S A IPCC MAY-2011-GR-1

8/13/2019 S A IPCC MAY-2011-GR-1

1/100

8/13/2019 S A IPCC MAY-2011-GR-1

2/100

SUGGESTED ANSWERS TO QUESTIONS SET AT THE

COMMONFOR

INTEGRATED PROFESSIONAL COMPETENCE

EXAMINATION

GROUP I

&

ACCOUNTING TECHNICIAN EXAMINATION

MAY,2011

BOARD OF STUDIES

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

(Set up by an Act of Parliament)

8/13/2019 S A IPCC MAY-2011-GR-1

3/100

8/13/2019 S A IPCC MAY-2011-GR-1

4/100

Contents

Page Nos.

Paper 1. Accounting .................... ...................... ....................... ....................... ... 1 24

Paper 2. Business Laws, Ethics and Communication .........................................25 39

Paper 3. Cost Accounting and Financial Management .......................................40 63

Paper 4 Taxation ..................... ...................... ...................... ...................... .......64 89

Summary of Examiners comments on the performance of the candidates

8/13/2019 S A IPCC MAY-2011-GR-1

5/100

PAPER 1 : ACCOUNTING

Question No. 1 is compulsory

Answer any fivequestions from the remaining sixquestions.

Wherever necessary suitable assumptions should be made by the candidates.

Working Notes should form part of the answer.

Question 1

Answer the following quest ion:

(a) The abstract of the Balance Sheet of the AXE Ltd. as at 31stMarch 2011, are as follows:

Liabilities `

Equity share capital ( 100 each) 15,00,000

12% Preference share capital ( 100 each) 8,00,000

13% Debentures 3,00,000

On 31stMarch, 2011, BXE Ltd. agreed to take over AXE Ltd. on the following terms:

(1) For each preference share in AXE Ltd., ` 10 in cash and one 9% preference shareof ` 100 in BXE Ltd.

(2) For each equity share AXE Ltd. ` 20 in cash and one equity share in BXE Ltd. of` 100 each. It was decided that the share in BXE Ltd. will be issued at market price

` 140 per share.

(3) Liquidation expenses of AXE Ltd. are to be reimbursed by BXE Ltd. to the extent of

` 10,000. Actual expenses amounted to ` 12,500.You are required to compute the amount of purchase consideration.

(b) On 30thMarch, 2011 fire occurred in the premises of M/s Suraj Brothers. The concernhad taken an insurance policy of ` 60,000 which was subject to the average clause.

From the books of accounts, the following particulars are available relating to the period

1stJanuary to 30thMarch 2011.

(1) Stock as per Balance Sheet at 31stDecember, 2010, ` 95,600.

(2) Purchases (including purchase of machinery costing `30,000) ` 1,70,000

(3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000.(4) Sales (including goods sold on approval basis amounting to ` 49,500) ` 2,75,000.

No approval has been received in respect of 2/3rdof the goods sold on approval.

(5) The average rate of gross profit is 20% of sales.

(6) The value of the salvaged goods was ` 12,300.

8/13/2019 S A IPCC MAY-2011-GR-1

6/100

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : MAY, 2011

2

You are required to compute the amount of the claim to be lodged to the insurance

company.

(c) Shiv and Mohan are partners in a firm sharing profits and losses equally. On 31stMarch,2011, the balances of their capital accounts were ` 3,00,000 and ` 2,00,000

respectively. The average profits of the firm are ` 1,36,000 and the rate of normal profitis 20%.

On 1stApril, 2011 they agreed to admit Hari as a partner for one fourth share. Hari will

bring ` 1,00,000 as capital.

You are required to compute the value of the goodwill of the firm on admission of Hari, if

goodwill is to be calculated on the basis of:

(1) 5 years purchase of super profit

(2) Capitalization method

(3) 3 years purchase of average profit.

(d) On 1stApril, 2010, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 pershare (face value ` 10 each). He provides you the further information:

(1) On 20th June, 2010, he purchased another 10,000 shares of P Ltd. at ` 16 pershare.

(2) On 1stAugust, 2010, P Ltd. issued one equity bonus share for every six shares held

by the shareholders.

(3) On 31stOctober, 2010, the directors of P Ltd. announced a right issue which entitle

the holders to subscribe three shares for every seven shares at ` 15 per share.

Shareholders can transfer their rights in full or in part.Rajat sold 1/3rd of entitlement to Umang for a consideration of ` 2 per share and

subscribe the rest on 5thNovember, 2010.

You are required to prepare Investment A/c in the books of Rajat for the year ending

31stMarch, 2011. (4 5 = 20 Marks)

Answer

(a) Calculation of purchase consideration

`

I Payment made to shareholders of 8,000preference sharesof AXE Ltd. :

Cash @ ` 10 per share (8,000 preference shares x ` 10) 80,000

8,00,000

100

= 8,000 preference shares

8/13/2019 S A IPCC MAY-2011-GR-1

7/100


3

9% Preference shares in BXE Ltd. @ ` 100 each 8,00,000 8,80,000

II Payment made to Equity shareholders of 15,000 equityshares of AXE Ltd. :

Cash @ ` 20 per share (15,000 shares x ` 20) 3,00,000

Equity shares in BXE Ltd. issued at market price ` 140each (15,000 shares x ` 140) 21,00,000 24,00,000

Total purchase consideration 32,80,000

Note: Re-imbursement of liquidation expenses of AXE Ltd. to the extent of ` 10,000, will

not be included in the calculation of purchase consideration.

(b) Computation of claim for loss of stock

`

Stock on the date of fire i.e. on 30 thMarch, 2011 (W.N.1) 62,600

Less: Value of salvaged stock (12,300)

Loss of stock 50,300

Amount of claim =Insured value

Total cost of stock on the date of firex Loss of stock

=60,000

50,30062,600

48,211 (approx.)

A claim of ` 48,211 (approx.) should be lodged by M/s Suraj Brothers to the insurance

company.Working Notes:

1. Calculation of closing stock as on 30thMarch, 2011

Memorandum Trading Account for

(from 1stJanuary, 2011 to 30thMarch, 2011)

Particulars Amount()

Particulars Amount()

To Opening stock 95,600 By Sales (W.N.3) 2,42,000

To Purchases (1,70,000- 30,000) 1,40,000

By Goods with customers(for approval) (W.N.2) 26,400

To Wages (50,000 By Closing stock (Bal. fig.) 62,600

15,00,000

100

= 15,000 equity shares

8/13/2019 S A IPCC MAY-2011-GR-1

8/100


3,000) 47,000

To Gross profit (20% onsales) 48,400

3,31,000 3,31,000

2. Calculation of goods with customersSince no approval for sale has been received for the goods of ` 33,000 (i.e. 2/3 of

` 49,500) hence, these should be valued at cost i.e. ` 33,000 20% of ` 33,000 =

` 26,400.

3. Calculation of actual sales

Total sales Sale of goods on approval = ` 2,75,000 ` 33,000 = ` 2,42,000.

(c) Valuation of goodwill

(1) 5 years purchase of super profit

`

Average profit 1,36,000

Less: Normal profit @ 20% of (` 3,00,000+ ` 2,00,000) (1,00,000)

Super profit 36,000

Value of goodwill = 5 Super profit

= 5 ` 36,000

= ` 1,80,000

Value of goodwill of the firm will be ` 1,80,000.

(2) Capitalisation method

Normal value of business =Average profit

Normal rate of profit

=1,36,000

20%= ` 6,80,000

`

Normal value of business 6,80,000

Less: Actual capital employed Shiv

Mohan

3,00,000

2,00,000 (5,00,000)

Value of goodwill of the firm will be 1,80,000

(3) 3 years purchase of average profits

Goodwill = 3 Average profit

4

8/13/2019 S A IPCC MAY-2011-GR-1

9/100


= 3 ` 1,36,000

= ` 4,08,000

Value of goodwill of the firm will be ` 4,08,000.

(d) In the books of Rajat

Investment Account

(Equity shares in P Ltd. )

Date Particulars No. ofshares

Amount( )

Date Particulars No. ofshares

Amount( )

1.4.10

20.6.10

To Balance b/d

To Bank A/c

50,000

10,000

7,50,000

1,60,000

5.11.10 By Bank A/c (sale of rights)

(W.N.3) - 20,000

1.8.10 To Bonusissue (W.N.1)

10,000 - 31.3.11 By Balance c/d(Bal. fig.)

90,000 11,90,000

5.11.10 To Bank A/c(right shares)

(W.N.4) 20,000 3,00,000

90,000 12,10,000 90,000 12,10,000

Working Notes:

(1) Bonus shares =50,000 + 10,000

6= 10,000 shares

(2) Right shares =50,000 + 10,000 + 10,000

7

3 = 30,000 shares

(3) Sale of rights =1

30,000 shares 3

` 2= ` 20,000

(4) Rights subscribed = `2

30,000 shares 153

= ` 3,00,000

Question 2

Amit and Sumit are partners sharing prof its and losses in the ratio of 3:2. Their Balance Sheet

as on 31stMarch 2011 is given below:

Liabilities Amount

`

Assets Amount

`

Capital Accounts: Land & building 3,20,000

Amit 1,76,000 Investments (Market value `55,000) 50,000

Sumit 2,54,000 Debtors 3,00,000

Loan from Puneet 3,00,000 Less: Provision for doubtful debts 10,000 2,90,000

5

8/13/2019 S A IPCC MAY-2011-GR-1

10/100


General Reserve 30,000 Stock 1,10,000

Employers provident fund 10,000 Cash at bank 50,000

Creditors 50,000

8,20,000 8,20,000

They decided to admit Puneet as a new partner from 1st

April, 2011 on the following terms:(1) Amit will give 1/3rdof his share and Sumit will give 1/4thof his share to Puneet.

(2) Puneets loan account will be converted into his capital.

(3) The Goodwill of the firm is valued at `3,00,000. Puneet will bring his share of goodwill in

cash and the same was immediately withdrawn by the partners.

(4) Land and building was found undervalued by ` 1,00,000.

(5) Stock was found overvalued by ` 60,000.

(6) Provision for doubtful debts will be made equal to 5% of debtors.

(7) Investments are to be valued at their market price.

It was decided that the total capital of the firm after admission of new partner would be

` 10,00,000. Capital accounts of partners will be readjusted on the basis of their profit sharing

ratio and excess or deficiency will be adjusted in cash.

You are required to prepare:

(a) Revaluation A/c

(b) Partners capital A/cs

(c) Balance Sheet of the firm after admission of a new partner (16 Marks)

Answer

Revaluation A/c

Particulars ` Particulars `

To Stock 60,000 By Land & building 1,00,000

To Provision for doubtful debts 5,000 By Investments 5,000

To Profit transferred to

Amits capital A/c 24,000

Sumits capital A/c 16,000

1,05,000 1,05,000

6

8/13/2019 S A IPCC MAY-2011-GR-1

11/100


Partners Capital Accounts

Particulars Amit Sumit Puneet Particulars Amit Sumit Puneet

` ` ` ` ` `

To Amits

capital A/c - - 60,000

By Balance b/d

By Puneets' Loan A/c

1,76,000

-

2,54,000

-

-

3,00,000

To Puneetscapital A/c

- - 30,000 By Puneetscapital A/c 60,000 30,000 -

To Bank A/c 60,000 30,000 - By Bank A/c (W.N.2) - - 90,000

To Balancec/d 4,00,000 3,00,000 3,00,000

By RevaluationA/c

24,000 16,000 -

By Generalreserve 18,000 12,000 -

By Bank 1,82,000 18,000 -

4,60,000 3,30,000 3,90,000 4,60,000 3,30,000 3,90,000

Balance Sheet as on 1stApril, 2011

(After admission of a new partner - Puneet)

Liabilities Amount Assets Amount

` `

Capital accounts Land and building (3,20,000 + 1,00,000) 4,20,000

Amit 4,00,000 Investments 55,000

Sumit 3,00,000 Debtors 3,00,000Puneet 3,00,000 Less: Provision for doubtful debts (15,000) 2,85,000

Creditors 50,000 Stock (1,10,000 60,000) 50,000

Employers provident

fund 10,000Cash at bank (W.N. 3) 2,50,000

10,60,000 10,60,000

Working Notes:

(1) Calculation of incoming partners share, new profit sharing ratio and sacrificing

ratioAmit Sumit

Old profit sharing ratio 3/5 2/5

It is assumed that Employers Provident Fund represents employers contribution to provident fund which isyet to be deposited. Hence, the same represents a current liability.

7

8/13/2019 S A IPCC MAY-2011-GR-1

12/100


Surrendered by old partners 3/5 x 1/3 = 1/5 2/5 x 1/4 = 1/10

Remaining share 3/5 1/5 = 2/5 2/5 1/10 = 3/10

Puneets total share in profits = 1/5 + 1/10 = 3/10New profit sharing ratio of Amit : Sumit : Puneet =2/5 : 3/10 : 3/10 = 4:3:3

Sacrificing ratio of Amit : Sumit is 1/5 : 1/10 : or 2:1

(2) Calculation of share of goodwill by old partners

Goodwill of the firm was ` 3,00,000

Share of Puneet in goodwill = ` 3,00,0003

10 = ` 90,000

Goodwill will be distributed among the old partners in their sacrificing ratio of 2:1 i.e.` 60,000 by Amit and ` 30,000 by Sumit.

(3) Calculation of closing balance of bank account after admission

Bank A/c

Particulars Amount Particulars Amount

( ) ( )

To Balance b/d 50,000 By Amits capital A/c 60,000

To Puneets capital A/c 90,000 By Sumits capital A/c 30,000

To Sumits capital A/c 18,000 By Balance c/d 2,50,000To Amits capital A/c 1,82,000

3,40,000 3,40,000

Question 3

The Balance Sheet of Mars Limited as on 31stMarch, 2011 was as follow:

Liabilities ` Assets `

Share Capital: Fixed Assets:

1,00,000 Equity shares of ` 10each fully paid up 10,00,000 Land and buildingCurrent Assets 7,64,0007,75,000

Reserve and surplus Stock

Capital reserve 42,000 Sundry debtors 1,60,000

Contingency reserve

Profit and loss A/c

2,70,000

2,52,000

Less : Provision for

doubtful debts 8,000

1,52,000

8

8/13/2019 S A IPCC MAY-2011-GR-1

13/100


Current Liabilities & Provisions Bill receivable 30,000

Bills payable 40,000 Cash at bank 3,29,000

Sundry creditors 2,26,000

Provisions for income tax 2,20,000

20,50,000 20,50,000

On 1stApril, 2011, Jupiter Limited agreed to absorb Mars Limited on the following terms and

conditions:

(1) Jupiter Limited will take over the assets at the following values:

`

Land and building 10,80,000

Stock 7,70,000

Bills receivable 30,000(2) Purchase consideration will be settled by Jupiter Ltd. as under:

4,100 fully paid 10% preference shares of `100 will be issued and the balance will besettled by issuing equity shares of `10 each at `8 paid up.

(3) Liquidation expenses are to be reimbursed by Jupiter Ltd. to the extent of ` 5,000.

(4) Sundry debtors realized` 1,50,000. Bills payable were settled for ` 38,000. Income taxauthorities fixed the taxation liability at ` 2,22,000 and the same was paid.

(5) Creditors were finally settled with cash remaining after meeting liquidation expenses

amounting to `8,000

You are required to:

(i) Calculate the number of equity shares and preference shares to be allotted by Jupiter

Limited in discharge of purchase consideration

(ii) Prepare the Realisation account, Bank account, Equity shareholders account and Jupiter

Limiteds account in the books of Mars Ltd. (16 Marks)

Answer

(i) Calculation of number of shares to be allotted

Particulars Amount ( )

Land and building 10,80,000

Stock 7,70,000

Bills receivable 30,000

Total 18,80,000

9

8/13/2019 S A IPCC MAY-2011-GR-1

14/100


Amount discharged by issue of preference shares 4,10,000

Number of preference shares to be issued (4,10,000/100) 4,100 shares

Amount discharged by issue of equity shares (` 18,80,000 4,10,000) 14,70,000

Number of equity shares to be issued (` 14,70,000 / 8) 1,83,750 Shares

(ii) Ledger Accounts in the books of Mars Limited

Realization Account


To Land and building 7,64,000 By Provision for doubtful debts 8,000

To Stock 7,75,000 By Bills payable 40,000

To Sundry debtors 1,60,000 By Sundry creditors 2,26,000

To Bills receivable 30,000 By Provision for taxation 2,20,000

To Bank A/c liquidationexpenses

3,000 By Jupiter Ltd. (purchaseconsideration) 18,80,000

To Bank A/c- bills payable 38,000 By Bank A/c- sundry debtors 1,50,000

To Bank A/c income tax 2,22,000

To Bank A/c sundry creditors 2,16,000

To Profit transferred to equity shareholders A/c 3,16,000

25,24,000 25,24,000

Bank Account


To Balance b/dTo Realisation A/c (payment received

3,29,000 By Realisation A/c(liquidation expenses)

3,000

from debtors) 1,50,000 By Jupiter Ltd. 5,000

To Jupiter Ltd. (liquidation expenses) 5,000 By Bills payable 38,000

By Income tax 2,22,000

By Sundry creditors

(Bal.fig.) 2,16,0004,84,000 4,84,000

Equity Shareholders Account


To 10% Preference shares 4,10,000 By Equity share capital A/c 10,00,000

10

8/13/2019 S A IPCC MAY-2011-GR-1

15/100

8/13/2019 S A IPCC MAY-2011-GR-1

16/100


Additional information:

(1) Depreciation written off on land and building ` 20,000.

(2) The company sold some investment at a profit of ` 10,000, which was credited to CapitalReserve.

(3) Income-tax provided during the year ` 55,000.

(4) During the year, the company purchased a machinery for ` 2,25,000. They paid

`1,25,000 in cash and issued 10,000 equity shares of `10 each at par.

You are required to prepare a cash flow statement for the year ended 31 stMarch 2011 as per

AS 3 by using indirect method. (16 Marks)

Answer

In the books of Lotus Ltd.

Cash Flow Statement for the year ending 31stMarch, 2011

` `

I Cash flow from Operating Activities

Net Profit before tax for the year (W.N.1) 1,35,000

Add: Depreciation on machinery (W.N.2) 55,000

Depreciation on land & building 20,000

Operating profit before change in working capital 2,10,000

Add: Decrease in stock 20,000

Less: Increase in sundry debtors (20,000)Less: Decrease in sundry creditors (1,00,000)

Cash generated from Operations 1,10,000

Less: Income tax paid (W.N.3) (45,000)

Net cash generated from operating activities 65,000

II Cash flow from Investing activities

Purchase of machinery (2,25,000 1,00,000) (1,25,000)

Sale of investment (W.N. 4) 60,000

Net cash used in investing activities (65,000)III Cash flow from financing activities

Issue of equity shares (2,50,000-1,00,000) 1,50,000

Repayment of long term loan (1,00,000)

Net cash generated from financing activities 50,000

Net increase in cash and cash equivalents 50,000

12

8/13/2019 S A IPCC MAY-2011-GR-1

17/100


Cash and cash equivalents at the beginning of the year(2,00,000 + 3,00,000) 5,00,000

Cash and cash equivalents at the end of the year(1,40,000+4,10,000)

5,50,000

Working Notes:

1. Calculation of Net Profit before tax

`

Increase in Profit & Loss (Cr.) balance 80,000

Add: Provision for taxation made during the year 55,000

1,35,000

2. Calculation of Depreciation charged during the year on Machinery account

Particulars Amount ( ) Particulars Amount ( )To Balance b/d 7,50,000 By Depreciation (Bal.fig.) 55,000

To Bank 1,25,000 By Balance c/d 9,20,000

To Equity share capital 1,00,000

9,75,000 9,75,000

3. Calculation of tax paid during the year

Provision for Taxation A/c

Particulars Amount ( ) Particulars Amount ( )

To Cash (Bal.fig.) 45,000 By Balance b/d 50,000

To Balance c/d 60,000 By Profit and Loss A/c 55,000

1,05,000 1,05,000

4. Calculation of sales value of investment sold

Investment A/c

Particulars Amount ( ) Particulars Amount ( )

To Balance b/d 1,00,000 By Bank A/c (Bal.fig.) 60,000

To Capital reserve (Profiton sale of investments) 10,000

By Balance c/d 50,000

1,10,000 1,10,000

13

8/13/2019 S A IPCC MAY-2011-GR-1

18/100

8/13/2019 S A IPCC MAY-2011-GR-1

19/100


Answer

Park View Club

Income and Expenditure Account

for the year ending on 31st

March 2011Expenditure Amount

( )Income Amount

( )

To Salaries 2,08,000 By Subscriptions (W.N. 2) 2,25,000

To Stationery consumed (W.N.3) 36,000 By Profit on sports meet 1,55,000

To Rent 60,000 By Income on investments 1,00,000

To Telephone expenses 10,000

Add: Outstanding on 31.3.11 3,500 13,500

Add: Income accrued 3,750 1,03,750

To Sundry expenses 92,500

Less: Outstanding on 31.3.10 (7,000) 85,500

To Depreciation of building 50,000

To Surplus (excess of income overexpenditure) 30,750

4,83,750 4,83,750

Balance Sheet as at 31stMarch 2011

Liabilities Amount( )

Assets Amount ( )

Capital fund (W.N.1) 31,05,500 Outstanding subscriptions 14,500Add: Surplus 30,750

Subscriptions received in advance

Outstanding telephone bills

31,36,250

7,500

3,500

Investment

(20,00,000+1,25,000) 21,25,000

Add: Interest accrued oninvestments 3,750

Building 10,00,000

21,28,750

Less: Depreciation (50,000) 9,50,000

Stock of stationery 9,000

Cash balance 45,000

31,47,250 31,47,250

Working Notes:

(1) Balance Sheet as at 31stMarch 2010

Liabilities Amount ( ) Assets Amount ( )

Outstanding sundry expenses 7,000 Building 10,00,000

15

8/13/2019 S A IPCC MAY-2011-GR-1

20/100


Capital fund (Bal.fig.) 31,05,500 Investments 20,00,000

Stock of stationery 5,000

Cash balance 1,02,500

Outstanding subscriptions 5,000

31,12,500 31,12,500

(2) Calculation of subscriptions accrued during the year

Subscription A/c

Particulars Amount( )

Particulars Amount( )

To Outstanding Subscriptions(as on 1.4.10)

5,000 By Cash A/cBy Outstanding subscriptions

2,23,000

To Income & Expenditure A/c 2,25,000 (as on 31.3.11) (Bal.fig.) 14,500

To Subscriptions received inadvance for 2011-12 7,500

2,37,500 2,37,500

(3) Calculation of stationery consumed during the year

`

Stock of stationery as on 31 March, 2010 5,000

Add: Purchased during the year 2010-11 40,000

45,000Less: Stock of stationery as on 31stMarch, 2011 (9,000)

Stationery consumed 36,000

Question 6

Mr A runs a business of readymade garments. He closes the books of accounts on 31stMarch,

2010. The Balance Sheet as on 31stMarch, 2010 was as follows:


As capital a/c 4,04,000 Furniture 40,000

Creditors 82,000 Stock 2,80,000

Debtors 1,00,000

Cash in hand 28,000

Cash at bank 38,000

4,86,000 4,86,000

16

8/13/2019 S A IPCC MAY-2011-GR-1

21/100


You are furnished with the following information:

(1) His sales, for the year ended 31st March, 2011 were 20% higher than the sales of

previous year, out of which 20% sales was cash sales.

Total sales during the year 2009-10 were ` 5,00,000.

(2) Payments for all the purchases were made by cheques only.

(3) Goods were sold for cash and credit both. Credit customers pay be cheques only.

(4) Deprecition on furniture is to be charged 10% p.a.

(5) Mr A sent to the bank the collection of the month at the last date of the each month after

paying salary of ` 2,000 to the clerk, office expenses `1,200 and personal expenses

`500.

Analysis of bank pass book for the year ending 31stMarch 2011 disclosed the following:

`

Payment to creditors 3,00,000

Payment of rent up to 31stMarch, 2011 16,000

Cash deposited into the bank during the year 80,000

The following are the balances on 31stMarch, 2011:

`

Stock 1,60,000

Debtors 1,20,000

Creditors for goods 1,46,000On the evening of 31stMarch 2011, the cashier absconded with the available cash in the cash book.

You are required to prepare Trading and Profit and Loss A/c for the year ended 31 stMarch,

2011 and Balance Sheet as on that date. All the workings should form part of the answer.

(16 Marks)

Answer

Trading and Profit and Loss Account for the year ending 31st March 2011


To Opening stock 2,80,000 By Sales (W.N. 3)

To Purchases (W.N. 1) 3,64,000 Credit 4,80,000

To Gross profit 1,16,000 Cash 1,20,000 6,00,000

By Closing stock 1,60,000

7,60,000 7,60,000

17

8/13/2019 S A IPCC MAY-2011-GR-1

22/100


To Salary 24,000 By Gross profit 1,16,000

To Rent 16,000

To Office expenses 14,400

To Loss ofcash (W.N. 6) 23,600

To Depreciation on furniture 4,000

To Net Profit 34,000

1,16,000 1,16,000

Balance Sheet as on 31stMarch, 2011


As Capital 4,04,000 Furniture 40,000

Add: Net Profit 34,000 Less: Depreciation (4,000) 36,000

Less: Drawings (6,000) 4,32,000 Stock 1,60,000Debtors 1,20,000

Creditors 1,46,000 Cash at bank 2,62,000

5,78,000 5,78,000

Working Notes:

(1) Calculation of purchases

Creditors Account


To Bank A/c 3,00,000 By Balance b/d 82,000

To Balance c/d 1,46,000 By Purchases (Bal.fig.) 3,64,000

4,46,000 4,46,000

(2) Calculation of total sales

`

Sales for the year 2009-10 5,00,000

Add: 20% increase 1,00,000

Total sales for the year 2010-11 6,00,000

(3) Calculation of credit sales

`

Total sales 6,00,000

18

8/13/2019 S A IPCC MAY-2011-GR-1

23/100


Less: Cash sales (20% of total sales) (1,20,000)

4,80,000

(4) Calculation of cash collected from debtors

Debtors Account


To Balance b/d 1,00,000 By Bank A/c (Bal. fig.) 4,60,000

To Sales A/c 4,80,000 By Balance c/d 1,20,000

5,80,000 5,80,000

(5) Calculation of closing balance of cash at bank

Bank Account


To Balance b/d 38,000 By Creditors A/c 3,00,000

To Debtors A/c 4,60,000 By Rent A/c 16,000

To Cash A/c 80,000 By Balance c/d 2,62,000

5,78,000 5,78,000

(6) Calculation of the amount of cash defalcated by the cashier

`

Cash balance as on 1stApril 2010 28,000

Add: Cash sales during the year 1,20,000

1,48,000

Less: Salary (`2,000x12) 24,000

Office expenses (`1,200 x 12) 14,400

Drawings of A (`500x12) 6,000

Cash deposited into bank during the year

Cash balance as on 31stMarch 2011(defalcated by the cashier) 23,600

Question 7Answer any four of the following:

(a) A and B are partners in a firm and share profits and losses equally. A has withdrawn the

following sum during the half year ending 30thJune 2010:

19

80,000 (1,24,400)

8/13/2019 S A IPCC MAY-2011-GR-1

24/100


Date Amount

`

January 15 5,000

February 10 4,000

April 5 8,000

May 20 10,000

June 18 9,000

Interest on drawings is charged @ 10% per annum. Find out the average due date and

calculate the interest on drawings to be charged on 30thJune 2010.

(b) Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor

interchangeable. At the time of closing of its accounts for the year ending 31 st March2011, the historical cost and net realizable value of the items of the closing stock are

determined as follows:

Items Historical cost

`

Net realizable value

`

P 5,70,000 4,75,000

Q 9,80,000 10,32,000

R 3,16,000 2,89,000

S 4,25,000 4,25,000

T 1,60,000 2,15,000

What will be the value of closing stock for the year ending 31st

March, 2011 as per AS 2Valuation of Inventories?

(c) X,Y and Z are partners sharing profits an losses in the ratio of 4:3:2 respectively. On 31st

March, 2011 Y retires and X and Z decide to share profits and losses in the ratio of 5:3.

Then immediately, W is admitted for 3/10thshares in profits, 2/3rdof which was given by

X and rest was taken by W from Z . Goodwill of the firm is valued at`2,16,000 W brings

required amount of goodwill.

Give necessary Journal Entries to adjust goodwill on retirement of Y and admission of W

if they do not want to raise goodwill in the books of accounts.

(d) In business today, the accounts which were earlier maintained in a manual form, arereplaced with computerized accounts. Explain the significance of computerized

accounting system in modern time.

(e) On 1stOctober, 2010, the debit balances of debtors account is ` 77,500 in the books ofM/s Zee Ltd. Transactions during the 6 months ended on 31st March 2011 were as

follows:

20

8/13/2019 S A IPCC MAY-2011-GR-1

25/100


`

Total sales (including cash sales `14,000) 84,000

Payment received from debtors in cash 38,000

Bills receivable received 26,000

Discount allowed to customers for prompt payment 1,000

Goods rejected and returned back by the customer 2,550

Bad debts recovered (written off in 2009) 900

Interest debited for delay in payment 1,250

You are required to prepare a Debtors Account for the period ending 31stMarch in the

General of M/s Zee Ltd. (4 4 = 16 Marks)

Answer

(a) Calculation of Average due date

(Base Date 15thJan, 2010)

Date Amount

`

No. of days Product

`

January 15 5,000 0 0

February 10 4,000 26 1,04,000

April 5 8,000 80 6,40,000

May 20 10,000 125 12,50,000

June 18 9,000 154 13,86,000

36,000 33,80,000

Average due date = Base date +Total product

daysTotal amount

= 15 thJan +33,80,000

36,000days

= 15 thJan + 94 days (approx.)= 19 thApril, 2010

Number of days from 19thApril, 2010 to 30thJune, 2010 = 72 days

Interest on drawings from 19thApril to 30thJune @10%:

21

8/13/2019 S A IPCC MAY-2011-GR-1

26/100


= ` 36,00072 10

365 100

= ` 710

Hence, interest on drawings ` 710 will be charged from A on 30thJune, 2010.

(b) As per para 5 of AS 2 Valuation of Inventories, inventories should be valued at the lowerof cost and net relizable value. Inventories should be written down to net realizable

value on an item-by-item basis.

Valuation of inventory (item wise) for the year ending 31stMarch 2011

Item Historical Cost Net realizable value Valuation of closingstock

` ` `

P 5,70,000 4,75,000 4,75,000

Q 9,80,000 10,32,000 9,80,000R 3,16,000 2,89,000 2,89,000

S 4,25,000 4,25,000 4,25,000

T 1,60,000 2,15,000 1,60,000

23,29,000

The value of inventory for the year ending 31stMarch 2011= `23,29,000.(c) Journal Entries

Date Particulars L.F. Dr. ( ) Cr.( )

31.3.11 Xs capital A/c Dr. 39,000

Zs capital A/c Dr. 33,000

To Ys capital A/c (3/9 ` 2,16,000) 72,000

(Being Ys share of goodwill adjusted in the capitalaccounts of gaining partners in their gaining ratio13:11 Refer Working Note.)

Cash A/c Dr. 64,800

To Ws capital A/c (3/10 ` 2,16,000) 64,800

(Being the amount of goodwill brought in by W)

Ws capital A/c Dr. 64,800

To Xs capital A/c 43,200

To Zs capital A/c 21,600

(Being the goodwill credited to sacrificing partners intheir sacrificing ratio 2:1)

22

8/13/2019 S A IPCC MAY-2011-GR-1

27/100


Working Note:

Calculation of gaining ratio of X and Z

Gaining ratio = New ratio Old ratio

For X = 5/8-4/9

= 13/72

Z = 3/8-2/9

= 11/72

Gaining ratio = 13:11

(d) In modern time, computerized accounting systems are used in various areas. The

significance of the computerized accounting system is as follows:

(1) Increase speed, accuracy and security - In computerized accountingsystem, the

speed with which accounts can be maintained is several fold higher. Besides speed,level of accuracy is also high in computerized accounting system.

(2) Reduce errors - In computerized accounting, the possibilities of errors are alsovery less unless some mistake is made while recording the data.

(3) Immediate information - In this system, with an entry of a transaction,corresponding ledger posting is done automatically. Hence, trial balance will also be

automatically tallied and the user will get the information immediately.

(4) Avoid duplication of work - Computerized accounting systems also remove the

duplication of the work.

(e) Total Debtors account in the General Ledger of M/s Zee Ltd.

Date Particulars Amount Date Particulars Amount

` `

1.10.10 To Balance c/d 77,500 1.10.10 to31.3.11

By General LedgerAdjustment A/c:

1.10.10to31.3.11

To General LedgerAdjustment A/c:

Cash collected 38,000

Sales (84,000-14,000) 70,000 Bills Receivable A/c 26,000

Bills receivable Discount allowed 1,000

(Bill dishonored) 8,500 Sales return 2,550

Bank (Noting charges) 250 31.3.11 By Balance c/d 89,950

Interest 1,250

1,57,500 1,57,500

23

8/13/2019 S A IPCC MAY-2011-GR-1

28/100


Working Note:

1. Bad debts of the year 2008-09 recovered in 2010-11 will not appear in the Total

Debtors account. It will be credited to profit & loss account.

2. Bills receivables of ` 5,000 endorsed to the supplier will not be shown in the Total

Debtors account because at the time of endorsement Suppliers account will bedebited and Bills receivable account will be credited.

24

8/13/2019 S A IPCC MAY-2011-GR-1

29/100

PAPER 2 : BUSINESS LAWS, ETHICS AND COMMUNICATION

Question No. 1is compulsory.

Attempt anyfivequestions from the remaining six questions.

Question 1(a) What is the law relating to determination of compensation, on breach of contract,

contained in section 73 of the Indian Contract Act, 1872 ? (5 Marks)

(b) (I) State whether the following statements are correct or incorrect.: (2 1= 2 Marks)

(i) An agreement with a minor may be ratified on his attaining majority.

(ii) A cheque marked Not-Negotiable is not transferable.

(II) Choose the correct answer from the following : (3 1= 3 Marks)

(i) Which one of the following statements is not true about minors position in the

firm:

(a) He can not become a partner in the firm.

(b) A minor and a major can enter into an agreement of partnership.

(c) He can be admitted to the benefits in the firm.

(d) He can become a partner on becoming a major.

(ii) The delivery of goods by one person to another for some specific purpose and

time is known as:

(a) Mortage

(b) Pledge

(c) Bailment

(d) Charge

(iii) An agency in which the agent himself has interest in the subject matter of

agency is called:

(a) Agency by estoppel

(b) Agency by holding out

(c) Agency by necessity

(d) Agency coupled with interest

(c) Explain clearly the concept of perpetual-succession and common-seal in relation to a

company incorporated under the Companies Act, 1956. (5 Marks)

(d) What is the law and procedure relating to registration of a non-profit organization as a

company under the Companies Act, 1956 ? (5 Marks)

8/13/2019 S A IPCC MAY-2011-GR-1

30/100


Answer

(a) Compensation on Breach of Contract: Section 73 of the Indian Contract Act, 1872

provides that when a contract has been broken, the party who suffers by such breach is

entitled to receive from the party who has broken the contract, compensation for any loss

or damage caused to him thereby which naturally arose in the usual course of thingsfrom such breach or which the parties knew when they made the contract, to be likely to

result from the breach of it. Such compensation is not given for any remote and indirect

loss or damage sustained by reason of the breach. The explanation to the section furtherprovides that in estimating the loss or damage from a breach of contract, the means

which existed of remedying the inconvenience caused by the non-performance of the

contract must be taken into account.

(b) (I) (i) Incorrect

(ii) Incorrect

(II) (i) (b) A minor and a major can enter into an agreement of partnership.(ii) (c) Bailment.

(iii) (d) Agency coupled with interest

(c) Perpetual Succession and Common Seal: A company is a juristic person with a

perpetual succession. It never dies nor does its life depends upon the life of its

members. It is not in any manner affected by insolvency, mental disorder or retirement of

any of its members. It is created by a process of law and can be put to an end only bythe process of law. Members may come and go but the company can go on forever (until

dissolved). It continues to exist even if all its human members are dead.

Since a company had independent existence and since all acts of the company are donein the name of the company, it enjoys a Seal known as common seal. Common seal is

equivalent to signature of the company and is affixed on all documents issued by the

company. Common seal of the company is kept in safe custody by a responsible officer

of the company.

(d) Registration of Non-Profit Organisation: An association of persons set up for

promoting commerce, art, science, religion, charity or any other useful object and intends

to apply its profits or other income in promotion of its objects can be registered as a

company under the Companies Act, 1956. However, it has to prohibit payment of any

dividend to its members.

The association has to apply to the Central Government for issuing a licence. Through

this licence the Central Government shall direct the Registrar of Companies to register

the association as a company with limited liability without the addition of words limited

or private limited to its name. Therefore, the association may be registered

accordingly.

26

8/13/2019 S A IPCC MAY-2011-GR-1

31/100

8/13/2019 S A IPCC MAY-2011-GR-1

32/100


wrongful act of making a difference in treatment or favour on a basis other than individual

merit. Such discrimination may also be related in employment in business organization.

The elements which create discrimination may be summarized as follows:

(i) If the decision against one or more employees is taken which is not based on

individual merit, such as the ability to perform a given job, seniority or other morally

legitimate qualification.

(ii) If the decision has been derived solely from racial or sexual prejudice, false

stereotypes other kind of morally unjustified attitude against members of which the

employee belongs.

(iii) If the decision has a harmful or negative impact on the interests of the employees,

perhaps costing them jobs, promotions or better pay.

Discrimination in employment is wrong because it violates the basic principle of justice by

differentiating between people on the basis of characteristics (race or sex) that are not

relevant to the tasks they must perform. Looking to these aspects law has also beenchanged to conform to these moral requirements and to minimize the discrimination in

employment in this respect.

Question 3

(a) How is the amount of gratuity, payable to employees in a seasonal as well as other

establishments, calculated under the provisions of the Payment of Gratuity Act, 1972?

What is the maximums amount of gratuity payable under the said Act ? (8 Marks)

(b) What are the tips for improving inter-personal skills in a business organization ?(8 Marks)

Answer

(a) Payment of Gratuity:

Section 4 of the Payment of Gratuity Act, 1972 stipulates the manner in which the

amount of gratuity payable to an employee will be calculated.

In the case of establishments other than seasonal establishments, the employer shall pay

the gratuity to an employee at the rate of 15 days wages based on the rate of wages last

drawn by the employee concerned for every completed year of service or part thereof in

excess of 6 months. In the case of piece rated employees, daily wages shall be

computed on the average of the total wages received by him for a period of 3 months

immediately preceding the termination of his employment and for this purpose the wagespaid for any overtime work shall not be taken into account.

In the case of a monthly rated employee 15 days wages shall be calculated by dividing

the monthly rate of wages last drawn by 26 and by multiplying the quotient by 15.

In the case of seasonal establishment the employees can be classified into two groups

(i) Those who work throughout the year and

28

8/13/2019 S A IPCC MAY-2011-GR-1

33/100


(ii) Those who work only during the season.

The former are entitled to get the gratuity at the rate of 15 days wages for every

completed year of service or part thereof in excess of 6 months. The latter are entitled to

receive gratuity at the rate of 7 days for each season.

As per the Payment of Gratuity (Amendment) Act, 2010, the ceiling on the gratuityamount ` 3,50,000 has been increased to `10 lakhs.

(b) Tips for improving interpersonal skills:

Lines of communication must be open between people who rely on one another to get

work done. Poor interpersonal communication skills, which include active listening, result

in low productivity simply because one does not have the tools needed to influence,

persuade and negotiate which are necessary for workplace success. To get this success

the following tips are suggested:

(i) Congruency in communication elements:If the words used are incongruent with

the other interpersonal communication dynamics interpersonal communication isadversely affected. Since communication is shared meaning, words must send the

same message as the other interpersonal communication dynamics body

language, facial expression, posture, movement, tone of voice to help emphasize

the truth, sincerity and reliability of the communication. A consistent message

ensures effective communication.

(ii) Listening effectively:Effective or active listening is very important skill to enhance

interpersonal communication. Listening helps to build strong personal relationships.

The process of communication completes when the message as intended by the

sender is understood by the receiver. Most of the persons assume that listening is

natural trait, but practically very few of us listen properly. One needs to give the

communicator of the message sufficient attention and make an effort to understand

his view point.

Question 4

(a) Whether shares at premiums can be issued by a company ? What are the purposes for

which the share premium account can be used under the provisions of the Companies

Act, 1956 ? (8 Marks)

(b) What are the fundamental principles of ethics applicable to the persons of finance and

accounting profession ? (4 Marks)(c) Explain the merits and limitations of oral communication. (4 Marks)

Answer

(a) Share at Premium:

If the market exists, a company may issue its shares at premium i.e. the price higher than

their normal value. There is no restriction contained in the Companies Act, 1956 on the

29

8/13/2019 S A IPCC MAY-2011-GR-1

34/100


sale of shares at a premium. But SEBI (ICDR) Regulations, 2009 have to be observed

as they indicate when an issue has to be at par and when premium is chargeable.Premium may be received in cash or kind, where the value of assets received by a

company as a consideration for allotment is greater than the normal value of shares, it is

in essence an allotment at a premium. An amount equal to extra value of the assets

would have to be carried to the Securities Premium Account. The amount to the credit ofshare premium account has to be maintained with the same sanctity as share capital and

can be reduced only in the manner of share capital. The act does regulate the

disbursement of the amount collected as premium.

Such account be used in the following ways by the company

(a) It may be applied to issue to the members as fully paid by way of bonus the

unissued shares of the company.

(b) It may be used to write off preliminary expenses.

(c) It may be used to write off commission or discount account.(d) It may be spent in providing for the premium payable on the redemption of

preference shares or debentures of the company.

(b) Principles of Ethics

The fundamental principles relating to ethics as applicable to accounting and finance

professionals are as follows:

(i) The principle of integrity: Integrity means veracity. The principle requires all

accounting and finance personnel to be honest and straight-forward in discharging

their respective professional duties.

(ii) The principle of objectivity: The principle requires accounting and financialprofessionals to stick to their professional and financial judgement without bias,

conflicting interests, or under influence of others.

(iii) The principle of confidentiality: The principle requires accounting and financial

professionals to refrain from disclosing confidential information related to their work.

(iv) The principle of professional competence and due care: The financial and

accounting professional need to update their professional skill in the modern

competitive environment.

(v) The principle of professional behavior: The principle requires accounting andfinancial professional to comply with relevant laws and regulations and avoid such

action which may result into discrediting the profession.

(c) Oral Communication its merits and limitations- Communication through the spoken

word is known as oral communication. Some of the merits of oral communication are as

under:

(i) saves time and money;

30

8/13/2019 S A IPCC MAY-2011-GR-1

35/100


(ii) immediate feed back;

(iii) saves paper work;

(iv) an effective tool for exhortation;

(v) builds a healthy climate;

(vi) best tool during emergency.

Some of the limitations of Oral Communication are:

(i) Greater chances of misunderstanding;

(ii) Bad speaker;

(iii) Ineffective for lengthy communication;

(iv) Lower retention rate;

(v) No legal validity;

(vi) Difficult to fix responsibility.

Question 5

(a) Point out the differences between a Cheque and a Bill of Exchange under the

Negotiable Instruments Act, 1881. (8 Marks)

(b) State with reasons whether the following statements are correct or incorrect:

(2 2 = 4 Marks)

(i) The responsibility of the corporate management lies towards shareholders only.

(ii) Creation of proper ethical environment requires a proper understanding of thereasons which lead to an unethical behavior.

(c) Importance of communication is increasing day-by-day in the business organizations.

State the reasons for this increasing importance. (4 Marks)

Answer

(a) Cheque and Bill of Exchange

Following are the difference between a cheque and a bill of exchange:-

1. In cheque, the drawee is always a bank, whereas in a bill of exchange, the drawee

may be a bank or any other person.2. In cheque, days of grace are not allowed, whereas in a bill of exchange, 3 days of

grace are allowed for payment.

3. Notice of dishonour is not needed in a cheque, whereas notice of dishonour is

usually required in case of a bill of exchange.

31

8/13/2019 S A IPCC MAY-2011-GR-1

36/100


4. A cheque can be drawn to bearer and made payable on demand, whereas a bill of

exchange cannot be drawn to bearer, if it is made payable on demand.

5. Cheque does not require presentment for acceptance. It needs presentment forpayment. Bill of Exchange, sometimes, requires presentment for acceptance and it

is advisable to present them for acceptance even when it is not essential to do so.

6. Cheque does not require to be stamped in India, whereas bill of exchange must be

stamped according to Law.

7. A cheque may be crossed whereas a bill of exchange cannot be crossed.

8. A cheque being a revocable mandate, the authority may be revoked by counter

manding payment, and is determined by notice of the customers death or

insolvency. This is not so in a bill.

9. The drawer of a bill of exchange is discharged from liability, if it is not duly

presented for payment but the drawer of a cheque is not discharged by delay of the

holder in presenting the cheque for payment unless the drawer has suffered someloss due to delay.

(b) (i) Incorrect:The traditional governance model positions management is accountable

solely to the shareholders only. But a growing number of corporations accept theconstituents other than shareholders are affected by corporate activity and that the

corporations must, therefore, be responsible to them. These may be enumerated as

follows:

(a) Employees

(b) Trade Unions

(c) Customers

(d) Shareholders and investors

(e) Suppliers

(f) Local Communities

(g) Government

(h) Competitors.

(ii) Correct:A creation of a proper ethical environment requires a proper understanding

of the reasons which lead to an unethical behavior. The reasons may besummarized as follows:

(a) Emphasis on short term results

(b) Ignoring small unethical issues

(c) Economic Cycles

(d) Change in accounting rules.

32

8/13/2019 S A IPCC MAY-2011-GR-1

37/100

8/13/2019 S A IPCC MAY-2011-GR-1

38/100


Answer

(a) Conversion of a private company into a public company:

The procedure for conversion of a private company into a public company is as follows:

(1) Take necessary decision in its board meeting and fix up time, place and agenda for

convening Annual General Meeting.

(2) Amend Memorandum of Association to change its name by removing the word

Private by a special resolution. Approval of the Central Government is not

necessary.

(3) Pass a Special Resolution deleting from its articles the requirement of a private

company under Section 3(1). A copy of the Special Resolution must be filed with the

Register of Companies within 30 days. It becomes a public company on the date of

alteration. [Section 44(1)].

(4) Increase the number of shareholders/members to at least 7 and number of directorsto atleast 3.

(5) Within 30 days from the passing of Special Resolution, a prospectus or a statement

in lieu of prospectus in the prescribed form must be filed with the Registrar (Section

44).

(6) The aforesaid prospectus or the statement in lieu of prospectus must be in

conformity with Part I and II of Scheduled II or with Part I and II of Schedule IV

respectively.

(7) The company has to apply to the Registrar of Companies for the issue of a fresh

Certificate of Incorporation, for the changed name, namely, the existing name withthe work Private deleted.

(b) Managing ethics and preventing whistle-blowing:

The focus on core values and sound ethics, the hall mark of ethical management, is

being recognized as an important way to ensure the long term effectiveness of

governance structures and procedures and to avoid the need for whistle blowing.

Employers, who understand the importance of work place ethics, provide their work force

with an effective framework and guiding principles of identity and address ethical issues

as they arise. These guidelines for managing ethics and to avoid the need for whistle-

blowing in the work place may be summarized as follows:-(a) Have a Code of Conduct and ethics.

(b) Establishment of open communication.

(c) Make ethical decisions in group and make decision public whenever appropriate.

(d) Integrate ethics with other management practices.

34

8/13/2019 S A IPCC MAY-2011-GR-1

39/100


(e) Use of cross functional teams when developing and implementing the ethics

management programme.

(f) Appointing an ombudsman.

(g) Creating an atmosphere of trust.

(h) Regularly updating of policies and procedures

(i) Include a grievance policy for employees

(j) Set an example from the top.

(c) Characteristics of group personality

Following are the characteristics of group personality:

(a) Spirit of conformity: Individual member soon come to realize that in order to gainrecognition, admiration and respect from others they have to achieve a spirit of

conformity. Our beliefs, opinions and actions are influenced more by group opinion

than by an individuals opinion even if it is an expert opinion.

(b) Respect for group values: Any working group is likely to maintain certain values

and ideals which make it different from others. In order to deal effectively with a

group we must understand its values which will guide us in foreseeing its

programmes and actions.

(c) Resistance to change: It has been observed that a group generally does not take

kindly to social change. On the other hand the group may bring about its own

changes, whether by dictation of its leader or by consensus. The degree to which a

group resists change serves as an important index of its personality. It helps us in

dealing with it efficiently.(d) Group prejudice: Just as hardly any individual is free from prejudice, groups have

their own clearly evident prejudice. It is a different matter that the individual

members may not admit their prejudiced attitude to others race, religion, nationalityetc. But the fact is that the individuals prejudices get their intensified while coming

in contact with other members of the group holding similar prejudices.

(e) Collective power: Groups are always more powerful than individuals, how so ever

influential the individual may be. That is why individuals may find it difficult to speak

out their minds in groups. There is always the risk of the one-against many

situations cropping up.Question 7

(a) Write a short note on the composition and functions of the Central Board of Trustees

under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. (4 Marks)

(b) Which documents are required to be filed with the Registrar of Companies at the time of

registration of a company under the provisions of the Companies Act, 1956 ? (4 Marks)

35

8/13/2019 S A IPCC MAY-2011-GR-1

40/100

8/13/2019 S A IPCC MAY-2011-GR-1

41/100


(3) The agreement, if any, which the company proposed to enter into with any individual

for appointment as its Managing or Whole Time Director or Manager [Section

33(1)(c)].

(4) A declaration that the requirements of the Act and the rules framed there under

have been complied with. This declaration is required to be signed by an advocate

of the Supreme Court or High Court or an attorney or a pleader having the right to

appear before High Court or a Company Secretary or a Chartered Accountant in

whole time practice in India who is engaged in the formation of a company, or by

person named in the Articles as a Director, Manager or Secretary of the company

[Section 33(2)].

(5) In the case of a public company having share capital, where the Articles name a

person as director/directors, the list of the directors and their written consent in

prescribed form to act as directors and take up qualification shares.(Section 266).

(6) Apart from the above, the company must give a notice regarding the situation of its

registered office under Section 146 within 30 days of registration.

(OR)

(b) Non-issuing of Prospectus:

As per Section 56 of the Companies Act, 1956, the issue of prospectus is not necessary

in the following cases -

(1) Where shares or debentures are offered to existing holders of shares or debentures.

(2) When the issue relates to shares or debentures uniform in all respects, with shares

or debentures previously issued and dealt in or quoted in a recognized stock

exchange.

(3) Where a person is bona-fide invited to enter into an underwriting agreement.

(4) Where shares are not offered to the public.

(c) Pressures faced by finance and accounting professionals:

The finance and accounting professionals are supposed to support the legitimate and

ethical objectives established by the employer. As they are having responsibilities to an

employing organization, may be under pressure to act or behave in ways that could

directly or indirectly threaten compliance with the fundamental principles. Such pressures

may be explicit or implicit which may come from supervisor, manager, director or anotherindividuals. Such pressures which are being faced by finance and accounting

professionals may be stated as follows:

(a) To act contrary to Law or Regulation.

(b) To act contrary to technical a professional standards.

(c) To facilitate unethical or illegal earnings management strategies.

37

8/13/2019 S A IPCC MAY-2011-GR-1

42/100


(d) Lie to, or otherwise intentionally mislead other, in particular the auditors of the

employing organization or Regulators.

(e) To issue or otherwise be associated with, a financial or non financial report thatmaterially misrepresents the facts, including statements, in connection with. For

example:

(i) Thefinancial statements

(ii) Tax compliance

(iii) Legal compliance, or

(iv) Reports required by securities regulators.

OR

(c) Note on Ecological Ethics: The problem of pollution and other environmental issues

can best be framed in terms of our duty to recognize and preserve the ecological

systems within which we live. An ecological system is an interrelated and interdependentset of organisms and environments, such as a lake, in which the fish depend on small

aquatic organisms, which in turn live off decaying plant and fish waste products. Since

the various parts of an ecological system are interrelated, the activities of one of its parts

will affect all other parts. Business and all social firms are parts of a larger ecological

system.

Business firms depend on the natural environment for their energy, material resources,

waste disposal and that environment in turn is affected by the commercial activities of

business firms. Unless business recognize the interrelationship and interdependencies

of the ecological systems within which they operate and unless they ensure that their

activities will not seriously injure these systems one cannot hope to deal with the problemof pollution.

Ecological ethics is based on the idea that the environment should be protected not only

for the sake of human being but also for its own sake. The issue of environmental ethicsgoes beyond the problem relating to protection of environment or nature in terms of

pollution, resource utilization or waste disposal. It is the issue of exploitive human nature

and attitudes that should be addressed in a rational way. Problems like global warming,ozone depletion and disposal of hazardous waste that concern the entire world. They

require international co-operation and have to be tackled at the global level.

(d) Noise as barrier to communication:Noise is the first and foremost barrier to communication. It means interference that

occurs in a signal and prevents you from hearing sounds properly. In a factory the

continuous noise made by machines makes oral communication difficult. In the same

way, same technical problems in a public address system or a static in a telephone or

television cable will distort the sound signal and affect communication. Adverse weather

38

8/13/2019 S A IPCC MAY-2011-GR-1

43/100


conditions or some fault in the ultramodern telecommunications systems may also spoil

the effect.

Further, the sender may resort to ambiguous or confusing signals. The receiver maymess up the message owing to inattention or may spoil decoding because of wrong or

unexpected interpretation. The receivers prejudices may also come in the way of his

understanding the message in the right spirit. Thus the communication is always likely to

affected by noise that stands for so many things. Some of the factors contributing

towards noise factors are as follows:

(a) Poor Listening: A last moment communication with deadline may put too much

pressure on the receiver and may result in resentment.

(b) In appropriate Channel: Poor choice of channel of communication can also be

contributory to them in understanding of the message.

(c) Network breakdown: Some time staff may forget to forward a letter or there may

be professional jealousy resulting in closed channel.OR

(d) Negotiation: Negotiation occurs when two or more parties either individuals or

groups discuss specific proposals in order to find a mutually acceptable agreement.

Whether it is with an employer, family member or business associate, we all

negotiate for things each day like higher salary, letter service or solving a disputewith a co worker or family member. Negotiation is a common way of settling

conflicts in business. When handled skillfully, negotiation can improve the position

of one or even both but when poorly handled; it can leave a problem still unsolved

and perhaps worse than before.

Techniques for Negotiation:

(a) Spiraling agreements: Begin by reaching a minimums agreement even

though it is not related to the objectives and build, hit by hit, on this first

agreement.

(b) Changing of position: Formulate the proposals in a different way, without

changing the final result.

(c) Gathering information:Ask for information from the other party to clarify their

position

(d) Making the cake bigger:Offer alternatives that may be agreeable to the otherparty, without changing the terms.

(e) Commitments:Formalize agreements orally and in writing before ending the

negotiation.

39

8/13/2019 S A IPCC MAY-2011-GR-1

44/100

8/13/2019 S A IPCC MAY-2011-GR-1

45/100

PAPER 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

(ix) Bonus : 40% of time saved

(x) Worker X worked 9 hours a day.

You are required to calculate the remuneration of the worker on the following basis:

(i) Halsey plan and

(ii) Rowan plan

(c) Prepare a Store Ledger Account from the following transactions of XY Company Ltd.

April, 2011

1 Opening balance 200 units @ ` 10 per unit.

5 Receipt 250 units costing ` 2,000

8 Receipt 150 units costing ` 1,275

10 Issue 100 units

15 Receipt 50 units costing ` 500

20 Shortage 10 units

21 Receipt 60 units costing ` 540

22 Issue 400 units

The issues upto 10-4-11 will be priced at LIFO and from 11-4-11 issues will be priced at

FIFO.

Shortage will be charged as overhead.

(d) What is factoring? Enumerate the main advantages of factoring. (4

5 = 20 Marks)Answer

(a) Computation of Operating and Financial Leverage

Actual Production and Sales: 60% of 10,000 = 6,000 units

Contribution per unit: ` 30 ` 20 = ` 10

Total Contribution: 6,000 ` 10 = ` 60,000

Financial Plan XY XM

Situation A B A B

` ` ` `

Contribution (C) 60,000 60,000 60,000 60,000

Less: Fixed Cost 20,000 25,000 20,000 25,000

Operating Profit or EBIT 40,000 35,000 40,000 35,000

Less: Interest 4,800 4,800 1,200 1,200

41

8/13/2019 S A IPCC MAY-2011-GR-1

46/100

INTEGRATED PROFESSIONALCOMPETENCEEXAMINATION:MAY,2011

Earnings before tax (EBT) 35,200 30,200 38,800 33,800

Operating Leverage

=EBIT

C 000,40

000,60

000,35

000,60

000,40

000,60

000,35

000,60

= 1.5 = 1.71 = 1.5 = 1.71

Financial Leverage =EBT

EBIT

200,35

000,40

200,30

000,35

800,38

000,40

800,33

000,35

= 1.14 = 1.16 = 1.03 = 1.04

(b) No. of units produced and approved = 2,000

Standard time = 40 units per hour

Hourly Wage Rate = ` 25

Time allowed = 40 units per hour

Time allowed for 2,000 units hours5040

2,000=

(i) Calculation of Remuneration under Halsey Plan:

Standard time allowed for 2,000 units : 50 hours

Actual time taken for 2,000 units : 40 hours

Time saved 10 hours

Basic wages for time taken 40 hours @`

25 =`

1,000

Bonus: 40% of time saved 2510100

40 =

` 100

Total ` 1,100

(ii) Calculation of Remuneration Under Rowan Plan:

Wages for time taken 40 hours @ ` 25 = ` 1,000

allowedTime

savedTimeBonus = x (Time Taken x Hourly Rate)

50

251040

= = ` 200

Total ` 1,200

42

8/13/2019 S A IPCC MAY-2011-GR-1

47/100


(c)

Store Ledger AccountName :- Max. Stock Level - Bin No.-

Code No. :- Min. Stock Level - Location Code-

Description:- Re-order level

Re-order quantity-

Date Receipts Issues Balance

Qty.

Units

Rate Amount Qty.

Units

Rate Amount Qty. Rate Amount

` ` ` ` ` `

April 1 200 10 2,000

5 250 8 2,000 200 10 4,000

250 8

8 150 8.50 1,275 200 10 5,275

250 8150 8.50

10 100 8.50 8.50 200 10 4,425

250 8

50 8.50

15 50 10 500 200 10 4,925

250 8

50 8.50

50 10

20 10(shortage)

10 100 190 10 4,825

250 8

50 8.50

50 10

21 60 9 540 190 10 5,365

250 8

50 8.50

50 10

60 9

22 190 103,580

40 81,785

(Closing

Stock)

210 8 50 8.50

50 10

60 9

43

8/13/2019 S A IPCC MAY-2011-GR-1

48/100

8/13/2019 S A IPCC MAY-2011-GR-1

49/100


Annual interest on capital outlay 50,000 20,000 20,000 10,000

Monthly charge for rent and rates 10,000

Salary of foreman (per month) 20,000

Salary of Attendant (per month) 5,000

(The foreman and the attendant control all the three machines and spend equal time onthem.)

The following additional information is also available:

Machines

A B C

Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000

Ratio of K.W. Rating 3 2 3

Floor space (sq. ft.) 40,000 40,000 20,000

There are 12 holidays besides Sundays in the year, of which two were on Saturdays.

The manufacturing department works 8 hours in a day but Saturdays are half days. All

machines work at 90% capacity throughout the year and 2% is reasonable for

breakdown.

You are required to :

Calculate predetermined machine hour rates for the above machines after taking into

consideration the following factors:

An increase of 15% in the price of spare parts. An increase of 25% in the consumption of spare parts for machine B & C only. 20% general increase in wages rates.

(b) The Marketing Manager of XY Ltd. is giving a proposal to the Board of Directors of the

company that an increase in credit period allowed to customers from the present one

month to two months will bring a 25% increase in sales volume in the next year.

The following operational data of the company for the current year are taken from the

records of the company:

`

Selling price 21 p.u.

Variable cost 14 p.u.

Total cost 18 p.u.

Sales value 18,90,000

45

8/13/2019 S A IPCC MAY-2011-GR-1

50/100


The Board, by forwarding the above proposal and data requests you to give your expert

opinion on the adoption of the new credit policy in next year subject to a condition that

the companys required rate of return on investments is 40%. (8 + 8 = 16 Marks)

Answer

(a) Computation of Machine Hour Rate

Basis ofapportionment

TotalMachines

A B C

` ` ` `

(A) StandingCharges

Insurance DepreciationBasis

8,000 3,000 3,000 2,000

Indirect Labour Direct Labour 24,000 6,000 9,000 9,000

BuildingMaintenanceexpenses

Floor Space 20,000 8,000 8,000 4,000

Rent and Rates Floor Space 1,20,000 48,000 48,000 24,000

Salary offoreman

Equal 2,40,000 80,000 80,000 80,000

Salary ofattendant

Equal 60,000 20,000 20,000 20,000

Total standingcharges

4,72,000 1,65,000 1,68,000 1,39,000

Hourly rate forstandingcharges

84.75 86.29 71.40

(B) MachineExpenses:

Depreciation Direct 20,000 7,500 7,500 5,000

Spare parts Finalestimates 13,225 4,600 5,750 2,875

Power K.W. rating 40,000 15,000 10,000 15,000

ConsumableStores

Direct 8,000 3,000 2,500 2,500

46

8/13/2019 S A IPCC MAY-2011-GR-1

51/100


Total Machineexpenses

81,225 30,100 25,750 25,375

Hourly Rate forMachineexpenses

15.46 13.23 13.03

Total (A + B) 553,225 1,95,100 1,93,750 1,64,375

Machine Hourrate

100.21 99.52 84.43

Working Notes:

(i) Calculation of effective working hours:

No. of holidays 52 (Sundays) + 12 (other holidays) = 64

Saturday (52 2) = 50

No. of days (Work full time) = 365 64 50 = 251

Hours

Full days work 251 8 = 2,008

Half days work 50 4 = 200

2,208

Hours

Effective capacity 90% of 2,208 1,987 (Rounded off)

Less: Normal loss of time (Breakdown) 2% 40 (Rounded off)

Effective running hour 1,947

(ii) Amount of spare parts is calculated as under:

A B C

Preliminary estimates 4,000 4,000 2,000

Add: Increase in price @ 15% 600 600 300

4,600 4,600 2,300Add: Increase in consumption @ 25% 1,150 575

Estimated cost 4,600 5,750 2,875

47

8/13/2019 S A IPCC MAY-2011-GR-1

52/100


(iii) Amount of Indirect Labour is calculated as under:

Preliminary estimates 20,000

Add: Increase in wages @ 20% 4,000

24,000

(iv) Interest on capital outlay is a financial matter and, therefore it has been excluded

from the cost accounts.

(b) Advise regarding Change in Credit Policy

Working Notes:

(1) Present Sales Value ` 18,90,000

Present Selling Price per unit ` 21

Present Sales Volumeunits90,000

21

18,90,000

Expected increase in Sales Volume = 25%

Expected Sales Volume in next year = 90,000 + 25%

= 90,000 + 22,500

= 1,12,500 units

(2) `

Present total cost (90,000 18) 16,20,000Add: Variable cost on additional Sales

(22,500 14)

3,15,000

Total cost of future sales 19,35,000

Average cost per unit

500,12,1

000,35,19= ` 17.2

(3) `

Cost of Sale (1,12,500 17.2) 19,35,000

Average collection period = 2 months

Average Investment in receivables in theproposed credit policy

3,22,500212

19,35,000

48

8/13/2019 S A IPCC MAY-2011-GR-1

53/100


(4) `

Additional Investment in receivables

12

1890,000-3,22,500

= 3,22,5001,35,000

= ` 1,87,500

(5) Contribution from additional sales = (21 14) 22,500

= ` 1,57,500

(6) Return on additional investments inreceivables 1001,87,500

1,57,500

= 84%

Advise: Since the expected rate of return on additional investment in receivables (84%)is more than the required rate of return (40%), the proposed increase in credit period

from one month to two months should be accepted and implemented in the next year.

Question 3

The management of MNP Company Ltd. is planning to expand its business and consults you

to prepare an estimated working capital statement. The records of the company reveal the

following annual information:

`

Sales Domestic at one months credit 24,00,000

Export at three months credit (sales price 10% below domestic price) 10,80,000Materials used (suppliers extend two months credit) 9,00,000

Lag in payment of wages month 7,20,000

Lag in payment of manufacturing expenses (cash) 1 month 10,80,000

Lag in payment of Adm. Expenses 1 month 2,40,000

Sales promotion expenses payable quarterly in advance 1,50,000

Income tax payable in four instalments of which one falls in the next financial year 2,25,000

Rate of gross profit is 20%.

Ignore work-in-progress and depreciation.The company keeps one months stock of raw materials and finished goods (each) and

believes in keeping ` 2,50,000 available to it including the overdraft limit of ` 75,000 not yet

utilized by the company.

The management is also of the opinion to make 12% margin for contingencies on computed figure.

You are required to prepare the estimated working capital statement for the next year. (16 Marks)

49

8/13/2019 S A IPCC MAY-2011-GR-1

54/100


Answer

Preparation of Statement of Working Capital Requirement for MNP Company Ltd.

Estimated Working Capital Statement

(A) Current Assets in terms of Cash Costs `

Debtors: Domestic Sales 19,20,00012

1 1,60,000

Export Sales 9,60,00012

3 2,40,000Prepaid Sales promotion expenses 37,500

Stock of Raw materials 9,00,00012

1 75,000

Stock of finished goods 28,80,000121 2,40,000

Cash at Bank and in Hand 1,75,000

Total Current Assets 9,27,500

(B) Current Liabilities in terms of Cash Costs `

Creditors for:

Material 9,00,00012

2 1,50,000

Wages 7,20,00024

1 30,000

Manufacturing expenses 10,80,00012

1 90,000

Administrative expenses 2,40,00012

1 20,000Income Tax Payable 56,250

Total Current Liabilities 3,46,250

(C) `

Net Current Assets (A B) 5,81,250

Add:12% margin for contingencies 69,750

Required Working Capital 6,51,000

50

8/13/2019 S A IPCC MAY-2011-GR-1

55/100


Working Notes:

Cash cost of sales is calculated as under: ` `

Domestic Sales 24,00,000

Less:Gross profit @ 20% 4,80,000 19,20,000

Export Sales 10,80,000

10,80,000 10012,00,000@10%

90

=` 1,20,000 9,60,000

28,80,000

Question 4

The summarized Balance Sheets of XYZ Limited as at 31stMarch, 2010 and 2011 are given

below:

Liabilities 2010 2011 Assets 2010 2011

( ) ( ) ( ) ( )

Preference sharecapital

4,00,000 2,00,000 Plant andMachinery

7,00,000 8,20,000

Equity share capital 4,00,000 6,60,000 Long terminvestment

3,20,000 4,00,000

Share premium A/c 40,000 30,000 Goodwill - 30,000

Capital redemptionreserve

- 1,00,000 Current Assets 9,10,000 11,41,000

General reserve 2,00,000 1,20,000 Short terminvestment (lessthan 2 months)

50,000 84,000

P & L A/c 1,30,000 1,75,000 Cash and Bank 1,00,000 80,000

Current liabilities 6,40,000 9,00,000 Preliminaryexpenses

40,000 20,000

Proposed dividend 1,60,000 2,10,000

Provision for tax 1,50,000 1,80,000

21,20,000 25,75,000 21,20,000 25,75,000Additional information:

During the year 2011 the company:

(i) Preference share capital was redeemed at a premium of 10% partly out of proceeds

issue of 10,000 equity shares of ` 10 each issued at 10% premium and partly out of

profits otherwise available for dividends.

51

8/13/2019 S A IPCC MAY-2011-GR-1

56/100


(ii) The company purchased plant and machinery for ` 95,000. It also acquired another

company stock ` 25,000 and plant and machinery ` 1,05,000 and paid ` 1,60,000 in

Equity share capital for the acquisition.

(iii) Foreign exchange loss of ` 1,600 represents loss in value of short-term investment.

(iv) The company paid tax of ` 1,40,000.You are required to prepare cash flow statement. (16 Marks)

Answer

Preparation of Statement of Cash Flow for XYZ Limited

Cash flow statement as per AS 3 for the year ending 31stMarch, 2011

(a) Cash flow from Operating Activities ` `

Profit before tax (2,75,000 + 1,70,000) 4,45,000

Add: Depreciation on machinery 80,000Foreign exchange loss 1,600

Preliminary expenses written off 20,000

Cash flow before working capital adjustment 5,46,600

Add: Stock obtained on acquire 25,000

Increase in Current Liabilities 2,60,000

Less:Increase in current assets (2,31,000)

Cash flow before tax paid 6,00,600

Less:Tax paid (1,40,000)Cash flow from operating activities 4,60,600

(b) Cash flow from Investing Activities

Purchase of Machinery (95,000)

Purchase of investment (80,000) (1,75,000)

(c) Cash flow from Financing Activities

Issue of shares at premium 1,10,000

Payment of dividend (1,60,000)

Redemption of preference shares at premium (2,20,000) (2,70,000)Net increase/decrease in cash and cash equivalent(a+b+c)

15,600

Cash and cash equivalent at the beginning of the year 1,50,000

Cash and cash equivalent at the end of the year 1,65,600

52

8/13/2019 S A IPCC MAY-2011-GR-1

57/100

8/13/2019 S A IPCC MAY-2011-GR-1

58/100


Transfer from work-in-progress 33,60,000

Issue to work-in-progress 67,20,000

Issue to repairs and maintenance 8,40,000

Shortage found in stock taking 2,52,000

Work-in-progress:

Opening Balance 25,20,000

Direct wages applied 25,20,000

Overhead applied 90,08,000

Closing Balance 15,20,000

Finished products:

Entire output is sold at a profit of 12% on actual cost from work-in-progress.

Other information:

`

Wages incurred 29,40,000

Overhead incurred 95,50,000

Income from Investment 4,00,000

Loss on sale of fixed assets 8,40,000

Shortage in stock taking is treated as normal loss.

You are require to prepare:

(i) Stores control account;

(ii) Work-in-progress control account;

(iii) Costing Profit and Loss account;

(iv) Profit and Loss account and

(v) Reconciliation statement

(b) What is debt securitization? Explain the basic debt securitization process.

(12 + 4 = 16 Marks)

Answer(a) Stores Leger Control Account

Dr. Cr.

` `

To Balance b/d 12,60,000 By Work-in-progress control A/c 67,20,000

54

8/13/2019 S A IPCC MAY-2011-GR-1

59/100


To General ledgeradjustment A/C

67,20,000 By Overhead control A/c 8,40,000

To Work-in progressControl A/c

33,60,000 By Overhead control A/c(Shortage)

2,52,000

By Balance c/d 35,28,0001,13,40,000 1,13,40,000

W.I.P Control A/c

Dr. Cr.

` `

To Balance b/d 25,20,000 By Stores ledger control A/c 33,60,000

To Stores ledger control A/c 67,20,000 By Costing P&L A/c (Cost ofSales) (Balancing figure)

1,58,88,000

To Direct wages Control A/c 25,20,000

To Overhead control A/c 90,08,000 BY Balance c/d 15,20,000

2,07,68,000 2,07,68,000

Costing Profit and Loss A/c

Dr. Cr.

` ` `

To W.I.P Control A/c 1,58,88,000 By General LedgerAdj. A/c

Cost of salesAdd 12%Profit

To General ledger Adj.

A/c (Profit)

19,06,560

1,58,88,00019,06,560 1,77,94,560

1,77,94,560 1,77,94,560

Financial Profit and Loss A/c

Dr. Cr.

` ` ` `

To opening stock :Stores

12,60,000 By Sales 1,77,94,560

W.I.P 25,20,000 37,80,000 By Income frominvestment

4,00,000

To Purchases 67,20,000 By Closingstock:

To Wages 29,40,000 Stores 35,28,000

W.I.P 15,20,000 50,48,000

55

8/13/2019 S A IPCC MAY-2011-GR-1

60/100

8/13/2019 S A IPCC MAY-2011-GR-1

61/100


(ii) The Pooling Function: Similar loans or receivables are clubbed together to create

an underlying pool of assets. The pool is transferred in favour of special purpose

vehicle (SPV), which acts as a trustee for investors.

(iii) The Securitization Function:SPV will structure and issue securities on the basis

of assets pool. The securities carry a coupon and expected maturity, which can beasset based/mortgage based. These are generally sold to investors through

merchant bankers. Investors are pension funds, mutual funds and insurance funds.

The process of securitization is without resource i.e. investors bear the credit risk or riskof default. Credit enhancement facilities like insurance, letter of credit and guarantees

are provided.

Question 6

(a) The management of Z Company Ltd. wants to raise its funds from market to meet out the

financial demands of its long-term projects. The company has various combination of

proposals to raise i ts funds. You are given the following proposals of the company:

(i) Proposals % of Equity % of Debts % of Preference shares

P 100 - -

Q 50 50 -

R 50 - 50

(ii) Cost of debt 10%

Cost of preference shares 10%

(iii) Tax rate 50%(iv) Equity shares of the face value of ` 10 each will be issued at a premium of ` 10 per

share.

(v) Total investment to be raised ` 40,00,000.

(vi) Expected earnings before interest and tax ` 18,00,000.

From the above proposals the management wants to take advice from you for

appropriate plan after computing the following:

Earnings per share Financial break-even-point Compute the EBIT range among the plans for indifference. Also indicate if any of the

plans dominate.

(b) Distinguish between cost units and cost centres. (12 + 4 = 16 Marks)

57

8/13/2019 S A IPCC MAY-2011-GR-1

62/100


Answer

(a) (i) Computation of Earnings per Share (EPS)

Plans P Q R

` ` `

Earnings before interest & tax (EBIT) 18,00,000 18,00,000 18,00,000

Less: Interest charges - 2,00,000 -

Earnings before tax (EBT) 18,00,000 16,00,000 18,00,000

Less: Tax @ 50% 9,00,000 8,00,000 9,00,000

Earnings after tax (EAT) 9,00,000 8,00,000 9,00,000

Less : Preference share dividend - - 2,00,000

Earnings available for equity shareholders 9,00,000 8,00,000 7,00,000

No. of shares 2,00,000 1,00,000 1,00,000E.P.S (Rs.) 4.5 8 7

(ii) Computation of Financial Break-even Points

Proposal P = 0

Proposal Q = ` 2,00,000 (Interest charges)

Proposal R = Earnings required for payment of preference share dividend i.e.

` 2,00,000 0.5 (Tax Rate) = ` 4,00,000

(iii) Computation of Indifference Point between the ProposalsThe indifference point

=

1

1

E

)T1)(1EBIT(

2

2

E

)T1)(1EBIT(

Where,

EBIT = Earnings before interest and tax

1 1 = Fixed Charges (Interest) under Proposal P

1 2 = Fixed charges (Interest) under Proposal Q

T = Tax Rate

E1 = Number of Equity shares in Proposal P

E2 = Number of Equity shares in Proposal Q

58

8/13/2019 S A IPCC MAY-2011-GR-1

63/100


Combination of Proposals

Indifference point where EBIT of proposal P and proposal Q is equal

000,00,2

)5.1)(0EBIT( =

000,00,1

)5.01)(000,00,2EBIT(

.5 EBIT (1,00,000) = (.5 EBIT -1,00,000) 2,00,000

.5 EBIT = EBIT 2,00,000

EBIT = ` 4,00,000

(b) Indifference point where EBIT of proposal P and Proposal R is equal:

1E

)T1)(1EBIT( =

2E

)T1)(12EBIT - Preference share dividend

000,00,2)5.1)(0EBIT( =

000,00,1000,00,2)5.1)(0EBIT(

000,00,2

EBIT5.=

000,00,1

000,00,2EBIT5.

.25 EBIT = 0.5 EBIT -2,00,000

EBIT = 2,00,000 0.25

= ` 8,00,000

(c) Indifference point where EBIT of proposal Q and proposal R are equal

000,00,1

)5.01)(000,00,2EBIT( =

000,00,1

000,00,2)5.01)(0EBIT(

.5 EBIT -1,00,000 = .5 EBIT 2,00,000

There is no indifference point between proposal Q and proposal R

Analysis: It can be seen that Financial proposal Q dominates proposal R, since

the financial break-even-point of the former is only ` 2,00,000 but in case of latter, i

Date post:	04-Jun-2018
Category:	Documents
Upload:	saibhumi
View:	218 times
Download:	0 times

S A IPCC MAY-2011-GR-1

Documents