000 1,00,000/0.10 = 10,00,000

10.60% Above 1,00,000 --

Long Term Debt 0.40 5.68% Up to `4,00,000 4,00,000/0.40 = 10,00,000

6.50% 4,00,000 – 8,00,000 8,00,000/0.40 = 20,00,000

7.10% Above 8,00,000 --

Now, the WMCC for different ranges of new financing may be calculated as follows:

Range (`) Source Weight COC% WACC%

Up to `6,00,000 Equity Share Capital 0.50 13.00 6.50

Preference Shares 0.10 9.33 0.93

Long Term Debt 0.40 5.68 2.27

WMCC 9.70

`6,00,000 – 10,00,000 Equity Share Capital 0.50 13.30 6.65

Preference Shares 0.10 9.33 0.93

Long Term Debt 0.40 5.68 2.27

WMCC 9.85

`10,00,000 – 15,00,000 Equity Share Capital 0.50 13.30 6.65

Preference Shares 0.10 10.60 1.06

Long Term Debt 0.40 6.50 2.60

WMCC 10.31

`15,00,000 – 20,00,000 Equity Share Capital 0.50 15.50 7.75

Preference Shares 0.10 10.60 1.06

Long Term Debt 0.40 6.50 2.60

WMCC 11.41

`20,00,000 and above Equity Share Capital 0.50 15.50 7.75

Preference Shares 0.10 10.60 1.06

Long Term Debt 0.40 7.10 2.84

WMCC 11.65

Page 3: CA Ipcc Assignment

10.31%

The WMCC curve for the firm has been presented in the following Figure:

6 10 15 20 Total New financing (` Lacs)

Weighted Marginal Cost of Capital

Question No. 3: The following information is available for Rahul Limited.

Net operating income ` 60 lakh

Interest on debt ` 15 lakh

Cost of equity 17%

Cost of debt 13%

Calculate the average cost of capital for the firm. (4 Marks) Answer 3:

Total amount of Debt = ` 15 lakh

13%

= ` 115.38 lakh

Total amount of Equity = ` 60 lakh – ` 15 lakh

17%

= ` 264.71 lakh

Total Debt & Equity = ` 115.38 lakh + ` 264.71 lakh = ` 380.09 lakh

Statement showing Computation of Average Cost of Capital

Source Amount

(` in lakhs)

Weight Cost WACC

Debt 115.38 0.304 13% 3.952%

Equity 264.71 0.696 17% 11.832%

380.09 1.00 15.784%

Therefore Average Cost of Capital for the firm = 15.78%.

Question No. 4: AK Ltd. provides you the following information

Income Statement

Particulars `

Sales (operating at 60% level of installed capacity) 6,00,000

Total costs (excluding interest but including fixed cost which is 1/6 of total cost) (5,40,000)

EBIT 60,000

Interest on Debentures @ 11% (44,000)

EBT 16,000

Income tax paid @ 40% (6,400)

Earnings after tax 9,600

Pref. Dividend paid @ 8% (4,000)

Earnings available for Equity Shareholders 5,600

Earnings per share of 100 each ` 11.20

MPS ` 112

Dividend paid per share ` 11.20

Cost of proposed expansion programme 50% of Total Assets at Present Flotation Cost associated with raising of finance `

5,000.

Sales expected to be increased by 33⅓% from present level as a result of expansion.

11.41% 11.65%

9.85% 9.7%

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

WMCC%

Page 4: CA Ipcc Assignment

If AK Ltd. finances the expansion with debt, the rate of the incremental debt will be 1% more than that at present and the

price earnings ratio shall be 4 times. If expansion is financed through equity shares, the new share can be sold at 70% premium

and the price-earnings ratio shall be at present level. Required:

(a) Calculate the degree of all leverages at present and proposed sales level.

(b) Calculate EPS and percentage change in EPS if financing is through (i) Debt and (ii) Equity shares

(c) Calculate the market value per equity share under both the alternatives.

(d) Which form of financing should be employed?

(e) Determine the indifference point.

(f) Determine the financial break-even point, operating break-even point & Overall Break Even Point at present and proposed

sales levels.

(g) Determine that level of Indifference point between Debt Plan & Equity Plan & level of EBIT at which uncommitted earnings

per share (UEPS) would be same if sinking fund obligations amount to ` 50,000 per year.

(h) Shall the market price of share be same at the indifference point under all forms of financing?

(i) Which plan has more financial risk?

(j) Compute post tax cost of new debt & cost of new equity assuming that entire earnings will be distributed amongst equity

shareholders.

(20 Marks) Answer 4: Statement showing Calculation of Degree for various Leverages

Particulars Present

Situation (`)

Debt Plan

(`)

Equity

Plan (`)

Sales 6,00,000 8,00,000 8,00,000

Less: Variable Costs (75% of sales) (4,50,000) (6,00,000) (6,00,000)

Contribution 1,50,000 2,00,000 2,00,000

Less: Fixed Costs (1/6 x 5,40,000) (90,000) (90,000 (90,000)

Earnings before Interest & Tax 60,000 1,10,000 1,10,000

Less: Interest (44,000) (74,600) (44,000)

Earnings before Tax (EBT) 16,000 35,400 66,000

Less: Tax @ 40% (6400) (14,160 (26,400)

Earnings after Tax (EAT ) 9,600 21,240 39,600

Less: Pref. Dividend (4,000) (4,000) (4,000)

Earnings Available for Equity Shareholders (EAE) 5,600 17,240 35,600

No. of Equity Shares 500 500 2.000

(a) Operating Leverage (Contribution/EBIT) 2.50 1.82 1.82

Financial Leverage EBIT

EBT – Pref. Dividend

1 – t

6.429 3.828 1.854

Combined leverage (Operating Leverage x Financial Leverage) 16.07 6.97 3.37

(b) Earnings per share (EPS) [EAE/No. of Equity Shares] 11.20 34.48 17.80

Percentage Change in EPS 207.86% 58.93%

Price Earnings Ratio (P/E Ratio) 10 4 10

(c) Market Price [EPS x P/E Ratio] 112 137.92 178

(d) Recommendation: The equity financing should be employed since the market price of an equity share is higher than that

under debt financing.

(e) Calculation of indifference point between the proposed plans

(x – 74,600) (1 – 0.4) – 4,000 = (x – 44,000) (1 – 0.4) – 4,000

500 2,000

0.6 X – 48,760 = 0.6 X – 30,400

500 2000

X = ` 91,467

(f) (i) Calculation of Financial Break Even Point (`)

Particulars Present Plan Debt Plan Equity Plan

A. Interest on Debt 44,000 74,600 44,000

B. Preference Dividend after Grossing up for Tax

Preference Dividend

(1 – t)

6,667

6,667

6,667

C. Financial Break Even Point [A + B] 50,667 81,267 50,667

Page 5: CA Ipcc Assignment

(ii) Calculation of Operating Break Even Point (`)

Particulars Present Plan Debt Plan Equity Plan

A. Fixed Cost 90,000 90,000 90,000

B. P/V Ratio 25% 25% 25%

C. Operating BEP (A/B) (in `) 3,60,000 3,60,000 3,60,000

(iii) Calculation of Overall Break Even Point (`)

Particulars Present Plan Debt Plan Equity Plan

A. Fixed Cost 90,000 90,000 90,000

B. Interest on Debt 44,000 74,600 44,000

C. Preference Dividend after Grossing up for Tax

Preference Dividend

(1 – t)

6,667

6,667

6,667

D. P/V Ratio 25% 25% 25%

E. Operating BEP (A+B+C/D) (in `) 5,62,668 6,85,068 5,62,668

(g) Calculation of Indifference Point at which UEPS will be same

(x – 74,600) (1 – 0.4) - 4,000 - 50,000 = (x – 44,000) (1 – 0.4) – 4,000 – 50,000

500 2,000

0.6X – 98,760 = 0.6X – 80,400

500 2000

X = `1,74,800

(h) At the Indifference Points though the EPS under both Plans will be same, but the P/E Ratio under both Plans is not same.

P/E Ratio for Debt Plan is 4 and P/E Ratio for Equity Plan is 10. Therefore, market price of Shares under both Plans will be

different at the Indifferent Point.

(i) Financial risk under Debt Plan is more on account of the following reasons:

(i) Debt Plan has higher Financial Leverage.

(ii) Financial BEP is higher under Debt Plan as compared to Equity Plan.

(j) Post tax Cost of new debt Kd = I(1-t) = ` 30,600 (1 – 0.4) = 7.34%

NP ` 2,50,000

Post tax Cost of new equity Ke = DPS = ` 26,700 = 10.68%

NP ` 2,50,000

Working Notes:

(i) Calculation of Total Funds Required

= (50% of Total Assets) + Flotation Cost

= [50% of (Debt + Equity + Pref. Share Capital)] + Flotation Cost

= [50% of ` 44,000 + 5,600 x 100 + 4,000 + ` 5,000

11% 11.20 8%

= [50% of (` 4,00,000 + ` 50,000 + ` 50,000)] + ` 5,000 = ` 2,55,000

(ii) No. of New Equity Shares to be issued = ` 2,55,000/(` 100 + ` 70) = 1,500.

(iii) Amount of new interest expense = ` 2,55,000 x 12%

= ` 30,600

(iv) Amount of equity dividends on new equity shares = ` 17.80 x 1,500 shares

= ` 26,700

Question No. 5: You are provided with the following information for Excellent Ltd.:

Balance Sheet Amount in (`)

Liabilities As at 31.3.2011 As at 31.3.2010 Assets As at 31.3.2011 As at 31.3.2010

Share Capital 5,00,000 5,00,000 Fixed Assets 10,50,000 8,50,000

P&L A/c 5,00,000 4,25,000 Stock 3,00,000 3,40,000

Long-term Loan 5,50,000 5,00,000 Debtors 3,45,000 3,80,000

Creditors 1,80,000 1,75,000 Cash 35,000 30,000

17,30,000 16,00,000 17,30,000 16,00,000

Income Statement for the year ended 31.3.2011 (Amount in `)

Sales 21,50,000

Less: Cost of sales (14,70,000)

6,80,000

Page 6: CA Ipcc Assignment

Less: Operating Expenses:

Administrative Expenses (2,40,000)

Depreciation (1,00,000)

3,40,000

Add: Dividend Received 25,000

3,65,000

Less: Interest Paid (70,000)

2,95,000

Less: Income Tax (1,30,000)

Profit after tax 1,65,000

Excellent Ltd. paid Dividend of `90,000 during the year ended 31.3.2011

Prepare Cashflow Statement of Excellent Ltd. for the year ended 31.3.2011 using Direct and Indirect Method both and

disclosing cashflows from Operating, Investing and Financing activities and the opening and closing cash balances.

(12 Marks) Answer 5: Cashflow Statement of Excellent Ltd. for the year ended 31.3.2011 (Indirect Method)

Particulars Amount in (`) Amount in (`)

A. Cashflows from Operating Activities

Net Profits before tax 2,95,000

Add: Depreciation 1,00,000

Add: Interest paid 70,000

Less: Dividend received (25,000)

Operating Profit before Working Capital changes 4,40,000

Add: Decrease in Stock 40,000

Add: Decrease in Debtors 35,000

Add: Increase in Creditors 5,000

Cashflows from Operating Activities before tax 5,20,000

Less: Tax paid (1,30,000)

Cashflows from Operating Activities (A) 3,90,000

B. Cashflows from Investing Activities

Dividend received on Investments 25,000

Less: Purchase of Fixed assets (WN 1) (3,00,000)

Cash Outflows from Investing Activities (B) (2,75,000)

C. Cashflows from Financing Activities

Long term loan taken 50,000

Less: Interest paid (70,000)

Less: Dividend paid (90,000)

Cash Outflows from Financing Activities (c) (1,10,000)

Changes in Cash and Cash Equivalents (A + B + C) 5,000

Add: Opening Cash and Cash Equivalents 30,000

Closing Cash and Cash Equivalents 35,000

Alternatively, Cashflows from Operating Activities (Direct Method)

Particulars Amount in (`) Amount in (`)

Cashflows from Operations:

Cash received from Debtors 21,85,000

Uses of Cash from Operations:

Less: Payment to Creditors (WN 2) (14,25,000)

Less: Administrative Expenses (2,40,000) (16,65,000)

Cashflows from Operating Activities before tax 5,20,000

Less: Tax Paid (1,30,000)

Cashflows from Operating Activities 3,90,000

Working Notes: WN 1: Fixed Assets A/c

Particulars Amount in (`) Particulars Amount in (`)

To Balance b/d 8,50,000 By Depreciation 1,00,000

To Bank A/c (BF) 3,00,000 By Balance c/d 10,50,000

11,50,000 11,50,000

Page 7: CA Ipcc Assignment

WN2: Payment to Suppliers

Cost of Goods sold 14,70,000

Add: Closing Stock 3,00,000

Less: Opening Stock (3,40,000)

Purchases 14,30,000

Add: Opening Creditors 1,75,000

Less: Closing Creditors (1,80,000)

Payment to suppliers 14,25,000

WN 3: Debtors A/c

Particulars Amount in (`) Particulars Amount in (`)

To Balance b/d 3,80,000 By Cash A/c (B.F.) 21,85,000

To Sales 21,50,000 By Balance c/d 3,45,000

25,30,000 25,30,000

Question No. 6: The following are the estimates made by Raman & Co., for the year 2004-2005:

(i) The expected Degree of Operating Leverage (DOL) is 1.50.

(ii) The amount of debt outstanding will be `50 lakh and interest rate on the same will be 12%.

(iii) It is estimated that fixed costs will be `10 lakh.

(iv) The earnings per share of the company is expected to be `2.50.

You are required to calculate:

a. The expected degree of financial leverage of the company.

b. The expected degree of total leverage of the company.

c. The percentage decline in sales which will wipe out the entire profit before tax. (9 Marks)

Answer 6: a. DOL = 1.50

DOL = Contribution = C .

Contribution – Fixed Cost C – F

1.5 (C - 10) = C

Or 1.5C – 1.5 x 10 = C

Or (1.5 - 1) C = 15

Or 0.5 C = 15

Or C = `30 Lakh

EBIT = Contribution – Fixed Cost = `30 Lakhs – `10 Lakhs = `20 Lakhs

DFL = EBIT/(EBIT - I) = 20/(20 - 6) or DFL = 1.43

b. DTL = DOL x DFL = 1.5 x 1.43 = 2.145

c. If a decline in sales causes the profit before tax to be zero then profit after tax and EPS will also be zero.

DTL = Change in EPS ÷ Change in S or Change in S = Change in EPS ÷ DTL

EPS S S EPS

In such a situation, Change in EPS = 0 – 2.5 = - 2.5

Change in EPS = - 2.5 = - 1.00

EPS 2.5

Change in S = - 1.00 = - 0.4662 i.e., - 46.62%

S 2.145

A decline in sales by 46.62% will wipe out the entire profit before tax.

Question No. 7: Maxwell Ltd. is operating in electronic equipments development and its sales and earnings before interest and

taxes for the current year were `70,00,000 and `18,00,000 respectively. During the year, interest expense was `16,000 and

preference dividend was `20,000. These fixed charges are expected to continue for the next year. The company is thinking to

diversify its operations which will require `7,00,000 and is expected to increase EBIT by `4,00,000 to `22,00,000.

The company has the following three financing alternatives under its consideration:

Alternative 1: Issue 10,000 equity shares at `70 per share. The company has currently 80,000 shares of common stock

outstanding.

Alternative 2: Issue `7,00,000, 15 years 15% debentures, Sinking fund payments on these debentures will commence after 15

years.

Alternative 3: Issue `7,00,000, 14% preference shares.

You are required to calculate:

(i) The EPS at the expected earnings before interest and taxes level of `22,00,000 for each financing alternative.

Page 8: CA Ipcc Assignment

(ii) The equivalency level of earnings before interest and taxes between the debt and common stock alternatives.

(iii) The equivalency level of earnings before interest and taxes between the preference shares and common stock alternatives.

Assume 30% income-tax rate. (12 marks) Answer 7:

(i) Determination of EPS at EBIT level of `22,00,000

Financing Plan

(a) (b) (c)

Equity Shares (`) Debentures (`) Pref. Shares (`)

EBIT 22,00,000 22,00,000 22,00,000

Less: Interest (16,000) (1,21,000) (16,000)

Taxable Income 21,84,000 20,79,000 21,84,000

Less: Tax @ 30% (6,55,200) (6,23,700) (6,55,200)

EAT 15,28,800 14,55,300 15,28,800

Less: Dividend on Pref. Shares (20,000) (20,000) (1,18,000)

Earnings available for equity shares 15,08,800 14,35,300 14,10,800

Number of Equity Shares 90,000 80,000 80,000

EPS (`) 16.76 17.94 17.64

(ii) Equivalency level of Earnings between Equity & Debt

[(X – `16,000) (1 - 0.30)] – `20,000 = (X – `16,000 – `1,05,000) (1 - 0.30) – `20,000

90,000 80,000

0.7X – `11,200 – `20,000 = 0.7X – `11,200 – `73,500 - `20,000

90,000 80,000

0.7X – `31,200 = 0.7X – `1,04,700

90,000 80,000

8(0.7X – `31,200) = 9(0.7X – `1,04,700)

5.6X – `2,49,600 = 6.3X – `9,42,300

5.6X – 6.3X = - `9,42,300 + `2,49,600

- 0.7X = - `6,92,700

X = `6,92,700 = `9,89,571

0.7

(iii) Equivalency level between Preferred Stock and Common Stock

(X – `16,000) (1 - 0.30) – `20,000 – `98,000 = (X – `16,000) (1 – 0.30) – `20,000

80,000 90,000

0.7X – `11,200 – `1,18,000 = 0.7X – `11,200 – `20,000

80,000 90,000

9(0.7X – `1,29,200) = 8(0.7X – `31,200)

6.3X – `11,62,800 = 5.6X – `2,49,600

6.3X – 5.6X = - `2,49,600 + `11,62,800

0.7X = `9,13,200

X = `9,13,200

0.7

= `13,04,571

Page 9: CA Ipcc Assignment

CA-IPCC COST ASSIGNMENT

MATERIAL, LABOUR, OPERATING AND CONTRACT COSTING

MM: 75 Marks Question No. 1: Rajat owns 5 taxis which generally operate 100 km daily for 30 days in a month. Cost relating to the taxis are

as follows:

Cost of each taxi ` 2,00,000.

Expected life of each taxi 1,00,000 km.

Salvage value at the end of effective life ` 50,000.

Petrol consumption @ ` 15 per litre, each litre sufficing for 15 kms.

Mobil oil @ ` 20 per litre. One litre of mobil oil is required for 100 kms,

Monthly maintenance cost per taxi ` 300.

Repair cost for the entire life of a taxi is estimated at ` 40,000.

Driver’s salary is ` 3,000 per month.

Garage Rent is ` 5,000 per month for all the taxis.

Permit fee ` 3,000 per taxi per annum.

Insurance ` 1,500 per taxi per annum. Token tax ` 600 per taxi per annum.

Rajat knows by experience that generally ` 900 per taxi per annum is spent on challans and other sundry costs. He also

regards 15% interest on investment in taxis as costs and attributes a salary of ` 4,500 per month for his personal service,

towards this business. In addition he pays ` 1,500 per month to a part time accountant. Other office and administration

expenses amount to ` 3,000 per month.

Generally each taxi runs 20% without fare every day. During the month in question one of the taxis had met with an

accident which resulted in an extra repair cost of 20,000 of which only ` 16,000 were recovered from insurance company. This

also resulted in that taxi being non-operational for 10 days in a month.

Calculate total monthly cost for 5 taxis, cost per taxi and also charge per km if Rajat wants to earn a profit of 20% on total

cost.

(10 Marks) Answer 1: Total normal kms in a month = (30 x 100) x 5 = 15,000 km

Actual running in the month = 4 x (30 x 100) + (20 x 100) = 14,000 kms

Total normal effective kms in a month due to 20% idle running = 15,000 x (80 ÷ 100) = 12,000 kms

Effective kms for actual running = 14,000 x (80 ÷ 100) = 11,200 kms

Operating Cost Sheet For The Taxis

Particulars For 5

taxis

Per taxi

per month

Cost per

effective km

Monthly Variable charges:

Depreciation 2,00,000 – 50,000 x 14,000; or ` 1.50 per km x 100

1,00,000 80

21,000 4,500 1.825

Petrol ` 15 per 15 kms = ` 1 x 14,000; or ` 1 x 100

80

14,000 3,000 1.250

Mobil oil 20 per 100 km for 14,000; kms or 20 x 100

80

2,800 600 0.25

Repair 40,000 = 0.40 x 14,000; or 0.40 x 100

1,00,000 80

5,600

1,200

0.50

Total variable cost for the month (A) 43,400 9,300 3.875

Charged on the basis of actual running of 14,000 kms

Fixed Monthly Charges

Office & Admn. Expenses 3,000 600

Notional salary for personal supervision 4,500 900

Part time accountant’s salary 1,500 300

Interest 2,00,000 x 15 x 1 x 5

100 12

12,500 2,500

Monthly maintenance 1,500 300

Drivers salary 15,000 3,000

Garage rent 5,000 1,000

Permit fee (3,000 ÷ 12) x 5 1,250 250

Insurance (1,500 ÷ 12) x 5 625 125

Token tax (600 ÷ 12) x 5 250 50

Page 10: CA Ipcc Assignment

Challans & other sundry (900 ÷ 12) x 5 375 75 ____

Total month fixed charges distributed over normal running of

15,000 kms (b)

45,500 9,100 3.792

Total cost per effective Km (a) + (b) 7.667

Add: Profit per effective Km @ 20% on cost 1.533

Total charge/collection per effective Km 9.20

Note: Abnormal loss of ` 20,000 – ` 16,000 = ` 4,000 is debited to Costing Profit % Loss A/c

Unabsorbed fixed cost = 45,500 x 1,000 = ` 3,033.33 also debited to Costing P & L A/c

15,000

Note: Variable cost is calculated with reference to actual running whereas fixed cost is distributed over normal running.

Question No. 2: You have invited tenders. Three tenders have been received. First is from a local supplier at a price of `8 per

unit. The second is from an Indian supplier located far off which involves a fixed cost of `3,000 per order at a price of `7.50

per unit. The third quotation is from a foreign supplier involving a fixed cost of `6,000 per order at a price of `6.90 per unit.

Explain with whom order should be placed & upto what quantity.

(4 Marks) Answer 2:

Supplier Variable Cost Fixed Cost

I 8 -

II 7.5 3,000

III 6.9 6,000

Cut off the order quantity between 1st and 2nd supplier = Fixed Cost per order/Per unit price difference

= 3,000 / (8 – 7.50) = 6,000 units

Cut off the order quantity between 2nd and 3rd supplier = (6,000 – 3,000) / (7.50 – 6.90) = 5,000 units

Cut off the order quantity between 1st and 3rd supplier = 6,000 / (8 – 6.90) = 5,454.54 units

From above calculations the conclusions are:

(a) For order quantity below 5,454.54 units, the first supplier is economical.

(b) For order quantity of 5,454.54 units, both 1st and 3rd suppliers are equally good.

(c) For order quantity above 5,454.54 units 3rd supplier is better.

Question No. 3: A school has ten 50 seater buses. Cost of each bus is ` 8,50,000 with salvage value of ` 50,000 and an

estimated effective life of 10 years. The school has a separate transportation section in the school premises. The rent

apportioned to this section is ` 60,000 per annum. Salary of transport officer is ` 3,000 per month and establishment expenses

of this section amount to ` 8,000 per month in addition. The school is close for two months in summer, fifteen days in autumn

and for fifteen days during winter. But for this period the buses operate on the average for 20 days in a month. However,

students are charged bus fee per 11 months in a year, though the entire staff is paid salary for the full year. The bus covers a

distance upto 15 kms. from the school both in the morning and evening. About 30 student in each bus are from a distance upto 5

kms, 10 students from distance upto 5 to 10 kms, and 10 students from a distance between 10 to 15 kms. The monthly charge

from second category of students is double compared to that in the first and that from third category the charge is three

times that from the first category. Within each category all students, are charged equally.

Expenses relating to buses are as follows:

Driver’s salary ` 3,000 per month

Conductor’s salary ` 2,500 per month

Annual maintenance and repair ` 10,000 per bus

Diesel ` 8 per litre, each litre sufficing 2 kms. of running

Lubricants ` 20 per litre, each litre sufficient for 100 kms.

Prepare operating cost sheet giving monthly transport charge from each category of students so as to recover full annual

transportation cost incurred by the school. (10 Marks) Answer 3: Total number of months in a year 12 Months

Holidays in summer, autumn and winter - 3

Study months 9

No. of days buses operate each month x 20

Total operational days in a year = 180

Total trips two each day (to and fro) 180 x 2 360

Kms. Covered in each trip = 15 x 2 x 30

Actual Annual total kms travelled per bus 10,800

Page 11: CA Ipcc Assignment

Operating Cost Sheet for a bus

Variable cost for the year per bus: ` `

Diesel 10,800 x 8/2 = 43,200

Lubricating oil 10,800 x 20/100 2,160 45,360

Fixed cost for the year per bus:

Depreciation: (8,50,000 – 50,000) ÷ 10 80,000

Rent (60,000 ÷ 10) 6,000

Transport officer’s salary (3,000 x 12 ÷ 10) 3,600

Establishment expenses (8,000 x 12 ÷ 10) 9,600

Driver’s salary (3,000 x 12) 36,000

Conductor’s salary (2,500 x 12) 30,000

Annual maintenance and repair 10,000

Total annual fixed cost per bus 1,75,200

Total annual cost per bus 2,20,560

The above cost is to be recovered from 11 months fee

Monthly collection = 2,20,560 = ` 20,051

11

Let charges per student from 1st category (i.e. 0 to 5 km) = x

Let charges per student from 2nd category (i.e. 5 to 10 km) = 2x

Let charges per student from 3rd category (i.e. 10 to 15 km) = 3x

Charge x No. of students = Charge x No. of student

x x 30 = 30 x

2 x x 10 = 20 x

3 x x 10 = 30 x

80 x

80 x = ` 20,051; x = 20,051 ÷ 80 = ` 250.64

Monthly charge per student upto 0 to 5 kms = 250.64

Monthly charge per student upto 5 to 10 kms = 250.64 x 2 = ` 501.48

Monthly charge per student upto 10 to 15 kms = 250.64 x 3 = ` 751.92

Approximating ` 250, ` 500 and ` 750 per month, respectively.

Question No. 4: Calculate Economic Order Quantity (EOQ), minimum stock or safety stock, re-order level and maximum stock

with the help of the following data supplied by a producer for a particular material:

Annual demand for material = 4,000 units Average daily consumption = 12 units

Cost of placing an order = ` 200 Maximum daily consumption = 16 units

Per unit cost of material = ` 60 Maximum lead time = 10 days

Annual rate of interest = 10% Minimum lead time = 6 days

Rent, insurance and other storage costs = ` 4 per unit (4 Marks) Answer 4: Minimum Daily Consumption = 2 x Average daily consumption – Maximum daily consumption

= 2 x 12 – 16 = 8 units.

Average Lead time = Maximum Lead time + Minimum Lead time = 10 + 6 = 8 days

2 2

EOQ = 2 x A x O = 2 x 4,000 x 200 = 400 units

C (60 x 0.10 ) + 4

Reorder Level = Maximum Daily Consumption x Maximum Lead time = 16 x 10 = 160 units

Safety Stock or Minimum Level = Reorder Level – (Average Daily Consumption x Average Lead time)

= 160 – (12 x 8) = 64 units

Maximum Level = Reorder Level + EOQ – (Minimum Daily Consumption x Minimum Lead time)

= 160 + 400 – (8 x 6) = 512 units

Question No. 5: Enter the following transactions in Stores Ledger Account of material A on the basis of:

(i) FIFO

(ii) LIFO

(iii) Weighted Average Method

2000

Sept. 1 Opening stock 100 units @ `8 per unit

Sept.4 Ordered 300 units @ `8.50 via purchase order 21

Sept.6 Issued 40 units via MRN 72 for job no. 301

Sept.9 Ordered 200 units @ `8.80 via purchase order 24

Page 12: CA Ipcc Assignment

Sept.11 Received 300 units @ `8.50 via GRN 37

Sept.14 Issued 120 units for production order 502 MRN 77

Sept.18 Return from Job no.301, 10 units MRT 105

Sept.21 Received 200 units @ `8.80 via GRN 41

Sept.23 Issued 150 units for Job no. 309 via MRN 83

Sept.25 Returned to vendor 20 units received via GRN 37 (DN 14)

Sept.28 Received 160 units @ `8.85 via GRN 54

Sept.28 Freight on above purchase `24

Sept.30 Ordered 250 units @ `9.10 via purchase order 29

(9 Marks) Answer 5: (i) Stores Ledger Account Based on FIFO Material A

Date

2000

Receipts Issue Balance

Particulars Qty

Units Rate

` Amount

` Particulars

Qty

Units Rate

` Amount

` Qty

Units Amount

`

Sept 1 Op. Stock 100 8 800 - - - - 100 800

Sept 6 - - - - MRN 72

Job 301

40 8 320 60 480

Sept 11 P.O. 21

GRN 37

300 8.50 2,550 - - - - 360 3,030

Sept 14 - - - - Pr. O. 502

MRN 77

60

60

8

8.50

480

510

990

240 2,040

Sept 18 Job 301

MRT 105

10 8 80 - - - - 250 2,120

Sept 21 GRN 41 200 8.80 1,760 - - - - 450 3,880

Sept 23 - - - - Job 309

MRN 83

150 8.50 1,275 300 2,605

Sept 25 - - - - DN 14 20 8.50 170 280 2,435

Sept 28 GRN 54 160 9* 1,440 - - - - 440 3,875

Note * Freight paid has been distributed over units purchased. Thus, purchase price = 8.85 + (24/160) = `9

(ii) Stores Ledger Account Based on LIFO Material A

Date

2000

Receipts Issue Balance

Particulars Qty

Units Rate

` Amount

` Particulars

Qty

Units Rate

` Amount

` Qty

Units Amount

`

Sept 1 Op. Stock 100 8 800 - - - - 100 800

Sept 6 - - - - MRN 72

Job 301

40 8 320 60 480

Sept 11 P.O. 21

GRN 37

300 8.50 2,550 - - - - 360 3,030

Sept 14 - - - - Pr. O. 502

MRN 77

120 8.50 1,020 240 2,010

Sept 18 Job 301

MRT 105

10 8 80 - - - - 250 2,090

Sept 21 GRN 41 200 8.80 1,760 - - - - 450 3,850

Sept 23 - - - - Job 309

MRN 83

150 8.80 1,320 300 2,530

Sept 25 - - - - DN 14 20 8.50* 170 280 2,360

Sept 28 GRN 54 160 9 1,440 - - - - 440 3,800

Note: * Since the units of materials returned to vendor are unissued as per stores records, they have been valued at the same

rate at which they have been purchased, i.e., `8.50 per unit.

(iii) Stores Ledger Account Based on Weighted Average Material A

Date

2000

Receipts Issue Balance

Particulars Qty

Units Rate

` Amount

` Particulars

Qty

Units Rate

` Amount

` Qty

Units Amount

`

Sept 1 Op. Stock 100 8 800 - - - - 100 800

Sept 6 - - - - MRN 72

Job 301

40 8 320 60 480

Page 13: CA Ipcc Assignment

Sept 11 P.O. 21

GRN 37

300 8.50 2,550 - - - - 360 3,030

Sept 14 - - - - Pr. O. 502

MRN 77

120 8.417* 1,010 240 2,020

Sept 18 Job 301

MRT 105

10 8 80 - - - - 250 2,100

Sept 21 GRN 41 200 8.80 1,760 - - - - 450 3,860

Sept 23 - - - - Job 309

MRN 83

150 8.578 1,287 300 2,573

Sept 25 - - - - DN 14 20 8.578* 172 280 2,401

Sept 28 GRN 54 160 9 1,440 - - - - 440 3,841

Note: Materials returned to vendor were purchased @ `8.50 but are entered in issue column @ 8.578 based on weighted

average. Therefore, inventory adjustment A/c is debited by 20 x (8.578 – 8.50) = `2 or 172 – 20 x 8.50 = `2.

Vendor is debited by the original price, i.e., 20 x 8.50 = `170. The difference is due to approximation.

Question No 6: The three workers Govind, Ram and Shyam produced 80, 100 and 120 pieces of a product X on a particular day

in May 2009 in a factory. The time allowed for 10 units of Product X is 1 hour and their hourly rate is `4.

Calculate for each of these three workers the following:

(i) Earnings for the day

(ii) Effective rate of earnings per hour under:

(a) Straight piece-rate plan

(b) Halsey premium bonus plan (50% sharing)

(c) Rowan premium bonus plan of labour remuneration.

(8 Marks) Answer 6: Statement Showing Computation of Earnings of Workers

Particulars Govind Ram Shyam

Production (Units) 80 100 120

Time Allowed (Hours) (80/10) = 8 (100/10) = 10 (120/10) = 12

Piece Rate `4 .

10 Units

`0.40 `0.40 `0.40

Time Taken (Hours) 8 8 8

Time Saved (Hours) 0 2 4

(i) Earnings for the day:

(a) Straight Piece Rate Plan 80 units x `0.40

= `32

100 units x `0.40

= `40

120 units x `0.40

= `48

(b) Halsey Premium Bonus Plan (50% sharing)

Wages = Time Taken x Time Rate + 50% of

Time Saved x Time Rate

8 hours x `4 + 50% x 0

hours x `4

= `32

8 hours x `4 + 50% x 2

hours x `4

= `36

8 hours x `4 + 50% x 4

hours x `4

= `40

(c) Rowan Premium Bonus Plan

Wages = Time Taken x Time Rate +

Time Saved x Time Taken x Time Rate

Time Allowed

8 hours x `4 +

0 hours x 8 hours x `4

8 hours

= `32

8 hours x `4 +

2 hours x 8 hours x `4

10 hours

= `38.4

8 hours x `4 +

4 hours x 8 hours x `4

12 hours

= `42.67

Question No. 7: The following is the trial balance of Premier Construction Company engaged on the execution of Contract No.

1047 for the year 31st December, 2005:

Particulars Amount in (`) Amount in (`)

Contractee’s account (amount received) 3,00,000

Buildings 1,60,000

Creditors 72,000

Bank balance 35,000

Capital account 5,00,000

Materials 2,00,000

Wages 1,80,000

Expenses 47,000

Plant 2,50,000

8,72,000 8,72,000

Page 14: CA Ipcc Assignment

The work on Contract No. 1047 commenced on 1st January 2005. Materials costing `1,70,000 were sent to the site of the

contract but those of `6,000 were destroyed in an accident. Wages of `1,80,000 were paid during the year. Plant costing

`50,000 was used on the contract all through the year. Plant with a cost of `2 lakh was used from 1st January to 30th

September and was then returned to stores. Materials of the cost of `4,000 were at site on 31st December, 2005. The contract

was for `6,00,000 and the contract pays 75% of the work certified. Work certified was 80% of the total contract work at the

end of 2005. Uncertified work was estimated at `15,000 on 31st December, 2005. Expenses are charged to contract at 25% of

wages. Plant is to be depreciated at 10% p.a.

Prepare Contract No. 1047 account for the year 2005 and make out the Balance Sheet as on 31st December, 2005 in the books

of Premier Construction Company. (10 Marks) Answer 7: In the books of Premier Construction company Contract No. 1047 A/c

Particulars Amount in (`) Particulars Amount in (`)

To Materials 1,70,000 By W.I.P

To Wages 1,80,000 Certified 4,80,000

To Expenses (25% of `1,80,000) 45,000 Uncertified 15,000

To Depreciation on Plant

`50,000 x 10% x 12 + `2,00,000 x 10% x 9 .

12 12

20,000 By Abnormal Loss of

Material

6,000

To Notional Profit c/d 90,000 By Material at site 4,000

5,05,000 5,05,000

To Profit & Loss A/c (WN1) 37,500 By Notional Profit b/d 90,000

To WIP A/c (Profit in Reserve B.F.) 52,500

90,000 90,000

Working Note:

WN1: Transfer to Profit and Loss A/c = Notional Profit x 2 x Cash Received [

3 Work Certified

= `90,000 x 2 x `3,00,000 = `37,500

3 `4,80,000

Particulars Amount in (`) Particulars Amount in (`)

Capital 5,00,000 Buildings 1,60,000

Profit & Loss A/c (WN2) 24,500 Plant at site 45,000

Creditors 72,000 Plant in store (2,00,000 – 20,000) 1,80,000

Material in site 4,000

Material in store (`2,00,000 - `1,70,000) 30,000

Work – in – progress:

Certified 4,80,000

Uncertified 15,000

4,95,000

Less: Cash (3,00,000)

1,95,000

Less: Reserve (52,500) 1,42,500

Bank 35,000

5,96,500 5,96,500

WN2:

Particulars Amount in (`)

Profit on Contract A/c 37,500

Less: Depreciation on Plant `2,00,000 x 10% x 3 .

12

5,000

Under-absorbed expenses (`47,000 – `45,000) 2,000

Loss of materials 6,000 (13,000)

Net Profit 24,500

Question No. 8: Accountant of your company had computed labour turnover rates for the quarter ended 30th September, 2012

as 14%, 8% and 6% under Flux method, Replacement method and Separation method respectively. If the number of workers

replaced during 2nd quarter of the financial year 2012-13 is 36, find the following:

(i) The number of workers recruited and jointed; and

(ii) The number of workers left and discharged.

(4 Marks)

Page 15: CA Ipcc Assignment

Answer 8: Replacement Rate = No. of Replacements x 100

Average no. of workers

8 = 36 x 100

Average no. of workers

Average no. of workers = 450 workers

Separation Rate = No. of Separations x 100

Average no. of workers

6 = No. of separations x 100

450

No. of separations = 27 Workers

Since Flux Rate = 14%, hence flux rate would be

Flux Rate = No. of Replacements + No. of Separations x 100

Average no. of workers

14 = 36 + 27 x 100

450

Hence,

No. of workers recruited & joined = 36 workers

No. of workers left & discharged = 27 workers

Question No. 9: The contract ledger of M/s XYZ showed the following expenditure on account of contract on 31st December,

2006:

Amount in (`)

Materials 2,10,000

Wages 2,93,000

Plant 70,000

Sundry Expenses 15,000

Establishment charges 10,000

The contract was started on 1st January, 2006 and the contract price was `10,00,000. Cash received on account to date was

`4,80,000 representing 80% of work certified, remaining 20% being retained until completion. Value of plant on 31st December,

2006 was `20,000 and the value of materials in hand was `6,000. The cost of work finished but not certified on said date was

`50,000. Some of the materials costing `20,000 were found unsuitable and were sold for `16,000 and a part of plant costing

`5,000 unsuited for the contract was sold at a profit of `1,000.

The contractor estimated a further expenditure that would be incurred in completing the contract and took to the credit of

P&L A/c for the year 2006. The preparation of estimated net profit on contract which the value of work certified bears to the

contract price. This is to be further reduced by proportion of cash received that bears to work certified. The estimates of

further expenditure were as follows:

(i) That the contract would be completed by 30th June, 2007.

(ii) That a further sum of `30,000 would have to be spent on the plant and its residual value on completion of the

contract would be `12,000.

(iii) That materials in addition to those in hand on 31st Dec., 2006 would cost `1,00,000 and that further sundry

expenses of `7,000 would be incurred.

(iv) That the wages for the completion of contract would amount to 1,69,900.

(v) That the establishment charges would cost the same amount per year as in the previous year.

(vi) That `18,000 would be sufficient to provide for contingencies.

Prepare Contract Account for the year ended 31st December, 2006 and show the amount to be credited to P&L A/c for the

year. Also show how the relevant figures would appear in the Balance Sheet as on that date.

(12 Marks) Answer 9: Contract Account

Particulars Amount in (`) Particulars Amount in (`)

To Materials 2,10,000 By Plant at site 20,000

To Wages 2,93,000 By Material at site 6,000

To Plant 70,000 By Loss on Materials 4,000

To Sundry Expenses 15,000 By Sale of Materials 16,000

To Establishment charges 10,000 By Sale of Plant 6,000

To Profit on sale of Plant 1,000 By Balance c/d 5,47,000

5,99,000 5,99,000

To Balance b/d 5,47,000 By Work in Progress certified `4,80,000 x 100 .

80

6,00,000

Page 16: CA Ipcc Assignment

To Notional Profit c/d 1,03,000 By Work in Progress Uncertified 50,000

6,50,000 6,50,000

To Profit and Loss A/c* 52,368 By Notional Profit b/d 1,03,000

To Work in Progress Reserve A/c

(Bal. Fig.)

50,632

1,03,000 1,03,000

*Profit to be taken to P&L A/c

= Estimated Profit x Work Certified x Cash Received .

Contract Price Work Certified

= `1,09,100 x `6,00,000 x `4,80,000

`10,00,000 `6,00,000

= `52,368

Memorandum Contract Account (18 months)

Particulars Amount in (`) Particulars Amount in (`)

To Materials (2,10,000 – 4,000 – 16,000) 2,90,000 By Contractee‘s A/c 10,00,000

To Wages (2,93,000 + 1,69,900) 4,62,900

To Plant (70,000 + 1,000 – 6,000 + 30,000 – 12,000) 83,000

To Sundry Expenses (1,50,000 + 7,000) 22,000

To Establishment Charges (10,000 + 10,000 x 6 )

12

15,000

To Reserve for contingencies 18,000

To Estimated Profit (Bal. fig.) 1,09,100

10,00,000 10,00,000

Extract of Balance Sheet as on 31-12-2006

Liabilities Amount in (`) Assets Amount in (`)

Work in Progress:

Work Certified 6,00,000

Work Uncertified 50,000

6,50,000

Less: Reserve (50,632)

5,99,368

Less: Cash Received (4,80,000)

Work in Progress 1,19,368

Materials in Hand 6,000

Plant at Site 20,000

Question No. 10: From the following particulars compute a conservation estimate of profit by 4 methods on a contract which

has 80 percent complete: `

Total expenditure to date 8,50,000

Estimate further expenditure to complete the contract 1,70,000

Contract Price 15,30,000

Work Certified 10,00,000

Work not certified 85,000

Cash received 8,16,000

(4 Marks) Answer 10: Computation of Notional Profit & Profit to be taken to Contract P & L A/c

Value of Work Certified `10,00,000

Less: Cost of Work Certified

Cost of Contract to date `8,50,000

Less: Cost of Work uncertified (`85,000) (`7,65,000)

Notional Profit `2,35,000

Profit to be taken to Contract Profit & Loss A/c (When 80% of Contract is complete)

= 2 x Notional Profit x Cash Received

3 Work Certified

= 2 x `2,35,000 x `8,16,000 = `1,27,840

3 `10,00,000

Page 17: CA Ipcc Assignment

(2) Four Methods of Computing the Conservative estimates of Profit

(a) Computation of Total estimated Profit on Contract

Contract Price `15,30,000

Less: Total estimated Cost of Contract Cost to date `8,50,000

Less: Estimated further Cost to Complete the Contract`1,70,000 (`10,20,000)

Estimated Profit `5,10,000

(b) Profit to be taken to Contract P/L A/c

1. Cost to Cost Basis

(i) Estimated Profit x Cost to date .

Total Estimated Cost

`5,10,000 x `8,50,000 = `4,25,000

`10,20,000

(ii) Total Estimated Profit x Cost of Contract to date x Cash Received

Total Estimated Cost Work Certified

`5,10,000 x `8,50,000 x `8,16,000 = `3,46,800

`10,20,000 `10,00,000

2. On Value to Value Basis

(a) Estimated Profit x Work Certified

Contract Price

`5,10,000 x `10,00,000 = `3,33,333

`15,30,000

(b) Estimated Profit x Work Certified x Cash Received

Contract Price Work Certified

`5,10,000 x `10,00,000 x `8,16,000 = `2,72,000

`15,30,000 `10,00,000

Most Conservative estimate = `1,27,840


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